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The Procter & Gamble Company Message Board

cartorman 11 posts  |  Last Activity: 20 hours ago Member since: Dec 12, 2008
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  • Reply to

    Governor A. Padilla of PR

    by urichey Jul 8, 2014 6:30 PM
    cartorman cartorman 20 hours ago Flag

    From the latest news PREPA delaying payment to lenders (Citi, et al), it's clear they are now in a cash position whereby they need to be able to pay suppliers (oil) to run their plants and likely have little left in their reserves and subsequent future revenues to pay lenders or future interest payments. Net, they either get a bailout from the PR Gov't Bank (recent law wouldn't have been passed if they were so inclined/capable to provide it) or they restructure their debt (a technical default) or simply default on the payments. Their reality is ... they have no money to maintain their status guo. Whether what they are doing is constitutional or not is, under their circumstances, irrelevant. If you have no money to pay, you cannot pay.
    I suspect the next leg down for RMUNX will be triggered by the actual restructuring/default of the PREPA Corporations. Although the RMUNX fundamentals (holdings and prior discounting thereof) would suggest this should be modest, the actual default (s) will likely cause further investor panic - those in RMUNX and other Funds - as losses will be realized and fear of more PR restructuring/defaults are anticipated. Confidence in the PR Government's disclosures and the timeliness thereof will also be part of investor weighting.
    Market fear is triggered largely by a lack of available information and investor knowledge. The bond market (muni's in particular) have little transparency and one learns what is happening much too late to allow a calculated response. Net, the human response is to seek to protect one's capital as the risk is not knowable (on both the fundamentals and the human reactions).
    The problem with investor panic, relative to bond funds, is the forcing of Funds to sell their most liquid bonds (usually investment grade) to meet redemption requirements, as the selling of the depressed bonds leads to the greatest losses. This can lead to permanent declines in the Fund's NAV.

  • cartorman cartorman Jul 4, 2014 10:22 AM Flag

    Additive to my post above on alternatives for you. Much depends on obviously what your needs are. If you are not wed to tax-exempt income (most conservative funds will be yielding ~half of RMUNX), there are funds such as dividend funds offering modest yield, taxed at 20% (unless you are in a higher income bracket (adding another 3.8% via the Affordable Care Act). Many individual stocks from good companies (P&G, J&J, AT&T) have solid yields with the potential of upside appreciation over time. The alternatives may help you sleep better at night. Hope this all helps somewhat.

  • cartorman cartorman Jul 4, 2014 10:11 AM Flag

    As I indicated in my earlier post, RMUNX is high risk / high reward. PR, Tobacco bonds and high leverage provides for the high yield. Although PR is highly indebted ($70B debt, high unemployment, extremely low funding of public pensions and economically stressed population) the immediate threats are its public corporations (likely to default). The GO bonds are, at this time, generally considered risky, but currently expected to maintain their debt payments. There is, however, no evident path for PR (the island) to get out of the hole their in. Further, with PR's credit rating, all future debt issued will carry large coupon premiums, further straining their ability to get to a better place.
    You'll have to make your own call as to what you want to do here. With interest rates likely rising in 2015 (modestly), PR, declining tobacco use/volume (that could affect payments of the bonds going forward) and investor sensitivity/reaction, the Fund, in my view, will likely experience extreme volatility not kind to the NAV. If the aforementioned PR public corporations default, both the realized and unrealized losses on the bonds will be predicated on the Funds acquisition costs, pulling down the NAV and possibly it's yield. There are not any viable municipal bond funds I know of providing the yield RMUNX does. Current interest rates simply continue holding down yield everywhere.
    These are tough times for everyone and I appreciate and am empathetic to the decisions you need to make.

  • cartorman cartorman Jul 3, 2014 4:53 PM Flag

    For perspective, PR's Gov't. was not fully forthcoming on how their various debt was being looked at. The restructuring advisors they brought in were not indicated to be helping them with any restructuring (only with finance options). This was not the case. It is now reasonably clear PR's Utility (s) have no money to pay interest on their debt beyond August. The three utilities owe $19.4B. Many of their bonds are now trading at 40%, down from 55% last week (WSJ 3/3/14). The government's bank has indicated they will likely not step in to provide further loans to cover the debt payments. While this will likely take some time to sort out, the likelihood of a formal default has a high probability. How will this affect the fund?

    On the fundamentals, as many of the Fund's bonds have already been significantly discounted, the remaining hit, though still meaningful should likely be limited to another 20% (of acquisition cost) downturn. This would result in a realized loss to the NAV and could affect the Fund's dividend (?) given the current yield of the affected PR bonds. The additional credit downgrades yesterday further exacerbated the NAV decline last night. Until some good news comes out of PR affecting the island's economy and finances and debt, I don't see any catalysts helping the NAV recover from this anytime soon. Most troubling is the investor panic button being pushed here, which brings its own momentum, as this is now the third time in 6-years the Fund has realized steep declines in its NAV and investor participation (via shares outstanding). The Fund has always been high risk/high reward, but has not demonstrated the volatility seen in these last 6-years of the 23-years+ I've been in the Fund, largely due to PR. For those planning on sticking this out for the dividend, you may be OK. However, recovery of capital invested has, I now believe, a very long horizon.

  • cartorman cartorman Jun 30, 2014 7:34 PM Flag

    Oppenheimer, Franklin-Templeton and likely others are challenging the recent legislation. The WSJ article indicated Rochester Funds hold ~$821M of the debt. This may be all of Oppenheimer Rochester Funds. By my check, on December 31, 2013 RMUNX held $268M in Utility and Transportation PR debt and this, as of that date, was already reflecting an unrealized depreciation value of $168M (down 37.2%). See my most recent post.
    I don't think PR will mess with the triple-tax status. They still have the ability to raise rates somewhat. All told some of these particular bonds could default. or be restructured with debt holder agreement, but the authorities could not afford to "majorly stiff" bond holders and continue to operate (which requires future debt issuance. We'll see where this ends up, but I sense the reaction to the media reports is more severe than an eventual outcome here.

    Sentiment: Hold

  • RMUNX’s holdings relative to PR’s Utility & Transportation bonds at the end of 2013 amounted to $267.6M (3.2% of total holdings). They had already been discounted 37.2% from their principal amount (vs 17.45% of unrealized depreciation for all bonds held), net a 62.79% value of their acquisition cost. If one assumes a harsh restructure of these bonds, recovering say 20% of original value (a Detroit-like restructuring), you would have a 1.54% further impact on the NAV of the Fund or about $0.22 of the $14.29 NAV on Dec. 31, 2013. Further (I take some license here) if you take the Fund’s NAV on May 30, 2014 ($15.40) versus Fridays 6/27 close at $15.18, you have a $0.238 decline – largely attributed to PR. Net a restructuring to 20% of the PR referenced holdings has already been reasonably priced in. Further declines from here can be seen as an irrational response to the PR situation.

    Panic selling is not smart.

    Sentiment: Hold

  • Recovering from 2013's significant declines, muni's have been recovering well so far this year. Of the [known] reasons: 1) many pension funds coming off a robust equities market rally in 2013 took some money off the table and purchased bonds (to include muni's) increasing demand; 2) the issuance of new muni's is down 26% so far this year as municipalities continue to address their debt increasing demand for existing bonds; 3) Puerto Rico bonds have appreciated from their lows by about 10-points, although still depressed from what one could call normal levels.

    Many (hedge funds, others) bet bonds would go the other way this year as interest rates were expected to rise from the 3% 10-year benchmark reached in December 2013. While rates will rise at some time going forward, the increases will likely be quite modest and slower than realized under Greenspan based on different times and different issues. Wage pressure remains low and anti-business programs continuing to come out of the White House will likely keep them low despite rising costs elsewhere. Net, I remain encouraged for fixed income in general and RMUNX in particular.

    Sentiment: Hold

  • Reply to

    Fixed Income Performance

    by cartorman May 8, 2014 6:26 PM
    cartorman cartorman May 12, 2014 10:15 PM Flag

    Agree with your position on long treasury's. Unless someone is trying to time them for the short play (not a good playground), I'd stay away from them. Gold is a tough one to call. I don't think interest rate movement is going to move that needle - certainly no time soon. A large/serious geopolitical incident would be the greater causal factor for gold movement.
    Good to hear from you. Your posts are both intelligent and insightful.

  • Interesting performance for the first third of 2014 for fixed income versus other market sectors (WSJ 5-6-14). Treasury Bonds earned a total return of 2.1%, 4.66% for Corporate Investment-grade bonds, 3.72% for Junk Bonds and 4.72 for Municipal Bonds. This compares to the S&P of 2.41% and the Dow of 0.42%. RMUNX delivered 7.28%.
    While the winds of change continue to whipsaw the various markets, few (if any) can predict what will occur in front of investors relative to any of these sectors. For now, fixed income continues to deliver well above expectations and we should celebrate how this fund has performed so far this year.
    This performance continues to support the “long-view” of investing, whether in fixed income or equities.

    Sentiment: Hold

  • PR's new proposed 2015 budget (begins July 1, 2014) balances expenses with revenues for the first time in 10-years. Given all their challenges, this is a significant achievement. With gradual recovery, they should be able to begin also paying down debt - though this will take a long time. This is significant progress. To their own words ..."There is still work to be done". I find this most recent achievement quite encouraging.

  • Reply to

    Dividend Increase

    by cartorman Mar 28, 2014 6:49 PM
    cartorman cartorman Apr 15, 2014 5:02 PM Flag

    They both have their attributes. I lean towards RMUNX as this fund has a steadier dividend over time. Also for those who live in NY (I don't) RMUNX has a greater tax advantage.

PG
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