Terminal Bars
Whenever I took the train up to Riverdale, NY, I always passed the Terminal Bar. Just viewing the establishment made me smile on several levels. But, now the rapid reopening of bars especially has contributed to a spike in Covid-19 cases in a subset of populous states. This development has sickened people and has the possibility of contributing to more deaths. Of course, the other tragedy is that the workers in these venues are subject to furloughs or layoffs once again.
This new comes with the backdrop of positive news of the addition of 4.8 million of jobs in June. This level was quite a bit higher than the average expectation. We must be grateful for the positive print. However, the bar, restaurant and retail workers that were called back are subject to potential backtracking again.
In the meantime, the Dow Jones Index is hovering around the 26,000 level that represents a strong recovery. As several pundits have noted, the index reflects expectations a year hence and is not always a good indicator of where we are now. It is well understood that the efforts of the Fed and the Treasury are underpinning a good portion of the positive news.
On the municipal front, we see that the flows to the municipal funds have remained positive for some weeks now while rates remain in the cellar. The cost of seeking out stability is relatively high. The memories from 2008 are fresh in the mind of many. Although investors may benefit from volatility especially in terms of greater yields, nobody want to relive a downdraft of the kind that happened in 2008.
Most issuers have now concluded their Fiscal Year 2020. It will be some time before we will be able to review final numbers. Most audits will not be available until late Fall or early next year. What we can glean at present is being provided by the financial plans offered in budgets. We know that New York City has faced a gap of $9 billion. At some point, we will be able to review the details. Posting documents currently is taking a lot more effort than it has in pre-pandemic times.
Income taxes, sales taxes and corporate income taxes are among the most volatile revenues sources. Several states have indicated their revenues have declined by 15% or more in the most recent quarter. Such a loss is not easy to counteract when the bulk of the expenditures are in personnel costs. This is one of the reasons that despite the positive employment numbers today, the state and local employment remains at risk. New York City has indicated if sufficient savings are not forthcoming approximately 22,000 jobs will be at risk in October.
Property taxes are staying steady and tend to do so even in severe downturns unless concentrated areas have been bid up beyond realistic prices as was the cast in 2008. We know that the turnover of properties has really come to a standstill of late. Now that realtors can do showings in person again, the level of activity may be accelerating. The low rates are helping to drive activity. However, the lack of inventory appears to be a common refrain. The bottom line of all these considerations is that assessed valuation growth will be much more subdued than the annual double digit increases of the recent past.
The Fed has been in buying high grade corporates in a relatively significant way. We have not witnessed such activity in the municipal market. Chairman Powell was asked about providing loans to the U.S. Territories in recent testimony. The answer was that the matter is being studied but the credit quality of Territorial issuers is not necessarily in the Fed’s sweet spot. Some of the associated revenue bonds may be viewed more favorably in the review.
Independence Day means a lot of different things to people these days. We yearn for the days without the effects of Covid-19. Financial independence also means a lot. We still have the most free markets in the world that have regulations in the end that are bearable With the markets exhibiting a more positive tone, we are not certain how long the low rates will be with us but we know that they will be with us for quite some time.
Have a great 4th of July and let us keep improving freedom for all.
John Hallacy
John Hallacy Consulting LLC
07/02/20
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