Puerto Rico’s Rising Debt
Puerto Rico’s finances are a mess (think Detroit) and are getting messier. Moody’s cut its rating on Puerto Rico’s GOs to B2 from Ba2. This is below investment grade and is considered “Junk bond” in nature. Bond insurers MBIA (MBI) and Assured Guaranty (AGO) have both traded lower on the downgrade as a result of their exposure to what may turn into a default situation. Puerto Rico issued $4.8 billion of 30-year bonds in March yielding 8% and offered at $93. They have fallen to $85 and are yielding over 9.5%. Puerto Rico has more than $70 billion of common wealth debt.
At 9 p.m. last night I received a call from a reporter asking about the effects of Jamie Dimon’s newly diagnosed throat cancer and the prognosis for JP Morgan shares. Serious illness striking a Chairman or Chief Executive Officer of a publicly traded company is real news. While there is a feeling of inappropriate intrusion into an ill person’s private life, the extent to which they guide and add value to a company in which they’ve encouraged others to invest makes their ability to lead an investor “need to know.” A regulated financial institution is required to have deep contingency and succession plans. JP Morgan needs to be clear about management plans during Mr. Dimon’s treatment. All reports indicate that his condition is highly curable, and we wish him a quick recovery, long career, and happy retirement.
There is a lot of noise about Dow 17,000; we were about a point and a half away from it on Tuesday. It will happen, but what does it mean? It is one of those numbers that is both a wow and a worry. I was in the business during the days of Dow 1,700, so this strikes me as pretty cool and illustrative of the powerful rewards investors may reap. Many are saying not to worry about these new highs because they are earnings driven. That is only partially true. They are also multiples driven.
PE multiples have increased in recent years thereby magnifying increases from earnings. Earnings increases justify higher prices but only to a point. The percentage gains in broad equity markets have well-surpassed the percentage gains in earnings. In sum, stocks are not cheap. If the rule is “Buy Low,” this is not “low.” Our portfolio is more defensive in nature and will remain so as prices continue to climb. This strikes us as a time to enjoy but not a time to speculate. Remember the fish market rule: ignore the yelling and pay attention to the price of fish!
The ADP monthly jobs report showed a gain of 281,000 workers hired in June. This is a very good report. The ADP number has proven a bit “noisy” in the past and often differs from the Labor Department’s number which will be released tomorrow. So, as they say at the track, “hold all tickets.” While noisy, this datum is another positive piece of our long slog higher. It would be a mistake to mine for a negative spin.
A Note to You From Me
Tomorrow, July 3, my grandmother Gene Reed will turn 106. I will have breakfast with her tomorrow in her home that she built and has lived in since 1939. Nana’s advice to folks in their 80s and 90s: invest for the long term!
On July 4th, we hope you have a wonderful celebration of this outstanding country. For all of our challenges, there is no better place on earth. In honor of the 4th, I’ll share a paragraph from my book, Restoring Our American Dream. I hope you enjoy it.
America has a religion. It is noble and sacred and pure. It is carried in the hearts and souls of her citizens and is the pride and legacy of committed, self-reliant, and determined generation upon generation. America’s Faith is one of possibility, hope, longing, yearning, hard-work, and in spite of intimidating almost impossible odds, glorious triumph. America offers her fertile, self-reliant loam for fabulous imaginings that grow into steps tenaciously taken and result in victories previously thought impossible. This faith is so pervasive that it is unwise to tell Americans they can’t because the American heart will reflexively whisper back, “Oh, yes, we can!” America’s religion is Our American Dream.
Happy Independence Day!