June 30, 1999 Newsletter
June 30, 1999
Dear Shareholder:
The Milk Cow and Today's Bond Market: Remember the Milk Cow? If you have
only been a shareholder for a year or less you won't know what I am talking about.
So, for you newcomers, the story of the milk cow, a true story, is about how a husband
explained to his wife that market price changes in our bond fund were like market
price changes on a milk cow. As long as the cow gives good milk, he told his wife, why
should you care what she will sell for at the livestock market. Likewise, if the bond
fund continues to pay good tax-free interest, why should you care about what it sells
for on the market?
That's a clever analysis but there are folks who don't find much comfort there
when share prices drop. And lately share prices have been off a little. If price changes
make you nervous, here are some things to remember:
1. Your income today is the same as yesterday when your price may have been higher
(or lower). Remember the Milk Cow! It is true that income changes as we buy and
sell bonds in changing markets, but this change is small, and very gradual. In
a market of falling interest rates, income gradually erodes, and in rising
interest rate markets, income gradually rises.
2. It is expensive to redeem your shares and sit on the sidelines in a Money Market
Account. Figure this. You own $10.00 shares in one of our bond funds and are in
a 28% federal and a 6% state income tax bracket. What will it cost (per share)
to redeem and sit on the sidelines for one year in a 3% bank money market
account? How much more if you have a 20 cents per share profit in your bond
fund shares. I think you will be surprised. The answer is on the back page of
this letter.
3. Price changes in our funds have never been the result of bonds defaulting or
becoming "more risky". Price changes have been due solely to general market
changes in the level of interest rates and not because some bonds we owned
"didn't do well".
4. Generally speaking, if bond prices rise, then sometime later they will fall,
and vice versa. These cycles may take a few weeks, or months or years; but if
you own bonds long enough, on the average you will neither make nor lose money
on the principal value, however, you will steadily make money on the interest
they pay, year after year. Remember the Milk Cow!
5. Our records indicate redemptions due to market fears are highest at the bottom
of the market. In other words, most people redeem at exactly the wrong time!
The long term Treasury bond was at 4.95% in December 1998. It is now around
6.10%.
This Month's Reading on the Stock and Bond Markets: At the end of 1998 almost every
economist who had a reputation was predicting a substantial slowing of the economy in the
first quarter of 1999. They were wrong. Then there were a few who saw decline coming in
the second quarter. It now seems certain that was wrong too. The strength of the
United States economy over the past eight or nine years has confounded all the experts.
How we could have survived a depression that has ravaged Japan and the Pacific Rim
countries, Russia and parts of Europe without faltering for even a moment, is just
amazing. That dismal science, economics, still has a long way to go in the art of
predicting outcomes.
Predictions that the stock market might back off have been mostly correct. Only the
Dow Industrials are dramatically up. The S&P rise is due to only a handful of technology
stocks. Still, there are a growing number of people that believe stocks will never go
down.
Meanwhile, another prediction that has never left the scene since this last recovery
began is, "inflation is coming". But inflation has not come during this time. Not even
in 1994 when the bond market was depressed all year by this expectation. Now, in the
past few months, there has been a small rise in the CPI (though none in June), and the
doomsday inflation voices have risen again. So we have the bond market again being held
hostage to the economy. Stay tuned. Meanwhile, enjoy your tax-free income and remember
the cow.
Payable on Death Registration: A few shareholders are using the new "payable on
death" and "transfer on death" registration privileges. If your beneficiary does not
live in Kentucky, Tennessee or North Carolina, "payable on death" is probably a better
option than "transfer on death", as they will almost certainly want to redeem the shares
and invest in a fund free from taxes in the state where they are domiciled.
New Morningstar Ratings: After some quiet inquiries, Morningstar has agreed to
revise the computation of their risk factor on our three quarterly pay Income Series
to conform with the computation for those monthly pay funds with which we are regularly
compared. When this was complete we discovered the Kentucky, Tennessee and North Carolina
Income Series have all been rated five star for their lifetime as follows:
Series: 3 Yrs. 5 Yrs. 10 Yrs.
Kentucky Tax-Free Income ***** ***** *****
Tennessee Tax-Free Income ***** *****
North Carolina Tax-Free Income *****
The Short-to-Medium Series of each of these states, as well as the Intermediate
Government Bond series are all currently rated four star. (The Intermediate Government
Bond Series is rated five star for the last three years.) These are impressively high
ratings.
Yours truly,
DUPREE MUTUAL FUNDS
Thomas P. Dupree, President
President
Answer: The cost expressed in cents per share to sit on the sidelines for a year in a
3% money market account is: (1) 28% bracket, no-gains, 27 cents.; (2) 28% bracket, 20
cents gain, 32 cents. (3) 39.5% bracket, no gains, 30 cents; (4) 39.5% bracket, 20
cents gain, 35 cents. If your shares don't go down more than this after redeeming them,
you will have lost money while sitting on the sidelines waiting to buy back your
position.
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