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Dear Shareholder:
CNBC Experts: I play tennis two or three mornings a week, so I find myself watching CNBC as I shower and dress. I am amazed that the “experts” they have on each morning seem not to have heard of bonds. Lately, as they struggled to suggest what an investor ought to do next in this sick stock market, their suggestions center around some alternative kind of equity: “international stocks? (no – look at Japan's economy), utility stocks? (Maybe – but what about California's problems?), and so on. Somehow, bonds are not mentioned.
May I point out that bonds have always been an alternative to stocks? In the first place, they actually pay something regularly. They are not dependent upon a third party buyer appearing to supply your hoped-for income. They have always been considered to be a significant part of a "balanced" portfolio of investments. Yet, somehow, they have faded from popular "expert" memory.
On Having Money Wired to Your AccountIt is possible to have redemption money wired to your account, which saves your having to wait for a check in the mail, or having to come into our office to pick up a check. We do not charge for this service, but you must elect this service at the time you fill out the application to open your account, or instruct us in writing after the account is opened. Some folks assume that, since we have wiring privileges, they can just wait until they have need for this service and then give us telephone directions. We can only accept instructions in writing over your signature. We are audited closely to see that we don't do so by mistake. To make sure we are dealing with your instructions, we won't accept telephoned wiring instructions (or an address change). This is to avoid an unauthorized person getting the funds.
There are often periods when bonds earn more than stocks. In the last twelve months two of our Bond Series have a total before-tax return of over 19% to higher bracket taxpayers. (Stock market results are always reported “before tax”.) Compare this with The S&P 500 (-14.2%), Dow Jones Industrials (+1.7%) and Nasdaq Composite (-%58.1%). At this writing these indices are look worse.
More on the Alternative Minimum Tax (AMT) and Bonds: In my last letter I discussed the hope for tax relief for municipal bonds from the AMT formula. A shareholder has asked what effect AMT has on municipal bonds. The answer is: If a municipal bond is not AMT exempt, its income must be added back to either an individual or corporate taxpayer's income in order to compute AMT. If that computation leads to the assessment of an Alternative Minimum tax, then the income of that otherwise tax-free bond becomes taxable to the extent of the Alternative Minimum tax assessed.
This tax is so small in the scheme of things that I would guess it provides something close to zero in additional taxes to the federal government. Yet, just because it is there, we are unable to include AMT subject bonds in our portfolio. If we did so, every shareholder's accountant would have to do a computation on the few cents of our income that was AMT applicable, an additional accounting expense you would not enjoy. Again, this reduces our choices, and makes us pass up quality bonds that we would otherwise buy.
In addition, we mentioned a rule applying ordinary income rates to municipal bonds that sell in the market below a certain “de minimis” price. One of our Tennessee investors did a fine job of describing this problem to his Congressman. He asked why there would be an ordinary income tax applied to municipals, but not other investments? Again, I doubt this raises any tax for the U. S. Government, but it serves to upset municipal markets. I have written both of Kentucky's Senators McConnell and Bunning about these problems with essentially no response. If each of you Kentucky shareholders would make contact with one or both of these men it would completely change their interest in the subject. It is a proven fact that letters get results.
Morningstar Ratings
Series 3 Years 5 Years Kentucky Tax-Free Income Series ***** ***** Kentucky Tax-Free Short-to-Medium Series ***** ***** Tennessee Tax-Free Income Series ***** ***** Tennessee Tax-Free Short-to-Medium Series ***** ***** North Carolina Tax-Free Income Series ***** ***** North Carolina Tax-Free Short-to-Medium Series ***** ***** Intermediate Government Bond Series **** ****
The North Carolina Tax-Free Income Series is now listed in the Wall Street Journal and USA Today. Also, the larger regional newspapers in North Carolina should pick up this listing right away. If you don't see it in these papers, call Carolina Financial Group in Brevard @828 883 4400.
So, what's next in the bond market? The stock market's decline is beginning to look like panic, though some stock valuations are still high. I would guess that the economy is slowing right now. The “reverse-wealth” effect of a declining market depresses the economy faster than the “wealth effect” accelerates it. Among the first things to go will be unlimited prices for elegant vacation properties and other “posh” purchases. Gradually money should be attracted back to the bond market.
I have a British friend who has given me the origin of the word “posh”. When the English traveled out (east) to India in the “Empire” days, the left side of the ship was shaded from the southern sun, and when they traveled home (west) the right side was shaded. These were the more desirable cabins reserved for upper class travelers. So the expression “Port Out, Starboard Home” became “posh”. And that ends this edition of “Lexicology Today”.
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