Dear Shareholder:
The Alternative Minimum Tax (A.M.T.): Doubtless you have read at least something about A.M.T. in the past month or two. This tax has grown with inflation to the point that it will now apply to almost 30% of taxpayers with income between $50,000 and $200,000 in 2006. This is up sharply from about 2.5% the previous year. There is a move in Congress to readjust this tax to inflation, but there is resistance because it raises so much revenue for the government at a time when budget deficits are at near record levels.
Why is this important to municipal bond investors? Some municipal bonds are subject to A.M.T. These are bonds issued for industrial development, or airport bonds secured by a lease from airlines, for example. Naturally, shareholders are curious about the holdings in our family of municipal bond funds. Do we own any bonds subject to A.M.T.? The answer is “No!”
Then why waste two paragraphs talking about this? First, accountants and others who prepare tax returns for our shareholders need to know this. Secondly, we have numerous shareholders who have a personal portfolio of individual bonds. To these folks we say, it would first make sense to check with your tax advisor to see if the tax applies to you. If it applies, you might consider selling your A.M.T. bonds before 2006 if you can. If A.M.T. does apply to you, the only thing short of disposing of the subject bonds is to pray for an adjustment in the A.M.T. tax by Congress. The current tax on an A.M.T. bond, if the taxpayer is subject to that tax, is 28%; a big lick.
A Very Strange Bond Market: At the beginning of 2005 almost every interest rate guru in the country was predicting a moderate rise in interest rates (fall in bond prices) by the end of the year. Most thought the ten year treasury, then yielding about 4.25%, would rise to 5% by year end. In the past month almost every one of these financial experts have reversed their field and are now predicting 4% or lower for the ten year treasury by December 31st. The expectation of inflation and global selling of U.S. Treasury bonds has just not been realized and, apparently, is no longer seen as a threat by interest rate prognosticators. Also contrary to recent expectations has been the strengthening of the dollar vs. foreign currencies.
All of this has occurred in the face of the steady increase in the fed funds rate, which seems counter-intuitive.
So, what do I think is going to happen next? At the beginning of the year I said that I thought rates would rise for a few months but then return to previous levels by year end. Instead, this has happened in only six months. The next six months now seems much more difficult to predict and, if I had my druthers, I wouldn’t try. But, since I must guess, I’ll suggest that rates (and fund share prices) will remain in the present range for the rest of the year.
The American penchant to help: I have had an active correspondence in the past few months with shareholders who are WWII and Korean veterans. The tendency is to think these were truly the “last great generation” who saved the world from despotism, and they are. But then I look at the evening news and realize there is another generation sacrificing lives to help Iraqis find a workable democracy. Our size and power scares others and gets us resented, but by and large we are a helping nation that cares. This extends beyond the military to all sorts of “helping” professions in other fields. For example:
About seven or eight years ago I was driving on Interstate 75, south of Lexington, when an automobile directly in front of me lost control, skidded into the guard rail and up ended, turning completely over on its top, then sliding about a hundred yards down the right lane. I skidded to a halt right behind them and leapt out to find the roof of the car had collapsed, but a man on the passenger side was frantically signaling me to help. With strength boosted by adrenalin, I managed to force open his door, release his seat belt and get him out. The driver was in much deeper trouble. Her head was trapped between the collapsed ceiling and the seat-top in the upside down car. She was frantic. I crawled in the car and tried to reassure her, holding her hand and saying a short prayer. Then I crawled back out to see about help.
Well help was everywhere! Three eighteen wheelers were parked so as to protect the overturned vehicle, and the drivers were all standing by with fire extinguishers at the ready. A state policeman had just arrived and crawled back in the car himself. No less than two minutes later an ambulance arrived and a minute or two after that a truck with the “jaws of life”, a power tool for bending and tearing metal, appeared and leapt into action. They had the woman out, in a neck brace, and on the way in the ambulance in minutes. Before they departed a nurse helped pick glass shards out of my arm and apply alcohol. I got back in my car and just sat there for a minute as the eighteen wheelers and emergency vehicles all pulled away, thinking, “this is a great country”. Well, it is, and you are helping finance many of its public services through your investment
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