Dear Shareholder:
Let me introduce Allen Grimes, the Executive Vice President of Dupree Mutual Funds who is going to write this letter while I rest. I will be back to write the December 31st letter and Allen and I may take turns after that. This will give you a fresh perspective from a younger person and perhaps will keep me writing longer than otherwise might be the case. So I’m not quitting; just trying to stretch things out a little. Will Rogers said, “Never miss a good chance to shut up!” So I won’t.
Thomas P. Dupree, Sr., President
Bond Market Rally: There is an old saying that “in life, timing is everything”. Fortunately, for my sake, as I write this first shareholder letter, the timing is right as the bond market has staged an impressive rally. The benchmark U.S. Treasury 10-year note’s yield, which moves inversely to its price, has declined by over 50 basis points since the end of June to a level around 4.60%, a six-month low. Municipal bond yields have also dropped by roughly an equal amount over the same time period. The combination of a pronounced slow down in the housing sector, a weaker-than-expected report on manufacturing in the Philadelphia region, and a somewhat unexpected decline in core producer prices seems to have convinced the markets (at least for now) that the economy may weaken further. This has strengthened the view that the Fed’s long campaign of raising short-term interest rates may finally be at an end. Some market forecasters are now even making the call that the Fed may begin lowering short-term interest rates as early as the first quarter of 2007. Whether these “experts” are right remains to be seen.
As you review your account statements that accompany this letter, you’ll be glad to know that this bond-friendly economic news has already affected the share price of our funds. For instance, the Kentucky Tax-Free Income Series closed at $7.40 per share on June 30, 2006; the share price of this Series closed at $7.58 on September 29, 2006. The share prices of our other Income Series in Alabama, Mississippi, North Carolina and Tennessee have also rebounded in similar fashion. So, for those of you who were patient during the past two years, the market has given back to you much of what it took away. More important than the rebound in share price, however, is the fact that you have continued to earn a steady stream of tax-free income during this period. It is this tax-free income that you receive year after year that continues to make investing in municipal bonds so attractive.
One Year Anniversary of Hurricane Katrina: The one year anniversary of Hurricane Katrina recently passed, and I am pleased to report that the bonds we hold in the portfolios of both the Alabama Tax-Free Income Series and the Mississippi Tax-Free Income Series have held up well over the past year. Southern Mississippi cities, counties and localities adversely affected by the storm suffered a temporary depression in the prices of the bonds issued by those communities, including securities that we hold in the Mississippi Tax-Free Income Series. However, the prices of the municipal securities have since recovered nicely. Moody’s Investors Service recently reaffirmed its existing ratings and outlooks for nine southern Mississippi credits despite the widespread devastation caused by the storm. Fortunately, our strict discipline of investing only in high quality investment grade bonds appears to have served us well.
Recent Morningstar Ratings: Some of you may get tired of hearing us recite our Morningstar ratings but we feel compelled to periodically share this information with you since Morningstar is widely recognized as the nation’s leading fund rating system. As of August 31, 2006, the Alabama Tax-Free Income Series, Mississippi Tax-Free Income Series, and North Carolina Tax-Free Income Series earned overall Morningstar ratings of five stars. The Kentucky Tax-Free Income Series, Tennessee Tax-Free Income Series, North Carolina Tax-Free Short-to-Medium Series, and the Intermediate Government Bond Series earned four stars. The Kentucky Tax-Free Short-to-Medium Series and the Tennessee Tax-Free Short-to-Medium Series earned three stars. The overall Morningstar rating is based on risk-adjusted returns, derived from a weighted average of the three-, five-, and ten-year (if applicable) Morningstar metrics.
Proxy Season & Annual Shareholder Meeting: The time of year has arrived when we have to send out the annual proxy in connection with the annual shareholder meeting. The shareholder meeting will be held this year on October 30, 2006, at 10:00 a.m. local time at the Radisson Hotel here in Lexington. I want to remind you that sending in your proxy not only helps us obtain a quorum needed to conduct business at the annual shareholder meeting, it also helps us with the process of updating shareholder records to reflect such things as changes of address and changes in account registration. So please promptly sign and return your proxy when you receive it. Thank you in advance for your cooperation.
I look forward to seeing many of you at the annual shareholder meeting where I fully expect hearing from some of you that my letters aren’t nearly as interesting or witty as Tom’s. That’s one point on which the “experts” can agree!
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