May 31, 2013 The Man of Steel Returns As a child growing up in the 50’s, part of life was reading Superman comic books and watching George Reeves portray Superman on our black and white television. Now, the third movie version of Superman will be out. As a child, one thing I never thought about was Superman’s real name “Kal-El”. Upon analysis, the name is curious because El means God as in Isra-el, Dani-el, Samu-el, and the word Kal in Hebrew means voice and vessel. I also never related the trip to Earth in a spaceship to Moses’ trip on the Nile in a reed basket, nor the fact that both Moses and Superman were rescued by non Jews and raised in a foreign culture, Moses by Pharoah’s daughter and Kal-El by Kansas farmers named Kent. Maybe because the root story was so familiar the Man of Steel’s story survives for its 75th Anniversary. Stockton’s Woes Worry Muni Market The most important event playing out in the world of municipal fixed income has nothing to do with the fear of rising interest rates. The bankruptcy of Stockton, California and the forthcoming legal battle has the potential to permanently change the way municipal credit risk is viewed both in California and on a national level. On April 1, 2013, Stockton’s petition to proceed with the Chapter 9 bankruptcy was accepted. Stockton is not the first municipality to go bankrupt but it could be the most important. The most interesting aspect of the Stockton case revolves the treatment of pension obligations. Pensions are protected by California statute to the detriment of bondholders. Because of this protection, public employees in Stockton and throughout California have traditionally been unwilling to make material concessions when negotiating with troubled municipalities. In fact, this issue is pervasive across the country. In general, public labor unions have seldom made material concessions because of a perceived protection of future benefits. Unfortunately, for the public employees in Stockton and around the country, the bankruptcy case will be heard in federal court and the status of the pension will play a key role. Should the judge rule in favor of the pension holders, protecting their benefits above the claims of bondholders, it would essentially subordinate the bondholders to the claims of public workers. A ruling of this type would immediately decrease the credit quality of ALL municipal bonds. In the future, public employees would have no incentive to negotiate with stressed municipalities. The result could be an increase in Chapter 9 bankruptcy filings as municipalities lose the flexibility to control future expenses. On the other hand, should the judge rule that public employees take a haircut in line with other creditors, municipal bondholders will benefit. Under that scenario, public employees would be more willing to come to the bargaining table and negotiate. The Stockton case will take several years to come to a conclusion. Without a definite resolution municipal investors are left to invest in a market where the nature and perception of risk may be materially altered. Until this issue is sorted out we recommend investors to entirely avoid situations similar to that faced by Stockton. Consider these three guidelines: 1. Avoid municipalities that were hit the hardest by declining home prices 2. Be aware of the portion of the budget that is being spent on labor; these contracts are difficult to amend leaving the municipality little flexibility. 3. Avoid municipalities with large unfunded pension obligations The Missing Millions As you have probably read, there allegedly is good economic news. Since the November election, employers have created an average of 200,000 jobs a month and the published unemployment rate has dipped to 7.6%. But before anybody starts celebrating, let’s take a closer look at the US labor market. 12,000,000 Americans are unemployed and actively looking for work, 8,000,000 are working part-time and 2,500,000 say they want a job but have given up looking. (So by definition, they are no longer unemployed) So, 22,500,000 Americans are unemployed or underemployed. This implies a real unemployment rate of at least 14%.Additionally, the participation rate, the proportion of the population in the labor force has declined from 66.2% in January, 2008 to 63.5% in February, 2013 (a number which equals 6,600,000 people). Where did this 2.7% of the workforce go? They are missing. Some have retired, as they are baby boomers nearing retirement age because they cannot find a job even though they need to supplement the lost income from the depleted investments of the two stock meltdowns in 2000 and 2008. A substantial number have applied for Social Security Disability which has quadrupled due to the Obama Administration’s active advertising of and recruitment into this program for those whose unemployment benefits have expired. This expansion has been aided by a reinterpretation of disability. Originally, disabilities were physical ailments caused by workplace injuries. Today, the definition of disability has been expanded to include mental problems caused by work, such as the police officer who is afraid of firearms and other like situations. The increase in persons claiming these payments will accelerate the depletion of Social Security funds. Finally, because these almost 30,000,000 Americans are not working, they do not have the income to spend. If they cannot spend, then goods and services cannot be purchased. The economic news is not really so good; if one just looks behind the headlines! As always, if you have any questions about these or any other matters, do not hesitate to call us. Remember, We’re Here For You!