Latest / Bloomberg Intelligence / Kotok: Puerto Rico Deal Is Pandora's Box for Muni Market(Audio)

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Kotok: Puerto Rico Deal Is Pandora's Box for Muni Market(Audio) · Bloomberg Intelligence

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  Speaker 1: to Katherine Calgary for the e t F Report. The
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  Speaker 1: prospect of higher interest rates is taking center stage again
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  Speaker 1: and it's no surprise that e t s it focus
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  Speaker 1: on dividend paying stocks have pulled back a bit. One
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  Speaker 1: of those is the Alpsector Dividend Dogs, a t F
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  Speaker 1: taker S d O G or S dog. It has
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  Speaker 1: one point one billion dollars in assets, and although it's
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  Speaker 1: fallen about three in the past month, it's gained eight
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  Speaker 1: point eight percent since it started the year. Mike Aigan's
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  Speaker 1: portfolio manager and senior vice president Adoups says they locate
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  Speaker 1: potentially undervalued high dividend paying stocks and each of the
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  Speaker 1: S and P five hundred ten industry groups. To actually
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  Speaker 1: get five of the five highest fielding companies in each
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  Speaker 1: of the ten sectors of the market, you get an
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  Speaker 1: equally weighted portfolio, so two percent per company and ten
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  Speaker 1: percent per sector. And our structure from a characteristics perspective
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  Speaker 1: is very similar to our competitors in the sense that
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  Speaker 1: you get a very nice dividend yield, you get cheaper companies,
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  Speaker 1: so a deep value play on the market. The e
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  Speaker 1: t F has a twelvemonth dividend yield of three point
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  Speaker 1: three percent and an expense ratio of forty basis points.
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  Speaker 1: ALPS offers two other e t f s based on
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  Speaker 1: the same strategy. One focuses on international stocks, the other
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  Speaker 1: on emerging markets. And that's your Bloomberg ETF report. I'm
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  Speaker 1: Katherine Cowdery. You're listening to taking Stock with pimp Box
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  Speaker 1: and Kathleen Hayes on Bloomberg Radio, taking stock of the
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  Speaker 1: stock market, the bond market and more. We really want
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  Speaker 1: to focus in particular on the municipal bond market. After
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  Speaker 1: the White House and the House of Representatives hammered out
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  Speaker 1: a deal to help Puerto Rico restructure its debt. Joining
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  Speaker 1: us now from Sara Sota, Florida is David Kotak. David
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  Speaker 1: ko Talk is chairman and chief investment officer at Cumberland Advisors. So, David,
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  Speaker 1: you are a very interesting note to your clients and
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  Speaker 1: friends and followers this morning, raising a question of what
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  Speaker 1: the deal hammered out means for bondholders. You're afraid maybe
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  Speaker 1: bond holders are gonna get the short into the stick. Why, well,
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  Speaker 1: I'm I'm worried that in the negotiation, the pension promise
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  Speaker 1: gets a higher claim in a restructor e van the
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  Speaker 1: bond holder. And if this is set and developed and
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  Speaker 1: settled in a traditional bankruptcy format, there'll be a judge
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  Speaker 1: as a referee. The judge will look at all the
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  Speaker 1: competing claims and achieve a settlement. There is not enough
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  Speaker 1: money here in Puerto Rico to pay everybody, Kathleen, somebody's
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  Speaker 1: gonna come up short. The question is between impeding claims,
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  Speaker 1: who's it gonna be? And what I worry in this
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  Speaker 1: legislation is ways which empower the pension promise to get
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  Speaker 1: ahead of the bond promise. That's the concern. David Kotok,
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  Speaker 1: do you own any Puerto Rican COMMUNI debt? Yes, we do.
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  Speaker 1: What are you going to do with it? Why? The
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  Speaker 1: only Puerto Rico debt that we own is insured by
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  Speaker 1: one of two bond insurers. The rest of them we
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  Speaker 1: won't own, and has particular structure and clauses that give
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  Speaker 1: us sufficient comfort. So We're not worried about getting paid
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  Speaker 1: on the particular bonds we own PIM, but we are
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  Speaker 1: worried about an impact on the entire municipal bond market
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  Speaker 1: if the status of claims of bonds gets subordinated. Two
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  Speaker 1: pension claims that did not happen into Troy, there was
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  Speaker 1: a settlement that did not happen in other bankruptcy format settlements.
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  Speaker 1: But this is a different structure and it may open
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  Speaker 1: that box. So you know this, This to me just
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  Speaker 1: reminds me it's a bit of the financial crisis, right.
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  Speaker 1: Uh there was when when there were some restructurings of
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  Speaker 1: various kinds of bonds and derivative contracts, and uh, some
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  Speaker 1: a lot of consternation in some instances to live when
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  Speaker 1: it came to banks that the bond holders we're not
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  Speaker 1: going to get built out. Now a lot of them did.
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  Speaker 1: But what does this mean? Are you saying that if
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  Speaker 1: we do for this one island nation territory, if we
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  Speaker 1: help them restructure, they're dead and support those pensions that
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  Speaker 1: people are going to say that could happen in Los
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  Speaker 1: Angeles or New York. Really, it depends if the structure
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  Speaker 1: is under supervision in a referee proceeding like upon a
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  Speaker 1: bankruptcy proceeding, and there's an administer of body that has
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  Speaker 1: oversight over the island of Puerto Rico, and therefore the
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  Speaker 1: politicians do not have the ability to alter the mechanism.
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  Speaker 1: Then you have a discipline on the politicians. The politicians
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  Speaker 1: who created the mess, made the pharmises on pensions, didn't
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  Speaker 1: fund them. They're not in office anymore. They've absconded with
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  Speaker 1: whatever benefits they got. The same stories taking place in
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  Speaker 1: jurisdictions like Chicago school systems and elsewhere in the country.
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  Speaker 1: And so the idea here is do you open the
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  Speaker 1: door a notch and put the promised pension benefit which
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  Speaker 1: cannot be paid there's not enough money to pay it
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  Speaker 1: ahead of a bondholder. We have some retired teachers in
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  Speaker 1: Chicago that are making four times in a pension benefit
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  Speaker 1: they made when they were employed as a teacher, and
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  Speaker 1: in Puerto Rico you have a totally unfunded planned system
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  Speaker 1: with no ability to make the payment. Well, having said that,
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  Speaker 1: that sounds like a large political time bomb waiting to
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  Speaker 1: go off, right, David, I great pim. It's a large
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  Speaker 1: political time bomb and it is building in Illinois that
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  Speaker 1: is the weakest graded of the fifty states. The same
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  Speaker 1: thing is occurring, although not as severe, in New Jersey.
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  Speaker 1: When you don't fund the pension system and you tell
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  Speaker 1: everybody they're going to get a pension, how do you
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  Speaker 1: pay it? And that's part of what the Puerto Rico
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  Speaker 1: problem is about. Forty four billion is unpaid promises for
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  Speaker 1: pension benefits. Seventy billion is bonded debt of all types.
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  Speaker 1: And some of that debt can be resolved and settled,
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  Speaker 1: like the electric utility or the highway. The means to
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  Speaker 1: settle them are there. The worst the worst person to
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  Speaker 1: tea company business two not pay the electric bill is
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  Speaker 1: the government of Puerto Rico, and that's why the electric
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  Speaker 1: utility is behind in its cash flows, because it's customer.
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  Speaker 1: The government doesn't pay for electricity. Well, so then I
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  Speaker 1: guess you aside with some of the Republicans in Congress
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  Speaker 1: who have signaled that they are concerned about the deal
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  Speaker 1: that was hammered out and may not support it. No, I,
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  Speaker 1: First of all, we have a House action. This is
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  Speaker 1: the second attempt. The first attempt didn't succeed in the House.
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  Speaker 1: It looks like this is a House action. It will
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  Speaker 1: have to be bipartisan support to get it past. The
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  Speaker 1: White House, of course wants something done. Now, it'll go
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  Speaker 1: to the Senate. There will be a conference compromise bill.
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  Speaker 1: We don't know what it will look like. You've got
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  Speaker 1: competing interest since we typically do. The issue though, is
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  Speaker 1: will the settlement process allow a judicial type proceeding and
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  Speaker 1: impartial independent board and keep the politicians away from the money.
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  Speaker 1: That is the cutting edge of the issue. And a
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  Speaker 1: politician has constituents who receive a pension payment, the politicians
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  Speaker 1: gonna make whatever they can for that pensioner and say,
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  Speaker 1: the Botto holders are rich, we don't have to pay them,
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  Speaker 1: even if the Botto holders the one that lent the
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  Speaker 1: money to build the school or the highway. Well, David,
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  Speaker 1: you raise a number of points that are not going
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  Speaker 1: to be resolved immediately. This sounds like something that the
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  Speaker 1: lawyers are going to end up making a lot of
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  Speaker 1: money on. How are there other ways right now? I mean,
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  Speaker 1: you look at the municipal market, where where's the best value? Well,
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  Speaker 1: there are lots of very good values in the market.
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  Speaker 1: It's three point seven trillion deep. It's got ninety thousand
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  Speaker 1: issue worth and many many municipal bonds or of high
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  Speaker 1: credit quality and pay great states like Utah or Virginia,
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  Speaker 1: UH school bonds like a l university revenue bonds the
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  Speaker 1: New Jersey turn even though it's in New Jersey, it's
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  Speaker 1: a good credit quick final question on E T s
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  Speaker 1: and stocks? Is there one in particular, any kind that
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  Speaker 1: you like right now? I still like utilities because of
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  Speaker 1: the yield. X l U is the utility basket. I'm overweight,
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  Speaker 1: have been for several years and loved the position. Anything else.
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  Speaker 1: You're asking me to segue from pension bonds and Puerto
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  Speaker 1: Rico to E T F s and I can give
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  Speaker 1: you other names. I would be careful of the energy sector.
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  Speaker 1: Here we sold, We now are underweight. We think your
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  Speaker 1: price around fifty bucks is topping, and we don't know
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  Speaker 1: if we get another down draft once the sector clears.
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  Speaker 1: I want to thank you very much for spending time
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  Speaker 1: with us. David Kotok is the chairman and the chief
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  Speaker 1: investment officer at Cumberland Advisors, talking about the Spider Utility
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  Speaker 1: select E t F X l U. We take a
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  Speaker 1: dude to the close. Next