Under Water in the Caribbean

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

By all accounts, Puerto Rico is a beautiful, sunny place to visit, especially in the Winter. But it's hard to fathom how this U.S. island territory of 3.5 million people could have racked up $70 billion in public debt—roughly $20,000 per citizen, which happens to be almost exactly the population's average yearly income. Now that Puerto Rican bonds are trading at 20-50 cents on the dollar, a lot of people are starting to wonder what happened.

On Monday, for the third time, Puerto Rico defaulted on its debt, paying the interest due on bonds issued by the Government Development Bank, but nothing on the principal—effectively defaulting on $370 million. Previous defaults include $143 million worth of appropriation bonds from Puerto Rico's Public Finance Corp. and rum-tax securities issued by the territory's Infrastructure Financing Authority. An additional $1.9 billion payment is due July 1, and nobody seems to be very optimistic that Puerto Rico will come through with that money either.

The story is a familiar one. There was a lot of investor demand for Puerto Rican bonds, because they're exempt from federal and state income tax in all 50 states—meaning residents in Wyoming can buy Wyoming bonds, or Puerto Rican bonds, and have the interest exempt from state taxation. The territory met the demand by issuing debt by 18 different public debt issuers. In recent years, interest rates on these bonds crept higher as it became clearer that the territory would not be able to meet its obligations, making the bonds attractive to mutual funds that wanted to offer high yields to investors who didn't understand the default risks.

Would a broader Puerto Rican default affect your portfolio or the municipal bond market generally? Probably not. Most of the bonds have been repurchased for pennies on the dollar by opportunistic speculators, mostly hedge funds, some of whom recently traded $900 million of face amount Puerto Rican bonds for 47 cents on the dollar. A similar agreement retired $33 million in debt held by a group of credit unions. The territorial government has proposed that holders of its general obligation bonds accept 74 cents on the dollar, and Congress is discussing the possibility of allowing the territory to file for bankruptcy under Chapter 9—currently an option for U.S. states, but not for Puerto Rico.

But investors in some of those aforementioned mutual funds could be greatly impacted. Most municipal bond funds were reluctant to touch Puerto Rican paper with the proverbial ten-foot pole, knowing that the risk of default made positive returns problematic. But load fund company Oppenheimer loaded up on Puerto Rican debt through its Rochester line of funds, and the Franklin Double Tax-Free Income Fund holds the endangered paper as well. Both companies are now lobbying hard against any deal, but the most likely outcome is that they will become poster children for the dangers of recklessly chasing yields, particularly as the handwriting has been on the wall for years.



The anxious bull

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

We're in one of the longest-running, biggest wealth-producing bull markets in history, but you wouldn't know it from the headlines or the gloomy mood of investors. On March 9, the bull market in U.S. stocks, represented by the S&P 500, celebrated its seventh year. The index has risen 194% since closing at 676.53 on March 9, 2009. The Russell 2000 is up 213% over the same seven years. The Nasdaq 100 has gained 311%. Corporate earnings are up 148% from the first quarter of 2009.

So why hasn't this bull market gotten more respect? For one thing, the S&P 500 is down 7% from its record highs in May 2015. There have been two separate drops of more than 10% between then and now. And the profit levels of American corporations are down 32% from a record high set in the third quarter of 2014.

Perhaps more importantly, the rise has been gradual, and the recovery from the Great Recession has been incremental and below the recovery rate from previous recessions. Wages have barely kept pace with inflation, which means that many people don't feel any wealthier today than they did seven years ago. And investors who didn't trust stocks, who bailed every time the markets dipped or who sat on the sidelines waiting for a clearer sign of recovery, are NOT wealthier than they were back then.

The truth is, only a few staunch investors have really benefited from one of the steadiest, longest bull markets in our history. Instead of celebrating, most of us are keeping a wary eye on the future horizon, doing what we humans do best: looking for the next thing to worry about.


Leading the World in Wasted Time

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

America leads the world in economic productivity, total economic output, earnings and wealth per citizen and a variety of other categories. Now we can add something new to the list: time spent in automobiles during our daily commutes to work.

The annual Traffic Scorecard compiled by INRIX in Kirkland, WA reveals that the average automobile commuter spends nearly 50 hours a year stuck in traffic—more than Belgium (44 hours), the Netherlands (39 hours), Germany (38 hours), Luxembourg (33 hours), Switzerland (30 hours), Britain (30 hours) and France (28 hours). Among major cities, only London (101 hours) beats the largest American cities, led by Los Angeles, where people spent an extra 81 hours in rush hour congestion last year.

In all, U.S. commuters wasted an aggregate of eight billion extra hours stuck in traffic—more than an entire workweek per year per worker.



The Most Complicated Part of Your Estate

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

In recent years, a new category of assets has appeared on the scene, which can be more complicated to pass on at someone's death than stocks, bonds and cash. The list includes such valuable property as digital domain names, social media accounts, websites and blogs that you manage, and pretty much anything stored on the cloud. In addition, if you were to die tomorrow, would your heirs know the passcodes to access your iPad or smartphone? Or, for that matter, your email account or the or iTunes shopping accounts you've set up? Would they know how to shut down your Facebook account, or would it live on after your death?

A service called Everplans has created a listing of these and other digital assets that you might consider in your estate plan, and recommends that you share your logins and passwords with a digital executor or heirs. If the account or asset has value (airline miles or hotel rewards programs, domain names) these should be transferred to specific heirs—and you can include these bequests in your will. Other assets should probably be shut down or discontinued, which means your digital executor should probably be a detail-oriented person with some technical familiarity.

The site also provides a guide to how to shut down accounts; click on "F," select "Facebook," and you're taken to a site ( which tells you how to deactivate or delete the account. Note that each option requires the digital executor to be able to log into the site first; otherwise that person would have to submit your birth and death certificates and proof of authority under local law that he/she is your lawful representative. (The executor can also "memorialize" your account, which means freezing it from outside participation.)

The point here is that even if you know who would get your house and retirement assets if you were hit by a bus tomorrow, you could still be leaving a mess to your heirs unless you clean up your digital assets as well.



Recovery—For How Long?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

On Tuesday, the U.S. stock markets went up 2.39%, the highest one-day return in a month. Analysts attributed the rise to a variety of economic news that suggested that the American economy is not, after all, plunging into recession. The buoyant mood among investors may not last, but for many, it's a welcome sign that things may not be as gloomy as they seemed just a month ago.

In fact, the S&P 500 only dropped about 12%, from 2078.36 at the end of December 2015 to the bottom of 1829.08 on February 11—despite widespread predictions of a 20% bear market. Since then, it has risen on shaky legs back to more than 1978, just 100 points from breaking even on the year. Two more days like yesterday would erase nearly all of the damage in 2016.

The good economic news involved construction spending, which reached its highest level since 2007. Oil prices were also gaining ground, although it's hard to see why the average American would find reason to cheer about that. In addition, new orders and inventories stabilized in the manufacturing sector, after experiencing downturns in the last quarter of 2015. Other factors include the possibility that U.S. stock investors may finally have decided that declines in the Chinese markets are not going to directly affect the value of American-based businesses.

None of this means that we know what will happen next. Neither we nor any of the pundits you see on the financial news have any idea whether that long-awaited 20% decline will materialize, or the markets will continue to recover and we'll all look back on February 11 prices as a great time to buy. But it's worth reflecting on how unexpected this latest rally has been at a time when it seemed that all the news pointed to more pain and decline. Anybody who believed the pundits and retreated to the sidelines after the January selloff is now sitting on losses and wondering whether to jump in now and hope the gains continue, or wait and hope for another downturn, and risk losing even more ground if this turns out to be a long-term rally.

We can never see the next turn in the market roller coaster, but long-term, the markets seem to operate under the opposite of gravity. You and I know with some degree of certainty in which direction the next 100% market move will be, even if we can't pinpoint when or where.