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Crime Stats as Credit Indicator: Will Detroit Be Joined By Other Cities?

 

Your Money: Experts call Phila. high-risk but no bankruptcy candidate

ERIN E. ARVEDLUND
Published Tuesday, July 30, 2013, 1:08 AM in The Philly Inquirer (sub wall)

 

The Philadelphia region is home to some well-respected municipal-bond-investing experts, among them David Kotok, chief investment officer of Cumberland Advisors in Vineland, N.J., and Tom Kozlik, of Janney Montgomery Scott in Center City.

We checked in with them to find out the skinny on investing in munis right now, after Detroit’s bankruptcy filing sounded a wake-up call across the market.

In recent days, Kotok has been advancing a war of words with the Cassandra of muni bonds, Meredith Whitney, who famously appeared on 60 Minutes in 2010 predicting an avalanche of bankruptcies across American cities. She reiterated that call last week.

Kotok, for his part, counters Whitney and other pundits’ predictions that a staggering number of cities will follow Detroit’s default and bankruptcy filing. In fact, he says, there are some fantastic bargains in municipal bonds – you just have to know which ones to buy and which to sell.

He cites his own research and that of Strategas Research Partners looking at general-obligation debt of cities cross-referenced with crime rates. That helps him figure out which bonds to avoid.

Strategas analyzed personal-crime rates and property-crime rates and drew inferences from the statistics. The Strategas research shows that Detroit is an outlier when combining crime rates with debt burdens to rank cities.

Other high-risk cities include Memphis, Philadelphia, and Baltimore. But will Philly end up filing for bankruptcy like Detroit? Not likely.

“Philly is not Detroit, and credit markets seem reasonably content with Philly,” Kotok says. He is “concerned but content for now” with Philly’s municipal status.

“That said,” Kotok says, “the Strategas research I cited crosses debt statistics with crime statistics. In the model, Philly fares poorly, along with Baltimore, Memphis and Oakland. These four are flashing warnings signs. Using crime statistics as a credit indicator is new for financial markets, but it has some validity, in my view.”

Adds Janney’s Kozlik: “We are not expecting the pace of local-government Chapter 9 bankruptcies to rise significantly, and we are not expecting a contagion effect to trigger additional occurrences among local-government issuers as a result” of Detroit’s Chapter 9 filing.

Kotok and the rest of the portfolio managers at Cumberland buy and sell individual municipal bonds, which is hard for the retail public to do. He does not use muni exchange-traded funds and closed-end funds.

“Since we do our own research and manage accounts of individually selected bonds, our position is straightforward on this: We rarely use muni-bond ETFs, and we do not use mutual funds for managed munis.”

For those of us who are do-it-yourselfers, the Municipal Securities Rulemaking Board has a great website for doing research on muni bonds (http://emma.msrb.org/Search/Search.aspx), where you can search by city or issuer, or just look at recent trading activity in the marketplace to get an idea of prices and yields. And it’s free.

 

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