Market Commentary: Internetworking

Published October 29, 2019

Over time, dozens have taken credit for inventing the internet that, for millions if not billions, has become our primary method of communication. Tribute is certainly due to Xerox and to those who developed protocols for routing data and for creating the World Wide Web. But the name internet is short for “internetworking” or having one computer network collaborate with another. And the first internet message is attributed to a team led by Leonard Kleinrock, a professor at the University of California at Los Angeles, who pioneered the mathematical theory of packet networks, the technology on which the internet is based. He along with Vinton Cerf, Robert Kahn and Larry Roberts are considered the “fathers” of the internet. And fifty years ago on October 29, 1969, a grad student in the Kleinrock’s Network Measurement Center logged into a computer at the Stanford Research Institute from the UCLA host computer. The first message was a typo, but on the second try he succeeded in sending a digital data packet via ATT lines connecting computers on a system that had been funded by the U.S. Defense Department’s Advanced Research Projects Agency. By the end of the year, four host computers were connected together into the first ARPAnet. At the time, all these brilliant engineers could envision was a future where people talked to computers or computers talked among themselves. No consideration was given to the possibility of people talking to other people. Right now, approximately 3.6 billion people are on line, texting, sharing information, studying, playing games, shopping, job hunting, trading or, on a dark side never envisioned by the innovators, sending spam, laundering money, stealing personal information and training terrorists.

Billions around the world learned via internet of the raid against one of the world’s top terrorists on Sunday shortly after technology enabled the military operation to be viewed real-time from the White House Situation Room. While welcome news, markets have had a muted reaction — much the same as met the news of Osama bin Laden’s death. Traders are still laser-focused on the delay or elimination of tariff hikes on Chinese imports and accommodative policies of central banks. Stocks have been in rally mode since the October 11 announcement of a “Phase One” trade agreement with China and delay in planned tariff hikes by President Trump. The deal is expected to be signed on November 17 when both presidents meet in Chile for the Asia-Pacific Economic Cooperation Summit. In the meantime, investors are watching the management transition at the European Central Bank and actions taken at the Bank of Japan and Federal Reserve Open Market Committee meetings on Thursday. At this writing, futures trading reflects a 97% market consensus that the Fed will lower target rates by another 25 basis points to the range of 1.75%-2.00%, and a 77% consensus that the rates will be reduced by another 25 basis points at the next meeting on December 11.

Our research takes us online to monitor futures trading as well as to analyze and recap the performance of the financial markets. From sources including Bloomberg, Thomson Reuters, CME Group, and Refinitiv we can instantly access data that once required laborious efforts at collection. Through the close on Friday, the Dow Industrials were up 41 points to 26,958, while the S&P 500 gained 45 points to 3,022 and the Nasdaq was up 243 points or 3% to 8,243. Oil prices at $56.66 per barrel have gained 4.8% this month and gold prices have increased by $34 to $1,504.63 per ounce. Investor willingness to assume more risk always leads to a selloff in haven assets including U.S. Treasury and municipal bonds. The 10-year government yield has risen 13 basis points in October to 1.79% and the comparable 10-year AAA municipal general obligation bond is up 9 basis points to 1.51%. The 30-year Treasury yield at 2.28% is up 17 basis points this month, while the muni counterpart at 2.10% has risen 9 basis points. With one more week of reporting left in this tenth month of the calendar year, mutual fund investors skeptical of the stock market highs have so far withdrawn $14.7 billion from equity funds while adding $11.4 billion to taxable fixed income funds and $3.8 billion to municipal bond funds.

This week, HJ Sims is a sponsor of the LeadingAge Annual Meeting in San Diego where 6,500 attendees are networking with social media, discussing trends for telehealthcare, and sharing voice technologies and risk management tools all made possible by the internet. We are also a co-senior manager on the $13 million pre-development financing in the market for Aldersgate at Shalom Park in Charlotte, North Carolina. The non-rated revenue anticipation notes being issued by the Public Finance Authority of Wisconsin will finance a new life plan community. The municipal primary slate is expected to total $7.7 billion and will include a substantial number of taxable advance refundings as well as several deals being financed at these low, prevailing rates for forward delivery. There is also a $415.1 million non-rated tobacco securitization refunding for San Diego County, a $21.5 million non-rated Colorado Health Facilities Authority issue for Capella of Grand Junction, a $41.5 million Yonkers Economic Development Corporation deal for Charter School of Educational Excellence and a $10.7 million California Municipal Finance Authority sale for BBB-minus rated Literacy First Charter School in El Cajon.

New issue volume in October is running 26% higher than last year and, on a year-over-year basis, issuance is up 19%. Taxable muni sales are up a whopping 70% over 2018 and borrowers are enjoying historically low rates. Last week, we saw a number of deals come with 5.00% coupons priced at significant premiums. The City of Santa Fe sold $64.8 million of BB+ rated revenue bonds for El Castillo Retirement Residences with maximum yields of 3.725% in 2049, Fulton County brought a $51.2 million non-rated financing for Canterbury Court structured with a 2054 term bond priced to yield 4.04%, the Washington Housing Finance Commission brought a $39 million non-rated transaction for Rockwood Retirement Communities yielding 4.30% in 2055, and the Public Finance Authority had a $32.4 million non-rated issue for Penick Village that included a 2054 term bond yielding 4.125%. To help educate the next generation of scientists, engineers, mathematicians that will change the world in ways we cannot predict, muni bond investors helped to finance several charter schools. A $40.4 million non-rated Pima County Industrial Development Authority sale for American Leadership Academy featured a final maturity in 2052 priced to yield 4.01% and the Utah State Charter School Finance Authority had a $13 million non-rated financing for Wallace Stegner Academy structured with 30-year term bonds priced to yield 4.20%.

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