Market Commentary: Start-Ups, Patents and Things Pending

Published October 8, 2019

Back in 1935, Herbert J. Sims opened a one-room investment office with money loaned from an influential venture capitalist: his mother. The start-up focused on credit-driven research on higher yielding instruments and succeeded beyond all expectations. Eighty four years later, the firm is still known around the country for its investment banking and fixed income expertise. We are now dedicated to the success of many other start-ups as well as thriving ventures, investing in and financing a variety of projects essential to our communities including senior living campuses, federally insured hospitals and fast-growing charter schools, to name a few. We are proud of our pioneering and entrepreneurial roots as well as the innovative approaches and tools we have brought to the markets throughout the years. Inspired by our founder, our banking, sales, trading and wealth management professionals continue to create with new ways to help our clients achieve their financial goals and enrich the lives of those most dear to them.

While the daily headlines tend to focus on the negatives, divides, and troubles, painting a rather dismal picture of current conditions and future outlooks, we are optimists who cheer our country, our representative democracy, our freedoms, and the prosperity that American capitalism makes possible. On any given day, for example, the U.S. Patent Office receives an average of 789 new applications from U.S inventors, and new products and services are rolled out every day by enterprising men and women and the investors who back them. Just this past week, consumers have been introduced to waterless shampoo, anti-pollution shampoo, a car air purifier, the Amazon smart oven, antioxidants for pets, Tinder’s Swipe Night, small business group insurance, pink rhubarb tonic water, pumpkin butter, Voodoo Doughnuts, radio site video security services, and Glenlivet’s new edible capsules filled with whiskey, quickly re-dubbed Tide Pod shots.

We have yet to try any of these products, immersed as we are in the financial markets that have just entered the fourth quarter of the year. During the first trading week of October, bonds and gold fared well while stocks lost some ground. This all came in response to economic data showing some contraction in the U.S. manufacturing and services sectors, and the announcement of US tariffs on various European Union products. Amid the renewed recession concerns, the 2-year Treasury yield plummeted 22 basis points to 1.40% while the 10-year dropped 14 basis points to 1.52% and the 30-year fell 10 basis points to 2.01%. The Dow Industrials fell 343 points to 26,573, while the S&P lost 24 points to close the week at 2,952 and the Nasdaq dropped 16 points to finish at 7,982. Oil prices were down $1.26 a barrel to $52.81 as gold climbed $34 an ounce to $1,504. Markets began to shrug off some of their worries when U.S. payroll data came in on Friday and reflected strong (though less than expected) growth and 3.5% unemployment (at a 50-year low).

Municipal bonds quickly recovered from the selloff that occurred during the first two weeks of September and produced the first monthly losses in a year.  Last month, the general muni market as measured by the ICE BofAML Municipal Bond Index returned negative 0.75% although high yield munis were basically flat. The MMA municipal price index dropped by 1% in September. Issuance at $37 billion was about 37% above last year and municipal bond mutual funds took in $6.5 billion of new money. It was a noisy, active, volatile month that included a drone attack on Saudi Arabia’s Abqaiq oil processing facility, a Federal Reserve quarter point rate cut and massive intervention in the overnight lending markets to stabilize repo dollar funding rates with several hundred billion of ad-hoc infusions, $1.1 trillion of U.S. Treasury issuance, record investment grade corporate debt issuance, the cancellation of the WeWork IPO, the release of the President’s call to Ukraine and launch of a form of impeachment inquiry, the United Nations assembly, European Central Bank stimulus, the launch of Apple’s new iPhone, the dismissal of a lawsuit claiming that the $10,000 state and local tax cap was unconstitutional, and the posting of the Puerto Rico Oversight Board’s restructuring plan. The U.S. Treasury Index ended September down 0.30% and high grade corporate bonds lost 0.62% while high yield corporates gained 0.30% and the S&P 500 Index returned 1.87%.

Tax-exempts underperformed their taxable counterparts during the first few trading days of October, strengthening on the week in spite of heavy new issue supply. The primary market is increasingly comprised of taxable muni bonds which are being used to advance refund higher coupon tax-exempt bonds and achieve significant savings for nonprofit borrowers unable to refinance on a tax-exempt basis since the enactment of tax reforms in 2017. In addition, high premiums on 5% coupons have redirected some institutional buyers into 3% and 4% bonds. Flows into municipal bond funds continued for the 39th consecutive week as investors added $884 million. In the high yield sector, the Public Authority of Wisconsin sold $49.3 million of non-rated bonds for Friends Homes in a deal structured with a 2054 term bond priced at 5.00% to yield 3.80%. The City of Baltimore brought a $47.1 million non-rated refunding for Harbor Point structured with seventeen maturities all priced at par; the maximum yield bonds in 2046 came at 3.625%. Columbia Heights, Minnesota issued $16.2 million of non-rated charter school lease revenue bonds for Prodeo Academy that had a 2054 maturity priced at 5.00% to yield 4.625%. And Kentwood Economic Development Corporation came to market with an $11.3 million BBB-minus rated refunding for Holland Home structured with 2041 term bonds priced at 5.00% to yield 3.23%.

This week, HJ Sims is a co-manager on the $48.2 million non-rated North Carolina Medical Commission refunding for the Galloway Ridge life plan community in Pittsboro. We expect a primary slate of $10 billion, led by a $596 million Massachusetts Water Resources Authority deal and a $513 million taxable transaction for the University of Nebraska. Market attention will focus on the relaunch of the U.S.-China trade talks, developments in Northern Syria, the protests in Hong Kong, the General Motors autoworkers’ strike now in its fourth week, rulings by the Supreme Court now back in a new session, and any hints on future rate action that may be offered by several Federal Reserve speakers, including Chair Powell. For the most part, all the honking and pile-ups inside the Beltway have not grabbed the attention of Wall Street. Economic data to be released includes the producer price index, consumer price index, mortgage applications, wholesale inventories, import price index, jobless claims and the University of Michigan sentiment.  Analysts will pour through the minutes from the last FOMC meeting, and investors will monitor $78 billion of 3-, 10- and 30-year Treasury auctions as well as the morning repo auctions which have captured attention since September 17 when overnight lending rates hit 10%. The Fed has announced that it will continue to inject cash into the overnight lending markets until at least November 4.

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