When in Doubt, Stay Out

09/05/2013 6:00 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen, president of Envision Capital Management, tells it to you straight. She's going to stay far away from Detroit and wants you to look to the friendly skies instead.

NANCY: My guest today is Marilyn Cohen. Hello, Marilyn, thanks for stopping by.

MARILYN COHEN: Nancy, my pleasure.

NANCY: It’s always great to see you.

MARILYN COHEN: Thank you.

NANCY: So you’ve written a lot lately about municipal bonds and especially about Detroit and the problems that they have there. Are you still sort of saying forget Detroit right now; we’re not in the business of buying bonds there?

MARILYN COHEN: I’m not only sort of saying it, I’m shouting it. Nancy, I think we are at a perilous moment in time for the municipal bond market. The emergency manager of Detroit, Kevin Orr, is a smart guy and what he wants to do is he needs to clean the slate. He needs to clean up the joint and the only way he can do that is by sticking it to the bond holders; that’s the only way I can put it. Meaning, not only the unsecured lenders, but the secured lenders, the general obligation bondholders, and I think that this is going to be a precedenting situation. I think that what’s going to happen is it will end up in the Supreme Court and we will finally know who has jurisdiction. Is the state having the jurisdiction or can the federal government govern, and tell Detroit what to do? The bottom line is we may see a redefinition of what a general obligation bond is. There have been a lot of money managers quoted in the Wall Street Journal saying, oh they own Detroit water and sewer, or they own this, or they own that. That isn’t for the do-it-yourselfer. When in doubt, stay out. Has there been a contagion in Michigan. Well the answer is kind of; kind of in the sense that there were three deals that several counties in Michigan wanted to come to the market on, and they were afraid nobody would show up at the interest rate they wanted to pay. So they didn’t want to pay anymore. I think that’s a mini-contagion. It’s certainly an influenza, that’s for sure, so I think that there are precedenting situations out there and I don’t want to be part of it, and I don’t think the Money Show participants should either.

NANCY: Right, but you are invested in some municipalities right now?

MARILYN COHEN: Absolutely, about 65% of our business is in municipal bonds and here’s what I think people should buy--airport revenue bonds. You can connect the dots. You stay in the senior leans. You don’t buy junior or subordinated debt. You know how much income’s going to come in. You can see the enplanements; how busy the airport is. San Francisco International, Los Angeles International, the international airport in Atlanta, the big, big airports, I think, are fine. I think what you do is you stay in bonds that have a state intercept program, meaning if the school district can’t make it’s payments, the state steps in. Indiana is a great state. They have a huge intercept program. Look for those words – intercept program – and you know that you have a secondary source of repayment. I like water and sewer bonds in good areas--not Detroit--good areas, in which there’s a good population. There aren’t a lot of homes that are in foreclosure and I think you just keep it simple and keep it safe and keep it short now.

NANCY: If you’re an individual investor—say you don’t have enough money to buy a whole bond, but you want to be in bonds funds. Are you an advocate of bond funds right now?

MARILYN COHEN: I’m not and I’ll tell you why. People that lived through May and June—they got killed. Didn’t matter what they owned in bond land, they got killed if they had bond funds, because most of the bond funds, the majority of them, are long term. There’s a few intermediate term and a couple of short-term, but I think you’re far better off owning the individual security in which you know when you’re going to get your income, when you’re going to get your premium, your premium call price, and then they mature and I think that that’s the safety valve that you need for right now in a rising interest rate environment.

NANCY: Super, makes a lot of sense. Thank you.

MARILYN COHEN: It does.

NANCY: And thanks for being with us on the Moneyshow.com video network.

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