March 24, 2003

Apparently the bond bubble began to burst last week. Yields increased by 40 basis points on one to ten year maturities and approximately thirty basis points on longer maturities. This yield change reflects the municipal bond market from March 14 to March 21.

We continue to recommend that investors wait for higher yields, lower prices before investing in municipal bonds. Our rationale remains the same.

The deterioration in the financial strength of almost all municipal issuers is not priced into the yields offered on municipal bonds.

Yields do not reflect the very real risk of credit downgrades by rating agencies.

Yields do not reflect the municipalitiesÕ obligation under law to balance their budgets. Continuing declines in tax revenue force a municipality to stop spending by cutting jobs and services. This action causes the regionÕs already weak economy to decline further.

As a result, tax revenues decline more and a downward economic spiral is set in motion. Unless the economy regionally or nationally were to turn around significantly, the possibility of some municipal bond issuers seeking comfort in bankruptcy is not as remote as investors might believe.

The Federal GovernmentÕs budget deficit continues to grow. The Government recently announced it was running a $200 billion deficit currently and forecasts a $300 billion one next year. We treat the Federal GovernmentÕs optimism with a grain of salt, and so we increase these figures to come up with our estimate - $300 billion currently and $450 billion next year.

Neither estimate considers the cost of going to war with Iraq, stabilizing Iraq, the Middle East and North Korea. Nor do these numbers include the funds necessary to establish and run the Office of Homeland Security. A trillion-dollar deficit could very well prove to be a reality.

Washington 3/7/03 The nonpartisan Congressional Budget Office forecast a $1.8 trillion Federal deficit over the next ten years Two years ago forecasters envisioned an unprecedented $5.6 trillion in surpluses for the next decade.

Underlying the growth of future budget deficits are the inexplicable tax cuts made in the "name of tax cuts". Hardly stimulative, these cuts insure chronic Federal budget deficits for years to come. The tax cuts will make it extremely difficult for the Federal government to stimulate the economy in the future.

And the Government can forget about the Federal Reserve stimulating the economy. Just. Just look at Japan. One percent or lower interest rates for Japanese banks hasnÕt achieved any stimulus, However, it has bred a lack of confidence in the Japanese economy.

We expect the Federal Government to be a large seller of bonds in order to finance its ever-growing deficit. As a result, the Federal Government will be limited by its own financial problems in helping states and cities.

A continuing large supply of US Government bonds over the foreseeable future will push interest rates higher, In addition, we expect the US dollar to continue to weaken. Weakness will lessen the amount of foreign investment in US bonds, thereby exacerbating this trend toward higher interest rates.

"Cash" continues to be " King"! Enjoy the secure feeling cash brings while waiting for opportunities to put it to work at higher rates of interest.

  

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