Last Friday General Electric (GE) released its second quarter earnings and raised guidance for the rest of the year. Things are looking up.
Orders were up four percent globally and 20 percent in the U.S. and the backlog stands at an all-time high. The stock leaped to a five-year high. Why is GE important? No company is a better proxy for the global economy than GE.
General Electric is the dominant player in may cyclical areas of the global economy. GE is in infrastructure (turbines, locomotives, power plants, windmills), energy service, health-care technology, aerospace (jet engines) and finance with GE Capital.
The recent strength in this conglomerate and their optimistic outlook implies that the global economy has turned the corner. That is a good sign for other industrials (United Technologies, Honeywell and 3M) and the market as a whole.
Municipal bond investors were thrown a curve last week when Detroit filed for bankruptcy protection. Their move was not unexpected. After all, the city’s problems and decline were well known and further deterioration was expected and inevitable.
Should muni investors care about Detroit? If they own Detroit bonds, of course. Those will be worth pennies on the dollar. But others should be concerned, too. Here’s why:
General Obligation bonds (called GO’s), whether issued by states, counties or cities, are as old as the municipal market itself.
Investors have always assumed that the bonds were backed by the full taxing authority of the issuer, which would raise taxes to whatever level needed to pay interest and principal. That is how it’s worked for many decades ... until now.
Detroit refused to raise taxes to pay interest due on some of its bonds. Bankruptcy soon followed. A court will decide whether Detroit can go this route and muni investors will be watching closely. The first ruling by a lower court nixed the idea, but that’s surely not the last word.
Stand by for more. Until there is some clarity, I’d avoid General Obligation bonds. Muni investors should focus on revenue bonds instead.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.