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business newsFlorida "Dirt Bonds" in Default
By
Richard Suttmeier
Jun 29, 2010 9:00 am
More than $3 billion in the municipal bonds used to fund the development of streets, water lines, and other utilities for new communities are in default.
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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.
US Treasury Yields -- The weekly chart for the 10-Year shows that this yield traded as low as 2.016 during the week of December 19, 2008, so yields have been a lot lower than today’s break just below 3%. Note how the 200-week simple moving average held the week of April 9, 2010, around 4% just before stocks peaked on April 26. The 10-Year yield is now between my annual pivot and resistance at 2.999 and 2.813, but will the “Bond Vigilantes” start selling?
Comex Gold -- The weekly chart shows overbought MOJO following the test of $1266.5 on June 21. Note the ascending-wedge pattern on the chart. This type of formation is usually broken to the downside. My annual support started the year as a pivot at $1115.2.
Nymex Crude Oil -- The weekly chart shows sliding MOJO as my annual pivot at 200-week simple moving averages have been magnets year to date at $77.05 and $76.76. Lack of global demand has been offset by supply concerns on the Gulf oil spill and hurricane season.
The Euro -- The daily chart shows declining MOJO after strength reached my quarterly resistance at 1.2450 on June 21. Now the euro is just below its 21-day simple moving average; support is at 1.2209.
Daily Dow -- Weekly support is 9,483 with today’s pivot at 10,145. The Dow is below the 21-day, 50-day, and 200-day simple moving averages at 10,190, 10,499, and 10,359, and my annual pivot at 10,379. MOJO is declining on the daily chart. My call remains that the April 26 high at 11,258 ended the bear market rally since March 2009, and starts the second leg of the multi-year bear market.
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The Florida “Dirt Bond” Market -- According to Florida Trend magazine, more than $3 billion in “Dirt Bonds” are in default. Dirt bonds are municipal bonds used to fund the development of streets, water lines, and other utilities for the many new communities that were planned during the real-estate boom years in Florida. Dirt bonds are backed by the taxing power of Community Development Districts (CDD) that manage the construction and development of communities. Interest payments are made to investors from reserves set aside until homebuyers and businesses move in to completed houses, office buildings, and strip malls, etc. Then annual taxes are collected, typically escrowed at banks holding mortgages on the properties. The bondholders get their interest payments from collected CDD taxes. An incomplete development doesn't have a tax base to pay bondholders.
As of May, Florida had 125 CDDs in default on more than $3 billion in dirt bonds, the largest muni-bond default crisis in at least 30 years. According to Interactive Data, which monitors $5.6 billion in dirt bonds, 40%, or $2.4 billion, failed to make interest payments in November or had to draw from reserves to do so.
In Tampa Bay, where I live and work, there are 25% of the CDDs in the state of Florida that were issued between 2004 and 2007, which is the sweet spot for real-estate loan defaults. One development in south Florida has been resurrected because a buyer bought the project at a 29% discount. Other projects are changing hands at 28 cents on the dollar.
My community CDD dirt bond in Land O’ Lakes, Florida, is performing as the community has 948 completed homes with only a few empty lots. In December, about 90% of the taxes for 2010 were prepaid through mortgage escrow accounts.
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US Treasury Yields -- The weekly chart for the 10-Year shows that this yield traded as low as 2.016 during the week of December 19, 2008, so yields have been a lot lower than today’s break just below 3%. Note how the 200-week simple moving average held the week of April 9, 2010, around 4% just before stocks peaked on April 26. The 10-Year yield is now between my annual pivot and resistance at 2.999 and 2.813, but will the “Bond Vigilantes” start selling?
Comex Gold -- The weekly chart shows overbought MOJO following the test of $1266.5 on June 21. Note the ascending-wedge pattern on the chart. This type of formation is usually broken to the downside. My annual support started the year as a pivot at $1115.2.
Nymex Crude Oil -- The weekly chart shows sliding MOJO as my annual pivot at 200-week simple moving averages have been magnets year to date at $77.05 and $76.76. Lack of global demand has been offset by supply concerns on the Gulf oil spill and hurricane season.
The Euro -- The daily chart shows declining MOJO after strength reached my quarterly resistance at 1.2450 on June 21. Now the euro is just below its 21-day simple moving average; support is at 1.2209.
Daily Dow -- Weekly support is 9,483 with today’s pivot at 10,145. The Dow is below the 21-day, 50-day, and 200-day simple moving averages at 10,190, 10,499, and 10,359, and my annual pivot at 10,379. MOJO is declining on the daily chart. My call remains that the April 26 high at 11,258 ended the bear market rally since March 2009, and starts the second leg of the multi-year bear market.
The Florida “Dirt Bond” Market -- According to Florida Trend magazine, more than $3 billion in “Dirt Bonds” are in default. Dirt bonds are municipal bonds used to fund the development of streets, water lines, and other utilities for the many new communities that were planned during the real-estate boom years in Florida. Dirt bonds are backed by the taxing power of Community Development Districts (CDD) that manage the construction and development of communities. Interest payments are made to investors from reserves set aside until homebuyers and businesses move in to completed houses, office buildings, and strip malls, etc. Then annual taxes are collected, typically escrowed at banks holding mortgages on the properties. The bondholders get their interest payments from collected CDD taxes. An incomplete development doesn't have a tax base to pay bondholders.
As of May, Florida had 125 CDDs in default on more than $3 billion in dirt bonds, the largest muni-bond default crisis in at least 30 years. According to Interactive Data, which monitors $5.6 billion in dirt bonds, 40%, or $2.4 billion, failed to make interest payments in November or had to draw from reserves to do so. In Tampa Bay, where I live and work, there are 25% of the CDDs in the state of Florida that were issued between 2004 and 2007, which is the sweet spot for real-estate loan defaults. One development in south Florida has been resurrected because a buyer bought the project at a 29% discount. Other projects are changing hands at 28 cents on the dollar.
My community CDD dirt bond in Land O’ Lakes, Florida, is performing as the community has 948 completed homes with only a few empty lots. In December, about 90% of the taxes for 2010 were prepaid through mortgage escrow accounts.
Trade ETFs? Take a FREE 14 day trial to Minyanville's Grail ETF & Equity Investor newsletter. Receive specific trades with entries, targets, stops and strategy. 20 of the last 22 closed trades have been profitable. Learn more.
No positions in stocks mentioned.
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