Investing in muncipal bonds was the topic of the June 29 conference sponsored by Business Week Online. The guests were Alexandra Lebenthal, president of municipal securities dealer Lebenthal & Co., and Business Week's Pam Black.
OnlineHost: Good evening and welcome! Tonight, Business Week presents another in its series of special conferences, Interviews With Women in Business. Our guest is Alexandra Lebenthal (AlexLeb), president of municipal securities dealer Lebenthal & Co. in New York. Among other things, Ms. Lebenthal will be discussing municipal bonds: Are they the right investment for you? And where can you find the best information on them?Alexandra Lebenthal seems to have inherited some financial genes from her grandmother, Sayra Fischer, who founded the family firm, which is now headed by Alexandra's father, Jim Lebenthal. In fact, she has been following the bond market since age five. After graduating from Princeton, she sold bonds for Kidder Peabody before joining Lebenthal & Co.
With Ms. Lebenthal on stage will be Business Week's Pam Black (PamBW), a staff editor in the Personal Business section who writes on topics ranging from taxes and investing to health and travel. Pam is a graduate of the University of Wisconsin in Madison (in history) and of the Columbia Graduate School of Journalism. The moderator tonight is Bob Arnold (BobABW), senior editor of Business Week and editor of BW Online.
BobABW: Hi Alexandra & Pam, and welcome.
Pambw: Hi Alex, Hi Bob.
Alexleb: Hello, glad to be here.
BobABW: Pam, would you like to start off the evening?
Pambw: Before we start talking about municipal bonds, let's talk about you. How did you first get interested in municipals?
Alexleb: I grew up hearing about them at the dinner table, and as kids we always heard about this exciting business that Dad, Nana, Uncle Gerry, and Aunt Ellie were involved in.
Pambw: Alex, what was it about these investments that intrigued you besides the family?
Alexleb: Dealing with people and their money. And that these investments were tied to the building of this country.
Pambw: You said you started following the bond market in 5th grade, how so?
Alexleb: Actually, at age 5! I used to put gummed reinforcements on my grandmother's client pages. Then in the 7th grade, my friends and I came down and added up the par value of all the NYC bonds that Lebenthal had sold, because my father wanted to prove that hard-working individuals -- not just the rich -- owned them.
Pambw: Let's cover a few basics for newcomers. What is a municipal bond?
Alexleb: A bond is an IOU. A muni is an IOU from a state, town, city, or agency thereof. Because these are issued by local governments, the interest is tax free, not so much for the [benefit of the] holder who gets the income, but so the local government can keep taxes down by issuing its debt at a lower rate than IBM, etc.
Pambw: What do the bonds pay for?
Alexleb: Schools that need to be built, bridges that will transport people and commerce in and out of a city, roads, hospitals, airports, tunnels -- on and on and on. You can't get up in the morning without a municipal touching your life.
Pambw: Give us a specific example.
Alexleb: The Triborough Bridge and Tunnel Authority for the Triborough bridge in New York.
BobABW: JeffBond asks a question re New York:Question: Do you think NYC bonds will be downgraded? And what will that do to their prices?
Alexleb: It is very likely. But they [already] trade lower than [they should given] what [they're rated] now. Right now, a New York City bond has a yield similar to a bond [for a city] that is rated lower than New York is. Now, the bonds are Baa1/A-. The A- is what people think will be downgraded by Standard & Poors, one of the two major rating agencies.
Pambw: Do you think prices will drop further? And why are the bonds being downgraded?Alexleb: My feeling is that they won't fall in price very much if at all, because "the market" -- traders and institutional buyers -- demand a higher yield right now when they buy and sell them. IF the downgrade comes, it will be because the city has not addressed its budget problems in a way that the agencies think is responsible and solves long-term problems, not just short-term ones.
Pambw: Alex, let's talk about Orange County, Calif. That debacle has lots of people scared of munis. What, in brief, went wrong, and will it happen again?
Alexleb: Yes [people are scared]. And the jury is still out. This is municipal and U.S. history being made as we speak. What went wrong was that the treasurer speculated with the county's short-term funds -- as if you knew you needed your checking account to pay for living expenses over the year and instead took the money out of the bank and put it into risky investments.
BobABW: PMPE has an investment strategy question, Alexandra.Question: The share price of my muni-bond fund dropped last year because of the rising interest rates. Is there a strategy to compensate for this risk?Alexleb: Well, one strategy is to take advantage of a lower share price and dollar cost average and buy more of the fund. You have to expect, though, that over the time you own the fund it will fluctuate, and you can't let your longer-term goals get overshadowed by short-term [market] moves -- although last year was painful and unexpected.
BobABW: Alexandra, MikeM asks you to put Orange County in perspective.Question: Ms. Lebenthal, can you compare the situation in Orange County with that of the Washington Public Power Supply (the infamous Whoops) default several years back?
Alexleb: Similar in that debt essentially was repudiated by the court. But this is very different, as we are dealing with a G.O. -- general obligation bond -- in which the full faith and taxing power of the issuer is pledged to pay the bondholders.
BobABW: Here's JeffBond again.Question: Is it better to buy direct bonds rather than funds?
Pambw: Good question.Alexleb: Great question. Not necessarily. It depends on your personal needs and love or hate of market moves. On Orange County, it is important to understand that this is not over yet. This week, the voters said they would not increase taxes to help pay the debt. They didn't say they wouldn't pay the debt, although by not voting yes to the first step in the plan, they sure threw a monkey wrench into the hope of working it out.
Pambw: How else would they pay the debt? And what does this mean?
Alexleb: Well, that remains to be seen. Many think the state of California will come through with a bailout. But the state may very well take the county over. There are $200 million in notes coming due next week. The main theme now is to try to get the holders of those notes to "rollover" for a year.
Pambw: Talk about the precedent this may set.
Alexleb: This [would] set a precedent that others can get out of their troubles by "stiffing" their creditors, and the worst thing of all is it that this was/is a wealthy county!
BobABW: Here's a question from a mature investor.Question: What's a good investing horizon for munis? I.E. if you're 60, should you pass them up?
Alexleb: Great! Most of our customers are your age and above. They want the income the bonds provide and have less of a need, or the time to invest in stocks and get growth.
Pambw: Back to bonds vs funds. What are the pros and cons of owning individual bonds over bond funds?
Alexleb: Funds don't have a "maturity" so if you know you need your money in three years a fund isn't right. If you want to reinvest and compound your interest, they are great. If you want a dependable stream of income and a known maturity date, then a bond is better. Funds also give you the diversity that one or two bonds can't, so if you don't have a lot of money to invest, you should consider a fund or other "package."
Pambw: How much do individual bonds cost?
Alexleb: In our opinion at Lebenthal, we do not want to sell you an individual bond for less than $10,000 unless you want a fund or a unit investment trust. We did sell a number of minibonds that sold for $1,000 and $2,000 a few years ago to broaden the market, but those were zeros that were for long-term savers.
BobABW: Here's a followup question on Orange County.Question: Do you think the Orange County debacle will prompt investors to start demanding higher yields on munis, to compensate for a new element of risk?
Alexleb: For a while, but it very likely will push people to insured bonds. Also, remember that while this is an individual market, it is really owned by funds. And the fund managers are the ones who determine "demand."
BobABW: Enchanter has a geographical question.
Question: Would you invest in California bonds now due to quakes and Orange County? Would you move bonds to another state?
Alexleb: Lebenthal will not sell any bonds of Orange County. It is our stand for what we feel is the right thing to do -- which is to shun a "deadbeat." It's funny that you mention a natural disaster, since bonds have always paid [despite those]. It's the man-made ones that are trouble.
BobABW: Here's an Internet question for you.Question: I noticed in your big newspaper ad, you mentioned that Lebenthal was preparing for the Internet. Can you give us an idea of what your firm might do on the Net?
Alexleb: Yes -- we are setting up our site right now. We'll start basic since this is a frontier right now, and becuase I want to develop it over time. I'm on AOL a lot, so I have been observing the personal finance sections for a time.
BobABW: JeffBond asks another Internet question.Question: Does your firm plan to use the Internet or AOL to help sell or give info on munis?
Alexleb: As before: Yes, and can't wait. We have a "kit" on bonds we send out now. The web site will probably have simliar info.
BobABW: Enchanter is back, and asking for a prediction.
Question: Do you feel a VAT (value-added tax) will be a threat to those of us living on muni bond income? What is your strategy to deal with this eventuality?
Alexleb: More important to us is the talk of flat tax, which would be more harmful since it could mean that bonds would go down in value to equal taxables, but maybe the other way around: yields might come down on taxables. Also we do not feel, as most do, that the flat tax will happen.
BobABW: Here's another from JeffBond.Question: Isn't the spread [profit to brokers] very large on funds?
Alexleb: Larger on funds than on bonds themselves, but "spreads" or sales charges and fees on funds are "advertised." They aren't on bonds -- or at least not quite yet!!
BobABW: JWalsh has what will have to be the last question.Question: What is the best way for a young couple to get started in tax-frees?
Alexleb: First -- know your own situation. Most important, are you in the right tax bracket? Then, figure out if you will be saving regularly over time. [If so], a fund may be best.
BobABW: Thanks, Alexandra and Pam, for an interesting evening.Alexleb: Thanks -- it was great!Pambw: Thanks Bob and Alex, great talking with you, great audience questions, too.
OnlineHost: Thanks to Alexandra Lebenthal of municipal securities dealer Lebenthal & Co., to Pam Black of Business Week, and to all the BW Online team for this evening's program. If you would like to continue the discussion, we invite you to move over to the BW Online Chat Room (it's under Talk on our opening screen). Or you can post questions and comments on the BW Online Message Boards (try Economics & Finance or Social Issues/Women/Work/Sports).
Transcripts of all BW Online conferences are available for downloading soon after the event (look under Special Events, Talk, or Search BW). And join us Sunday at 9 pm ET in the Globe for a conference on the current BW Cover Story, Windows '95. Thanks again, and goodnight.
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