The collapse of the municipal bond market last week caused great consternation in Montgomery County, which was only 10 days away from trying to sell $50 million worth of bonds for an array of projects.
News that Congress might include interest on tax-exempt bonds in a new minimum tax imposed on wealthy investors sent a wave of panic through the capital markets Wednesday. Trading ground to a halt in many firms, and Montgomery County officials were left wondering whether they would be able to sell their bonds on April 1. Indeed, for a short time, it looked as if there wouldn't be any muni bond market at all.
The panic was caused by word that Sen. Robert Packwood (R-Ore.), chairman of the Senate Finance Committee, wanted to tax interest on municipal bonds that are held by individuals who are able to shelter so much of their income that they fall into the minimum-tax category. That rule would apply to munis issued both in the past and in the future.
The wave of uncertainty about the future of munis began to ebb somewhat on Thursday as traders decided the threat might not be as bad as it seemed.
By Friday, trading was back on track and prices firmed, but trading remained light. The market seemed reassured by Packwood's admission that his proposals may not survive a committee vote scheduled for today.
Max R. Bohnstedt, the Montgomery County director of finance, was watching the situation intently, and with more than a little annoyance.
Montgomery County, along with many other municipalities, has work that needs to be done, and chaos in the muni bond market just makes it more difficult to get those jobs done, he said.
"The real problem is getting Congress . . . to do its debating so it doesn't tear up the system . . . so it doesn't close down the capital markets," he said.
Bohnstedt said he will evaluate the state of the muni bond market this week and decide whether Montgomery will be able to sell its bonds on time and at a reasonable rate of interest.
He has a number of options, including going ahead with the offering and rejecting the bids if he doesn't like what he gets, or rescheduling the sale.
One bond expert, Robert T. Reeves, senior vice president of Ferris & Co., doesn't think Montgomery County will have any trouble selling its bonds at a good price. He thinks the muni climate will continue to improve.
Reeves noted that one local bond issue came to market on the day most trading was suspended. Fortunately, it was a negotiated issue.
The issue was a $11.5 million "certificate of participation" for the state of Maryland (Salisbury State College) with Alex. Brown & Sons. The preliminary price was 7.5 percent at par. When the market floundered, the sale was postponed until today.
Meanwhile, several small local bond issues are coming to market during the second week of April. They include Washington County, Md., $5 million; Pulaski County, Va., $4 million; Charlottesville, Va., $6 million, and Front Royal, Va., $3 million.
By then, the fate of municipal bonds may be somewhat clearer.
How do you know when you're getting near the top of the market? Some market analysts watch the Dow Jones industrial average, others watch advance-decline lines. But the folks in the local brokerage houses have their own way of telling. Here's how:
The New Broker Wave: As the market rises, so do the number of applications pouring into brokerage offices from men and women who have decided it's bonanza time. They've read the stories that say brokers average $111,000 a year and decided: "Hey, with the market booming, I wouldn't mind just being average."
The New Diversification: Investors used to diversify by putting some of their money in stocks, some in bonds and, perhaps, some in real estate partnerships. Today, it's a rainbow of mutual funds, from conservative to aggressive (another way of saying risky). Brokers say their clients now call and tell them to put part of their money in an income fund, part in a growth fund and, perhaps, part in an emerging growth fund.
New issues are blooming like the crocuses these days, thanks to the bull market and lots of willing buyers. Newest on the list is Seaboard Savings and Loan Association of Virginia Beach, a 10-year-old thrift that has four offices, two in Virginia Beach and one each in Norfolk and in Portsmouth. The thrift is selling 300,000 shares at an estimated price of $10.50 to $12.50. That will raise between $3.1 million and $3.7 million, before commissions.
Until this offering, Seaboard said, there wasn't much of a market for its 507,000 outstanding shares, which traded at between $5.13 and $10.83 in 1984 and 1985. Since Jan. 1, however, the stock has moved up. By March 13, it had gone as high as $12.50.
Having survived the interest crunch of the early 1980s, Seaboard has moved to minimize the impact of interest-rate gyrations. During each of the last three years, more than 95 percent of its new loans have been either short term or have had adjustable or renegotiable interest rates. In 1983, those kinds of loans occupied only 48.4 percent of its portfolio. That went up to 76.4 percent in 1985.
The improved interest-rate climate, which has brought many thrifts back to life, has helped the bottom line at Seaboard, too. With total assets of $72.4 million, Seaboard earned $654,000 in 1985, up from only $2,000 in 1981. That brought its earnings up to $1.29 a share last year from a negligible sum in 1981.
If Seaboard stock opens at $11 a share, it will be selling at 8.5 times 1985 earnings, but at a 42 percent premium over its book value of $7.74 a share.
Remember Sonex Research Inc., the six-year-old company in Annapolis that said it had developed a new technology to improve the efficiency of the internal combustion engine? The firm went public last April, selling 500,000 units at $5 each. Today, its shares are selling at $21.50, jumping $2.25 on Friday alone.
The stock has risen, even though the firm has lost a total of $3.25 million and continues to be awash in red ink. In its latest statement, for the quarter that ended Sept. 1, Sonex lost $343,000 (13 cents a share), compared with a loss of $337,000 (15 cents) a year earlier.
To raise new money, Sonex recently called in its warrants. That requires a bit of explanation. The $5 units originally sold by Sonex consisted of one share of stock and one warrant. For every two warrants, the holder could buy one share of stock for $6.
When it decided to call the warrants, Sonex worked out a slightly different deal. For every two warrants and $5.50, it gave stockholders 1.05 shares of stock in Sonex. As a result, it raised about $1.3 million.
Sonex also has distributed stock in one of its subsidiaries, SonoChem Inc., a firm that applies the Sonex combustion technology to the disposal of toxic wastes. For every 100 shares of Sonex, a stockholder got 60 shares of SonoChem. In effect, Sonex was spinning off 60 percent of its interest in SonoChem to its stockholders and perhaps creating a larger market for SonoChem stock.
Clearly, what has been keeping the Sonex stock price up is the hope that Sonex may succeed in licensing its technology to a major player in the auto or motorcycle engine business. If it does, the company could boom.
Sonex claims its engines will be more fuel-efficient, require less maintenance and emit substantially fewer pollutants.
The latest news, Sonex said, is that the U.S. Patent Office has reversed its rejection of five Sonex patent applications filed in 1983. Now, the company says, the patent office has "approved all of the major claims presented in those patent applications." While that is not quite the same as issuing the patents, Sonex believes it is getting close.
Which mutual funds are attracting the most money these days? At T. Rowe Price in Baltimore, the International Fund is the leader among seven equity funds. International drew $21 million between March 1 and March 20. Of the seven bond funds, the fastest-growing is the High Yield Fund, which drew $33 million during the same period. The High Yield Fund is sometimes referred as the "junk bond" fund because it contains relatively low-rated but high-yielding corporate bonds.