Romero: Question 5, pardon our dust

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The future of the economy is as scary or even scarier than the prospect of going into a dark cave. Unfortunately, we have not gotten over our dark cave fear, passed on to us by our pre-historic ancestors. During the week ending on October 10, investors pulled over $43 billion dollars out of mutual funds, just to see, the very next day, the market rebound in the greatest one day gain in history. The week ended with the second highest one-week percentage gain on the Dow Jones.

Over the last 35 years the market has been down eight years and never more than three consecutive years. One thousand dollars invested in the S&P 500 composite index, with dividends reinvested would be worth approximately $32,000 after this huge market correction. Investors that tend to retrieve never achieve the full potential of their investments. If you had invested $10,000 10 years ago in the S&P taking your dividends in cash and because of fear of the market had pulled out and missed the 10 best days you would have $9,534. Now, if you had stayed invested, you would have $15,131. It is the unexplainable impulse of investors of selling low, only to come back months later and buy high.

Bond measures during a time of economic crisis naturally bring out the Scrooge in everyone. The same fears that drive people to act irrationally, selling low and buying high, are used to reason why it is time to dig trenches and prepare for war, as opposed to start building and preparing for the future. Warren Buffet, arguably the savviest investor in the world has made his fortune when others are fearful (NY Times). When all of us have been panicking and running for cover, Warren Buffet has been busy pumping billions of dollars into the market.

But even if Warren Buffet tried to convince investors into returning to the market, investors are not quite ready for the adventure. So, where are those $43 billion and more dollars going to be invested? One sure candidate is the Municipal Bond market. There will be plenty of demand for safe, tax-free investments and, if the demand and supply laws work, it is the perfect time to issue debt. Remember buy low and sell high, and not the opposite.

Cities like Palo Alto, Salt Lake City, Atlanta and Oklahoma City have similar measures as Maricopa’s Question 5, with two major differences. Those cities already have plenty of parks and libraries, and we don’t. Second, those cities didn’t experience the drop in real estate values we experienced at the City of Maricopa. Yet, if you study the list of reasons for why the measures make sense, one argument jumps as a common theme: “To maintain and improve property values.” We are constantly asking our elected officials to bring jobs and development to Maricopa. Well, we have to have the tools to compete with other cities for those jobs and projects. When someone buys a house they don’t limit their decision to what is inside the four walls. City amenities play a very important role on those decisions. Those decisions are called demand, and, if there is anything we can do to drive demand up, hence prices, we must act accordingly.

We in Maricopa have suffered one of the largest drops of personal net worth seen in many decades in the U.S. We have seen a drop of 30 to 40% on house values coupled with the drop of 20 to 30% of the stock market affecting our IRA and 401K investments. What we do now will have a direct impact on how well we are going to be able to recuperate.

Not only is the market poised to be favorable for bond issuers, there is intense competition in the construction industry for the few projects available. We can negotiate very competitive deals to build our parks, libraries and recreational facilities. Land prices have dropped about 20 to 30 percent from the highs of a couple of years ago. Those prices will not stay at that level forever.

As with any debt, there is always a cost associated with that debt. But there are also opportunity losses that are very hard to measure. If we wait for the “right time” to proceed, just consider how much land and construction costs will be in the next five years. How much are we going to forgo on real estate appreciation if we wait until the economy recovers? There are many features we can incorporate into a bond as safety measures. We can issue callable bonds to avoid interest rate risk. If rates drop considerably compared to our bonds, we can call the bonds and issue replacement bonds at a lower cost, hence retiring the first debt. Better times mean higher land prices, less flexibility on construction prices, higher demand on construction materials and an overall higher cost.

Today, Dr Quincy Krosby, Chief Investment Strategist with the Hartford, was asked if he anticipated any further rate cuts. He said, “We anticipate further rate cuts down the road, especially from non-U.S. central banks. Fortunately, the inflation picture has changed right now, at least as far as oil and other commodity prices are concerned. That should help the Europeans to lower rates. We have seen a rate cut in China, India, and from the Reserve Bank of Australia, and we expect to see more in other countries. And as I’ve said before, we will probably see another rate cut in the U.S. This news is not good for lenders, but for borrowers: as in the case of Maricopa, it is great news because of the low cost of money. If there has been a time in recent history where the cost of money has the potential of being low, this is it!! Let’s buy LOW.

I had the opportunity to speak to some business owners is Maricopa about the measure. They are concerned about the impact taxes are going to have on their business. I ask you: Have you ever made improvements in your business and passed the cost to your customers? Were you able to serve your customers better as a consequence of those improvements? Did the market value of your business go up? Were you able to attract new customers? Question 5 is the way to improve the business of our city. It will attract people to the city, i.e.: residents, investors, business, etc. It will increase the value of the business, i.e. home values. It will benefit us all, i.e. something for our children to do, small town with larger city amenities.

We have to act now. If we wait and decide to act after we read in the newspapers how good the economy is, we will be acting based on yesterday’s news, that is unless you are Gary Hobson from the TV series “Early Edition.” Waiting for a “better time” to invest in to our city is like waiting for the water to stop so that we can cross the river.

Let’s get the “Under construction signs.” Yes on Question 5.

Jake Romero is a Financial Advisor, with an International Business degree and a minor in Finance. He is the current President of the City of Maricopa Industrial Development Authority, former VP of the Maricopa Chamber of Commerce and a former member of the Newark Regional Business Partnership. He is also a board member at an education related organization in Arizona. He lives in the Villages with his wife and two kids.

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