Puerto Rico Opportunity … Final Of a Three Part Series

While I am not sure if it is the new car effect (when you buy one, seems like everyone else is driving one too) or there really has been a major increase in headlines concerning Puerto Rico. Coincidentally, S&P downgraded them the day before our first post, now Moody’s followed with an even lower rating last Friday. Either way our logic is the same, and is as follows.

Puerto Rico Opportunity

In our first and second post along with our fill in muni primer earlier this week, we spoke about Puerto Rico’s background, economy, and the huge size of it’s public debt.

Here is the possible secret opportunity and most important item. As we highlighted and underlined in the second post, 75% of all Muni Mutual Funds hold some Puerto Rico Debt.

If there is a rush for the exits due to the perceived risk of Puerto Rico debt or even more opportunistically, Puerto Rico debt starts to wobble and Mutual Fund Managers see heavy redemptions, there will be blood AND opportunity.

It is possible that Mutual Fund managers MAY HAVE TO SELL GREAT Muni Bonds in the open market if there is a rush for the exits. If this occurs, we will be ready.  Remember, bonds are more complicated in many ways than stocks and may present inefficient opportunities.

Closing Thoughts

We hope you enjoyed our three-part series. Our thesis may never occur, and for the record, we think it highly likely a USA intervention would occur if Puerto Rico started to wobble. We also know that perception can be stronger than reality and may present an opportunity in the interim. If this occurs we will be ready (digital diary.)

Have a Great Day!

John A. Kvale CFA, CFP