Tag Archives: Oppenheimer Funds

Warning: Get Your Money Out Of Bond Funds

Whenever I constructed a “difficult to sell” muni deal, I could count on the Rochester Family of Funds[Oppenheimer’s Rochester muni fund complex] to buy the deal if there was some “juice” in the yield. After all its other peoples money right? – an email from a multi-decade muni bond professional to IRD this a.m.

IRD warned about Oppenheimer’s exposure to Puerto Rico in July 2015

Puerto Rico officially filed bankruptcy and it appears that Oppenheimer Funds will be taking it on the chin to the tune of at least $2.1 billion in losses.  Oppenheimer was the biggest bagholder of PR bonds.  In July 2015, Investment Research Dynamics issued this warning about leaving money in Oppenheimer bond funds:

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt. including $4.4 billion of uninsured bonds. Not including tobacco bonds, insured debt and pre-funded bonds, as much as 13%  of some of Oppenheimer’s bond funds’ total holding holdings are in Puerto Rico bonds.  Oppenheimer Will Be A Bagholder

The Wall St Journal reported today that the “estimated” losses for mutual funds on PR bonds to be $5.4 billion, of which Oppenheimer’s estimated losses represent at least $2.1 billion, or 38% of the total estimated losses.

“Estimate” in this case is a guesstimate based on what’s been put on the table so far and based on the assumption that the current restructuring proposal will occur and that the new securities issued will maintain their “at issue” value.   As a former junk market professional specializing in special situations like this, I can say with certainty that the Wall Street Journal’s estimate of losses will end up being on the low side.

The July 2015 warning about Oppenheimer’s bond funds applies to ALL bond funds except perhaps short term U.S. Treasury bond funds, if you can verify that the specific fund you hold is free from any derivatives exposure – a proposition that is, at best, “iffy.”

I don’t know when the next financial crisis is going hit the markets but, when it does, the damage that will be inflicted on the stock and bond markets will dwarf what occurred in 2008.  That’s just one risk faced by bond funds.

Eventually the Fed will lose control of its ability to keep a lid on the short end of the Treasury curve.  Short term interest rates will correct rapidly by shooting up several hundred basis points in a price-discovery “correction” that will factor in the real rate of inflation (not the rigged CPI) and the real risk of default by the U.S. Government. In this context default is defined as either the halting of payments on U.S. Treasuries or, more likely, the “de facto” default that is implied when the Government has to print money in order to make the interest and principal payments.   When this “price discovery” event occurs, the value of all bond funds will plummet.

The message here is that it is time to get your money out of fixed income and equity mutual funds.   The risks embedded in these funds are not worth the probability of incurring a massive hit to your wealth that is held in mutual funds.  Eventually these funds will be “gated,” which will prevent you from withdrawing your money.

Look at it this way with regard to your bond funds:   you are not earning enough interest on them to make a difference in your lifestyle, so why bother taking on the high risk of a big hit to your invested capital.  Currently, you should be concerned about the return of your money as opposed to the return on your money.

The Greece-ification Of Puerto Rico: Get Your Money Out Of Oppenheimer Funds

(Please note:  the term “Greece-ification” was coined by John Titus  of Best Evidence, who will be a guest on the Shadow of Truth podcast show tomorrow).

A big fight is brewing between Oppenheimer Funds and the Governor of Puerto Rico.  The battle is a smaller scale version of the battle between the EU and Greece.  Currently hedge funds own $15 billion in Puerto Rican debt, mutual funds hold $11 billion, and comatose high net worth investors have been stuffed with the rest – $46 billion – by their brain-dead, trusty financial advisors.

Too be sure, there is no doubt many $10’s of billions in credit default swaps connected to the bond insurance on Puerto Rico’s debt underwritten by MBIA, Ambac and Assured Guaranty.  I would not be surprised if Oppenheimer has exposure in this derivative form as well.

Puerto Rico announced on June 28 that it was unable to handle the debt service requirements of $72 billion in debt it has issued over the years.  The debt issued by Puerto Rico is structured as “super” municipal bonds.  This is because it is triple-tax free for everyone in the United States.  Typically muni-bonds are only triple-tax free for residents of the issuing municipality.

Because of this “super” tax-exempt status, the yield hog investors groped for Puerto Rican debt like groping pedophiles running a daycare center.  Despite the junk bond rating status of this debt, investors continue to beg for it like Oliver Twist groveling for gruel.

Puerto Rico’s economy has been sliding for nearly 10 years.   Nearly 50% of the island’s residents are living in poverty.  Yet the buyers of Puerto Rico’s debt continued to have insatiable appetite so Wall Street was more than willing to oblige, naturally.

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt.  including $4.4 billion of uninsured bonds.  Not including tobacco bonds, insured debt and pre-funded bonds,as much as 13%  of some of Oppenheimer’s bond funds’ total holdings are in Puerto Rico’s bonds.

This explains why Oppenheimer has assumed the role of Germany in the ongoing battle between creditors and Puerto Rico’s Government.  Puerto Rico’s Governor is seeking to restructure the $72 billion in debt down to a level that will enable Puerto Rico to continue servicing it.  The alternative is to force Puerto Rico to implement draconian budget cuts and tax hikes which would crush the economy and throw even more of its residents in brutal poverty.

Without getting into the details, Puerto Rico can not file bankruptcy in order to force a restructuring of the debt, although Congress is considering legislation which would enable the island to take this route.  If this occurs, 13.8% of Oppenheimer’s asset base will get hammered.  In my experience as junk bond market trader, in this particular asset sector yield hogs almost always lose their shirt.

The message here is clear:  If you own any Oppenheimer mutual funds, you are a complete moron if you do not call up your mutual fund custodian and sell them all tomorrow.  

Source links for this analysis:  Investment News and Vox.com