Archive for March, 2011

Smith’s Gradings Monitor Seismic Risk

March 18, 2011

Smith’s Gradings include a category of “event risk”, which includes seismic risk, for every credit.  These types of event risk can be described as “episodic” in frequency.   However, Smith’s Gradings monitors the presence of these event risks and models the expected loss for each credit.   It is part of the enhanced surveillence program that allows Smith’s Gradings to heighten the situational awareness of our clientele.  To learn more about Smith’s Gradings and the event risks that we monitor, please send us an e-mail at smiths@smithsresearch.net.

Advertisements

In Memoriam: James Gammon

March 14, 2011

James Gammon, “The Wizard of Bonds”, died last weekend from complications associated with his heart. He is one of the most important figures in municipal finance during the past 50 years. His record speaks for itself: Mr. Gammon was simply one of the best buyers in the business — ever. Trackrecord of Innovation Mr. Gammon was an early proponent of innovation in the municipal bond market and many of the portfolio techniques that he developed have become widely used throughout the industry. His aggressive trading style forever changed the municipal bond buying community. In the days when portfolio managers worked hard at “playing par golf” (a euphemism for buy/hold strategies), he bought and sold more municipal bonds in a day than some sleepy rivals traded in a month. Not surprisingly, Mr. Gammon was also one of the greatest champions of high-quality municipal analysis. For example, he would host investor meetings to disseminate the findings of an analyst that highlighted an overlooked facet of a municipal bond. Mr. Gammon was, of course, quick to profit from those research reports. He used the municipal analysis to acquire recently discovered “gems”, which provided his portfolios with opulent returns. Also, Mr. Gammon would honor analysts with “The Order of The Eagle”, which presaged SMITH’s All-Star Municipal Analyst Team. To this day, Mr. Gammon’s elegant Stuben crystal statues proudly adorn the desks and credenzas in the offices of some of the municipal bond market’s finest analysts. Iowa Born and Investment Wise Mr. Gammon was born and reared in Iowa. His Midwestern sensibilities served his investors well over the years. At the crack of dawn, he arrived at work. Then he toiled into the night. Mr. Gammon always worked hard. He started in the business at General Electric Investment Corporation, after graduating from the University of Nebraska and a brief stint in GE’s accounting/auditing program. He took to managing tax-exempt investments like a duck to water. The Elfun Tax-Exempt Income Fund provided G.E. executives with the best performing municipal bond fund for seven straight years. And, the Elfun fund’s performance wasn’t just the best by a little bit — it was head and shoulders above the competition. While at GE, Mr. Gammon was actively involved in the formation of one of the big three bond insurers, FGIC (Financial Guaranty Insurance Company), and was Chairman of the Credit Committee on FGIC’s founding Board of Directors. For the next nine years, Mr. Gammon was a senior vice president and senior portfolio manager at Loews/CNA Holdings Inc. He was responsible for as much as $12.5 billion in the municipal bond and preferred stock portfolios of the CNA Insurance Companies and Loews Corporation. Mr. Gammon’s trading programs were prodigious. How big? Well, Doug Birmingham, municipal bond institutional sales executive at E.F. Hutton, resigned from all his other accounts in order to serve Loews/CNA on an exclusive full-time basis. Mr. Gammon was the first major buyer of tax-free zero coupon bonds, aggressively hailing their benefits and popularizing the product in the municipal market. He also pioneered the use of techniques like escrowing bonds to maturity (economic defeasance) and converting high-coupon bonds into non-callable zeros (stripping bonds). Mr. Gammon almost single-handedly built the taxable municipal bond market, which is one of the industry’s fastest growing sectors. Additionally, he was the buyer and major proponent of tax-exempt nursing home bonds. At the peak of the Loews/CNA trading programs, Mr. Gammon was incredibly generous with designations. He would include allocations for sales (1/3), trading (1/3) and research (1/3). Often, private syndicate messages for bond allocations would include a proviso: “No Designations For Research Will Be Accepted”. But, Mr. Gammon did try to provide sellside analysts with recognition. The Tax Reform Act of 1986 eliminated many of the tax-exemptions for large corporate investors like Loews/CNA Insurance and commercial banks. The target of tax-exemption was the retail investor, so it was probably inevitable that Loews/CNA would eventually favor other asset classes. After leaving Loews/CNA, Mr. Gammon went into the wilderness (his home in Fairfield County). Not too much later, Mr. Gammon teamed up with James Lebenthal. Together, the “Two Jims”, founded Lebenthal Asset Management. The performance of Lebenthal Asset Management’s funds was superlative. Mr. Gammon consistently posted No.1 total returns for one-year, three-year and five-year, according to Lipper Analytics. In 2001, Jim Lebenthal sold the business to Advest and, once again, Mr. Gammon went to work in Fairfield, Connecticut. Over the past decade, Mr. Gammon managed his money in the stock markets, in general, and exchange traded funds (ETFs), in particular. 