Distressed Volatility

As you've read in the news, Detroit's current mayor Kwame Kilpatrick is currently being investigated in a text message scandal and now I recently read this article by AP: FBI Probe Latest Setback for Beleaguered Detroit. FBI probe of sludge recycling contract is latest setback for beleaguered Detroit..

"Auto industry cutbacks, double-digit unemployment and one of the nation's highest home foreclosure rates have left Detroit with a dreary economic future. Now, a mayoral text-messaging sex scandal, federal investigation into a City Council-approved $47 million sludge recycling deal, and poorly run and deficit-plagued public school system have dashed inroads toward respect and reopened Detroit to outside ridicule. "When we're out doing business and trying to get customers we sometimes get asked 'You're from Detroit? What's going on there?'" Compuware Corp. senior vice president Jason Vines said. "As taxpayers and residents, it has to be disheartening. When your city is used as a public joke, it's not good." Like most major cities, Detroit is no stranger to scandal. Former City Council members, and even a police chief, have been indicted, arrested or imprisoned. But the current political crisis threatens to bury the city deeper in an economic grave. While the mayoral text-messaging scandal has been going on since the end of January, the past week alone has brought a new round of bad news for the city."

So I read this, and then I read this a few days later!!


Dave Bing: I may run for mayor of Detroit. Scandal drags city down, he says.

"Detroit businessman and former NBA star Dave Bing is considering a run for the Detroit mayor's office because the city needs to "regain credibility" after the scandals that have infected all levels of government, and before the city loses the middle- and working-class population so necessary for its renaissance. "I don't think most of us that live in Detroit or call Detroit home feel real good about it right now and that's so unfortunate because there are so many good things happening right now," said Bing, the 64-year-old founder and president of the Bing Group, an automotive supply company and a real estate developer whose latest project is a condo development on the city's waterfront. "All of this overshadows that. We've got to get back on track to turn this ship around, and I think it will be with new leadership."

I think that will be a helpful start for a Detroit turn around tied to the dying auto industry. Detroit is at a 100 year low, it peaked when Henry Ford came out with the Model-T. With Dave Bing, and help from: (1) Dan Gilbert founder of Quicken Loans, owner of CAVS, and newly formed private equity firm RockBridge Equity Partners (Gilbert starts private-equity biz, RockBridge to invest up to $200M, focus on Michigan) who also plans on moving the Quicken Loans headquarters downtown (Quicken Loans Headquarters Will Bring 4,000 Staff to Downtown Detroit in a Joint Announcement with Mayor Kwame Kilpatrick), (2) an online interactive promotions start up called ePrize, and (3) some interesting bank/private equity start ups in the Detroit area that have big asset bases together all have potential to grease up the economic engine for new potential businesses in need of capital and people in need of jobs. So Detroit is starting to get the point that they need to diversify out of the auto industry. Plus don't forget Detroit has 4 professional sports teams!!!

Also, it's great to hear talks about the funding of a light rail transit system in Detroit. Detroit needs a safe public transportation system in order to attract a thriving social community, which will eventually drive business back to the city. Michigan Bill Would Allow TIFs for Transit (bondbuyer), Legislators, Gilbert, Penske will back light rail on Woodward (Crains), Hertel at Mackinac: Mass transit could drive economic turnaround in Metro Detroit.

Can mass transit really happen in Detroit?

I'M NOT SAYING THINGS ARE LOOKING BRIGHT! Detroit is dealing with huge unemployment issues, a horrible housing downturn, the distressed auto industry situation, oil prices affecting drivers, and business trickle down effects all throughout the area killing business. Michigan jobless rate jumps in May, Metro Detroit home prices continue downward spiral

"DETROIT (Reuters) - Michigan's unemployment rate jumped to 8.5 percent for May, the highest jobless rate in 16 years for a state that has been hardest hit by the combined downturn in the U.S. auto industry and the slump in housing. The Michigan unemployment rate, up from 6.9 percent in April, was three percentage points higher than the national rate of 5.5 percent for the month."

"In April, metro Detroit saw home prices drop by 18% compared to the same month a year ago. Prices fell 1.9% since March. Metro Detroit remains the only metro area in the top 20 that has an index level under 100. Metro Detroit had a 93.79 index level in April, below the 100 set in 2000 as the baseline. That means home prices have not risen enough since 2000 to offset the current erosion. Detroit’s home prices have fallen off more than other Midwest cities. Cleveland had an index level of 109.55 in April, Minneapolis was at 139.19 and Chicago was at 150.44."

Detroit Unemployment Rate (bls.gov)
So, now I'd like to actually check out some of Detroit's financial statements. It looks from there website that they only have their fiscal year ending June 30, 2006 comprehensive annual report, and haven't we passed June 30, 2008? That's a big reason why Moody's just downgraded their bonds on May 30, 2008 because they didn't have up to date numbers, as well as had a declining general fund balance and current economic hard ships. Also, if you care, look at this most recent July 1, 2008 article in the bond buyer, It's Never Dull in Detroit. Now I thought I'd look at Detroit's numbers from 2006, so in no way is this relevant to Detroit's current situation, it's very backward looking.

The pictures I'm going to show you were from the 2006 CAFR which can be downloaded here. So I took a peak at the 2006 statements, and REMEMBER folks this is at the PEAK OF THE HOUSING MARKET! I found a historical trend section in the back and it looked like their total governmental fund revenues were relatively stable, however in order to probably substitute for their increased debt service costs that almost tripled they cut some expenditures across the board. Looking at their most important fund, the general fund balance, I saw that it was at -107 million compared to 206 million in 2002, that is a HUGE DEFICIT! They transferred 139 million to the transportation fund and debt service fund for principal and interest payments. Also, looking at their property tax base valuation chart, the residential valuation went from $4.6 billion in 2003 to $5.46 billion in 2006, I couldn't even imagine how they would value the property in 2008, post housing bubble with property tax revaluations due to foreclosures. That would ultimately effect their legal debt limit (which is specific % of assessed value). Their legal debt margin stood at $628 million with a debt limit of $1.4 billion or 56.48% in 2006. The percentage has been rising since 2002, but there were even higher levels in 1997 and 1998.

Total Fund Expenditure Trends

General Fund Balance Trends

General Fund Balance (Transfers Out)

Assessed Property Value Trends

Legal Debt Margin
Eventually the municipal bond debt will start to look attractive when the price reflects more distressed levels of Detroit and Michigan in general. I would like to see Detroit's 2007 and 2008 audits first, with the auto industry laying off so many people tax money is leaving in droves. Here are some long term charts of closed ended Michigan Municpal Bond ETFs. BlackRock MuniYield Michigan Insured Fund, Inc. (MIY) with a price/book value of 0.83, and the Nuveen Michigan Quality Income Municipal Fund Inc. (NUM) with a price/book value of 0.84.



I'll leave you with some optimism, here's an article in the press saying it's a great time to buy real estate in the Detroit area, and it only comes every 25 years.