California "meltdown" offers wonderful muni opportunity
Started Jun 12 2009 at 7:01AM (EST) (By beancounter)
Keep your eyes on this self inflicted disaster looming for California. The Terminator has indicated that the state has 50 days until they can no longer pay their bills, in the form of a significant cash flow hiccup or technical insolvency. Whatever the nature of this so called 50 day ultimatum, it may result in the states bonds to drop significantly as they reprice potential default risk higher and take the prices lower. So you've got to ask the question, "Would you buy bonds in the 9th largest economy in the world, in an asset class with a default rate of less than 1% and where IF the payer did default, your worst case scenario would be new paper with a slightly longer maturity and perhaps a lower coupon, but otherwise you'd be made whole? And we'll throw in a federal tax exemption to boot."
Not time to buy yet, but time to keep a very close eye on what could be a very nice muni bond buy that would give you taxable equivalent yields, potentially into the teens...
Not time to buy yet, but time to keep a very close eye on what could be a very nice muni bond buy that would give you taxable equivalent yields, potentially into the teens...
This post is more than 60 days old. Replying to it might be confusing for other members reading the discussion.
By all means, keep the ball rolling and post a new opinion.
- Advertisement -
10 Comments
Top 95%
doubleyux
Jun 12 2009 at 7:12AM (EST)
Thanks - Nice input
PWZ?
Top 1%
beancounter
Jun 12 2009 at 7:40AM (EST)
Sure - maybe leg in around 20, easily. If you like fishing, there are LOADS of individual agency bonds, water, sewer, schools, roads, subway, hospitals,etc. that will offer stronger opportunities,imo, because many of their bonds are supported by separate fees (not state money specifically, but their own revenue streams), but will likely be damaged by any action that happens at the state level. I especially like the water/sewer/road pieces, probably subways/trains too. Hospitals and schools (including universities) could be a little "riskier" but you're still talking a miniscule default rate.
The only big one in the country that really looks like it could puke is Jefferson Cty, Alabama - one of the many "rate swap" victims of the Wall Street bigs...Great story too - bloomberg's been following it pretty closely.
Top 1%
ellkell
Jun 12 2009 at 7:45AM (EST)
they are going to release prisoners, about 100k of them. one of the hugest windfalls is the real estate the state will have to dump in order to be made whole. Alcatraz is up for sale for i think five billion and has a buyer already im told. anyone with local knowledge could go through the state land holdings and pretty much count on anything being put on the block.
i wonder if there are any california pawn shop stocks or gun sales shops that are traded. there would tend to be collateral opportunities for the economic collapse there. makes you wonder if this is the grapes of wrath in reverse...covered jalopes headed for 'oklahomee way'
Top 1%
beancounter
Jun 12 2009 at 8:10AM (EST)
Very nice literary reference Ell... I do believe CA is losing population, too and they are heading to lower tax states. (Oklahoma does have that oil thing going for it...)
There are several public pawn shops that I have traded from time to time...
EZPW, CSH and FCFS are a few of them - I believe they do have California and Nevada exposure, but check their 10ks for details.
Top 1%
guliamo
Jun 13 2009 at 3:25AM (EST)
This sounds like a great opportunity and I agree default isn't a real option.. not sure what to put in my watch list though..
beancounter, you mention it's not time yet - when do you think will be the right moment?
Top 1%
beancounter
Jun 13 2009 at 8:18AM (EST)
That's a tough one - It's one of those "you'll know it when you see it kind of things..." what I'd suggest is that you watch the ETFs and some of the California only muni bonds funds forprice declines. If you have it available from your broker, you can go out and put specific issues in your watch lists, which would be the best option.
I feel like it will be news driven, and if you hear the rating agencies start squawking about downgrades, especially if they focus on specific state agency issuers, that would be the time to pay close attention.
Ellkell raised a very interesting play too and I'm researching it with little success thus far, any agency whose debt can be serviced by asset sales, i.e. if the Parks department has bonds and is the actual owner of Alcatraz, that would make for very serious consideration b/c they could liquidate to cover the bonds, so you could get a nice downtick on the bonds, but if they sell you could get a nice cap gain out of it too. Big risk there is would they be forced to transfer the proceeds to the state general fund before satisfying their own debt obligations.
Top 1%
guliamo
Jun 14 2009 at 12:57AM (EST)
The bigger risk of course, would be someone turning Alcatraz into another darn Disneyland.. but I suppose these are the times we live in.. :)
Thanks beancounter, do share any interesting finds you might have, this sounds like a fundamentally good play.
Top 1%
beancounter
Jul 01 2009 at 7:30AM (EST)
Well you see it on MG and 3 weeks later it gets discussed in the press...
http://www.bloomberg.com/apps/news?pid=20601212&sid=aFty2T7nwlno
Also in bloomberg today - preferreds are also "very interesting", but on a pullback imo. particularly PGF around 12-13.
Top 73%
ramigabai
Jul 01 2009 at 8:36AM (EST)
That's why I keep saying MG should be my primary source for news and investing ideas.. Maybe time for me stop using Google Finance :)
Top 1%
beancounter
Jul 01 2009 at 1:17PM (EST)
This is a great indicator that the California munis may be getting close... Just one IOU can ruin your whole cost basis!
http://seekingalpha.com/article/146408-time-for-california-muni-bond-investors-to-take-a-stand
The article reminds me of the saying "buy when they cry and sell when they yell," I get that vibe from this - not crying but definitely frustration.