Comments on: Will California's budget crisis whack your munis? http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/ Money Magazine looks at a wide range of personal finance issues and asks for your feedback. Tue, 22 Dec 2009 00:19:01 +0000 http://wordpress.com/ hourly 1 By: EJHickey, Chicago, Illinois http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18081 EJHickey, Chicago, Illinois Sun, 05 Jul 2009 22:35:15 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18081 This article exhibits some of the same thinking that led investors to buy Chrysler bonds in 2007 and 2008. The thinking was that there was not much downside risk. What investors did not count on was a Federal government takeover and being told to take even less for their investment. The same thing might happen to California GO Bonds and the bonds of other Munis from that State. There might be a Federal Bailout of California with the Feds dictating to bondholders that they take 50 cents on the dollar. The justification would be a "National Emergency". This might violate several laws but I would not put it past this Administration. Also any owner of Cal. Muni bonds who insists on being paid in full will be labeled as greedy. I think the risk of Cal Muni bonds is greater than many investors perceive. Best to stay away unti the dust clears This article exhibits some of the same thinking that led investors to buy Chrysler bonds in 2007 and 2008. The thinking was that there was not much downside risk.

What investors did not count on was a Federal government takeover and being told to take even less for their investment.

The same thing might happen to California GO Bonds and the bonds of other Munis from that State. There might be a Federal Bailout of California with the Feds dictating to bondholders that they take 50 cents on the dollar. The justification would be a "National Emergency". This might violate several laws but I would not put it past this Administration.

Also any owner of Cal. Muni bonds who insists on being paid in full will be labeled as greedy. I think the risk of Cal Muni bonds is greater than many investors perceive. Best to stay away unti the dust clears

]]> By: Jason, Tampa, FL http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18073 Jason, Tampa, FL Sun, 05 Jul 2009 08:30:51 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18073 "Your money is completely safe" - One of the most overused famous last words. "Your money is completely safe" – One of the most overused famous last words.

]]> By: Dave Jones Orangevale CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18063 Dave Jones Orangevale CA Sat, 04 Jul 2009 19:05:54 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18063 This article assumes one thing that the Federal government won’t step in and treat California Muni Bonds like it treated Corporate Bonds from GM. Just imagine getting back 28% of your investment? This article assumes one thing that the Federal government won’t step in and treat California Muni Bonds like it treated Corporate Bonds from GM. Just imagine getting back 28% of your investment?

]]> By: Ric, Somers, NY http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18061 Ric, Somers, NY Sat, 04 Jul 2009 18:34:41 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18061 Are Muni Bonds Financial Narcotics ? There is growing acknowledgment amongst some muni bond analysts that downgrade risk has increased substantially and therefore significant investor risk of mark to market devaluation may occur. Investors should forget about liquidity when their municipal bond issue goes downhill....unless they are prepared to take a big capital loss ..... It is astonishing that muni investors are “blocked” about downgrade risk. Some think of munis as commodities like U.S. Treasuries, but they are not.. A municipal bond is a loan to a municipality or agency which have about as much liquidity as a commercial loan. This is troubling and the way the muni complex works is no different than any other structured or derivative product: no transparency. I see investors ignoring the significance of rapidly declining municipalities' tax receipts, the Federal intervention of propping municipalities up with fangled inventions ( Buy America Bonds) . There is only one reason that California got away with excellent pricing a few months ago on its huge deal: this is a closed information market. States like New are equally in trouble .........no one talks about what is happening financially to New York State and New York City. Are muni analysts missing something? In the Corporate bond market, increased default or downgrade expectations are matched with increased borrower cost. Munis will not remain immune to this market phenomena . Check these two reports and you will see what is the status of municipalities' ability to pay back investors. http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-06-18-state_revenue_flash.pdf and: http://www.nasbo.org/Publications/PDFs/FSSpring2009.pdf Munis are high in their own stratosphere right now as a credit product. They should be compared to medium to low investment grade and to even below investment grade loans. The only time they came close to reflecting their true underlying credit reality was in Q4 2008. So when the Rockefeller Inst. of Govt. says "sales tax in late 2008 was worst in 50 years" no one pays attention. No one should be told that muni rates have gone down because muni credit risk is declining. A shoe is going to drop in the muni market and when it does to it’s going to hurt awful..... When the financial press tells people that investors are "gobbling up" munis I say watch out! Imagine the perfect product, almost the whole world is in financial turmoil and there is this product called municipal bonds that you don’t have to pay taxes on, you don’t have to worry about default because its negligible, don't fret about liquidity even if your bonds get downgraded because you got a 7-10 % effective yield and that beats DOW and S&P hand over foot. You just make money and don't even bother to look. Muni bonds become the new financial narcotics. Are Muni Bonds Financial Narcotics ?
There is growing acknowledgment amongst some muni bond analysts that downgrade risk has increased substantially and therefore significant investor risk of mark to market devaluation may occur. Investors should forget about liquidity when their municipal bond issue goes downhill….unless they are prepared to take a big capital loss …..
It is astonishing that muni investors are “blocked” about downgrade risk. Some think of munis as commodities like U.S. Treasuries, but they are not.. A municipal bond is a loan to a municipality or agency which have about as much liquidity as a commercial loan. This is troubling and the way the muni complex works is no different than any other structured or derivative product: no transparency. I see investors ignoring the significance of rapidly declining municipalities' tax receipts, the Federal intervention of propping municipalities up with fangled inventions ( Buy America Bonds) . There is only one reason that California got away with excellent pricing a few months ago on its huge deal: this is a closed information market. States like New are equally in trouble ………no one talks about what is happening financially to New York State and New York City. Are muni analysts missing something? In the Corporate bond market, increased default or downgrade expectations are matched with increased borrower cost. Munis will not remain immune to this market phenomena . Check these two reports and you will see what is the status of municipalities' ability to pay back investors.

http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-06-18-state_revenue_flash.pdf

and:
http://www.nasbo.org/Publications/PDFs/FSSpring2009.pdf

Munis are high in their own stratosphere right now as a credit product. They should be compared to medium to low investment grade and to even below investment grade loans. The only time they came close to reflecting their true underlying credit reality was in Q4 2008.
So when the Rockefeller Inst. of Govt. says "sales tax in late 2008 was worst in 50 years" no one pays attention. No one should be told that muni rates have gone down because muni credit risk is declining. A shoe is going to drop in the muni market and when it does to it’s going to hurt awful….. When the financial press tells people that investors are "gobbling up" munis I say watch out!
Imagine the perfect product, almost the whole world is in financial turmoil and there is this product called municipal bonds that you don’t have to pay taxes on, you don’t have to worry about default because its negligible, don't fret about liquidity even if your bonds get downgraded because you got a 7-10 % effective yield and that beats DOW and S&P hand over foot. You just make money and don't even bother to look. Muni bonds become the new financial narcotics.

]]> By: Frank, Ventura CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18058 Frank, Ventura CA Sat, 04 Jul 2009 15:15:07 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18058 There's no shortage of fearmongers on this blog. Here's a quote for you doom sayers out there from last week's news: In the secondary municipal market, California bonds due in 10 to 30 years were trading more strongly yesterday because the market has priced in expectations for a missed budget deadline, said Domenic Vonella, an analyst with Municipal Market Data. "Not having a budget on time has been par for the course lately," added Parker Colvin, head of municipal securities trading at Stone & Youngberg in San Francisco. There's no shortage of fearmongers on this blog. Here's a quote for you doom sayers out there from last week's news:
In the secondary municipal market, California bonds due in 10 to 30 years were trading more strongly yesterday because the market has priced in expectations for a missed budget deadline, said Domenic Vonella, an analyst with Municipal Market Data.

"Not having a budget on time has been par for the course lately," added Parker Colvin, head of municipal securities trading at Stone & Youngberg in San Francisco.

]]> By: Ric, Somers, NY http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18057 Ric, Somers, NY Sat, 04 Jul 2009 13:49:29 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18057 Perhaps muni bonds will not default but when interest rates rise as a result of the Federal Deficit and muni rates rise in tandem with U.S. Treasury bond rates and muni bond rates hit over 6.5 % and you have to sell your current 5% coupon muni bond when muni rates reach their peak are you prepared to loose 25% or more in your principal? Let's see 25% of $ 50,000.00 is $ 12,500.00. Is that enough to loose? Perhaps muni bonds will not default but when interest rates rise as a result of the Federal Deficit and muni rates rise in tandem with U.S. Treasury bond rates and muni bond rates hit over 6.5 % and you have to sell your current 5% coupon muni bond when muni rates reach their peak are you prepared to loose 25% or more in your principal? Let's see 25% of
$ 50,000.00 is $ 12,500.00. Is that enough to loose?

]]> By: Fiat Money, Florida http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18056 Fiat Money, Florida Sat, 04 Jul 2009 12:54:42 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18056 You leave one thing out in your analysis, and that is inflation. And I'm not talking about the biased and manipulated CPI fantasy numbers that the government announces. Those that track the true rate of inflation put it at around 2% (see: shadowstats.com), meaning that your 2.14% muni is actually yielding a whopping 0.14%. Hardly worth the effort when you can get 12%+ from a Canadian Royalty Trust. Give me a break. You leave one thing out in your analysis, and that is inflation. And I'm not talking about the biased and manipulated CPI fantasy numbers that the government announces. Those that track the true rate of inflation put it at around 2% (see: shadowstats.com), meaning that your 2.14% muni is actually yielding a whopping 0.14%. Hardly worth the effort when you can get 12%+ from a Canadian Royalty Trust. Give me a break.

]]> By: Gainesville, Florida http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18055 Gainesville, Florida Sat, 04 Jul 2009 12:34:25 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18055 Get your money out fast there is little time left before California defaults. We are in a different situation than any time before, even during the Depression. The U.S. is going to default too. People are still to comprehend the size of our debt, and the unfunded obligations it is unpayable. Get your money out fast there is little time left before California defaults.
We are in a different situation than any time before, even during the Depression.
The U.S. is going to default too. People are still to comprehend the size of our debt, and the unfunded obligations it is unpayable.

]]> By: Escondido, California http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18054 Escondido, California Sat, 04 Jul 2009 12:18:54 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18054 Deep cuts WILL happen, and they should start with the over compensation in Pensions for State Employees. These people are living on another planet, with no hope of an Earth re-entry. Once again the fault does not rest with our Govenor, but our State lawmakers. Deep cuts WILL happen, and they should start with the over compensation in Pensions for State Employees. These people are living on another planet, with no hope of an Earth re-entry. Once again the fault does not rest with our Govenor, but our State lawmakers.

]]> By: Sybil, Santa Rosa, CA. http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18053 Sybil, Santa Rosa, CA. Sat, 04 Jul 2009 03:00:28 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18053 California's Governor refuses to sign a budget that uses accounting tricks and impossible math to close the gap. He's taking a lot of flack for that but he is right on with the point. The time for temporary fake fixes is long past. Yet, the same Governor wants to use yet more borrowing to help close the gap. The time for that is long gone too. The Dems want to add more taxes. Always an "easy" fix from the point of view of a politician, but California is probably past the tipping point of diminishing returns on additional taxes. So the time for that is also past. Deep cuts is the only option California has. Something that the citizens are going to have to come to grips with. Like it or not. Which, they wont. Like it, that is. California's Governor refuses to sign a budget that uses accounting tricks and impossible math to close the gap. He's taking a lot of flack for that but he is right on with the point. The time for temporary fake fixes is long past.

Yet, the same Governor wants to use yet more borrowing to help close the gap. The time for that is long gone too.

The Dems want to add more taxes. Always an "easy" fix from the point of view of a politician, but California is probably past the tipping point of diminishing returns on additional taxes. So the time for that is also past.

Deep cuts is the only option California has. Something that the citizens are going to have to come to grips with. Like it or not.

Which, they wont. Like it, that is.

]]> By: Munir, Los Angeles, CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18052 Munir, Los Angeles, CA Sat, 04 Jul 2009 00:55:51 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18052 There will be painful cutbacks statewide combined with a bailout effort--yet unannounced--from the federal government. (Too many votes at stake to just ignore.) Hopefully this will motivate California to turn over a new leaf and become more thrifty and efficient. There's bloat in the budget. The article here seems to understate the risks to specific California municipal bonds. Further downgrades could force funds to sell bonds en masse, triggering a significant and sudden drop in value. I've met people here who bought 'high-yield' municipals with coupons as high as 14%. (These are the same types of investors who were big into JDS Uniphase during the .com bubble.) This type of 'bargain' now looks mighty risky. At least things aren't boring here in California! There will be painful cutbacks statewide combined with a bailout effort–yet unannounced–from the federal government. (Too many votes at stake to just ignore.) Hopefully this will motivate California to turn over a new leaf and become more thrifty and efficient. There's bloat in the budget.

The article here seems to understate the risks to specific California municipal bonds. Further downgrades could force funds to sell bonds en masse, triggering a significant and sudden drop in value. I've met people here who bought 'high-yield' municipals with coupons as high as 14%. (These are the same types of investors who were big into JDS Uniphase during the .com bubble.) This type of 'bargain' now looks mighty risky.

At least things aren't boring here in California!

]]> By: Chzwiz, Sunnyvale, CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18050 Chzwiz, Sunnyvale, CA Fri, 03 Jul 2009 19:46:50 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18050 California has become populated by fruits and nuts with far left socialist ideals. Almost none of them were born here or grew up here. I was born and raised here. We used to have good solid people in government with sound ideas and policies. Now we have Mark Leno on the news every day. Screw it! The fruits and nuts can have it. I am leaving next year and going to Texas or Georgia. BTW, Texas has a surplus not a deficit. Do the research right here on this site. California has become populated by fruits and nuts with far left socialist ideals. Almost none of them were born here or grew up here.

I was born and raised here. We used to have good solid people in government with sound ideas and policies. Now we have Mark Leno on the news every day.

Screw it! The fruits and nuts can have it. I am leaving next year and going to Texas or Georgia. BTW, Texas has a surplus not a deficit. Do the research right here on this site.

]]> By: Frankly Skeptic, Parkville, MO http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18049 Frankly Skeptic, Parkville, MO Fri, 03 Jul 2009 19:21:55 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18049 Mr. Redwood City (of the very liberal Bay Area) blames the mess on the governator while Democratic party hacks who wouldn't know an honestly earned dollar from a gov't hand-out have run the Not-So-Golden-State into the ground. As an "ex-patriot" (and very productive) Californian who, with my family, voted with our feet to flee the silly air they all breathe there three years ago, it makes me sick to see how unrestrained silly spending and general liberal goofiness has ruined the once great state. California is ground zero for the ultimate failure of the unrestrained welfare state. LOL Mr. Redwood City (of the very liberal Bay Area) blames the mess on the governator while Democratic party hacks who wouldn't know an honestly earned dollar from a gov't hand-out have run the Not-So-Golden-State into the ground.

As an "ex-patriot" (and very productive) Californian who, with my family, voted with our feet to flee the silly air they all breathe there three years ago, it makes me sick to see how unrestrained silly spending and general liberal goofiness has ruined the once great state.

California is ground zero for the ultimate failure of the unrestrained welfare state. LOL

]]> By: Ed Gefre Valrico,Fl. http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18048 Ed Gefre Valrico,Fl. Fri, 03 Jul 2009 19:12:51 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18048 When does the gov. stop printing money? When does the gov. stop printing
money?

]]> By: Richard, Los Angeles, CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18047 Richard, Los Angeles, CA Fri, 03 Jul 2009 19:08:53 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18047 You're using long-term statistics to come up with a probability that is not reflective of what is happening today. My advice is to do what allows you to sleep at night based upon the unprecedented (in our lifetime) economic meltdown and the extremely high probability of California defaulting. You're using long-term statistics to come up with a probability that is not reflective of what is happening today. My advice is to do what allows you to sleep at night based upon the unprecedented (in our lifetime) economic meltdown and the extremely high probability of California defaulting.

]]> By: Mike, Redwood City, CA http://moremoney.blogs.money.cnn.com/2009/07/03/will-californias-budget-crisis-whack-your-munis/#comment-18042 Mike, Redwood City, CA Fri, 03 Jul 2009 15:19:18 +0000 http://moneyfeatures.blogs.money.cnn.com/?p=1523#comment-18042 You're dreaming. Using the default rates of the last 10 (bubble) years to forecast future default rate is nonsense. The odds of a CA default are now very high, maybe as high as 50/50. The state has a Republican governator (Herbert Hoover was a Republican, too), who is fiddling while the state burns. The state will begin issuing 'IOUs', which sound to me like the state printing money. While CA has the largest annual budget deficit of any state ($27 billion), there are a number of states that have even higher % budget deficits (NV, NY, TX, etc. are above 30% shortfalls). So, this is a widespread problem. Even if you feel lucky, you should sell half of your muni bonds. 2% interest is not enough to compensate for the risk of loss of principal. Only very wealthy investors should take this level of risk for such low rates of return. You're dreaming. Using the default rates of the last 10 (bubble) years to forecast future default rate is nonsense. The odds of a CA default are now very high, maybe as high as 50/50. The state has a Republican governator (Herbert Hoover was a Republican, too), who is fiddling while the state burns. The state will begin issuing 'IOUs', which sound to me like the state printing money.

While CA has the largest annual budget deficit of any state ($27 billion), there are a number of states that have even higher % budget deficits (NV, NY, TX, etc. are above 30% shortfalls). So, this is a widespread problem.

Even if you feel lucky, you should sell half of your muni bonds. 2% interest is not enough to compensate for the risk of loss of principal. Only very wealthy investors should take this level of risk for such low rates of return.

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