California Munis Closed End Funds tanked today, why?

[Disappointed]

Anybody know why Ca Munis CEF tanked today (BCK, EVM, PCK) ?

Thanks,
mP

 

[twaddle]

The Associated Press: Ambac Downgraded, Cities Seen at Risk

 

[Disappointed]

Thanks, that what I thought but was not sure. This could be an opportunity as munis are usually pretty safe.

mP

 

[RetireeRobert]

Just read somewhere about Cal's $14 BILLION budget deficit. Maybe things are hitting the fan in relation to state government fiscal conditions there. R's don't want to raise taxes and D's don't want to cut spending. In between sits the $14 bil deficit.

 

[FIREd]

Thanks, that what I thought but was not sure. This could be an opportunity as munis are usually pretty safe.

mP

Just my 2 cents... I'd be a bit careful with munis especially in places like California right now. Yes historically, they have been safer than say corporate bonds, but with declining home values in CA (which will probably translate into lower property tax revenues down the road), plus the fact that CA seem to already be squarely in a recession (which translates into lower income, sales, etc. tax revenues), some cities could find themselves in a bit of a financial pickle. It become especially delicate for investors if the company insuring their municipal bonds goes out of business or becomes insolvent. Now there is an argument out there that yields on munis are currently very attractive (especially compared to taxable treasury bonds) and that's where everyone should put their cash (as heard on CNBC). It is based on the assumption that munis are safe investments (almost as safe as treasuries). But there must be a reason why those yields are so much higher right now than the yields on treasuries (Is it perhaps because they have become much riskier?). So choose your munis very carefully...

 

[CyclingInvestor]

My last 2 CA muni's (bought in 1984) come due in 2 years. CA state GO muni's
are second in line after education for the state's $$. I am not too worried.

 

[2B]

The rating agencies have all be criticized for not raising the alarm on the CDOs and SIVs they rated as AAA. Now they won't ever let any of the bond insurers have enough capital to keep their AAA rating. The bond insurers had been forced to dilute equity once already and the rating agencies are trying to force a second round except the insurers have decided enough is enough. That triggered MBIC to basically give the "finger" to the rating downgrade threat. When that happens, all of the "insured" municipals will drop to whatever level the rating agencies happen to rate the highest -- the municipality or the bond insurer. I think the agencies are over reacting to avoid further finger pointing at them.

One thing worth noting is that so far, to the best of my knowledge, none of the insured CDOs or SIVs have missed an interest or principal payment. That is not the case with the uninsured obligations. The insurance companies are obligated to maintain the principal and interest payments on the products they insure. They are not obligated to maintain a AAA rating on themselves. Not having a AAA rating will greatly impact their ability to get new business. They are still well capitalized and should remain in business for several more years even with a rating drop. That should give them more time to work through the credit issues.

My BIL/SIL live in California. Listening to them makes me think the state is in a full blown depression. They are semi-frantic about the economy. DW and I are stuck in Houston where housing is going up 5 to 10% a year and any unemployment is voluntary.

In many ways, I think the federal govt would spend $150 billion more wisely by shoring up the bond insurers instead of sending out $800 checks.

I would personally not buy any of the bond insurer stocks based on my feable analysis.

 

[al_bundy]

Thanks, that what I thought but was not sure. This could be an opportunity as munis are usually pretty safe.

mP

i suggest you find a good news database and look up what happened in the early 1990's when some counties especially in california either went bankrupt or were very very close to it

 

[Disappointed]

The rating agencies have all be criticized for not raising the alarm on the CDOs and SIVs they rated as AAA. Now they won't ever let any of the bond insurers have enough capital to keep their AAA rating. The bond insurers had been forced to dilute equity once already and the rating agencies are trying to force a second round except the insurers have decided enough is enough. That triggered MBIC to basically give the "finger" to the rating downgrade threat. When that happens, all of the "insured" municipals will drop to whatever level the rating agencies happen to rate the highest -- the municipality or the bond insurer. I think the agencies are over reacting to avoid further finger pointing at them.

One thing worth noting is that so far, to the best of my knowledge, none of the insured CDOs or SIVs have missed an interest or principal payment. That is not the case with the uninsured obligations. The insurance companies are obligated to maintain the principal and interest payments on the products they insure. They are not obligated to maintain a AAA rating on themselves. Not having a AAA rating will greatly impact their ability to get new business. They are still well capitalized and should remain in business for several more years even with a rating drop. That should give them more time to work through the credit issues.

My BIL/SIL live in California. Listening to them makes me think the state is in a full blown depression. They are semi-frantic about the economy. DW and I are stuck in Houston where housing is going up 5 to 10% a year and any unemployment is voluntary.

In many ways, I think the federal govt would spend $150 billion more wisely by shoring up the bond insurers instead of sending out $800 checks.

I would personally not buy any of the bond insurer stocks based on my feable analysis.

Interesting article re MBIA in Barron's
MBIA: Priced for Catastrophe - Barron's Online

mP

 

[Disappointed]

i suggest you find a good news database and look up what happened in the early 1990's when some counties especially in california either went bankrupt or were very very close to it

Thanks, I believe that was Orange County and MER. All bond holders got paid. Now it looks like the entire state may be in financial trouble.

mP

 

[al_bundy]

and the issue back then was derivatives as well

this time there are a lot more retirees for the local governments to take care of