Monday, November 15, 2010

Why California Will Begin Defaulting On Its Bonds Within Two Months

As a result of the recent CA elections and specifically props 25 and 26 CA is doomed. It is thought that California will begin defaulting on Bonds within a couple of months, because of the gridlock in Congress just voted in. There will be no bailouts. Governor Jerry Brown will fall back on the fact that this isn't his debt and will have no choice but to default on CA obligations.

Consensus believes this is a first half of 2011 event but its thought more people are watching Muni's and the price action in California than many realize....see below for some new information...will be interesting to see the follow through.

1) Credit Default Swaps closed at 278 bps last night, the live market is 290-300 and a trade through the offer breaks a 5-month range. For those with Bloomberg terminals, type STCALI CDS SR 5Y Index GP to see a chart.

2) CA announced today a deal for 10 billion Revenue Anticipation Notes (RAN's), 2 billion will mature in May at yields of 1-1.25% and 8 billion will mature in June at yields of 1.25-1.5%. Look at this tombstone as an example of what to expect...

3) Individuals historically are the largest buyers of RAN's as an alternative money market funds.

4) CA will also sell 3.75 billion of long-term obligations starting later this week.

5) PCK US, the CA Muni ETF is now down -14% and the NAV of the fund is down -4.5%. Its the wrong product but most cont to watch the move down...

6) "If you are full on California then don't add fuel to the fire," said Marilyn Cohen, chief executive officer of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. "If you hardly have any California exposure and you've got money sitting in money markets, then you better make sure it's worth your while because the news headlines are going to continue to go from bad to terminal."

7) The "punitive" yield California pays this year will be determined by the amount of individual investor interest the state can draw, said Regina Shafer, who oversees $5.3 billion in tax-exempt municipal bonds as assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio, Texas. The notes will be attractive to retail buyers compared with other cash alternatives such as money market funds, which offer lower yields, she said. "Given the marketing effort, it'll probably be priced pretty easily," Shafer said. "Where states have a high tax rate, it's very attractive. I think retail will be very successful."

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