Posts Tagged ‘state problems’

Great magazine cover: State of the Union

Tuesday, February 1st, 2011

I like magazine covers for their use as contrary indicators.  You can find some dandies by perusing the Cover Stories category on the blog.  This one, though, is great for its creativity.  It’s intended to highlight the problems facing the U.S., what with its divided government.  Check out those names:

  • No Jersey (New Jersey)
  • Indeep (Indiana)
  • Ill. (what else?)
  • Taxes

Below the image you can see a couple of paragraphs from the actual article.  Click on the picture to see a huge version of it, and click on the link with the paragraphs to jump to the full story.

To the Republicans who now control the House of Representatives, the main problem is the deficit and the cumulative burden of debt it brings with it. The deficit will of course narrow as the economy recovers, but because of the insatiable demands for health care of America’s now-creaky and retiring baby-boomers, unless taxes are hiked it will not dip below 4% of GDP, and it will start to rise again after 2015. That is not sustainable. Not only will borrowing on this scale tend to crowd out more productive investment: the interest on it is already eating up 10% of government revenue, a figure that will rise as interest rates go up. Hence the Republican demand for swift and deep cuts. Get spending down, shift government off the backs of the people, and jobs will return, as the invisible hand works its magic.

Mr Obama sees things the opposite way round. His state-of-the-union speech was an attempt to place jobs—which, according to pollsters, most Americans say are their priority—at the forefront of the debate, and he put the deficit at the end of a long list of concerns. After two years in which he concentrated more than was wise on getting health reform passed, refocusing on jobs makes some sense. It is obviously true that America’s infrastructure, both human and physical, is sub-par (its children’s maths skills were recently placed 25th out of 34 in a ranking of OECD countries). And it is hard to reduce the deficit while the country has a large group of persistently un- or underemployed people.  Full article here.

Share

Municipal Bonds and Abnormal Psychology

Thursday, January 27th, 2011

Have you heard there might be trouble with municipal bonds?  Can you fog a mirror?  If the answer to the first is no, and the second yes, then you should probably a) check out this blog more often, b) watch 60 Minutes, c) read the story that was on page 16 of the Wall Street Journal–3 years ago!–and which has now moved to page one of every newspaper.  Mitch Daniels is making it easier for municipalities–cities, is it?–to declare bankruptcy, and there has been talk in Congress of making it possible for states to default on their own debt–it’s presently unconstitutional.

No state in the union will default on its state-level debt obligations.  There.

We have heard of a number of folks who are concerned about the risk in municipal bonds.  So they want to reduce it.  Fine; makes sense.  That’s a prudent step.  Look at one’s holdings of bonds and bond funds to see if there are heightened risks with any of them.   Then sell them if–with individual bonds–the yield you receive based on the price you’ll be paid is worth it to you.  Shift to a safer municipal fund with all or a part of the bond fund proceeds.  Better yet, sell the riskiest individual bonds and invest the proceeds in a well-diversified municipal bond mutual–or exchange traded–fund.  The manager will have his eggs in many more baskets and will be trafficking in such quantities of bonds that it won’t be difficult to make moves based on that firm’s substantial research department’s calls.

But don’t try to reduce your risk by selling your municipal bonds and buying stocks with the proceeds!

You’ll reduce your default risk and heap on a–Indiana phrase coming–whole ‘nother bunch of risks, like event risk, political risk, amongst others–all the risks that are encapsulated in the chart below of the quintessential blue chip stock, Procter & Gamble.  Here’s the schpiel, 

“it’s a great company . . . been around for ever . . . nice dividend . . . you use their products, don’t you?  . . . you know, Tide, Crest, Kitty Litter . . . there management’s great . . . headquartered in the Midwest . . . “

You don’t know General Electric, Ford, Procter & Gamble–or any other stock–any better than you know those municipal bonds that have got you awake at night.

Share

The King is dead; long live the [bond] King – part II

Friday, January 14th, 2011

Another voice joined the municipal bond debate on Wednesday, when Bill Gross, aka the Bond King, was interviewed on Bloomberg television.  He said he doesn’t, “subscribe to the theory that there will be lots of [municipality defaults.]“  Like most, though, he doesn’t think that the municipalities are in great shape (“there will be increasing amounts of defaults”).  He praised Illinois, which raised its state income tax from three to five percent, and Jerry Brown, governor of California, who is taking wide-ranging steps to shore up the Golden State’s finances.  It’s at that level–the state’s–where he sees the least risk of municipal bond trouble.

Here’s a look at the pricing of default insurance on Illinois state bonds following the income tax increase.

Share

The King is dead; long live the King

Tuesday, January 11th, 2011

 . . . or rather, municipal bonds are dead; long live municipal bonds.

As usual, I’m a day late and five dollars (inflation) short on this subject.

Meredith Whitney made a splash late in the last decade saying Citigroup was going down the tubes.  Not having made any market-shaking calls since that call when she was employed at Oppenheimer–she left there to start up her own shop–and needing some new clients, she recently showed up in a 60 Minutes interview predicting there would be between 50 and 100 “significant” muni bond defaults in 2011, totalling “hundreds of billions” of dollars.  [Plagiarism police please note:  I lifted everything from “between” to “dollars” verbatim from the Bloomberg synopsis below the video at bottom.  She was not pressed to substantiate those claims and, thus, fear was mongered.  You can watch that video by clicking on the image below, but only if you promise to watch the one below it.

A number of folks have taken umbrage at her claims.  Their umbrage is pretty well summed up in the Bloomberg interview below.  In short, she doesn’t know what she’s talking about.  In long, unfunded pensions have been an issue for several years.

Share

Cool feature at the Financial Times website

Friday, July 30th, 2010

The Financial Times–FT for short–is one of the world’s best financial papers.  Were it not for the pink newsprint, which is just sort of wierd, I’d put it ahead of the Wall Street Journal.  Anyway, it has this cool feature that lets you get a quick graphical look at the condition of the states.  (We’ve been concerned with the state of the states, but have recently taken solace in the widespread recognition of the problem–something we’ve been watching since late 2005.)

Here’s a look at the FT feature.  It shows the states in a typical heat-map fashion, based on budget shortfalls for each state.  (You should be able to click on it to jump to the FT’s site.)  There’s also a tab that brings up credit ratings for each state.  Indiana’s AAA rating is a bit misleading, though, since the State has no general obligation debt; most of it is shifted to local municipalities, most of which are not rated AAA.

While I’ve highlighted Indiana since I’m ethnocentric, notice all the states in worse financial condition–solely on this measure–than the poster child for states-worse-than-Greece, California.  They include California-by-the-lake (Illinois), as well as bucolic Maine and hip–well, I think so–North Carolina (think Asheville or the Raleigh-Durham/Research Triangle).

According to Indiana’s Treasurer (see below), Indiana is the envy of other states.  It’s also, “unlike our neighboring states ,” which happen to include one of the nation’s worst quantitatively (Illinois) and one anecdotally (Michigan), “that are deferring their obligations, we’ve continued . . . in a businesslike and sound manner.”  But I have to forgive Mr. Mourdock’s financial liberties since he included a great Roy Rogers quote.

Share