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Sunday, January 23, 2011

January 23, 2011, Bob Brinker's Moneytalk: Summary, Commentary and Excerpts

January 23. 2011....Bob Brinker hosted Moneytalk today.

This was an important program for anyone who has concerns about the National Debt, and the fiscal viability of states, counties or cities. California and Illinois bonds were the main topics, but what is happening in those states is already impacting the whole nation.

.....The only mention of the stock market was at the beginning of hour three -- Brinker recited the latest stock market closing numbers.

STATE BANKRUPTCY: "Brinker said:
"States are not allowed to seek protection in Federal Bankruptcy Court under current law. If they try to change it. And I think they might try to change that, they are going to have to clear hurdles in the Constitution because each state is considered a sovereign entity, just like Greece is considered a sovereign state.....So they will probably have a lot of legal work to do to try to get this changed....."

: Brinker reported some news that is a few days old and was previously covered in the comments section of the prior summary: (See Pig's post at this [LINK]) The old-new governor of California has declared a fiscal emergency in the State of California. California's budget gap deficit is about $25 billion per year....

.....Brinker said:
"There are some very deep structural problems in California. For example, insolvent pension funds......But not only in California. There are other places as well that have that problem.....But if they can work out a way for the States to declare bankruptcy or insolvency or whatever they come up with, that would allow a state to change it's contractual promises to retirees. This is one thing that is costing huge amounts of red ink for various states like California."

....Brinker said:
"If California were to become insolvent, unable to meet their obligations, I think they would probably try to re-structure their obligations......An example of that might be that if someone owned $10,000 in California general obligations, if the state went into a condition of insolvency.......They might offer you in return new general obligations of the state that would be worth less than the ones you own now. This is one of the ways this is handled in corporate bankruptcies......"

: "This is a new risk factor that all listeners should be aware of in the municipal bond market.....The idea that they might come up with an insolvency plan for the states which would change the landscape of investing in state general obligations......

.....Now there are eleven states around the USA that have a triple-A rating...And those are Delaware, also Indiana, also Maryland and Missouri, Utah, Florida, Iowa, Minnesota and North Carolina and Georgia and Virginia. And I personally own general obligations of the Commonwealth of Virginia, triple-A rated, and the State of Georgia that is also triple-A rated....

......There are a lot of states out there with double-A ratings and I think that generally speaking, as long as they maintain those double-A ratings, can be held in a portfolio......

.....But then you have states out there with clear cut fiscal issues and I think it's best to stay away from those issues....The six that really jump out for me would be Arizona, California, Illinois, Louisiana, New York and New Jersey.... I would not purchase their municipal securities.....that's just my opinion."

"The cities are already allowed to declare bankruptcy. And we've already seen what happened in Vallejo, California. They went into Chapter Nine a couple of years ago."

"They (states) have given up their fiscal futures to entities such as unionized public workers who are so powerful -- there is no way to describe the power of unionized public workers. And as I've said before, the reason they have so much power is because when they go to the bargaining table, the side that is representing the taxpayer, is just milquetoast. They don't have a horse in the race. They don't have a dog in the hunt and so it's just give, give, give..... And now it's coming time to pay off these obligations and the money is not there......

.....If they could declare bankruptcy, then they could simply walk away from these contracts. They wouldn't have to pay these benefits.....but the law doesn't provide that right now for the states because of their sovereign status, and I think that's what they are exploring is a way to change that."

"I want to mention on the subject of municipal bonds. I had a chat about this in the past week with someone who owns a lot of municipal bonds, but this individual's California Municipal Bonds are pre-refunded in almost all cases......And so he's in good shape.....

.....The reason he's in good shape, and I've mentioned this before, it's very important. When you have a pre-refunded municipal, that means that the original municipal issue, which you may have purchased, has subsequently been backed by Treasury securities through the sale of a new issue by that entity at a lower rate where they took the proceeds of the money they raised at the lower rate, because rates went down.....and they buy Treasuries with it. And they pledge those Treasuries against your holding, which means you're backed by Treasuries......

......So you're sitting on Triple-A Treasury paper while you're still collecting your municipal interest......So you're in the catbird seat.....In your monthly statement, you will see that the prices of your bonds will be way higher than the prices of bonds that are not pre-refunded.....You should have that marked on your monthly statement. It should say PR or something along that line...."

Honey EC: I sure don't know who the man was that Brinker said he was talking to that owns all the pre-refunded California munis he mentioned. But I do recall that several times in the past, Brinker has stated on Moneytalk that he owns them. In the past, he recommended California general obligation bonds highly, but he did a very fast about face when things started looking dicey for California budget-wise. All of a sudden, he began telling callers how nicely he was situated because HIS bonds were Treasury-backed. That is from the "You can't make this stuff up, no one would believe you" file....

Several callers from Illinois were very angry about the recent income tax increase. Mark said he had already lost money on a $10,000 State of Illinois bond and wanted to know if he should sell it. Brinker told him no, but advised him to "Watch the Moody and S&P rating trends" because "they are all over it."

Brinker asked Irwin from Skokie, Illinois what people are saying about the tax increase. Irwin said that many people are very upset and angry, and even talking about recalling the governor. They, like Californians, want costs cut instead of tax increases. Irwin said this tax was passed in a lame duck session.

Malinda from Chicago said that she was extremely unhappy when she heard that the bill the governor signed "in the middle of the night also provided for a 2% increase in spending, rather than a decrease."

Susan from Skokie, Illinois said:
"I'd like to let you know there is a grass-roots movement here in Illinois.... among businesses and individuals who are thinking about withholding this additional 2% increase. For the reason that, we are aware that it is the exorbitant pensions and salaries that are paid to state and government employees. And they are structured in the manner in which many employees double their salaries within four years, contrary to what goes on in the private sector for similar and identical work.....We have been having so many tax increases on everything. A real estate taxes, gasoline, sales tax. In fact, one of the more absurd taxes is on shampoo. In addition to the regular sales tax, there's an additional tax on shampoo, along with some other items."

Brinker commented that while it had no effect on him personally, anyone who has money invested in Illinois bonds will be tracking any kind of a possible tax-revolt. More importantly, Standard & Poors and Moodys will be tracking it very closely because it could have ramifications if it catches on.

..Brinker explained that even if they are high quality, there is interest rate risk. Assuming a 14 year maturity, if rates went up 1%, the net-asset-value would probably go down about 8 or 9% -- depending on the funds actual duration.

Brinker talked about this rather chilling front page piece in the January 20th New York Times by Mary Williams Walsh, titled "A Path is Sought For States to Escape Their Debt Burdens." See: "State Bankruptcy Option is Sought, Quietly" Excerpt:
Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Brinker said: "What they are really trying to do here is to find a path, since under current law they can't declare bankruptcy today because they are sovereign states, they are trying to find a way to change the law. It will be difficult to do it because of Constitutional issues......And according to the article, they are working on this behind the scenes in congress. We are told in the article in the New York Times, it is being done behind the scenes because they are afraid of creating a panic reaction in the municipal bond market if the word gets out. Well as far as I'm concerned, we're talking about it across America today on Moneytalk, so the word is out."

For the second week in a row, Brinker touted Alan Ross Sorkin's book. Brinker said that as he went through the book, he got a kick out of reading about a meeting with the "Maestro," Alan Greenspan, where he suggested that excess houses be burned down to get rid of the housing supply-demand imbalance. Brinker said he thought it was a possibility that Greenspan said it in jest.

Brinker guest-speaker was Perry Mehrling:

[PS, When you make your Amazon purchases from links on this blog, I alone, get the credit for it. Thank you.]
I took this picture a few years ago in Cabo San Lucas when there on a cruise. Click to enlarge:

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