Friday, October 9, 2009

California clarity

Just the other day, California had to boost the yield on some $4.5billion in general obligation bonds, due to lackluster investor demand.
Tom Dresslar, a spokesman for Lockyer, acknowledged that the state's weak credit rating -- the lowest of any state -- "didn't help" the bond sale. What's more, institutional investors knew they could push the state for higher yields after bond orders from individual investors came in well below expectations:
Of the $1.3 billion in tax-free bonds offered for sale, individuals ordered just 33%, or $428 million.By contrast, when California offered $4 billion in tax-free bonds for sale in March, individuals grabbed 75% of them.
In this week's offering, individual investors were offered a preliminary yield of 4.63% on the 20-year tax-free issue.But the relative dearth of demand this time around forced the state to raise final yields across the board. The 20-year tax-free bond will pay 5%.

Tax-free (at least state tax) 5%????? If that's out there, why even BOTHER with the stock market? The answer is because California is a basket case. The only reason its bonds are a reasonably safe investment is that they will be (inappropriately) rescued with other states' money in the event of a possible default.
While California politicians can say what they want about rosy prospects for a recovery, the bond offering documents LEGALLY must paint out a proper picture of the reductions in expected tax revenue, employment assumptions, and so on...

Far too optimistic on some major employment and housing starts numbers for the coming year:

They admit that budget issues will impact the state at least for the next four years:

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