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Pending Grey Swans / Salad Oil Events and How to Position Oneself - Munis


Myth465
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This post got me thinking.

 

I've spent the last two quarters selling stocks as the market (S&P 500) has risen and the housing market and job market have not.

 

I'm at an all-time high in cash because I expect some MAJOR opportunities in municipal bonds later this year.

 

 

 

I keep 3 lists going based on current events and thoughts on the future.

 

1. Is about deep value sectors - Have a thread to discuss these. Its nice to know where future profits will be made.

 

2. Is salad oil type events - Events which have caused massive sell offs in industries, but which are temporary in nature and have a measurable time frame. The Deep Water Horizon Event is the best recent example. I dont see anything going on currently (unless you count the defacto moratorium which is still effecting (ATPG and DO).

 

3. Potential Risks or Upcoming Issues we can call these Grey Swans.

 

Issues relating to Sovereign Debt - Could be US, Japan or Euro. Something is likely around the corner.

 

Potential Collapse of Commercial Real Estate - So far this one has yet to happen, and may not ever happen. We have extend and pretend and it may just work.

 

Issues with debt at the State and Muni level, Collapse of Muni Bond Market - Buy Bonds shortly after a municipality collapses or stops paying. Try to wait for good yields, and maximum pessimism.

 

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Its easy to identify these, but what are the best ways to position and profit for them. One needs cash but what next. The one everyone seems to agree on is the Muni issue. Does one just buy munis yielding high rates when the panic ensues or is there a better way to play the situation should it occur. Everyone seems to agree that we will have a panic, then Fed bailout. Whats the plan post panic, pre bailout.

 

Here is Meredith Whitney's Take - http://www.gurufocus.com/news.php?id=119380

Thats one confident women.

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Good topic and shold be a good discution.

 

just one small point based on one of your statements.

Everyone seems to agree that we will have a panic, then Fed bailout.

 

This is why I am not sure that there will ever be a significant opportunity in Muni bonds. Or you might say that the real opportunity will be if the federal government decides not to bail them out. Then you might have a great opportunity.

 

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Its tough to bet on or plan for something that everyone knows will occur but I will or am planning on it.

 

Congress is inept. Look at the freshman in the house. Do you really think they will be comfortable bailing out California or New Jersey. God hope Arizona is first or another red state.

 

When / If a muni or state stops paying there will be panic because no one will know what will happen next. I think Congress will hem and ha for a long time before a bailout is signed. I could be wrong though perhaps the Fed or some other institution will simply go around Congress and tie up the loose end.

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Bill Gross has added muni shares to his personal accounts already...

 

http://www.investmentnews.com/article/20101214/FREE/101219977

 

Excerpt - Gross added to shares in Pimco California Municipal Income Fund, Pimco California Municipal Income Fund II, Pimco California Municipal Income Fund III, Pimco Municipal Income Fund and Pimco Municipal Income Fund III on Dec. 9 and Dec. 10, according to SEC filings today.

 

He bought 50,000 shares of the Pimco Municipal Income Fund III on Dec. 10 at an average price of $9.75, according to public records. That fund hit a 52-week high of $12 on Sept. 8.

 

PMX (Pimco Muni III) closed today $10.05  15% premium to NAV - Distribution rate 8%+

 

~8% tax-free with 20% potential gains ahead taxed at 15% -- seems like a Christmas present to me, not a gray goose... :)

 

 

 

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Bill Gross has added muni shares to his personal accounts already...

 

http://www.investmentnews.com/article/20101214/FREE/101219977

 

Excerpt - Gross added to shares in Pimco California Municipal Income Fund, Pimco California Municipal Income Fund II, Pimco California Municipal Income Fund III, Pimco Municipal Income Fund and Pimco Municipal Income Fund III on Dec. 9 and Dec. 10, according to SEC filings today.

 

He bought 50,000 shares of the Pimco Municipal Income Fund III on Dec. 10 at an average price of $9.75, according to public records. That fund hit a 52-week high of $12 on Sept. 8.

 

PMX (Pimco Muni III) closed today $10.05  15% premium to NAV - Distribution rate 8%+

 

~8% tax-free with 20% potential gains ahead taxed at 15% -- seems like a Christmas present to me, not a gray goose... :)

 

 

 

 

Did Gross purchase at a discount to NAV? The fund has a large exposure to short and intermediate term callable issues. Perhaps he made a bet on large triggers due to refinancings rather than a duration/yield/spread bet.

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Why do Closed End Funds with leverage trade premiums to NAV?

 

For example: http://www.cefconnect.com/Details/Summary.aspx?ticker=PMX

 

 

 

For the same reason that highly leveraged Lloyds syndicates usually trade at higher multiples to NAV than Bermuda Re companies!

 

Also for the same reason that the house has a larger expected gain on high potential payoff Keno tickets than most other games of chance!

 

The prospect of large gains blinds people to suspend judgement when a rational computation of probability might throw cold water on a happy thought.

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  • 2 years later...

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