It is not my intention to make this blog partisan or political, I am interested only to the extent it affects the market and the economy. I will offer the disclaimer that I am socially very liberal, and fiscally somewhat conservative to the extent that it complies with my social conscience.

The specific event that prompted me to construct this essay was the speech given by President Obama this afternoon. Mr Obama laid out a plan to bar banks from proprietary trading, which for those unfamiliar with the term, is investing on behalf of the bank itself. He spoke of other limitations and regulations. The sad fact of the matter is, this type of activity is only obliquely related to the problem. The regulating bodies have proven grossly inept at enforcing regulations, and now this will obligate them to enforce it, taking away from their already limited ability to deal with matters of greater relevancy. The congress who will eventually craft the legislation is paralyzed by bifurcation, and even if inclined to act responsibly, ill equipped to do so. If any legislation is ever written, a doubtful proposition in and of itself, history indicates it will be so full of loopholes that it will be rendered impotent.

Then there is the timing of the announcement. Is it so critical to the public good that it had to be presented in unfinished form? I do not believe so. Going on a crusade against these banks now serves only to further erode the public confidence in an already shaky market environment. Forcing these institutions to divest themselves in a hurried manor may result in a fire sale atmosphere as as any potential buyer will know the seller is under mandate to do so, and will make low ball offers potentially causing a devaluation similar to the one that occurred in derivative securities, and resulted in the very crisis this allegedly attempts to forestall. Market participants whose livelihood entails having an understanding of these events displayed their opinion of it by dropping the Dow Jones Industrial Average 213 pts today after a 122pt drop the day before.

It has led me to believe one, or perhaps both, of the following:

1) The President and his advisors have a staggering lack of sense with regard to the economy, the markets, and the effects their actions will have in the short and long term.

or

2) The President was engaging in a reprehensible act of political diversion, Setting the banks up as a Straw Man in order to deflect attention away from his parties loss in the Massachusetts Senatorial Election on Tuesday.

Sadly, the previous administration engaged in equally egregious behavior, as have the players in the crisis not directly affiliated with the parties. In fact the only commonality I can find in all the individuals and entities, political, corporate, or regulatory, is their mendacity. The one quality displayed by nearly every player is a lack of understanding the concept of personal honor. If we are, as Dr. King eloquently put it, to be judged by the content of our character, that judgment as imposed upon these folks is likely to be harsh indeed.

I cannot think of a single individual who has put politics, personal gain, or ego aside and stood before the people. Not one who has put these things aside and done the absolute right thing by the people. In fact in every case the people have been cast aside like an empty soup can and kicked around. The official, the regulator, and the mogul, unrepentant all, suffer naught for their misdeeds.

What is wrong with us as a people that we have chosen these particular folks to represent our interests, to ensure our economic security, to lead us towards prosperity? Have we sunk to such a level of disfunction that we are willing to settle for this? Is it too late for us to rescue ourselves from them? From ourselves?

I have seen blame, righteous indignation, political grandstanding, deflection, distraction, evasion, misdirection, lying, perjury, obfuscation, denial, and of course incredible greed, idiocy, and incompetence on the part of all players.

So I have decided that I can no longer in good conscience cast my vote in any election, for any candidate, that chooses to ally him or herself with either of our two "mainstream" political parties. Both have degenerated to existing merely to perpetuate their existance. They, as currently organized, are an impediment to progress both as individual entities and as part of this two party system. Their actions toward each other and toward the people no longer serve the public good. I will no longer hold my nose and pull the lever. Who knows maybe someday there will be enough folks who feel the same way that these two parties will have to change or perish. Many of you have heard the message already, and I, out of fear of "wasting my vote" cast it for one of these parties. Well I am one of you now and I commend you your foresight and courage.

So who is the Whig candidate this year? It has to be a better choice than the powers that be.

First two caveats:
1) I would be selective in the particular instruments and the timeframe I would invest in.
2) I would not invest widows and orphans fund money. For the sake of this I will stipulate that I would invest with money I would normally invest in other Municipal Debt.

The Case Against:
California has as bad a problem with residential real estate as any state in the country with a 20% increase in mortgage defaults in 2009. (CA along with FL, AZ, and IL are responsible for 51% of the nations defaults).
It's Civilian Unemployment rate for November 2009 was 12.3% versus 10.0% for the nation as a whole. And this is predicted to remain constant through 2010 (per CA dept of Finance)
Total Wages and Salaries declined in 2009 to below 2007 levels
It's CPI is higher than the national average
Large budget shortfalls for 2010

This is certainly a pretty bleak picture and there are many more things one can point to in the case against the debt of California. Here is a link to a PDF put out by the California Dept of Finance entitled "California at the Brink of Financial Disaster". When your own Dept of Finance entitles a presentation thusly, things are pretty bad. Financial_Disaster-Presentation-w

The Case For:
Below is page 4 of the aforementioned presentation. I put this up to note the second item in the "Will Pay" column.

As indicated the state is committed to paying off the General Obligation debt.
There are still many investment grade Muni Bonds issued by California and Tax Districts inside California. The current environment has pushed the yield of these bonds well above the national average.
There are more than 15 million registered voters in California, with the Democratic party having the largest share by a wide margin. In my opinion the current Congress is unlikely in the extreme to let the largest state in the country (by total population and registered voters), who have supported the Democrat party in national elections since 1992 default on it's debt.

So what would I invest in, for how long and Why?
Bonds of aa2 or AA or higher and Insured
I would be looking at the 2-3 year timeframe simply due to the belief that towards the end of that timeframe we will be entering into a higher interest rate environment and I want to avoid interest rate risk.
I would not buy any bond callable during that holding period other than make whole calls
I would be looking at General Obligation, Necessary Services such as Electric and Water Utilities, and Public Education.
I would mediate my risk by examining the economic condition of the issuing entity thoroughly.

First let's look at the comps:
The 2 year U.S. Treasury is currently yielding .96%
The advantage of UST's is they have the lowest risk of any investment
A 2 year Bank Certificate of Deposit is yielding around 2.05%
CD's have the disadvantage of illiquidity
Nationwide average yield for 2 year Municipal Bonds is AAA 1.00% AA 1.44 A 1.51

I did a search of current offers where at least $25,000 worth were on offer using the above criteria and came up with many hits. Average yield to maturity (feb 2012 to feb 2013) was 1.5% with a range of .77-2.7% nearly all of which were insured. If one can get 50-100bps above a comparable instrument it seems prudent to examine it.

Conclusion:
If you're a Muni investor, California Municipal Debt is worthy of your consideration here because fear has made the yields attractive when compared to the debt of other states. i do not think I would reallocate from other asset classes into Municipal debt in the current economy on any time frame, but I would reallocate from the Municipal debt of other states to gain the additional yield.

Additional Considerations:
While California Municipal Bonds are Federally Tax advantaged they are probably not in your state, the difference in after tax yield may be a mitigating factor.

Disclaimer:
The Author holds positions in California State Municipal Debt as well as the Debt of other entities within California.

References
The California Department of Finance

Here is a link to the TradersExpo Home Page

I'll be hanging around after the presentation and attending some of the other events. Please don't hesitate to stop by and say hello.

"It is always in our company's best interest to provide information to the best of our ability," he said.

Really Mr. Stanley? Always? Seems kind of odd then that you didn't provide the information to the best of your ability WHEN ANOTHER HUMAN BEING WAS DYING.

Let me try to make my point here without any further histrionics. The gap between legal and moral exemplified by the above disgrace is ever widening and is supported by shortsighted business interests and even shorter sighted politicians. It makes both entities look pretty bad in the eyes of any thinking individual.

My impulse is to urge the Mark Stanley's of the world to take a drink of their own poison, but a more reasoned approach is to urge them to put themselves in the place of the nurse in the story, or imagine it was one of their loved ones in her place and then do what they would do were that the case. Anyone capable of making the statement Mr. Stanley made with a straight face may be too far over into the vampyre realm to be swayed by any argument I can make but a normal individual with actual human feelings and perhaps some semblance of a moral compass might heed these words and do the right thing.

So to you out there in the world of secret chemicals, come back to us, and do not only what is best for your business, but what is right for your fellow human beings, not only what is legal under the flawed guidance of politicians barren of gray matter, but what is morally consistent with civilized behaviour.

Most of all I want to wish everyone good fortune and much success in the New Year

Jim