09/10/10 North Weymouth, Massachusetts — Harrisburg, Pennsylvania, is defaulting; Half Moon Bay, California, is disincorporating; and the City of Miami, Florida, declared a “state of fiscal urgency,” then broke contracts with workers. Yet, Pennsylvania, California, and Florida municipal bond funds managed by Blackrock are trading at or near 52-week highs.
Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.
Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.
In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.
By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.
All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.
As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”
However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.
As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.
As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.
Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”
As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?
It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)
We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.
The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”
Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”
Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.
What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.
It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)
Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.
There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.
Regards,
Frederick Sheehan,
for The Daily Reckoning
[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]
Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
eric seiger
The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
Probably Bad <b>News</b>: Transformer FAIL - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Transformer FAIL.
eric seiger
09/10/10 North Weymouth, Massachusetts — Harrisburg, Pennsylvania, is defaulting; Half Moon Bay, California, is disincorporating; and the City of Miami, Florida, declared a “state of fiscal urgency,” then broke contracts with workers. Yet, Pennsylvania, California, and Florida municipal bond funds managed by Blackrock are trading at or near 52-week highs.
Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.
Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.
In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.
By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.
All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.
As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”
However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.
As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.
As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.
Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”
As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?
It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)
We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.
The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”
Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”
Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.
What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.
It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)
Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.
There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.
Regards,
Frederick Sheehan,
for The Daily Reckoning
[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]
Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
eric seiger
The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
Probably Bad <b>News</b>: Transformer FAIL - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Transformer FAIL.
eric seiger
eric seiger
eric seiger
The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
Probably Bad <b>News</b>: Transformer FAIL - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Transformer FAIL.
eric seiger
09/10/10 North Weymouth, Massachusetts — Harrisburg, Pennsylvania, is defaulting; Half Moon Bay, California, is disincorporating; and the City of Miami, Florida, declared a “state of fiscal urgency,” then broke contracts with workers. Yet, Pennsylvania, California, and Florida municipal bond funds managed by Blackrock are trading at or near 52-week highs.
Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.
Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.
In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.
By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.
All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.
As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”
However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.
As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.
As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.
Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”
As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?
It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)
We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.
The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”
Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”
Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.
What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.
It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)
Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.
There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.
Regards,
Frederick Sheehan,
for The Daily Reckoning
[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]
Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
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eric seiger
The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
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Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
Probably Bad <b>News</b>: Transformer FAIL - Epic Fail Funny Videos and <b>...</b>
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Last summer, before I took full advantage of the benefits provided by e-mail filtering and multiple accounts, I was getting a ton of daily SPAM (I still get a ton of SPAM, only now it goes where it should: into its own dedicated e-mail account). Much of this unsolicited e-mail had to do with achieving wealth over the internet, usually effortlessly - a concept I had always summarily dismissed. But one day, all booted up with no place to go, I decided to take a trip into internet money-making land just to see where it would lead. Though I can identify, and know the pitfalls of a sexy come-on when I read one, I've never been averse to making money. So I set out on a crash course of making money online, starting with Google. I entered that exact phrase, "making money online", and got some 15 million results. Wow, I thought. Either I wasn’t the only one with time on my hands, or something about this concept was sucking people in. Eventually, I would click my way to an online world that I had no clue even existed. And I spend a lot of time online.
In the days and months that followed, I became intrigued with one online money making venture that had gained phenomenonal popularity: HYIPs, or “High Yield Investment Plans”. In retrospect, HYIPs had probably reached their peak right about the time I learned of them. Chances are you're familiar with the phrase, "High Yield Investment Plan." Perhaps you've seen it while skimming a prospectus or some other form of investment literature. For the record, legitimate high yield, short term investments do exist, and they are a totally different animal from what I'm talking about.
HYIPs - the acronym is pronounced, ironically, just the way you think - are tailor-made for our Right Here, Right Now generation. That's right. One of the many things the World Wide Web has brought us is the expectation of instant access. We want our information, our relationships, and our wealth at the click of a mouse. HYIPs provide this immediacy by giving you the ability to watch your money grow exponentially, incredibly, and even better, daily - online.
That is, assuming everything goes according to plan. Frequently it does not, however, and that's when many a starry eyed wealth builder runs into trouble. Fortunately, I happen to be more parts cynic than idealist, so it didn’t take a great deal of sleuthing to find that these are essentially thinly disguised ponzi schemes - which, according to the Federal Trade Commission and the Securities and Exchange Commission, are illegal.
Simply by virtue of the way they are structured, even the best run ponzis are destined to fail because in order for someone to win, someone else has to lose. It is also important to note that the fact that there may or may not be deception involved about the nature of a ponzi (false claims of investing in goods or services) makes it no less illegal.
Step right up...
The infamous scheme named after Carlo Ponzi was first launched in 1920 to great success. Brilliant in its simplicity, it worked on a simple premise: get people to invest in a nonexistent product or service, promise an outrageous return after a specified number of days or weeks, and use the money from new investors to pay off old investors who cash out. Ponzi’s plan did have one fatal flaw, though. When new money stopped coming in at a rate sufficient to pay out people who wanted to withdraw, the cycle collapsed. This was inevitable, for the simple reason that no investment vehicle can have a steady inflow of new investors forever; if for no other reason than the fact that the Earth's population is not infinite. But here's a funny thing about human nature: Where money is involved, it is not highly unusual to see ethics and common sense take a flying leap. What this means is that people may be aware that they are building their dreams on a house of cards, but will tend to ignore that fact and take their chances until they’ve been burned themselves.
This is the reason countless variations of Ponzi's scheme have been able to proliferate for nearly a century after his death. From day one, there has never been any shortage of dreamers and schemers in the world. And conveniently, the World Wide Web has given them all one huge playground in which to romp.
The blueprint...
The way a HYIP works is as follows: Using an online payment processor, you make a “spend”, or a deposit, into the plan of your choice. Generally, there will be a variety of plans, all displayed on the home page of the program (In November 2005, a typical HYIP offered plans ranging from 35% profit after four days, to 450% or more after 10 days). After your plan has matured, you have the choice of either withdrawing the money or rolling it over into another plan. By the way, if you are thinking four or 10 days is a very short time for an investment, I want to reiterate that there are no similarities between the way a HYIP operates and the way a stock, mutual fund, or certificate of deposit does, so throw out that whole paradigm. The only common element is that with all of them, you hope to eventually take more money out than you put in.
The potential returns are mind boggling. Enough to make many take the plunge, ponzi or not.
HYIPs are run by an administrator, or “Admin“. This would be anyone who woke up one morning, bought a template, or script off the web, and decided to start one up. The lifespan of a HYIP can range anywhere from a few hours to several months, depending upon how quickly it runs into problems. The main reason for the demise of a HYIP is always money. Because they act on Ponzi’s Principle, once the withdrawals start exceeding deposits, you can kiss the program goodbye, along with your money.
Also, since these are businesses run almost exclusively over the Internet, other problems can come into play that don’t even involve a faulty business model. Databases can be hacked, money stolen. More than one HYIP has been permanently disabled when the admin’s payment processor account - the one that holds all the money - was emptied because a security vulnerability in the script was exploited. Or so many an admin has claimed. The hacker alibi has been used so often as the reason for a HYIP’s demise that members have reasonably speculated as to whether or not an Admin simply ran off with all the cash before it had a chance to die of its own accord. And members have also had the unpleasant experience of discovering their own payment processor accounts were hacked. You can never be certain as to why a HYIP collapses, just that it will.
Trust me...
Admins frequently make posts on message and discussion boards devoted to the subject of online investing, and, early in a program, will work to gain the trust of online speculators by cultivating an image of accessibility, honesty, and program transparency. They encourage people to make spends into programs they have just started. An admin may have other people assisting her in this regard, people who will regularly make posts about how excellent the program is and attesting to the admin’s good character. Recently, many HYIPs have attempted an image makeover: they now define themselves as “games” or "programs" rather than investments. You are a “member” making a “spend” into said “game” or "program". There are a couple of reasons for this: 1) The Securities and Exchange Commission requires that one have a license to sell securities and generally speaking, HYIP administrators do not. A typical admin may never have even bought a share of stock in his life, let alone possessed a Series 7 license. An admin could be your barber, your babysitter, or a barber or babysitter in another country. 2) By stating that it is a game, this supposedly eliminates the obligation on an admin’s part to disclose how your money is being “invested” (Some still, however, will claim that at least a portion of member spends are being invested in the forex market, though I have not found a single instance where that could be verified). Again, such simplistic nods to disclosure do not provide a safe haven for these schemes under the law. "Robbing Peter to pay Paul" is not a legally viable foundation upon which to build a business.
If you wander to the discussion board of any HYIP - and there are hundreds of them, though decidedly fewer than just six months ago - chances are you will find several lively threads debating the merits of “xyz HYIP” and whether or not the Admin is a scamster. This discussion becomes most lively when payments start to slow, as that is a clear indication that the clock is running out on that program. But sometimes there is no forewarning at all; the program just vanishes. You find out by reading an apologetic note posted on the website by the admin: “Sorry. Hackers kept getting in my back office. I tried to keep this going as long as I could…” or something equally succinct.
Occasionally, there will also be a promise to refund those who had active spends or were due money when the program ended. Then again, sometimes there won't, and you will never "see" that admin on the internet again, at least under the same handle. In the end it doesn’t matter, though, because even if promises were made, they will likely not be kept. Assuming the admin didn’t outright rip everyone off and, indeed, could be trusted, the program ran out of money because that's what happens. As a result, there are better-than-average odds that you will never see a refund of any money you lost. Seriously. If you think I’m being redundant, I could point you right now to discussion boards of HYIPs that folded months ago, and you will find people posting who still believe they will be paid. They are believers, and anyone who disagrees is, to them, a naysayer. Can I get an Amen dot com?
Stuff happens?
If you got burned by a HYIP, then chances are your feelings are, Darn tootin’ it was a Ponzi, and the admin is a bleeping thief (I‘ve cleaned up your feelings for you). You might even be kicking yourself for being so greedy or naïve and have taken a blood oath to stick to Certificates of Deposit from now on. 3% a year may not be much, but you don’t have to worry about the bank president stealing it out of your account and running away to Cancun.
On the other hand, if you think you lost money because you had bad timing, or bad luck, or Mercury was in retrograde; if you believed in the admin, or if you happened to actually be in the money at the time the HYIP went under; if you are convinced that, despite the outcome, the admin ran an excellent program, and he was a stand-up guy... well, I can guarantee you that there is an admin out there right now hoping that you’ll visit her website. And you might want to do that soon, because, as I write this, internet schemes are being investigated with unprecedented vigor by the SEC, and in several cases, the FBI. The outcome of it all will undoubtedly influence how the "game" is played in the future, or if indeed, it will be played at all. Stay tuned.
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
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The Week Ahead in Health Care <b>News</b> - NYTimes.com
Politicians are campaigning on their health care votes. The Brookings Institution is holding a public forum on ensuring patient access to effective information about prescription medicines.
Denver Broncos <b>News</b>: Horse Tracks - 10/11/10 - Mile High Report
Your Daily Cup of Orange and Blue Coffee - Horse Tracks!
Probably Bad <b>News</b>: Transformer FAIL - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Transformer FAIL.
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