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Subject:  Looking at CA Muni Bonds Date:  11/21/2012  3:08 PM
Author:  trader2012 Number:  34515 of 35593

In another thread, Blacktree introduced the idea of buying CA munis. So, let’s pursue it. For those who might want to follow along, I’m going to assume you have an account at E*Trade.

An unrestricted search returns more than five hundred issues. So, start imposing filters. An obvious one is a 'yield filter', such as 3%. (Why would you accept less for a muni no matter how good its credit-worthiness might be?) That scan still returns more than 500 bonds, which is more than will appear on a single webpage, which is more than can be downloaded by a single click. So, either adjust the parameter for the filter, such as by increasing the minimum YTM to 4%, or add a new one.

At this stage in the scanning process, I’d say not to tighten up the yield, but, instead, partition the set into more manageable groups, and this is the reason. Yield numbers by themselves are meaningless. What you want to see is how any given bond’s yield compare to that of its supposed peers across the range of available maturities. So, at this stage of the shopping, you want to see what that range of yields might be. So, keep the min-yield at 3%, but partition the set into “Use of Proceeds”.

The first choice in the drop-down menu for “Use of Proceeds” is “Agriculture”, and a mere 13 bonds will be returned. That’s a manageable sized group to look at. So, go back and relax the yield filter, as well as relax the credit-rating filter (which had been set at its default of ‘invest-grade’). Now you’re looking at total set of currently-offered, CA munis whose proceeds are somehow tied to ag. Sort the list by ‘Issuer’ and then ‘Maturity and then start looking for patterns, specifically, “Who’s in trouble, but not more trouble than you could likely manage?” And the reason for this is, as Marty Whitman says, “If there’s nothing wrong with it, you don’t want, because there’s no money to be made.” But, also in your search for yield, you don’t want to take on more risk than you’re being paid to take on.

A quick glance at the list of 34 suggests there’s little of interest. Either the mins are too high (which is anything more than a min of five), or the yields are too low. So let’s step back again and talk about strategy again.

As an individual bond-investor, you lack the research skills and trading advantages that the big boys have. You aren’t smarter than they are, nor will you ever have the experience they do. Therefore, the only way you’re to survive your inevitable mistakes, misjudgments, and disadvantages is by betting small. Period. End of discussion. I don’t care that you might have gotten away with buying bigger in the past. You’re not going to be able to get away with it going forward. A five-min at par is $5k. A prudent exposure to anyone’s muni debt is no more than 2% of AUM. In other words, if you’re trading with an account less than $250k, you can’t be buying tens and twenty of anything that offers a decent return and expect to survive, on average and over the long haul. $250 is 3x the median investment net-worth, meaning, most investors have no business screwing around with munis, for two reasons. The supposedly ‘safe stuff’ won’t offer them a real rate of return. Thus, to buy is to lose money for sure. The stuff that might offer a real rate of return isn’t safe, and some losses will have to be assumed. You’ve got to size and place your bets so that you can survive the inevitable damage as well as do better for yourself than you would have done simply by buyi