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The preceding, very long post asks a simple question:

Under what conditions does Debt Instrument A offer comparable safety of nominal principal, but superior yield, to Debt Instrument B?

Answering that question is also quite simple, but it isn't easy, which explains a lot of the length of the post, which was devoted to framing the sorts of answers that would have to be found.

Some reflection this morning suggests that I'm probably wrong about the possibility of a municipal bond which is not Federal-tax exempt being state-tax exempt. But tax laws are created by lobbyists, not logicians. So what the facts are is something I'll have to find out. I do know for a fact, for having obtained Publican 101-615 from the Oregon Department of Revenue, “Interest and dividends on U.S. bonds and notes”, that at least the following Agency bonds qualify for exemption from Oregon state taxes:

A-TVA-Tennessee Valley Authority
A-SLMA- Student Loan Mkt Assn
A-REFCO- Resolution Fdg Corp
A-FHLB- Fed Home Loan Bank
A-FFCB- Fed Farm Credit Bank
A-FICO- Financing Corp

I do know, for having an account with them, that E*Trade makes a market in those bonds. So, if I can build the tools I need, then I can expand the investing universe that I permit myself as a Saver. (As an Investor, I go anywhere I please. But that's a different game.)

The facts concerning the low rate of corporate defaults in short term time frames were, frankly, a surprise. It's been years since I've looked at the available studies and I'm looking forward to digging in more deeply. I smell an opportunity along the lines of thinking that Marty Whitman uses. He argues in his “Value Investing: A Balanced Approach” (and its revision, “The Aggressive Conservative Investor”) that there is not one market, but a multiplicity of markets, each of which is assigning a different value to the same security. So the task of a value investor, who is typically an OPMI (Outside, Passive, Minority Investor) is to understand which market he is buying in and which market he is selling to. He further argues that there are bargains to be gained if you can buy cheaply (and safely) what one market is ignoring and sell dear to what another market is seeking. (For present purposes, buying and holding until maturity will be considered the transactional equivalent of a trade. You knew your entry point and your exit point, which is all that a trade is.) How are some of those unseen markets discovered? By thinking about the conventional in unconventional ways. That's the sum of my post. There's no guarantee that the idea will work. But if I don't explore ideas, for sure I'll be forever trapped in conventional ways of doing things.

Lastly, the post contains a couple of typos. I wrote “FICA” and meant “FDIC”, etc. If you spot an error, just make the needed fix and keep reading. Nothing that I post is a final version, and none of it is worth revising. It's just scratch work that I did as I explored an idea.

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When Life Gives You Lemons
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