Deep Value Letter - Banner Ad / Email Capture

Tuesday, August 21, 2012

Civility, Municipal Bonds and Playoff Baseball

I have noticed of late a disturbing lack of civility in the world. Keep in mind this is coming from me. I couldn’t wait to grow older as I ASPIRED to be a curmudgeon. I am far from politically correct and have been known to be moderately to excessively foul mouthed at times. I call a fool a fool and will call you out for stupid statements if you insist on making them. Even with these truths, at a basic level of society I see all pretense of civility and basic kindness to others disappearing at a raid rate.

I blame the internet. You can be anyone anywhere on social media and this emboldens folks to say things they would not have to balls to say in person. Some think that being a semi arrogant asshole is hip.  One such character suggested the other night that I perform physically difficult sexual acts upon my person in response to a fairly innocuous, and certainly not insulting, remark. In the ensuing exchange we ended up blocking each other’s accounts. It’s a shame as the person in question occasionally had some interesting salient points to make but his need to embrace his inner asshole overrode any value he may have provided. I don’t care how brilliant you are, or imagine yourself to be, life is too short to put up with assholes.

The trend towards uncivil conversation is most marked in political discussions.  I am appalled by the things those on the other side tend to call each. Nazi and communist are two of the nicer labels tossed around.  Incredibly it is the least informed that yells the loudest and resort to the most base of insults. Volume replaces intelligence and fuck you stands in for actual policy statements. I love a good argument or spirited political discussion. I happen to think both parties are evil personified and delight in hoisting their adherents on their own petard any chance I get. However I have never lost a friend or resorted to base insults as part of the discourse. I have certainly never insulted someone I have never or just met over their political beliefs. I may think it but civility demands I get to know them better before informing them of their intellectual shortcomings.

It has spilled over into everyday life. I may be happy and quick to tell a Red Sox fan that they root for a slime encrusted scum sucking baseball team but in my day to day life I try to be civil to those whose path I cross. Please, thank you, have a nice day, excuse me, pardon me are all phrases that are disappearing form the world. People seem to think that being rude to a server or store clerk is a birth right. Pushing and shoving through crowds is the norm not the exception at most venues. By the way I can now confirm that this is indeed truer in the North than the South.I heard thank you and excuse me more in the first week in Orlando than in a year in the Mid Atlantic.

I am never going to be the nicest guy in the world. I will always have a foul mouth.  I will never suffer fools easily. But I do manage to get through the day without going out of my way to antagonize, belittle or insult those I meet along the way. Unless they really deserve it. You do not have to be a milquetoast but there is no need to be a random and constant asshole either. Save that shit for your friends like I do. They are used to it.  Especially those who root for the Red Sox and believe in growth stocks.

Warren Buffet has caused a bit of furor in the municipal bond markets in the past week. The sage exited his portfolio of credit default swaps on munis to the extent that he could. He still holds some but any he could contractually cancel were cancelled by his insurance companies. This caused quite the  conversation and lit some of the investment oriented social media networks on fire. Is he concerned about state and local government finances? Some speculated it was a reallocation of assets to a higher return vehicle but since they have cash to the tune of $40 billion that they have been unable to deploy I doubt that is the case. I think it is simple math. If there is a 20% chance of a muni financial meltdown then writing the swaps has a huge negative expectation. Simply put the squeeze is no longer worth the juice and Berkshire wants out.  

We will not hear from Warren on this matter unless we get widespread defaults.If that occurs Warren will come out and in a self-deprecating grandfatherly fashion inform us that his extraordinary common sense has once again saved him from a grievous error. If nothing happens we will never hear another word about the decision.

Some postulate that this indicates that we are on the verge of a huge meltdown in the muni market. Dear God I hope so. Right now long term municipal bonds yield a little over 3%. That’s not worth the risk of owning for long term investors. I would love to see a sell off in this market place. Muni yields of 5% or higher are a long term conservative income investors best friend. I do not think we will see a sell off as a result of Warrens moves but interest rate movements and government policy may push yields higher over the next few years.

I am not a muni expert by any chance but I have learned enough over the years to know a few things. From 1953 to 1980 muni yields rose almost continuously. From 1980 to today yields have fallen in similar fashion. Buying during recessions has always been a solid profitable trade for muni buyers. GO default rates are very low even when times are horrible. Buying individual binds works better than funds. Unless you can buy a closed end municipal fund at a double digit discount. Yield chasing in lower rated or unrated binds is a horrible idea unless you have very specialized local knowledge. Municipal bear markets are usually the result of a rising interest rate environment. Sell offs are usually a result of a lack of buyers rather than widespread selling. Most munis are held by individuals, funds and insurance companies that are very slow to sell in volume. From 1970 to 2009 there were 54 muni defaults. Only three were General Obligation bonds. The default rate of AAA binds over that period was 0. From 1970 to the end of 2011 there were a total of 71 defaults by rated bond issuers. 2450 unrated bonds defaulted. Don’t buy unrated bonds without in depth specialized and local knowledge. Never ever buy muni closed end funds on the IPO or at a premium to NAV. Wait for those rare occasions when they sell at large discounts and buy the higher quality portfolios with great abandon.

The day to day minutiae and movement of the muni market is over my pay grade. For individuals the rules are simple. Buy when we are in a recession, interest rates have risen and you can lock in yields of 5% or greater. Buy when Muni funds trade at discounts. Ignore what Warren Buffet says or does. You are not Warren and contrary to his persona he does not give tow shits about you or your portfolio. That goes for every other guru and talking head. Think for yourself and go opposite the crowd in all markets.

  Looking at baseball the standings tell me we have an interesting Spetmeber coming up. All of the divisions are fairly close with no lead being more than 6.5 games. In the NL East it is Washingtons to lose and I do not think they will. Even if they shut Strasburg down early to save him for the playoffs they have the best pitching staff in the league. They have a team ERO of just 3.24 and teams are hitting an enemic  .232 against them The bats aren’t bad either. The team is fifth in the NL for batting average and fourth for home runs. Atlanta has a shot and the teams play six more time before the end of the year but I don’t think they can do it. Davy Johnson and crew will make a playoff run and I would not be shocked ot see them in the series.

No one is going to catch the Reds in the Central Division. They are sixth in average and second in home runs. The pitching staff is third in ERA. They have a tough schedule but Votto will be back for September and I think they finish s strong. Pittsburgh will make a run but I do not think they can catch the Reds.
The Giants and Dodgers have five games left to play against each other. The Dodgers need to sweep them as the Giants have a far easier schedule to finish the year. I think they do and the Boys in Blue are playing ball in October.

The Giants will be there as well. I think they beat Pittsburgh for the Wildcard.

In the AL West the Angels are going to have make an incredible run to make the playoff picture. They have the talent. They have the talent but do not seem to have the will. If Oakland continues to win the most talented team on paper will miss the play-offs. Texas wins the division going away.

Chicago is second in the AL in home runs but Detroit is hitting for a much better average. The pitching staffs are close with both hovering around a 4.0 ERA. They have seven games left against each other. Whoever wins that series wins the division and goes on to the playoffs. I think it is Chicago this year. The Robin Ventura story and Adam Dun comeback  are just too good for the baseball gods to ignore.

In the East it’s the Yankees once again. Tampa Bay has a pitchers chance and may make it interesting but the Yankees just have too much offense. With a fifth in the league ERA the pitching staff is not terrible and they will hold off the pesky Rays. Baltimore has chance f the pitching staff holds up and they can continue to hit the long ball. The September schedule in the AL East is brutal and that favors the Yankees.

There is a very good chance that the Orioles and Rays play the wild card game. If that happens I think the baseball gods will honor the 15 years of sacrifice and send the Orioles to the next round. If they fold then the Rays will probably face the second place Central division team and get homered into postseason oblivion.

That is all for today. To sum up:

Be Fucking Nice.

Buy munis with over 5% yields or when the CE funds trade at a double digit discount. Ignore the noise.

The Orioles have a shot at this thing. 

No comments: