The more turmoil in California, the more attractive its bonds? "Yes," says Jon Schotz, Chief Investment Officer at Saybrook Capital in Santa Monica.
He and others are hoping to scoop up California's general obligation bonds in the coming weeks as the budget impasse hits DEFCON Delta. "California bonds have never been this cheap," he says. Yields are around 6.2%, which equates to 9.5% or even 10% of a taxable bond. But Schotz is actually holding off buying for a week or two, expecting yields to go higher. Seven percent? Possible, though "that would be unprecedented."
He's buying even as Martin Weiss of Weiss Research tells Fortune, "Sell all California paper now!" Our own Jim Cramer says he's concerned about California munis, and he's never concerned about munis.
But Schotz and others believe the California constitution guarantees very little risk. By law, general obligation bondholders are second only to education in getting paid by the state, and California still has plenty of revenue coming in to cover those costs. "The entire prison system, all local aid, the medical system, the highway system, most things that the state pays for will have to not get funded before the bondholders don't get paid," says Matt Fabian, Managing Director of Municipal Market Advisors. He put a "buy" rating on California bonds this week. But GM bondholders learned one's place in the food chain isn't always secure. However, Schotz points out that it would take a constitutional convention to force bondholders to the back of the line, and California, unlike GM, cannot seek protection in bankruptcy. Still, these are unprecedented times and one never knows what political leaders might try...
Schotz and Fabian are only interested in purchasing the state's general obligation bonds, not any other California debt, nor any debt from a particular city or county. For one thing, the state can force local governments to lend it money in time of need. "So a city that could be doing very well, all of a sudden could lose a bunch of sources of revenue," says Schotz, "and you as a bondholder could do nothing about it."