I love California, but man have we messed it up…

Last week, Moody’s and Standard & Poor’s threatened to downgrade California’s Credit Rating. Today Fitch CUT California’s Credit Rating – it already was the lowest rated debt in the nation and now is but a few levels above Junk.

The downgrades will make it more expensive for California to sell future bonds. I am sure that Barney Frank will now want to use Federal money to guarantee California Muni Bonds…

California had ample time to fix things, but chose not to and now California Municipal Bond Investors are the ones at risk.

Here are some ideas of how California will fix its financing problems –

Increase withholdings ($2.3 billion) – but they have to refund it next April
Pay State Employees on July 1st, instead of June 30th ($1.2 billion) – California’s Fiscal Year ends on June 30th
Do the same with education funding ($1.8 billion) – add both to next year’s Budget

America at its finest – kick the can down the road and make the next guy have to deal with it – and keep collecting all the bribes and kickbacks…

California’s Revenue is $24 billion less than its Expenses. At some point, we have to spend as much as we make. But the politicians are obsessed with the idea that they don’t have to make any cuts and they can use accounting tricks and borrowing to keep sustainable Expenses way above sustainable Revenue.

Ultimately, the Bond Market will veto the politicians as investors stop buying the debt or stop buying it at low Interest Rates.

Without a Federal Bailout or temporary Federal backing of California debt, California will start defaulting in about 30 days.

Here is a chart of what has historically been the best selling California municipal Bond Fund. It rallied nicely from 1990 – 2002, as Interest Rates fell, but has now broken down from an 8-year topping pattern. For the first time in over 20 years, the 1-yr (Blue Line) sits below the 2-yr (Red Line). That is a Bear Market – get used to a Bear Market in Bonds.

Here is a weekly chart of the same fund. The breakdown was at $6.90 (Blue Line). If you have been reading my blog for a while, then you know that the two green lines make a bearish wedge and if you hold this fund you should be losing sleep.

Short of Obama forcing the US Taxpayer to eat California’s debt, this fund is toast. I used to believe that you could ignore the actions of Government, because all they ever seemed to do was screw things up. Now I understand the greed of our Politicians and know that they can be bought to misappropriate public funds.

Understand this though, that even if Obama does bail out California, he will not fix the root problems of this mess and the markets will crush long term Bond Prices either via defaults or via skyrocketing Interest Rates. The Government has shown their propensity to kicking the can down the road, so a Federal Bailout of California seems a likely outcome. That said, I would still not own too much (if any) California Muni Debt!