MUNI BOND MISHAPS?

With alot of talk now going on about the Muni Bond market and whether or not there will be widespread defaults, it seemed like a good idea to chime in on this. The above chart is that of the MUB the equivalent of an ETF/Fund tracking Municipal Bonds. The damage that has been done recently is obvious. Keep in mind that this is a weekly chart, the daily chart looks like a black diamond ski slope. Fibonacci analysis would call to have you buying in right about now to catch the "magical" .618 level. I have never been a fan of that type of trading even when I actually tried to trade using it. The problem of course is that you just blindly buy in space at some magic number that may or may not be relevant. You also have to be aware that by the time it gets to the .618 it has already blown through the .236, .382 and .50 "magic" levels. You already have 3 losing trades by the time you pull the trigger on the fourth one. I wish I had the "confidence" to trade like that but I do not and never will, I like my money and don't believe in just throwing it away like that. However, at times the .618 does stop the market on a dime, but it does not do it consistently.

With regard to the overall thesis of a high amount of defaults coming, this is a tricky subject. When you have the Meredith Whitney's of the world and her presumably high paid staff of eggheads studying this, it would be hard for someone like me to challenge the analysis. I don't have the collective staff, brain power, or inkling to undertake such a study. As a result, just thinking about it on a rudimentary level, it does seem likely to me that there are some deeply rooted problems here. First, the concept of just inventing money and figuring out how to pay for those that financed it later, has gotten us into most of the pickles our country has gotten into other than wars. That is essentially what is happening when a bankrupt entity issues bonds. Some municipal bonds are backed by higher levels of government and some are not. Also, as we have seen the concept of bailouts take a larger than life role, it is entirely possible even the FEDs could show up on some of these issues. As a result, it is difficult on an individual basis to truly pick on one and make some money by betting against it.

Living here in San Diego, I would be inclined to bet this city could become escape from San Diego like New York in the Kurt Russell movie. Rarely does a week go by when some business entity does not leave here costing hundreds of millions of lost revenue. It makes me wonder if it is possible to get to a point of negative net revenue for the city? I guess we can just all buy and sell our stuff from each other and exchange our money! It would seem betting against Muni's from here would be a good bet. They may be backed by the state, but this state is bankrupt, so that should not mean much. However, this is a very heavily democratic state, and a stronghold for that party. There is also a democrat in the white house, so bail outs are high probabilities for this state. Net net, you see the slippery slope that gets going here.

If you accept the overall thesis that this house of cards in Muni Bonds is crumbling, how exactly should you play it? First, avoid buying them as part of a low risk retirement portfolio. They would fall into the category of high risk, hence commanding a smaller percentage of your net worth. You could use that premise to buy some if they go on fire sale, which they will at some point. Second, look for symbols like the one above that track these vehicles, and trade them. The problem with doing that is this symbol above on it's busy days barely reaches 500,000 shares. I don't like shorting anything under 1,000,000 shares per day. These lighter volume items are perfect storms for short squeezes. There is no guarantee you can avoid them anyway if a big hedge fund shows up, but your odds are better on the heavier volume products. You can search for others and also wait until the volume climbs here.

The other way to play these types of things is a big mans game requiring millions of dollars and getting into some of the obscure derivative products that are out there, CDS etc. I do not suggest doing that. We also are at a point here where if you were inclined to get short, I would wait for a bounce, there is no logical place to have a stop if you are wrong here. We have a free fall going and it is a pure momentum play to chase it right here. It could turn on you at any moment.

In summary, I tend to agree that there are problems in the Municipal Bond Market. I am far from an expert in this area so I defer to the conceptual research others have presented ( I hate doing that I always want to do my own). How to play it is another matter entirely, and I have outlined a couple of ways here. For the most part I think the best idea is to avoid them in retirement accounts.

PNJ ADVISORS

This is the name of the company I have formed with a close associate and excellent fellow trader, Michael Poissant. We have entered the Robbins World Cup of futures trading contest under this name, so you can monitor how we do there. We will eventually be putting together a fund, but we have not done so at this point. There are very tight restrictions on what can and cannot be done ( mostly cannot ), once you enter into that business. Once we are registered etc, I will have to change how I do this blog, but that is a long ways off at this point. For now it is business as usual, and you can watch and see how we do in the contest. I will  not report specific trades we make in the contest, if we do well eyes will zero in on us. Hopefully we will stay on the leaderboard.

My partners name is Michael Poissant, hence P, the N just a cute separator, then J for Johnston. With all that we arrive at PNJ, pretty simple. The technical issues that caused me to withdraw from the contest last year are resolved. I think I was up around 50% when I closed the account, don't recall exactly. Last year was not a great trading year for me anyway, and the purpose of entering this contest under our company name is to have a track record in an independently audited account that will serve as the beginning of our company's performance.

Wish us luck, it always makes things more difficult when you trade in the public's eye wide open every day. Trust me, it puts pressure on decisions that you don't have trading in private. You never want to look like a fool!