Explaining Southern California's economy

Standard & Poor's upgrades California's bonds...but state is still in the bottom two

Gov. Jerry Brown

Sharon McNary/KPCC

California Gov. Jerry Brown speaks in support of Prop. 30 at a rally of UCLA students on campus, Oct. 16, 2012. The passage of the ballor measure in combination with fiscal discipline has led ratings agencies to re-examine California's debt.

Hot on the heels of lowering Illinois' general obligation (GO) bond debt one notch, from "A" to "A-", Standard & Poor's raised California's GO debt to "A" from "A-".

So California is now the second lowest rating U.S. state, among those whose debt S&P rates.

It was S&P's first upgrade for the state since before the financial crisis.

I talked to California Treasurer Bill Lockyer after the announcement, and he credited the combination of Prop 30 — the ballot measure passed last November that raised sales taxes and income taxes on wealthy Californians — along with improved fiscal discipline for prompting the upgrade.

Another agency, Fitch Ratings, is also keeping an eye on California's improving finances. Doug Offerman, an analyst I spoke with last year, wouldn't put a timetable on a possible upgrade, but he did indicate that Fitch likes the math Prop 30 delivers:

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Shamu goes public: Could SeaWorld's IPO retire a whale of debt?

Baby Killer Whale Born At SeaWorld San Diego

Getty Images/Getty Images

A mother and baby orcas, also called killer whales, swim at Sea World in San Diego. The company just filed for a $100 million IPO, much of which may go to put a dent in $1.7 billion of debt.

Last week, SeaWorld and its iconic orcas filed with the Securities and Exchange Commission for an initial public offering. It's fair to call this the "Shamu IPO," even though the original Shamu, who performed at the original SeaWorld in San Diego, died in 1971. SeaWorld has kept the moniker around as a sort of branded stage name for orcas.

SeaWorld also operates marine-based theme parks in Orlando, Florida, and San Antonio, Texas; the parent company, SeaWorld Parks & Entertainment, runs eight other venues in the U.S. And that parent company is owned by Blackstone, a huge private equity firm that bought SeaWord from Anheuser-Busch in 2009.

(Blackstone, with another aspect of its business, also managed the sale of the Dodgers last year and is currently involved with the sale of sports and entertainment colossus AEG.)

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The investors' view on the Federal Reserve's interest rate decision

Ben Bernanke

Alex Wong/Getty Images

Federal Reserve Chairman Ben Bernanke. Will continued low interest rates lead to inflation? Some money managers don't think so.

The Federal Reserve's Open Market Committee announcement Wednesday wasn't a big surprise on the interest-rate front. The Fed has stated it intends to keep short-term rates low for the foreseeable future, in an effort to stimulate the economy and push investors into riskier assets, like stocks. A continued low-interest rate environment will also continue to bolster the housing market, where mortgage rates are at historic lows.

Fed Chairman Ben Bernanke and the rest of the FOMC annouced that they will keep rates low until unemployment falls to 6.5 percent. It will also continue to buy up mortgage-backed securities, at roughly the same rate it has been (so-called "Quantitive Easing," installment 3, or "QE3").

[UPDATE: I slightly misinterpreted what the Fed is doing on the bond-buying side. It's also worth noting that the Fed is now saying that it will keep interest rates low until unemployment hits a specified level. This is a policy departure from saying that rates will stay low until the economy improves. But anyway, bond-buying: the Fed is going to double what it's doing in the QE front and change "Operation Twist" into an extension of QE3. The older aspect of QE will still involve buying MBS. But the additions to QE3 will entail buying long-term U.S. Treasuries without selling short-term bonds. This is important as it means the Fed will be adding $85 billion per month to its balance sheet — under Operation Twist, it hadn't grown much, which was viewed as an way to "sterilize" against inflation. Former Dallas Fed President Bob McTeer has a good post about the FOMC decision at Forbes.]

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California home sales, foreclosures, and the fiscal cliff

Reed Saxon

A foreclosure sign in Pasadena. As the backlog of foreclosures has been worked through, borrowers who are less underwater are turning to short sales. But the expiration of a Bush era tax law could upset this market.

Distressed homeowners who are underwater on their mortgages, owing more than the house is worth, have two main options, if they don't try to pursue a government-sponsored modification program: foreclosure or short sale.

Financially, foreclosure makes more sense for borrowers who are way underwater, owing say $400,000 on a house that's now worth $300,000. Struggling to make the monthly payments, maybe because some financial cataclysm has befallen the family, just adds to the pain. Super-distressed homeowners quit making payments and wait for the bank to repossess the home. Unfortunately, this process tends to depress prices and lower overall home values if a region is particularly hard-hit. 

If you want to look for places where foreclosures are in crisis mode, the bankrupt California cities of Stockton and San Bernardino are a good place to start (although the pace of foreclosures in those areas has slowed substantially in recent months).

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California city bankruptcies are raising questions about the municipal bond market

Muni-Defaults

Federal Reserve Bank of New York

Last month, I wrote about Moody's, one of the big ratings agencies, and its view that the municipal bond market was getting a bit riskier than everyone has conventionally thought, in the aftermath of the bankruptcies of Stockton and San Bernardino and other U.S. cities. 

At the time, I noted that between 1970 and 2011, Moody's could find only one city — Cicero, New York — "electing to default on debt not out of ability to pay but willingness to pay."

What that implies is that the now $3.7-trillion muni bond market has been a safe investment for decades. As long as you're investing in rated bonds. (And even if you haven't, but more on that in a sec.)

Now the Federal Reserve Bank of New York has offered its own take, at its Liberty Street Economics blog. It differs from Moody's in terms of the looking at the entire muni market, not just the part that's rated by Moody's and others. The conclusion is represented in the graphic above. Moody's found 71 defaults between 1970 and 2011 — and that's total defaults in its rating universe, so presumably 70 we due to inability to pay while only Cicero strategically defaulted due to an unwillingness to pay.

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