Long US Municipal Bonds and Long China: The Knife Catcher’s Edition

US Municipal Bonds

Reasons that buying muni bonds now makes sense:

• The news wire/headlines are dominated by (a) “so and so bonds are down x%, haven’t been down this much since ___.” And (b) so and so funds are down y% in month of ___. and (c) so and so are trading at a discount to NAV, compared against deviation from NAV.
• Some of the yields relative to taxable equivalents seem sensible, especially if one pursues a hedged approach (hedge out the rate risk).
• The prevailing story/belief is that the recent selling is partially driven by ‘retail’ selling.

Reasons I remain cautious:

• I’m not sure if the ‘retail is selling’ thesis is a sufficient one, especially seeing that munis investor base is retail (albeit more affluent retail).
•  Unclear how the interest rate risk works here.
• Would have to better understand what’s going on in “TOB” land.
• x% discount to NAVs can turn into 3x% discount to NAV

Current view: I believe now is the time to start buying, or at least start evaluating/planning a “buy munis” plan.

China

Reasons going long China makes sense:

• SHIBOR this, “China’s Lehman moment that”, China’s 2008 this… you get the idea. That’s when to buy.
• Both the current A shares level and the downward velocity seem predictive of positive return to risk, over longer duration.
•  The bears thesis is widely known; markets are not the economy; it’s discounting some pretty bad outcomes.

Reasons to be cautious/wait:

•  US 2008 preceded march 2009, i.e. if this is China’s 2008, why rush? We’d need a few events/failures.
• A very smart China manager is very bullish China (in terms of the real economy), BUT he’s not bullish the A shares; he’s bullish private companies, though proper security selection/due diligence is critical. his rationale (in a nutshell) is that A shares are wealth distribution mechanism of the political class, whereas the private shares aren’t necessarily.
• I don’t think these securities are worthless

Current view: Start buying and/or come up with a buy plan. Lest we forget, China is the world’s 2nd economy, blah blah blah.