For California Bond Investors, ‘A’ Is for ‘Anxiety’
Some investors who own California municipal bonds were shaken Tuesday after analysts at Standard & Poor’s Corp. warned that economic troubles could lead to yet another downgrade in the state’s credit rating.
If S&P; were to follow through on its threat with an actual downgrade, California could be given a single-A credit rating for the first time in its history. The highest credit rating from S&P; is triple-A, followed by double-A. For decades, California has always ranked one or the other.
Though the distance between triple-and single-A may not seem like much, the difference in ratings means a great deal on Wall Street. As a double-A state, California general obligation bonds maturing in 20 years yield 6.5% annually. In contrast, single-A-rated New York state must pay 6.8% to 6.9% on its long-term bonds because investors perceive that state to be less credit-worthy. A lower rating means higher risk.
So if California were downgraded, it would have to pay more to issue new bonds--which also would mean that its $11.5 billion of older, lower-yielding bonds would plunge in value, potentially leaving thousands of investors with paper losses if they needed to sell their bonds before maturity.
The warning from S&P;, one of three major independent bond-rating services, clearly took many muni bond investors by surprise. Traders said the yield on the state’s 20-year general obligation bonds, which finished Tuesday at 6.5%, had started the day at 6.46%. That’s a significant rise in yield for that issue. Trading was active.
What’s more, investors were demanding 0.10 to 0.15 percentage points more in yield on short-term state notes set to mature in June, on fears that the state could soon face a temporary cash crunch.
S&P; analyst Steven Zimmerman in San Francisco said the agency decided to place California on “credit watch” after state finance officials late last week projected that the state could fall $3.8 billion short of revenue projections in the fiscal year that will end June 30.
“We’re concerned that the extent of the (budget) difficulties is far worse than ever before,” Zimmerman said. In addition, he said, the state’s cash position “has deteriorated to the point that internally borrowable funds may be inadequate to meet ongoing disbursement needs” through June.
Translation: There may not be enough money to pay the bills in the short run, even with the usual tricks of robbing one part of the budget (or next year’s budget) to pay another part.
Bond traders said S&P;’s warning was a surprise because the market expected the rating agencies to wait at least a few more weeks before even considering another downgrade. David MacEwen, a muni bond portfolio manager at Benham Management in Mountain View, noted that S&P; just cut the state from triple-A to double-A in December. He figured S&P; would wait into May to see what kind of budget fix Gov. Pete Wilson and the Legislature might patch together.
Zimmerman said S&P; was influenced in part by the state’s decision to issue $279 million in new bonds on Tuesday for various California State University projects. “We felt we couldn’t let the (Cal State) bonds go out without saying something,” he said.
Many big investors say they simply can’t believe that gigantic California could fall to a single-A rating. They note that S&P; could cut the rating in increments--say, to “AA-minus” first. More likely, they say, is that the governor and Legislature will resolve the budget crisis fast enough to keep the rating agencies content with a double-A credit rating for the Golden State.
If you own a lot of California muni bonds, though, it’s time to consider all the possibilities. A single-A rating wouldn’t mean the state is going bankrupt. But it could slice off a significant piece of your bonds’ value, if you need to sell them soon. Forewarned is forearmed.
Tech Stock Blow Off: Technology companies gathered in San Francisco this week for the annual Hambrecht & Quist tech stock conference are mostly telling a story of economic recovery. But you’d never know it from their share prices.
Most tech stocks have sold off dramatically in recent weeks, and not for terribly good reasons--except that a lot of investors are nervous about the stock market in general. Contrast the share action with what analysts and money managers are hearing in San Francisco:
* Apple Computer says its U.S. sales are showing new strength and that demand from Asia remains healthy. Only Europe is soft.
* Microsoft, while admitting overall earnings growth probably will slow from the 50% pace, says sales in France and Germany are already reviving after a late-1991 slowdown.
* National Semiconductor says it sees “tentative” signs of recovery in both the U.S. and Europe.
Better sales should translate into better earnings down the road. But for whatever reason, many investors are choosing to ignore good news today. That could mean tech stocks are fast approaching a great buying opportunity.
Says Bruce Lupatkin, an H&Q; senior analyst: “It just isn’t so bad out there. From a fundamental standpoint, many of the tech companies are doing much better.”
Tech Stocks on the Fritz Despite rising orders--and in some cases a new consciousness about reducing the volatility of their businesses--many technology companies have seen their shares plunge this spring. A look at 10 issues versus the broad market:
52-week Tues. Change Stock high/low close from high AST Research 32 1/4-14 1/2 15 1/4 -53% BMC Software 79-33 48 -39% Sun Microsystems 38-20 3/4 26 5/8 -30% Intel Corp. 68 3/4-38 1/2 50 3/4 -26% Apple Computer 70-40 1/4 54 1/4 -23% Novell Inc. 65-22 5/8 49 3/4 -23% Microsoft 133 1/4-60 1/2 109 -18% Seagate Technology 16 1/2-7 1/8 13 5/8 -17% Hewlett-Packard 85-44 5/8 75 3/8 -11% Motorola 82 1/2-54 78 -5% S&P; 500 index 421-369 409.11 -3%
All stocks trade on NASDAQ except Hewlett-Packard and Motorola (NYSE).
