“I SAY PUT EVERYTHING YOU GOT AT THOSE TWO TARGETS AND YOU CAN’T MISS!”

2/24/11

I sent the following note to my Investment students at Columbia College, urging them to read two articles in today’s Wall Street Journal. I thought my readers might enjoy the note, especially the first portion, which will remind loyal readers of the almost instantaneous seminality of my 9/3/10 post YOU PROBABLY DIDN’T HAVE TO BE TOLD THIS AFTER THE LAST FEW YEARS BUT…

Thanks.



TWO ARTICLES IN THE 2/24 WALL STREET JOURNAL

Two articles in today’s (i.e., Thursday, 2/24’s) Wall Street Journal merit your attention.

The first is found on the op-ed page, page A15 entitled “Why I Was Wrong About ‘Dow 36,000.’” In it, James K. Glassman repents of his former gormless enthusiasm for an all stock portfolio. This is a point on which I have been harping for years and that we, coincidentally, will be examining in Monday’s class. You would also do well to read the 9/3/10 post on my blog at

http://insightfulpontificator.blogspot.com/

entitled YOU PROBABLY DIDN’T HAVE TO BE TOLD THIS AFTER THE LAST FEW YEARS BUT… on the same subject. The larger issue here is to be wary of the investment shibboleths routinely tossed around by ingénues and, in the case of the likes of Mr. Glassman, by people who ought to know better.

The second article you should read, entitled “Illinois Bond Sale Gets Done At a Cost,” appears on page C1. This one, outlining the high interest rates our state has to pay on its borrowing, hits close to home, literally and figuratively, and gives you some exposure to bond ratings and taxable municipal bonds, a comparatively rare financial instrument.

In this article, its authors, Michael Corkery and Jeannette Neumann, explain

“Illinois tapped the taxable-debt market, where yields tend to be higher than in the tax-exempt municipal bond market, because selling bonds to prop up sagging pensions typically doesn’t qualify for tax-exempt status under the U.S. tax code, say bankers and state officials.”

Two questions:

First, by way of review, the easy one: Why do yields “tend to be higher” in the taxable municipal bond market than in the tax-exempt municipal bond market? We discussed this point extensively last week.

Second, the more difficult one: What other reason could Illinois have had to go the taxable, as opposed to the tax exempt, route for this bond issue? We discussed this point briefly last week.

We’ll discuss both these questions on Monday; the first person to answer the second one correctly might get an extra point or two on the mid-term.

Thanks.