What’s so special about Virginia and Maryland Muni funds?

Discussion in 'ETFs' started by drsteph, Jul 17, 2012.

  1. Posted in this forum since CEF's and ETF's are kissing cousins.

    Along with bonds being generally bid, there has been a corresponding run up in the levered national municipal bond CEF’s (closed end funds). Specifically, while national muni CEF’s used to trade with discounts in the low single digits (through 2005-2011), most of the national muni CEF’s are now trading close to NAV or at a premium. Examples are MUA, PIA,PMM, etc… In fact, most of these were recently trading at higher premiums, except for the recent run in Treasuries pumping up NAV’s and making the relative premium drop.

    Here’s where it gets interesting. Take a look at premiums for state specific municipal CEF’s:

    BHV: Since early September – late august 2008, traded around NAV with frequent premiums. Since January 2010, has traded at increasing premiums. It hit a premium high of 29% at the beginning of January 2012, and has been at a mean of about 20% over NAV this year.

    BZM: Has recently (today)traded up to a 23% premium. Also net positive premium since October last year.

    For comparison, look at BPS: started the year at modest 1-2% discount; currently trading right around NAV.

    And look at BIE – dealing at NAV, has had up to a very modest premium this year but mostly has been trading at a small discount.

    Ticker Price NAV Disc/Prem Dividend Yield
    BHV 19.71 16.6 18.73 0.083 5.05
    BZM 19.06 15.48 23.13 0.079 4.97
    BPS 15.4 15.37 0.20 0.071 5.53
    BIE 16.65 16.68 -0.18 0.081 5.84

    So, what’s my point? BHV and BZM are Virginia and Maryland tax free Muni CEF’s, while BPS is Pennsylvania and BIE is a national. Note that BVH and BZM are trading at a 0.5% to 0.8% reduced interest rate relative to the other two. WHY?
    Of course, we know that DC is currently one of the places where its booming, and a cogent argument can be made that it is all a matter of supply and demand. Fine. But, given the political distribution of these states, and that folks there seems to be somewhat more ‘in the know’ than the rest of us people when it comes to all things politics, is it possible that they are telling us something else?

    One of the attractive things about Muni bonds is that in a scenario where higher taxation is implemented, they are one of the few categories of assets to escape. Qualified dividends to be treated as ordinary dividends? Not relevant to Munis. And the leverage of the muni CEF’s may outweigh their generally higher fees in the form of extra yield.

    In any case, some folks are willing to pay up to a 30% premium for these assets – compared to other states where the premium is close to zero. And those folks live in the states that are the most connected to the federal government. I’m not sure you can draw a direct conclusion, but it is coincidental.
  2. State muni funds are real inside baseball.

    In general, premium/discount to NAV...
    Is almost irrelevant in this niche...
    You can assume the market has that correct...
    So any NAV analysis is barking up the wrong tree.
  3. ===========
    cool analysis.

    Good points, good pattern;
    well, VA is rightly named the Old Dominion State. But generally speaking, anything is suspect/possible in an election year.

    Not that the cool downtrend/coal downtrend in KOL is auto suspect in an election year. It seems to be a genuine downtrend.:cool: There maybe a fierce battle over the spelling of capital coal/capitol coal.LOL.

    While I think past trends & present trends are important/very important;like the trader/investor said that shorted Citigroup , years said''fundamentals win in the end.''
    BOA may want to bail out CA, Warren Buffet may want to bail out CA.Its still a free country; but Meridith Whitney, when asked , what is the scariest state??[knowing she has studied plenty of muni trends/fundamentals]-''CA'' she said
  4. No, ETFs and CEFs are completely different.

    ETFs have a specific NAV + a specific arbing mechanism...
    So an ETF's NAV is arbed all day long by robots.

    Assuming a CEF has no redemption date (which is most)...
    It's "NAV" is almost completely meaningless...
    Since it can't be arbed or redeemed at that theoretical price.

    So a CEF's market price can move +/- 30% from it's NAV...
    For any number of reasons...
    State tax laws, the fund manager, the fund's liquidity, etc, etc...
    The market is very good at pricing CEFs...
    MUCH better that high school level quant analysis.
  5. JackR


    I believe both MD and VA are Triple A rated. Don't believe PA is. I assume there is a place you can look this up.

    I'm not an ETF guy, I just live in MD.

  6. nkhoi

    nkhoi Moderator

    email from the governor of VA

    August 15, 2012

    Dear Fellow State Employees :

    Thanks in great measure to your hard work and dedication to efficient and effective government, I will formally announce today that, for the third year in a row, the Commonwealth finished the fiscal year with a budget surplus that includes both revenue and savings. This total surplus of $448.5 million is comprised of the $129.2 million in revenue that I previously announced, plus $319.3 million in savings from unspent general fund appropriations, recoveries, and non-general fund balances. I am pleased to share with you in advance of my public announcement that $187 million in savings, largely due to your continued dedication to spending taxpayer resources wisely, made up the largest portion of the surplus total. To be clear, the largest share of this surplus would not have been possible without the hard work and ingenuity of state employees.
  7. ==========
    Interesting read[common wealth of VA];
    nicknamed ''the old dominion state'':cool: Another interesting muni read, an old ad wanting to buy NYC muni bonds[$50,000 minimum].

    Mr Jimmy Cayne [old Bear Stearns]put that ad in the paper, durong the NYC crisis;
    he , on phone, offered to pay $00.27 on the dollar.. The broker for the seller insulted him /refused.LOL

    But same broker later called back and sold them for $00.25 cents on the dollar.All those details may not be exact, but probably close.The NY state supreme court helped get the bonds selling for $1.00 again . So it was a nice profit.

    Frankly i would like to buy at that price also[.78 cents gross profit, plus yield] But not CA, mini bonds I was talking about NY. Upstate NY is quite rural/quite conservative, generally speaking, like VA.:cool: