Intro to Stocks Lesson 6
Municipal Bond Funds

Onward to evaluation of some other kinds of things which actually are worthwhile investments but for which you need to go through a quite different evaluation process to determine whether and at what price you might want to buy any of their shares.  The relevant information for closed end exchange traded municipal bond funds (which I refer to as "cemunis") is generally available at the Noveen sponsored CEF Connect web site rather than the Yahoo site or the SEC's EDGAR web site that is used to evaluate individual companies. 
      Such things have actually been quite good for me over the years.  Individual municipal bonds themselves are an absolute horror.  They involve horrendous tax complications, special risks of refusal to pay what they owe by the goofermints that issue them, and "trade" in "markets" with brutally wide differences between what you might be required to pay to buy one of them and what you could get for selling the very same thing.  So what the securities industry has done is to develop a set of "ten foot poles" for dealing in these debts of goofermints which solve "most" of the problems inherent in the individual municipal bonds.  The cemunis gather together in a single portfolio, tradeable under a single ticker symbol, a whole lot of *different* municipal bonds, take care of such trading as may be necessary in the individual bonds, of collecting the interest due on them when due, of collecting the proceeds when the bonds are due to be paid off, and of distributing the resulting *income* to you as the holder of one of those cemuni *funds*.  Unlike the hype and hoop lala surrounding them, the vast majority of cemunis are not really "tax exempt".  The goofermints involved issue bonds on behalf of local businesses that they want to encourage, styled as "revenue bonds", which are payable only by the local business and not under the "full faith and credit" of the goofermint involved.  The income on that portion of a cemuni portfolio which comes from revenue bonds is subjected to a special tax called an "Alternative Minimum Tax" which, if you have very much of such income, results in an extra page or two of tax filing requirements, not necessarily any additional taxes.
      One of the goofermints to which I am required to pay taxes because I spend too much time there, working on my hoped for eventual retirement home, is the state of California.  Since I have to pay taxes to their Frank Heist Takes Bored on my world income and partly because my selected ticker symbol has a few less complications than some of the other 151 cemunis that I have evaluated (and actually track every business night with a special program that I wrote to evaluate current yields), I'm selecting that cemuni that deals almost exclusively in *California* municipal bonds for this discussion of "how to" evaluate them.  The underlying reason is that the Frank Heist Takes Bored (the income tax takers for those required to pay taxes to them) *exempts* the taxpayer from taxation on entirely California bonds while imposing its egregious takings against any bond issued by anybody else.  If you reside in a different state which follows similar xenophobic or provincial taxation practices, you may want to focus on your state's specific favored cemunis for actual purchase after you learn how to do the evaluations.

      Start a Note File for "[VCV]".  Go to the CEF Connect site and plug in that ticker symbol.  Include that URL at the bottom of your Note File because that's the only genuine source of information about cemunis and a range of other "exchange traded funds".  Start an *addr line just above the URL that you included in your Note File and continue it with a copy of the name that CEFConnect provides for the fund.  Then at the top, a space after the "]" include the information you can already see using the "as of" date in the format "YYMMDD last ##.##" and the current share price in that format.  You'll be using that information later in the analysis.
      Then click on the "All" button to expand the information page.  You can see by the size of the dark bar at the far right of the page whether it has expanded yet or not.  If it hasn't, click back to Overview and then All again until it does.  Once you've got the small dark bar showing in that right hand navigation area, go down into the Basic Information section and pick up the "inception date" from the right hand set of information reorganized into standard YYMMDD format.  Start a new line of the format "*YYMMDD inception; " then pick up four items from the "As of" area into the continuing format on that information line "YYMMDD Total Net Assets $###.### mln of which $###.### for common (##.#%) on ##.### outs; " compressing the common shares outstanding number into the standard you already learned of rounded millions only. Calculate the percent of total assets which *are* for common and fill in that "%" part of what you have written.
      Then scroll down nearly to the bottom of the information page to find the area where it provides a graphic showing "Credit Quality as of date ##/##/#### reported by Fund Sponsor".  Until recently, CEF Connect included that Credit Quality array for most of the funds covered.  But if it isn't there for your cemuni o interest (VCV for now), you will have to navigate back up to three clicks down from the top and click on the Fund Sponsor Website button.  In the situation of VCV (since the change at CEF Connect), click on the "Portfolio" button to get the Credit Quality array.  What you're going to do next is to pick up each of the percentages shown for holdings *rated* AAA, AA, A, and BBB to include in the format after the second ";" in the inception line(s) you've been working on " YYMMDD Credit Quality AAA #.##%, AA ##.##%, A ##.##%, BBB ##.##%, Others ##.##% avg #.## which is ".  Add up all of the individual numbers below the BBB line and include them in your Note File as part of the Others percentage.  Then add up all of the entries from your Note File to make sure the total is really close if not precisely at 100.00%.
      Next step is to compute a *composite* credit quality score for the specific fund that you're evaluating.  The math is simple enough:  1x those rated AAA plus 2x those rated AA plus 3x those rated A plus 4x those rated BBB plus 5x those identified as "Others".  Addemup and you come up with a number between 1.00 (almost impossible these days with credit quality diminutions inflicted by the corrupt bunko system) and 5.00 (altogether too frequent as I'll discuss later).  Put that number into the format after the word "avg".  Then test that number against my standards which say that if and only if that number is 3.20 or less it's a potential buyable but if larger than that it's too dangerous.
      What I'm saying with that standard is a recognition of what those credit quality ratings actually *mean*.  The various "A" ratings are generally reliable borrowers considered quite likely to PAY interest when due and principal when it comes due.  The "BBB" rating is reserved for borrowers who have gotten "a little sloppy" about their financing practices, but not to the point of serious concern for lenders.  The "Others" rating is for those who have gotten a lot sloppy to the point of raising serious question as to whether they're going to pay the interest due and substantial doubt as to whether they'll eventually pay off their bonded debt when it comes due.  What I'm saying with my "3.20" standard is that "on an overall basis" having an average credit quality just slightly below the "A" level is likely to be "okay" but anything worse is definitely NOT OKAY, i.e. the fund is intentionallly operating on a JUNK BOND basis.
      So after computing that "avg" number, if it is 3.20 or less complete the line with "which is less than my maximum permissible 3.20" or if it is more than 3.20 complete the line with "which EXCEEDS MY MAXIMUM PERMISSIBLE LIMIT OF 3.20".  For some other kinds of things, the information at the left of the Credit Quality array (which may not be there at all) under the Heading "Asset Allocation" can be important to identify what kind of animal the closed end fund actually is.  For VCV under the less informative CEF Connect presentation, you'll need to return to the CEF Connect Site to get the Asset Allocation information.  In most cases, perhaps all, pick that information into a new line under the inception and credit quality line of the form "*YYMMDD Asset Allocation: " and then list each of the kinds of things that they *do* have in the portfolio with the applicable percentages involved.  For VCV it's going to be a simple little line of the format "*YYMMDD Asset Allocation: Muni Bonds (now rephrased as "Debt - General") ##.##%, Cash Alters #.##%" confirming that it really is a cemuni and not one of the stranger kinds of animals.
      Now navigate back up the page above the "Premium/Discount Information" graphic to the area where the site provides a detailed listing of each and every one of the payments which the fund made in the last twelve months.  Part of the reason that I chose VCV for you is that it is one of the "simple" ones which actually did pay what they appeared to have been paying in each of the last twelve months.  The other things that could have been included have nothing to do with evaluating whether the fund is earning what it's paying.  "Long Gain" and "Short Gain" for example are nothing but bond market (or stock market in some cases) *gambling* profits which definitely can't be relied upon to *recur*, i.e. not part of anything worth paying for.  "ROC" is an abbreviation for "Return of Capital" which is to say that a lot of fnuds (the wrong spelling is intentional) are doing nothing but sending back some of the money that you paid to buy their shares without ever making anything on the money that they gathered when selling their shares or that you paid when you bought on the open market.  Sending out money to get your own money back piecemeal isn't an investment process but only unreasonable "trust" that the company is eventually going to be doing something positive with "the rest of it".
      So now it's time to create a set of lines above the inception and credit quality lines which reports the distribution information.  It begins with the YYMMDD payable date of the most recent distribution shown, e.g. "*YYMMDD divs ".  It then proceeds from the bottom of the list up to the top with a count of each different amount of distribution times the number of *cents* involved.  For example $0.0nnn becomes n.nnc in your accumulation of information about those payments.  Whatever the most recent payment amount was has the word "last" before it along with its count, e.g. "last 12xn.nnc indic " then followed by what you would expect to get if they were to continue paying that same "last" amount for the next 12 months.  Some things pay only quarterly so it would be the "last" amount times 4 instead of times 12.  Express that as a dollar amount, e.g. "$#.####/year" after the word "indic ".
      In this simple case, you then add the phrase " (and TTM was $#.####/year)" using the same number that you computed for "indic". "TTM" is an abbreviation for "Trailing Twelve Months".  In more complicated cases, where there was some month to month or quarter to quarter variation in the amounts paid, that becomes instead " (but TTM was $#.####/year" adding up the number of payments times each payment amount (plus any "special" distributions typically at the end of some years, if any) to find the total actually paid in the trailing twelve months. When there are modifications necessary for those messy things LTCG, STCG, and ROC, the total amounts of each of those things are added up and added as qualifying entries, each with their proper label, after the TTM/year figure, then deducted to arrive at a "net actual income" figure of whatever it turns out to have been (the "indic" minus the total of all the nonreliable payments).

      Unlike ownership interests in the equity of companies (called "stocks") cemunis are portfolios of *bonds* which are mere promises to pay interest for a period of time and then to repay the principal amount.  What that does is to make cemunis an INTEREST RATE dependent investment.  When interest rates are up, the prices of the bonds paying interest are *down*.  When interest rates are down, the price of the bonds paying interest are *up*.  Those features are because the "interest rate" is simply the amount of interest promised divided by the price of the bonds (or portfolio of bonds in the case of cemunis).  But it's the interest rate itself that indicates whether the cemunis are buyable or should be sold.  So, for example, when I first got into buying cemunis in December 1999 heading into the blowoff top of the Internet Mania Swindles in March 2000 and a few even out to September 2000, I reviewed all of the cemunis available at the time and found that their effective selling prices were at a yield of roughly 8.00% and that their effective buying prices were at a yield of roughly 5.72%.  That was computed based on where the actual cemunis I reviewed topped out (never went any higher) or bottomed out (never went any lower) during the time period that I was studying.  Had another opportunity to buy some cemunis within that same set of interest rate parameters during May 2004.  Sold quite a few of them when they reached the selling prices indicated by those original parameters.  All well and good *at the time* when interest rates were still substantially being set by *voluntary* market considerations.
      Although cemunis are widely described as "tax exempt income", the reality is nowhere near so clean.  The majority of them juice their returns on investment by including "revenue bonds" of businesses within the jurisdictions of the goofermints involved which are payable only out of the revenues of the businesses and are *not* guaranteed by the "full faith and credit" of the goofermints involved.  That adds some minor complications for tax purposes if you get any significant amount of those revenue bond interest incomes (requires at least *calculating* the "Alternative Minimum Tax" even if it typically doesn't result in any additional tax).  But "effectively" they are close to being "tax exempt" for Federal income tax purposes as widely suggested.  What that does is to suggest looking at "taxable equivalent yield" which compares the difference between income on which you don't have to pay taxes versus what you otherwise would have to pay if it was taxable income, suggesting a lower permissible yield for that "tax exempt" income.  But my original figuring was based on what *actually* happened and the only time it makes any difference is when *your* abusively high tax state exempts "some" (their own) bonds but taxes at their regular abusively high income tax rates any bonds issued by "other guys".  That varies from state to state, but unlike for Federal tax purposes, California is one of those where it makes a *big* difference in the final tax implications (a big part of why I selected a California exempt fund for your first analysis of cemunis).  If your state of residence has similar "big differences" in final tax implications of holding municipal bonds, you will need to know what their marginal top rate is for determining effective taxable equivalent yields.
      By the time the next opportunity arose to buy cemunis at reasonable prices during the 2008 market collapse following the felony illegal seizure of all stocks by the criminally corrupt SEC which began in October 2007, the interest rate situation had changed radically.  There no longer was any fair and orderly rational setting of interest rates available to investors.  Instead, the feloniously abusive Frauderal Reserve Bored had implemented the dictums of the criminal British manipulator John Maynard Keynes (euphemistically styled as an "economist" despite the clear point of his writings being to put absolute control of all financial resources into the hands of criminal gangs including goofermints) and the *religionist* practices of Islamic Terrorist Sh'ria (which prohibits the paying of any interest of any kind to anybody, although in fact that has been applied only to humans and not to criminal gangs in the former banking, now bunko, busymess whose interest charges and fees were virtually unchanged by the criminal theft of the entirety of the rightful interest incomes of elderly interest income dependent retired persons).
      As I was reviewing the situation during 2008, it became very clear that my former "8.00%" buying level had become inappropriate.  The availability of numerous cemunis at that rate or better was based entirely on the mass bankruptcies of vast numbers of municipal and state goofermints (perhaps especially in Californicatia where I'm sure you already know of many goofermints which have declared bankruptcy because of their refusals to collect any of the taxes due from the felony tax evading, slave mongering, hate mongering against male citizens, male baby raping, belligerently blaspheming "religion" gangs in violation of Article I of the US Constitution amendments which prohibits any such favoring of "religion" gangs).  There was *no* generally available *market* interest rate guidance since the Frauderal Reserve Bored had effectively rigged interest rates to ZERO.
      So what I did was to look at what that multiply criminal manipulator and fraud, the goo roo of Oh Ma, Ha! Warren Buffett, was doing for an interest rate for *his* loans to massive majorly criminal gangs such as Gulled Mon Sux, Lehman Brothers, and Milkfuss (which was forced by the bunko "regulators" into destroying much of the equity of my BankAmerica Corporation).  He was "lending" to facilitate the survival of those criminal gangs at a rate of *10%* per annum.  Without getting into a normative discussion of the comparative criminality of the gangs to which Buffett was lending vis a vis the frauds and thieves in the goofermint busymess, I settled on ELEVEN PERCENT as my new appropriate permissible buying point.  Was able to buy a whole slew of various cemunis for *that* effective yield during December 2008 and early 2009.
      The Islamic Terrorist Sh'ria rigging of interest rates to virtually zero continued until quite recently.  I haven't changed my view of the RISK involved in lending at my old buy level of "8.00%" but am just now "considering" lowering it slightly to reflect the fact that the FRB has increased rates above the former ZERO.  There being nothing even above the original 8.00% level currently, I haven't made any such change "yet" but when as and if I do it would be in relation to a portion of what interest rates have then been set at in relation to the former standard of 6.00% for other kinds of things.  As of early 2019, the FRB had increased rigged interest rates as far as 2.25% and I adjusted my "thinking" to 10%, but then the debt drunk bankruptcy inflicting Presidunce Trump brow beat the otherwise rational Chair of the FRB Powell into discontinuing both rate increases and resolution of the grotesque accumulation of insecurities held.  So as of this writing, all that is being covered is *barely* the thefts of resources via "inflation" with still nothing in the way of payment for the enslavement of elderly resources to the schemes of freeloading debt drunks.  There is also the complication that "if" interest rates were allowed to rise to normal levels, there would be a DOUBLE WHAMMY effect on the prices of the cemunis that I do own. What happens in a genuine rising interest rate environment is that the cost of the leverage they use (typically about one third of their total portfolio is borrowed on "floating rate preferreds" whose *costs* increase rapidly in a rising interest rate environment) all the while the market value of their bond holdings is being diminished by the standard "rising rates means lower prices from the bonds themselves".
      In fact, there is only *one* out of the 151 cemunis that I track, which is currently available even for that 8.00% and none at all which satisfy my Credit Quality requirements. Meanwhile, the six cemunis that I still have have established PaidFor Stock Ratios ranging from 1.18x to 1.45x (depending on whether I had done previous capital gains producing trades in the specific funds along with the income received).  "PaidFor Stock Ratio" is the sum of all income received plus capital gains realized, that sum divided by my remaining tax basis in the "stock" involved.  So I haven't sold any of them (beyond one for other reasons) despite them flirting regularly with my former "selling" interest rate levels.  They're at least producing *some* income for me and the PFS Ratios they've established make continued holding "nearly" risk free for me.  With nothing to buy to replace the income involved, no reasonable prospects at this time, I have decided to stick with what I've got despite their current interest yields ranging from 5.17% to 5.86%.  Theoretically, my current parameters are "buy at 10.00%, sell at 5.72%" but I'm stalled out by the ongoing criminally rigged environment from doing anything in either direction. It may be "awhile" before any genuine opportunity arises in the realm of cemunis, but I wanted to make sure that you understood HOW to evaluate them, and what the considerations are for pricing them, for "when as and if" another opportunity does come up.

      Once you have the basic information gathered, it's time to create the top line statement of permissible buying or selling prices.  That begins by entering the paying date of the most recent dividend into the "[VCV,yymmdd]" area followed by the date you create that top line "YYMMDD QUOTING  CA bid $#.##/sh (yield 10.00% on indic) at $##.##/sh (yield 5.72% on indic)".  The mention of "CA" is because CA provides special tax treatment for taxable residents of that state.  If your state of residence provides similar special treatment for its municipal bonds, you would do similarly for cemunis which qualify.  Go ahead and compute the actual potential pricing by dividing the indicated annual payments by the expected yield rates, e.g. /.10 for the first and /.0572 for the second.  Then allow the yymmdd last price information you gathered originally to compute a #.##% yield figure "which at marginal CA rate of 9.3% is equivalent to /0.907 to #.##% for CA taxpayers". If you want to you may then email to me your resulting VCV.txt file for review.
      I omitted a couple of the "to be discussed later" items in writing this Lesson 6 for you simply because the stated intentions of the Frauderal Reserve Bored are soooo far from allowing historically normal interest rates to be in force and the current Presidunce Don Old Trumpet is so insistent for his own bankruptcy inducing borryings to continue the now eighteen year practice of stealing the rightful incomes of elderly interest income dependent retired persons that there doesn't seem much "near term" relevance to learning the rest of those details at this time.  But I did want to make sure you understood HOW to do the basic analysis of cemunis for when as and if things change constructively.
    Bob Grumbine    :-)##               Onward to Lesson 7               back to Bob Grumbine's Central Blogging Site