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California Rebound: Less than Meets the Eye


Is the dramatic rebound of California’s bonds just a mirage? That’s the question on the minds of a number of investors who think the bonds are still too unpredictable and susceptible to fluctuations in the state economy. Bloomberg reports:

The best predictor of California’s revenue is the performance of the stock market, Jason Sisney, deputy state legislative analyst for state and local finance, said at the Bond Buyer’s California Public Finance Conference in Los Angeles Sept. 25.

The S&P 500 index of shares has gained about 22 percent this year, after a 13.4 percent increase in 2012.

The state is equivalent to a company whose performance depends on the economic climate, BlackRock’s Schwartz said.

“During good times, they look like an AA, and in bad times, they look like a BBB,” he said.

At the moment, the economy and stock market doing comparatively well, so the state’s bonds look good. But if the economic outlook sours again, California may not be much healthier than it was when the recession first hit. We’ve noted before that the Calpers pension fund had a strong year thanks to the performance of the stock market, not because it improved its fundamentals. The same may be true for the state as a whole.

This isn’t to say that no progress has been made at all: The state’s economy has improved somewhat and Governor Jerry Brown, for all his faults, has made significant steps toward shoring up his government’s finances. But this is a reminder that California’s improved credit doesn’t mean that its problems are solved.

[California seal image courtesy of Shutterstock]

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