Thread: Muni watch
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Old 03-22-2011, 08:06 AM
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Mary Pat Campbell
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
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Meredith Whitney walking it back

Q: You have been the voice of concern regarding the finances of the states and municipalities. How do things stand today?
A: Every day things get better because politicians are addressing the fiscal challenges more aggressively. Since November you’ve had more governors take strong austerity measures. The reality is that states have simply been spending far more than they’ve been taking in. In many cases, states have spent over two times the tax revenue they’re taking in. Of course, that’s not sustainable because they run down their rainy day funds, which they had previously used to balance misbudgets on a year-to-year basis. They don't have any wiggle room today. But every day the situation gets more focused, and that means it’s closer to finding a fix

Q: You have said that there could be 50 to 100 sizable defaults that could amount to hundreds of billions of dollars. Could we still see defaults?
A: Yes. This will be an extended multiyear issue. You will see defaults. You have debt that’s just not backed by ample cash flows, ample revenue. You’ve got too many drains and demands on state revenue. I’ve never said that a state would default, but I think the local municipal bonds are at a significant risk of default. Ultimately, a legislator is going to have to decide between the bondholder and their constituents, i.e., paying the police force or paying the bondholder. The local governments have decided they’re going to pay their police force, their firemen, their trash collectors. Some of the project finance bonds that have gone to back entities should never have been backed by tax-exempt municipal bond paper. Hotels, sports arenas, etc., project development bonds, don't have the revenue to back up the projects.
: What are you telling your clients about investing in light of all of this?
A: You don’t have a lot of bad news through May and June. And then you have some real challenges coming after June as housing starts to decelerate again as foreclosures resume and inventory really comes on the market. Investors who are looking for a strong second half may be disappointed. You may see a repeat of what happened last year. And inflation is a real issue. But for the next couple of months the markets should continue to do well. The more we can do to address fiscal austerity, the better our markets will do, and there is a real political shift to doing that.
And someone who's having none of it
Meredith Whitney's doomsday prediction back in December that there would be 50 to 100 sizable municipal bond defaults totaling hundreds of billions of dollars over the next year sparked a panic that hurt average investors who hold munis for their retirement, and municipalities trying to raise much needed cash during a time of strained budgets.

And yet, even as it become clearer by the day that what Whitney said was both irresponsible and wrong (do the math; just $12 million of munis have defaulted since December and we're already of the way through her timetable) she continues to mesmerize certain members of the press with her nonsensical meanderings about a market she obviously knows nothing about.
All of which wouldn't be so bad if Bartiromo didn't serve as a conduit for Whitney's initial absurd claim. In late December, after Whitney told 60 Minutes that municipal governments in 2011 were going to be no different than the banks were in 2008, she was promptly "interviewed" by Bartiromo on CNBC without even having to produce a shred of actual research to support her claims.

With that, the market for municipal bonds imploded. Because of the panic selling, small investors (the primary holders of munis because of their tax advantages) got hit the hardest, unless of course you count the nation's taxpayers who are now forced to pay higher interest rates when the cities and states they live in need issue debt.

This all seemed to fly over the head of Bartiromo, who lets Whitney off the hook once again, namely by failing to get Whitney to admit that she was wrong, and make her concede that her prediction was devoid of any real analysis (I have seen the research and it makes no mention of all those defaults).

And make no mistake about it, what Whitney predicted is wrong; so wrong that now she's even admitting to it, though her mea culpa once again seemed to go over the author's head. In the interview, Whitney now says her 50 to 100 sizable defaults prediction isn't going to occur over the next year. Rather, it's "an extended, multi-year issue." It would have been nice to know this three months ago.
Tell us how you really feel, Charles.

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