Archive for January, 2011

Municipal Bonds and Abnormal Psychology

Thursday, January 27th, 2011

Have you heard there might be trouble with municipal bonds?  Can you fog a mirror?  If the answer to the first is no, and the second yes, then you should probably a) check out this blog more often, b) watch 60 Minutes, c) read the story that was on page 16 of the Wall Street Journal–3 years ago!–and which has now moved to page one of every newspaper.  Mitch Daniels is making it easier for municipalities–cities, is it?–to declare bankruptcy, and there has been talk in Congress of making it possible for states to default on their own debt–it’s presently unconstitutional.

No state in the union will default on its state-level debt obligations.  There.

We have heard of a number of folks who are concerned about the risk in municipal bonds.  So they want to reduce it.  Fine; makes sense.  That’s a prudent step.  Look at one’s holdings of bonds and bond funds to see if there are heightened risks with any of them.   Then sell them if–with individual bonds–the yield you receive based on the price you’ll be paid is worth it to you.  Shift to a safer municipal fund with all or a part of the bond fund proceeds.  Better yet, sell the riskiest individual bonds and invest the proceeds in a well-diversified municipal bond mutual–or exchange traded–fund.  The manager will have his eggs in many more baskets and will be trafficking in such quantities of bonds that it won’t be difficult to make moves based on that firm’s substantial research department’s calls.

But don’t try to reduce your risk by selling your municipal bonds and buying stocks with the proceeds!

You’ll reduce your default risk and heap on a–Indiana phrase coming–whole ‘nother bunch of risks, like event risk, political risk, amongst others–all the risks that are encapsulated in the chart below of the quintessential blue chip stock, Procter & Gamble.  Here’s the schpiel, 

“it’s a great company . . . been around for ever . . . nice dividend . . . you use their products, don’t you?  . . . you know, Tide, Crest, Kitty Litter . . . there management’s great . . . headquartered in the Midwest . . . “

You don’t know General Electric, Ford, Procter & Gamble–or any other stock–any better than you know those municipal bonds that have got you awake at night.

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Weekly Recap & Outlook – 01.21.11

Friday, January 21st, 2011

Tower Private Advisors

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  • Earnings don’t matter
  • Housing perking up

(more…)

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Wkly Recap & Otlk – 01.14.11

Friday, January 14th, 2011

Tower Private Advisors

Prior Posts

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  • Whatever I can cram into about an hour of furious typing

(more…)

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The King is dead; long live the [bond] King – part II

Friday, January 14th, 2011

Another voice joined the municipal bond debate on Wednesday, when Bill Gross, aka the Bond King, was interviewed on Bloomberg television.  He said he doesn’t, “subscribe to the theory that there will be lots of [municipality defaults.]“  Like most, though, he doesn’t think that the municipalities are in great shape (“there will be increasing amounts of defaults”).  He praised Illinois, which raised its state income tax from three to five percent, and Jerry Brown, governor of California, who is taking wide-ranging steps to shore up the Golden State’s finances.  It’s at that level–the state’s–where he sees the least risk of municipal bond trouble.

Here’s a look at the pricing of default insurance on Illinois state bonds following the income tax increase.

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The King is dead; long live the King

Tuesday, January 11th, 2011

 . . . or rather, municipal bonds are dead; long live municipal bonds.

As usual, I’m a day late and five dollars (inflation) short on this subject.

Meredith Whitney made a splash late in the last decade saying Citigroup was going down the tubes.  Not having made any market-shaking calls since that call when she was employed at Oppenheimer–she left there to start up her own shop–and needing some new clients, she recently showed up in a 60 Minutes interview predicting there would be between 50 and 100 “significant” muni bond defaults in 2011, totalling “hundreds of billions” of dollars.  [Plagiarism police please note:  I lifted everything from “between” to “dollars” verbatim from the Bloomberg synopsis below the video at bottom.  She was not pressed to substantiate those claims and, thus, fear was mongered.  You can watch that video by clicking on the image below, but only if you promise to watch the one below it.

A number of folks have taken umbrage at her claims.  Their umbrage is pretty well summed up in the Bloomberg interview below.  In short, she doesn’t know what she’s talking about.  In long, unfunded pensions have been an issue for several years.

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