Municipal Bond Market

[lmrhoades]

Henry and others
Is there a big problem with the muni bond market. On cnbc this morning they were talking about it as if it could lose big money. I know bill gross is investing big into the muni bond market and it's done well this year thus far.
Is there a problem that you know of or is it just continued speculation?
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LMR

[HenryTo]

Financial transparency has always been the unknown ideal. Cooking the books have been a hallmark ever since the first business sprang up - and even before accounting became a "profession" and double-entry accounting was invented.

It may not seem like this today, but the US as a whole has significantly much better transparency than all other countries - this includes the US government vs. other national governments, even versus the UK. The UK doesn't even publish any data similar to the Flow of Funds data - because if they do, they will be slashing interest rates right now. That is one reason why the BoE and the ECB don't act until late in the game, primarily because they do not have the data.

Nearly every financial crisis arose out of the loss of confidence in the system and in the integrity of the financial institutions, their books, etc - this is no different. For a good daily account of a crisis a century ago, there is a recent book published on the Panic of 1907 - I highly suggest reading that (it is a very quick read). This is what defines a financial crisis - and this is why value investors like Buffett and Wilbur Ross make money - because they believe in the long-term integrity of the system, the overall soundness of balance sheets, and the durability of the U.S. capitalist system, while others around them panic. Last but not least, financial transparency has continued to increase over the last 200 years. As recently as 15 years ago, one would've had to make a trek to the local or university library to look up financial information. With the click of a button, one can now pull up financial data rather easily and for no fee - not just for companies registered with the SEC but for the federal, state, and local governments, etc. This is as good as you can get without formally going in and audit their books.

[mildred]

I'm glad to see our local governments getting out of speculating in the financial markets, that's certainly a positive.

But I'm worried about local gov't balance sheets. I worry because of the opaque nature of gov't finance. Everything is so convoluted and politics trumps reality too often.

I don't deny gov't balance sheets are relatively sound today, but my concern as a muni investor is tommorow NOT TODAY. I believe what has occurred in the muni market today is the first hiccup. Yeah ... it's probably overdone as far as today is concerned, but to ignore the probability of future financial chaos would be shortsighted IMO.

My motto these days is "everything isn't what it appears to be". Before I make financial decisions these days I want to make sure I know what I'm investing in. Yesterday's safe havens mean nothing to me anymore. My confidence in our financial system has been shaken and there's never only one skeleton in the closet.

Gross and Ross can buy all they want ... I don't care. They may be supporting established positions ... who knows. I'll sit on the sidelines and watch a little here and when I see some more transparency I'll make my mind up then.

[rffrydr]

Wilbur's muni buy:

http://www.cnbc.com/id/15840232?video=676428631&play=1
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

They will suffer from an economic slowdown/recession just like everyone else but the recent sell-off is definitely overdone. Please see Bill's latest commentary on the munis - there are those who are still seeing rising home prices and a relatively stable local economy whose bonds have been indiscriminately sold off as well. Don't forget that they also have a huge tax base - not to mention that municipal finances in general are still relatively sound today relative to history.

Gross and Ross now moving into the markets:

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayu_rz4zxnt8&refer=home

As mentioned before, I was on a PIMCO conference call a few weeks ago and the "overhang" issue (entities pulling back from the ARS market and issuing long-term municipal bonds instead) came up. The two PIMCO muni managers stated that they don't believe it is an issue over the intermediate term, given the fact there the amount of muni offerings have been very low over the last few years. This is not good timing by any means, but the ARS market was never a sound one anyway as there was a huge inherent duration mismatch. The broker/dealers and municipalities active in this market can now go back to doing what they do best (whatever that is) instead of speculating in the financial markets. These excesses are being wrung out as we speak.

[mildred]

Seems like the mantra emmanating from the municipalities today is that insurance is not needed and by going it alone the municipality can actually save money making it an even stronger entity.

The way I see it ...... with the ramping of municipal expenses and diminishing municipal revenues the need for insurance is as important as ever. Municipalities have never been weaker than what I see today ... to pass themselves off as anything other is shameful.

[rffrydr]

TheStreet account of Retail's interest in a big CA issue:

[HenryTo]

Institutions and retail investors getting back into the game in the world of munis:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJeYz7_1Yl20&refer=home

[rffrydr]

I'm still bearish on these. Automatic pilot structural budgets makes GM look like greasy kids stuff. Taxes are pressing ceilings and govts look to follow the "hidden fee" corportate strategies. Medical looms large here--and maybe the route to reform. I drove from LA north today and can tesify the revenuers were out in force.

What's the reaction from the "good companies"?

Denial:


http://www.nytimes.com/2008/03/03/business/03bond.html?_r=1&hp&oref=slogin
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Today is the Tomorrow you worried about Yesterday!

[lmrhoades]

Thanks for your response henry...cannot believe the move, wow! A bit scary right now
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LMR

[HenryTo]

Len,

I just looked at the Lehman Brothers long-term municipal indices and they're down about 0.60% today - not as drastic as the Eaton Vance fund. Nonetheless, that is still a relatively big move for a muni index, especially since Treasury long yields declined today.

I continue to believe this is an overreaction. Municipalities have the tax power to sustain their payments - virtually none have potential default problems, except in the case of potential fraud.

Best regards,

Henry

[lmrhoades]

Henry...
How long will this go on...it's crazy they are dropping faster than high yield...eanax was down 2.3% today alone. Wondering if i should bail out fast and wait...is this an overreaction?
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LMR

[HenryTo]

This was inevitable for the most part. Not only was there a duration mismatch, there was also a credit quality mismatch as well. Going forward, this arrangement (ARS market) will cease - and most of these entities (hospitals, etc.) will move back to long-term financing.

In the meantime, many of these entites will continue to bleed - I expect virtually all the AAA and AA rated entities will find long-term financing or a bank letter of credit as backup very soon. The ones who will continue to bleed will be the A rated entities or lower or those who never seeked an outside rating from Moody's or S&P, and solely depended on the bond insurers for their ratings. But once the bond insurerss' troubles are fully resolved, rates in the ARS market should come down dramatically. Like I mentioned before, the 20% deal on the NY Port Authority was a one-day deal - many bond funds (like PIMCO) as well as hedge funds have come in as "liquidity providers" to the market. As more entities get long-term financing (resulting in a shrinking of supply in the ARS market), a tremendous amount of liquidity will return to this market.

[lmrhoades]

Any thoughts, should i bail on my muni's, this is crazy!
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LMR

[rffrydr]

More details on swap/auction rate funding:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXbB2xpLMj0M&refer=home
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Today is the Tomorrow you worried about Yesterday!

[lmrhoades]

My muni fund at vanguard keeps losing money...how much longer will this last, i never thought i would be wondering so much about muni's...they seem the best place to invest in this enviroment with treasuries so low and corporate as well and with all the credit crap, what is going on?
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LMR