Meredith Whitney Is Wrong About Muni Bonds

| February 17, 2011 | 0 Comments

Meredith Whitney is wrong.

Who is Meredith Whitney?  She’s a former Oppenheimer analyst who famously predicted the Banking Crisis of 2008.  Since then, Whitney has become something of a rock star on Wall Street.  She left her old gig and started her own company (creatively named Meredith Whitney Advisory Group).

Make no mistake, Meredith Whitney knows banks.  I certainly wouldn’t bet against any of her banking industry predictions.

But municipal bonds… now that’s a different story.

Whitney has been all over the news lately with her doom and gloom predictions about municipal bonds.  She’s forecasting nothing less than total Armageddon in the muni bond market.  According to Whitney, we’re on the verge of collapse in state and local governments.

That’s a bit much Meredith.

I appreciate your vigor.  You’ve definitely stirred up a hornet’s nest… and I’m sure you’ve picked up a few clients for your shiny, new, self-named company.  But frankly, it’s irresponsible for a respected analyst, such as yourself, to participate in fear-mongering.  There’s enough of that going around already.

Unfortunately, I don’t think she’s listening…

The facts simply don’t support Whitney’s catastrophic predictions.  Her “conservative” estimates call for 50 to 100 large muni bond defaults within the year.  What’s more, she’s forecasting losses of a staggering $200 billion or more.

Folks, it’s simply not going to happen.  You can stop stockpiling canned food in your basement.  Your local government will survive.  Chaos will not reign in the streets of America.  This isn’t Egypt.

Yes, there will be some defaults.  No doubt, some muni bonds will fail.  But what Whitney claims… no way.

Check this out…

According to municipal bond experts, in the six weeks since Whitney’s proclamation, there’s been ONE default.  It was for the grand sum of $6 million.

For Whitney’s claims to come true, there’d have to be over $4 billion in defaults every week for the rest of year.  In fact, if the 50 largest cities in the US defaulted on their debt, it would only add up to $83 billion.

Is $200 billion in muni defaults even possible?

Here’s the deal…

The widespread fear over municipal bonds (widespread in part because of Whitney’s campaign on national TV) is based on state and local governments seeing lower revenues and higher expenses.

In this case, revenues are taxes.  And tax receipts are down mostly because property values are depressed.  Meanwhile, expenses are rising mostly due to pensions.  Many government workers are at retirement age and expect to start collecting their pensions.

It’s a tough combination for sure… but hardly one guaranteeing mass defaults.

You see, governments have more options than corporations do.  Like corporations, governments have the option of cutting expenses by reducing the workforce, cutting pay, or halting projects (such as repaving roads or building a new park).

But unlike corporations, governments have a virtually guaranteed way to increase revenues.

They can raise taxes.

If a corporation raises prices, customers can shop elsewhere.  If a local government raises taxes, people have to move away to avoid those taxes.  And moving is a major undertaking on many levels.

A small to medium increase in sales tax or property tax is generally not going to cause people to make drastic changes to their lives.  And I certainly consider relocating to be a drastic change.

Simply put, if a government needs to avoid default, they usually can find a way to do so.  It may be unpopular, but it can and will happen, particularly in larger cities.

This isn’t to say pensions aren’t a problem.  They certainly are.  But it’s a problem that will occur over time… and can also be solved over time – especially if the economy continues to improve.

Here’s the bottom line…

Municipal bonds aren’t quite as safe as they’ve been historically… but they’re a long way from experiencing a catastrophe.  Meredith Whitney’s national crusade against munis is nothing more than a way to gain publicity – and clients – for her new company.

Fortunately, there’s an opportunity to profit from this situation.

Municipal bonds have sold off sharply since Whitney canvassed the major networks with her anti-muni campaign.  Now, fear-based selling has pushed muni bonds into deeply oversold territory.

So, if you’re holding municipal bonds in your portfolio already, don’t sell.  Chances are, your investment is safe.

And if you’re not holding any muni bonds, now’s a great time to buy.

If you don’t want to pick and choose between individual muni bonds, you can always go the ETF route.  Funds like iShares S&P National Muni Bond ETF (MUB) are good, safe ways to invest in diversified baskets of muni bonds.

Meredith Whitney had her day in the sun.  But her latest prediction of mass municipal bond failure is over the top.  But, we can still make money off of Whitney’s forecast… by taking the opposite side.  Ignore the fear tactics.  And don’t be afraid to add municipal bonds to your portfolio.

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Category: Bonds

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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