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Rosie on Munis


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Everybody's favorite permabear, David Rosenberg, and his musings on the Municipal bond market.

 

Are we getting close to another once in a lifetime opportunity, not so different from the corporate bond blowup circa 2008. Keep some dry powder.

 

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TIME TO FADE THE MUNI HYPE

There is a clear buyers’ strike in the market for state and local government debt that is largely based on fear and misperception. The mass selling of muni’s, which represent the bedrock of the U.S. economy, is incredible ― nine consecutive weeks of net redemptions totalling $16.5 billion ($1.5 billion in the January 15 week). Talk about fertile ground for a huge long-term buying opportunity.

 

First, even if you buy into the default talk, look at the yield protection you get now. There are some long-term muni’s trading north of eight percent ― even higher than junk bonds (a premium of over 100bps!). Long-term AAA-rated muni’s are now trading well north of five percent or 116% vis-a-vis Treasury bonds (typically, muni bond yields are equivalent to 82% of Treasury yields given their tax advantage). California off-the-run 30-year 6% bonds are now being quoted at a yield premium to dollar-denominated debts offered by the likes of Mexico and Columbia.

 

Give me a giant break.

 

Even in California, only teachers come in front of bond holders. In other states, the debt holders are the first to get paid. It’s amazing how few people know that.

 

The spurious reasons beyond default concerns is that the lower levels of government are saddled with a huge supply calendar (partly because of the expiration of the federal Buy America Bonds subsidy). But in truth, new issuance this year at an estimated $350 billion is lower than the $439 billion in 2010.

 

If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for:

Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power.

 

And have a read of Older Workers Are Keeping a Tighter Grip on Jobs on page B3 of the Saturday NYT. As we have long argued, the prime reason for this phenomena is that the boomers increasingly need income as an antidote to this last decade of lost wealth. And right now, in the muni space, we may well have the most compelling opportunity to add income to portfolios since the rapid meltup in corporate bond yields in late 2008.

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If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for:

Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power.

 

I have a kindergarten's level of knowledge regarding bond research.  How do I find out the aformentioned information?

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Yields are getting very interesting and trying to catch up on my research.  Is anyone here taking positions and through which vehicle i.e  Bond fund, etfs, or individual purchases?

 

Listing of current yields on blackrock closed end funds

http://www2.blackrock.com/US/individual-investors/performance-pricing/closed-end-funds

 

I'd prefer to go with a respected manager, but just not versed in the bond world like equities.  Any muni-bond manager with a long track record that someone could suggest to take a look at?

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"It's funny the Republican's bailed the financial industry who acted for it's own profit but won't bail out states that acted for common good."

 

2 wrongs do not make a right. It was certainly wrong to bail out the banks. But that does not mean we should bail out the states. Why should people in Texas who are fiscally responsible, bailout the lunatics in Illinois. Each state needs to unwind the idiotic, politically inspired pension deals that were made with the public employee unions. Hopefully the Congress will stand its ground and resist a bailout.

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"It's funny the Republican's bailed the financial industry who acted for it's own profit but won't bail out states that acted for common good."

 

2 wrongs do not make a right. It was certainly wrong to bail out the banks. But that does not mean we should bail out the states. Why should people in Texas who are fiscally responsible, bailout the lunatics in Illinois. Each state needs to unwind the idiotic, politically inspired pension deals that were made with the public employee unions. Hopefully the Congress will stand its ground and resist a bailout.

 

Or honor their promises and pay their bills (deadbeats), by raising taxes. Pensions are crazy, but its more so because they have been underfunded and used as a political tool by both parties.

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Why was it crazy to bail out the banks vs. the states?  Weren't many of the TARP payments returned for a profit?

 

What's crazy is FNMA and supporting that thing. 

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Congress Wants to Hear from Meredith Whitney on Muni Call

-talk of subpoenaing her to appear

 

http://www.foxbusiness.com/markets/2011/02/03/congress-wants-hear-whitney-muni/

 

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update:  Apparently, she has a calendar conflict.

http://www.bloomberg.com/news/2011-02-03/whitney-said-to-decline-house-testimony-due-to-calendar-conflict.html?cmpid=yhoo

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What do y'all think is the best way to play this?  The PIMCO PMX, PMF and PML appear interesting as long as inflation does not roar.

 

Packer

 

I'd stick with individual municipal bonds, perhaps doing a yield search through your broker based on a minimum credit rating, and then check to see if that rating is accurate and what it is backed by,  and who if anybody wrapped it....generally sticking with GOs.. If you do go with a closed end fund watch out for those premiums to NAV, especially the pimco ones.

 

Munis, on a whole, though very attractive relative to treasuries and even corporates in most cases, are still not yet at high enough yields to make me take any meaningful positions, other than in MBIA (though that is an equity)and more recently in AGO in the 14s is a good price.

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Aren't the PIMCO funds leveraged funds?  So you get more potential upside if munis recover.  How do you factor the leverage into the fair value premium?

 

How do you feel comfortable with the bond insurers?  As thier market is shrinking (50% to 10%) from the data I have seen and the possibility of adverse selection bias in the municipalities buying insurance.

 

Packer

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Aren't the PIMCO funds leveraged funds?  So you get more potential upside if munis recover.   How do you factor the leverage into the fair value premium?

 

How do you feel comfortable with the bond insurers?  As thier market is shrinking (50% to 10%) from the data I have seen and the possibility of adverse selection bias in the municipalities buying insurance.

 

Yes, the Pimco Funds are leveraged and yes there's more upside potential. I'm looking at fair value as the price six months ago with everything else equal. The leveraged funds were down 15%-20% mid-Jan, now they are down 10%-15%.

 

I did not buy insured bond funds. The ones I looked at didn't fall quite as much as the uninsured.

 

Some of the Pimoc funds also carry a healthy premium, If the premium declines the upside is reduced. Other "investment grade" CEFs are trading much closer to NAV, if not a discount.

 

The situation is turning quickly. The 20% decline in mid January equates to a 25% gain upon return to previous prices. Today's 12.5% decline is a 13%+ gain, plus the current 7-8% yield (Tax Eq 10%+)  Thank you Meredith!

 

 

 

 

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