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Being Contrarian to Meredith Whitney One Year Ago Is 2011's #1 Investment


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http://news.businessweek.com/article.asp?documentKey=1376-LVR66K07SXKX01-56QI66TNCHLU9IN8GHJAO9AQ7V

 

Investors, spooked by bank analyst Meredith Whitney's prediction of “hundreds of billions of dollars” of municipal defaults in 2011, started fleeing the market in record numbers, sending interest rates soaring, according to Craig Sheagren, the hospital's chief financial officer. As bond buyers ran, JPMorgan Chase & Co. and other underwriters stepped up with offers of loans, letting the institution bypass the public markets.

 

“I have not seen a better deal yet than what we got,” Sheagren said recently of the 3.6 percent annual cost, almost half the market rate, that the hospital received on 15-year debt in March from JPMorgan in New York. At about the same time, Jamie Dimon, the bank's chief executive officer, was publicly cautioning investors on the risks of municipal debt.

 

Refuting Whitney's forecast, which helped send borrowing costs to two-year highs in January, the $3.7 trillion municipal- bond market rebounded this year, generating an average total return of 10 percent through Dec. 12, better than U.S. Treasuries and corporate bonds, Bank of America Merrill Lynch indexes show. Munis also trounced equities as the Standard & Poor's 500 Index lost 0.6 percent in the same period.

 

 

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  • 1 year later...

Looks like Whitney's predictions may be coming true (two years late):

 

http://finance.yahoo.com/news/detroit-not-one-off-aftershocks-062741376.html

 

Detroit's leaders have set an important precedent in siding with residents rather than unions and bondholders in their decision to declare the city bankrupt last week, Meredith Whitney wrote in the Financial Times.

 

As part of Detroit's restructuring plan, Emergency Manager Kevyn Orr wants to treat general obligation (GO) bonds as unsecured debt. If that request is approved by the bankruptcy judge, the $3.7 trillion muni-bond market could be turned on its head, as would the long-held assumption that GO bonds represent a relatively risk-free investment.

 

Wouldn't such a judgment be great for muni bond insurers as they could then be justified in jacking up premiums?

 

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Yep, I suppose we will see.  So far she's years early and off by orders of magnitude.  One could argue that the producers of the classic film "Robocop" have an equally impressive record of predicting the financial future of the city of Detroit.  ;D

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Yep, I suppose we will see.  So far she's years early and off by orders of magnitude.  One could argue that the producers of the classic film "Robocop" have an equally impressive record of predicting the financial future of the city of Detroit.  ;D

 

Murphy?  Is that you?

 

Agreed.  A prediction has to have some kind of time constraint on it or it is meaningless.  It's bullshit to give some credit for a prediction made with respect to another time even though it just so happens to occur in the future.  I can make a ton of predictions that I am positive will come true at some point.  A large money center bank somewhere in the world will go bankrupt.  At least 10 more cities will declare bankruptcy. 

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Personally, I very much respect Mrs Meredith. She has studied the financial situation in the municipal world.  She saw the problem with the retirement funds of their employees among many other problems . She predicted that there would be eventually a huge default in municipal bonds.

 

I do not think that one can predict really when the disaster will occur. If you look at Fairfax, for years they were aware of the possible disaster in the financial world. But for years nothing happened  to the point that the even the most confident shareholders of Fairfax  were in doubt as of their strategy (even within this board). But then, disaster came in 2008, and what a disaster it was!!!!   

 

Many cities have already filed for bankruptcy in the states. Detroit is the latest and the most significant ones. More cities filing for bankruptcy in the near future would not surprised me at all!

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http://news.businessweek.com/article.asp?documentKey=1376-LVR66K07SXKX01-56QI66TNCHLU9IN8GHJAO9AQ7V

 

Investors, spooked by bank analyst Meredith Whitney's prediction of “hundreds of billions of dollars” of municipal defaults in 2011, started fleeing the market in record numbers, sending interest rates soaring, according to Craig Sheagren, the hospital's chief financial officer. As bond buyers ran, JPMorgan Chase & Co. and other underwriters stepped up with offers of loans, letting the institution bypass the public markets.

 

“I have not seen a better deal yet than what we got,” Sheagren said recently of the 3.6 percent annual cost, almost half the market rate, that the hospital received on 15-year debt in March from JPMorgan in New York. At about the same time, Jamie Dimon, the bank's chief executive officer, was publicly cautioning investors on the risks of municipal debt.

 

Refuting Whitney's forecast, which helped send borrowing costs to two-year highs in January, the $3.7 trillion municipal- bond market rebounded this year, generating an average total return of 10 percent through Dec. 12, better than U.S. Treasuries and corporate bonds, Bank of America Merrill Lynch indexes show. Munis also trounced equities as the Standard & Poor's 500 Index lost 0.6 percent in the same period.

 

I am not close to munis but this could be a case of sound macro =/= good investments.  Munis could be in worse health but not showing it yet.  We should also try to dissect the returns here.  The 10 year was above 3% in the beginning of 2011 and ended below 2%.  She should be evaluated on the credit spread and number of defaults and the interest component should be bifurcated.

 

This reminds me of Blurry in a way where he thought housing was in bad shape, but he did a ton of micro work too by analyzing a ton of RMBS.  He specifically looked at state concentration to identify which were exposed to the worst bubbles, he looked for esoteric products like Alt-A ARMs with specific payment change catalysts, etc.  He had a macro thought and then through due diligence narrowed it down to individual actionable ideas.  Does anyone know if Meredith called out specific municipalities or was this a macro call?

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