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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
|
0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
|---|
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Why Fears of a Municipal Bond Collapse Are Overdone |
Seeking Alpha - Feb. 2, 2011 - By Alexander Green
I once heard a comedian tell an audience, “Never forget that you are a completely unique individual … just like everyone else.”
It’s a good line – one that reminds me how often investment analysts and various gurus who claim to offer “fiercely independent” advice generally end up saying much the same thing.
Take municipal bonds, for example – those supposedly safe securities issued by states, counties and cities to finance public works and which pay interest exempt from federal income taxes (and some state ones). If you’ve been paying any attention at all, you’ve heard that the next shoe to drop – the next big financial crisis – will be major defaults by California, Illinois and other states with huge fiscal imbalances.
It won’t happen. Here’s why.
No Fluff … Just the Facts
Let me begin by saying that any pending crisis on everyone’s radar screen is usually no crisis at all. (Remember Y2K?) A genuine crisis, almost by definition, is unpredictable.
How can all these “independent” analysts and Wall Street Cassandras be wrong? Mostly because they all have a tendency to listen to each other and adopt the viewpoint du jour, rather than looking at the plain facts.
So let’s do just that.
Fact #1: Municipal bonds have plunged over the last several weeks, as the consensus has grown that we’ll see widespread defaults this year.
Fact #2: Financial analyst Meredith Whitney, in particular, expects that we’ll see 50 to 100 American cities go bust this year and the defaults will amount to hundreds of billions of dollars.
A lot of investors are listening, apparently. The Wall Street Journal reports that municipal bond funds have seen $22.7 billion of withdrawals since November 10 – about two-thirds of the $34.5 billion that had been invested since January 1, 2010. Vanguard even withdrew the offering of several muni bond ETFs, citing chaotic and uncertain market conditions.
Digging Out of the Deficit Abyss
I’m not Dr. Pangloss. I realize that state budget deficits will increase from $120 billion this year to almost $150 billion next year, thanks largely to underfunded pensions and growing healthcare costs.
Yet many analysts assume these deficits will just keep growing in perpetuity. They won’t.
Look at New Jersey Governor Chris Christie, for example. He’s stood firm against unhappy public employee unions – a group that traditionally tells political leaders what they “must have,” not what they “want” – and his poll numbers have surged.
In California, Governor Jerry Brown announced $12.5 billion in spending cuts on January 12. That same day, Illinois raised its state income tax to 5% from 3% to help plug an estimated $13 billion shortfall. (I’m not applauding this, just pointing it out.)
Moreover, revenue for U.S. municipalities as a group rose during the first three quarters of last year – and the trend will almost certainly continue as the recovery takes hold.
What Caused the Muni Bond Selloff -- And What Will Arrest the Slide
Yes, there will be muni bond defaults this year. Lots of them. But they’ll be by mostly small, weak municipalities. Not even muni bond super-bear Meredith Whitney predicts that any state will default on its debt.
Bear in mind, much of the recent selloff is due to reasons other than fear of major defaults. For instance:
The extension of the Bush-era tax cuts for two years took away the urgency to invest in tax-free bonds.
Muni bonds also sold off, in part, because of a broader slump in U.S. Treasury securities.
For the complete article.
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