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muni bonds are poised for serious problems
Old 12-19-2010, 09:51 PM   #1
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muni bonds are poised for serious problems

i've said this before, did anyone watch 60 minutes tonight? it's a disaster waiting to happen.
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Old 12-19-2010, 09:52 PM   #2
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It is a disaster for someone, that much is for sure. Whether that turns out to be bondholders or state and federal taxpayers remains to be seen.
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Old 12-19-2010, 10:06 PM   #3
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I'm glad I caught this. Sometimes I forget to look for 60 minutes when it's delayed for football.
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Old 12-19-2010, 10:17 PM   #4
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State Budgets: The Day of Reckoning - 60 Minutes - CBS News
The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.
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It could be a self fulfilling prophesy. The individual bond holder sees the story and starts to sell, then Wall St; states have to pay higher interests rate etc.

The extension of unemployment benefits and help to the states will probably continue.

Putting aside the wisdom of extending help to the states and the unemployment insurance; these are the type of issues the Republicans are learn the lesson of 'Be careful for what you ask for' warning. They view their win as saying the public wants to cut back on gov't spending. If they don't help the states and extend unemployment; the problems that happen will be viewed as their responsibility. I think, they are in a no win situation - as are we.

The European debt issue isn't off the table either.

http://www.bloomberg.com/news/2010-1...a-s-drill.html

Asian stocks dropped for a third time in four days as concern mounted Europe’s debt crisis will spread and South Korea said it will proceed with an artillery drill that has prompted threats of retaliation from North Korea.
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Old 12-20-2010, 12:05 AM   #5
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The problem always boils down to the same thing for me. Even if I ignore the 7 trillion dollar trade deficit, the untold trillions of bad debt the fed is holding, the 50 to 100 trillion estimation of unfunded federal liabilities, and all the state debt and unfunded liabilities, and only consider the 14 trillion admitted federal deficit and divide it by the 350 million Americans...I figure each and every one of us currently owe 40,000 dollars. 160,000 for a family of four. It's a situation I just can't see getting corrected.
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Old 12-20-2010, 01:54 AM   #6
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.
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Old 12-20-2010, 05:22 AM   #7
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.

that's a very good question, one that I've been asking myself a lot re: munis. but at the end of the day I just sit tight and stay with my AA. I re-balance once a year based on asset class value vs my model, takes some of the worry away (but not enough!).

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Old 12-20-2010, 06:00 AM   #8
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It was interesting. There is so much to be concerned with re: our financial systems.

We keep "kicking the can down the street," and the electorate is just as much at fault as the politicians, but no one mentions that the can is growing larger and more rotten as we go.
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Asked why people aren't paying attention, Whitney said, "'Cause they don't pay attention until they have to." [Meredith Whitney quote from the segment.]
It will be interesting to see how New Jersey fares, it would appear he is the first Governor who intends to tackle the problem head on, though he doesn't have any choice. His comments were interesting, and we may end up with 50 Governors like that...
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Old 12-20-2010, 07:03 AM   #9
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Please, start the cascade of selling. I would very much like to buy some solid munis at 10+% yields.
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Old 12-20-2010, 07:09 AM   #10
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Many local and state finances are in good shape, have and deserve top credit ratings. Others do not but are in no danger of defaulting. An active muni bond fund manager should be able to identify and acquire lower risk bonds without much difficulty. I have no plans to reduce our muni holdings (20% of total) and might increase that if prices get much better.

We have not yet seen how states and local gov’t plan on dealing with future liabilities. Never underestimate the ability of politicians to find ways to deal with these challenges.

Lastly, never underestimate the ability of a professional storyteller to upset you. That is their specialty. And don’t assume you have seen the whole story.
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Old 12-20-2010, 08:29 AM   #11
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Been watching this the past couple of months or so and saw the 60 minutes segment. It's hard to tell which way things will go. States can not afford to default on their munis ....as it is the main source of their funding for projects (doesn't mean some states won't default on certain ones). If they do this, they absolutely know...their will be few if any investors. The states also can't afford to pay escalated or inflated interest on any new issues (but doesn't mean they won't). Meredith Whitney...while she may be correct in stating the obvious problem....she may not be correct in her analysis of how it will play out. She doesn't have a crystal ball. I also sense she is trying to "reclaim" her status since having basically blown the whistle on the banks. But look what the Federal government and the Fed did to soften that blow! What Whitney said basically has been known...and was already predicted so when one thinks about it...it was nothing new. Chris Christy and others have been saying it for months.
All of that said, I have questioned my broker about my muni bond funds. While his response is that he thinks 2011 may be the year for munis....we temporarily sold some of these funds. His thoughts are that ...since everyone probably has a bond position in their portfolio...the munis are the ones to have ...as opposed to corporates and others. Don't really know. But one thing is certain...as interest rates rise and they have no where to go but up, the NAV on bonds will go down. Just my opinion.
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Old 12-20-2010, 08:49 AM   #12
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.
I have a pretty good size stake in a VG muni bond fund.
Staying the course.
In fact, if the NAV drops significantly, I may even buy some more.
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Old 12-20-2010, 09:02 AM   #13
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There are several types of bonds issued by states e.g. insured, revenue backed, asset backed. Actual default could be limited to the unsecured bonds. Of course all muni bonds would take a hit and the secured bonds could be an opportunity.

I don't think actual default would happen, states and people who read the budgets would give a warning. My guess is that the Fed Gov't would step in to guarantee the bonds to shore up the market. States would then cut costs, try to restructure the bonds and pay higher interest rates. If a state does get into that situation the 'C' word - contagion - would be used a lot.



GEAB N°50 is available! Global systemic crisis: Second half of 2011 - European context and US catalyst - Explosion of the Western public debt bubble

The second half of 2011 will mark the point in time when all the world’s financial operators will finally understand that the West will not repay in full a significant portion of the loans advanced over the last two decades.
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Old 12-20-2010, 09:18 AM   #14
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The second half of 2011 will mark the point in time when all the world’s financial operators will finally understand that the West will not repay in full a significant portion of the loans advanced over the last two decades.
I selling muni bonds, and upping my allocation to medical marijuana...
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Old 12-20-2010, 10:37 AM   #15
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I selling muni bonds, and upping my allocation to medical marijuana...

brilliant!
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Old 12-20-2010, 11:08 AM   #16
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.
No, I am holding on to my CA munis. I am a little nervous though.
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Old 12-20-2010, 03:38 PM   #17
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For the most part, I like to buy individual bonds, rather than bond funds (although I do own Vanguard GNMA and also Wellesley).

I've never had a problem until about two years ago, when a $40K muni bond went into technical default. I just watched it, and it was trading for about 65 cents on the dollar for most of that period, then finally they bailed themselves out through bankruptcy, and the bonds were called at par just recently. Big relief!

After that little episode, I'm much less sanguine about munis than I used to be.
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Old 12-20-2010, 03:51 PM   #18
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I had been thinking about getting out of about 50K in a Vanguard muni fund for about a month. The returns are weak (around 2.8%) and it has actually has a small capital loss right now (about $300) although overall the gain when adding in the interest payments is slightly positive (a bit over 1K for a year of letting a semi-bankrupt group of municipalities use my money). Now that the dividend tax rate has been kept at 15% I think I will sleep much better spreading this money into a few large caps with solid balance sheets paying divys. Microsoft and Exxon come immediately to mind as probably being safer than most muncipalities.
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Old 12-20-2010, 04:38 PM   #19
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What Brewer said.... I am confident enough take a stake at a steep discount.

Many state and local pension funds were looking bad last year and early this year. But I have not seen any recent numbers. I suspect they have recovered a little and are in a little better shape.

Tax payers are not interested in more taxes... Local and State govt will have to cut programs and payroll. Trim back pension benefits on current workers (not retired... pay larger contribution).
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Old 12-20-2010, 04:46 PM   #20
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Local and State govt will have to cut programs and payroll. Trim back pension benefits on current workers (not retired... pay larger contribution).
I think they will have to trim back pension benefits for current AND retired workers in order to make things work out. At the very least they probably should increase the age where you can draw a full pension just like SS has done in the past.

But I would also probably get back into muni at 10% return. That is a long way from the puny 2.8% returns of today though. Even walmart pays a higher divy than that, even after paying the 15% divy tax. Walmart has much more stable accounting than most cities.

Edit: Oops, walmart divy is pretty low. But I think walmart bonds are around 5%?
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