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one view of the 2011 municipal bond market & unemployment graph
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one view of the 2011 municipal bond market & unemployment graph

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one view of the 2011 municipal bond market & unemployment graph

Hi All,

All monthly unemployment data in the U.S. for the year 2010
is available. (The data for the month of December 2010 will not
be available until, apparently Jan. 7 2011, from the Bureau of Labor Statistics.}

One attachment below shows 19 straight months of unemployment
at >9.0%.

Other attachment is image of analyst Meredith Whitney.

In a 60 minutes piece there is concern about state and local
governments and their financial situations. There may be significant
permanent layoffs in this category in 2011.

There is also real concern about the $3 trillion municipal bond market. Wall street analyst Meredith
Whitney sees the likelyhood of 50 or more size able municipal bond defaults. She
feels that this will amount to 100's of billions of dollars of defaults. She believes
defaults will begin in 2011.

Another bailout by the American taxpayers may change all this in my opinion, however
I don't see public support for that in the current political climate.

Video of 60 minutes piece here:



State Budgets: Day of Reckoning - 60 Minutes - CBS News

========================================================================
A municipal bond is a bond issued by a city or other local government, or their agencies.

Municipal bonds are securities that are issued for the purpose of financing the infrastructure needs of the issuing municipality. These needs vary greatly but can include schools, streets and highways, bridges, hospitals, public housing, sewer and water systems, power utilities, and various public projects.

Municipal bond - Wikipedia, the free encyclopedia
========================================================================

Hope this interests a few of you guys,

- Stephen

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one view of the 2011 municipal bond market & unemployment graph-u.s.-unemployment-graph.jpg   one view of the 2011 municipal bond market & unemployment graph-meredith-whitney.jpg  
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lots of variables go into pricing munis... but issuers financial health is always critical IMO, and as such they are no different than companies when one looks at the offer statements. They have the ability to lien and sue, something that companies lack.. but at the end of the day their health depends on their constituents being able to pay and as such those areas hurt by the recession are the ones most at risk of default, but all that is already priced into the secondary market and new issues given the problems in the fi munis bond market started at the beginning of the year.. 60 mins is late to the party in raising the issue.

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sysot1t View Post
lots of variables go into pricing munis... but issuers financial health is always critical IMO, and as such they are no different than companies when one looks at the offer statements. They have the ability to lien and sue, something that companies lack.. but at the end of the day their health depends on their constituents being able to pay and as such those areas hurt by the recession are the ones most at risk of default, but all that is already priced into the secondary market and new issues given the problems in the fi munis bond market started at the beginning of the year.. 60 mins is late to the party in raising the issue.


Everything seems ok at the moment. I think this is due to stimulus money still going
out to prop up the states. This will stop in a few months. What will happen then will be...
interesting. There is no crisis now probably because of this.



In the video it was mentioned that the ratings
agencies say everything is fine, just like they did before the 2008 crisis came. This doesn't mean
anything by itself, I just think there are those in the general public that still trust them. Anyway, to
me, I don't care what the ratings agencies say.

In the video
you can see how bad California is. The governor of New Jersey is interviewed and is in a bad situation.

The the comptroller of the state of Illinois is also interviewed. Illinois is truly in a pathetic situation.
He says that there are '10's of thousands if not 100's of thousands of people waiting to be paid
by the state'. Of this group there are not-for-profit organizations that are owed $1,000,000,000.
Apparently, Illinois state troopers can't always use their state credit cards at gas stations to get gas.
Some gas stations just won't accept the cards.

When Steve Kroft asked Meredith Whitney why people weren't paying attention to this she replied that
'people don't pay attention until they have to'.

She and her staff have spent 2 years trying to analyze the financial condition of the 15 largest states.
The financial data available to her from the states is public data. She considers the data out-dated
as well as incomplete. If this is actually true, then how bad all this is can not be priced into the market.

- Stephen

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Keep in mind that those investing in Munis, to have the income fully exempted, will only invest on their own states... insurance and bond funds are the other direct buyers of munis that will hold significant inventory... also, there are multiple levels of munis... that a state might go BK, does not mean a town or county will (they might also go BK)... as I said.. many variables going into it pricing and evaluating munis... and rating is only one of them as well.

Things being ok at the moment is only perception and illusion from the stimulus funds that came into the states coffers, nothing else. All those roads being repaired, bridges, etc. provided gap and interim finance to the state budgets.. but those funds are limited, which is why they are debating another stimulus packgage. (I dont recall if that was passed already as I dont pay too much attention to the news to be honest... it doesnt help me on my trading at all I have come to realize, so I ignore it for the most part)

Munis already have the coming issues priced in for the most part, but any panic will further influence the price and yield; is the public aware of the issues? not really, as most people are oblivious to what happens around them and most americans are financially iliterate. The information is there, as it is all public, but Meredith legions would have to extract it from each town/county/etc, not just at the state level.

I only invest on my state munis, and at that only in the towns I evaluate by reaching out to the tax collectors office and city's attorney office and gather information on their actions and debt sales..while looking at their budget/deficit, what pct comes from the state, what pct comes from the feds, what pct of the population works where, what they earn, industries in town, tax base and mill rate, etc.. basica demographics and financial details available from any town and city.

The info provides an insight into financial trends taking place that I use to decide which ones I buy to include on my ladder to replace expiring ones. They are a small portion of my assets as I prefer to not pay taxes on my income, and munis have been one way to achieve that goal.

CA and IL being in bad shape is not new.. CA had issues covering payroll a while ago, and that has not improved by much. I am not sure why it is being raised as a concern now, but that is media for you.


stephenszpak View Post
Everything seems ok at the moment. I think this is due to stimulus money still going
out to prop up the states. This will stop in a few months. What will happen then will be...
interesting. There is no crisis now probably because of this.



In the video it was mentioned that the ratings
agencies say everything is fine, just like they did before the 2008 crisis came. This doesn't mean
anything by itself, I just think there are those in the general public that still trust them. Anyway, to
me, I don't care what the ratings agencies say.

In the video
you can see how bad California is. The governor of New Jersey is interviewed and is in a bad situation.

The the comptroller of the state of Illinois is also interviewed. Illinois is truly in a pathetic situation.
He says that there are '10's of thousands if not 100's of thousands of people waiting to be paid
by the state'. Of this group there are not-for-profit organizations that are owed $1,000,000,000.
Apparently, Illinois state troopers can't always use their state credit cards at gas stations to get gas.
Some gas stations just won't accept the cards.

When Steve Kroft asked Meredith Whitney why people weren't paying attention to this she replied that
'people don't pay attention until they have to'.

She and her staff have spent 2 years trying to analyze the financial condition of the 15 largest states.
The financial data available to her from the states is public data. She considers the data out-dated
as well as incomplete. If this is actually true, then how bad all this is can not be priced into the market.

- Stephen


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sysot1t View Post


CA and IL being in bad shape is not new.. CA had issues covering payroll a while ago, and that has not improved by much. I am not sure why it is being raised as a concern now, but that is media for you.

You seem to be doing your homework. I can't say I'm an expert on this matter so I
think I'll just wait the 12 months (according to Whitney) and see what happens.

It was mentioned that munis are generally considered quite safe. If that belief is shaken
perhaps the ones that are indeed financially strong might suffer as well.

California and Illinois were brought up simply because of the theme of the 60 minutes story, that is,
the budget difficulties of the states.

In New Jersey, the long term pension obligations are $46,000,000,000 and $66,000,000,000 for health care.
( I can't say I understand the health care figure.) Regardless, this is >.1 trillion dollars, just for that state.
Apparently those two numbers are just estimates (as can be seen in the interview Steve Kroft had). This
confirms Meredith Whitney's comments regarding how hard/impossible it is to really get the truth regarding the financial problems of the states.


Thanks for the replies,

- Stephen


Last edited by stephenszpak; December 26th, 2010 at 02:00 PM. Reason: change
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not an expert but any means... but I am familiar and have an interest in munis... I like the idea of tax free income.. imagine if you had $2MM munis paying you an average yield of 7-9% tax free? ... I dont have that portfolio, but that is the value I see in munis.

In any event, cities have filed bk, and failed. States? not so much.. I dont think a state has ever filed BK... only CA came close to filing BK CH9 back in 2008/9... AZ was another one... I mean back in 1/2009 46 states had all budget shortfalls and those were all forecasted into 2010.. conditions have not changed drastically since then, and if the states have funding issues, then the cities will also have funding issues as support from the states decreases, so it is all a domino effect.

I just find it surprising that it is being raised as an issue now given I consider it old news.. but that is news media outlets for you, they need have "crises" so that we watch and they can continue to compete with online media for ad revenues.

I dont follow NJ, since I dont invest on them, but all states are being impacted by raising healthcare and pension costs... some more than others, and now more than ever.

also, dont forget... we are a union ... so if you were to think about it a different way... each state is truly a country ... many states, CA/NJ/NY/etc, will have budgets in the billions, able to compete with many other countries out there in the world..

here is a good link to state budget info for those that are interested on the macro level ..

States Continue to Feel Recession?s Impact — Center on Budget and Policy Priorities

keep in mind that is only one factor to munis... it all comes down to how you invest...


stephenszpak View Post
You seem to be doing your homework. I can't say I'm an expert on this matter so I
think I'll just wait the 12 months (according to Whitney) and see what happens.

It was mentioned that munis are generally considered quite safe. If that belief is shaken
perhaps the ones that are indeed financially strong might suffer as well.

California and Illinois were brought up simply because of the theme of the 60 minutes story, that is,
the budget difficulties of the states.

In New Jersey, the long term pension obligations are $46,000,000,000 and $66,000,000,000 for health care.
( I can't say I understand the health care figure.) Regardless, this is >.1 trillion dollars, just for that state.
Apparently those two numbers are just estimates (as can be seen in the interview Steve Kroft had). This
confirms Meredith Whitney's comments regarding how hard/impossible it is to really get the truth regarding the financial problems of the states.


Thanks for the replies,

- Stephen


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here are some links to help paint a picture as to current state financial health as well..

I have to thank you for the original post... it forced me to look outside of my current muni investments (i.e. my state based bonds) and I think there are opportunities for shorting some munis ETF's based on what I have seen... I am going to start reviewing them closely and try to identify opportunities to long some ITM/ATM puts.. hopefully I am not too late to that party..

Interactive: Is Your State A Debt Disaster? - Forbes.com

10 Debt-Laden States Quickly Becoming The Next California

Here's One Big Fact Meredith Whitney Is Ignoring In Her Muni Doom Prediction

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sysot1t View Post
here are some links to help paint a picture as to current state financial health as well..

I have to thank you for the original post... it forced me to look outside of my current muni investments (i.e. my state based bonds) and I think there are opportunities for shorting some munis ETF's based on what I have seen... I am going to start reviewing them closely and try to identify opportunities to long some ITM/ATM puts.. hopefully I am not too late to that party..

Interactive: Is Your State A Debt Disaster? - Forbes.com

10 Debt-Laden States Quickly Becoming The Next California

Here's One Big Fact Meredith Whitney Is Ignoring In Her Muni Doom Prediction


Caveat #1 : 60 minutes and the WSJ, are both notorious lagging indicators...more of a fade, than anything else.

Caveat # 2 : If Bernanke would go to such lengths to monetize the Federal debt, what makes you think he wouldn't monetize state and municipal debt?

Caveat #3: You are selling into weakness.

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Caveat #1 : 60 minutes and the WSJ, are both notorious lagging indicators...more of a fade, than anything else.

Caveat # 2 : If Bernanke would go to such lengths to monetize the Federal debt, what makes you think he wouldn't monetize state and municipal debt?

Caveat #3: You are selling into weakness.

all valid points, which is why I said I am hoping to not be too late to the party... from looking at MUB, PZA, MLN, TFI and a few others so far, it seems like I am late by about 2-3 months.. Nov was when the breakdown seems to have taken place across the board..

my lesson out of this one... not to look at munis just for income, which is how I always viewed them; but also for possible short term trading plays when there are screaming factors that I know will impact that market derivatives...

I still think there might still be some opportunities to long some puts, but I will have to define my risks and manage the positions a lot closer than normal... but certainly late to the main alpha buffet on munis ETF's ... but might be able to get some left overs..

maybe I need to start watching bloomberg tv again as well.. no more watching japanese anime while I trade I guess...

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sysot1t View Post
here are some links to help paint a picture as to current state financial health as well..

I have to thank you for the original post... it forced me to look outside of my current muni investments (i.e. my state based bonds) and I think there are opportunities for shorting some munis ETF's based on what I have seen... I am going to start reviewing them closely and try to identify opportunities to long some ITM/ATM puts.. hopefully I am not too late to that party..

Interactive: Is Your State A Debt Disaster? - Forbes.com

10 Debt-Laden States Quickly Becoming The Next California

Here's One Big Fact Meredith Whitney Is Ignoring In Her Muni Doom Prediction

==========================================================================

Thanks for the thanks.

This is from your businessinsider link about debt-laden states:
---------------------------------------------------------------------------------------------------------------------------------
New Jersey

New Republican Governor Chris Christie is attempting to have the federal government forgive the state's unemployment related debt of $1.2 billion.
CDS Spread: 222.2 bps

Municipal Bond Ratings (Moody's): Aa3
Municipal Bond Ratings (S&P): AA
---------------------------------------------------------------------------------------------------------------------------------
New Jersey's bonds are rated as 'investment grade' by S&P. In fact all at "10 Debt-Laden States Quickly Becoming The Next California" (except New York City which doesn't have any rating) are all rated as investment grade by S&P.

{In addition, the 60 minutes piece says that N.J. faces a 10 billion dollar deficit next year.)

I don't understand what this article is trying to say. Maybe, they're saying that no matter how bad a state's financial situation is, its bonds are still investment grade.

As you've stated, you do your own analysis, which I think is quite prudent.


At this link you sent:

Interactive: Is Your State A Debt Disaster? - Forbes.com

The states on the map by Forbes that have the worst debt rating are California, New York, New Jersey, Illinois,
also Louisiana, Mississippi, Ohio, Wisconsin, Connecticut, and last but never least, Massachusetts.

Regarding the link about "Here's one fact Meredith Whitney is Ignoring":

These are quotes:
===========================================================================
Why would a governmental entity choose to default on its bonds, especially if they make up a relatively small proportion of its costs? -Joe Mysak at Bloomberg

Also:

“Debt levels for U.S. local and state governments are relatively low, with annual debt service representing a relatively small part of budgets,” Fitch Ratings said in a special report in November.

===========================================================================

My question is, why did this happen? Why didn't New York City "roll over maturing notes in August of 1975"?
Didn't they know that something bad would happen?

Excerpt from link below:

When New York City was unable to roll over maturing notes in August of 1975, its de facto default sent
shock waves through the municipal bond market.
It was preceded in its ignominy by the Urban
Development Corporation, whose credit had been curtailed by the market six months earlier. Investment
reaction was immediate. Cities, counties, states and agencies that had previously enjoyed unquestioned
credit found themselves virtually shut out of the bond market. Some received no bids for their offerings..."


From The "New York City Effect" in the Municipal bond market

{The link below should work, I hope.}

JSTOR: An Error Occurred Setting Your User Cookie



We'll see what happens. Be advised, I do often have a gloom and doom outlook in general,

- Stephen

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