Whitney still sticks in muni bonds' craw

May 5, 2013 @ 12:01 am

By Jeff Benjamin

The municipal bond market continues to view outspoken analyst Meredith Whitney as an unwelcome guest at a private party.

As much as the industry would like to see her focus her attention and sensational comments elsewhere, she refuses to leave the muni market alone.

“I do think she is an element that won't go away, but there is nothing new that she is bringing up,” said James Colby, a senior muni bond strategist at Van Eck Global.

Ms. Whitney's most recent jab at the muni market came a week ago when the independent equity analyst and founder of Meredith Whitney Advisory Group LLC delivered a keynote address at an industry conference and essentially doubled down on earlier predictions of problems for muni bonds.

'Negative-feedback loop'

“People who don't like the taxes in one state will move to another state, and that creates the negative-feedback loop from hell, and something has got to give,” she said during her presentation at the Investment Management Consultants Association's annual conference in Seattle. “This is just the beginning, and this stuff will take a long time to play out.”

Ms. Whitney first upset the muni bond market apple cart during a December 2010 interview on “60 Minutes” in which she predicted imminent and sweeping defaults across the $3.7 trillion market.

Although the bold call got plenty of attention and rattled the muni bond world, which is made up mostly of individual investors, the bearish forecast didn't come to pass.

Backpedal

When asked about the 2010 call last week, Ms. Whitney dialed back a bit and admitted that she never intended to make such big news during that television interview.

“I first published the research from that [December] "60 Minutes' interview in September,” she said. “That was an hour-and-a-half interview, and it was not my intention to make any calls on the show, and I didn't expect it to resonate as much as it did.”

In terms of whether her call on the muni market was premature or exaggerated, Ms. Whitney said: “I said people would have to worry about it in 12 months because the stimulus money was running out.”

Even now, she still isn't backing down on her pessimistic view of the level of risk that she sees in the muni market.

“The investment side of the issue is, the demographic landscape of the United States is changing before our eyes, and this is what is important for the next 25 years,” Ms. Whitney said.

Ms. Whitney, who has a book coming out next month, often refers to herself as “an equity gal,” a point that isn't lost on those in the fixed-income industry.

“If you're trying to sell books and you want to force people out of bonds and into stocks, well, then, I guess there is some benefit to her calls for alarm,” said Ronald Bernardi, a muni bond trader and president of Bernardi Securities Inc.

“There are clearly weak credits in the municipal bond markets, just like there are weak corporate credits and weak household credits, but I don't see any reason to believe there is Armageddon befalling the muni bond market,” he said. “Short of a cataclysmic financial collapse in this country, I don't see anything like that happening to municipal bonds.”

From Ms. Whitney's perspective, the country can be divided between the central corridor states, where the local economies tend to be stronger, and the coastal states, where things are bad and getting worse.

Sand states

Specifically, she is leery of the so-called sand states, including Arizona, California, Florida and Nevada, where local budgets have been hit hardest by collapsing housing markets.

“When housing started to decline, the banks had to pull credit lines in the sand states, and those economies were tied to real estate,” Ms. Whitney said.

“Right now, unemployment is more than twice as high on the coasts as it is in the central corridor, and [gross domestic product] in the central-corridor states is in the high single digits, while it's sub-2% in the coastal states,” she said. “That's not going to get better anytime soon, and I think it's going to get worse.”

Ms. Whitney laid out an investment theme that involves digging deep into state and local budgets to determine where and how money will be spent over the next few decades.

Even if her points are interesting, most of those who spend their waking hours studying the muni bond market aren't impressed.

“I dare say that asset managers and investors are very aware of the impact that the recession has had on municipalities dealing with less revenues,” Mr. Colby said.

“In the municipal bond space, the mismanagement gets built into the pricing and valuation on a daily basis, and there's no hiding it,” he said. “This market is actively aware of what's going on.”

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