Are Munis Next?

Warren Buffett is all warns of a "terrible problem" of municpal bond defaults as signaled by increasing credit default swap (CDS) spreads. With all due respect to Warren, his worries over the rising CDS spreads in California and Illinois bonds, however, are misplaced. Illinois is in deep trouble, but it is not the next Greece, nor is California about to join Club Med. The Big Picture does a nice treatment on why muni's are not in as much risk as sovereign debt despite scary charts like this one: 

 

Simply put, a State cannot go bankrupt. They can run out of money, as California is wont to do every year, but then they scale back their commitments: first education (50% of budget), then interest on muni's (7%), using California numbers. The shortfall has to be 43% before California muni's get at risk of default. Also, they simply cannot let their State debt go down. Individual cities or districts can, but the State cannot survive without debt. It needs the debt to bridge across sporadic tax collections. I discuss this at length in my longer post, Investing in Munis.

The muni rating agency Fitch recently re-calibrated their ratings, increasing them. As the WSJ reports, Fitch took into consideration the fact that many municipalities are under intense stress, but “historically, the level of [muni] default was very minute as compared to other sectors.” Investors have basically shrugged off the risks, as yields have not moved much in the face of rising CDS spreads (see chart, courtesy WSJ).

To top it off, the Stimulus has provided a large bridge to the States: $135B of the $150B estimated State shortfall will be covered by Stimulus. A lot remains to be drawn down, particularly for education, giving the debt service segment even more leeway. See next chart. Instead of dragging down muni's, State problems will drag down the Federal taxpayer. 

It seems inevitable that Greece and other PIIGS in Poo will default. It turns out sovereign nations tend to default much more frequently than muni's. They have armies and can get away with it. Here is what I wrote as the Greek Tragedy began to erupt and gold began to be hoarded:

What happens when the debts of the issuer are vastly beyond their productive capacity? Well, the country defaults, and the fiat currency is forcibly exchanged for scratch. A 2008 paper by Harvard Professor Rogoff and Prof. Reinhart, both members of the NBER (which calls recessions and recoveries) entitled This Time Is Different demonstrates that instead of fiat regimes making good, they have defaulted over and over throughout eight centuries of financial crises:

We find that serial default [repeated sovereign default] is nearly a universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. 

Before we take comfort in the US being already an advanced economy, the imperial power of its day has typically defaulted after over-extending. Rich European countries have defaulted, including Austria, France, Portugal Spain and Germany. The reunified German defaulted in 1873, bringing the whole world into a long depression, including the United States. In the last century, Germany defaulted twice: 1932 and 1939. Russia three times, beginning in 1918. England in effect defaulted in 1931. 

The interesting conclusion: Treasuries, gold and Muni's stack up as the safer places to be. Even corporate debt from quality issuers may prove safer than sovereign debt. 

Comments

[Account Deleted]

SP 500 Head and shoulders pattern
http://niftychartsandpatterns.blogspot.com/2010/06/sp-500-head-and-shoulders-pattern.html

[David]

If the market is getting ready to rally to new highs why would the bond market, expecially long bonds, be rallying?

I put more faith in bond market than the stock market for telling me were things are going.

[RT]

According to Cramer, everyone hates this market.

http://www.zerohedge.com/article/cramer-calls-market-stupid-rapacious-arbitrary-capricious-and-downright-ridiculous-tells-vie

When everyone hates a market it tends to be more near a low than a high. When everyone LOVES a market, watch out. We may not see a top in this market until SP500 hits 1300 and everyone falls in love with it again.

[RT]

If the market is getting ready to rally to new highs why would the bond market, expecially long bonds, be rallying?

Bond rally means lower rates. Lower rates are good for the economy right?

When rates are low, stocks will grow.

[Roger's Bearoine sidekick]

RT you're starting to sound desperate. Maybe you need to calm down, watch the Lava Lamps and have yourself a little Bearoine with me and Roger...

aaahhhhhh......

f--- that Monkey

[Got Chubby?]

>>>Might try another short scalp, late today, if I can get it to look right.

Been real busy with OTHER THINGS, too.

Posted by: Mamma Boom Boom | Friday, June 18, 2010 at 09:14 AM<<<

UUUGGGHH! Just got another one!

[Roger D.]

"Doesnt look like it. Distribution days tend to be wild and volatile.

This market is too quiet and dull, looks like sideways correction accumulation pattern."

My record hasn't been too good lately,but this market looks to sell off here.

They mask their selling pretty good.

RD

[Dr Forecast?]

What about all the methane that comes from Gainesville, GA?

Posted by: Neo | Friday, June 18, 2010 at 10:00 AM

The Georgian Methane will combine with the Gulfian Methane and together will form Super-Poo which Prechter will see as a sign of an alien attack and the DOW30 going to well below zero.

Everyone will then scurry into underground bunkers and will only come out at night for fear of the terminator drones lurking about

[Mamma Boom Boom]

No action today! Short term, very over stretched. But it's been that way since late Tuesday. Best guess, quick burst Monday morning then the correction starts.

[Chabazite]

Hock - you seem to forget that this is NOT British Petroleum but BP. 39% of the ownership are US citizens and instutions. The board of 12 directors is split evenly between British and American nationals. But almost 23,000 of its other employees are American, compared to only 10,000 Brits. BP has 7,000 staff in Houston alone. So presumably the 'fucking arseholes' that you so eloquently refer to are largely US citizens. THAT IS YOUR OWN PEOPLE. This is an educated blog and generally the standard of comment and analysis is high; I had somehow expected a more insightful response in this debate.

[Chubby]

Best guess, quick burst Monday morning then the correction starts.

Posted by: Mamma Boom Boom | Friday, June 18, 2010 at 01:24 PM

I like that quick burst thing, but don't know if I can wait...

[Chabazite]

David - 'So does this mean that you don't believe that 60,000 barrels per day of crude oil being dumped into the Gulf of Mexico will do any long-term harm to the environment, let alone the $3 billion dollar per year fishing industry?

And by the way, that 60,000 per barrel figure is one that BP's very own CEO has recently used as an estimate on how much oil can be captured by July. That figure isn't coming from any propoganda machine.'
-------------------------------------------------------------------------------------

I know and accept that this is a terrible tragedy. But the question at stake was 'how is BP not already guilty'? Yesterdays proceedings were not designed to get to a better understanding of 'how' this disaster happened. And surely that question must be answered before anyone points the finger of blame. My guess is that it is a complex matter with a number of key parties have meddled and it will take time to unravel the precise sequence of events and background to the matter. No, yesterdays proceedings were designed to give a bunch of jumped up politicians a once-in-a-lifetime chance to very publicly humiliate the Chief Executive of a major corporation for their own glorification. Did they succeed? Well, maybe. But there again a lot of people will be looking at the way justice is dispensed in 'land of the free' and thinking that Hayward would more likely have got a fairer 'hearing' from a right-wing military style junta in a bananna republic.

[usdollar]

Try 800,000 barrels +. I am hanging on until next friday to the drop begins. I believe we will see intraday break of 1150 for spx first.

[Michael]

"No, yesterdays proceedings were designed to give a bunch of jumped up politicians a once-in-a-lifetime chance to very publicly humiliate the Chief Executive of a major corporation for their own glorification." - Chabazite

Understood and Agreed on 100%
But I really think that you are being overly dramatic when it comes to characterizing these proceedings in "the Land of the Free."

Moreover, this is nothing new here in the USA. Politicians love to "grandstand" in front of the cameras, especially in an election year. Did you not see all of the absurd hearings of oil execs when crude traded up to $147 per barrel in 2008? Or did you not see the ridiculous grilling of one bank CEO after another last year? Where have you been all this time?

This is nothing new.

Furthermore, I can assure you that no American here mistakes it as "justice" or judge, jury, and executionary. It's all done for show . . . and no one really expects any new or significant information to come forward, especially when people like CEO Tony Hayward are "lawyered-up" to the gills.

As for BP being guilty, I think that the investigations will most likely come to that conclusion. But I'm sure that most of us that don't live in the Gulf or have to make our livelihood in the Gulf can be patient enough to wait for whatever the investigations conclude. But with civil fines of $4,300.00 per barrel, it's gonna get extremely expensive for BP and anyone else held responsible.

Anyone remember the Union Carbide / Bhopal disaster back in 1984?

I do.

[The Three Terrors]

http://www.youtube.com/watch?v=VmffgIqlAYA&feature=player_embedded

[Chabazite]

Good points Michael. Thanks for the mature debate.

[rc]

Chabazite: "No, yesterdays proceedings were designed to give a bunch of jumped up politicians a once-in-a-lifetime chance to very publicly humiliate the Chief Executive of a major corporation for their own glorification."

I absolutely agree. The politicians only exhibited their own shallowness and inability to provide good government. I don't defend BP. But what was the point of those hearings and what did they expect from Hayward? It was embarrassing.

This is a failure of government. It's up to the government to look out for the common welfare and prevent a tragedy of the commons. What happened to congressional oversight of MMS? Why wasn't there any preparation for such a disaster with available equipment and personnel? Where are the adults who were supposed to be providing oversight?

BP is no doubt culpable. But so are those driving suvs and trucks , mostly alone, who demand cheap gasoline and who don't want to pay the true cost, including the premium of effectively mitigating the risk of damage to the environment.

[da bear]

So the Theorist came out. Anyone subscribe to it? Not much in the way of charts.
The next Financial Forecast will update the markets. I am sure us guys here at yelnick's blog can figure things out for 'em. lol

The chart of the dollar in this month's Theorist (Figure 2 page 2) has the dollar in a move down, but I think that their (5) counts better as a B of (4), so now the dollar is in C of (4) down. The dollar index could work its way down to 83 or 84 before a Wave 5 begins.

However, their count has the wave (1) as an extension, so their (2) might count better as the wave (4) so the current C wave could take the dollar down to the 80-82 level.

Either way, the C wave down in the dollar should end when this current 'v' of 5 of B in gold ends.

da bear

[Popeye]

Game Over for deflationists:

http://www.zerohedge.com/article/advance-g-20-meeting-china-announces-dollar-peg-end

[Viper]

Thanks, Popeye. Time to buy gold 'n silver, I suppose.

[Chabazite]

rc - $20 billion of culpable (so far). Having bought into BP over the past few days my gamble is that the company won't end up obliged to write blank cheques to fund the Obama stimulus. I anticipate that BP will remain battered but in tact and recover over a three or four year period. That is my gamble and having considered the downside (100% if the company is bankrupted), its one I am prepared to take. Best. Chab.

[Nero]

I'm shorting BP to zero...she's toast. I now see why gold has been (and will continue) spiking that past few days...china dropping the dollar-peg is a game changer...a BIG game changer.

I'll be putting shorts on the greenback sunday night...my new target for the DX index is 25-30 over the next ten years...it'll take a LONG time to play out. Dow 25,000 and Gold 18,000 within the same ten year time frame.

I'M GOING TO BE FILTHY, STINKING RICH!

[Michael]

"This is a failure of government. It's up to the government to look out for the common welfare and prevent a tragedy of the commons. What happened to congressional oversight of MMS? Why wasn't there any preparation for such a disaster with available equipment and personnel? Where are the adults who were supposed to be providing oversight?" - rc

I have two names for you.
George Bush and Dick Cheney.

The "Energy Act of 2005" which was spearheaded by Cheney and his "leutenants" Gayle Norton and Ms. Johnnie Burton, also of Wyoming.

[Michael]

"Having bought into BP over the past few days my gamble is that the company won't end up obliged to write blank cheques to fund the Obama stimulus. I anticipate that BP will remain battered but in tact and recover over a three or four year period." - Chabazite

Why even bother investing in a company that has had safety violations at a rate that is 100 TIMES the industry average???

There are plenty of good, solid, and well-managed companies out there to invest in. BP is not one of them.

[DG]

"I have two names for you.
George Bush and Dick Cheney.

The "Energy Act of 2005" which was spearheaded by Cheney and his "leutenants" Gayle Norton and Ms. Johnnie Burton, also of Wyoming."

Obama's been in office for over a year. If the "Energy Act of 2005" was so egregious, why didn't he sign an Executive Order to overturn its provisions?

Only the Obama dead-enders believe that this is somehow Bush's fault. I was going to say only "morons and Obama dead-enders" but then realized the two groups overlap to such an extent it's not worth differentiating between them.

[Chabazite]

MichaeL ... with respect, just over a year ago you might have said 'why bother investing in the likes of Barclays, when there are plenty of good, solid and well-managed companies out there to invest in. Like BP!

[Michael]

Quite frankly, I am at a loss as to why you believe that BP is such an attractive investment at the price level where you purchased it?

As for Barclay's ... it's trading at the same price "level" that it was trading at one year ago. No one cares.

If someone is looking for exposure in international offshore drilling with minimal risk in the Gulf of Mexico ( one rig ) I would suggest SDRL. It also happens to be paying an 8% dividend.

The stock got unfairly dragged down by the BP mess.

[Michael]

"Obama's been in office for over a year. If the "Energy Act of 2005" was so egregious, why didn't he sign an Executive Order to overturn its provisions?

Only the Obama dead-enders believe that this is somehow Bush's fault. I was going to say only "morons and Obama dead-enders" but then realized the two groups overlap to such an extent it's not worth differentiating between them." - DG

Sorry Darrin, but you have no idea what you are talking about when it comes to Gayle Norton and the Department of Interior, let alone the previous director of MMS, Johnnie Burton of Wyoming. You've already proven that in a previous post that you made regarding the topic a week ago.

Given your twisted sense of logic, I guess that George Bush is also to blame for 9/11 given that he had already been in office for one year and he and his campaign had severely criticized the Clinton Administration and democrats in general for a lack of committment to the defense and security of our Nation.

Yet, he was unable to protect our country from harm.

[Glenn Loser Neely]

Que up a 1200 word essay by DG because he has nothing better to do with his Saturday in 3 - 2 - 1 ...

[DG]

Sorry Darrin, but you have no idea what you are talking about when it comes to Gayle Norton and the Department of Interior, let alone the previous director of MMS, Johnnie Burton of Wyoming. You've already proven that in a previous post that you made regarding the topic a week ago.

My "previous post" was that ultimately all government bureaucrats are the same, so I'm not sure you've "proven" jack shit about Norton or Burton that makes me question that. It's fucking moronic losers like you who romanticize government bureaucrats into all-powerful Nietzschean supermen who've turned this country into a fucking sewer to make up for your own personal inadequacies in taking care of your own life.

Given your twisted sense of logic, I guess that George Bush is also to blame for 9/11 given that he had already been in office for one year and he and his campaign had severely criticized the Clinton Administration and democrats in general for a lack of committment to the defense and security of our Nation.

No, dumbfuck, because George Bush couldn't have signed an Executive Order forbidding terrorists to attack the US like Obama could have signed an Executive Order overturning provisions of the allegedly egregious Energy Act of 2005 you cited.

Can you see the difference, retard?

[DG]

Formatting issues in first post. The stuff in quotation marks is from the resident Obama ass-licker in-chief, "Michael".

"Sorry Darrin, but you have no idea what you are talking about when it comes to Gayle Norton and the Department of Interior, let alone the previous director of MMS, Johnnie Burton of Wyoming. You've already proven that in a previous post that you made regarding the topic a week ago."

My previous post was that ultimately all government bureaucrats are the same, so I'm not sure you've proven jack shit about Norton or Burton that makes me question that. It's fucking moronic losers like you who romanticize government bureaucrats into all-powerful Nietzschean supermen who've turned this country into a fucking sewer to make up for your own personal inadequacies in taking care of your own life.

"Given your twisted sense of logic, I guess that George Bush is also to blame for 9/11 given that he had already been in office for one year and he and his campaign had severely criticized the Clinton Administration and democrats in general for a lack of committment to the defense and security of our Nation."

No, dumbfuck, because George Bush couldn't have signed an Executive Order forbidding terrorists to attack the US like Obama could have signed an Executive Order overturning provisions of the allegedly egregious Energy Act of 2005 you cited.

Can you see the difference, retard?

[DG]

"Que up a 1200 word essay by DG because he has nothing better to do with his Saturday in 3 - 2 - 1 ...

Posted by: Glenn Loser Neely | Saturday, June 19, 2010 at 04:22 PM "

It's "cue", moron. God you are an idiot.

[DG's Dad]

Next thing we will hear from DG is how Dick Cheney had nothing to do with Halliburton and Texas Senate Republican Phil Gramm had nothing to do with Enron.

My son is clearly not the sharpest "tool" in the shed.
My apologies to all. Please come home my son for Father's Day. Please come home.

[Michael]

"The stuff in quotation marks is from the resident Obama ass-licker in-chief, Michael."

Ummmm... newsflash for the naive young man in the back of class that exhuberantly raises his hand every time the teacher asks the class a question and loves to argue for the sake of arguing ... I am a registered Republican. I did not vote for Obama, nor did I vote for McCain.

And yes, I originally voted for George Bush the first time around and admit that I made a terrible mistake. The man was the WORST US PRESIDENT in a generation. Period.

[DG]

"Next thing we will hear from DG is how Dick Cheney had nothing to do with Halliburton and Texas Senate Republican Phil Gramm had nothing to do with Enron."

Yeah, way to change the topic. I guess that's the only response the three brain cells you've got could come up with.

"Ummmm... newsflash for the naive young man in the back of class that exhuberantly raises his hand every time the teacher asks the class a question and loves to argue for the sake of arguing ... I am a registered Republican. I did not vote for Obama, nor did I vote for McCain."

I'm not "arguing for the sake of arguing", I'm telling you (not arguing it, stating it as a fact) that you're licking Obama's ass now in 2010, regardless of who you did or didn't vote for in 2008. As if I'd believe you, anyway. I don't believe a word you and your dozen sockpuppet usernames say. Any man who hides behind a bunch of fake usernames trying to make it seem as though there are a bunch of people posting here who agree with him will lie about other things as well. Once a liar, always a liar.

[leo]

INTERNET WARNING!
The hype:
http://up5.typepad.com/6a00e551ec207588340120a7cec811970b-250si

The possibility:
http://whitewatch.files.wordpress.com/2008/11/fat-blogger.jpg?w=316&h=322

[Tu Padre]

Michael=GLN

No Mames Guey!

[Tu Padre]

Leo:

You're a buzz kill my friend!

[Michael]

"No, dumbfuck, because George Bush couldn't have signed an Executive Order forbidding terrorists to attack the US like Obama could have signed an Executive Order overturning provisions of the allegedly egregious Energy Act of 2005 you cited." - DG

I must say, that I always find it rather humurous that you have to resort to using expletives in order to get your point across. YOUR PROBLEM is that you think that you have a complete understanding of the facts, when you clearly do not.

I suggest that you do some homework to comprehend just what an "Executive Order" can and cannot do. Otherwise, you make yourself look like a FOOL which is so often the case here with you.

You clearly have a faulty understanding of the act, which merely seeks to clarify existing legislation and law; not make new law.

[Michael]

"Next thing we will hear from DG is how Dick Cheney had nothing to do with Halliburton and Texas Senate Republican Phil Gramm had nothing to do with Enron." - Michael

"Yeah, way to change the topic. I guess that's the only response the three brain cells you've got could come up with." - DG

Excuse me?
Change the topic?

I'm sorry, but I think that most people here can clearly see that the Bush Administration had everything to do with
the Department of the Interior ( which oversaw the Minerals Management Services agency that regulates offshore drilling ) becoming so pro-oil and allowing for all sorts of safety and environmental exemptions when it came to drilling.

And you are arguing to the contrary?
Good luck with that.

[software testing services]

What I think here that I think in the eyes of the world, the jumped up Kangaroo court that has just finished hearing testimony from Hayward (BP) has done the United States an incredible mis-service"

[Professor Linguist]

Software Testing Services;

Are you also a:

1. Politician?

2. Attorney?

3. Slick Salesman?

4. Inhibited soul with deep-rooted heart felt beliefs and opinions but lacking skills to clearly state these in writing?

5. A dumb fuck with a compulsion to write something just for the hell of it?

Stick to zeros and ones or maybe take a writing class (or ten)

[Cancer]

INTERNET WARNING!
The hype:
http://up5.typepad.com/6a00e551ec207588340120a7cec811970b-250si

The possibility:
http://whitewatch.files.wordpress.com/2008/11/fat-blogger.jpg?w=316&h=322

Posted by: leo | Saturday, June 19, 2010 at 09:24 PM

Alright, Alright so maybe Mamma might've let herself go a wee bit. Simply turn the lights off and keep the first image firmly in mind?

[Virgo]

MORE INTERNET HYPE UNCOVERED!

The Then Hype:
http://up5.typepad.com/6a00e551ec207588340120a7cec811970b-250si

The Now Reality:
http://health.msn.co.nz/img/health-news/240310_fat.jpg

[Libra]

THE DEFINITIVE INTERNET HYPE FINALLY UNCOVERED!

The Then Hype:
http://up5.typepad.com/6a00e551ec207588340120a7cec811970b-250si

The MOST LIKELY Reality:
http://images.mirror.co.uk/upl/sm3/dec2007/5/7/2B17CA63-94E2-854E-B90FB77ED7D8F9A7.jpg

[DG]

I must say, that I always find it rather humurous that you have to resort to using expletives in order to get your point across. YOUR PROBLEM is that you think that you have a complete understanding of the facts, when you clearly do not.

I resort to expletives because you are a retard and I figure that's the easiest way to get things through to you. And, I think you're a fucking idiot and that only the modifier "fucking" captures the true depths of your idiocy. There are literally no non-expletive adjectives that can do the job of "fucking" in the description.

I didn't say anything about having a "complete understanding of the facts", although, if past is prologue, I doubt you do, either. You made some ridiculous point that Obama basically was faultless here because of some Bush-era regulations. Well, if the regulation stood out so egregiously as "pro-oil" why didn't Obama's people alert him to that fact and undo it, whether by Executive Order or by regulatory fiat?

"I'm sorry, but I think that most people here can clearly see that the Bush Administration had everything to do with
the Department of the Interior ( which oversaw the Minerals Management Services agency that regulates offshore drilling ) becoming so pro-oil and allowing for all sorts of safety and environmental exemptions when it came to drilling."

OK, so as soon as you connect this back to your moronic off-topic post about Cheney/Halliburton and Gramm/Enron in a way that makes that relevant to the BP spill, it might matter. Not relevant in some generic way, but specifically relevant.

[DG]

One last thing is that I find the presumptuousness of addressing me as something other than "DG", my chosen forum name and chose to preserve anonymity, highly grating and, in a face-to-face situation, cause for me punching you in your fucking face.

Did my expletives get that point across, motherfucker?