The 'noise' to avoid: A lesson from the muni non-crisis.

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gkaplan
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The 'noise' to avoid: A lesson from the muni non-crisis.

Post by gkaplan » Mon Nov 12, 2012 8:59 pm

From November 2010 through May 2011, amid widely publicized predictions of massive municipal defaults, investors withdrew a net $35 billion from U.S. muni bond funds, according to Lipper Inc. It was a sharp reversal from the pattern earlier in the 2000s, when investors typically added cash to these funds over the same seven-month stretch.

The timing of their exodus was unfortunate. Over the next 15 months, the return of the broad municipal bond market exceeded 12%—more than double the return of the taxable bond market, and 3.5 percentage points more than the return of the recovering U.S. stock market.* Now that fear has subsided and munis have rallied, investors are piling back in.

It's an old story in a new setting. Emotions run high, investors react, and the result is disappointment....
https://personal.vanguard.com/us/insigh ... sis-112012
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by NYBoglehead » Mon Nov 12, 2012 9:34 pm

Not sure how many have seen it, but I happened to catch Meredith Whitney getting asked about how completely wrong she was about muni bonds after her warning of a significant number of large defaults. She went on to explain how there were many "social defaults" through the reforms of various pension programs, the curtailing of certain expenditures, in certain cases tax increases, etc.

So even if the bonds didn't default in the traditional sense, there were "social defaults." Quite amusing to watch actually, but some people will listen to her future predictions as if they were Gospel.

Booper
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by Booper » Mon Nov 12, 2012 10:54 pm

NYBoglehead wrote:Not sure how many have seen it, but I happened to catch Meredith Whitney getting asked about how completely wrong she was about muni bonds after her warning of a significant number of large defaults. She went on to explain how there were many "social defaults" through the reforms of various pension programs, the curtailing of certain expenditures, in certain cases tax increases, etc.

So even if the bonds didn't default in the traditional sense, there were "social defaults." Quite amusing to watch actually, but some people will listen to her future predictions as if they were Gospel.
I'm sure that the article is correct on the numbers, but I think that the muni crisis is very real, and is far from over. As a starting place, if you look at Wikipedia's partial list of muni bankruptcies, you can see that there has been a large incease in the number of filings in recent years:

http://en.wikipedia.org/wiki/Chapter_9, ... nkruptcies

Additionally, if you go to google news and search for "municipal bankruptcy" you can see that there is a lot of munis that have not yet declared bankruptcy but are quite close to doing so. For example, Atwater, CA and Compton, CA are both quite close to bankrtupcy. Also, City College San Francisco (the largest commuity college in the US) is close to bankrtupcy too. These are just recent headlines - I didnt search to find these examples.

Also, I would not dismiss the "social default" issue that you mention. This is very real. One example is that Stockton, CA had previously committed to funding all healthcare costs for retirees, and then unilaterally said that it would in fact contribute nothing to those costs going forward. I think we can all realize that this puts a lot of people in a very bad situation. Similarly, many of these governments have drastically cut down on their police and fire departments, and crime has run rampant. A lot of these munis are failing to provide fundamental services in a very real way.

Also, outside of CA, munis in Michigan have solvency problems. Previously they have not been able to declare bankruptcy because of state law that required an emergency manager to intervene first. But they just voted to change the law, so it's easier for cities to declare bankruptcy. Let me find the article I found about this ... here:

http://www.mlive.com/politics/index.ssf ... r_law.html

I'm less familiar with MI finances, but it sounds seriously problematic as well.

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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by DaveS » Mon Nov 12, 2012 11:16 pm

The municipal default rate is still infinitesimally small. Last time I looked it was .003% and most of those were revenue bonds from foolish projects like the Las Vegas Monorail which is currently in a Chapter 11. It did not qualify for a chapter 9 or municipal bankruptcy. Revenue bonds are easy to avoid. They all are non AMT - Alternative Minimum Tax, exempt. All the Vanguard Municipal funds except High Yield do not have non AMT bonds. High yield has only about 12% of it's assets in them. No state General Obligation bond has defaulted since Arkansas in the dust bowl era. Ms. Whitney was way off base. Dave

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mas
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by mas » Tue Nov 13, 2012 12:23 am

Booper wrote:Also, I would not dismiss the "social default" issue that you mention. This is very real.
Sure it is real for the people impacted, but if you invest in municipal bonds... it isn't you that is impacted.
Booper wrote:I'm sure that the article is correct on the numbers, but I think that the muni crisis is very real, and is far from over.
There could still be a wave of defaults and, but if you were waiting for it to occur, you apparently missed quite a gain. Market timing is not easy, and generally not productive.

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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by Clever_Username » Tue Nov 13, 2012 1:33 am

I'm having trouble accessing the "California is not Greece" analysis as linked from that article. As best I can tell, here is an alternate link: https://advisors.vanguard.com/VGApp/iip ... aNotGreece
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by NYBoglehead » Tue Nov 13, 2012 7:41 am

Mas,

You hit the the nail on the head. While the "social defaults" affect the people of the municipality that needed to change its program/benefit, the holder of the muni bond is protected by such measures. Let's keep in mind that the providing of services only lasts so long as someone is willing to pay for it through taxation or debt issuance. One could argue that Stockton "socially defaulted" with their tax base and city employees by promising benefits they had no means to pay for.

Booper,

As Mas outlined as well those that got out of muni bonds when there were dark sky predicitions of massive defaults missed out on big gains this year. I know a lot of municipalities are still in trouble and a wave of defaults may be around the corner, but is the corner next year or next decade? I don't pretend to know the answer, and I'm not even a muni bond investor but think this is another example of noise that clouds the judgment of the investment community.

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nisiprius
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by nisiprius » Tue Nov 13, 2012 10:41 am

Meredith Whitney was wrong. Wrong, as in wrong.

On December 19th, 2010 she said, read the transcript, that "There's not a doubt in my mind that you will see a spate of municipal bond defaults."

How big is a spate? "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More."

Was she talking about "social defaults?" No, she was talking about money defaults.

How much money? "This will amount to hundreds of billions of dollars' worth of defaults."

Was she saying, a la Babson, "Sooner or later a crash is coming and it may be terrific?" No, she said "It'll be something to worry about within the next 12 months."

Did she say "Sniff, sniff, does something in this crowded theatre smell hot to you?" No. She yelled "Fire!"
Last edited by nisiprius on Tue Nov 13, 2012 11:00 am, edited 1 time in total.
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by bornloser » Tue Nov 13, 2012 10:54 am

As a muni bond investor, I am ashamed to say that I was one of the idiots "spooked" by her prediction. Didn't sell all, but sold enough to have missed out on some gains. I hope I have learned a lesson in staying the course.

NYBoglehead
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by NYBoglehead » Tue Nov 13, 2012 11:05 am

A lot of people said get out of the stock market in 2008 and those that did missed the doubling of their money from the lows. But a sizable portion of people will listen next time as well.

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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by DaveS » Tue Nov 13, 2012 11:14 am

Just one more piece of info on the Las Vegas Monorail bankruptcy. One of the largest creditors in that case is the bond insurer who is going to have to pay the bondholders if the monorail does not. Does that suggest to you that you should not panic about defaults. I don't like people who yell fire in a theater. Dave

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kenyan
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by kenyan » Tue Nov 13, 2012 12:03 pm

I have to admit - I practiced a bit of 'soft' market timing due to Meredith Whitney. No, I didn't sell because of her doomsaying; quite the opposite. As a then-nascent Boglehead, I did have a need to structure my taxable portfolio better, and I had been considering munis. When they tanked in early 2011 due to her well-publicized prognostication, I saw how much they had gone down recently, how much they were yielding, and considered it a buying opportunity (especially since I considered the fears overblown), and bit the bullet. They're up nearly 20% in under 2 years; I can't complain.
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Re: The 'noise' to avoid: A lesson from the muni non-crisis.

Post by abuss368 » Tue Nov 13, 2012 1:17 pm

I did read this article early this morning. The Intermediate Term Tax Exempt has had a great return since the "crisis".
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