I was watching cNBC's "Squawk Box" this morning and Ms. Whitney was the guest host. When it comes to her call on munis as near as I can tell she is lumping some things together that many of the standard players in the game are not including. She adds GO and Revenue bonds and the many project specific backed by the state/muni bonds that often are not directly visible in State and municipal budgets but the biggest kicker is unfunded liabilities to employees like retirement and medical benefits. It is common practice in govt accounting to create underfund employee benefits creating or adding to their liabilities and future costs estimates. Her argument is not unlike the GM and Chrysler bond bears who watched these unfunded legacy costs grow at a pace faster than revenue or income. A large portion of her argument is that the States and other municipalities are less likely to be able to stay ahead of this curve. It is also a large part of her argument that she did not make a time specific call only that this is a highly likely future outcome based on the condition of muni balance sheets. Later in the day on "Squawk on the Street" a muni fund manager disagreed. What I found fascinating is that she was visibly agitated by Ms. Whitney continuing to stand by her argument and the math that she is using. It is also important to note that this interviewee does not actively track the total servicing costs of everything Ms. Whitney is including in her calculations.I don't know who is right the old pros in the space or an outsider with little history but I do know there is often an emotional not an intellectual response from many that disagree with Ms. Whitney's findings. As near as I can tell much of the industry that follows muni debt is likely underestimating current muni risks by ignoring the growing unfunded liabilities. It is also quite plausible that Ms. Whitney is overestimating the risks in the space. YMMVjack
CNBC seems to be under a bit of stress. One of their star anchors died suddenly last month and that right after Erin Burnett left for a stint at CNN.Is this the influence of the new ownership and the passage of GE as the controlling owner? Loss of key personnel.Is their bench strong enough to fill in seamlessly? Or are they saving pennies and losing key people?
Paul,I doubt this has much to do with new ownership. cNBC has had several hosts/anchors move on to other networks its common to the industry. The loss of Mr. Haines was certainly a shock. As near as I can tell they have plenty of people to spread around as most of the business day shows have multiple hosts. There is always a transition period as people shuffle. It took me months to stop grumping when they broke up the original Squawk gang and created two shows. The whole network is a huge franchise with several competitors that are barely nipping at their heals. I suspect they will weather the current situation. Squawk box always has a guest host. jack
Jack:Thanks for the post regarding Ms. Whitney's segment on Squawk Box. This is a topic of serious interest to me as I have been slowly accumulating munis for roughly two years. I saw a couple of minutes of the segment while I was getting ready for work. I don't know why I didn't hit record on the DVR.Anyway, I did hear Ms. Whitney make a couple of additonal points that were key to her analysis.(1) The federal assistance that states have used the past couple of years to fill massive budget gaps will be ending (this year I think)(2) The financials for municipalities are extremely "dark" and out of date. She seemed to imply that the lack of good disclosure probably means municipal finances are worse than can be easily detected in the dated disclosure documents.Based upon my own modest level of experience with muni disclosures, I concur with Ms. Whitney's comments regarding the limited disclosure and dated nature of most muni financial disclosures.FWIW, I have come across a few muni debt issues that were issued for the specific purpose of funding retirement obligations. Each time I saw such debt issues, I immediately ended my research and moved to other pursuits based upon the belief that borrowing money to fund retirement obligations is a very bad sign.For the most part, by accident I have avoided the purchase of GO type state and large city muni bonds as their yields are typically quite low. The result has been that a majority of my muni purchases have been revenue bonds. I have grown to like revenue bonds because they typcially carry much better yields and while the revenue stream supporting the debt service is limited it is also typically a managable exercise to evaulate the credit.A significant percentage of my muni holdings have also ended up being bonds guaranteed by strong S&P 500 type corporations that have managed to issue tax advantaged debt to fund things such as air emissions reduction equipment, re-cycling equipment, and other pollution control related type equipment. These tend to be very small, illiquid debt issues but they typically offer a very good yield and the debt service is often supported by a corporation with a very good balance sheet.I would love to see this message board spend some time of muni bonds.
Prophet43M,Sorry for the delayed response. Took a quick trip to visit family. I would love to see this message board spend some time of muni bonds.If you find something post it. I'm sure all of us can learn from whatever we stumble across. It is a useful and unique corner of the debt market and we would all benefit from exploring it more deeply. Now is a good time to learn because I don't think now is the time to grab a shovel and back up the truck. It would be good to be solidly grounded in the basics if or when the back the truck up moment comes.(2) The financials for municipalities are extremely "dark" and out of date. She seemed to imply that the lack of good disclosure probably means municipal finances are worse than can be easily detected in the dated disclosure documents.I'm not sure I completely agree with this assertion of hers. Getting fundamental data is a pain in the arse but I would not describe it as "dark." She has been studying the market in large chunks and each bond issued is very, very local. These are public entities, every thing they do is of public record. Digging through it is a different game. It is not laid out neatly like publicly listed companies lay things out. These are often line item budgets and we need to chase the right rabbits down the correct hole, a tedious task. The budgets are built for internal use to manage the entity not for investors ease of financial stability analysis. I do agree that many who are defending the stability of the muni market are probably under estimating the risks because of the difficulty in digging up the specifics of some budget numbers. I get the impression that they often accept the easy answer and the local equivalent of a "headline" number. Total debt servicing to revenue numbers are not often used on the local level because project X is funded by ymils, project A is funded by Zmils and so on. For their purposes it is often easier to look at the parts, dept by dept, project by project. In the town I grew up in they put in a street light tax to defer the city costs of lighting and maintaining street lights plus the service on the debt of revamping of the downtown lights into something more esthetically appealing; it was billed by the local electric company. Specific tax for a specific purpose. The money for the revamp was part loan, part loan guarantee and part grant. Did they qualify for the grant based on general revenue? Were the bonds revenue bonds? I don't know and they would have a great deal of flexibility in setting it up. Often a good place to look for places to dig deeper is in the local newspaper, some carry a report of the last public meeting or the even publish the minutes if the community and the docket is small. If something newsworthy is going on the paper will be printing something. If its a slow news week and the editor is a local irritation they may send a reporter to scratch something up. Finally, letters to the editor are also useful; we have to sort out the crack pots from the material. All of the above can provide clues to the budgetary health of an entity.Often the best source is someone who lives there who understand local culture and politics. It helps to know who is making noise so they can be seen and who is asking a question out of deep fiduciary concern. In my neck of the woods half the count commissioners are blow-hards who love a good headline. jack
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