Kaminsky's Call: Muni Market May Be Great Buy Opportunity
Morgan Stanley, Vice Chairman
After watching the "60 Minutes" segment on state budget woes Sunday night, I had one thought: the numbers don't lie.
What do I mean by that?
Well, for those who missed the interview Sunday night—and the subsequent sell-off in muni bond funds on Monday morning—here's what happened: Noted analyst Meredith Whitney told "60 Minutes" that the mounting debt problems at the state and local level comprise "the largest threat to the U.S. economy."
Fair enough, but then Whitney made a whopper of a claim. "You could see 50 sizable defaults," she said. "Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
Now this K-Call is not about Meredith Whitney, whose work I respect.
In fact, on The Strategy Session, I have warned early and often about the perils facing the municipal bond market. But that was before the recent correction.
Now I'm writing about something else: a buying opportunity.
To be clear, I'm not saying the muni market today offers the same opportunity as it did in 2008, during the heart of the credit crisis. But it now presents a fantastic opportunity for those looking to generate tax-free income, and here's why.
Let's say Whitney is correct, and we do see a rash of defaults totaling "billions of dollars." As Ben Thompson, who manages seven billion in munis for Samson Capital pointed out on The Strategy Session on Monday, the muni market is measured in trillions, not billions, so those defaults would represent just a sliver of the overall market.
"Could we see 50 or 100 defaults? Sure - but they'd be coming from small, weak local governments that were vulnerable long before the crisis began," Thompson added.
But when you dig deeper, the math looks even better.
As Thompson pointed out, the ten largest cities in the U.S. have about $85 billion in debt. The 25 largest counties have about $30 billion. If they all defaulted at the same time in the near future, that would represent over $100 billion in defaults. But that would mean the entire urbanized core of the United States—New York City, Chicago, etc.—would default at the same time. And how likely is that?
But it gets even better.
Remember, we are living in the golden era of "Too Big To Fail," a time when Uncle Sam is ready, willing and able to bailout any institution is deems systemically important. If Citigroup is too big to fail, logic would dictate that so too is the State of California.
Moreover, state and local issuers can do something corporations can't: raise your taxes and cut your services, something that is happening right now across the country.
All of this is bullish for the muni market.
Word to the wise: when listening to the prognostications of the gloom and doom crowd, it's always important to remember the intended audience. Often times, its hard to hear the logic amid noises.
Watch Gary Kaminsky weekdays at Noon ET on CNBC's "The Strategy Session."
Gary Kaminsky does not hold any equity positions.
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