A Guide to Profiting from Meredith Whitney’s Muni Meltdown Scenario
Although, for the most part, 2010 was an okay year on many different business fronts, there was plenty of scary prognosticating and hand wringing to go around.
The Greek chorus, led by the financial media’s favorite Cassandra Meredith Whitney, sang to the pending doom facing the municipal bond market.
In her December 19th interview on CBS’ “60 Minutes,” (NYSE:CBS) she predicted nationwide municipal defaults as pension and expenditure liabilities outstrip tax revenues.
“Sizeable defaults” could affect 50 to 100 communities in 2011 amounting to “hundreds of billions of dollars” in bad muni debt. So much for safe, tax free income.
Now remember, painting a grim picture with a gray brush is Whitney’s reason for getting out of bed in the morning. Like it or not, she does deserve some props. In 2007, Whitney was one of the first analysts to foresee the implosions at the big banks. She hit that one on the screws.
She also predicted that 300 banks would fail in 2010. She got it half right with 150 or so. But with a nearly comatose housing market and an ambulatory, at best, economy, it didn’t take an MBA with a Ouija board to see that one coming.
Whether the Talented Mrs. Whitney (she’s married to retired pro-wrestler turned Fox News contributor “Bradshaw”) is on the money or not with her muni predictions remains to be seen. However, no one can argue that we do, indeed, live in interesting times. Caution must be exercised and homework done when considering ANY investment. Once perceived as the ultimate in safe money, municipal bonds carry risk like just about anything else. After bond insurers MBIA (NYSE:MBI) and AMBAC decided to write insurance on the esoteric, mortgage backed garbage financial service firms were manufacturing, the going got weird. Most AAA insured muni bond ratings became a “remember when”. Yes, Mr. and Mrs. Investor, you can lose money with municipal bonds.
But, as always, there’s opportunity in chaos. Well, maybe we’re not quite to chaos, but, the iShares S&P National AMT Free Muni Index ETF is off about 7% from it’s high back in August of 2010. 7% is a healthy whack in the bond world. There’s even more value in muni closed end funds. The Mega Mind of Fixed Income, Bill Gross himself, has plowed nearly $18 million of his own money into mostly closed end municipal bond funds. That’s a big number and Big Brain Bill’s no dummy.
Gross went long his own brand: PIMCO for obvious reasons (if we have to point them out to you, please go directly to TMZ.com and read the latest Jessica Simpson story). We found some ideas that might be worth a look. We looked for diversified CEF’s that were trading at a 15% or greater discount to their 52 week high and yields north of 7%. Here’s what we found:
1. Invesco Van Kampen Municipal Trust (NYSE:VKQ) : Born in 1991, VKQ trades at around 12.49 a share, about 16% off of it’s 52 week high and yields approximately 7.6%.
2. Nuveen Municipal Advantage Fund (NYSE:NMA): Launched in 1989, NMA shares trade around 15.8% of their 52 week high at 13.02 with a 7.6% distribution.
3. Nuveen Dividend Advantage Municipal Fund (NYSE:NAD): The youngest of the bunch (inception 1999), NAD fetches 12.85 a share, off 15.7% from their 52 week high and yield 7.09%.
All yields are federal tax free and, as with most older closed end funds, all employ leverage. Love it or hate it, it is what it is. Always keep that in mind. If indeed something muni wicked this way comes, why not take advantage of the opportunity others fear? You might even make a couple of dollars in the process.
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