On one side, you have Meredith Whitney, going on 60 Minutes and predicting "50 or 100" municipal-bond defaults nationwide (but publishing a report that backs off any hard predictions).
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On the other side, you have Bill Gross, the co-founder of PIMCO, the biggest bond-fund manager in the world. Municipal-bond funds, like the ones PIMCO sells, have seen billions of dollars in outflows recently, as investors move to protect themselves from what they've come to view as a muni-bond apocalypse. According to the Investment Company Institute, investors have pulled $33.5 billion from muni-bond funds. That includes $2.7 billion in the week ended January 26, the 12th straight week of muni-bond redemptions.
Charles Gasparino of Fox Business News says PIMCO is waging an all-out war to discredit Whitney's report. Gross paid $10,000 to get a copy of the report. His people said it "wasn't worth the paper it was printed on." So Gross is telling brokers to ignore it.
Of course he'd say that. They make money by selling muni-bond funds. He doesn't make any money being short muni bonds.
And of course, Whitney makes money selling research. Making grand calls helps sell her reports.
So... who's right? Whitney or Gross?
It's hard to say, because you'd have to know the state of the entire $2.86 trillion municipal-bond market to know if Whitney is right (and she'd have to know it to be right). That seems hard to know. Even Whitney says it's extremely difficult to know because municipalities' financial reporting is poor.
But we don't doubt a lot of municipalities are in deep financial trouble these days. States like Illinois and California face record deficits and declining tax revenues, with no solution in sight. Cities like Detroit and Camden, New Jersey, are effectively bankrupt. Camden is firing cops and firefighters to try to stem the bleeding. In many places all over the country, it's ugly, for sure.
Whitney isn't alone, either. George Soros apparently agrees with her, telling CNBC the muni-bond crisis would be 2011's "big drama." And James Chanos has been talking about an impending muni-bond crisis since 2009, much longer than Meredith Whitney.
Chanos says municipalities haven't properly accounted for pensions, and retiring baby boomers are causing states and cities to realize they don't have enough money to pay all those pensioners. Chanos says it'll be more politically palatable to pay firefighter and police pensions than to pay bondholders, the latter being perceived as "rich people."
But Chanos' scenario would be different than what we've seen before. In the past, the courts have put municipal bondholders at the head of the line of claimants to tax revenues. That's what happened in New York City when it went broke in the '70s. I wouldn't expect the courts to change much in this regard.
In the end, it's wise to challenge the assumption that municipal bonds are super-safe. The veneer of ultimate safety is cracking.
Municipal bonds have always been thought of as the second-safest investment in the world. But you can't know if a bond is safe, no matter who's issuing it, unless you do the necessary homework on the individual bond.
The No. 2 safest investment isn't what it used to be. And the No. 1 safest investment looks just as bad, and it's much easier to sell it short...
Porter calls it "the only trend that matters for the next decade." Nassim Taleb, hedge-fund manager and author of the best-selling financial book The Black Swan, calls it a "no-brainer." Taleb says, "Every single human being should have that trade."
These gentlemen are talking about the U.S.'s growing debt crisis and shorting the long-term U.S. Treasurys. We've covered the details of our fiscal situation ad nauseam, so we won't expand here. The thesis is simple… The U.S. has taken on more debt than it can ever repay. Eventually, foreign buyers of U.S. debt will stop buying. The U.S. will have to default. And it will eventually lead to the end of the U.S. dollar's status as the world's reserve currency. Taleb says investors halting U.S. debt purchases – a "bond riot" as he calls it – is "the only happy thing that can happen in the U.S." It would "force some discipline."
Taleb is right, too. Folks keep writing in, asking about what to do when the bad times get here. But... these are the bad times. It's bad to have a government prying into every crevice of your life, stealing your money, and giving it to... well... everyone else, from the biggest corporations to the poorest families.
The good times don't end with the destruction of the dollar. The good times start when the U.S. dollar is thoroughly discredited. A U.S. dollar rout isn't a calamity. It's justice.
As we pointed out in yesterday's Digest, the Federal Reserve just passed China as the world's largest holder of Treasurys. By the end of Quantitative Easing 2 this June, the Fed will own around $1.6 trillion of U.S. Treasurys. When you're forced to be the biggest buyer of your own debt, that should tell you it's not sustainable.
This money-printing will lead to higher interest rates and massive inflation. This is all part of our larger End of America theme. And our goal is to preserve your wealth through these turbulent times. (A quick look at our Report Card issues – here and here – shows we've done a good job so far.) In particular, our resource recommendations have made readers a fortune.
In the now-famous November 2009 issue of Phase 1 Investor, Matt Badiali recommended three junior gold mining stocks. All three produced triple-digit gains for subscribers. One of the recommended miners, AuEx Ventures (XAU.TO), discovered what Badiali called "the next great trend" in Nevada – a gathering of project dubbed Pequop. In November 2010, Fronteer Gold purchased AuEx for its Long Canyon project in Pequop. Phase 1 readers booked a nearly 200% gain.
Coincidentally, Matt recommended Fronteer Gold to his S&A Resource Report readers in August – two months before the takeover. Today, Newmont Gold, one of the world's largest gold miners, announced it would buy Fronteer for more than $2.33 billion. It wants the company's Long Canyon project (the same reason Fronteer purchased AuEx). The stock jumped nearly 40% today bringing readers' gains to almost 140%.
This is another example of how profitable "hoarding" the world's richest gold and energy deposits is. Developing economies – namely "Chindia" – are driving demand for the world's best precious metal and energy deposits. And we've seen China doesn't hesitate to drop tens of billions of dollars on top-notch commodity projects. That's why Matt's hoarding strategy is a no brainer. If you buy the world's best energy and precious metal reserves, eventually you will make tons of cash.
To access Matt's latest hoarding recommendation, the safest and best way to buy into the Canadian oil sands, click here.
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New highs: Atlantic Power (AT), WisdomTree Japan SmallCap Fund (DFJ), Cambria Global (GTAA), Northern Dynasty Minerals (NAK), Sprott Resources (SCP.TO), Suncor Energy (SU), ConocoPhillips (COP), Vanguard Natural Resources (VNR), Take-Two Interactive (TTWO).
If you have any experience investing in municipal bonds, we'd welcome your input. Are you buying munis? Selling them? Let us hear from you. Also, if you live in a place where local and state government budget cuts are affecting your life, we'd like to hear about that, too. Write to us at feedback@stansberryresearch.com.
"I'm new to S&A. I'm not much of a numbers guy but this advice on shorting Assured Guaranty (AGO) bothers me a bit. While the muni market looks rather dicey, AGO looks pretty good. With a current PE of about 3, an EPS of about $5, ave. daily vol. of about 2M shares and a 1.2% div. to boot, what do you short here? Moreover, S&P, Reuters and Daily Opinion all rate it a hold or neutral. If memory serves, S&P has a 12-month target of $20. I guess we'll just have to stay tuned." – Paid-up subscriber J. Reisner
Goldsmith comment: While you're listening to price projections from S&P, Reuters, and Daily Opinion, our readers are up more than 20% on the short. On a similar topic, I wonder why the credit-ratings agency Standard & Poor's would want the largest remaining municipal-bond insurer to succeed?
"OK, I AM NOT SMARTER THAN A 2ND. GRADER... I KEEP READING, 'DO NOT PUT YOUR TRAILING STOPS IN THE MARKET'... I TRADE OVER THE INTERNET WITH AMERITRADE AND HAVE TRAILING STOPS ON ALL YOUR RECOMMENDATIONS... DOES THE FACT THAT I SET UP THE TRAILING STOPS THROUGH AMERITRADE MEAN, I AM 'IN THE MARKET'?" – Paid-up subscriber EL
Ferris comment: You're in the market if your stops are set to automatically sell. You're not in the market if you've merely set up an alert to tell you when the stop is hit. You're in the market if your broker has been told to execute the trade when the stop is hit.
"In your digest you continue to report new highs for the stock of COP. As you also did in the February 2 issue today. I submit that such a report is false. COP closed on 1 February at 71.71 and closed today at 72.11. The high of COP occurred on 17 June 2008 at 95.96, and closed for that day at 95.78 the highest close in the last decade. Can you please correct this misstatement in future issues, please?" – Paid-up subscriber John Cunningham
Goldsmith comment: Our new highs list reports open positions in our portfolios that closed the previous day at a 52-week high. ConocoPhillips meets those criteria.
"Can you give me the symbol of the co. that is making the solar window spray. I paid $49.95 for this info and somehow you are not giving it out." – Paid-up subscriber Bud
Goldsmith comment: Bud, we don't believe in solar energy. And we certainly didn't recommend a company making a "solar window spray." I think you've got the wrong publisher…
Ferris comment: But if you find the report, I'd like the symbol, too. I'm looking around for some good short sale ideas...
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
February 3, 2011