POSITION: Short MUB
If it doesn’t make you laugh, it will make you cry – but the sell-side’s probability of defending anything that starts to go down these days is as predictable as, well, US Municipalities and States running deficits. Sadly, very few risk management lessons from the 2007 MBS market seem to have been learned. And yes, there was another side to the Bush Tax cut trade!
We’re on the transparency/accountability tape getting bearish on Munis on February 24th, 2010 in a note we titled “Domestic Pigs.” We’re also currently on the tape with a short position in MUB in the Hedgeye Portfolio. It’s not a position we intend on covering down here because “munis are cheap.” If you’re already long them, we know why you are bullish on “cheap”. If you aren’t short them, we know why you aren’t Bearish Enough.
Barron’s Randall Forsyth wrote an article this weekend titled “Yields Soar on Overpunished Munis”, and I can’t help myself but to highlight a few of his lowlight reasons to be bellying up to opacity’s next sketch bar.
- “Last week saw wholesale selling”
- “A technical situation caused by heavy liquidations”
- “Smart managers are buying munis, not the hysteria”
First of all, he actually did the outflow math ($16.5B out of open-end muni funds in the last 9 weeks over a base of a $2.8T market), but failed to acknowledge that this means this selling party has barely started. This is not “wholesale” selling yet. This is not “heavy” liquidation either. This is simply the beginning.
It’s also the first born problem child of The Ber-nank’s 3D Risks that are associated with keeping US interest rates unsustainably low.
As a refresher – what the Fed staying at ground ZERO percent means in terms of 3D Risk is:
- Dares investors to chase “yield” (including munis)
- Disguises financial risk (what will municipalities do when borrowing costs go Greek?)
- Delays financial restructuring
How many of America’s Domestic Pig governments need to be restructured? What’s a revenue bond worth if the municipality can’t generate its required tax revenues? What do rising bond yields tell risk managers about default risk?
These are simple risk management questions that should be answered by risk managers before we let an 8th grader hit <bond yield go> on a Bloomberg terminal and analytically deduce a bond is “cheap” when it’s yield is higher than another.
Our refreshed TRADE and TREND lines of resistance for MUB are outlined in the chart below.
Keith R. McCullough
Chief Executive Officer