Munis: Another Short Selling Opportunity

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. 

  1. “Last week saw wholesale selling”
  2. “A technical situation caused by heavy liquidations”
  3. “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: 

  1. Dares investors to chase “yield” (including munis)
  2. Disguises financial risk (what will municipalities do when borrowing costs go Greek?)
  3. 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.

KM 

 

Keith R. McCullough
Chief Executive Officer

 

Munis: Another Short Selling Opportunity - 1


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more