Which Way Wednesday: Muni Bombs Fall

Dec.15.10 | About: iShares National (MUB)


That’s the yield on high-grade, tax-exempt 30-year Muni bonds, now the highest level since March 2009, when investors thought the world was ending. Why then, in December of 2010, when everything is "fixed" are we back to our market crash lows? David Fry’s chart tracks the broader MUB but that too is falling at an alarming rate, erasing 18 months of progress since mid-October.

Despite the Fed buying over 1/3 of everything that goes up for auction, the yield on 10-year TBills has shot up to 3.5% -- that is 40% HIGHER than it was when The Bernank announced his brilliant QE2 plan at the last Fed meeting in November. That’s a national crisis for a government that borrows $140Bn a month to service a $15Tn debt! Of course the pain filters right on down to the local level too as spreads on Illinois 10-year notes widened from 1.60 to 1.90 since Nov. 1st and California’s general obligation bond spreads jumped 30%, from 0.97 to 1.30.

We have so many bigger fish to fry (our own deficit, unemployment, Greece, China, Spain … ) that we’ve forgotten about the estimated $2.8Tn municipal bond debt, a number that is up 100% over the past decade. As the year winds down to a close, we may be seeing our first round of municipal defaults as local governments simply run out of money. The pressure will certainly mount between January and June 30th, when most fiscal years wrap up and Governments will be forced to take drastic measures to balance their books.

Here’s a nice video of how well Rome is taking austerity measures this week (that’s a police van they’ve set on fire):

See, it’s easy to push austerity measures – just leave a little room in the budget for extra vehicles and tear gas. We’ve been buying TASR for quite some time on the global unrest premise and it looks like they’ll be needing a lot of cartridges in 2011 to control those crowds! I still like them at $4.60 as a long-term hold. Athens is rioting this morning as well and that’s Ka-Ching! for our TASR shares. This is a good example of how, when the global markets give us lemons, we just make lemonade.

These are not Third World nations, people – these are places some of you have even gone to for nice vacations and stayed in 5-star hotels and conducted business meetings. This is Europe – don’t think we can’t be next! As David Stockman said yesterday on the Dylan Ratigan Show:

The Fed is destroying prosperity by funding demand that we can’t support with earnings and productions, causing massive current accounts deficits and the flow of funds overseas and the build up in China, OPEC and Korea of massive dollar reserves which is a totally unsustainable, unsupportable system, and we are coming near the edge of where that can continue to remain stable.

Yikes! That doesn’t sound good, does it? I mentioned in yesterday’s post that data is not matching very high expectations of a recovery and I think January earnings are going to be a real gauntlet. AdMedia Partners released their M&A Survey for 2011 and it’s across the board bullish with 97% of the respondents thinking the economy would be the same or stronger next year with an average expectation of 13% growth in their own businesses. It’s an M&A study so no one even asked if anyone was hiring (but I’m guessing not) but those top 1% company owners sure are enthusiastic about their segment of the economy.

In the bottom 99% economy, we have Mortgage Applications falling another 2.3% this week as the 30-year mortgage ticks back up to 4.84%. If we pop over 5% again, you can kiss housing goodbye for the duration. Meanwhile, Consumer Prices went up just 0.1% vs the 1.2% rise in Producer Prices we saw yesterday. That sure sounds like a 1.1% contraction in margin to me! Fortunately for our Corporate Masters, real wages dropped another 0.1% as the workers of the world continue to sacrifice themselves to protect Wall Street bonuses and CEO paychecks.

Spanish workers just aren’t sacrificing enough, according to Moody’s, who put Spain’s debt on review for a possible downgrade, which pushed Spain’s bond spread to within just 30 basis points of the November crisis highs. Moody’s says Spain’s banks may need another $120Bn on the eve of a two-day EU summit where Merkel has again rejected calls to increase the $1Tn bailout fund. That sent Portugese yields up close to 100% as it sold $650M worth of 3-month bills at 3.4% vs 1.8% at the November auction. Spain will attempt to sell $3Bn worth of paper tomorrow – what fun!

Closer to home, the Empire State Manufacturing Survey came in at a nice 10.57, blowing away expectations of up 5 and much better than -11.4 prior. How did they do it? By dropping all the employees they’ve hired in all of 2010 (pg 4)! Isn’t that FANTASTIC?!? Make more stuff with less people – BRILLIANT!

Not only have we returned number of employees to 2009 levels but we’ve actually made new lows in the Average Employee Workweek. Despite the fact that ACTUAL prices paid are outpacing ACTUAL prices received by 10%, EXPECTATIONS across the board (pg 6) are for prices received to catch up. Boy, those unemployment checks must be really, really big, right?

As we know, terrified employees are productive employees and Industrial Production came in at a very nice 0.4% increase, led by an index value of 104.1 in mining as we’re pulling 4.1% more "precious" metals out of the ground now than we did in the boom of 2007. Overall, Capacity Utilization is at 75.2% of capacity, with 25% of our manufacturing base inactive. As we have noted for quite some time, the output of consumer durable goods fell 2.3% and I had mentioned Whirlpool (NYSE:WHR) was being unrealistic yesterday. The production of energy products, on the other hand, rose 1.9% because, if people are dumb enough to pay $90 a barrel for something we have a glut of – they are darned well going to pull out all the stops to sell it to you!

It’s expected they will push the tax cuts through today but, as usual, it’s going to be all about the Dollar and whether or not it holds 80 today. Are European woes enough to counteract profligate American spending?

It will be fun to find out…