So Far, Municipal Finances Not as Bad as Feared

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 |  Includes: BBK, MUNI
by: Rising Dividend Investing

Analyst Meredith Whitney in December sent the municipal bond world into a hissy fit when she predicted that hundreds of billions of dollars of municipal bonds would default over the next year. Early on we joined countless municipal experts in disagreeing with Ms. Whitney's prediction.

Governments of all stripes are groaning under their debt loads. Unfortunately, some politicians seem less intent on balancing their budgets than saving the out-sized fringe benefits of government workers. Yet in spite of some cases of politics a usual, and unusual such as in the states of Wisconsin and Indiana where runaway legislators shut down the legislative process, progress is being made in almost all corners of the United States in getting municipal costs in line with revenues.

In recent weeks, many municipalities across the country have released their 2010 financial reports. This gives us the opportunity to take a hard look at how our holdings are faring in these tough times. Thus far almost all the municipalities we have studied have shown improved financial conditions over a year ago. We own 574 tax-exempt bond issues so we have a ways to go, but there is another important indicator that gives us confidence that things are on the mend. Of the 574 issues we own, none were downgraded by Standard & Poors or Moodys in the last six months. Indeed, the ratings changed on only 12 issues and they all rose by at least one rating level. With tax revenues ticking higher in most states and cost cutting grudgingly underway, we believe we will see a continuation of more rating hikes than cuts during the rest of the year.

We believe even more strongly than we did in December that Ms. Whitney will be wrong in her prediction of massive defaults among municipal bonds. We now believe unless there are a few anarchists among the legislators of this country -- people who genuinely want municipalities to default -- that the defaults will be few.

We'll keep you posted as we continue to study our holdings.

Disclosure: We own lots of municipal bonds.