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Best of the Exchange: Muni Auctions and Bottoms Up!


Minyans talk trouble in the debt markets.

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes a "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Minyan Allen quizzed Mr. Practical about the Fed's real effect on liquidity, the dollar and what it means for our economy. The implications are significant to say the least.

Minyan Mark:

I never miss an article from Mr. Practical ... always on target.

However, while I completely buy into the deflation scenario, I do not believe it will be in U.S. dollars.

I see the situation with the U.S. borrowing as untenable going forward. Who will be willing to continue to lend to us and how will we service the existing debt?

I believe we will see foreigners begin to want our assets rather than our IOUs. When the U.S. debt bubble begins to unwind, our creditors will want to unwind their dollar holdings. This will be inflationary in U.S. dollars as the market will be flooded with dollars for hard assets.

I see gold as just one of those hard assets that will be bought.

Minyan Doug:

Doesn't the highly indebted government t want inflation to easily payoff debt with future inflated dollars? Doesn't deflation make it very hard to 'balance the budget' given the massive debt we have now and plan to have in current budgets?

You state it wipes out debt, but it doesn't for the government, does it? Washington is the biggest borrowers . I fully agree with deflation of 'things' other than dollars and can not grasp what happens with dollars.

I am out of debt, but patience is wearing thin with government entities...thanks for your insight.

It seems every week we learn about some new esoteric segments of the fixed income markets, and its not because things are going well. This week Professor Seddaca enlightened us on the obscure world of auction rate securities and the failure of another market for short term paper.

Minyan Bill:

I have spent most of the last twenty-five years of my professional life working as a technical specialist in the municipal finance industry. As such, I am reasonably familiar with some of the auction securities that are currently failing to re-price in the market.

A very significant number of the failed auctions have nothing to do with closed end funds or leverage. For example, one AA governmental issuer in the northeast recently had a series of taxable auction rate paper insured by MBIA reset to a 20% maximum interest rate! This is an entity with hundreds of millions of cash on its balance sheet and completely solid financials. So why the panic? First, anything with the name MBIA (MBI) or Ambac (ABK) (to name but two of the troubled insurers) on it causes people to run for cover, even when the underlying credit is rock solid. This indiscriminate reaction constitutes irrational fear of the stupidest kind.

But not all auction rate securities are backed up by cash rich AA issuers with excellent cash flow. While I can't speak to closed end funds, there are various kinds of structured investment vehicles that have taken advantage of Alan Greenspan's artificially low rates by financing long term bond purchases with overnight variable rate borrowings with no security or collateral beyond the acquired asset. One such product is called tender option bonds. When sold without a bank supported put, these look like an auction rate security. And in this case the only underlying asset is a bond which may also be troubled (because, surprise, it's insurer has been downgraded). There's no deep pocket to bail you out here.

Wise investors will choose the former investment and avoid the latter.

Trading challenging markets require discipline, and Toddo revisited the four primary metrics to try and chart a path for the future.

Minyan Rick:

I once heard a fellow trader say: "Rick, if everyone knew and felt the same way about the market, it would simply cease to exist."

One of the hardest things to do as a trader, is to get past our own bias and see things for what they are. It's actually impossible to do it because you are always shaping your realities based on what you see.

The essence of this article and your interpretation of the current events should serve as invaluable insight on how we trade today and in the future.

That is why I love this place. Thank you Todd.

Minyan Scott:

Fundies: weak

Technicals: so-so with overhead

Structural: not resolved and lots of efforts to paper over

Psychology: denial with some panic, especially in credit land.

Not the stuff of lasting rallies, but also not the stuff of complete wash out. Stay tuned.

Minyan Tim:

Thank you for the great read today.

It is always difficult to see both sides of the trade and near impossible to hear all the noise, what with the Street Shills and and the Sky Is Falling crowds singing their various renditions of their latest hit. You provide a fulcrum, a balance and whether the reader agrees or not ... it's their choice and their judgment.

If you and the Professors are not the most consistent read on matters financial please elucidate me.

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