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Muni Meltdown Continues to Dominate Headlines
January 21, 2011 01:22 PM
The meltdown in the muni market continues to dominate the headlines.
The New York Times
reports that policymakers are now working behind the scenes to come up with ways to permit states to declare bankruptcy, which they’re currently prohibited from doing.
Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign, the NYT notes. “But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.”
The back-and-forth between prominent analysts has certainly ratcheted up over this issue: On CNBC, Meredith Whitney,
who is predicting 50 to 100 “significant” municipal-bond defaults
, recently said she expected accelerated “outflows” from the municipal-bond market as state finances deteriorate in the next six months.
Bill Gross begs to differ. On Bloomberg Television, the soft-spoken bond king had this to say: “Ultimately, municipal bankruptcies will be at a lower level. I don’t subscribe to the theory that there will be lots of them.”
However, it looks like your friends have thought about this issue and made a decision: they’re stampeding out of the muni market.
According to the most recent data from EPFR, for the week ending January 19, investors pulled a record $3.6 billion from US municipal bond funds. Since November 11, investors have now pulled $17.6 billion out of these funds.
“The combination of municipal and state budget woes, with some threats of impending bankruptcy and possible defaults, and a US tax deal extending the Bush-era tax cuts for two years lessening demand for tax-exempt investments such as muni bonds are all weighing on investor minds,” say EPFR analysts.
So, if not munis, where are investors then eyeballing opportunity? Turns out, they’re becoming more comfortable with stocks in their own backyard.
Flows into all equity funds hit a five week high of $10.1 billion, of which $6.9 billion flowed into US Equity Funds. It was the sixth week of net inflows to US Equity Funds in the past seven weeks, amounting to total inflows of $17.3 billion for this period.
This comes on the heels of total outflows from all US Equity Funds of $49 billion in 2010.
Ok, the next question on this pop test: is this a bullish sign for domestic equities as new money can move the market higher? Or a bearish signal that should spook contrarians?
No positions in stocks mentioned.
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