Muni Bonds: Another Strike Against Meredith Whitney

Last Updated May 11, 2011 1:14 PM EDT

Superstar analyst Meredith Whitney isn't backing down from her disaster-scenario prediction for municipal bonds, even as her dismal forecast seems less likely to pan out with each passing day. And now even the muni market -- in the form of a boring but critical technical indicator -- is saying the outlook for munis is looking up.

My colleague Larry Swedroe just did a checkup on Whitney's muni doomsday prediction. You know, the one she made back in December on 60 Minutes calling for "between 50 and 100 'significant' municipal bond defaults in 2011, totaling 'hundreds of billions' of dollars."

Whitney pretty much single-handedly disrupted the muni band market, Swedroe writes, since her comments were a key trigger that caused investors to withdraw money from municipal bond funds for 24 consecutive weeks. Swedroe's checkup shows that the analyst's famous (or infamous) call hasn't been working out:
So far, Whitney has been pretty far off the mark, and it seems to have had a large and unnecessary impact on investor behavior. As George Spritzer of Seeking Alpha noted, we should be seeing more than $4 billion of municipal bond defaults per week, according to Whitney. Yet, municipal bond defaults actually declined dramatically in the first quarter of 2011 compared with last year. Only nine small issues have failed, totaling $0.25 billion compared to about $1 billion last year, and none of the nine issues had an S&P rating.
But wait, there's more. Now even the muni market -- the people who actually buy and sell the darn things -- are fizzling on Whitney's alarming prediction.


Sorry, but here' the boring technical analysis kicker: A key muni bond ETF made a very bullish move for the first time since last November, the folks at Bespoke Investment Group report.
Over the last six months, the dire predictions that were common place in the muni bond market last fall have so far failed to materialize, and munis have been showing steady and under-the-radar improvement. MUB, which is a popular ETF used as a proxy for the muni bond market, is today on track to close above its 200-DMA [daily moving average] for the first time since November 9.
Now, at MoneyWatch, we don't recommend that people start ringing up their brokers and trading on technical indicators. Far from it. But that 200-DMA stuff is a pretty big deal. As Jesse Livermore, the godfather of speculators, noticed around the turn of the last century, when a price heads above its 200-DMA, it tends to keep heading in that direction. Confidence inspires more confidence. Buyers beget buyers.

So in addition to Swedroe's checklist, the facts -- or lack of defaults -- on the ground and now what the market is telling us, maybe my colleague Conrad de Aenlle's pros and cons of munis list just notched another win on the pro-muni side of things.

Blackberry Photo by Jack Otter
More on MoneyWatch:
Municipal Bonds: Was Meredith Whitney Right?
5 Reasons to Favor Municipal Bonds - and 4 Reasons Not To
Buy Low, Sell High, Automatically
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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.

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