Doug Kass wrote up his list of 20 surprises in 2009 for theStreet.com. Included in the list is the following;
11. State and municipal imbalances and deficits mushroom. The municipal bond market seizes up in the face of poor fiscal management, revenue shortfalls and rising budgets at state and local levels. Municipal bond yields spike higher. A new Municipal TARP totaling $2 trillion is introduced in the year’s second half.
I don’t know about any muni Tarp but I have written a couple of posts expressing concern about going into this area. Many people in print and on TV are extolling the space for the yields available. I take the yields as a warning of something coming. There is some stat out there, I think I saw it on Barry’s site a while back, about 31 states either having a deficit or soon to have a deficit.
One could argue that treasury yields are so low because of the crisis/deleveraging/flight to safety trade which is of course true but we need to watch out for justifying abnormalities. An anomaly that lasts for months isn’t an anomaly it is something else–IMO it is a warning.
As opposed to trying to quantify what it all means I’d rather just heed the warning not have a meaningful commitment to the space. This is what I wrote about and did in the portfolio with financial stocks when the yield curve inverted. Just lightening up into an early warning is enough to reduce pain. Look at many of the famous value mutual funds that held on to (and probably still own) financial stocks too long.
One of these times someone will outsmart one of these indicators but it doesn’t have to be you and it won’t be me.
One last item; I’m scheduled to appear on Closing Bell on CNBC at about 15 or 20 minutes after the close of the market, I hope you can check it out.