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Buffet gets out of muni-bonds
September 3, 2012
by Brian Wolf

News flash from Yahoo! Finance; Warren Buffett’s Berkshire Hathaway ended its five-year bullish bet on the municipal bond market. The Omaha, NE, company noted in a recent quarterly filing that it had canceled credit-default swaps insuring its $8.25 billion muni-bond market wager.

When perhaps the wealthiest investor on the planet makes a move, people take notice. According to Buffett, the municipal bond environment is getting too risky. The question you should be asking yourself is whether or not you should do the same.

Currently, investors are pouring money into muni-bonds. Yahoo! Finance stated, “Investors have generally remained positive on the $3.7 trillion municipal market, pouring $964 million into municipal-bond mutual funds last week – 18 straight weeks of inflows.” Right now, muni-bonds are paying competitive interest rates, and individual investors seem to be chasing those rates while potentially ignoring potential risks of default. These inflows have continued even as we see a number of issues defaulting across the country.

There have been six Chapter 9 municipal bankruptcy filings this year, compared to 13 in 2011. Muni bankruptcies have totaled 268 since 1980, according to Reuters, with cities, villages, and counties accounting for 49 of the filings.

Nebraska, California, and Texas have experienced the greatest number of bankruptcy filings. Stockton, CA became the largest US city to ever declare bankruptcy when city officials were unable to reach a deal with creditors. San Bernardino, CA, filed its bankruptcy paperwork Aug. 1, making it the third California city, after Mammoth Lakes, to seek bankruptcy protection.

Scranton, PA, could be the next big city to go bankrupt; its city business manager, Ryan McGowan told the Scranton Times Tribune that Scranton has just $133,000 in cash, but owes vendors $3.4 million. The former industrial city also decided to slash public employees’ hourly pay to $7.25 — firefighters, police officers, and the mayor included – to stop hemorrhaging money. Public employees are not only experiencing job cuts and smaller wages, but local authorities are under pressure to reduce benefits and pensions also.

Individual investors should be aware that as early as December 2010, we had warnings about muni-bonds. Meredith Whitney (a banking analyst and frequent contributor to CNBC, Fox Business, and Bloomberg News) came out on “60 Minutes” to warn of rough seas ahead for muni-bond holders. Bloomberg reported further that Buffett himself, has shared his misgivings on the road ahead for muni-bonds, predicting that there will be a “terrible problem.”

It seems that many “experts” are getting out, while the “amateurs” (individual investors) are getting in. If you study market history, you’ll know that this is about the clearest signal you can ask for to gain a good understanding for what could happen. Whenever the “experts” are moving in one direction, while the “amateurs” are doing the opposite, shouldn’t you sit up and take notice?


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