Is the Municipal Bond Market in Serious Trouble?

Posted on 11th February 2011 in Bonds

When Meredith Whitney ominously warned of new dangers in the municipal bonds markets, she was only reiterating in forceful language what many analysts have been aware of for years. Traditionally, municipal bonds have been one of the safest investments for conservative buyers and historically they have lower default rates than corporate bonds. However, Ms. Whitney upped the ante by suggesting that as many as 50–100 “sizeable” defaults could occur within the coming months, representing hundreds of millions of dollars.

Against the larger total of $3 trillion dollars in outstanding municipal debt, this may not seem like a huge percentage, but to each individual investor and municipal bond holder, such losses could be crushing. Also, when unhealthy counties, cities, public agencies or utilities default, the damage can leak over onto healthy economies. Is Ms. Whitney correct in predicting calamity in the near future in municipal bonds? While her detractors are numerous and loud, men such as Warren Buffett and Jamie Dimon, CEO of JP Morgan tend to agree. Dimon expects more US municipalities to file for bankruptcy and warns, “If you are an investor in municipals you should be very, very careful.”

With prices falling and investors leaving the muni bonds market by the droves, especially since Ms. Whitney’s public announcements, the broader question becomes why are so many state and local governments in danger of defaulting? It would appear that several factors are at work and both timing and dangerous fiscal policy from the top down have played a significant role in the precarious positions states such as New York, California, New Jersey and Illinois now find themselves.

Everyone agrees that the Recession did a lot of damage as more homes were lost to foreclosure and jobs disappeared or were falsely created by agencies that couldn’t afford them as part of government stimulus acceptance requirements aimed at assisting women and minorities. In spite of reduced revenue from devalued properties, bankruptcies and lost jobs, in many places local spending continued unabated. Additionally those adversely affected were requiring more and more community assistance in the form of social services.

Incentive programs such as the Build America Bonds strategy only encouraged epidemic borrowing now to pay later, the equivalent of “generational robbery” in which localities “borrow from the future dollars to benefit the present,” according to Ms. Whitney. Now many cities and states are saddled with enormous debt loads and scarce resources with which to meet them. California, land of fantasy, faces a $19 billion budget deficit; New Jersey has cut services 26% and still holds a $10 billion debt; Illinois is six months behind paying $5 billion in outstanding debts; Miami is facing bankruptcy; Detroit is suggesting a 20% cut in essential social services; and Arizona actually sold its capitol building, supreme court building and legislative space in a desperate attempt to rein in debt loads. Organ transplants for Medicaid patients were also on the axe list.

The reality is that the majority of state and local governments, while feeling the pinch, are coping with more stringent policies, slashing where necessary, but maintaining a diet that will make them lean without starving them to death. States like Texas have found ways to cut spending in less critical areas, and while it still hurts, the procedures seem to be working. The old-fashioned, conservative policy of only spending what you have available and not borrowing against future expected income may be an inconvenient and expensive lesson to learn. However, unless we want to shackle our children and grandchildren with unconquerable debt, the time for refusing costly government handouts and fiscal belt-tightening is certainly here.

From a stock broker perspective or for online trading investors, muni bonds are as healthy as the agency offering them. During the last half of 2010, they rose in profit rapidly and substantially. Most state and local governments are not at risk of default and there are still good deals to be made. However, as Jamie Dimon warned, be careful, very careful.

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Microsoft’s Future Is Cloudy

Posted on 9th February 2011 in Technology Stock Picks

As Microsoft Corp CEO Steve Ballmer recently announced an anticipated management shake-up, one has to wonder if he is really addressing the root of the company’s lack luster performance. Ballmer postures that bringing in better qualified management with technological expertise and engineering backgrounds will breathe new vision into the company. This really makes you wonder why he fired his server division president Bob Muglia (BA in Computer Science and 23 years experience) in January and allowed other key executives like Ray Ozzie, an acknowledged engineering visionary, to slip out of his grasp since May.

While still a money-maker in terms of its Windows and Office sales, Microsoft has been steadily falling behind competitors Google and Apple in mobile products (which have risen 80% and 16% respectively). The current stock price, hovering at $28.16 seems to be mired below the $30.00 mark, and there is little inspiration for positive change in the near future. It is difficult to recommend this company as a promising stock pick at this time.

Steve Ballmer is spot-on in assessing part of Microsoft’s problem as lack of educated vision. Cloud software is a crucial connection in the ongoing convergence of the communications world and computing. In the near future location independent computing will be the new grid in which consumer-shared resources are provided on demand, much like electricity. The new self-service model in which users pay as they go for only the services they need is a potential gold mine for those who stake their claims earliest and offer the best products. However, to date Microsoft has been dawdling in the past success of Windows 7 and Office rather than working towards future innovation. Attempts with smart phones and tablet computers have been more embarrassing than promising.

Since Ballmer took the CEO helm in 2000, he has been known as an eccentric, over-the-top kind of boss with a style that attracts other management-style groupies. As the 30th person Bill Gates originally hired and the company’s first business manager, he has a long history with Microsoft. He is also one of the richest men in the world. Perhaps the edge is gone. Maybe the drive has faded in view of the comfort of his personal success. Who really knows?

At the recent Consumer Electronics Show, Ballmer said very little about future vision for Microsoft. Nor did he mention any plans to mount a strong competitive force against Google in 2011. In fact, there was nothing of ground-breaking significance in his address. Could it be that Ballmer no longer has the energy to keep up with the ever-changing technology industry? Bringing in new blood will only have a limited impact if the man in charge is not equally hungry for new ideas and opportunities. In light of these circumstances, cautious investors may want to take a let’s wait and see approach to the purported changes underway at Microsoft.

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Do Lower Unemployment Figures Signal Spring Is Coming?

Posted on 8th February 2011 in Stock Pick

We are all fully aware of the annoying winter weather problems this year. Snow, snow and more snow seems to be the order of the day unless you’re dealing with ice and sleet and snow. If inconvenience were not enough, stock market analysts and economists are also blaming the bad weather for interfering with our attempts to accurately monitor our economic recovery, if in fact, that is happening.

It seems that less people were out looking for work in December and January in the middle of blizzard conditions. Should that be surprising? Before we get too excited about the drop to 9% in the unemployment figures, perhaps we need to consider just how many job hunters decided to stay in and keep warm. But weather conditions are only part of the picture in declining unemployment figures.

If 556,000 less people were unemployed in December, but only 300,000 more were hired, what did the other 250,000 do with their time? Perhaps some just decided to take an early retirement; maybe there were those who quit dead end jobs they hated and are going back to school; some mothers probably left the workforce to raise their children at home; a few may have gone on disability and inevitably some died. But what about the rest? After 99 weeks of unemployment benefits, you not only lose your stipend, but you also lose your place on the roll. You effectively drop off the unemployment statistics, hence the drop in unemployment percentages? It just isn’t all about the weather.

The good news is that there are signs, albeit small ones, that the springtime of recovery is beginning to be felt like those suggestive warmer temperatures we should all be soon enjoying, even while snow still blankets our yards. Underemployment figures for those who want to work fulltime but are stuck at part time jobs have dropped slightly from 16.7% in December to 16.1% in January. That means businesses are hiring more of their temps and giving them coveted fulltime positions. That’s good.

While construction and transportation hiring actually dropped by a combined 70,000 last month, perhaps that can fairly be blamed on miserable winter conditions. Who wants to work outside in a snow storm or drive on treacherous highways? On the other hand, indoor factory employment figures rose across the board in every area. Companies such as Emerson Electric have already upped their hiring and plan to add another 7,000 jobs in 2011 alone. The automotive industry is suggesting that it is ready to expand as well. While government agencies who seem to be universally struggling with massive deficits continue to lay off workers, the private sector is poised to grow.

Emerging markets seem to be regaining confidence in the American market as the dollar gains once more. With commodities up, values down and short supplies the best stock prices right now might be in aluminum, copper, chemicals, sugar, corn, soybean oil and plastics. I guess we’ll have to choose between Chairman Bernanke’s pessimistic warning that, “It will be several years before the unemployment rate has returned to a normal level,” and Ward McCarthy, chief financial economist for Jeffries & Co., “Snow suppressed payrolls, but look past it and the labor market is clearly improving.” As for me, I’m looking forward to spring.

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Recovering Private Sector Struggling Against Staggering Government Deficits

Posted on 7th February 2011 in Stock Picks, stock broker

Every coin has two sides and so does public opinion when talking about the growth and recovery of the US economy. Decisions about whether or not to buy a new car, take a long anticipated vacation, try to find a second job, buy stocks or squirrel more money away for retirement all hinge on whether you view the future as hopeful or hopeless. On the one hand, it does seem that increased consumer spending has triggered some signs of economic expansion and the potential for more jobs in the near future which may finally drag the current dismal 9.5% unemployment rate down to below 9%.

Emerging global markets have been encouraged by the recent recovery of the stock market and seem more interested in placing orders once more, especially in agricultural equipment and supplies. Rising food costs, especially sugar, health care products and communications equipment are big sellers right now. Manufacturing is responding with accelerated growth extending past 2010 into the first month of 2011. Expansion, if continued, will lead to new hiring in the not-too-distant future.

In fact, planned firings by US companies dropped 46% to 38,519 in January, the fewest job cuts for this month since 1993. While large businesses and small companies were still laying off workers, medium size operations (50–499 employees) were actually beginning to add to their payrolls. On the down side, governments led the way with 6,450 firings while retailers were second with 5,755 layoffs. As grim as this sounds it is significantly less than the number of employees who lost their paychecks a year ago.

As retailers and computer companies institute rehiring and consumer spending appears to be remaining strong, it is anticipated that manufacturing will lead the way out of this latest recession as it has in the past. However, manufacturing accounts for barely 11% of the economy and one wonders just how much impact it can really bring to bear on the long range recovery, especially when housing and unemployment issues remain unresolved.

There is another huge elephant in the room: how to self-correct staggering state and local government deficits. After having trimmed the fat from as many programs as possible, it leaves some of the nation’s largest employers with the unpleasant task of laying off more employees. It is estimated by the US Conference of Mayors that between the years 2009–2011, 500,000 public safety, public works, public health, parks and recreation and social services personnel will have lost their jobs in an effort to balance lop-sided budgets. The painful slashing may well continue into 2012.

When we think of government spending, it is so easy to scorn big waste and assume that a government deficit is always the result of too many wasteful decisions and creating countless non-productive jobs to hire somebody’s cousins. Government is viewed with distrust and disdain by the private sector who has been bearing the brunt of this current recession. However, every slashed job represents a person who has bills to pay, perhaps a mortgage, possibly a child who needs braces, and maybe an illness with no health insurance. He or she could be a neighbor, a kindergarten teacher, a fireman, a nurse, a librarian, a trash collector or a policeman. How many public service employees do we want to do without, especially when they are providing needed services to an increasingly needy community?

Government cutbacks affect the quality of community services and local economies as well as just individual employees. That’s one more mortgage to go under water, one more literacy program that gets cancelled, one more hospice patient who gets less care, one more person to add to the unemployment statistics and one less consumer of goods and services. When the city or county government is forced to lay off workers, the entire community suffers, as does the infrastructure that should be a platform for economic growth and development.

With property devaluation and decreased spending, local governments have been hit hard by shrunken tax revenues. A depletion in the flow of state and federal aid has added salt to an already infected wound. Add to this the increased need for social services that always occurs during a recession or depression and it is estimated that state budget shortfalls for 2010–2012 could reach beyond $400 billion. Unless the federal government steps up to infuse these deficit budgets, the worst may be yet to come.

While the private sector may be able to stimulate many areas of the economy, it would appear that state and local governments are wounded and need immediate restorative care. One can only diet so much before starvation sets in and the body begins to consume itself. Let’s hope that doesn’t happen to localized governments at a time when they are so needed by their communities.

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