Meredith Whitney Revises Her Municipal Bond Outlook

Outlook06/14/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.
Production data last night suggested that the fast-growing Chinese economy was not slowing as quickly as had been feared, sending U.S. stocks higher this morning despite another increase in bank reserve requirements and uptick in inflation.  This morning’s set of U.S. data didn’t hurt the positive tone, including benign producer inflation and relatively good monthly retail sales amid low expectations.  In company news, a major electronics retailer reported better-than-expected earnings for its first quarter.  Asian markets closed mixed, with the Nikkei higher while the additional monetary policy tightening weighed on the Hang Seng.  Meanwhile, key European markets are higher midway through their trading session.  Key commodities are mixed, with copper and oil higher, precious metals flat and modest weakness in key crop prices.

Looking back at Monday, the major averages ended near unchanged as the boost to sentiment from several merger announcements was offset by ongoing concerns about the pace of economic recovery and the Greece saga.  Sector performance had a decidedly defensive tone, as Consumer Staples, Health Care, Telecom and Utilities each moved higher, by an average of one half percent, while five of six cyclical sectors ended flat or down.  Bucking the defensive bid was Financials, which gained 1% on the day.  Energy was by far the biggest decliner, tumbling over 1% as U.S. crude fell 2% to near $97.  Crude weakness dragged the broad commodity indexes down about 1%.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. Municipal budget season is winding down. California remains the only major state without a budget in place.  This is no surprise as California has typically failed to have a budget in place before the start of the new fiscal year on July 1st.  This year, however, thanks to a new voter-approved referendum last year, politicians will forego pay starting June 15th until a budget is passed.  Budget season has proved uneventful for the municipal market and budget cuts have been the dominant feature of most new fiscal 2012 budgets.
  2. And speaking of municipals, Meredith Whitney is back in the spotlight. Analyst Meredith Whitney was back in the public eye with three media appearances over the past two weeks (Fortune, Bloomberg and CNBC).  Whitney backed down from her prior claim of $50 to $100 billion in municipal defaults over the coming 12 months, saying instead that she expects the defaults to occur over a “market cycle.”  Whitney cited some of the same well-known challenges facing municipal investors (budget cuts, declining federal aid, etc.) and offered little new perspective.
  3. More discussion on this morning’s Chinese data. Chinese authorities increased the reserve ratio requirement (the amount of reserves banks have to hold against their loan portfolios) this morning, amid a set of Chinese economic data for May that suggested the Chinese economy continued to slow, but not collapse, in May.  In addition, China released data on both consumer and producer price inflation for May.  The data revealed that while consumer price inflation did accelerate further in May, the recent gains in CPI have been mild, hinting that inflation may have peaked.  The market still expects a few more rate hikes in China and more reserve ratio requirement increases as well.  The pace and timing of future rate hikes in China is a key factor (in our view) of both emerging market equities and emerging market debt.
  4. May Producer Price Index (PPI) data was close to expectations. Producer prices rose 0.2% between April and May as a drop in food prices offset another surge in energy prices.  Excluding food and energy, producer prices also increased by 0.2% between April and May and were 2.1% higher than a year ago.  The underlying components of the report support Fed Chairman Bernake’s assertion that the rise in commodity (especially energy) prices was transitory.  The May CPI report is due out tomorrow.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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