Why Now?

If Munis aren’t about to melt down, what’s all the fuss about? What’s special about right now?

To answer this, we have to go back. This market has been in disarray since the sub-prime crisis hit. It used to be an insured market. An assortment of AAA bond insurers assured investors that their principal would be safe, and the three major credit rating agencies could speak credibly on the risk of the underlying borrower. But the bond insurers got greedy and underwrote a bunch of crappy sub-prime loans, and the ratings agencies got lazy and said they were all AAA anyways. The Agencies lost their credibility and the insurers lost billions. Those two pillars of the muni market collapsed.

We’re left with the underlying credit quality of the public sector. And that’s looking worse right now because of the nature of the credit cycle. In any economy there are leading and lagging elements. Construction and manufacturing leads; public sector employment lags. This is so because government is reactionary. It takes a while for tax receipts to fall; it takes even longer for the governments to adjust. The downturn started in ’08, so muni governments are just now tightening their belts.

But the economy is recovering now. Employment has been rising and tax receipts are improving. While 2011 will be a tough year, it should be the bottom for municipal credit conditions.

The turmoil of ’08 is finishing its work in the public sector. What goes up comes down, and what goes down will come back up.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T14:26:33+00:00 January 4th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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