Almost four years ago to the day, Meredith Whitney made a breathtaking call that helped roil the muni market and destroy an enormous amount of investor value.
Her prediction was, of course, unsupportable, irresponsible and wildly off the mark. Since then, her professional forays into other areas, equally beyond her expertise, haven’t panned out very well either.
Soon after this fateful episode, the market did an about-face, but the lessons gleaned from it are as important today as they were back then – perhaps more so, as the number of commentators espousing equally audacious and specious views has exploded.
Prescience then disaster
Whitney, a banking analyst, first made her mark in 2007, when she forecast disaster for Citigroup. As the fiscal crisis unfolded, she was heralded for her foresight.
Unfortunately, she then ventured beyond her specialty. In her infamous December 2010 interview – with “60 Minutes,” no less, as her platform – she told the world: “There is not a doubt in my mind that you will see a spate of municipal bond defaults. You can see 50 sizable defaults. Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars worth of defaults.”
Opportunity amid the tripe
As 40-year veterans of the municipal bond industry, we were astounded by this outlandish claim. However, we recognized an opportunity for investors to take advantage of the “chicken little” panic that ensued.
In other words, where a banking analyst with no muni experience saw scorched earth, we saw fertile ground, and we said so in a series of full-page messages to investors.
Her call was instrumental in causing an oversold market, which we recommended investors pounce on and enjoy the extraordinary tax-equivalent yields, which we expected to be temporary.
We understood what Whitney did not: Declining bond prices were the result of supply-and-demand factors, not the ability of state and local governments to pay their bills.
Straying from their specialty
Whitney isn’t the first pundit to stray from her primary area of expertise and wreak havoc elsewhere. Tune into most financial chat shows and you’ll find plenty of “experts” eager to share their opinions and fill TV time on any number of topics, regardless of their background or specialty.
The direction of interest rates, for example, attracts the greatest number of expert predictions, despite it being a futile exercise.
Once again, the vast majority are calling for higher rates in the New Year, suggesting investors continue to wait on the sidelines until then. At least this year, after so many past embarrassments, most of these opinions are prefaced by the acknowledgement that they have been way off the mark in previous forecasts.
Investors who’ve heeded this advice and remained parked in money market funds have been robbed of the opportunity to generate tax-free income for an untold number of years, often unaware of the onerous cost of waiting.
Today, as always, we urge investors seeking assistance in the municipal bond market to be highly discriminating.
• Eschew the prediction industry.
• Ignore the guessers who stray from their core competency.
• Look to the specialists, not the headline makers.
• Don’t attempt to predict interest rates.
• Keep your interest clock ticking at prevailing rates as investment dollars become available.
Our only prediction for successful tax-free bond investing? Specialization wins.