Tags: Kotok | muni | bond | ETF

Cumberland's Kotok: Investors Can Buy Solid Munis on the Cheap Now

By John Morgan   |   Monday, 29 Jul 2013 08:56 AM

All the doomsday calls from star analysts Meredith Whitney and others about the municipal debt market in the wake of Detroit's bankruptcy filing are just exaggerated baloney, according to Cumberland Advisors' Chief Investment Officer David Kotok.

That's because he believes there is still a mountain of rock-solid muni issues to pick from across the United States.

Whitney stirred the muni pot last week when she penned a piece for the Financial Times that predicted the Detroit bankruptcy would inspire a wave of municipal bankruptcies, with adverse effects for muni debt.

Editor's Note:
Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Kotok wrote in a research note that the $3.8 trillion muni market is so huge that it's easy to avoid the debt of broken cities like Flint, Mich., while scooping up solid issues from places like the state of Utah, Index Universe reported.

Kotok, whose firm manages billions of dollars in muni accounts for retail and institutional clients, trumpeted the fact that tax-free yields on AAA credits in the muni space are now higher than comparable Treasury yields. And such bonds have never defaulted, he claimed.

"When the tax-free AAA bond has a higher yield than the taxable U.S. government bond, it is not priced according to credit risk or the tax code, it is priced by a dysfunctional market," he said in the note.

Index Universe concluded the performance of muni index exchange-traded funds (ETFs) might now be compromised as a result of the bad publicity about munis. Fear of headline risk could keep such index ETFs "trading sideways in the coming weeks and months," Index Universe said.

On the other hand, Index Universe said actively managed muni ETFs that could take advantage of the knocked-down prices of munis could benefit.

ETF investors with the resources to make tactical purchases "have choices at their disposal worth pursuing, because in the heightened uncertainty following Detroit's bankruptcy, a buying opportunity seems to be brewing," Index Universe predicted.

Detroit's bankruptcy filing is "sending shivers" through the muni bond marketplace, CNBC reported. That's because Detroit Emergency Manager Kevyn Orr said the city now regards most of its limited and unlimited-tax General Obligation (GO) bonds as unsecured debt.

Investors have been fleeing municipal bond funds in drove, with Investment Company Institute data showing $2.5 billion of outflows in one last week alone, and about $16 billion in outflows over the past several weeks, CNBC said.

If it is upheld, Orr's plan, which would mean the safety of GO bonds would no longer be "sacrosanct," could throw into question the pricing of hundreds of billions of dollars in muni debt, according to CNBC.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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