Meredith Whitney is dead wrong about the coming muni-bond meltdown, and Cumberland Advisors is happy to take the opposite bet, says David Kotok, chairman and chief investment officer of the money-management firm.
In a recent note to investors, Kotok says Whitney’s forecast of “hundreds of billions” in default by 2011 simply isn’t going to happen on the scale she predicts.
Whitney, a former Oppenhemier analyst who struck out on her own after successful early calls on the banking crisis, made the forecast on the CBS News program “60 Minutes” in December 2010.
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“We are going to dig in our heels on the other side. We do not expect nor do we forecast that defaults on munis in 2011 will reach anywhere near $100 billion,” Kotok writes.
Kotok says that he does expect some technical defaults but not the outright default on payments and nowhere near the bloodbath predicted by Whitney.
“On Dec. 31, we will know who is correct,” Kotok writes.
Whitney’s call led to an exodus from muni bonds, Kotok points out, that has risen to $33 billion since early November, a decision he maintains those sellers surely have come to regret.
“All the evidence is contrary to Ms. Whitney’s prediction. We see rising revenues at the state and local levels for the last four quarters,” Kotok writes. “This is due to the recovery in the economy” and local government budget cutting.
Whitney has at least one famous backer in the muni default argument: Nouriel Roubini. A report released in early March by consultants at his firm, Roubini Global Economics, predicts $100 billion in municipal defaults over five years as the economy grows weaker, reported The Wall Street Journal.
That’s slower than the pace implied by Whitney, who said in the interview that she thought the defaults would begin “next year,” as in 2011. It is, however, about the same level of default.
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