PIMCO vs Whitney: The Muni War Of Words Turns Ugly, As Equity Mutual Funds Welcome The Wipeout In MUB
One of the consequences of Meredith Whitney's recent prognostications that we could be facing hundreds of billions worth of municipal defaults, is that after tens of billions of investor capital have been pulled out of municipal funds, with last week seen record $5.8 billion in redemptions alone, virtually the bulk of this money has been recycled in the form of inflows into equity instruments. As such, it is surprising why so much energy is wasted to attempt to debunk Whitney's thesis: after all, she has done more to stimulate equity inflows than years of government/CNBC propaganda ever could. Yet one firm which certainly stands to lose should the ongoing muni redemption wave not moderate, is everybody's favorite PIMCO, which is oh so good at bashing the Fed and Satan Bernanke with one half of its mouth, while with the other investing tens if not hundreds of billions in federally subsidized Build America Bonds, which for the past month have been in free fall. It is therefore not surprising that as Charlie Gasparino points out, Bill Gross "has launched an all-out war to discredit Whitney’s research in an attempt to restore confidence in the $3 trillion municipal-bond market." Of course, this is nothing more than a good old-fashioned book talking campaign: Meredith, who after have failed to predict anything notable at her new venture, needs to return to her shock factor roots, and Gross, whose TRF fund, after seeing nearly two years of AUM increases in his flagship TRF, has been having a bit of a hard time recently, all due to the firm's huge municipal exposure.
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Pimco, which specializes in selling bond-related mutual funds and other investments, has been hit particularly hard; the redemptions from municipal-bond funds have hit historic proportions, according to a report by Barclays Capital, totaling tens of billions of dollars, though there are some signs that the run on the market has abated.
But it hasn’t abated enough for Pimco. While Gross quietly jabs at Whitney in his television commentaries, his people on the ground in charge of selling bond funds to brokers are playing offense. According to one person with direct knowledge of the matter, a Pimco representative said that they money management firm has even obtained a copy of Whitney’s report, and it “wasn’t worth the paper it was written on.”
The Pimco representative said, according to this person, that the money management firm paid $10,000 to obtain the report and considered having Whitney herself address analysts at the money management firm, but decided not to because officials there believed her analysis to be superficial.
FOX Business was the first media outlet to obtain the report, written back in September of 2010, titled “Tragedy of the Common; Launching Ratings on the Top 15 States.” As first reported on FOX Business, Whitney’s analysis contained none of the doomsday predictions she made on television, namely that there will be 50 to 100 major municipal-bond defaults costing investors hundreds of billions in losses over the next year.
It focused on state municipal issues, and stated that her analysts showed that no state would likely default. It made just a passing reference to the wider municipal bond market, namely cities and private entities that can issue tax exempt debt , stating “we believe there will invariably be defaults on the local level,” without giving specifics.
And while it remains to be seen who is right in the muni solvency debate, with both camps having seen an extended array of defenders, one thing is sure: as long as investors continue to pull money out of muni bond funds, the proceeds will be reinvested into equities. Which is why nobody at the administration level has budged to refute Whitney's doomsday scenario: after all, as noted above, she has succeeded in doing more for the equities propaganda camp with one 60 Minutes appearance, than all the momo cheerleaders ever could. And since investors are once again putting money into taxable bond funds, it is imperative for the mutual fund community that the muni scare persists - after all cash levels at mutual funds are already near record lows. Which is why we expect that Meredith, right or wrong, will most certainly be carted around various B-grade cable channels to force people to convert their muni holdings into stocks for a few more months, at which point not only will Whitney's macro call end up being proven right, but the spillover effect into equities and other asset classes will prove once again that in a time of record government stimulus, any deviation from the priced to perfection centrally planned model always leads to a wholesale wipeout of capital markets.
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