David Kotok: Meredith, Will You Be My Valentine?

rcwhalen's picture

Latest from my friend David Kotok.  I think both he and Meredith Whitney are too bullish on the banks.  Fred Cannon at KBW is right.  Mortgage banking revenue for US banks peaked in Q3 2012.  And don't forget to read David's insightful comment, "The Real State of the Union." Happy Valentine's Day to all -- Chris

Meredith, Will You Be My Valentine?

David Kotok/Cumberland Advisors (www.cumber.com)

February 14, 2013


On Thursday, February 7, as I do most days, I watched Bloomberg Television’s Surveillance from an exercise bike while sipping my morning coffee.  Sara Eisen, Scarlet Fu, Tom Keene, and Mike McKee were interviewing Meredith Whitney.

First disclosure: Meredith Whitney and I have had our disagreements over municipal bonds and municipal bond strategies.  This was exacerbated by her infamous call on 60 Minutes, in December, 2010.

In the recent Bloomberg interview, Meredith sponsors the notion that the banking sector is improving and that the results will reflect in bank stocks. The case she makes for the sector is bullish. 

We completely agree with her on this issue. We think her recommendations and her arguments are sound. In the banking sector, she is our Valentine pundit.

Second disclosure: Cumberland has been overweight the banking sector and financials since this bull market started. We use only ETFs.  The ones we own represent regional banks, big banks, insurance companies, and small specialty types of financial institutions. Those ETFs as a group are overweight banking relative to the benchmark index. We are fully invested, according to our internal asset-allocation weighting models.  We believe these assets will attain much higher prices over time.

Meredith Whitney established herself in the banking sector with a famous call about Citigroup. We agreed with her call then, and we agree with her banking sector call now. While our job is not to make calls but to manage portfolios, we believe it is correct to praise where praise is due.  In the banking sector, Meredith has and does earn that praise.

One of the big issues that prompted our public disagreement with Whitney involved her call on municipal bonds. In that call she articulated a prediction that “hundreds of billions of dollars worth of defaults” would occur.  Furthermore, she expected that it would happen in 2012.  We disagreed.

Our view on Munis has several components.  First, some municipal bonds default every year.  Most of them are in the junk-credit category or are tied to specific projects. 

Second, we see no way that annual defaults could reach Meredith’s massive numbers.  This is especially true with the ongoing quantitative easing by the Federal Reserve.  Furthermore, municipal finance is slowly improving in credit quality in many jurisdictions due to the ongoing economic recovery. That recovery, underway since 2009, is proceeding at a slow but gradually increasing pace. 

Third, Meredith ignored the idiosyncratic nature of tax-exempt municipal securities. There are approximately ninety thousand issuers in the US, which fall under the governance of nearly that many state and local jurisdictions; and the claims upon them are equally various. You cannot paint the tax-free or taxable municipal bond sectors with a single broad brush. That just does not work. It did not work with her 60 Minutes prognostication, and it did not work for those investors who thought that they could buy insured bonds and that those bonds were all gilt-edged.  That is and was a fundamental flaw in certain bond funds.

In order to successfully invest, own, or lend your money to a municipality, or to otherwise place capital in the municipal bond sector, you must carefully research the credit and structure of the specific instrument. There is a vast difference between the nature of a general-obligation pledge versus a budget funded by an annual appropriation in a city in California.  There are very strongly monopolistic government franchises, such as the NJ Turnpike. Essential-service revenue bonds are available with tight liens and claims to secure the bond holders.  Many Munis are quite solid when it comes to credit.

In the February 7th Bloomberg interview, Meredith Whitney was asked specifically about her history with the municipal bond call. Readers can judge her response for themselves.   See her interview on www.Bloomberg.com:

http://www.bloomberg.com/video/meredith-whitney-on-banks-muni-bonds-s-p-... .

Her famous “100 billion dollar default” interview is here:  http://www.youtube.com/watch?v=hI-rIGyLri4 

Our view is that one must do the analysis on credit.  There are many opportunities in the municipal bond sector. Default on them is unlikely and default in a massive scale is also unlikely.

To Meredith and to all readers, we wish you a happy Valentine’s Day.

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NotApplicable's picture

As for muni credit quality... well, how long can places like Illinois keep up with bond payments when it's busy bankrupting the rest of the state by not paying its other bills?

The only answer to this problem from a bankster perspective is inflating away liabilities via Uncle Sugar (further increasing dependence).

Bicycle Repairman's picture

Meredith was wrong about munis.  The end.

NotApplicable's picture

No, she wasn't. They destroyed the system in order to prevent it from going nova.

Like Santelli said, what does "value" mean in a fiat regime?

Bicycle Repairman's picture

None of the states are going BK any time soon.  EOS.

Clowns on Acid's picture

To Big to Default ...... the neo Keynsian socio-political agenda is going to be forced upon the US come hell, high water, or QE to Infinity (Infinity being defined as "up until the USD loses Reserve currency status").

The subsequent risk of failure has been neatly and coercively placed on the doorstep of the formerly comfortable "middle classes".

Their message is clear - "Where your income is generated, we don't care, but you had better buy equities, and not pm's. By buying equities you may not get ahead, but you won't be left behind." P.S. - Buffet gets it, so should you.

Hapy Valentine's Day, signed,

The Committee

centerline's picture

What a dumb ass article.  More snake oil please!  lol.

Jesus, this author is as bad as any other.  Might as well post on Yahoo Finance or something.  As if the underpinnings aren't FUBAR.  Couldn't put your head in the sand any further bub.  Unless of course this is about "gambling."  Which I won't even call "trading" or "investing" because it isn't anymore.   Or it's about selling something... more middle men wannabes selling pixie dust to each other... a sign of the times huh?


John Law Lives's picture

Where are all those municipal defaults, Meredith?

centerline's picture

Got burned on that call maybe?

Of course, everything has been done to avoid them.  Measures that no one would have ever dreamed would be possible (example:  CAB loans).  Outright scams right and left to kick the can.  And it is clear they can kick the can pretty fucking far down the road.  That does not change the outcome though.  It only guarantees the outcome will be more explosive than ever.  Default may never happen because the system may just "stop" one day.  Well, that actually would be a default - but there won't be anyone in a short position yelling "I'm rich, bitch!"

John Law Lives's picture

When pundits blather on about municipal defaults, they should always be specific.  The creditworthiness of all municipalities is not in question.  I, for one, would not purchase munis issued from California or Illinois or New Jersey (for example), but those are specific examples.  I have purchased and held a variety of munis (mostly Texas GOs these days) since the 1980s, and I never lost $1 in principal one any of them to default... ever.  I don't intend to start losing $$$ now.  Meredith Whitney can crawfish all she likes, but she looks like an amateur re. her bold prediction she made in 2011.


NotApplicable's picture

Exactly, without Benron, Meredith's prediction would've been tame in comparison to reality. Meanwhile, Mr. Kotok takes a very disengenious approach to this reality.

Second, we see no way that annual defaults could reach Meredith’s massive numbers.  This is especially true with the ongoing quantitative easing by the Federal Reserve.

It's especially "especially true" in light of a reality that didn't exist at the time of her call. But hey, use it to ridicule her anyway. Makes you look smart, right???

So... David Kotok... stupid ass or scumbag?

Fuh Querada's picture

Watch those tight liens when sitting on an exercise cycle.