The Stock Market and the Next Crisis
Jan 16, 2011
Posted by Jody Eisenman | Filed under Uncategorized
Mark this date: November 26, 2010. This was the last the S and P 500 fell by as much as half a percent. At Friday’s close of 1293, this would be the equivalent of around 6.5 S and P points. Although I don’t have time to go through decades of data, I believe this may be the longest period in stock market history without any correction of even a minor magnitude. The stock market, led by QE2 and strong earnings, has shrugged off a poor housing market, problems in Europe, and weak consumer confidence. In every bull market, there is at least some pullback, if only for profit taking. However, the play for the last 6 weeks has been to buy every sell off with the market continuing to rise to new highs. Since November 26, the S and P has risen over 100 points without even a minor correction. It would be interesting to see how the market handles what’s going on in the municipal bond market. As I spoke about back in September, http://www.jodyeisenman.com/2010/09/a-quick-note-on-gold-and-the-markets/,
there could be a crisis coming in the municipal market. It is interesting the JP Morgan chief Jamie Dimon is urging caution to potential investors in the $2.9 trillion market. Most states run deficits. However, unlike the US government, states do not have the luxury of printing money whenever they need it. Instead, they must continue to rely on the willingness of investors to buy their bonds. It is believed that individual investors (as opposed to institutions) purchase roughly 2/3 of all municipal bonds issuances. U.S. states will contend with about $140 billion in deficits in the next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a report issued Dec. 16. Edmund “Ted” Kelly, CEO of Liberty Mutual Holding Co., said yesterday that his firm had reduced holdings of municipal debt in Connecticut, California and Illinois.
“The market is being held up to some extent by the belief that the federal government will bail out” state and local issuers, Kelly said in an interview.
Tax-exempt municipal-bond yields soared amid a U.S. Treasury selloff and expiration of the federally subsidized Build America Bond program in last year’s fourth quarter. The securities lost 4.5 percent in that period, according to the Bank of America Merrill Lynch Municipal Master Index, the worst performance in more than 16 years.
In the last week, the I shares national muni bond ETF (symbol:MUB) has dropped from 99.22 to 96.26, a drop of over 3 per cent. Shares of TFI, the Nuveen Barclays muni bond ETF fared even worse. In the last four days, they have dropped from 21.77 to 21.03, which is its’ lowest level since the financial crisis in November 2008. On the state level, it is believed that Illinois and California are probably at or near the bottom of the barrel. Illinois has raised the state tax from 3 percent to five percent, a 67% increase. Business taxes will go from 4.8% to 7%. In many cases, raising business taxes are counter-productive. An ill-fated attempt to do this in New York was aborted after Mayor Bloomberg pointed out that many financial services firms such as hedge funds could easily just pull up stakes and take their computers elsewhere if the arte became too onerous.
Will these muni woes lead to substantial defaults, or is this a great buying opportunity? How will the stock market react to this? This coming week should be very interesting.
January 25th, 2011 at 5:42 am
We got a drop greater than 0.5% last Wednesday, but for now it looks like a one-day wonder. The bulls haven’t made any headway this month (8 up days, 7 down days), but the bears can’t even follow through when everyone is essentially stepping aside and letting them. Interesting times to say the least.