Posts filed under “Analysts”
Bruce Krasting: I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.
When you stick your neck out and make prognostications about the future, sometimes you’re going to be wrong. I’m certainly no exception. But when it comes to really big misses, I think Meredith Whitney’s call for a monster blow-out of the Municipal Bond market is on top of the list.
Meredith is a smart lady. That being the case, it’s worth looking into why she was so wrong. A report this weekend from the Bond Buyer provides a partial answer:
A 32% ($138B) YoY decline is a very big relative change. The drop in long-term financing was not offset by increases in short-term debt; that category fell by 7.4% ($5B).
The drop in total borrowings is almost exclusively a result of the 46% ($129B) in the “New Money” category. The drop in New Money debt issuance is a consequence of hundreds of cities and states collectively saying:
We’re in a pinch on revenues. Let’s not spend any money we don’t have to for the time being. We’re going to have put off the construction of the new (Sewer plant, overpass, water treatment facility, school, whatever). The last thing we want to do is go to the Muni market and borrow any more.
As a result of many individual decisions to defer infrastructure projects, the Munis have kicked the can down road. They have eliminated the current and future expenses related to these projects. With that, they have stabilized the trajectory of their debt growth and improved short-term cash liquidity (by having less ST debt). In the process, they have created a shortage of muni bonds (relative to expectations) in the market.
Thus, all may appear well in muni land. A successful re-balancing has taken place, for the time being. If the munis can continue to push off infrastructure projects, they will not suffer the fate that Ms. Whitney feared they might.
I said that the munis had “kicked the can down the road”. In this case, it’s quite a different form of can kicking. When the Federal government raises the debt ceiling, we all say, “They kicked the can”. But the munis are doing (pretty much) the exact opposite, so Can Kicking would appear to be an improper/unfair description of what is happening with Munis. I think it’s still valid, deferring infrastructure investments is another form of kicking.
Like most Kicking efforts, it will end badly sooner or later. I’m looking at a potential example as I write. One of NYC’s reservoirs is about a half mile away. A $60mm NYC/NYS funded construction plan was shelved a month ago. Could this become one of those examples where Kicking goes badly? Consider this daisy-chain.
The Croton Reservoir is part of a chain of reservoirs that provide water for NYC. It’s large (22 miles), but it’s small in comparisons to the big man-made lakes further upstate. Croton is important because it connects directly to those upstate reservoirs via an underground tunnel. That tunnel goes north, and then west. It is 1,000 feet deep where it meets the Hudson River.
A bit of physics. The upstate reservoirs are 1,000 feet above the sea and the tunnel is 1,000 below. The tunnel is (was) large enough to drive a truck through so the water pressure at the lowest part of the tunnel is enormous. What might you expect from a 75 year old tunnel under that much pressure? A leak? Sure.
This is one hell of a leak. As much as 35 million gallons a day was the estimate seven years ago. There is evidence that rate has since accelerated. That comes to 13 billion gallons a year, which is sufficient for 250,000 average Americans. Think Orlando, Madison, Winston-Salem or Reno. Each of these cities uses about as much water as NYC is leaking. In China, this much water would meet the needs of 1.7mm people, In Bangladesh it would be sufficient for 3mm. It’s enough to fill 650,000 in-ground swimming pools. That’s a leak.
It gets worse. The leak was first detected in 1988. Therefore something like 15 million swimming pools worth of drinkable water have been pissed into the ocean. It’s so bad that areas on either side of the tunnel have sinkholes. People have been forced to move. Properties have been condemned. And the sinkholes keep getting bigger.
There are already dozens of lawsuits on this. They are after the State and the City who own and maintain the reservoirs. The judges have all sided against the City and State, and there have been promises to fix the damn leak for years. A few years ago, a formal plan was put together.
This is no small engineering matter. A new tunnel will be built that connects the old tunnel before and after the break. Once completed, the old tunnel will be cemented closed. The diversion tunnel will be ½ mile long. Recall that this is 1,000 below sea level, any construction/mining this deep is both difficult and dangerous (the bends). Those normal risks are, however, trumped by risks that the nearby existing tunnel breaches during construction of the diversion tunnel. The water pressure in the tunnel is sufficient to crush a submarine. Read More
And then there were just 4 Euro Zone countries who retain their AAA rating, according to S&P – no doubt less in time. Personally, I believe that the importance of the AAA rating is way overrated, particularly in the current circumstances. S&P downgraded 9 Euro Zone countries on Friday 13th, including France – don’t you…Read More
Today’s howler comes from the fundamental banking analyst community. Recall that this is the group who once existed to help investors decide where to place their monies. When that did not work out, their bosses morphed their business model towards generating IPO and syndicate business. When that failed, they moved towards driving short term institutional…Read More
Following a drop of factory output by -5.1% in October YoY, as compared with a forecast decline of just -0.7%, the Indian Rupee is tumbling – its down over 15% against the US$ YTD. The SENSEX is down approx 23% YTD, making it one of the worst performers of the Bric countries, though China is down roughly around the same percentage;
Well, you heard it first from Sarkozy – basically he is trying to defuse the impact of the impending French ratings downgrade, likely imminently. Remember that S&P suggested a possible 2 notch downgrade for France. A downgrade is considered a near terminal event for Sarkozy’s Presidential reelection hopes. The current favourite to replace Sarkozy is Francois Hollande, leader of the French Socialist Party, who may add a further complication to the recent Euro Zone “fiscal compact”.
Other euro Zone countries will be downgraded, including Germany, if S&P carries out their threat Fitch joined S&P and Moody’s in threatening a downgrade for a number of Euro Zone countries, warning of a “significant economic downturn” in the region;
It looks as if Commerzbank needs a 2nd state bail out since 2008, according to German political sources, though Government officials have denied the story – the EBA suggests that Commerzbank will need E5bn. The EBA has ordered European banks to raise E115bn by June next year which, whilst not enough, will still prove to be a struggle. European banks continue to reduce leverage – current estimates suggest that the need to reduce their balance sheets by at least E2tr;
After Moody’s did earlier today, Fitch is giving its thoughts on Friday’s EU summit. “It seems that a ‘comprehensive solution’ to the current crisis is not on offer.” They acknowledged the initiation of an “institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, but taking the gradualist approach imposes additional…Read More
What is the function of Ratings Agencies? The answer to that question was most pithily expressed thusly: might “The function of a ratings agency is to visit the field at the end of the battle and shoot the wounded.” -John Heimann, Spring 1998 (former U.S. Comptroller of the Currency and later vice chairman of Merrill…Read More
Old joke about Analysts: You do not need them in a Bull market, and you do not want them in a Bear market. > I was thinking about that in light of the S&P’s mass EU downgrade threat. As always, the Credit Rating Agencies are quite late to the party. And consider that the European…Read More
There may be no honor among thieves, but there has always been some small measure of dignity — even respectability — amongst the con men of the equity markets. Apparently, there is no such corresponding code of honor amongst commodity trading firms. I refer of course to the debacle that is MF Global. How on…Read More