David Kotok And All His Friends Agree: MEREDITH WHITNEY IS WRONG

david kotok

[credit provider=”Bloomberg” url=”www.businessweek.com/videos/2012-08-03/kotok-on-u-dot-s-dot-payrolls-jobless-rate-confidence”]

The war against Meredith Whitney’s call for a municipal bond-pocalypspe continues.David Kotok of Cumberland Advisors just wrapped up his 5-day retreat at Leen’s Lodge in Grand Lake Stream, Maine.  The annual gathering included around 48 financial market professionals, economists, traders, academics, and Fed advisors.

Among other things, the participants discussed Meredith Whitney’s call for cascading municipal bankruptcies.  And they pulled no punches.

From Kotok’s latest commentary (emphasis his):

We entirely disagree with Meredith Whitney, who persists in predicting that this world of state and local government finance will end in disaster.   We say it won’t.  In Maine, we can point to a concrete example.

Discussion topics in Maine included the tax-free municipal bond market.  In our group we had very skilled municipal bond professionals and analysts. By the way, they do not masquerade as bank analysts. We also had several skilled and knowledgeable bank analysts; they do not masquerade as municipal bond analysts. In Maine, there were discussions of both banks and municipal debt.

But this was not to say there would be no municipal defaults.

Let’s be clear.  There are some municipal organisations in trouble.  And there are cities in California and elsewhere that are seeking bankruptcy in order to gain relief from contracts.   And there are states where the pressures of finance are severe and the states have not yet made the changes needed to address then.  Illinois is an example of a state that we are currently avoiding.

But our view is that of a tax-free bond investor.  Our job is to deploy a client’s money in the tax-free sector.  We do not own Illinois GO debt.   We avoid cities like San Bernardino, CA.  We saw Harrisburg coming years before it made the headlines.  They were dumb enough to build a politically motivated project, an expensive incinerator that made no economic sense.  Now they have to pay the price of a bad governmental decision.

In Muniland, the key is to do the homework and avoid the troubled patches.  If you are not satisfied with the credit, don’t go there.   We don’t.

Most recently, Whitney has taken heat for alleged making municipal bond investment recommendations to clients.  She claims she never did.

However, CNBC’s Gary Kaminsky disagrees.  Kaminsky is calling for CBS’s 60 Minutes to release the full transcript of Whitney’s December 2010 interview when she made her controversial calls.

This isn’t over.