Serious Disturbances in Munincipal Debt Funds

Denninger notices some major issues -

I'd pay attention to these.....

That's IQI, a levered municipal bond fund. It yields 6.5% at present - totally unsustainable in today's ZIRP environment. At that discount (from recent price destruction) you're either getting the buy of the century or the portfolio is about to detonate in your face. Pick one.

This would be California municipal debt run by PIMCO. Yielding 7.8% (!!!) Again, you're either getting the buy of the century here, or you're about to get utterly destroyed.

Then there's New York. At today's price, this yields 5.8%. Again, either you're getting the buy of the century on this fund or you're fixing to get utterly trashed in the coming months.

Note that the last time we saw this sort of distortion the fund price declines were correct, and they presaged a detonation in the stock market. Yes, they were early - substantially so in the case of some of these. But they were correct - the credit market usually is in leading the stock market.

The Real Effect
I learned a fairly important lesson this year, namely, never underestimate a criminal's ability to lie, hide and obfuscate. In addition, this ability becomes compounded as the group gets larger and larger.

For instance, back in August I ran a stunningly accurate piece on the Dow's behavior for the next several months. I further followed up, enumerating almost exactly how the market's would behave -

Watch for the Dow to crash through support levels at 10,636 then 10,366 before it meets some resistance at 10,098 with a slight bounce around mid-September. Then all hell breaks loose as it violently crashes through any support that is offered realizing 300-1000 point drops as it rejoins the downward trend in October before finally meeting firm resistance at 9686. When that resistance finally gives way, say around November, look for increased panic as assets are sold off left and right to meet the dread margin calls as foolish investors get scalped.

At least it was accurate until very last prediction which exploded in my face, violently. If I had been banking on the breakthrough in October, I would have been financially destroyed as the exact opposite happened. Oh sure, all the stops along the way were realized, but what I critically failed to anticipate was the show that the Fed wanted to put on for the election. After the stops, the Fed dumped cash into the markets, propping it up and just about destroying the dollar in the process. If one views the Dow in inflation adjusted terms, there was a correction that month, not a gain.

All of that being said, it appears that the piper still needs to be paid and the back half of my prediction is still intact. Things are already shaking, question is, will it fall apart?