Friday, July 19, 2013

Detroit: Polly-anna Pundits vs Muni-Armaggedonistas...."Kentucky Fried Movie" 1977

Is anyone really surprised that Detroit filed for bankruptcy?  

In the language of teenagers....P-LEASE!!!

Reuter's makes it quite simple...Have a look at their "TIMELINE- A brief history of Detroit's fiscal problems".

The anguish of the city and it's citizens doesn't begin w/yesterday's bankruptcy filing...the anguish has been regrettably alive and well for some time, albeit on fewer and fewer people as the population has declined considerably in recent years.

The bankruptcy will hopefully mark the beginning of a new chapter for Detroit that will bring in private capital (billions have already flowed in to buy property on the cheap), and to restructure the city's finances in a way that is long term sustainable. 

From the perspective of direct impact on our portfolio and overall risk assessments, we have no municipal securities in the portfolio.  The more relevant risk to consider is if Detroit is the first of more to come....if we're facing an avalanche of municipal defaults that could collectively create the next broad-based financial crisis, exacerbate unemployment, crush consumer demand, etc.  That is what to look for.....and while the pundits this morning are quick to point out that Detroit's debt load is multiples of all other municipalities, making the case that Detroit is the outlier and does not portend a muni domino collapse.....It's worth considering names like Harrisburg, PA, or  the State of California, or Jefferson County, Alabama....and there are others....who have recently either defaulted or issued IOUs until they could come up the cash to pay up on debts.

Bottom line....the reality is likely to be somewhere in between the poly-anna pundits of today and the muni-armaggedonistas like Meredith Whitney.  

We are likely to continue to see stresses and strains on state and local government finances for some time to come and assessment of each case should be weighed on its real economic impact not only on the municipality, but on companies directly impacted in that region and by broader economic implications.

But one thing's or walk away from last night's Detroit Defaults headline with the following reaction might just be a bit overdone:  (From "Kentucky Fried Movie" 1977)

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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