The Next Shoe to Drop May be Munis according to Buffet.

A small piece in the right hand corner of the WSJ caught my attention just now so had to share. The title of the piece “Muni Bonds Keep Buffett Up at Night”. A few pages before I had read about the unprecedented fall in sales tax revenues and it’s impact on local budgets. “In the next two fiscal years, 47 states are likelyto face budget shortfalls of a combined $350 bb, according to the Center on Budget and Policy Priorites.” It goes on to say that “Moody’s assigned a negative outlook to the creditworthiness of every local government in the US.” Read that line again. I like how this writer ends the piece – “if the Oracle of Omaha is concerned, investors should listen.” Now every muni bond is different so I am not saying run out and sell your muni funds, but at the same time, you better be sure you know what risk you do have. For most munis you are likely owning a scant 1 to 2% on the short end, so you have to ask yourself if that incremental yield is worth the incremental risk? I am beginning to think that a portfolio with the safest of the safe, barbelled with true high yield paper, might prove a lot better then once high quality paper that now has substantial risk of downgrade or worse. Remember last year when money funds broke the buck and the government had to rush in and guarantee them? One has to think all is possible in this market.

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