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just before negative news was disclosed is highly suspicious from an “insider trading” standpoint. Given that Berkshire Hathaway owns Moody’s Investor Services, the most powerful credit rating agency, Berkshire Hathaway may have escaped a potential market collapse by selling on “material non-public information” from Moody’s
In the last week, we
published a series of devastating reports about the crumbling financial
stability of California and the safety of the municipal bond market. Wednesday
we broke “California Sales Tax Revenue Nose Dives by 33.5%”, on Friday we broke
“Moody's Warns of Mass California Municipal Bankruptcies” and Sunday we broke
“Federal Reserve Warns Municipal Bonds Very Risky”. Each of these stories
highlighted previously unknown risks in the muni market.
We scour financial
regulatory filings and media stories to get early indications regarding the
buying and selling of securities by major institutional investors. On June 13,
2010, the Wall Street Journal did run a story titled: “Investors Looking Past
Red Flags in Muni Market”. The Journal highlighted that most investors were
ignoring warning signs of deteriorating fundamentals in the $2.8 trillion
municipal-bond market, even though “famed investor Warren Buffett had recently
warned of a "terrible problem" ahead for municipal bonds.” When Mr.
Buffett also testified to a Joint Congressional “Financial Crisis Inquiry
Commission, which collected information on what caused the nation's 2008
financial crisis, he stated his concerns about how municipalities will be able
to pay for retirement and health benefits for public workers and that the
federal government may ultimately be compelled to bail out states.
But since 2010,
investing in municipal bonds has produced very high returns. The Fidelity Tax
Free Bond Fund (FTABX), a mutual fund widely held by conservative older
Americans, returned 11.98% over the last twelve months. But according to the
Federal Reserve report, much of this performance may be due to Moody’s and
other credit
rating agencies
“luring” investors into the municipal bond market by understating drastically
understating the risks of default by 97%.
At approximately 7:
PM EST on Friday evening, we were stunned when Moody’s stated that 10% of
California cities have already “declared fiscal crises”. Under California Law,
a requirement before a city is allowed to file for Chapter 9 municipal
bankruptcy is to have declared a fiscal crisis. Moody’s stated that the
declarations of emergency were "a reflection of the broader fiscal
stress in the state" that may cause Moody’s to make “across-the-board”
ratings downgrades of “California cities over the next month or two.”
Wall Street Journal
assumed that Berkshire Hathaway’s sale, accomplished by liquidating municipal
bond derivatives, "indicates that one of the world's savviest investors
has doubts about the state of municipal finances.” According to Jeff
Matthews, a hedge-fund manager who personally owns Berkshire shares, “Mr.
Buffett probably "doesn't want this exposure anymore and is getting out
while he can."
Whatever the reason
for making such a timely sale before bad news became public, the action by
Warren Buffett and Berkshire Hathaway is sure to now frighten thousands of
conservative elderly investors who have put their life savings in municipal
bonds that will now be considered very risky.
Chriss Street and Paul Preston Co-Host “The American
Exceptionalism Radio Talk Show” Streaming Live Monday Through Friday at 7-10 PM
Click Here to Listen: http://www.mysytv.net/kmyclive.html
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