How Bad Is The Muni Market? (MUB)

The municipal bond market is going to play out in 2011, probably as the biggest financial storyline of the year, as we continue to see more defaults than anyone thinks is possible. If we take nothing else from the Great Recession, we should take the fact that things we thought weren't feasibly or plausible, can happen. No one expected Lehman Bros. to actually fail, yet it happened. No one expected the government to not pass TARP the first time, yet it happened. Now people are saying that we won't see upto 100 municipals default. Personally, I don't think we see 100 municipalities default, but we sure as heck could come close. The majority of them will probably happen in the three financially weakest states, California, Illinois, and New Jersey. Jamie Dimon, CEO of J.P. Morgan JPM has already said that we're going to see many more municipalities default, it's just a matter of time. Meredith Whitney, of Meredith Whitney Advisory Group went on "60 Minutes" and put the fear of God into the retail investor, saying the muni market is near death. She's also received criticism for her calls, but she stands by her research. California is the world's 8th largest economy, and it really still hasn't recovered from the housing bust, and it may not recover for another decade, if home sales continue to be weak, and unemployment remains above the 9% range. Traders and investors can short the iShares S&P Municipal Bond Fund ETF MUB, but if you are looking for state specific issues, consider shorting any of the three states mentioned above. PIMCO California Municipal Income Fund PCQ, Blackrock New Jersey Municipal BLJ or any of the other New Jersey or California municipal ETF's will work just fine. There are no Illinois specific municipal bond ETF's. Whatever happens this year in terms of defaults, it will be bigger than most expect, and you need to be ready for the worst case scenarios, and hope for the best. These plays give you a small hedge to your other holdings, as no doubt we will see other asset classes fall on these worries. Disclosure: no position in names mentioned.