Market analysts make headlines when they make bold predictions. When those predictions are right, they can make an analyst's career. But even after you get one big call right, it can be incredibly hard to nail your next prediction.
That's the dilemma that analyst Meredith Whitney finds herself in right now. After having made a prescient call that the subprime crisis would spread to Wall Street's biggest banks, Whitney went on to predict a similar catastrophic event for the municipal bond market. Yet with munis having a calmer than average year so far in 2011, many now wonder if Whitney's call is the financial equivalent of crying wolf.
Whitney built her reputation by raising concerns about the health of big banks like Bank of America
Late last year, Whitney did an interview for 60 Minutes in which she painted a dire picture for the municipal bond market. She predicted that over the course of 2011, 50 to 100 significant defaults totaling hundreds of billions of dollars would occur.
The reception those two calls got were quite different. Few believed Whitney's apocalyptic views on big banks, and just as few investors were willing to put money on the collapse in housing prices that would eventually prove to be a huge thorn in those banks' balance sheets.
But it's easy to understand why the state and local governments that issue most municipal bonds are in financial trouble. Falling tax revenues combined with unsustainable spending adds up to a ticking time bomb. Indeed, even Warren Buffett suggested that the next crisis would come from municipalities. With many muni bonds insured by private insurers, Buffett argued that local government leaders would have little incentive to sacrifice the financial well-being of their constituents to prevent losses at far-away bond insurance companies.
So where's the crash?
Thus far, though, the muni market hasn't met Whitney's timeframe. Bloomberg reported last week that defaults in 2011 were down a whopping 60% from this time last year, with 24 defaults involving securities worth just less than $750 million as of the end of June.
After withdrawing tens of billions of dollars from municipals last year and causing a huge drop in bond prices, the market has stabilized and even reversed course. The muni-tracking ETF iShares National AMT-Free Muni
Where are the winners?
So if the muni default warning was a false alarm, who benefits most from it? The companies that insured muni bonds would get to keep premiums from municipal bond issuers while paying less money in loss claims. It may be too late for such a trend to do much good for bankrupt Ambac Financial, but other insurers, including Assured Guaranty
Of course, it's way too early to say that municipal bonds are out of the woods just yet. Whitney said as much in an interview with Bloomberg this month, saying that even if adjusting her timeframe proves necessary, nothing about her underlying arguments has changed.
What to do
With many worrying about higher taxes in the near future, the tax advantages of municipal bonds could become more valuable in the years to come. But tax considerations shouldn't take priority over protecting your capital. Although munis may not be on the brink of collapse just yet, they still carry risk -- and you need to be sure you understand that risk before you invest.
Unlike muni bond insurers, some stocks have tailwinds helping shareholders. The Fool has found five stocks for its portfolio that we think you should consider, too. Click on the link to have a free copy of our special report with those five names sent to you pronto.
Fool contributor Dan Caplinger remembers vividly every crash during his investing career. You can follow him on Twitter here. He owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't crash on you.