C.M.O. 6.25.2009
Credit Market Overview
June 25, 2009
The S&P closed above it’s 200DMA on June 10th; a bullish sign we were told. On June 22nd it closed back below its 200DMA a bearish sign unto itself but given more weight since the move above was then seen as failing. A “Golden Cross”, we have recently learned, occurs when the 50DMA moves above the 200DMA in any given prices stream. This occurred in the SPX by a paper thin margin of 0.3216 S&P points on the 23rd and continued in the same direction yesterday.
In thinking about the positive, double negative, positive movement just described an early routine by George Carlin came to mind as he describes a convoluted scenario whereby a Catholic misses Mass because they are on a ship that crosses the international date line while they are asleep and is then trying to determine whether they committed a mortal sin. “Would that there, then there, be a sin there, Fahtha?” was the punch line and it seem apropos in trying to determine whether this market is heading higher or lower.
So, are we in bull mode, bear mode or maybe just confused mode? CDS spreads at the index level turned lower again yesterday, usually an indication of higher stock prices, but more individual names in the CEC universe are showing widening spreads and declining stock prices than vice versa, albeit by only a 4.2% margin or 18 out of 428 names.
One thing that is not in dispute is the financial squeeze going on with the state of California and the states in general given the loss of tax revenue resulting from the current “Decession”.
Arnie’s budget was just rejected by voters in the Golden State and he is facing a $24.3BN deficit just six months after raising taxes to deal with a $40BN budget gap. His suggestions have run the gambit from cutbacks in education, Medicaid, prisons and pensions to the oft mentioned, much opined for Flat Tax.
More about the state of the State of California in a minute but should anyone need an example of what happens when you “tax the top 2%” they need only to look at the financial troubles on the Left Coast.
CDS spreads for CA peaked on 12/12/2008 at 456bps for 5 year protection, the low tick came on May 8th of this year at 213bps and they closed last night at 326bps down 6bps from the previous day which was the top tick for the move higher that started on 5/8.
California is not alone in this as the 50 kids that represent stars on the flag are not allowed to run deficits like their Uncle Sam. “There are so many issues that go way beyond the current downturn. This is an awful time for states fiscally, but they’re even more worried about 2011, 2012, 2013, 2014″ said Scott Pattison, executive director of the National Association of State Budget Officers recently. On a combined basis states face a gap of about $230BN for fiscal 2009-2011 which is more than double the $130BN they have access to through the federal stimulus package.
Additionally, growing their way out of the problem does not appear to be a quick fix as Donald J. Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government at the State University of New York (three times fast please) says that it will take at least five years and probably more from when the recession began in December 2007 for states to grow tax receipts to prerecession levels.
California appears to be the lightning rod in this situation and for many reasons the eyes of other Governors as well as those in D.C. and hopefully, the nations ordinary citizens will learn from the “Gubernator’s” experience.
Enjoy the week,
Jim Delaney
