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Posts Tagged ‘bankruptcy’

Please excuse any typos.  My assistant is out today and she normally proofreads my writing. 

There are so many facets of a debt crisis.  Unfortunately, there are many categories of debt that make up a debt crisis.  We have looked at the potential debt crisis in foreign debt.  Next week I am going to write an update on what is happening with mortgage debt.  This week I want to talk about municipalities.  Cities and states appear to be in trouble when it comes to debt. 

Last week, Jamie Dimon of JP Morgan made the statement that California was a worse problem than the country of Greece and is closer to being on the brink.  Of course, the big difference between a debt problem with Greece and a debt problem with California is that we can print money and save California (as if that is a good long-term solution).

Cities and states are feeling the financial squeeze.  The Rockefeller Institute of Government recently confirmed that state revenues fell through the first 3 quarters of 2009, the largest drop in 46 years.  The fourth quarter report showed even deeper declines in tax revenue, extending the decline to 5 straight quarters. 

California faces an estimated 20 billion dollar plus budget deficit.  California represents the 8th largest economy in the world.  By the way, Greece only represents the 34th largest economy in the world.

It is estimated that 43 of the 50 states are in financial trouble right now.  Twenty-one states have already put a number on their 2010 budget shortfall which totals over 60 billion dollars thus far. 

Some of the more noted states that are in trouble:

Budget Shortfalls

New York        $5.5 billion

Florida             $5.1 billion

New Jersey      $2.5 billion

Arizona            $2 billion

Nevada            $1.2 billion

The money has to come from somewhere.  States cannot claim bankruptcy.   As with any type of debt scenario, if the money cannot be paid back, a loss must be created.   Who is going to take that loss?  This is where it might become tricky for municipal bonds.  Bondholders could be at risk.  Through a municipal bond, an investor has essentially become a creditor by lending the city or state money and in return receiving a bond for it.

Would you feel comfortable lending money to a municipality?  By investing in a municipal bond, you are lending money.  With the problems that we are seeing, I don’t know that municipal bonds are such a great bet.

Incidentally, what we are seeing with states and cities is classic deflation.  These budget deficits and debt potentially create enormous losses due to the destruction of debt.  Once again, it is tough to see where inflation is going to come from with all of these debts waiting in the wings.

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Every Friday, all across the country, bankers hold their breath.  This is the day that the FDIC chooses to show up and take over banks that are on the verge of failure.  This past Friday, FDIC employees were especially busy when they showed up at 9 different banks.   The banks had combined assets of 19.4 billion dollars. 

On Sunday one of the largest bankruptcies in corporate history occurred.  CIT who lends money to hundreds of thousands small to medium business filed for bankruptcy protection.  This could have some pretty large ripple effects.

The problem is the lack of capital to those lenders and banks who focus on the small business owner.  The Obama and Bush Administrations failed miserably in taking care of  the heartbeat of America, the small business owner.   Take that capital they are dealing out like candy and give it to those banks that service the small business owner.  Further, if you want to solve the unemployment problem in this country, help the small and medium sized businesses.  Of course, that would be the promotion of capitalism which is something none of the politicians seem to understand.

The Obama Administration stated that they might infuse money to small banks if they will agree to lend to small businesses.  The Obama Administration needs to get a backbone.  If they are going to give money to the big banks,  put stipulations on the money and stop requesting what they want the banks to do in return of receiving the bail-out money.  They are dealing all of this money out to the big banks and at the same time wanting these big banks to stop abusing credit card customers and start lending it.   Here is an idea – STOP GIVING MONEY WITHOUT STIPULATIONS!!  Go ahead and give money to the small banks without stipulations and they still will not lend it out.  It is all about survival.

You got to love bank nationalization and the march to socialism.

Levels to Watch

Let’s take a look at the price levels on the S&P 500 because some damage was done last week.   We have broken through some pretty significant price levels.  However, the BIG ones are in front of us.  The range to watch on the S&P 500 is 989 to 918.  It will be interesting to see what happens around those levels.  Yes, this is a wide range.  However, it does give you a good range in which to monitor risk if you are heavily invested in stocks.   Remember, the question is always,  “Is the rise in the stock market from March a new bull market or just a bear market rally?”  The answer to that question is crucial to the future of your invested money.

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Have you heard of CIT Group?  CIT is a company that lends money to about 1 million small and medium size businesses and has about 40 billion dollars in debt. They are a pretty big player in the lending business, a company mired in debt, a company on the verge of collapse. 

In the event they fail, there could be some pretty significant repercussions throughout the financial system.  Of course, they are not on the same scale as the Lehman Brothers. However, with a financial system on shaky ground, who knows what would result in the collapse of a large lender.  So, a company in trouble should be no big deal.  After all, President Obama is in the bail-out business and hasn’t had a good bail-out in a while now. 

No, not this time.  Poor little CIT doesn’t meet the too big to fail test.  President Obama stated that it had set “high standards” for granting aid to companies and leaving private investors as the one alternative to avoid collapse.  Wait a minute, excuse me while I settle down from that good laugh I had while writing. 

Since when does this administration have standards?  They still think that GM is a good business model.  So will CIT go into bankruptcy if Big Brother doesn’t lend them a hand?  Of course not, because Big Brother is going to lend them a hand.  The secret is that they are going to do it behind closed doors.  Yes, this is what is happening to our taxpayer dollars.  Roughly 7 of their big bondholders are in talks to cough up 3 billion or so to place another band-aid on the festering wound. 

Where do you think that these bondholders get their money?  With the banking system pretty much nationalized, the money easily funnels from the Government through these banks to these troubled companies.  Obama can keep his “high standards” and no problems to deal with in the financial sector.  They have been running the same system with AIG since that major entity was nationalized.

Price Levels

Let’s take a look at price levels. Last week I warned that things were looking bleak for the market.  As soon as I wrote the warning and hit send, the market turned around and put in a big week.  So does that mean we are out of the woods in the near-term?  Well, last week was the one week out of the month that we have options expiration.  Options expiration can be a real dramatic week either positively or negatively.  It is misleading to see the results of options expiration as what is really occurring with the market.

The next significant price level we are looking at is 956.  The S&P 500 has entered into a price level “zone” (over 940) and now we will really see what this market is made of.  Any strength carrying the S&P 500 over 956 could indicate that we are heading towards 1000.

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