California Debt Unnerves Investors as Taxes Plunge $2 Billion

A $2.1 billion drop in California tax collection is opening a hole in Governor Arnold Schwarzenegger’s budget only three months after lawmakers in the most-populous state slashed spending for the second time in a year.

General fund revenue in the state accounting for 13 percent of the U.S. gross domestic product dropped to $19.4 billion during the fiscal year’s first three months, according to figures Democratic Controller John Chiang released Oct. 9. The total for the period ended Sept. 30 trailed by $1.1 billion, or 5.3 percent, forecasts in the annual budget the Republican governor signed July 28.

This reinforces that state’s budget problems aren’t over, and as the year goes on, we’re likely to see growing budget deficit projections,” said David Blair, an analyst with Pacific Investment Management Co. in Newport Beach, California, which invests $20 billion in municipal bonds. “This clearly is going to continue to put pressure on the Legislature and the governor.

The latest report underscores how states including California, the largest municipal bond issuer in the U.S., are still dealing with fallout from the recession even as the economy begins its recovery. The state last week was forced to raise yields to attract buyers to a $4.1 billion debt sale, after cutting the issue from $4.5 billion.

California’s decision helped push up borrowing costs in the municipal market by the most in almost four months even as states prepare new issues of taxable Build America Bonds, whose sales already total $40.2 billion. The Treasury pays 35 percent of interest costs for the debt, part of the federal economic stimulus plan approved in February.

 Losing Jobs

State governments are particularly hard hit by a continuing loss of jobs, which dampens the income- and sales-tax collections upon which they depend. From April through June, states and localities recorded a 12 percent tax revenue decline from a year earlier, the third consecutive quarterly drop, according to the U.S. Census. The national unemployment rate in September was 9.8 percent, the highest since 1983, according to the U.S. Labor Department.

In New York, Governor David Paterson on Oct. 6 ordered state agencies to cut spending amid predictions that the deficit for the year ending March 31 may grow to $3 billion, $900 million more than budget Officials estimated in July.

Pennsylvania, acting 101 days into the fiscal year, enacted a $27.8 billion budget on Oct. 9 that raises cigarette taxes and expands gambling to boost revenue. Ohio confronts an $844 billion gap, while Connecticut will borrow $2.25 billion over the next two years, beginning with a $1 billion debt sale in November, to balance its budget.

 ‘Somewhat Unique’

California’s problems, while somewhat unique and self- inflicted, are really America’s problems,” said Bill Gross, ‘s co-chief investment officer of the world’s biggest bond fund wrote on Oct. 1. State and federal lawmakers, unable to comprehend the extent of consumer borrowing, “reflect a lack of vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge.

The state has been among the hardest hit and its Legislature, requiring a two-thirds vote to raise taxes or pass a budget, has struggled to respond swiftly as the state’s fiscal strains worsened this year. Since February, Schwarzenegger and lawmakers have slashed $32 billion from spending, cutting into funding for schools, universities and welfare programs. They also raised taxes by $12.5 billion to balance the $85 billion budget.

Court Decision

Chiang, the controller, said the state’s latest figures show that Schwarzenegger and the Legislature must prepare for “more difficult decisions ahead.” California was as also handed a defeat on Oct. 2 by the state’s Supreme Court, which let stand a ruling that the governor and lawmakers illegally used $3.6 billion of money meant for local transportation agencies to balance the budget since 2007.

Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” Chiang said in a statement Oct. 9.While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag state revenues down.

California isn’t at immediate risk for running out of cash as it did in July, when it resorted to issuing IOUs to pay some vendors and tax refunds as lawmakers fought over how to shore up finances. Last month, it borrowed $8.8 billion by selling notes, an advance on the tax it will collect later in the budget year.

Plugging Gaps

Schwarzenegger’s administration said it’s too soon to tell whether the slide in tax receipts through September foretells a worsening trend. Should revenue continue slipping, California lawmakers may find it difficult to make up for the gaps, given how deeply they have already cut and resistance among Republicans to further tax increases.

Schwarzenegger, 62, who can’t seek re-election because of term limits, doesn’t have to present his budget for the next 12- month fiscal period until January, and he has given no indication that he is planning to call an emergency session beforehand, as he did last year.

Clearly, the numbers are cause for concern but the issue now for us is to determine if this is a one-time event or whether it has one more long-term implications,” said H.D. Palmer, a spokesman for chwarzenegger’s finance department.

The tax collection figures were released after the conclusion of a $4.1 billion bond sale, which was trimmed by about $400 million after investors demanded higher yields than the state was willing to pay on some of the securities. The sale came after a rally in demand for municipal bonds pushed state- and local-government borrowing costs to a 42-year low.

Watching for Deterioration

David Blair, the Pimco analyst, said the pullback was caused by the low yields California offered amid lingering investor concern that the state’s fiscal condition may deteriorate further.

They just got a little aggressive in where they wanted to price it, Blair said. Most people still recognize that there’s budget deficits the state is trying to deal with this year and going forward.

The difference between a 10-year California bond and a top- rated municipal security reached as much as 1.71 percentage points on July 1, when the California debt yielded 5.21 percent, according to Bloomberg data. The difference slipped to 1.06 percent on Sept. 11 before ending at 1.21 percent on Oct. 9.

Future Debt Sales
California plans to sell as much as $15 billion more in bonds this year and its deficits, while not projected to reach the $60 billion it dealt with in the two years that end in July, are persistent. The state will face a $7.4 billion gap in the fiscal year beginning on June 30 and about $15 billion in each of the following two fiscal periods, California Treasurer Bill Lockyer said in his annual report on the state’s debt, released ahead of the bond sale.

Tom Dresslar, a spokesman for the treasurer, said his office has alerted investors that the fiscal troubles are far from over and the latest tax data did little to alter the outlook.

The state has been very clear that our budget problems aren’t behind us,” Dresslar said. “This shouldn’t be a big surprise to anybody.”

(Source: Bloomberg News)

Ten Stock Market Myths That Bedevil Investors

In the dinosaur saga “Jurassic Park,” author Michael Crichton wrote about a man who believed
a tyrannosaurus couldn’t see him if he held still. The carnivore ate him.Later in the book,
someone asks what killed the man. Another character answers, “He was misinformed.”Misinformation
can be costly. Here are 10 notions that lead investors astray.

Myth No. 1: The best companies make the best stocks.
Stocks advance when a company exceeds prevailing expectations.The bestcompanies usually generate
lofty hopes among investors, which are hard to exceed.

I began writing about stocks in 1972, when the “Nifty Fifty” stocks were all the rage. Companies such as
International Business Machines Corp., McDonald’s Corp. and Xerox Corp. were so universally beloved that investors happily
paid 60 times earnings to own them.

These were indeed good companies: Their earnings continued to climb strongly for a decade or more. Yet they were bad
stocks, because people overpaid for their anticipated success.Today’s equivalent in my opinion is Apple Inc. The
Cupertino, California, maker of iMacs, iPhones and iPods is highly profitable, debt-free, and held in universal awe. That’s
why shares sell for 32 times earnings, more than six times book value and almost five times revenue.
     Apple is a great company. But I predict that over the next two years it will be only an average stock.


                          Trading Costs

Myth No. 2: In today’s volatile markets, one must be an active trader.

Before you are tempted to believe this, consider commissions and taxes. The commissions are not too bad these days, now that discount brokerage is routine.
     Taxes are nasty, though. Long-term capital gains are taxed at 15 percent, short-term gains at up to 33 percent. You have to be pretty arrogant to disregard that cost.



Myth No. 3: Analysts are a good guide to picking stocks.

Analysts are intelligent, know a company’s managers better than you ever will, work long hours, and have a staff of young,hard-charging assistants.
None of that necessarily makes them standouts at picking stocks. In my ongoing study, now at 10 years and counting, analysts’ most-favored stocks underperform the Standard & Poor’s
500 Index. I think analysts tend to fall for Myth No. 1.

                        Don’t Fear October

Myth No. 4: Beware of October, the killer month for stocks.

The worst month for the markets is September, not October. According to Ned Davis Research, the average monthly price change for the Dow Jones Industrial Average in September since
1900 has been a loss of 1.1 percent.

February and May also show small losses, on average. October, with an average gain of 0.1 percent, is the fourth worst month. Admittedly, October has seen more than its share of
stock market crashes, but there have also been plenty of robust Octobers.The best months, incidentally, are December (average gain 1.5 percent), July (1.3 percent) and April (1.2 percent).

                    Presidential Preferences

Myth No. 5: You can count on the U.S. presidential cycle to predict the market.


Sorry, Charlie, but the stock market has precious few things one can count on. In general, the first year of a president’s term is the weakest for stocks, and the third year
is strongest. The second and fourth years tend to be average.

The key phrase is “tend to.” According to presidential cycle lore, 2008 should have been a normal year, yet the S&P 500 fell 37 percent (including dividends). This year should be sub-
par, yet the S&P 500 has risen 13.5 percent.


Myth No. 6: Price-to-earnings ratios are the perfect measure of a stock’s value.
   
I probably love P/E ratios as much as anyone. Yet they are neither a perfect measure nor a magic shortcut to stock picking.For example, Ford Motor Co. earned $1.20 a share in 2005.
At the end of that year the stock was selling for about $8 a share, so the P/E ratio was attractive at about six. A winsome P/E, however, didn’t stop Ford from losing money
in each of the next three years. And it didn’t stop the stock from falling to $2.29 at the end of 2008.
     No single measure tells you everything you need to know.

                        Malkiel’s Advice

Myth No. 7: Stocks should be bought when they have momentum.

Many respected market participants hold this belief. Perhaps foremost is William O’Neil, publisher of Investors Business Daily.I tend to side with Burton Malkiel, a Princeton economics
professor who argues that the benefits of using relative strength are canceled out by the increased trading costs involved in using this strategy. Momentum investing works some
of the time, but in my judgment it doesn’t work consistently. In addition, it is a tax-inefficient strategy because it often generates short-term gains.

Myth No. 8: War is good for the stock market.

Because spending on World War II helped pull the U.S. out of the Great Depression, many people think rising military spending correlates with a rising market. It’s often untrue. The
market made little headway in the 1970s, when the Vietnam War raged. It boomed during the 1980s, a time of relative peace.

                          Party Favors

Myth No. 9: The market prefers Republicans.

According to Ned Davis Research, the annual gain in the Dow average was 7.2 percent under Democratic presidents from March 4, 1901, through July 8, 2008.
It was only 3.6 percent under Republicans during the same period.
The best stock-market performance on record so far was logged under Bill Clinton, a Democrat.

Myth No. 10: Market timing can greatly enhance your returns.

It could, if one could do it accurately. However, successful market timers are rarer than scrawny sumo wrestlers. Most people who try to time the market end up being on the
sidelines during the unexpected sudden upturns that account for a significant part of the market’s long-term gains -- this spring’s rally, for example.

U.S. Economy: Home Prices Increase by Most Since 2005

Home values in 20 U.S. cities climbed in July by the most in almost four years, helping stem the record plunge in household wealth that’s depressed spending.

The S&P/Case-Shiller home-price index rose 1.2 percent in July from the prior month, the biggest gain since October 2005, the group said today in New York. Another report showed consumer confidence unexpectedly fell in September, while holding above the record low reached earlier this year.

Home values are rebounding as low borrowing costs and government tax credits lift home sales. Combined with rising stock prices, the gains will begin to restore the $13 trillion plunge in net worth caused by the worst financial crisis since the Great Depression, a process that economists such as Brian Bethune say will take years to complete.

Home prices are “a major, major turning point for the economy,” said Bethune, chief financial economist at HIS Global Insight in Lexington, Massachusetts. “We are eating away at the problem of household balance sheets.”

The New York-based Conference Board’s consumer confidence index fell to 53.1 in September from 54.5 the prior month, the private research group said today, amid growing concern over the lack of jobs. The gauge sank to 25.3 in February, the lowest level in data going back to 1967.

The Standard & Poor’s 500 Index dropped after the confidence report, erasing earlier gains, and closed down 0.2 percent at 1,060.61 in New York. The yield on the benchmark 10- year Treasury note was little changed at 5:15 p.m. in New York from 3.28 percent late yesterday.

                         Decline Slows

From a year earlier, the S&P/Case Shiller index was down 13.3 percent, less than economists anticipated and the smallest decrease in 17 months.

The measure was forecast to fall 14.2 percent, according to the median projection of 36 economists surveyed by Bloomberg News. Estimates ranged from declines of 12.5 percent to 15 percent. It was down 15.4 percent in the 12 months ended in June.

Compared with the prior month, 17 of the 20 cities covered showed an increase, led by a 3.1 percent jump in Minneapolis and a 2.9 percent increase in San Francisco. Las Vegas suffered the biggest one-month decrease at 1.9 percent.

                         Sales Rising

Combined sales of new and existing homes have risen for four out of the last five months, signaling the worst of the housing crisis is over.

The Obama administration’s $8,000 tax credit for first- time buyers, which is due to expire at the end of November, combined with lower prices as foreclosures soared, have helped lift sales this year. The National Association of Realtors and the National Association of Home Builders have lobbied to extend the credit on concern demand will wane after it lapses.

Karl Case, co-creator of the S&P/Case-Shiller index, said the U.S. residential property market is improving enough to end the tax credit for first-time buyers.

“We’ve got to phase back incentives and this may be a good time to do that,” Case said in an interview on Bloomberg Radio. “I believe in some cities you’ll see the beginning of recovery.”

                        Pending Profit

Lennar Corp., the third-largest U.S. homebuilder, is among companies that see demand improving, even as losses mount. The Miami-based company said last week it expects to turn a profit in fiscal 2010.

“In the third quarter we started to see some real signs that the housing market is in fact starting to stabilize,” Stuart Miller, Lennar’s chief executive officer, said on a Sept. 21 conference call. “The sense that now is the time to buy is starting to gain momentum.”

The Conference Board’s confidence gauge was projected to increase to 57, according to the median estimate of economists surveyed by Bloomberg News.

The decline was caused by growing pessimism over jobs. The share of consumers who said jobs are plentiful fell to 3.4 percent this month from 4.3 percent. The proportion of people who said jobs are hard to get increased to 47 percent from 44.3 percent.

“It’s a little hard for households to look at their paychecks, or the lack thereof, and feel more confident,” Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in a Bloomberg Television interview.

Even so, “we should continue to see consumer confidence turn around,” because the recession is over and hiring eventually will rebound, she said.

                       Fewer Job Losses

The pace of job losses is easing as the economy shows signs of accelerating. Payrolls fell by 216,000 in August, the smallest decline in a year, according to the Labor Department.

Employers probably cut another 180,000 workers this month, economists project a Labor Department report later this week will show. 

Economists say the Conference Board’s index tends to be more influenced by attitudes about the labor market. Confidence may improve in future months as balance sheets rebound. Net worth for households and non-profit groups climbed by $2 trillion in the second quarter, marking the first gain since the third quarter of 2007, according to figures from the Federal Reserve.

Fed policy makers last week said they would keep the benchmark lending rate near zero “for an extended period,” and noted that sluggish income growth and tight credit are curbing household spending and slowing the pace of the economic recovery.

(Source: Bloomberg)