The Debts of the Spenders: 50 States of Disunion?

*With credit to Jeff Bernstein of Urban Digs.

I have added a few of my own comments below in the last section.

So, just how bad are individual state finances in the USA? See for yourself here and here.

According to the National Conference of State Legislatures "Ironically, a contributing factor to future state budget gaps is the end of federal stimulus funds provided by the American Recovery and Reinvestment Act (ARRA). Those additional funds supported state budgets in FY 2009 and, to an even greater extent, in FY 2010. That money recedes in FY 2011 and, when it is gone, will leave big holes in state budgets—what many state officials are calling the “cliff effect.”"

Despite this bearish data ISM data is improving. And the numbers have been growing steadily for the past few months of 2009. In fact, we are already back to 2006 levels!

I am going to say a few heretical things here. Long time readers will note a departure from the traditional bearish tone on unemployment and personal consumption which are lagging indicators. But we've got bullish data coming in from inventory re-stocking. Of course a lot of this is federal money but it looks like Keynesian spending may work - short term at least. Let us also not forget the Census 2010 hiring spree ongoing. It's going to give a big bump to NFP in Q2.

The Debts of the Lenders: 2 Year Note Recovers in Mid-Week

I went in too early and got hit - still underwater - but this was a nice rally in bonds (yield is inverse to price).

Bloomberg covers the story here. The short trade got too crowded.

http://www.bloomberg.com/apps/news?pid=20601009&sid=aR.TaoURgHpI

A JPMorganChase & Co. survey showed that investors who are short the Treasury market was at its highest level since March 2007. The pending home sales data show housing may be at risk of weakening when homebuyer incentives, which were extended in November, expire later this year. Unemployment close to a 26-year high and weaker consumer finances remain hurdles to a sustained acceleration in home sales that would help fuel the economy.

The Debts of the Lenders: Russia Warns Against Capital Inflows

First Brazil. Now Russia. Only 2 more BRICs to go (China and
India).

"We need to correct the rules so that it is less interesting for
speculative capital to come running into Russia," Mr Putin told journalists while on a trip to Vladivostok, in the far east of Russia.

He said: "It flows in quite well, works here, but creates problems, because if crisis hits, it leaves quickly."

http://www.ft.com/cms/s/0/1cb8df02-f4e2-11de-9cba-00144feab49a.html

The Debts of the Spenders: Bond Vigilantes Target 2 Year Treasuries

In recent days, the US bond vigilantes have been speculating on the Fed raising interest rates in 2010. Speculative volume as well as poor auctions have resulted in yield spiking dramatically higher.

But bond bears beware, they are pushing against resistance on the weekly chart.

The Debts of the World: Bond Vigilantes Place Bets on US Treasuries for 2010

The US bond vigilantes are adding to their bets by placing shorts against treasuries:

http://www.bloomberg.com.au/apps/quote?ticker=USGG2YR%3AIND

http://www.bloomberg.com/apps/quote?ticker=USGG30YR%3AIND

The most interesting story for the beginning of 2010 is the dollar and its correlation w/the safe haven trade of US treasuries. Everyone knows how the dollar has traded inversely to commodities. But the real story is to be found in the dollar-bond relationship. Normally, dollars and bonds rise in tandem as a flight to safety trade. But as the economic data improves (we can argue about all day about the validity of the official data but ultimately the official data is what moves the market and successful traders long ago figured not to fight the tape) so has the dollar's strength!

This means we can have a higher dollar and weaker bonds at the same time. But don't weaker bonds mean automatically higher stocks? Not necessarily. After the global equity indices explosive rally this year, there isn't much room left to grow.

The following comments goes towards my point earlier this month about EUR/USD.

I predict that fund flows from major institutions will be sloshing around the global financial system in a quest to figure out which country is weakest and thereby short that nation's bonds. The dollar, by virtue of its reserve currency status, will benefit from this comparative weakness. This means we can see market corrections among the most popular carry trades like AUD/USD and BRL/USD w/spillover effects in weaker commodity prices as well as gold.

But in the short term, as the 2-10 year spread approaches record steepness, it may be time to become a bull for the longer end of the curve. Especially after stories like this hit the media.

Further out, I have been considering placing bear put spread trades against the longer end of the curve by buying closer otm strikes on 30 year puts (LEAPs) while selling the same month strike further otm on the same expiration. 2011 and 2012 look like interesting bets w/2012 obviously safer because theta works in the call buyer's favor.

The Debts of the Spenders: Latvian Court Says Its Ok for the State to Go Bankrupt

Little Latvia wants the same benefits that larger countries in the West (the USA and UK) have long managed to enjoy - namely the ability to ring up huge debts without being able to pay for any of it. Unfortunately, since the Latvians are not members of the OECD and do not enjoy the benefits of being "too big to fail" (e.g. capital markets large enough to lure in enough suck-I mean investors), then their ministers are faced with the small problem of finding enough money to somehow repay their debts.

However, the Latvians are also members of the EU and have tied their economic fortunes to the bureaucratic stodginess of Brussels thousands of miles to the west. The resulting Eurozone bailout (all but certain) will result in only more joy for USD/EUR bulls.


DJ Latvian Court Overturns Pension Cuts; Threat To IMF Bailout

RIGA, Latvia (AFP)--Latvia's constitutional court Monday struck down pension cuts that form a key plank of an austerity drive, casting doubt on a crucial International Monetary Fund and European Union-led bailout for the recession-hit Baltic state.

"The decision to cut pensions violated the individual's right to social security and the principle of the rule of law," the court said in its judgment, which cannot be appealed.

It said while the government could tighten its belt at a time of crisis, agreements signed with
international lenders "in and of themselves cannot serve as an argument about the limiting of basic rights" and lawmakers who approved the rushed-through cuts had "not evaluated carefully the alternatives."

The court said the cuts--in force since July, and clawing back between 10% 70% of a pension depending on an individual's status--were illegal and parliament must by March 2010 have measures in place to rescind them.

The cut money itself must be paid back no later than 2015, the court ruled in the case brought by 9,000 individual pensioners. The government won a similar case in November over its decision to stop linking pensions to inflation.

Welfare Minister Uldis Augulis said Monday the government would have to find almost 184 million lati (EUR258 million) to refund unpaid pensions and resume full payments at pre-cuts levels.

It wasn't immediately clear how Latvia's embattled center-right government would meet the challenge, nor what the impact would be on the international rescue package that has been helping keep the country afloat.

Finance Minister Einars Repse said the government may have to ask parliament to amend the budget. He said the government would have to find the money within spending limits agreed with lenders.

The Debts of the Spenders: US Commercial Real Estate in 2010

And the search for yield continues. . .

http://nationalmortgageprofessional.com/news15182/2010-rei-outlook-real-estate-investors-planning-buying-commercial-properties-its-2005