Credit Market Overview

July 2, 2009

http://www.marketstrategiesmgmt.com

 It took me a while to figure out why the market did not react negatively to the additional 79,000 job cuts the ADP Employment Change report revealed yesterday, missing the forecast by a full 20% and then it struck me; with one of the largest redistribution of wealth programs in progress, it doesn’t matter, nobody will need a job anymore. Healthcare will be free, unemployment benefits will continue to be extended and the top 2% of the residents in the new UUAS (Union of United American States) will pay for everything else through a system of taxation that will make being successful about as much fun as Bernie Madoff is going to have for the next 150 years.

California Governor, Arnold Schwarzenegger declared a fiscal state of emergency yesterday to try to break the budget impasse in that state resulting from years of monetary mismanagement. As CA is finding out; “when the outflow exceeds the inflow the upkeep becomes the downfall”. Even having a co-cigar smoking chief of staff (D., Susan Kennedy) hasn’t seemed to help.

California is not in distress alone as it was recently reported in the WSJ that unemployment rose in all but two states last month and reached its highest level in 33 years in eight of the 50. Michigan has at least 14.1% of its population out of work, a level not seen since the early 80’s. Oregon’s percentage of unemployed came in at 12.4% and Rhode Island and South Carolina posted rates of 12.1%.

The problems in the auto industry have Michigan in the spotlight for another reason as well; a dramatic increase in welfare applications is expected in January as one in seven of the 680,000 residents now receiving jobless benefits see those expire. “We’re expecting a huge influx of applications in the next few months”, Barbara Anders, Dir. Michigan Dept. of Human Services.

States are looking at a number of options to increase revenues with CA and PA in particular proposing what is known as a “severance tax” on oil and natural gas properties. Arkansas instituted a similar tax in January of this year and Alaska raised its severance tax last year. “Given the economy, any source of revenue is significant”, a spokesman for Pennsylvania Governor, Ed Rendell said recently.

CDS levels for CA have actually come down recently closing at 290bps last night after peaking at 331bps on June 23^rd. Prior to the credit crunch CA’s CDS’s ranged between 70-90bps and hit their all time high in December of last year at 456bps.

Michigan’s CDS follow a similar path with slightly different numbers as pre CC levels were around 50bps and the December 2008 high was 406bps. MI’s CDS level was 282 as of last night’s close.

Now that you’ve enjoyed the short week, enjoy the long weekend!

Jim Delaney