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The Big Recovery in California
Yesterday was easily the most boring day of the year, with congressmen asking endless ridiculous questions of the vampire squid’s senior management. So I opted instead to watch Fight Club for the umpteenth time, a film that is overflowing with deep meaning for me. I studied karate in Japan for ten years, the goju-ryu school. Since I was by far the largest student, I was always matched with the best black belt to make things even. Half the Japanese students then were yakuza, and the other half right wing nationalists, and there were two atomic bombs and that WWII thing to atone for. That meant getting the crap beat out of me every day for a decade, and half my front teeth still reside in Tokyo. Boy, can payback be a bitch. For my efforts, I am getting early onset arthritis in my knuckles.
While watching Tyler Durden beat himself up, I clicked around my chart software, noticing that the California state bond funds I recommended last fall were exploding to the upside (click here for the call at http://www.madhedgefundtrader.com/November_18__2009.html ). Controller, John Chiang, says the Golden State’s revenues are suddenly running far ahead of even the most optimistic expectations, suggesting that the corner has been tuned on its seemingly endless fiscal crisis.
March receipts came in $356 million above expectations, pushing the general fund revenues ahead of budget by a total $2.3 billion in the current fiscal year. Corporate income taxes were the main cash cow, no doubt powered by a booming technology sector, running 15.8% ahead of forecast.
The Land of Fruits and Nuts is far from out of the woods. There is still a daunting $22.6 billion budget deficit to deal with, sales tax receipts are still down, and the Bureau of Labor Statistics says there are 600,000 fewer employed than a year ago. Personal income tax receipts have also shrunk, suggesting that investors are sitting on longs and piling up big unrealized capital gains for the monstrous stock market rally.
Of course, it will be a long time before the legions of laid off teachers, firemen and policemen are hired back. The state is going to have to raise property taxes and unload a few thousand prison guards before that happens.
With California in the heat of the Republican primary elections for governor, this is good news no one seems to want to talk about. It looked like former EBay CEO Meg Whitman was going to bury her hapless opponent, Steve Poizner, with an onslaught of attack ads financed by her own personal fortune, claiming he is “more liberal than he says he is.” I’m amazed he hasn’t yet been arrested for cruelty to animals. But then the year Whitman spent as a director of Goldman Sachs (GS) has come back to haunt her, and now the campaign is a tossup. Democratic candidate Jerry Brown, ironically, has also been tarred with ties to the vampire squid. But at least the Moonbeam Governor has no opposition to worry about.
After a long famine, the state’s finances may finally be putting on some muscle. It is not too late to profit from this stealth recovery by picking up some municipal bond funds like (VCV), (NCP), and the (NVX). If rebounding revenues are saving California, you can bet other big deficit states like New York and Illinois are on the mend as well. With taxes about to go up a lot, everywhere, tax free municipal bonds are about to become more valuable.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
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CA tax revenue off 30% reported today
Doesn't California ask corporations to pay their estimated full year 2010 taxes by end of June 2010 this year (as yet another way to try to kick the can).
This would account for why corporate taxes are up at this point.
The self employed, contractors or anyone whose income is expected to be higher than the previous year were asked for the same estimation and prepayments as well.
The answer of the most was (one would hope) F- u CA, and favoring cash transactions or increase in the claimed exemptions on W-2 form (which may or may not be illegal) at least by one degree.
I for one want to thank MHFT for posting this, and urge ZH to keep them coming...
[ducking a barrage of abuse from outraged ZHeads I will bravely continue]
...because absurd essays like this produce a wealth of informed comments, with solid facts and arguments.
This site would be a poorer (and duller) place if it only published opinions that everyone agreed with.
[sarcasm on] GOLD BITCHES!!! [sarcasm off]
[sarcasm off] GOLD BITCHES!!! [sarcasm on]
Anyone with media experience knows the iron-clad 3-part rule: boy meets girl, boy & girl break-up, boy & girl are reunited. Or, ying & yang.
Tyler/Dan nees the likes of Hairy Wanker, MHFT & Leo as comic relief. Otherwise, ZH would just become an empty echo chamber. As you state, shallow postings by obvious charlatans gin up the hive to bring out important facts.
Great, so since corporate tax revenues are exploding, jobs are soon to follow. I'll hold my breath.
Um.
Okay.
California is a big state, and while I don't profess to know everything that's going on north, west, south and east of me, I am trying to figure out what "recovery" you're talking about?
The only recovery happening in this state is in the numerous celebrity rehab clinics, and we all know how those can turn out.
This is why I hate finance guys. Everything to them is just a trade in the immediate moment of time. Sure, they look at charts of past performance and make predictions of future possibilities, but they really don't comprehend anything. Just lines on a graph without any context.
These are the last days of the once great Republic of California.
I am Chumbawamba.
For once I will agree with Chu exemption being finance guys. Just look at the unemployment numbers by county (google has the graphs.) and you will see that you can not compare North CA to the Center and South CA.
Also the tax inflow reflects higher SALES TAXES (those were increased by 100 - 150bp from a yar ago) as much as corporate taxes. It's just redistribution of money from the private sector to the public sector, however you could increase those only so much without people finding other options = net purchases, craigslist, avoiding unnecessary purchases all together, moving the f. out of here. It's just a temporary blimp in the sea of trouble, you can't focus on it to judge the long term , even medium term perspective.
In addition, currently most of the counties and cities that are under water are looking for some fed help or just afraid to default first. Let's see what will happen to your muni holdings when first couple will default and others will decide, it's acceptable to do the same. By the way same has happened with the strategic walk outs, everyone is hesitant at first, but once it becomes more acceptable all rush in.
Well, he certainly sounds like a mad (as in insane) trader. Nobody with moron ideas like his could ever run my money. All of the guest posters, except for Robo, sound like small children with no experience and no understanding of the big picture. I don't know why they are given space on zero hedge, and I can't imagine how people can let them manage investments. It's like giving the car keys to your 3 year old and just turning your back.
MHFT you gotta come back with something. Either reply to the naysayers with evidence, admit you stand corrected or you will lose "eyeballs" (readers). And if you are right there's no coming back with "told you so's" unless you stick up for yourself.
+1
Unlike most of the posters, I agree with madhedgefundtrader. Yes, CA fundamentals are awful, but they will manage to kick the can down the road a few more years, at least beyond the next set of elections. In the short and intermediate term, there's a killing to be made here.
Stealth recovery, eh? So you like getting beat up? Is that what this is about?
Barfly > Fight Club
The flood of illegal aliens from Arizona seeking shelter, social services, free stays at the hotel crossbars and ever more taxpayer goodies will be another nail in Californias coffin.
I'm going to go ahead and ask this fellow why one should invest in California muni bonds over, say, muni bonds in Texas. Sure, the yield curve isn't going to look as pretty, but that's because it's not based on a complete fucking fantasy.
California is chasing away businesses and losing taxpayers. Last years issuance of IOU's was merely a trial before a more permanate implementation. The governor race doesn't matter, the Schwantz has proven the insignificance of the office. The liberal state is so broken that it will be getting it's own bailout, CARP, named after the bottom feeder. Your view of the lib state, CA, is misguided, "rebounding revenues"? hah. The state has raided the budgets of every city and county and they're still going to sink.
As many readers are aware, I have a moderate list of economic 'tells' that provide me with a road map of where we're going. (With the eventual outcome being termination of the Fed and overall reduced fed.gov presence.)
One of my biggies is the introduction of state scrip; the IOUs issued last year in Calif were only a test run. A full blown state pseudo-currency (designed in such a way as to obviate federal constitutional prohibitions), backed by some form of hard assets (eg state parks) will be a critical first step towards eventual dissolution of the union.
We're not even at the end of the beginning. The last two years have only been an informal rehearsal before the show has started.
I can see california from here! And Hairry Wanker too!
Muni bonds could be a good investment, as long as the said area is powered by hydro-elecrticity. Peak oil is not only starting to be a bitch, it will be the bitch of all bitches.
Oh we wont even mention the accounting "peccadillos" of California's pension funds...
Perhaps Calpers and Calsters should only be allowed to invest in California bonds.Then we'd see how "vested" they really are in the success of our state. But tumors can't survive on tumors, can they? They must have an obliging host.
He was pimping this crap on Business Insider...
Is the Mad Hegde Fund Trader a liberal? I read his link and this fool is criticising Prop 13 and the 2/3 budget rule (both are ballot initiatives passed by a wide margin to fight increasing taxes coming from Sacramento) in the context that they hinder Sacramento's ability to "increase revenue."
He even had the temerity to say this :
"Once boasting the best public education system in the country, California now ranks 47th in spending/pupil and 49th in pupils/teacher."
California is in the middle of the pack on spending per pupil but has the highest paid teachers in the union. I guess this MHFT is smoking whatever they are selling on the streets of Berkeley. Because his quote is a flat out lie. John has just lost his credibility with me. I even thought I might attend his little conference in San Fran.
I have news for you John...
"Starting Nov. 1, California employers are required to withhold 10 percent more in state income taxes to help ease the state's budget problems. Wage earners will get the withholding back either through a tax refund or a reduction in the balance due when they file their taxes April 15."
Suprise! The money is coming back when tax returns are filed.... The entire premise is bullsh!t. The single metric used is largely the function of a tax increase that have to be repaid.
MHFT does have nice word useage though. "Projection" - is a nice word. Personally I like the word "context" even better.
Personal income tax collections in the important month of March beat budget expectations by a modest $8.4 million, or 0.4%. So far this fiscal year, they are $877 million, or 3.1%, ahead of projections. Compared to actual collections a year ago, personal income taxes are down $979 million, or 3.2%.
Oh yes buy bonds when even a 10% increase in withholdings produces a reduction of 3.2% yoy. That Berkeley weed is mighty potent.
I won't mention the 20 billion dollar budget gap for fiscal 2010. Nah, I will.
" Furthermore, under our forecast that assumes school funding at the minimum guarantee level for Proposition 98, districts will be affected by the loss of billions of dollars of temporary federal stimulus funding over the next two years. Even in this stringent scenario, we forecast that operating deficits after 2010–11 will be around $20 billion each year. The forecasted gap between revenues and expenditures is the greatest—$23 billion—in 2012–13 (the year when the state must pay back its loan from local governments pursuant to Proposition 1A of 2004)."
Did anyone notice what Obama did to the GM bondholders? He eviscerated them. Why? They are faceless and the Bond Holders International Union does not exist. Repeat after me" Politicians screw over those who can damage them the least politically and bless those that can benefit them the most. When the shit hits the fan California liberals aren't going to have a problem liqiidating bondholders. Hell, neither will conservaties. Again. They. Are . Faceless.
California bonds or Vegas? I'd rather go to Vegas. At least I'll get a comp'd meal or two and have a nice dinner.
Thanks! Selective fact presentation is a misrepresentation of the truth.
I hate this phrase “above or below expectations” when you’re bouncing along the bottom. And in an election year, credibility is at its low point and even more suspect, especially regarding economic figures because the Democrats and the Republicans are dealing with the budget deficit as arguably the number one of voter issues.
Also, Chiang is an activist controller clearly siding in the past with California’s public employee unions.
It’s very suspicious when you have the two states in the union, New York and California, at one point at the edge of bankruptcy, insolvent and their bonds teetering with suspicion and then a few weeks later everything is fine because the March tax receipts are coming in. And, Voila! once again California is the golden state. And if you want to make money, put your faith in California!
Thanks for your research. It helps to keep contributor articles in context.
I too wish there were an ignore button that could keep madhedgefund from appearing on my RSS feed. If his article was meant as a joke, sorry but I didn't get it.
I assume this is mostly fiction. Unfortunately the sarcasm isn't coming through clearly.
Madhedgefundtrader has written so many seemingly serious pieces that are obviously implausible that it's really hard to either take anything he posts seriously or to separate the serious posts from the sarcastic posts. Net result: his posts are largely useless to me.
MHFT, you could perhaps alleviate this problem by stating at the end of each post whether it was intended seriously or otherwise.
And the fuckhead doesn't even mention NorthropGruman re-locating from Los Angeles to Virginia. Berkeley is completely dependent on state spending. The dirty hippies that infest that crap-hole are gonna be crying when their checks start bouncing.
Sorry Pal.
I live in california. I don't even know where to begin to refute this.
I know. This so-called 'analysis' is so poor I wish Tyler/Dan had an ignore feature so that I wouldn't even see the posting.
First of all, the numbers he's touting are the same ones the SCO (state controller's office) has been cherry-picking by comparing month-month actuals to revised estimates. Big fucking deal! Why not look at YoY YTD actuals to actuals if you want a real eye-opener.
Second of all, PIT (personal income tax), which represents over 50% of the state's revenues, is way down no matter what comparison is used. The only upward blips have been the last few months of sales taxes resulting from ... you guessed it, consumer spending driven by tax refunds and mortgage walk-aways.
Thirdly, a few months of smaller segments (ie sales tax) beating revised estimates by $hundred millions doesn't do anything towards generating the $20 billion in surplus funds necessary to pay off the short-term deficit financing bonds.
And lastly (but not really, 'cause there's so much more if you know what's happening), the unfunded pension/health benefits are growing at such a rapid clip that muni's are going to have to declare BK just to rescind the public union contracts. Think bondholders will be made whole once the munis go BK? LOL In for a penny, in for a pound. While they're bothering to clear their unfunded mandates, they'll just clear everything out as well.
I agree . Riverside County has an annual operating budget of about $ 687 million. The County's unfunded public pension nut to CalPers is $ 600 million and growing. That's just a one county snapshot of the ticking pension timebomb for CA municipalities. All efforts to reform pension eligibility for future employees have been rebuffed by the unions ( think Greece ).
I'm wondering if MHFT left half of his brains on that dojo floor. Spending might be up, but this is temporary at best, and a figment of government statistician's imaginations at worst.
DON'T DO IT. DON'T TOUCH BONDS ANYWHERE, OF ANY TYPE. YOU WILL BE WIPED OUT.
That was my first thought (actually, I first assumed too many head shots), but then when I got to thinking I realized there was no thought.
Let me see: tax receipts are projected to be up by about $2.3 billion. I fully agree that tax receipts are a very good indicator, but there are a few buts here before we dive off into happy recovery land. First, the level of recorded general fund expenditures for fiscal year 2010 is: about $82.9 billion, add in special funds $111.8 billion, add in bond funds $118.8 billion, and add in federal funds $200.5. Therefore, the projected number is roughly 1% to 3%, depending on the number we compare to (and ignoring it is a projected estimate by government employees who hope this will all work out well). So, the number is not huge by any stretch. Second, it is mentioned that much/most of this surprising windfall is tied to corporate taxes. Let's see, there is 100s of billions of stimulus and deficit spending (trillions) sloshing around the country and California represents about 13% of U.S. GDP. Therefore, we would expect it to score at least several billion (actually tens of billions) in increased tax revenue. Now when that stimulus and/or federal deficit spending ends then they/we are screwed. Third, how much of this is bank or defense related? This is a temporary blip that is more of a pimple on an elephant.
Hey, if having ties to GS is now seen as a political liability, we are definitely making progress. Just think, in a generation or two we could have this all cleared up and be back to smooth sailing!
"Yesterday was easily the most boring day of the year, with congressmen asking endless ridiculous questions of the vampire squid’s senior management."
You watching Europe disintegrate?
Yesterday, we read articles on how CA budgets were getting gutted ($5.5b) to pay for unfundeds and that this same load was only going to increase in the future.
So my reaction to your article is,"I don't think you are right."
How is the sale of the more than $65 billion of California Bonds going? How much of the inventory sold has been picked up by The Beard?
http://www.buycaliforniabonds.com/
Hmmmmm...
* "Corporate income taxes were the main cash cow, no doubt powered by a booming technology sector, running 15.8% ahead of forecast."
* "there are 600,000 fewer employed than a year ago. Personal income tax receipts have also shrunk, suggesting that investors are sitting on longs and piling up big unrealized capital gains for the monstrous stock market rally."
* "Of course, it will be a long time before the legions of laid off teachers, firemen and policemen are hired back. The state is going to have to raise property taxes and unload a few thousand prison guards before that happens."
So....
* "If rebounding revenues are saving California, you can bet other big deficit states like New York and Illinois are on the mend"
CA is rebounding/being driven by tech.... Is tech really that big a driver in NY & IL?
Sounds to me more like you are talking your book. Which is fine since you do mention you're long the thesis.
And the historical comps, both Y/Y and the larger historical outcome of Keynesian stimulus, are being played as evidence of recovery ensured.
But when was the last time the leveraging was this significant?... 1930s And the "foreign growth will save the world" is a bit hard to swallow when the EU & Japan are demographically and debt wise a mess yet resolved, and China is in the midst of a housing bubble....
Sorry, I just dont see Y/Y comps having the back strength to finish the lift.
Of course Ben and his buddies have a lot of paper and ink..... so the fiat can surely continue for far longer than I or almost all other sane people can imagine.
HCSKnight
That's what I would have said if I was as smart as you. Not being sarcastic.
I agree. I would love to think and write like HCSK...
"talking your book"
"long the thesis"
"having the back strength to finish the lift"
sehr hard-boiled
Twenties of billions in unfunded liabilities, and budget shortfalls vs a few hundred million of unplanned for receipts?
Twenties of billions in unfunded liabilities, and budget shortfalls vs a few hundred million of unplanned for receipts?
Twenties of billions in unfunded liabilities, and budget shortfalls vs a few hundred million of unplanned for receipts?
Think I'll short those bonds.
This is like how Bret Michaels' condition is "improving."
I love how every time things bounce on the cliff-ride down, everyone sees "improvement" as if really bad times cannot exist unless things go straight down unabated.
And where is the money going to come from for future public employee pay and pension increases, with pensions already 500 B in the red?
Target for the S&P correction is at 1153, after a slight upward bounce today.
If that breaks, look for 1111.
How's that for improving?
+1
You'd better give solid evidence of that, and more solid evidence why, at the beginning of a stagflationary recession, you believe that overpaid, underworked, overtaxed, supremely-expensive-place-to-do-business California will ever pay off those bargain bonds with dollars of anywhere NEAR the value they have TODAY...
That last goes some way to explaining why anyone with any hankering for any chance at all for yield has been forced to plunk every last dollar into equities...NOT bonds, least of all non-sovereign state and muni ones
Or...are you a closet deflationist!?
"The Big recovery in California"? Stealth mustard seeds sprouting under the piles of debt.
You forgot to add the half trillion dollar underfunded public pension plans. Looks like they have to inflate for CA's sake (and others), because if they don't, it's a sure-fire default.
Oh and "anyone with any hankering for any chance at all for yield has been forced to plunk every last dollar into equities" ...and that barbarous relic.
Hey, goju-ryu! My dojo practiced goju-ryu back in the eighties, then picked up goju-kai at some point, but I think I preferred the former.