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 ).  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 . 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.