First U.S. State Bankruptcy:
The Unpleasant Race to it

Ten U.S. states are insolvent; what will the U.S. government do?Ten U.S. states, accounting for about one-third of the U.S. population, are insolvent. You will find the list of states below.

The question: what state will go bankrupt first?

Technically, there is no legal process by which a state can file for bankruptcy. Chapter 9 of the Bankruptcy Code permits cities and municipalities to file for bankruptcy, but not states. One of the most famous municipalities to go bankrupt was Orange County, California, in 1994. Fifteen U.S. municipalities filed for bankruptcy in 2009 and 2010.

California’s deficit could reach $24.0 billion this year. Illinois deficit sits at about $15.0 billion.

Advertisement

Illinois, which could be the most insolvent state, raised its personal income tax rate earlier this year by a whopping 66%. Illinois is sitting on about $5.0 billion in bills it cannot pay.

Some states are making the hard decisions necessary to remain solvent. A two-year budget plan released by the Texas House of Representatives yesterday calls for the elimination of about 10,000 state-related jobs over the next two years.

According to the Washington-based Center on Budget and Policy Priorities, U.S. states as a whole will have a budget deficit of $140 billion this year.

The U.S. government lent more than $100 billion to a single company, American International Group (AIG), during the credit crisis. AIG is now paying back the government. If push comes to shove, why wouldn’t the federal government lend $100 billion to $200 billion to state governments, asking for repayment over a 20-year period?

Here’s why: AIG could have filed for bankruptcy; state governments have no legal mechanism to do so. Financially troubled states just keep piling on the bills without paying them. They are like interest-free loans from your suppliers. Why borrow money to pay your suppliers if they cannot petition you into bankruptcy?

The total value of the bond market worldwide is about $50.0 trillion. Half of that market is made up of U.S. bonds, $25.0 trillion, of which $2.7 trillion is the size of the U.S. municipality bond market.

The 10 most insolvent U.S. states are: California, Florida, Illinois, Arizona, New Jersey, Michigan, Nevada, Oregon, Wisconsin, and Rhode Island. These states make up about one-third of the U.S. population.

Michael’s Personal Notes:

Last night, the big hitters came out with some very good earnings reports.

International Business Machines Corporation (NYSE/IBM) said that its profit rose 16% in its latest quarter to $4.18 a share, beating analyst expectations. More importantly, IBM gave an upbeat forecast for 2011.

Apple Inc. (NASDAQ/AAPL) reported last night that it made a staggering $6.0 billion in net income for its first fiscal quarter ended December 31, 2010, on a 70% jump in revenue, shattering records and beating analyst expectations.

Yes, Apple made more money in its last quarter than IBM. We are running a check here to see if this is a first-time event—and it might just be. The little company that Steve Jobs grew made more money selling consumer gadgets than the world’s largest computer-service provider made.

How could the stock market not go up with these kinds of earnings?

Where the Market Stands; Where it’s Headed:

Is there any stopping this bear market rally?

The Dow Jones Industrial Average is up 2.2% so far in 2011 and we are only 10 trading days into the New Year! The S&P 500 has been up seven weeks in a row. I haven’t seen action like this in the beginning of a January in years.

But I’m not a big believer in the “January Effect;” that old adage that states if the stock market is up in January, it is up for the remainder of the year. Let’s face the facts: the stock market is rising on strong corporate earnings given companies have slashed their costs, demand for their products is rising, and interest rates remain very favorable.

I’ve been telling my readers to enjoy the bear market rally while it lasts, because it won’t last. Everyone is talking about a better 2011 for the economy. Unfortunately, I see some unpleasant surprises ahead. And the more investors this bear market rally lures back into the market, the bigger the surprises will be.

Michael’s Personal Notes:

“I’m getting very worried about the state of the U.S. housing market and its ramifications for the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else