Unpleasant Forced State Budget Cuts

The situation in California is characteristic of many states; not enough revenue coming in to pay the bills. Tax revenue will need to rise sharply or government spending cuts need to be deep.California Governor Jerry Brown and his Democratic government made financial projections for California’s current fiscal year, which began July 1, 2011. Only three months into the current fiscal year, tax revenue for California has fallen $705 million.

The risk?

Based on the budget plan the Governor signed into effect this past June, if revenue for the state falls $1.0 billion below projections, two universities, University of California and California State University, will see their budgets cut by $100 million each and community-college fees would rise $10 million.

If revenue falls by $2.0 billion in its fiscal year, the next step would be a seven-day reduction in the California public-school year. (You won’t have many happy parents under this scenario.) Based on current numbers, revenue shortfall has been an average of $235 million over the past three months. Extrapolate this number out and the tax revenue loss for the year is about $2.8 billion.

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Unemployment in the “Hollywood” state sits at about 12%. When the State starts selling tax-exempt public works bonds later this week, it may find that it needs to offer investors a higher yield to attract attention to the bonds. When California sold $2.4 billion in general-obligations bonds last month, the bonds yielded 3.17%—compare that to a U.S. 10-year Treasury, currently yielding 1.95%!

The situation in California is characteristic of many states; not enough revenue coming in to pay the bills. Tax revenue will need to rise sharply or government spending cuts need to be deep—I see neither happening.

To me, it’s just a matter of more debt being piled up on old debt…a situation that cannot go one indefinitely…a situation that will ultimately have dire consequences unless action is taken.

The sovereign debt crisis in Greece…it could look like a proverbial “cake walk” compared to what lies ahead if state governments don’t get their financial houses in order.

Michael’s Personal Notes:

If there is one thing I find with stock market advisors and investors, it is that they are very fickle.

How many stock advisors jumped onto the bearish bandwagon this summer? How many investors pulled money out of the markets?

The answers: Last week the percentage of bearish stock market advisors was at its highest level since March of 2009. We all know what happened after March 2009; stocks went up 100%. Stock market investors pulled more money out of the stock market in August of 2011 than any other time since 2008. We all know what happened after investors pulled money out of stocks in late 2008…stocks rebounded strongly in 2009 and 2010.

Moving to PROFIT CONFIDENTIAL, if there is one thing I hope we achieve here, it is directing our readers through difficult market conditions…instilling a common-sense, longer-term approach…the “old buy low, sell high, don’t follow the herd mentality” rationale.

This summer, while most stock market advisors and analysts turned bearish, I was writing that the summer doldrums would blow over. At the end of September, I was telling my readers that the stock market of 2011 looked a lot like the summer stock market of 2010, when the market bottomed out.

Last Thursday I wrote, “Four Reasons Why Stock Prices Will Bounce Higher Now.” This morning, the Dow Jones Industrial Average opens at about the same level it started 2011. I’m happy to have helped my readers weather this summer’s market storm.

Where the Market Stands, Where it’s Headed:

We are in the final stages of a bear market rally that started in March of 2009. I believe this rally will bring stock prices higher before Phase III of the bear market settles in.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.