The State of the States
Pension tension abounds.
Last week, in our Five-Step Guide to Contagion, we touched on two of our Top Ten Themes for 2010, the "tricky tri-fecta" and "European Disunion." This morning, another theme is jockeying for mindshare; US states face a total shortfall of at least $1 trillion in their funds for employees' pension and retirement benefits and the problems are quickly mounting, according to a report released by the Pew Center, says Reuters.
As discussed in January, when we vibed on The State of The States:
"The Center on Budget and Policy Priorities recently offered that state budget shortfalls could reach a whopping $180 billion for the coming fiscal year.
"States across the union -- particularly those that benefited from the housing bubble and the taxable income associated with it -- are now experiencing a massive reversal of those golden years. The decline is so swift that it will take several years for the real estate reset to flush its way through municipal budgets.
"Additionally, the US public pension system -- one of our 2009 themes -- faces a higher-than-expected shortfall of $2 trillion that will increase pressure on strained finances and further crimp economic growth, according to the chairman of New Jersey's pension fund, as quoted in the Financial Times.
"This evolution should lead to a comprehensive Federal bailout package in 2010. TARP money returned to the government will likely be funneled back to the states, including but not limited to Arizona, California, and New York, as taxpayers shoulder the load and bear the burden of our outsized societal largess."
Given the Euronary Tract Infection, a stateside poke in the eye is the last thing we need right now. While there was some sovereign tightening overnight (New Zealand, Saudi Arabia), there were wideners as well (Israel, Belgium, Morocco, the UK). The context of time remains a critical variable (remember how long it took for Bear Stearns (JPM) to "infect" American International Group (AIG), Citigroup (C), Fannie Mae (FNM), and the like) so understand that an unwind will unfold at it's own pace.
As discussed this week, a case can be made for the bulls; they "held" the bottom of the upward sloping trend channel, earnings were by-and-large "better," there are building blocks for the wall of worry and the spates of M&A are on the margin constructive. I learned long ago that when a trade seems easy, it's typically a trap. That's why I've defined the risk on my negative bets, leaning against the current cluster of resistance at S&P 1100-1120.
I will say this before I go; given what's going on in the world, the VXO (fear index) feels out of whack. As profitability is achieved by capturing the disconnect between perception and reality, my sense is that volatility, as measured by VXO 21, may be the best bet on the 2010 board. Don't trade these instruments unless you're well versed in the risks, but understand the implications as they pertain to the broader tape.
Brussels Sprouts? The European Commission is pulling on the string of swap yarn; if they're other sovereign sweaters, expect the DEFCON level to be raised.
- So, the S&P is sitting at the same exact spot as it was in the middle of October?
- Have I mentioned we have a handful of snazzy new MV Professors lined up?
- Ever play word association?
- A few years ago, if I said "Free", would you have said "lunch"?
- Or "Markets"?
- Or "Press"?
- If we played now and I said "Free", would most folks respond, "Yeah sure; what's the catch?"
- Yesterday we touched on the specter (perception) of fraud as it relates to Goldman's (GS) role in the Greek Swap situation. Today, German Chancellor Angela Merkel said it would be a "scandal" if banks helped Greece massage its budget, according to Bloomberg.
- Was season two best in breed for our buddy Jack Bauer?
- Trading is about identifying advantageous risk/reward. As it stands, I believe we've got 4:1 odds on the downside. My upside risk? 20 handles on the S&P, through a technical lens. If we shake and break?.S&P 1027ish (the 200-day moving average) is the level of lore.
- Do i-Minyans wanna check out a "killer app" from Minyan Oren?
- A higher savings rate is bullish in a bull market (future ammo) but bearish in a bear market (hoarding).
- After breaking a prolonged pennant, is it worth noting that China has rallied back to the underbelly of the 200-day moving average?
- Someday we'll look back at this and it will all seem funny.
- Think you'd benefit from the insights and ideas of 30 of the smartest traders I know? Take a trial to our Buzz & Banter for real-time vibes.
- Good luck Minyans and make sure you enjoy the journey. By the time you get to where you think you wanna be, the experience will already be over.
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