State Finances: More Reasons for their Troubles

In The States and the Stimulus, the WSJ editorializes on adverse fiscal effects on the states of last year's ARRA "stimulus" bill. Even after I strip away unnecessary partisan comments, the facts laid out--assuming they are presented accurately--are impressive and taught me something: Sometimes you have to look a gift horse in the mouth. It appears that the states got a "teaser" one-year gift and now they are stuck paying for it.

Thank goodness 49 states have balanced budget requirements. At least they will deal with revenue shortfalls as best as they can. If on the other hand the Federal government makes up much of the states' deficits with grants and borrows/prints the money to so do, then our mess is bigger than contemplated.

The stock market is valuing companies based on earnings, not on tangible assets, and now that ECRI has repeated its prediction for more frequent recessions than we have been used to since Volcker let up on the reins, I continue to believe that investors should minimize their exposure to the general market even though the alternatives look a bit uninspiring to be sure, and follow Jeremy Grantham's advice (at GMO) to focus only on high quality companies whatever their size. And please don't chase performance unless you know how to do it. GOOG/AAPL/ISRG etc. were great buys. But they are in the hands of momentum buyers who are really renters. Who knows, but Chubb (CB) or the less well-known insurer Everest Re (RE) are highly safe stocks (top-ranked for safety by Value Line) that offer historically low price to tangible book ratios, low price/earnings ratios, dividend yields better than 3-year Treasuries, and low correlation to the general market or even general economy. In tech, IBM and Oracle have both broken out to multi-year price highs associated with record earnings, and both are free cash flow generating machines with rising dividends. Neither is cheap, but then nothing from precious metals, cash itself, bonds, etc. is cheap, so it's a pick-your-poison financial marketplace. Perhaps the most dangerous market is the tax-free muni market, as was hinted at at the start of this post. You can lose on credit as well as interest rates. Caveat emptor there.

Copyright (C) Long Lake LLC 2010

California Does Not Have the Worst State Fiscal Crisis

From Credit Writedowns comes the news that New York and Nevada have budget gaps that are nearly one-third of revenues, which is worse than California's relative deficit. Thought you'd like to know.

However, it is old news that the industries New York and Nevada are best known for (finance; and sin) are troubled just now, whereas Hollywood and high-tech are doing just fine, thank you. Is California, the mega-state, going to be forced to be just another large state rather than a proto-nation so rich and (self)- important that it could, for example, repeatedly try to lead the country to enact tougher laws on all sorts of Good Causes?

There may be a strange parallel between the likely relative decline of the importance of America on the world stage with the possible decline in the relative importance of California as first amongst states.

Copyright (C) Long Lake LLC 2009