Wednesday, January 13, 2010

California Credit Downgraded By S&P

S&P thinks that California’s finances are bad. So they cut our credit rating –

http://www.bloomberg.com/apps/news?pid=20601087&sid=acy9dGwDe9HM&pos=5

They don’t think that Obama will be bailing out California, as requested by Arnold –

http://www.businessweek.com/news/2010-01-13/california-creditors-see-ious-with-schwarzenegger-missing-obama.html

“We recognize they have enormous problems,” David Axelrod, senior adviser to President Barack Obama, said in an interview. “But we can’t solve all of those problems from Washington.”

California Municipal Bonds (MYC) have been in a consolidation since early October. My guess is that a breakout from here would be mean that California will again be able to monetize their debt and kick the can into 2011, or that Obama will come to the rescue and prevent Arnold from becoming a “Little Hoover” (per Krugman).


California and Stocks
There is a clear correlation between California Muni Bonds and stocks in 2009. In July, it became clear that California would be able to print a new currency (“IOUs”) with the blessing of the SEC and use accounting tricks and the borrowing of more money to cover its 2009 Budget shortfall. When stocks figured out that this would be the norm for how states would deal with the shortfalls in their 2009 Budgets, stocks when vertical – no pain this year means more leverage and stocks love that.

If California is forced balance its Budget, without issuing new debt and without Obama’s assistance, then that can only mean bad things for stocks. If Obama blinks or California kicks the can into 2011, then we may get another leg up for Muni Bonds and Stocks.

Keep an eye on California Muni Bonds to see where stocks may be heading next.

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