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May 15, 2009

Just the Facts
by Doug Noland

For the week, the S&P500 fell 5.0% (down 2.3% y-t-d), and the Dow lost 3.6% (down 5.8% y-t-d). Economically-sensitive stocks gave back some of their recent big gains. The Morgan Stanley Cyclicals sank 10.7% (up 8.3%), and the Transports dropped 8.9% (down 13.7%). The Morgan Stanley Consumer index declined 3.3% (down 1.5%), and the Utilities sank 5.1% (down 12.4%). The broader market was in retreat. The S&P 400 Mid-Caps (up 1.4%) and the small cap Russell 2000 (down 4.7%) each fell 7.0%. The Nasdaq100 declined 2.8% (up 11.8%), and the Morgan Stanley High Tech index lost 2.5% (up 19.9%). The Semiconductors fell 3.0% (up 14.2%), and the InteractiveWeek Internet index sank 3.6% (up 30.4%). The Biotechs fell 3.0% (down 4.9%). After last week's melt-up, the Banks sank 16.2% (down 17.3%), and the Broker/Dealers fell 9.1% (up 18.4%). Although Bullion gained another $15, the HUI gold index slipped 0.4% (up 13.1%).

One-month Treasury bill rates ended the week at 11 bps, and three-month bills closed at 9 bps. Two-year government yields fell 13 bps to 0.79%. Five year T-note yields fell 15 bps to 1.97%. Ten-year yields dropped 16 bps to 3.13%. The long-bond saw yields drop 18 bps to 4.08%. The implied yield on 3-month December '09 Eurodollars fell 15 bps to 0.95%. Benchmark Fannie MBS yields fell 16 bps to 3.96%. The spread between benchmark MBS and 10-year T-notes was unchanged at 83 bps. Agency 10-yr debt spreads widened 7 to 37 bps. The 2-year dollar swap spread declined 4.5 to 41.75 bps; the 10-year dollar swap spread declined 2.5 to 9.25 bps; and the 30-year swap spread increased 0.5 to negative 41.5 bps. Corporate bond spreads were mixed. An index of investment grade bond spreads widened 13 to 207 bps, while an index of junk spreads narrowed 40 to 953 bps.

Corporate issuance remained exceptionally strong. Investment grade issuers included Microsoft $3.75bn, Anheuser-Busch $3.0bn, American Express $3.0bn, JPMorgan Chase $2.5bn, Wal-Mart $1.0bn, Allstate $1.0bn, US Bancorp $1.0bn, Becton Dickson $750 million, Occidental Petroleum $750 million, Sempra Energy $750 million, Simon Properties $600 million, Southern Co. $350 million, and San Diego G&E $300 million.

Junk bond funds saw inflows of $885 million this past week (from AMG), the strongest 4-week flows in six years. Junk issuers included MGM Mirage $1.5bn, Calpine $1.0bn, EQT Corp $700 million, Ameristar Casino $500 million, Maritime & Northeast Pipeline $500 million, Ameren $425 million, Sandbridge Energy $365 million, Range Resources $300 million, Speedway Motorsports $275 million, Regency Energy $250 million, Linn Energy $250 million, Black Hills $250 million, Wyndham Worldwide $250 million, El Pollo Loco $132 million, and Rock-Tenn Co. $100 million.

Convert issuance this week included GLG Partners $200 million.

International dollar debt issuers included Lloyds Bank $6.75bn, Standard Chartered $1.5bn, Arcelormittal $2.25bn, Inter-American Development Bank $2.0bn, Fowloon-Canton Railway $750 million, Canadian Pacific Railroad $350 million and KFW $200 million.

U.K. 10-year gilt yields dropped 19 bps to 3.53%, and German bund yields fell 8 bps to 3.36%. The German DAX equities index dropped 3.6% (down 1.5%). Japanese 10-year "JGB" yields declined 2 bps to 1.42%. The Nikkei 225 declined 1.8% (up 4.6%). Emerging markets held together pretty well. Brazil's benchmark dollar bond yields rose 5 bps to 6.00%. Brazil's Bovespa equities index dropped 4.6% (up 30.5% y-t-d). The Mexican Bolsa fell 3.1% (up 4.3% y-t-d). Mexico's 10-year $ yields increased 4 bps to 5.91%. Russia's RTS equities index was down only 0.6% (up 48.2%). India's Sensex equities index gained 2.5% (up 26.2%). China's Shanghai Exchange added 0.7% (up 45.3%).

Freddie Mac 30-year fixed mortgage rates increased 2 bps to 4.86% (down 115bps y-o-y). Fifteen-year fixed rates added one basis point to 4.52% (down 108bps y-o-y). One-year ARMs dropped 7 bps to 4.71% (down 47bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 3 bps to 6.37% (down 68bps y-o-y).

Federal Reserve Credit jumped $75.1bn last week to $2.116TN. Fed Credit has declined $130bn y-t-d, although it expanded $1.250 TN over the past 52 weeks (144%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/13) surged $23.5bn to a record $2.684 TN. "Custody holdings" have been expanding at an 18.2% rate y-t-d, and were up $405bn over the past year, or 17.8%.

Bank Credit increased $14.3bn to $9.797 TN (week of 5/6). Bank Credit was up $372bn year-over-year, or 4.0%. Bank Credit was down $117bn y-t-d (3.4% annualized). For the week, Securities Credit added $1.9bn. Loans & Leases rose $12.5bn to $7.130 TN (52-wk gain of $216bn, or 3.1%). C&I loans declined $3.5bn, with one-year growth of 1.6%. Real Estate loans increased $4.0bn (up 7.4% y-o-y). Consumer loans slipped $0.9bn, while Securities loans added $1.5bn. Other loans jumped $11.3bn.

M2 (narrow) "money" supply rose $18.9bn to $8.304 TN (week of 5/4). Narrow "money" has expanded at a 3.8% rate y-t-d and 9.1% over the past year. For the week, Currency slipped $0.7, while Demand & Checkable Deposits jumped $32.3bn. Savings Deposits fell $9.3bn, and Small Denominated Deposits declined $3.8bn. Retail Money Funds added $0.6bn.

Total Money Market Fund assets (from Invest Co Inst) increased $2.3bn to $3.790 TN. Money fund assets have declined a modest $40.7bn y-t-d, or 2.9% annualized. Money funds have expanded $292bn, or 8.3% over the past year.

Total Commercial Paper outstanding sank an additional $81.0bn this past week to $1.298 TN. CP has declined $383bn y-t-d (62% annualized) and $456bn over the past year (26%). Asset-backed CP fell $22.3bn to $600bn, with a 52-wk drop of $144bn (19.4%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were down $101bn y-o-y to $6.689 TN. Reserves have declined $257bn over the past 30 weeks.

Global Credit Market Dislocation Watch:

May 15 - Bloomberg (Anna Rascouet): "The cost of borrowing in dollars between banks fell, capping its biggest weekly decline in four months... The London interbank offered rate, or Libor, for such loans, decreased almost two bps to 0.83%... The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed to the lowest level since August 2007, when the credit crisis began."

May 15 - Bloomberg (John Detrixhe and Caroline Salas): "Citigroup Inc. plans to sell $2 billion of 10-year notes in its first benchmark offering without a U.S. government guarantee since August, according to a person familiar with the transaction. The notes, to be sold as soon as today, may price to yield about 562.5 bps more than similar-maturity Treasuries, said the person..."

May 15 - Bloomberg (John Detrixhe): "Microsoft Corp., the world's biggest software maker, and Wal-Mart Stores Inc. were among companies selling $32.6 billion of debt this week as investors show signs of "pulling back" after a seven-week credit rally. Wal-Mart, the world's largest retailer, raised $1 billion of notes, and... Microsoft sold $3.75 billion of bonds in its debut issue... Companies sold $29.4 billion of debt without government backing this week, down... from $34.7 billion the week before when borrowers raised the most debt without a sovereign guarantee in a year."

May 15 - Bloomberg (Jeremy R. Cooke): "Municipal bond sales rose to... $6.8 billion... The Bond Buyer 20, a weekly index of 20-year general obligation bond yields, slid to 4.54%, matching the level reached Sept. 11, 2008... State and local government bonds headed for their sixth weekly gain in the past seven weeks..."

May 11 - Bloomberg (Oshrat Carmiel): "Delinquencies on commercial property loans soared in the first quarter, as rising vacancies and credit contraction made loan refinancing difficult, S&P said... The number of commercial loans that paid off at maturity in the first quarter decreased to 55%, compared with 83% in the fourth quarter..."

May 13 - Bloomberg (Eugene Tang): "China Development Bank's sale of 10- year floating-rate debt for 18 bps less than analysts estimated reflects growing confidence that the recent round of interest-rate cuts is over, Bank of China Ltd. said... The notes were priced to yield 55 bps more than the one-year benchmark deposit rate, less than the 72.5 bps premium forecast by analysts..."

May 12 - Bloomberg (Svenja O'Donnell): "The U.K.'s housing slump eased in April and manufacturing shrank at the slowest pace in more than a year, evidence the recession may be abating."

May 13 - Bloomberg (Tracy Withers): "New Zealand home sales rose in April from a year earlier, adding to signs that falling interest rates and prices are helping the property market recover. Sales increased 39.6% to 6,210 last month from 4,450 in April last year..."

Government Finance Bubble Watch:

May 14 - Bloomberg (Scott Lanman): "The size of the Federal Reserve's balance sheet rose 5.6% over the past week as the central bank bought Treasuries and mortgage-backed securities to bring down U.S. interest rates... Mortgage-backed securities held by the Fed totaled $431.5 billion as of yesterday, up $65.7 billion from the previous week... Total U.S. Treasury securities owned by the Fed rose $16.5 billion to $577.1 billion..."

May 15 - Wall Street Journal (Andrew Dowell and Jamie Heller): "The Treasury Department will make federal bailout funds available to a number of U.S. life insurers... The Treasury is prepared to inject up to $22 billion into the insurers under the rescue plan launched last fall as the Troubled Asset Relief Program..."

May 11 - Bloomberg (Kevin Hamlin and Rob Delaney): "China's new lending cooled in April, easing concern that banks are taking on too much risk in a credit boom after the government dropped restrictions on loans in November. Money supply rose by a record. Lending was 591.8 billion yuan ($86.7 billion)... The number is about a third of the record 1.89 trillion yuan in March. M2, the broadest measure of money supply, rose 26% from a year earlier."

May 12 - Bloomberg (Victoria Batchelor): "Australia's government plans to sell a record A$60 billion ($45.6 billion) of bonds in the 12 months to June 2010... The amount is almost double an estimated A$35 billion of debt sales in the 2008-2009 fiscal year and up from A$5.1 billion issued in 2007-2008..."

May 12 - Bloomberg (Jacob Greber and Gemma Daley): "Australia faces record budget deficits until 2016 as it embarks on the biggest building program in its history, spending on roads, rail lines and high-speed Internet to blunt fallout from the global recession."

May 11 - Bloomberg (Fabiola Moura and Francisco Marcelino): "Brazil's state development bank is financing the biggest acquisitions in the country as other sources of credit dry up, driving a consolidation in the meat, ethanol, paper and telecom industries. 'They are trying to help the creation of national champions,' said Marcello Hallake, a lawyer focused on mergers and acquisitions... who has spent more than a dozen years advising in Latin America. 'They want to encourage the formation of large Brazilian companies that could then in turn acquire outside of Brazil.'"

Currency Watch:

May 12 - Bloomberg (Chen Shiyin and Haslinda Amin): "The dollar's rally is set to end in a "currency crisis," investor Jim Rogers said, adding that he may bet on a slide in equities after nine weeks of gains. The advance in the U.S. currency has been driven by investors covering their short sales, Rogers...said... He may consider adding to his holdings of the yen and prefers the euro to the dollar or the pound... 'We're going to have a currency crisis, probably this fall or the fall of 2010. It's been building up for a long time. We've had a huge rally in the dollar, an artificial rally in the dollar, so it's time for a currency crisis."

The dollar index gained 0.6% this week to 83.02 (up 2.1% y-t-d). For the week on the upside, the Japanese yen increased 3.5% and the Taiwan dollar gained 0.3%. On the downside, the South African rand declined 5.1%, the Swedish krona 3.5%, the New Zealand dollar 3.0%, the Norwegian krone 3.0%, the Canadian dollar 2.6%, the Australian dollar 2.5%, the Swiss franc 1.5%, and the Euro 1.0%. In the emerging currencies, the Hungarian forint dropped 4.7% and the Polish zloty 4.0%.

Commodities Watch:

May 12 - Bloomberg (John Duce): "China, the world's second-largest energy user, increased crude-oil imports in April by 13.6% from a year earlier after the government announced plans to boost stockpiles of the fuel. Crude-oil imports reached 16.17 million metric tons last month, or 3.9 million barrels a day..."

May 12 - Bloomberg (William Bi): "Copper imports by China, the world's largest consumer, rose to a record for a third month in April as buyers took advantage of low prices to replenish stockpiles and demand was spurred by a $585 billion stimulus program. Inbound shipments advanced 7% from the previous month to 399,833 metric tons..."

Gold ended the week up 1.6% to $931 (up 5.6% y-t-d). Silver was little changed at $13.97 (up 23.6% y-t-d). June Crude dropped $2.11 to $56.52 (up 27% y-t-d). June Gasoline dipped 1.5% (up 58% y-t-d), and June Natural Gas sank 4.7% (down 27% y-t-d). Copper fell 6.3% (up 43% y-t-d). July Wheat declined 2.3% (down 5% y-t-d), and July Corn fell 0.9% (up 3% y-t-d). The CRB index dropped 2.9% (up 2.9% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 2.8% (up 14.6% y-t-d).

China Reflation Watch:

May 15 - Bloomberg (Eugene Tang): "China's banks face significant pressure on their profits this year, said Liu Mingkang, head of the China Banking Regulatory Commission. 'Banks should focus on traditional businesses, such as deposit and lending,' Liu said... China's banks, most of which are government-controlled, posted a slowdown or drop in profits for the first quarter while tripling lending to $670 billion as part of a government stimulus package, raising concerns that non-performing loans will curb earnings growth."

May 11 - MarketNews International: "China's national fiscal revenue fell by 13.6% year-on-year to CNY589.72 billion in April and the full year-fiscal outlook is grim, the Ministry of Finance said... falling corporate profits as well as government fiscal stimulus measures to boost economic growth are the main reasons for the decline in fiscal revenue. The Finance Ministry said corporate income tax fell 27% year-on-year in April... Fiscal spending rose 24.5%..."

May 13 - Bloomberg (Kevin Hamlin): "China's industrial production grew less than economists estimated in April as electricity output fell and exports tumbled. Retail sales climbed. Output rose 7.3% from a year earlier, the statistics bureau said today, after gaining 8.3% in March."

May 12 - Bloomberg (Kevin Hamlin): "China's investment in factories and property surged by more than economists forecast in response to the government's 4 trillion yuan ($586 billion) stimulus package... Urban fixed-asset investment climbed 30.5% in the four months to the end of April from a year earlier, from 28.6% in the first three months..."

May 12 - Bloomberg (Chia-Peck Wong): "Housing prices in 70 Chinese cities fell 1.1% in April from a year earlier, the smallest drop in three months, as the government's 4 trillion yuan ($585 billion) stimulus package spurred lending and revived demand."

May 12 - Bloomberg (Nerys Avery): "China... issued draft rules for allowing non-deposit taking foreign institutions to offer consumer loans to its more than 1.3 billion citizens."

May 15 - Bloomberg (Kevin Hamlin): "China's policy makers, grappling with their bigger voice on the global stage, have yet to agree on what they want from a new world financial order, central bank Governor Zhou Xiaochuan said. 'Many issues are new to us and we haven't formed a collective opinion about them. There are some scholars' views on those issues but we haven't reached a consensus at a national level or set any goal.'"

May 15 - Bloomberg (Nipa Piboontanasawat and Theresa Tang): "Hong Kong's economy shrank by the most since at least 1990... Gross domestic product shrank a seasonally adjusted 4.3% in the first quarter... It forecast a full-year contraction of as much as 6.5%, which would be the biggest decline since data began in 1962."

Japan Watch:

May 13 - Bloomberg (Ron Harui and Yasuhiko Seki): "Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year. Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange."

India Watch:

May 12 - Bloomberg (Kartik Goyal): "India's industrial production fell the most in 16 years in March... Output at factories, utilities and mines declined 2.3% from a year earlier after a revised 0.7% drop in February..."

May 14 - Bloomberg (Cherian Thomas): "India needs to cut its budget deficit to avoid having its credit rating lowered, Fitch Ratings said. 'India faces considerable challenges in balancing the need for short-term stimulus measures to counter the economic downturn and the necessity of re-establishing a sustainable medium-term path for the country's public finances,' Fitch said..."

Asia Bubble Watch:

May 15 - Bloomberg (Aloysius Unditu and Berni Moestafa): "Indonesia's economy grew at the fastest pace in Southeast Asia last quarter as buoyant local spending helped the nation fend off the global recession. GDP expanded 4.4% in the three months to March 31 from a year earlier..."

Latin America Watch:

May 12 - Bloomberg (Valerie Rota and Carlos Manuel Rodriguez): "Mexico's credit rating may be cut as soon as the third quarter as the global recession exposes the government's failure to raise taxes and ease its dependence on oil income... 'Mexico was very complacent over the past decade,' Alonso Cervera, a Latin America economist at Credit Suisse, said... The country 'didn't really move in a meaningful way to accomplish the reforms that it needed,' he said."

May 15 - Associated Press: "Mexico's central bank has cut the benchmark interest rate by three quarters of a point to spur growth for the recession-plagued economy. The bank has lowered the rate to 5.25% from 6%..."

Central Banker Watch:

May 14 - Bloomberg (Matthew Brockett): "European Central Bank policy makers clashed over the bank's asset-buying program less than a week after President Jean-Claude Trichet engineered a truce. Slovenia's Marko Kranjec said yesterday the ECB is likely to spend more than the 60 billion euros ($82 billion) it has earmarked for covered-bond purchases and hasn't ruled out acquiring corporate bonds and commercial paper. Hours later Germany's Axel Weber, who had already said there's no need to buy other assets, insisted 60 billion euros is the 'maximum.' Slovakia's Ivan Sramko said today nothing can be excluded. 'The ECB Governing Council looks like a battlefield,' said Laurent Bilke, an economist at Nomura..."

GSE Watch:

May 13 - Washington Post (Zachary A. Goldfarb): "Freddie Mac... reported that it lost $10 billion in the first three months of the year, as investments in mortgages continued to fall in value at the federally run housing finance giant. The disclosure automatically prompts a $6 billion investment from the Treasury Department to keep the company solvent, bringing Freddie Mac's bailout total to $51 billion in the first nine months of its government rescue."

Freddie's "Book of Business" (retained mortgages and MBS guarantees) expanded at a 21% annualized rate during March to $2.247 TN. Freddie's retained mortgage portfolio expanded any eye-opening $45bn during the month, or 65.8% annualized, to $867.1bn. It is worth nothing that Freddie's retained portfolio has now grown $155bn, or 21.7%, over the past twelve months. Freddie and Fannie combined to balloon their retained portfolios by $216bn over the past year, or 15%, to $1.651 TN.

For the month of March, Fannie's and Freddie's combined Books of Business increased $69.0bn, or 15.6% annualized, to a record $5.390 TN.

Real Estate Bubble Watch:

May 12 - Wall Street Journal (James R. Hagerty): "The median price for a single-family house fell 14% to $169,000 in the first quarter from a year earlier, the National Association of Realtors reported. The trade group said first-time home buyers accounted for half of all purchases in the quarter, and many of them zeroed in on foreclosed homes. That dragged down the median, the Realtors said. The median price for the latest quarter is down 26% from a peak of $227,600 in the third quarter of 2005."

May 13 - Los Angeles Times (E. Scott Reckard): "The slumping market for commercial real estate... now threatens to drag down regional banks as they struggle to collect on loans made against shopping centers and office buildings. Seriously overdue loans against commercial developments have shot up dramatically in recent months... That's bad for giants... But it's even worse for smaller banks, which stepped up lending to local developers and businesses as a way to stay afloat... That's especially true in California, where unemployment exceeds 11% and commercial real estate is being pummeled."

Unbalanced Global Economy Watch:

May 15 - Bloomberg (Simone Meier): "Europe's economy contracted at the fastest pace in at least 13 years... Gross domestic product in the 16-member euro region dropped 2.5% from the fourth quarter, when it fell 1.6%..."

May 14 - Bloomberg (Chris Bourke): "Anyone driving a BMW 3-series convertible in London probably knows the price has doubled since 1991. A three-bedroom home in Chelsea fetches almost three times what it cost 18 years ago. And at Le Gavroche, the two-Michelin- star menu favored by bankers since the Big Bang of the 1980s, dinner will set you back 33% more than you paid when Margaret Thatcher was prime minister. It's another story in the City of London, where office rents in the U.K.'s main financial district are falling to 1991 levels as job losses and a mistimed building boom depress prices."

May 14 - Bloomberg (Emma Ross-Thomas): "Spain's economy, shattered by a housing-market collapse and the global financial crisis, contracted the most in four decades in the first quarter as manufacturing sank and unemployment soared toward 20%. Gross domestic product shrank 1.8% in the three months..."

May 12 - Bloomberg (Monika Rozlal): "Polish average monthly wages rose at a faster pace in the first quarter than in the previous three months... The average monthly wage grew an annual 6.7% to 3,186 zloty ($994)..."

May 12 - Financial Times (Robert Anderson): "Latvia's economy shrunk by 18% year on year in the first quarter... The once booming Baltic states of Latvia, Lithuania and Estonia have gone into reverse gear... Lithuania's economy contracted by 12.6% in the first quarter... The Baltic states' fall in output now looks likely to be worse than even during their rocky transition from the Soviet planned economy in the early 1990s."

May 15 - Bloomberg (Alex Nicholson): "Russia's economic output plummeted 23% in the first quarter from the previous three months... GDP declined an annual 9.5% in the period..."

Bursting Bubble Economy Watch:

May 12 - Bloomberg (Mary Jane Credeur): "American Airlines and US Airways Group Inc. led U.S. carriers in collecting a record $1.1 billion in bag fees in 2008 as they began charging to check all luggage to defray jet-fuel costs."

May 12 - Bloomberg (Lindsay Pollock and Philip Boroff): "Actor Owen Wilson, billionaire Eli Broad and former Hollywood agent Michael Ovitz watched the art market take another knock last night as Sotheby's posted its smallest New York contemporary auction since May 2003. The $47 million tally was down 87%, or $315 million, from Sotheby's record a year ago..."

Fiscal Watch:

May 13 - New York Times (Jackie Calmes): "The administration... disclosed a double wallop of bad news from government number-crunchers. First, its Office of Management and Budget reported that the economy had added — both for this year and next — $90 billion to the historically high deficit estimates the administration issued just two months ago"

May 13 - MarketNews International (John Shaw): "If the Obama administration and Congress needed a wake-up call this week about the perilous long-term fiscal outlook, they received it with the release of two budget reports. First, the administration... provided the final iteration of its fiscal year 2010 budget... The administration's updated deficit projection sees a $1.841 trillion deficit in FY09 and $1.258 trillion deficit in FY'10. For the FY'10 through FY'14 period, the administration estimates cumulative deficits of $3.793 trillion and for the FY'10-'19 period, it sees a cumulative deficit of a staggering $7.108 trillion."

May 13 - Bloomberg (David Wilson): "The U.S. government typically pays down debt in April as personal income-tax payments swell the federal coffers. This year was an exception. Spending to bail out financial companies and automakers, revive the economy and pay for troops in Iraq and Afghanistan led the government to borrow $97.3 billion more than it repaid last month. The jump in so-called net borrowing... was the first since a $6.29 billion increase in April 1992."

California Watch:

May 14 - Bloomberg (William Selway): "California asked the U.S. Treasury for help with sales of short-term notes as the recession threatens to force the most-populous state to borrow as much as $23 billion to pay its bills. The federal government should use the Troubled Asset Relief Program to buy the notes of any state that defaults, California Treasurer Bill Lockyer said in a letter to Treasury Secretary Timothy Geithner..."

May 12 - Bloomberg (Michael B. Marois): "California's budget deficit has grown so severe that Governor Arnold Schwarzenegger said he may be forced to release 40,000 prisoners or lay off 51,000 teachers if voters next week reject three budget balancing measures. The state's projected deficit will swell to $15 billion between now and June 2010, Schwarzenegger told lawmakers..."

May 13 - Wall Street Journal (Stu Woo): "California Gov. Arnold Schwarzenegger warned Monday that the state would need to make another round of budget cuts if voters reject six key propositions in a May 19 special election. The possibilities include cutting $3.6 billion from education, reducing the state's firefighting budget by 10%, and releasing 40,000 low-risk inmates to cut prison costs, Mr. Schwarzenegger said... The warning comes as California's fiscal plight is worsening. ...the governor said the Golden State now projects a new $15 billion shortfall, up from a previous estimate of $8 billion, because of plummeting tax revenue amid the recession. That figure would jump to $21 billion if Californians next week defeat the propositions, Mr. Schwarzenegger said."

New York Watch:

May 12 - AP: "The price of a single bus or subway ride in New York City goes up by a quarter on June 28 to $2.25. Fares for the Long Island Rail Road and Metro-North Railroad will increase by about 10%..."

Muni Watch:

May 12 - Wall Street Journal (Conor Dougherty): "State tax collections continued to fall in the first quarter as muted consumption, falling incomes and weak profits plunged states into a deeper financial hole, the Nelson A. Rockefeller Institute of Government...said... The 47 states that have reported first-quarter revenues saw total tax collections fall 12.6% -- about $20 billion -- compared with the first three months of 2008... The steepest drops were in income taxes: Corporate income taxes declined 16.2% in the latest quarter, reflecting weaker profits. Personal income taxes fell 15.8%. Sales taxes were down 7.6%. Forty-five of the 47 states saw revenues decline."

Speculator Watch:

May 13 - Bloomberg (Tomoko Yamazaki): "Hedge funds returned an average 3.2% in April, the best performance in more than three years, and withdrawals slowed... according to Eurekahedge Pte. The Eurekahedge Hedge Fund Index has returned 4.1% this year... based on 42% of the more than 2000 funds it tracks globally. Last month's gain was the biggest since the index rose 3.4% in January 2006."

Crude Liquidity Watch:

May 15 - Bloomberg (Glen Carey and Mahmoud Kassem): "Middle East economies are 'doing a lot better' than other emerging markets as oil producers maintain spending on infrastructure projects, International Monetary Fund Mideast Director Masood Ahmed said... 'Oil producers have continued to spend during the down turn.'"

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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