“Phenomenally accurate forecasts”  

With GM’s bankruptcy no longer hanging over Wall Street, perhaps now investors can get their minds right for some really bad news. We’re talking about the looming bankruptcy of California, of course, and of at least a few more big-budget states whose books are in equally disastrous shape, including New York, Arizona, New Jersey, Nevada, Rhode Island and Florida. All told, the 50 states are looking at budget shortfalls totaling $350 billion over the next two-and-a-half years, according to the Center on Budget and Policy Priorities.

A disaster is taking shape before our eyes, although you’d never know it from all the celebrating that’s been going on in the stock market. Consider these sobering statistics from the Rockefeller Institute. They were cited by our colleague Bill Buckler of The Privateer, one of our favorite reads : “[With California leading the pack,] state tax collections continued to fall in the first quarter as muted consumption, falling incomes and weak profits plunged the states into a deeper fiscal hole,” writes Buckler. “The 47 states that have reported first-quarter revenues saw total tax collections fall 12.6 percent compared with the first three months of 2008. The steepest drops were in income taxes due to climbing unemployment. Corporate taxes declined 16.2 percent in the latest quarter, reflecting weaker profits. Personal income taxes fell 15.8 percent. Sales taxes were down 7.6 percent. Forty-five of the 47 states saw revenues decline.” 

“Stage Three” Deflation

As Buckler notes, California’s fiscal problems are deep and wide. In the coming weeks, he writes, the state faces “park closures, massive welfare cuts and sales of public buildings and land.” At the end of the line looms what he calls “stage three deflation” for the state’s economy, implying a complete collapse of income, jobs and economic activity. This is a very big deal, given that if California were ranked as a country, it would boast the sixth largest economy in the world. 

Not that Wall Street seems to care. If investors can find reason, as they did yesterday, to push stocks exuberantly higher following a wholesale government takeover of one of the nation’s biggest manufacturers, then California’s imminent death-dive should be good for another thousand-point surge.  It would be on a par with yesterday’s 221-pointer, which came on news that GM’s filing was official. Actually, the headlines took a different slant – that the Government is now “behind” GM. With friends like Uncle Sam, how can GM miss, right? We can think of a few ways ourselves, but for the time being, investors seem to have suspended disbelief, blessing a deal that must have warmed the cockles of such champions of private capital as Hugo Chavez and Fidel Castro. 

Stocks Move Blithely Higher

Regarding the stock market, it’s going to do what it’s going to do no matter what the news, and for now that means short-squeezing bears until the very last of them is too weak to stand. Meanwhile, we put out a target of 940 for the E-mini S&Ps Sunday night, a number that effectively discounted a nearly 200-point gap-up in the Dow. By day’s end, however, the futures had surpassed out mark, hitting a 947.25 high that equates to a 260-point rally in the Industrial Average. Naturally, we’re always looking for the dark lining in every silver cloud, and in this instance it could be the refusal of our market bellwether, Goldman Sachs, to go along with the stampede. Goldman shares actually closed slightly lower on the day, at 144.97, after failing by nearly four points to reach a 151.24 “Hidden Pivot” target that we still think has the power to turn back the bullish tide. We shall see. 

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