Monday, December 01, 2008

Just Another 8% Swing in the Market

"The best way to double your money is to fold your dollar in half and stick it in your pocket."

As I suspected the Thanksgiving week melt-up was met with a healthy dose of reality today. Stocks shed 8-9% in a particularly ugly session as people started to question the Black Friday retail data (sales seemed to be concentrated in low profit discount items) and the poor quality of the sales surveys (they tend to be baised unscientific surveys).

Today's drop was the fourth steepest in the history of the markets (three of these drops have occurred since September 2008) and the 12th steepest decline on a percentage basis. The obsession over the daily swings in the markets was unhealthy back in October, but I think the sort of "ostrich with its head in the sand" response is nearly as troubling (anectodal evidence - more and more people keep telling me how they refuse to open their 401k statements).

Meredith Whitney - a leading analyst who has been negative on Banks for some time - came out late in the day and highlighted the risk facing banks as the consumers feel the pinch. She said that the drought in consumer credit is likely to be the next shoe to drop in the banking industry. This really contributed to the slide in Financials late in the day.

The markets should remain volatile for the foreseeable future as mutual funds and stocks get hit with tax loss selling. However, I expect people to continue to try to trade these swings in an effort to make up for losses earlier in the year. Be nimble if you're in these markets.

California and NYC

California is facing a fiscal crisis unlike any we've seen in recent time. Many other states are facing crushing debts and deficits, but the scope of California's troubles makes it extremely important.

"Gov. Arnold Schwarzenegger declared a fiscal emergency Monday and called lawmakers into a special session to address California's $11.2 billion deficit.

The state's revenue gap is expected to hit $28 billion over the next 19 months without bold action. The emergency declaration authorizes the governor and lawmakers to change the existing budget within 45 days.

The state is likely to run out of cash in February.

"Without immediate action, our state is headed for a fiscal disaster, and that is why ... I am wasting no time in calling a fiscal emergency special session," Schwarzenegger said in prepared remarks.

The Republican governor and Democratic lawmakers have proposed a combination of tax increases and spending cuts, but Republican lawmakers steadfastly refuse to raise taxes."

Unfortunately, too many politicians are operating with the mindset that things are normal and they can take a stand on issues like taxes. This is no longer the case. Massive job cuts, true tax hikes and subtle tax hikes (think traffic tickets, more lotteries, sin taxes, etc), have to be enacted immediately or many states, including California are going to be facing some very ugly prospects.

NYC Faced with $800 million in Tax Refunds
There was a good piece in the NY Times today covering the painful reality facing NYC of a weak economy resulting in tax overpayments that now have to be refunded. As most businesses operate they make quarterly payments for the taxes that they estimate they owe on earnings. When business is stable, these tax revenues grow consistently. However, the weakness in the economy led many companies to overpay their taxes and now these companies are requesting refunds at a time when NYC can least afford it.

"The refunds — three times the amount typically returned — have triggered deep unease among city budget officials, who are already struggling with weakening revenue and face pressure to slash services and raise taxes.

They come as the city, according to the Bloomberg administration, faces a budget shortfall that is expected to climb to $4 billion over the next two years. And having to give back such a large amount of money is certainly going to make the situation even bleaker.

Each year, companies estimate their tax liabilities based largely on their performance in prior years. And because the first half of 2007 was so lucrative for many financial firms and other companies in New York, many prepaid millions of dollars more in taxes. But with revenues collapsing this year, companies owe the city much less in taxes.

In a departure from previous years, when the companies would simply instruct the city to apply any overpayment to subsequent tax bills, they are demanding the cash now."

Unfortunately, this isn't just a NYC issue, this will impact the NY State budgets and tax receipts as well. Thus, the impact will likely be felt throughout the our region as well.


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