Coming States Crisis, A Mega-Trend, The Financial “Free” Market, Insiders are Selling and More!

by Addison Wiggin & Ian Mathias

  • States on the brink… hard numbers on another crisis yet to come
  • Chris Mayer on a recent energy crossroads, centuries in the making
  • The end of an impressive streak… popular commodity rises for 54 days in a row
  • Commodities and stocks sell off… Rob Parenteau on what’s gotten into Mr. Market
  • Plus, Dan Amoss on the credit crisis: Can the free market be blamed?


  “These are some of the worst numbers we have ever seen,” said Scott Pattison over the weekend.

Who is Mr. Pattison? Not a man you should know, but certainly one worth listening to: He’s the head of National Association of State Budget Officers, and he’s rightfully freaked out.

The fiscal year will close in about two weeks for all but four states — New York, Texas, Michigan and Alabama. The 46 others have until midnight June 30 to figure out how to wrangle the $121 billion budget gap coming due over the next fiscal year. That task is so daunting, states have stopped increasing spending for the first time since the S&L crisis in 1983:

Cutting state government spending by a whole 2.2% certainly won’t save our states. Personal income tax revenues are down 6.6% and cooperate tax revenues have fallen 15.2%. The proposed $24 billion in new state taxes and fees for the fiscal year 2010 won’t even cover a quarter of the projected shortfall — a projection, we hasten to add, that’s counting on the recession to bottom sometime in the current calendar year.

We’ll keep an eye on this crisis yet to be. In the meantime, watch for some bizarre budget tricks. Proposals in various states include: Furloughs, pay cuts, park closures, early prisoner release (seriously), benefit cuts and odd new taxes (Kentucky is looking into taxing the purchase of cell phone ring tones.)

  California, the state in the most fiscal hot water, is in danger of a “multinotch” credit downgrade, Moody’s warned late Friday. The ratings agency, oddly still relevant, says that “if the [California] legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most nonpriority payments in July.”

If the Golden State can’t mend its budget woes, Moody’s is threatening a credit downgrade of at least two notches. California is already rated A2, Moody’s sixth highest grade and the worst of any U.S. state. A2 is also just five notches from “junk” status.

If California were a country, it would be the 10th largest economy in the world… and almost a junk bond? Scary.

  The global economy will shrink 2.9% this year, forecasts World Bank today. "The global recession has deepened," read a report from the group, which revised its March projection of a 1.8% global contraction.

(For a detailed look into this report, check out Joel Bowman’s sarcastic synopsis in today’s Rude Awakening.)

  “Energy consumption from non-OECD countries has passed OECD countries for the first time ever,” reports Chris Mayer, with BP’s latest Statistical Review of World Energy report in hand. “OECD stands for the Organization for Economic Cooperation and Development. There are 30 members. Essentially, it is a group of “Western” countries, including the U.S and U.K., along with several other European countries.

“Non-OECD countries include everyone else — most notably, China, India, Russia and Brazil. So you can look at the OECD broadly as developed countries versus the developing countries of the non-OECD.

“The Asia-Pacific region alone accounted for 87% of consumption growth. China by itself accounted for 75% of the increase. Even through the economic bust, Chinese demand for oil still rose 7% in 2008.

“My guess is that these lines won’t ever cross again, unless the membership of the OECD shifts. The world has changed in a fundamental way. The focus is east, not west.”

  The price of oil is backing down a bit today, along with just about every other commodity. Barrels of light sweet crude are down to $67 a pop as we write. News like you’ve read above has taken its toll on the whole “global rebound” story… copper’s down 3% today. Aluminum’s fallen 4%.

  Gold’s under pressure today too. The spot price is down $15, to $920 an ounce.

  But today’s commodity sell-off has also snapped gasoline’s 54-day hot streak. The national average price at the pump rose every day for nearly two straight months, from $2.05 a gallon at the end of April to $2.69 this morning. That’s down 3/10ths of one cent from yesterday… whoppededoo!

  Stocks are in trouble today as well. The S&P 500 opened down about 1.5% this morning, as the same commodity-oriented companies that led the last leg up are now heading back down.

“Equity investors,” writes Rob Parenteau, “appeared to have recognized that rising interest rates and commodity prices might pose some challenges to the trajectory of any economic recovery they have begun to anticipate over the past few months. We have been discussing this feedback loop for several weeks now, as massive Treasury issuance and a shift in institutional investors toward inflation hedges do pose challenges to the extent they lead to rising input costs and greater consumer discretionary income drains.

“FedEx coming up short on revenues and lowering guidance for the upcoming quarter added some bottom-up confirmation that, green shoots aside, the reality is that the global economy is still struggling to escape a rather severe recession.”

  Another bad sign for stocks… insiders at the S&P 500’s 252 companies have been sellers of their stocks at the highest rate since the rebound began. According to, execs at S&P companies have actually been net sellers for the last 14 straight weeks — as clear a sign as any that insiders have little confidence in the next few quarters.

The site says the ratio of sellers to buyers was around 1-to-1 at the start of the rally. At the end of last week, the ratio was nearly 9-to-1. That’s the highest rate of insider selling on the S&P in two years.

  Despite today’s sell-off, Breakthrough Technology Alert readers are sitting pretty. They own shares of Medarex Inc., which is up 17% today after the company announced a successful trial on prostate cancer patients. Basically, the company’s breakthrough treatment allows aggressive, inoperable prostate tumors to be reduced to an operable size.


"Medarex currently has magic bullets,” editor Patrick Cox told readers back in December, “aimed at lupus, hepatitis C, rheumatoid arthritis, Hodgkin’s and non-Hodgkin’s lymphoma, leukemia, lung cancer, kidney cancer, prostate cancer, ulcerative colitis and other diseases… This company, I truly believe, has the potential to join the ranks of legendary earners such as Genentech.”


Breakthrough Technology Alert readers are now up 87% on this pick, thanks to Patrick’s recommendation. Medarex was just one of several stocks he mentioned in his recent special report on the future of medical technology investing… check it out here.

  Another Monday, another batch of failed banks. Three bit the dust this weekend, the FDIC announced, taking a $363 million chunk from the regulator’s war chest.

That makes 40 bank failures this year, costing the FDIC over $11.5 billion.

  The U.S. dollar is one of very few asset classes on the rise today. When the world sells, it gets dollars in exchange… thus, the dollar index is up about half a point from Friday’s low, to 80.7.

  “Friday’s reader comment and Addison’s return shot,” writes a reader today, “causes me to wonder — which fox is worse? While Greenspan toiled away at the Federal printing presses, Wall Street created funny money of its own. Even recent attempts by ‘Helicopter’ Ben to catch up to the Street’s profligacy have been meager. Though the deficit numbers and acronymic (TARP, TALF) promises are staggering to behold, they pale in comparison with the obligations implied by the notional value of derivatives issued by the investment bankers. Put a number in front of 12 zeroes and hope that your counterparty doesn’t call seemed like an easy way to make money. Having learned nothing about black swans (or even white ones) from the LTC brain trust fiasco, Wall Street and its less well-informed cousins in the insurance business bet scads of money it didn’t have on products it didn’t need (to paraphrase Bill Bonner).

“I don’t believe the government will do a wonderful job of managing risk in the financial marketplace, but it may as well give it a try. It’s obvious now that the average overpaid C-level managers didn’t do very well at it. Since the Feds and, by extension, the public are funding the rescue, shouldn’t we be able to dictate the terms?”

The 5: “The popular narrative,” Dan Amoss inadvertently responds in his latest Strategic Short Report, “is that that the financial crisis was a failure of the free market, but this narrative glosses over the fact that banking is far, far from a free market. Those who describe the banking business as a wild, woolly free market simply do not understand how banks operate — especially how, with government subsidies and backstops giving them the confidence to make insane loans, banks had grown large enough to blow up the entire global economy.

“Last year was less of a failure of free markets than it was the failure of the ‘shadow’ banking system built on a weak foundation: bankers’ lack of connection with the risks they underwrote, government guarantees and tax incentives for mortgages and misapplication of statistics to exotic fixed-income securities, to name just a few things. The shadow banking system could not have grown as large and dangerous as it did without banks’ subsidies from taxpayers and the Fed’s manipulation of the price of money. The Fed’s interest rate targeting creates illusions about default and liquidity risks and distorts the natural relationship between savings and capital investment.

“The banking system shares much in common with the federal government, especially in their common isolation from the discipline of the free market; Free market discipline refers to the fact that if you make mistakes, your customers will let you know about it by leaving, and if you don’t reform and improve your product or service, you’re out of business. By promoting competition, free market discipline imposed on business has done more for ‘the little guy’ than any government handout by spurring advances in productivity and living standards.

“The banking system hasn’t been subject to free market discipline for decades, and it’s still not.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Bryon King’s latest report on gold investing is nearly out of stock. In it, he explains all the ins and outs of investing in gold miners, from definitions to screens to value traps… even what he calls “An Owner’s Manual” for junior miners. But since he also specifically recommends eight ways to play the next gold rush — some of which are small and thinly traded — we’re forced to limit the number of reports we distribute. Fewer than 150 remain today… get yours here, before we run out.

P.P.S. We’ll be taking a quick break from our daily forecastin’ tomorrow and Wednesday. Our editors and analysts are once again gathering at our Baltimore HQ for our bimonthly editorial meeting. Over the next two days, we’ll vet our latest and greatest investment ideas and economic expectations… much of which we’ll share with you when we return Thursday.

Until then, we suggest a ruder alternative to our daily 5 Min.



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