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U.S. stock index futures were pointing to a lower open on Tuesday
after China's ISM report showed a weakening economy. The Euro fell
well below 1.23 on the dollar overnight. European stocks were lower.
Asia was lower. ISM survey could be big market mover this morning.
News For Thought
Report: Iran has enough fuel for two nuclear weapons. According
to The New York Times: "In their last report before the United Nations
Security Council votes on sanctions against Iran, international nuclear
inspectors declared on Monday that Iran has now produced a stockpile
of nuclear fuel that experts say would be enough, with further enrichment,
to make two nuclear weapons."
The Times added: 'The toughly worded report says that Iran has expanded work
at one of its nuclear sites. It also describes, step-by-step, how inspectors
have been denied access to a series of facilities, and how Iran has refused to
answer inspectors’ questions on a variety of activities, including what the agency
called the “possible existence” of “activities related to the development of
a nuclear payload for a missile.”'
China begins to use commodity reserves. According to The Wall Street
Journal, the reason commodity prices have droppes, may be at least partially
due to China dipping into its commodity reserves. It's unclear if China is doing
this from a strategic point of view by decreasing demand in order to drop prices
and then swoop in at lower prices later. According to The Journal: 'Short term,
a move to tap reserves is a potentially bearish signal for investors in these
commodities, as China's reserves are deep. Analysts at Deutsche Bank said the
third quarter may see "considerable pressure" for prices on commodities such
as copper and nickel.'
Big hit ahead for European banks. According to The Wall Street
Journal: "Banks in the euro zone will suffer "considerable" loan losses this
year and next, which could amount to an additional €195 billion ($239.26 billion)
in write-downs and could weigh on banks' profitability, the European Central
Bank said." The Journal added: "The ECB cautioned that loan losses in 2011 may
even exceed current estimates."
China PMI suggests slowing economy. "China's Purchasing Managers
Index fell to 53.9 in May from 55.7 in April, the China Federation of Logistics
and Purchasing said. A PMI reading above 50 indicates growth, while a reading
below 50 indicates contraction." The Wall Street Journal reported. |
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Holders of mutual funds which specialize in tax free municipal
bonds could be in for a nasty surprise if a trend that has been under the
radar picks up speed as billions worth of municipal bonds could default
in the next two years.
The connectivity of the financial system, with its epicenter being housing and
credit will get a new wrinkle. According to Money.CNN.com: "Several downtrodden
cities are on the verge of defaulting on their debt, putting financially encumbered
states and taxpayers on the hook to pick up the tab. The National League of Cities
says municipal governments will probably come up $56 billion to $83 billion short
between now and 2012. That's the tab for decades of binge spending; municipal
defaults could be our collective hangover."
So far, only one city, Menasha, Wisconsin has defaulted in the past year, while
another Wisconsin city, Warrens, missed default by coming to an agreement with
the state. But according to the CNN Money report: "Last year 183 borrowers --
mostly "risky" municipal issuers, such as suburban developers in Florida -- were
unable to make $6.4 billion of payments. That's way up from 31 defaults on $348
million just two years earlier, according to Distressed Debt Securities."
And, you guessed it. According to the report: "Rampant unemployment, tepid consumer
spending, and deeply underfunded public pensions are the leading causes of the
balance sheet issues cities are having today. But years of political chicanery
and poor financial decision-making by city officials are what led to this problem."
There are three municipalities that have "perhaps the most tenuous grips on staying
in the black" according to the article.
First is Jefferson County Alabama, with a population of 665,000. Alabama's most
populated county "is shouldering about $5 billion of debt, most of which was
issued to overhaul its sewer system in the mid-1990s. But the county's real troubles
stem from a 2003 refinancing of the original fixed-rate bonds and a corrupt local
government that accepted kickbacks in exchange for mangling the county's portfolio."
Next, the capital of Pennsylvania, Harrisburg has its own set of problems. According
to the article: the city "owes $68 million in bond interest payments this year
-- $3 million or so more than its entire annual budget. The Harrisburg Authority,
the governing body that issued the bonds to construct a state-of-the-art trash
incinerator, has already been unable to make several payments, and now the county
government, which footed the bill last year for a $775,000 swap fee, is suing
for the funds."
And there is more. According to the article: "The authority is also indebted
to the owner of the trash-burning facility, Coventa Energy, to the tune of $20
million. In April the authority also missed a $637,500 payment to Coventa, and
is now in the process of negotiating a forbearance." The city is turning to a
collection of "arcane" Western objects that it is considering putting on Ebay
to raise money. The state has said it won't bail the city out.
And then there is Detroit. According to the article: "To make up for a 2010 budget
shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes
in March. The issuance followed on the heels of a warning from city officials
that if its financial state didn't improve, it could be forced to declare bankruptcy." The
state has stepped in before and will likely do so again if Detroit defaults on
its debt.
Conclusion
When Orange County failed in 1994, it proved to be the shock that led to a stock
market bottom as the inevitable "blood in the streets" buying opportunity had
arrived.
This time around, it's difficult to see the defaults of Jefferson County, Alabama,
Harrisburg, PA, and Detroit being signs that a bottom is in. They just don't
seem to have the kind of clout that Orange County did in 1994.
What's more, in 1994, counties and U.S. cities, didn't default. There was shock
value in Orange Countys' trouble. Now, there is no shock value. Countries are
defaulting, or being prevented from default on a regular basis. Greece, Spain,
Portugal, Ireland, and other European economies are discussed in terms of potential
defaults on a regular basis.
Trillion dollar bailouts are no longer rare, but rather common. The U.S. has
one ongoing. Now Europe has joined the party. Dubai has its own mini meltdown.
And now there are reports that Canada's health care system is about to change
due to unsustainable costs.
A default by three U.S. municipalities, although terrible developments, would
seem to be footnotes in an ongoing saga of money being sucked into black holes
all over the world.
Unless, of course, you happen to own some of their bonds, in which case, it becomes
personal. What's the point? It looks as if the more you look, the more trouble
you find in this ongoing phase of the global economy.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
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