The Perfect Storm: Already Hitting California.
By Martin D. Weiss, Ph.D.
“As California goes, so goes America.”
California has a GDP of $1.8 trillion, larger than the economies of Russia, Brazil, Canada and India.
It’s America’s most populous state with 38 million people. And it’s in the final throes of financial death — bankruptcy.
In Governor Schwarzenegger’s own words, “Our wallet is empty. Our bank is closed. And our credit is dried up.”
Yesterday, the Golden State had no choice but to begin paying its bills with i.o.u.’s.
And now, Moody’s and S&P are watching from the sidelines, poised to downgrade the state’s bonds by several notches to junk status in one fell swoop — a move that’s going to crush the tax-exempt bond market and could send stocks off the proverbial cliff.
We have done everything in our power to warn you that this shoe was about to drop — and the national media is taking notice. I think you should too.
I warned you in Money and Markets ten days ago. Remember? The headline was “California Collapsing.”
Three days later, Fortune picked up the story, featuring our warnings with the headline, “A warning bell on California muni bonds: As sure as the sun will set on the Golden State, analyst Martin Weiss says California is going to default.”
My main point to Fortune: California is facing a $24 billion budget gap with no obvious way to close it. The state has appealed to Washington for a federal bailout, but it has gotten the cold shoulder from the Obama administration. Next, expect draconian cuts that will merely deepen California’s depression and cause a rash of ratings downgrades.
A New Short-Term Target for Stocks
By Jeff Clark
It's hard to stay bearish.
Everything I look at tells me it's right to stay on the short side of the market. But it's been that way for six weeks, and so far it hasn't worked.
It hasn't worked to be bullish, though, either.
Anyone who turned bullish back in early May is suffering the same frustration. The S&P 500 closed at 919 last Friday. That's where it was six weeks ago. So stocks haven't lost or gained any ground.
It's the investor equivalent of purgatory.
At the risk of pressing my bet too far, I'll share with you this updated chart of the S&P 500...
A "head and shoulders" topping pattern is developing here. This is a bearish pattern and often indicates the reversal from a bull trend to a bear trend.
You can calculate the projected move by taking the difference between the top of the head (950) and the neckline (880) and subtracting it from the neckline. (Here's how the math works: 950 minus 880 equals 70. Then, 880 minus 70 equals 810.)
So if the index drops below the neckline, the intermediate bear trend is in force, and the pattern projects a move all the way down to 810.
Granted, a move down to 810 isn't exactly a disaster. After all, the index was at 670 just three months ago. I suspect, though, most investors didn't get on board back then. They likely bought in a bit higher, and a 10% correction right here will wipe out most of their gains and quite possibly put them underwater.
On the other hand, if the S&P can move on and break out solidly above 950, then that action will invalidate the head-and-shoulders pattern, and the path of least resistance will shift higher. Given the multiple bearish technical indicators we've covered over the past few weeks, an upside breakout is a low-odds proposition.
It makes more sense to me to bet on the downside right here. That's been my story for the past few weeks, and I'm sticking to it.
Best regards and good trading,