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1. California Has a Budget!
By Tom Graff
8:22 a.m. EDT
California's budget deal, at first glace, is exactly what observers feared it would be. There are about $15 billion in legitimate spending cuts, but another $11 billion in tricks and games. $1 billion is saved by delaying payroll payments that would be due on June 30 to July 1 (a different fiscal year). $1.7 billion is saved by borrowing from Redevelopment Agencies, but that exact plan was ruled unconstitutional just last year. I have no idea why they think it will be ruled otherwise this year. $1.9 billion is taken from local governments, but needs to be paid back within three years. The
Los Angeles Times
is reporting that public employee unions are already talking strike.
Legally the state will probably get away with calling their budget balanced for now while things like constitutional challenges and employee strikes are worked out. But since a lot of these one-time items will either not save as much as planned or else not be available again next year, it will almost certainly mean a large budget deficit next year. Maybe not $26 billion, but something.
No early read on how CA bonds are trading, but given the dicey nature of this budget as well as the rapid run-up in recent days, I wouldn't be surprised if they are wider today.
2. Bernanke's Statement
By Marc Chandler
11:10 a.m. EDT
There were no major surprises in the statement. Key points:
Lower rates for longer: The
will keep rates at exceptionally low levels for an extended period to support what is expected to be an anemic recovery in late 2009 and 2010. Triggers for a rate hike include a recovery in the jobs market and economy. That's not expected anytime soon. Reasons arn't surprising but did support the fed funds futures market.
The Fed expects the job losses to continue, with unemployment remaining at high levels well into the recovery stage. Additionally, credit remains hard to get, and financial conditions remain stressed. The recovery is also likely to be anemic. This reinforces our view the Fed will leave rates on hold until mid-2010. The fed funds market had been pricing in a rate hike as early as the first quarter of 2010, and today's comments have seen yields come off 2 to 3 basis points so far.
Plans for removal of quantitative easing, laid out in today's
Wall Street Journal
, were reiterated in the speech. These include paying more on reserves held by banks at the Fed, selling longer-term assets on the Fed's balance sheet, letting the balance sheet run down as assets mature, conducting reverse repos to drain reserves.
Market impact: There are still risks that the testimony may contain some unexpected surprises, but the chairman's speech should see the dollar correct higher. The outlook hasn't changed since the FOMC meeting. Growth is still seen as picking up at a very modest pace, and there are still risks to the financial sector.
3. East West Bancorp & Regionals
By Geoff Johnson
11:23 a.m. EDT
East West Bancorp
raised capital this morning. Recently I mentioned that I started a position, and I added to it after the deal. I like how this bank is aggressively working to write down and otherwise address its bad loans. The second-quarter press release is worth a read.
I suspect EWBC will not be the last to raise capital this quarter. Given how the regional bank results are being received, I suspect we'll start seeing announcements soon. Because I don't think they'll have any problem raising the cash, I think it is a good thing.
4. Economic Lamentations
By Howard Simons
11:57 a.m. EDT
The crocodile tears flow whenever someone goes up to Capitol Hill and has to endure questions designed for that evening's news. Or blogs. Or Twitterdom (other may Tweet; I shall Twoot).
Just save it. I have been on certain business networks whose
I have described as 1) ask the wrong question, 2) don't listen to the answer, and 3) mispronounce my name ("Simons" is with a long 'i') no matter how many times I tell the producer otherwise. Try discussing a complex topic in that environment; there is just no market for it.
I'm waiting for the next time anyone tells me, "Hey, that was great! But we really need for you to make it just a little more complex.
It extends to whatever is left of print, too. One reporter from a leading business newspaper, the one often used as a prop in advertising, told me she couldn't use the term, "sovereign credit risk." Could I please come up with something else?
Politicians exist at such a low state of understanding because our citizenry exists as such a low state of understanding and
actively rejects making the effort to learn.
If the business media keep dumbing down content, they become part of the problem.
I also learned more than three decades ago corporate efforts at "economic education" were similarly worthless. They were thinly disguised lobbying efforts.
5. Finding the Healthy Banks
By Tim Melvin
12:25 p.m. EDT
I am often asked what I am looking for when researching regional bank stocks. How about a paragraph like this one from the earnings release from Kansas City, Mo.-based
Nonperforming loans increased to $14.1 million at June 30, 2009, from $8.2 million at June 30, 2008. As a percentage of loans, nonperforming loans increased to 0.33% as of June 30, 2009, compared to 0.20% at June 30, 2008. Nonperforming loans are defined as nonaccrual loans and restructured loans. By comparison, the industry average for nonperforming loans as of March 31, 2009, was 2.44%. The company's allowance for loan losses totaled $55.1 million, or 1.27% of loans as of June 30, 2009, compared to $48.1 million, or 1.17% of loans as of June 30, 2008.
The banks that have been prudent lenders and protected their balance sheet during these turbulent times will grow market share and be obscenely profitable as the recovery takes hold next year.
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This article was written by a staff member of RealMoney.com.