States See Pickup in Tax Revenue

By CONOR DOUGHERTY

State tax revenue rose in the second quarter, as higher taxes and the slowly improving economy led to an increase in collections.

Overall tax revenue increased 2.2% in 47 states that have reported their receipts for the three months ended June 30, compared with the same period a year ago, according to a report to be released Monday by the Nelson A. Rockefeller Institute of Government at the State University of New York.

This marks the second quarter in a row of recovering tax collections—and follows five quarters of declines in revenue that hammered local-government budgets. The latest figures are still a mixed bag: Some states continue to see declining revenue, but those were offset by states that saw increases.

States continue to face financial pressure, in part because tax collections remain below the levels of two years ago. In addition, aid to state income provided by federal stimulus funds is starting to fall away. Signs that the economy is flagging add to the gloomy outlook for state coffers.

"Most states still show a mismatch between revenue and spending trend lines," said Robert B. Ward, deputy director of the Rockefeller Institute. "It's not time to put away the red ink yet."

Declining expenditures by state and local governments shaved 0.1 percentage point from second-quarter gross domestic product, according to a Commerce Department report on Friday. The nation's 89,000 local governments, everything from states to cities and school boards, have seen persistent layoffs over the last two years.

State and local governments shed 48,000 jobs in July, the biggest number in a year, according to the Labor Department. The sector, which now employs about 19.5 million people, has cut 169,000 jobs this year, including 102,000 in the past three months.

President Barack Obama recently signed legislation that will provide some $26 billion in budget assistance for states. Still, many economists think crimped local-government budgets will continue to drag on growth this year and next. Most state and local governments require a balanced budget, so weak revenue forces spending cuts or tax increases.

"Federal help will buy them more time, but doesn't change the fact that they've got to cut expenses," said Nigel Gault, chief U.S. economist at forecasting firm IHS Global Insight.

The second-quarter gains were driven by growth in sales and income taxes, both of which have been raised in many states. Second-quarter sales-tax revenue increased 5.9% in the 47 states surveyed by the Rockefeller Institute, while the take from personal income taxes grew 1.6%. Collections from corporate income taxes, which tend to be volatile and are just a small slice of most states' collections, fell nearly 19% over the period.

Some 30 states saw tax revenue in the second quarter rise from a year earlier. Many of the strongest performers were places where collections were hard-hit by the recession. Florida saw a nearly 14% increase. Arizona—which, like Florida, has been among the states most affected by falling real-estate prices and lackluster construction activity—saw a 3.9% increase.

Still, revenue declined in several big states. In California, tax revenue declined 0.9%, despite a nearly 12% increase in income-tax collections largely driven by higher taxes, according to the Rockefeller Institute. Illinois saw revenue decline 7%, while Michigan's collections fell 3.8%.

Barclay's Portfolio Strategy Report

Though we continue to believe that deflation will not happen, in this week's US Equity Strategy note, we discuss what could happen in a deflationary environment.
One thing that caught my eye is that the price-to-book multiple on the Nikkei 225 is 1.2x, while the S&P500 is almost double at 2x.

We believe that elevated economic and regulatory uncertainties will keep the markets volatile, and as such we continue to recommend our more defensive stance instituted in the last couple of weeks. Our favorite sectors are Utilities, Telecom, Healthcare and Staples, while avoiding Materials and Discretionary.

Barclay's Weekly Credit Call

Last week spreads weakened across the board even as overall volatility remained subdued.

In investment grade, yields touched record lows, however spreads remain wide which indicates that yields could move even lower.

Investors should consider new issues in the high yield market as a potential source of relative outperformance.

In the macro front, fiscal policies that complement and support monetary stimulus will be key to avoiding unfavorable broad market outcomes that negatively impact risk asset returns.

As corporate fundamentals remain on stable footing, we maintain our constructive stance on credit in the medium term. However risks linked to poor economic growth have risen of late, and we recommend hedging these risks through selective cyclical shorts or tail risk trades.

Full report via the article titile link.

Barron's: Uncle Sam: Depending on the Kindness of Strangers

EVEN AS U.S. INVESTORS AND companies ramp up investments in faster growing emerging economies like Brazil, Russia, India and China, these countries are reciprocating by snapping up record amounts of U.S. Treasuries. Total foreign ownership of Treasuries has grown to 48%, from 29% a decade ago. And, in a sign of their rising power, the BRICs now account for nearly a third of the foreign ownership, with China by far the biggest holder.

THIS IS A MUST READ... by Howard Marks of Oaktree

Click HERE for the letter

Second Half Slowdown

Wow, look Ma, I did it all by myself...

Click HERE for Goldman second half slowdown report

WSJ: Why This Isn't Like 1938--At Least Not Yet (Donald Luskin)

The article in full can be found via the above link, here are some pertinent paragraphs:

We didn't go into a depression or headed for a re-do of 1932, should we be worried about an economic relapse (1938 aka "the recession in a depression" that would have been a depression in any other market)

At the bottom in 1932, stocks (as measured by the S&P 500) had lost 86.2% from the 1929 top. Last Friday, stocks were only off 34.7% from the 2007 top. "Only"? To be sure, losing 34.7% is no buggy-ride. But to match the devastation in the Great Depression, the S&P 500 would have to fall 806 points from Friday's level, or 78.8%

The climax came in early March 2009. The hasty passage of a massive deficit-busting "stimulus" bill sent the message that a new president and Congress would just as quickly enact their strident antibusiness agenda. At the worst, stocks plunged to show a loss of 56.8% from the 2007 highs. At the comparable point in the Great Depression, stocks were off only 49%.

Chairman Ben Bernanke's Federal Reserve announced a massive program to buy Treasury bonds and mortgage-backed securities to pump liquidity into the banking system. Treasury Secretary Tim Geithner deftly executed "stress tests" enabling the largest banks to be recapitalized in public markets. And one agenda item at a time—socialized health-care, cap-and-trade energy tax, unionization "card check," mortgage "cramdown"—got diluted, slowed down or stopped.

From there, as the economy embarked on recovery, instead of following the path of history to massive further losses, stocks embarked on an upside run. In 14 months, the S&P 500 surged 79.9%. That still leaves us 34.7% from the 2007 highs. But consider the alternative. After the June 1, 1932, bottom in the Great Depression, stocks rallied more than twice that, 177.3%, over a similar period—for all that, they were still down 61.7% from the 1929 peak.

It took 25 years before stocks clawed their way back. We probably don't have to be quite that patient today, because in the recent bear market we simply didn't lose as much. But we shouldn't have illusions about how easy it is for stocks to recover from severe bear markets, especially those associated with systemic credit crises. After the bear market in the banking panic of 1907—which was very similar to the recent bear market in magnitude and duration—it took 10½ years for stocks to get back to the old highs.

The most worrisome analogue is the great bear market that began in March 1937. From the top stocks lost 60% of their value, making it the second worst bear market in history. Not ending until April 1942, it was the longest ever. As the chart demonstrates, over the last year the stock market has followed a path eerily similar to 1937. First, a strong, rapid run to a recovery high—same pace, same magnitude. Then a correction—again, the same.

Will we continue on the path that led the correction of 1937 into a collapse in 1938? This question would be nothing more than a technical curiosity for chartists if it weren't for alarmingly similar economic backdrops between the two periods.

In 1937 the economy was in a strong recovery from a severe crisis, and there was complacency that the worst was over—much like the exuberance about a "V-shaped' recovery this April. But after 1937 the economy relapsed into what historians call "the recession within the Depression" triggered by a set of very specific policy mistakes.

The Fed tightened by raising reserve requirements. Consumers were hit with new taxes to pay for the then-new Social Security program. Worried about excessive deficits, Roosevelt cut government spending. At the same time, his administration accelerated antibusiness rhetoric and regulation.

Another Hint of a Lil' bit more of QE??

Washington Post article:
Click HERE for article

Excerpt:

By Neil Irwin

Washington Post Staff Writer
Thursday, July 8, 2010

Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth. With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.