Charles Payne's  Instablog

While the world continues to play the wait and see game with respect to how Europe gets out of its bind that has broke nations making demands of rich nations to bail them out, there is a fair amount of drama that's not getting enough ink in America. There is a good chance that tomorrow Stockton, California will be become the largest American city to file for bankruptcy. There are several story lines here and all teachable moments. We see the aftermath of the bursting of the housing bubble, we see misguided public spending in the notion that temporary construction jobs represents true economic growth, and we see the horrors of borrowing, particularly when it's driven to pay off generous promises made to public workers.

Good Times

Stockton was really a boomtown in the not too distance past but how much of that boom was real and how much was it just a party where nobody thought or cared about tomorrow? Developments were great as the town erected:
Bob Hope Theater
Downtown Transit Center
Stockton Arena
Stockton Ballpark
Downtown Marina

I understand the concept of investing and making a town more appealing, but at what cost? The arena cost $68.0 million and the ballpark $22.0 million: were they trying to lure the Raiders? Of course, there was a housing boom but that was a private-sector phenomenon and while it does reverberate negatively today, the fact is local government saw a chance to piggyback that boom with their own spending boom. This, by the way, is always the case everywhere. Elected officials love to spend money because it's the only way they understand to gain votes.

Yes, the housing market bubble popped nationwide, but the fact is Stockton peaked even before that with single family housing permits peaking at 3,128 in 2003 that number tumbled to 123 in 2010.

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Entitlements

Americans love their public sector workers like policemen, firemen, and teachers, but there was a kind of love in Stockton not matched by the greatest songs or poems ever written. Police could retire at age fifty at their pay for the last year on the job or in some cases even more. (Of course we all know the trick of working overtime and skipping days off in the last year to goose pay so high that many retired public servants make more sitting in a rocking chair than they earned working). Healthcare was promised for life for city employees and their spouse, even if they only worked for Stockton for a single month.

The Debt Bomb

Stockton was spending like crazy, building in a way that would make the current administration proud, and making promises that could never be kept. So what did the folks in Stockton do when it was clear the city was heading in the wrong direction? They borrowed a ton of money. In 2007 the city borrowed $125.0 million then handed it over to CALPERS which proceeded to lose up to 30% of the principle. Today Stockton has $700.0 million in long term debt.

The Aftermath

Because of commitments to retired workers Stockton has reduced its police force dramatically to just 100 officers that can only respond to emergencies. In a recent interview the police chief said officers could only immediately respond to in-progress crimes or violent crimes. In 2010 the ratio of police per 1,000 citizens was 1.17 versus 2.46 statewide; that ratio is now significantly lower. In the meantime there are 94 retirees pulling in pensions of more than $100,000 (two times the statewide average of cities this size). Consequently, crime is exploding.

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Murders are up to a rate of 16.8 for 100,000 citizens from 13.1 in 1999 but pure economic crimes are surging even more. Robberies are now 483.8 per 100K from 371.0 and burglaries 1,534.7 per 100K from 1,016.2 or 50%.

If some kind of deal can't be hammered out today it looks like Stockton will go the bankruptcy route and considering the contingency plan that would wipe out $10.0 million in debt this could be a very contentious process.

Lessons Learned

I write about Europe all the time and trace the origins of their fiscal woes which point to embracing systems that never had economic growth in mind but some far-flung notion of fair society. The philosophy of fairness outside of Nietzsche has been child-like in simplicity. There are similar parallels in Stockton but it was mostly that alliance of Democrats and unions raiding the coffers until the coffers were empty. It was short-sighted lawmakers on both sides of the aisle that rubberstamped every spending bill in part because they don't know the difference between spending and investing. But, in larger part because it's always about bringing home the bacon.

There is also the greater lesson about accountability.

Stockton began as a boomtown that even birthed Caterpillar, and it was the first city in California not given a Spanish or Native American name. Before officially calling itself Stockton the city was known by a series of names including Tuleberg, Fat City and Mudville.

Considering how far the city has fallen, twice named Most Miserable City in America (Forbes) maybe Mudville could make a comeback. Of course it's also the fattest city in America, too, so Fat City would be a great name. Just think beyond the tongue and cheek stuff of a town that has collapsed so hard that its citizens are stealing and eating and giving up.

I would like to see bankruptcy run by a smart judge that enables the city to tear up those pension obligations and make them more reasonable. There isn't much room to cut spending on basic services as 25% of police, 30% of firefighters and 40% of "other" city employees have been canned recently. I hope this makes national headlines and people learn what went wrong so we don't make the same mistakes. This November will be a referendum on spending and higher taxes to level the playing field and it will sound flowery and for many it will sound fair.

It's not fair to people that work and love their communities.

June Rally in Trouble

After a devastating month of May the stock market came to life this month but volatility is picking up and that means vulnerability, too.

There has to be a stand this week but it's hard to imagine lots of investors stepping up to the plate before Thursday (Supreme Court decision) and Friday (EU Summit ends and slew of economic data).
On June 4th the Dow was 12,101 and rallied to 12,836 over the next couple of weeks. A 50% retracement of that 736 point move puts key support at 12,469 a number that could be tested today if we get additional pressure into the close. But from a technical point of view that could be good news if it holds.

It would shake out some traders but also form a short-term reverse head and shoulders formation.

The market continues to be a coiled spring waiting for leadership to go along with signs our economy can still be great. Sadly, the good news is expectations are so low "good news" could simply be mediocre stuff.

Worst case scenario is we re-test the aforementioned 12,101.

For the S&P it's critical to close above 1,317 today or we'll violate the 50% retracement from that June 4 spike that peaked on June 19th.

Yesterday's Session

I like the way the market closed. And there was good news after the bell including Apollo posting strong earnings results.

Another interesting story is the China Development bank agreeing to lend Lennar $1.7 billion to build homes in the San Francisco area. This is amazing on several levels including the fact China has more faith in the US housing market than most Americans have. Sure, the San Francisco area isn't the same as Detroit but what an investment. What does this say about American banks and Wall Street? I don't have details so maybe the deal was cheaper than those avenues if they existed to this same extent. I have to say it's really shocking news and should serve as a wakeup call of a different kind than Stockton going belly up.

You are crazy if you have given up on this country!

We should be looking west for lessons on terrible government policy but also as a reminder of greatness in our DNA.