Farrell: The President's Plate Overfloweth!

California faces a $24 billion deficit despite having raised taxes to address a $40 billion shortfall they thought they addressed only six months ago. Voters have had it and recently repudiated a budget at the polls and now the State is faced with harsh reality. California already has the second highest personal tax rate in the land at 10.55%. NYC is the highest at 12.62% which totals NYS and NYC. 50 to 55% of all personal taxes raised in California comes from 1% of the population and the movie stars can move elsewhere if you push too much. 75% of monies are spent on education, Medicaid, prisons and pensions. The Wall Street Journal noted in an editorial that state wide test scores in math and reading are the second lowest in the land despite teachers' salaries being the highest. The paper also pointed out that California spends 50% more per prisoner than the national average.

Prison quiche must cost a lot.

Financial Crisis
Financial Crisis

The rest of the states are struggling as well.

The unemployment rate rose in 48 of the 50 states last month. Michigan, with its auto dependence, has a 14.1% unemployment rate. Oregon is second at 12.4% and I always thought Oregon was God's country. Payrolls in 48 of the 50 states are below the level of one year ago. Drastic state spending cuts are called for and legislators don't seem to have the fortitude for that. The inclination is to raise taxes but voters are in no mood for higher taxes ever, and especially when incomes are down. The bright idea of turning to Washington for help is going to be a big problem for President Obama. If the car companies can get bailed out how do you tell California to drop dead when the state has 56 electoral college votes as my partner Greg Valliere has often stated. The President's plate overfloweth!

The push back from Congress over the President's white paper on financial reregulation centers mostly around expanding the Federal Reserve's supervisory role. Lawmakers are concerned about the possible conflict between the Fed's traditional role of setting monetary policy and the charge of being top regulatory cop for the financial system. I am concerned that the Fed gets expanded authority at the same time it has to get permission from the Treasury to act in an emergency. That, to me, has the monetary authority flowing from the White House as I wrote last week. Expanded powers with the Treasury's nose under the Fed's tent is a recipe for central White House control down the road and that spells potential disaster.

On a different note, Soleil's Jacques Rousseau has lowered his estimates for the refining stocks. Margins are squeezed due to the rise in the price of crude and the inability to raise refined product prices as quickly. Since the group is down more than 25% this month, Jacques feels the stocks reflect most of the disappointment. I would look to buy the group on any weakness. Jacques likes Holly, Sunand Valero. I might focus on Sun as it has a more diversified business mix, a solid balance sheet (although most of these companies do), and a 4.9% dividend yield. If I am right the market is in for some consolidation and we will get a chance to buy these stocks. My experience with the group is that their profits swing widely with the price of crude and looking to "rent" them for periods of time as opposed to owning them has been a good strategy. Sun closed at $24.41 on Friday and its 52 week low is $21.30 (the 52 week high is $49.44.) It wouldn't take much of a downtick for me to buy the stock.