The State of Shorts

by Mr Juggles

Actually, the title has it backwards. Short the States.

The latest institution asking for a federal loan to help bridge a massive shortfall caused by a bad bet on housing is The Bank Government of California. Their revenue forecast has fallen by $3bn in the two weeks since the budget bill was signed. The budget originally called for a deficit of $15bn on a budget of $100bn. Ooops!

Consider the Fed speaking in Fedspeak below:

The evidence suggests that property tax revenues are quite responsive to changes in house prices. Although it takes several years for house price appreciation to feed through to property tax revenues, the long-run elasticity is on the order of 0.4.

Let me translate: California is just the beginning. Most states will face massive budget deficits in the next two years.

Recommendation: State income taxes will skyrocket in order to cover for a massive shortfall in property tax revenues. Balance a short position in 41 states by going long the 9 states without income taxes.

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  1. Strattie
    October 10th, 2008 | 9:34 am

    Don’t you have to have income before it can be taxed?!

  2. Mr Juggles
    October 10th, 2008 | 10:56 am

    Great point. If you have no income, move to California. The weather is great, as is sucking off the teat of 40% of the population that pays taxes.

  3. October 10th, 2008 | 10:56 am

    The Spendinator is doing radio ads trying to swindle people into buying Titanic bonds.

  4. TexasHedge
    October 10th, 2008 | 1:27 pm

    Yeah because those states without income tax won’t do something stupid like, you know, raise property taxes (which are already ridiculously high).

  5. October 10th, 2008 | 2:57 pm

    @ TexasHedge

    List son, the voice of reason has no, I repeat, NO place here. That you haven’t picked up on this yet leads me to doubt your Texas hedging abilities, real or imagined or otherwise

  6. Matt
    October 10th, 2008 | 4:35 pm

    @ TexasHedge

    You sure that the Texas part is not contrived? Texas is under no real-estate related stress because property is still chugging along flat to slightly positive as it always has been. Sp you have flat real-estate taxes + no impact of income taxes as there are none.

    So once again, why would anything change in Texas? Hurts to know that you great socialist CA/NY miracles are shams, does it?

  7. TexasHedge
    October 10th, 2008 | 5:33 pm

    Matt- perhaps you missed the two independent E&Ps who filed for bankruptcy this week, or that the price of oil dipped below $80. Sales tax receipts, which are a huge chunk of state revenue, are slowing. Texas is in better shape than most, but it isn’t dodging this one…

  8. Credit Crunch Investor
    October 11th, 2008 | 4:44 am

    California governor Arnold Schwarzenegger told the Treasury Secretary Henry Paulson on Friday that the Sunshine State who is the most populated state in the country may need to ask the help of the federal government … In an October 2nd letter to Paulson, Schwarzenegger said, “Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing.”

    Arnie then went on to say that “I also need your clothes, your boots and your motorcycle” 🙂

  9. October 11th, 2008 | 4:50 pm

    TexasHedge is right. Austin got on the wrong side of its naked call written on Galveston County Recovery Corp. (OTC:GCRC.FU) and the Bank of Ike is looking for collateral now. Not to mention that the NAV of the Barnett Shale fell 20% this week and the secret every knows here is that the TX Medicaid program is one of the most underfunded West of the Mississippi.

    Great time to rent in the Lone Star State…

  10. Jeff
    October 13th, 2008 | 1:49 pm

    During the boom, the states used skyrocketing revenue to provide essential services for the people that need it the most.

    During the bust, the states are forced to raise taxes to record levels to provide essential services for the people that need it the most.

    I’m seeing a trend here…

  11. Novice
    October 14th, 2008 | 12:11 pm

    Texas-Sized Margin Call: are you referencing a certain Okie who was borrowing against his own stock to buy more?

    Also, I have faith in Texas to do what we always do when revenues decrease: slash social spending to the bone in order to keep the state budget pretty.

  12. Size
    October 15th, 2008 | 9:23 pm


    Independents going under because oil dipped to $80/bbl. Holy crap. When I covered independents as an equity analyst in the 90’s, those guys were dealing with oil dropping to $10/bbl and they weren’t going belly up. They can’t survive on $80/bbl oil? I’ve been out of the oil biz for a while, but that seems very strange to me. They should all go talk to the boys at Devon Energy. Those good old boys know how to run a petroleum company.

    Also, the product mix for most American independent companies is very natural gas heavy. All they really need is cold winters in the NE and hot summers in the South.

  13. Size
    October 15th, 2008 | 9:26 pm

    California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing.

    I have an idea so revolutionary that Californians may need to put on a pair of sunglasses as it will bathe them in the bright light of a Eureka Moment. Ready?

    Reduce spending.