The U.S. government will face pressure to bail out struggling states in the next 12 months, says Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008, Bloomberg writes.
“It’s going to be an incredibly divisive issue.”
Meredith Whitney
While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable, according to Bloomberg.
“People will think the federal government will bail these states out,” Whitney, the founder of Meredith Whitney Advisory Group Inc., says in an interview on Bloomberg Television.
“It’s going to be an incredibly divisive issue.”
Whitney’s comments coincide with her release of a report rating the financial health of the 15 largest U.S. states measured by gross domestic product, according to Fortune magazine.
The report, which Whitney said took two years to complete and hasn’t been released publicly, ranks California’s finances the worst, with New Jersey, Illinois and Ohio tied for second-worst.
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Related Articles
- Meredith Whitney Predicts 80,000 Layoffs for Wall Street (wallstreetpit.com)
- Meredith Whitney Warns Of Massive Pain Coming For The States (businessinsider.com)
- Meredith Whitney: Next Financial Crisis To Come From Local Government Defaults (huffingtonpost.com)
- Meredith Whitney: Wall Street Bonuses Will Disappoint (blogs.forbes.com)
- “States are not like banks” and related posts (self-evident.org)
- Meredith Whitney: ‘States Represent the New Systemic Risk’ (blogs.wsj.com)
EconoTwist's 
Options: Highest Put/Call Ratio Since Lehman
The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg. Investors are paying a high price to hedge against a drop in the US stock market.
“We are buying puts and protection across the board. There are many open fronts, too many question marks.”
Sergi Martin Amoros
The end of the Federal Reserve’s Treasury repurchase program is prompting options traders to pay the most in four years for protection against stock declines, a signal that proved bullish in the past, Bloomberg reports.
The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg.
The last 17 times that so-called skew rose as high, the benchmark gauge for American equities climbed a median 3.9 percent over three months, data compiled by Bloomberg show.
Traders are loading up on insurance in the options market on speculation policy makers will halt their program of quantitative easing in June.
“A Major Trend”
Similar purchases preceded gains in the past because they meant professional investors who use the contracts as hedges are buying stocks, said Pam Finelli, head of European equity derivatives research at Deutsche Bank AG.
“Risk management and portfolio protection is a huge theme in the market and it’s not unusual to see people expanding their equity allocation, but doing so with a hedge in place,” Finelli says in an interview from London.
“The equity market goes up but the puts stay bid because there’s an underlying hedge that’s being put on at the same time. This has been a major trend.”
Sergi Martin Amoros, chief executive officer at Credit Andorra Asset Management in Andorra, added to equities following the March 11 earthquake in Japan, he said in a telephone interview on April 21.
He’s also buying protection on the firm’s 4 billion euros ($5.8 billion) in investments.
“Question Marks”
“We made the most of the March sell-off to add to positions as equities had weakened,” he said.
The S&P 500 fell 0.2 percent to 1,334.60 as of 9:42 a.m. in New York. It climbed 6.3 percent this year through April 21 as the US unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as companies created more jobs than forecast, the Labor Department said earlier this month.
The economy probably expanded at a 1.9 percent annual pace in the first quarter and will grow at an average rate of 3.1 percent though 2013, according to the average of estimates in a Bloomberg survey.
Source: Bloomberg
Bloomberg’s Jeff Kearns and Whitney Kisling report the conversation between Howard Present, president and chief executive officer of F-Squared Investments Inc., and Carol Massar, Matt Miller and Adam Johnson on Bloomberg Television’s “Street Smart.”
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