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« US Dollar To Fade As Gold Heads Higher | Main | If Deflation Wins, What Will Gold Stocks Do? »
Friday
Aug132010

Florida – Much Worse Problems Than the Oil Spill

Oil Spill 14 August 2010.JPG



By Doug Hornig, Senior Editor, Casey Research



Media coverage of the oil spill’s effect on the Gulf focusing on tourist income lost by the waterfront towns – with footage of empty beaches, restaurants and T-shirt shops – dominates the news. Interviews with devastated business owners are heart rending. But they always end with references to somehow hanging on until “things get back to normal.”

Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either.

Projections suggest that Florida can expect oil all along its west coast, and possibly throughout the Keys and up the east coast as well. Yet even before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation awaiting a match.

Oily beaches and dying wildlife are likely that match.

Take unemployment. Statewide, it ballooned from 3% in 2006 to a peak of 12.3% in February 2010. Though it’s backed off, it remains in double-digit territory at 11.2%. ”Officially” – though official numbers understate the problem. Illegal immigrants, some 4.5% of Florida’s population, aren’t counted; the long-term unemployed and aging workers are regularly purged, even if they’re still looking for work.

This in a state already confronted with the worst of the coming healthcare/taxation crunch. It has the second oldest population in the nation, and as its citizens retire, their earnings fall off, causing tax revenues to drop. At the same time, healthcare bills rise, stressing social service budgets.

Florida is ground zero for Baby Boomer demographics. With 600 seniors for every 1,000 workers now, and the number trending inexorably higher, soon every employed person in the state will essentially have to adopt one senior to care for out of his or her paycheck.

Housing? Naturally, rising unemployment amplifies the difficulties of maintaining homeownership. With further negative effects from the oil, we can only expect the situation to worsen. A tsunami of defaults and foreclosures – and bank failures – would not be a surprise.

Florida is mortgaged to the hilt. It ranks second only to California in total securitized non-agency mortgage loans, 10% of the national total. Of those, half are 60 days or more delinquent, or 16% of all such mortgage delinquencies in the country, the highest ratio anywhere.

The state is full of retirees trying to live on modest incomes while hanging on to their homes. Unsurprisingly, this has led to a disproportionate amount of at-risk loans. 85% of the statewide pool is rated Alt-A or Subprime.

Nor has the crash in prices bypassed the Sunshine State. Nationally, fewer than 30% of houses sold for a loss in the past year, compared to nearly 50% in Miami and 65% in Orlando.

Many would-be sellers are clinging to the cliff edge by their fingernails. Overall, 81% of all Florida loans are under water, with the average mark-to-market loan-to-value ratio standing at 138%. Almost 40% of borrowers are crushed beneath debt of more than 150% of the value of their homes.

State government is no better off.

As the oil cuts into employment prospects, tax revenues will nosedive – and even before the blowout, the state was broke. The projected budget shortfall for fiscal year 2011 was $4.7 billion. What it will actually be is anyone’s guess – a bigger number is baked in the cake – but at $4.7 billion, it already represented more than 22% of the FY10 budget.

Both tax hikes and service cuts are political suicide. And desperately raising taxes in a depressed economy tends to decrease revenue, anyway. Yet a balanced budget is mandated by law. Where will the additional money and/or savings come from?

Then there’s Florida’s $113.8 billion public pension fund. It must generate earnings of 7.75% per year to meet its commitments to the nearly one million public employees and retirees who depend on it.

What investment safely yields 7.75% today? Nothing. So the fund’s administrators are asking for permission to try some “riskier” investments. Maybe they’ll succeed. Or maybe they’ll wind up staring down the barrel of a pensioners riot.

Florida’s coming problems are intractable, at best; the least bit of bad luck and they may become utterly irresolvable.

Expect bailouts. Washington will not be able to ignore what happens to this beleaguered state. The federal government will be forced to spend yet more vast sums of money that it doesn’t have, on a recovery that will take years, if it ever happens.

And that makes Florida’s plight a looming horror for us all.
----

[Florida is just one small gear in the United States’ broken economic machinery. The Casey Report regularly analyzes where the economy is going and how savvy investors can protect themselves from the inevitable fallout. One of the editors’ favorite investments for 2010 (and beyond) is betting on rising interest rates – a true no-brainer. Read more here.]





Stay on your toes these are treacherous waters and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

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Reader Comments (2)

I think that you had better buy back the Yamana Shares you sold and quickly and buy a load of other gold and silver companies as well for good measure. Roger.

August 14, 2010 | Unregistered CommenterRoger Levinson

Roger,

For the last 2 years SLW has outperfomed the HUI by a long way and the HUI has outperformed Yamana by a long way. When you compare the 3 Yamana has been a poor investment, if you fall in love with a stock you are skating on thin ice, take another look and then come back and convince us that AUY is a better investment than SLW.

As we said, we will plot the progress of these stocks and compare them from time to time so the team here and readers will all be aware of just which stocks are generating the best returns.

You are correct about loading up, we are only debating which truck to use......

August 14, 2010 | Unregistered CommenterGold Prices

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