While most of us have been preoccupied with AIG, Chrysler and GM, even bigger event is unfolding- potential bankruptcy of California. Which brings another question, will Washington bailout California? Our most populous state faces $24.3 billion budget deficit, even assuming no significant deterioration in the economy from this point onward. Governor Schwarzenegger told joint session of the California legislature: “Our wallet is empty. Our bank is closed. And our credit is dried up.” These are pretty dire words.
California is in the center of mortgage meltdown, with  some of its counties among the most hit in the nation. In Los Angeles County 5.32 percent of mortgages 90 days past due, San Bernadino-8.66%, Merced -10.57. This is just a highlight, the list is very long. On top of that, state’s unemployment rate has jumped to 11.5%, which is the worst since Second World War. Governor is proposing laying off 5,000 state employees, as well as slashing education and social welfare programs, but some observers speculate that eventually as many as 50,000 will have to be let go, making problems much worse that they are today.
Of biggest interest to financial markets is how California’s debt rating will change. It is already the lowest among all  states and S&P admitted recently to putting California on watch for a possible downgrade again. If the credit rating gets cut by more than one step, which is a real possibility, this could put their bonds in a junk status. This could create an avalanche of selling all kinds of munis, spilling well outside of California.
Within next few weeks state is expected to run out of cash to meet payroll and other bills. It is almost certain that California will ask federal government for some kind of assistance, a bailout if you will. So far President is not supportive of the idea. Apparently California is not “too big to fail”. I think we will see new drama unfolding soon in congress.
On a more inspiring note, I put an end to a drama of my AUD-JPY trades. For now that is, since more selling is planned.

I closed both of my trades, the original one for about break even, and the second one for 200 pips gain. I’m looking for more trades to the downside soon. Here is another perspective on this pair. I like doing analysis on 4H chart, something that the above broker doesn’t offer.

Price is getting to close to previous low of about 75.20 and I’d like to be in below that. However, with today’s sell off being rather steep, I want to see a bounce here before new trade is entered. That’s the reason why no specific levels are mentioned on the chart, since at the moment, I don’t know exactly what they are going to be. There is a chance of missing a move, if the price just keeps falling, an unlikely scenario though possible. In this case, I’m planning a trade in another JPY pair.

NZD-JPY is moving a little slower than Aussie-Yen. This means that if AUD-JPY falls through support without stopping, I’ll miss it, but should get in Kiwi-Yen a little later. Hopefully, this would confirm a move by all JPY crosses. Target here is 200 pips.
Trade mentioned yesterday, EUR-CHF, is live, but not much to report at the moment. I’ll cover it more detail tomorrow.

Mike K.