Continental Capital Advisors, LLC May 21, 2010

Only A Matter Of Time

European debt problems have become the center of market attention. However, it is only a matter of
time until markets turn their focus to the financial problems of larger countries such as the United
Kingdom, Japan and the United States.
Last week, the US Government reported its largest budget deficit ever for the month of April at
$86.2 billion, which when annualized surpasses one trillion dollars. Since April is the highest
revenue-generating month for the US (Figure 1), an annualized deficit of one trillion dollars is
astonishing. Outlays during April 2010 reached a record at $327.96 billion, up from $287.11 billion
in April 2009. This contrasts with receipts of $245.27 billion, a decline from the April 2009 level of
$266.21 billion.

Figure 1. Average Monthly Tax Receipts excluding April vs. April ($millions)

$450,000

$400,000

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0
85

87

89

91

93

95

97

99

01
81

83

03

05

07

09
19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

Average Rec eipts Ex cluding April April Receipts

Source: Treasury Department, Continental Capital Advisors

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Continental Capital Advisors, LLC May 21, 2010

The April deficits in 2009 and 2010 were the first back-to-back April deficits since 1963 and 1964
(Figure 2).
Figure 2. April Budget Deficits vs. Surplus since 1981 ($millions)

$250,000

$200,000

$150,000

$100,000

$50,000

$0

-$50,000

-$100,000
93

95

97

99
81

83

85

87

89

91

01

03

05

07

09
19

19

19

19

19

19

19

19

19

19

20

20

20

20

20
Source: Treasury Department, Continental Capital Advisors

The headwinds facing the US Government’s finances are significant. Not only has the US
Government recorded its 19th consecutive monthly deficits, but also it has the shortest maturity of
debt of all advanced economies (Figure 3).
Figure 3. Advanced Economies Gross Financing Needs, 2010 (In percent of GDP, unless
otherwise specified)

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Continental Capital Advisors, LLC May 21, 2010

The estimates in Figure 3 assume a modest GDP growth rate that is far from certain, given recent
market turmoil and deflationary pressures stemming from austerity measures in Europe and the
rising US dollar. As a result, debt/GDP levels will worsen should the US economy shrink. Despite
this possibility, most investors are only focused on the financial problems of Europe. As a result, the
US dollar and US Treasuries are benefitting from what is characterized as a flight to safety.
However, these inflows are simply the result of investors selling financial assets around the world.
Ultimately, the market will question the US, as it has with parts of Europe, and the investments that
are currently considered safe will be deemed risky.
Daniel Aaronson – daaronson@continentalca.com
Lee Markowitz, CFA – lmarkowitz@continentalca.com
http://www.continentalca.com

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text
should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their
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may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the above mentioned companies, and / or industry results, to be
materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Any action taken as a result of reading this is solely the responsibility of the reader.

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