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This is a VERY interesting development in the corporate earnings environment.  From a Stifel Nicolaus report on Cisco this morning:

**Cisco’sKeyTakeaways. (1) Cisco reporting notable weaknessinthe Public/Gov’t vertical, in which the company cited weakness particularly in the U.S. with a rapid change (deceleration) in State/Local Gov’t spending dynamics. Total public vertical accounted for ~22% of Cisco’s total product orders; total global orders up only 6% yr/yr vs. +23% yr/yr in the prior quarter.  Within this, Cisco did report that it saw mid-teens/stable growth in the U.S. Federal vertical.

This quarter’s weakness was largely the result of declines in state & local government spending.  This highlights the budget woes occurring in many municipalities.  In many ways this is eerily similar to what’s occurring across Europe as their states (or countries) on the periphery experience continued economic malaise.  Meredith Whitney has previously predicted that the muni bond crisis is being entirely overlooked:

“The level of complacency around this issue is alarming. Most assume, as last week’s Buttonwood panel did, that the federal government will simply come to the rescue of the states without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we’ve seen thus far, would amount to constantly putting out recurring fires.

Rather than waiting for more federal intervention, states need to make their own hard decisions and not kick the can down the road. How will taxpayers from fiscally conservative states like Texas or Nebraska feel about bailing out threadbare Illinois or California? Let’s hope we never have to find out.”

Perhaps even more interesting in recent days is the action in the muni market, which has been priced for perfection:

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