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Schmohl Talk:  Weekly Bullets

November 19, 2012

Economic themes: housing, industrial production, CPI, PPI, FOMC, employment, Europe, fiscal cliff.

  • Existing home sales: increased 2.1% in October to a 4.79 million annual pace, with supply falling to 5.4 months.  The Western US saw the largest uptick in sales, though national numbers were held back by lack of supply and effects from Hurricane Sandy.  The housing market index, a survey among home builders, surged to a 6.5 year high to 46, reflecting declines in distressed inventory which have restrained home builders’ ability to operate profitably.
  • Industrial production: Fell 0.4% in October, due to the Northeast region being hampered by Hurricane Sandy, led by declines in utilities, chemicals, food, transportation, and electronics.
  • Consumer price index: increased 0.1% in October, aided by drops in energy prices, and is up 2.2% on a year-over-year basis. 
  • Producer price index: decreased 0.2% in October, also aided by declining energy costs, though was up 2.3% on a year-over-year basis. 
  • FOMC Minutes: the Committee is debating the impacts of QE3. Though still too early to come to conclusions, members are observing notable yield decreases in both mortgage-backed securities and corporate bonds, which have contributed to lower consumer borrowing costs and stimulating home, auto, and consumer durable purchases.  They indicated they plan to continue to provide accommodative monetary policy, focusing on employment market metrics, as inflation remains within their target range.
  • Jobless claims: surged 78k to 439k, largely attributed to Hurricane Sandy.  While the number surprised markets, many participants are waiting to see if figures neutralize over the coming weeks.
  • European finance officials: are holding meetings this week to determine what path to take with Greece’s upcoming aid payments.  While it would be positive to see a constructive agreement be struck, placing the 17-nation union on a more positive long-term sustainable fiscal path, most expect the can to be kicked down the road, again.
  • Fiscal cliff: equity markets continue to react to the words coming out of Washington.  With revenues as a percentage of GDP near 60 year lows, and spending as a percentage of GDP near the highest since WWII, both sides should find a middle ground, though neither side seems that interested in a grand bargain.

Municipal market themes: Atwater, California Counties, California deficit, tax exemption.

  • Atwater, CA: after declaring a fiscal emergency, the small agricultural town was successful in negotiating more sustainable contracts with their labor unions, avoiding the need to take further steps toward bankruptcy.
  • California Counties: Moody’s put 17 counties on review for a downgrade, in relation to pension obligation and lease-backed bonds.  Markets had minimal reaction as much of the information was already priced in.
  • Legislative Analyst’s Office: the deficit in California is shrinking, though still persists, as it is projected to be $1.9 billion for the next fiscal year, down from a projected $15.7 billion at this time last year.  The Office is hopeful for operating surpluses beginning in 2014, and encourages the state to replenish reserves, rather than spend.
  • Tax exemption: with the fiscal cliff debate, some investors have become concerned about tax-free income staying tax-free.  An important factor to consider – local issuers are generally the largest beneficiaries of tax exempt financing due to low borrowing costs.  Other exemptions on the table include mortgage interest, child, marriage, education, and low-income; which together may risk getting capped, but are not being individually targeted.  Alamo Capital does anticipate that investors could face higher taxes on dividends, capital gains, and estates, in addition to the expiration of several temporary tax breaks.


This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Past performance does not guarantee future results.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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