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Schmohl Talk:  Weekly Bullets

January 7, 2013

Economic themes: Fiscal Cliff, Future Cliffs, Employment, Manufacturing.

  • Fiscal Cliff: If we have learned one thing from the Fiscal Cliff debate, it is that the Federal government is enamored with threatening to voluntarily walk off of a cliff.  Despite leaking into the New Year, the American Taxpayer Relief Act of 2012 was passed, making the Bush tax cuts permanent for incomes under $400k for individuals, $450k for couples, the top capital gains rate increases to 20%, estate taxes increased to 40% above $5 million, AMT was adjusted for inflation, and the payroll tax cut expired.  Tax revenues as a percentage of GDP will remain near 60 year lows (a win for Republicans) we avoided reforming our social insurance programs to be sustainable for the long term (a win for the democrats); resulting in short term gain for long term pain. 
  • Future Cliffs: Spending and debt ceiling debates are likely to continue.  We should reform our social insurance programs to be sustainable for the long term.  The debt ceiling debate is interesting in that the government already approved spending, and then essentially refuses to fund it, which I would consider a reckless way to play with the Government’s full faith and credit pledge.
  • Employment: 2012 resulted in bringing the unemployment rate down to 7.8%, after beginning the year at 8.3%.  The 0.5% improvement can be viewed as positive, but some of the improvement is attributed to the shrinking labor force, and if we continue to create jobs at the 150k/month pace, it would take an estimated six years to reach full employment.
  • Manufacturing: The ISM Manufacturing Index posted a 50.7 figure for December, reflecting a mild expansion, led by new export orders. 
  • Economic highlights for the week ahead:
    • Thursday, 1/10/2013: Jobless Claims.
    • Friday, 1/11/2013: International Trade.

Municipal market themes: Redevelopment, School Funding.

  • Redevelopment: Over a year has passed since redevelopment was eliminated in California, and many agencies are left with more questions than answers.  Municipal bonds for the agencies are readily considered valid enforceable obligations under the Recognized Obligation Payment Schedule, however, the validity of certain projects such as football stadiums have not been recognized, resulting in a wave of lawsuits.
  • School Funding: California Governor Jerry Brown is lobbying to shift funds to less fortunate school districts, and make certain programs mandatory.  Expect more details in the upcoming budget proposal.


Dec 11, 2012
by ewinslow





December 10, 2012

Economic themes: Employment, Fiscal Cliff, Europe, Japan

  • November jobs report: the unemployment rate fell to 7.7% in November, with payrolls increasing by 146k, well above the 80k consensus.  The positive numbers were led by private service-providing jobs, though held back by private goods-producing jobs, which reflected a drop of 22k.  Government jobs were little changed, falling by 1k.  The Labor Department stated that Hurricane Sandy had little effect on the November report, and the decline in the unemployment rate was partially attributed to a shrinking work force. 
  • Fiscal Cliff:  President Obama and House Speaker Boehner are stating, “the lines of communication remain open,” though no deal to fix our budget deficits, without excessively impairing growth, appears to be imminent. 
  • Europe: Italian equity and fixed income markets were rattled Monday morning with the news of PM Monti’s plans to resign after the authorization of the 2013 budget.  Investors in Greek debt have until Tuesday to get rid of their holdings in a buyback deal that is designed to lower debt to 124% of GDP by 2020, and enable the IMF and European Union to release the next round of financial aid.  In response, 10-year Greek bonds fell below a 14% yield for the first time since the debt restructuring in March.
  • Japan: Q3 GDP contracted 3.5% for the island nation, on the heels of a slight contraction in Q2, constituting a recession under the technical definition. 
  • Economic highlights for the week ahead:
    • Tuesday, 12/11/2012: International Trade.
    • Wednesday, 12/12/2012: FOMC meeting announcement/forecasts/Chairman Press Conference.
    • Thursday, 12/13/2012: Jobless claims, PPI, Retail Sales.
    • Friday, 12/14/2012: CPI, Industrial Production.

Municipal market themes: California debt, Reno Aces, Detroit.

  • California debt: data from S&P indicates California debt has returned 10.5% year-to-date 2012, and is poised to beat the broad muni market for the third consecutive year.  The rally reflects improving underlying fundamentals, with hopes the state will run a surplus by 2015, and the market perception of potential increases in income tax rates.
  • Reno Aces: facing the need to refinance a $55 million construction loan, the local minor league baseball affiliate is seeking a $30 million subsidy from the City.  Without the subsidy, the team is threatening to leave town.  Such a deal could further strain the already financially distressed City, which could contribute to a ratings downgrade.  The stadium was initially financed through a bond secured by rental car taxes, though revenues have been insufficient.
  • Detroit, MI: The State of Michigan is considering appointing an Emergency Financial Manager for the City of Detroit, which would constitute of state takeover of the City.  Without the release of funds from a State escrow account, the City could become insolvent as soon as January.

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