Schmohl Talk: Weekly Bullets
October 8, 2012
Economic themes: employment, earnings season, Europe, FOMC minutes, Fiscal Cliff
- Unemployment rate: unexpectedly fell to 7.8% in September, from 8.1%. The figure reflects a modest improvement in the payroll numbers of 114k, but is arguably also indicative of a shrinking workforce participation rate, and temporary employment.
- Earnings season: kicks off this week with Alcoa and Yum Brands reporting on Tuesday. Some companies have been revising estimates downward which has stirred some negativity, but some view it as gamesmanship.
- Europe: with the new bailout fund established, Spain stalling over asking for bailout funds in exchange for austerity measures, and questions surrounding Greece’s likelihood of receiving the next round of bailout funding, the region could be subject to greater volatility in the coming weeks, after a relatively quiet August and September.
- FOMC minutes: for the meeting from September 12-13, revealed substantive debate over the impact QE3 would have, and the extension of guidance for a low interest rate environment. With criticism of the Fed coming more into light, it is important to remember the Fed’s responsibility is to conduct fiscal policy by influencing monetary and credit conditions. The Fed cannot singlehandedly save the world, but can ease or constrain fiscal policy to promote or slow growth. Many politicians who criticize the Fed often lack a PhD in economics, and rarely propose a viable alternative.
- Congressional Budget Office: the economy could fall into a recession if the proposed Fiscal Cliff, which is scheduled to include approximately $600 billion in Federal spending cuts and the expiration of the Bush era tax cuts, is enacted as scheduled, in order curb the Federal deficit. Politicians have tabled discussions until after the election. While a compromise is far from certain, the most likely outcome is to ease in the measures.
- Economic highlights for the week ahead:
- Thursday, 10/11/2012: International Trade, Jobless Claims.
- Friday, 10/12/2012: Producer Price Index, Consumer Sentiment.
Municipal market themes: tax exemption, California Redevelopment, Atwater
- Municipal bond tax exemption: the Presidential race has brought tax reform back into the spotlight, with rivaling tax plans from each candidate, though neither has been explicitly specific. A general theme tends to be less income based taxes, and fewer exemptions. Many exemptions could be on the chopping block including mortgage deduction, child credit, and municipal bond interest exemptions. State and local governments tend to be among the most significant beneficiaries of tax exempt municipal bonds, thus I anticipate they will vehemently defend them.
- California redevelopment: since the dissolution of redevelopment agencies, a number of politicians have been actively seeking ways to reenact tax increment financing as a means to clean up blighted communities, create more affordable housing, and boost employment. Some low- to moderate-income housing bills have made progress, while infrastructure oriented measures have been stalled in efforts to rein in the State budget.
- Atwater, CA: the fiscally distressed City declared a fiscal emergency. Plagued with declining real estate values, high unemployment rates, and failed attempts to balance its budget, the City is considering all viable options to be sustainable for the long term. Of note, the majority of Atwater’s debt consists of water revenue, and tax allocation bonds, which are secured and payable by revenues separate and distinct from the City’s general fund.
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