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Economic Update

January 27, 2014

Economic themes: S&P 500, Housing, Week Ahead.

  • S&P 500: Coming off its worst week since June 2012, the S&P 500 index is chewing on the upcoming Fed meeting (1/29-30), weaker currencies in developing nations, signs of slowing growth in China, and earnings season.  One hundred and twenty five S&P 500 companies have reported thus far, with 74% beating profit forecasts, and 68% beating sales forecasts.
  • Housing: New home sales posted a 414k unit sales pace in December, below forecasts of 450k, increasing supply to 5.0 months, with prices up 4.6% over the past year.  Existing home sales posted a 4.87 million unit sales pace in December, below forecasts of 4.9 million, with supply up to 5.1 months, and prices up 9.9%.  Buyers appear to have been held back by foul weather, higher mortgage rates, and a soft job market.  Cash buyers accounted for 32% of sales, with first-time buyers accounting for 27%.
  • Economic highlights for the week ahead:
    • Tuesday, 1/28/2013: Durable Goods, S&P Case Shiller.
    • Wednesday, 1/29/2013: FOMC Meeting Announcement.
    • Thursday, 1/30/2013: GDP, Jobless Claims, Pending Home Sales.
    • Friday, 1/31/2013: Personal Income & Outlays, Consumer Sentiment.

Municipal market themes: Redevelopment, California Water, Puerto Rico.

  • Redevelopment: Gov. Jerry Brown included a proposal in his upcoming budget that would allow infrastructure financing districts (IFDs) to be created with 55% vote approval, down from the current 66.67%.  IFDs are similar to redevelopment agency project areas in that they may use tax increment revenues for infrastructure projects including roads, utilities, libraries, parks and other public improvements, although redevelopment agencies did not require voter approval, and IFDs do not require areas to be “blighted”.
  • California Water: Moody’s Investors Service released a report stating that California’s drought is a negative for local water agency credits.  We are focusing on agency reserves and their ability to raise rates in response to declining water sales.  Many agencies are designed to withstand multi-year droughts.  Moody’s specifically expressed concerns with the Sierra Madre, Central Basin, and Antelope Valley – East Kern water enterprises.
  • Puerto Rico: As the commonwealth seeks to access the capital markets for the first time since August, Puerto Rico is trying to prove to investors that it can afford its outstanding debt.  Tax supported debt per capita is estimated to be between $10.6k – $15.1k, depending on the variables included, which would be quite high for a local government, but the Commonwealth states that since its citizens pay very little in Federal income taxes it may not be appropriate to include the $55.5k federal debt burden per citizen.

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