May 13, 2013
Economic themes: S&P 500, Retail Sales, China, ECB.
- S&P 500: The index climbed to a record high on May 10th, and has gained 26.2% annually since March 2009. The index currently has a P/E ratio of 18.6, compared to a 25.7 multiple during the internet boom in the late 90s, which bulls are citing as justification for further growth. Bears believe the ratios reflect weakened confidence in the economy and weakened perceived earnings growth.
- Retail Sales: Headline retail sales increased by 0.1%, above expectations of a 0.3% decline, led by motor vehicle sales, building materials, clothing, and general merchandise, implying the discretionary spending among consumers is picking up. Expectations reflected decreasing gasoline prices.
- China: Chinese industrial output grew at a 9.3% pace in April, and retail sales grew at a 12.8% pace. Trade data was also strong with exports increasing by 14.7% in April, and imports increasing by 16.8%, but could be influenced by seasonal factors. Regardless, the numbers were viewed as a positive for the world’s second largest economy after some were fearing it was softening.
- ECB: European Central Bank member Ignazio Visco fueled talks of negative deposit rates over the weekend, stating they are “technically prepared” to institute such a policy. Other members have squashed such ideas, though Mario Draghi claims to keep an “open mind”. In reality, near zero rates are possible, but negative deposit rates do not seem fair, reasonable, or likely as funds would have a higher probability of leaving the Euro-zone.
- Economic highlights for the week ahead:
- Wednesday, 5/15/2013: PPI, Industrial Production, NAHB HMI.
- Thursday, 5/16/2013: CPI, Housing Starts, Jobless Claims.
- Friday, 5/17/2013: Consumer Sentiment.
Municipal market themes: MBIA, California, Detroit, Columbus.
- MBIA: S&P upgraded National Public Finance Guarantee, MBIA’s municipal insurer, to ‘A’ from ‘BBB’, following MBIAs settlement with Societe General, which represented the last of MBIA’s outstanding transformation litigation. MBIA stated the upgrade will greatly aid in underwriting new business, though they still need to mend relationships with issuers, investors, and market intermediaries.
- California: Through April, revenue for the State exceeded forecasts by $4.7 billion, stirring the debate in Sacramento over whether to pay down debt, or restore previous budget cuts.
- Detroit, MI: The recently appointed Emergency Manager outlined four debt restructuring plans for Detroit, which include principal reduction, interest rate reduction, payment delays, or the issuance of new debt, and called the report, “a sobering wake-up call about the dire financial straits the city of Detroit faces.” He also stated that pension and healthcare benefits must be part of any comprehensive restructuring.
- Columbus, OH: In response to a cut in Federal interest rate subsidy payments, Columbus announced a $368.7 million Build America Bonds par refunding. The City was able to negotiate an extraordinary redemption provision at par, whereas most other BABs issues have a make-whole call provision.
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