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Schmohl Talk: Weekly Bullets

September 24, 2012

Economic themes: Housing, Jobs, Fiscal Cliff, Treasuries, Greece

  • Housing: existing home sales were up 7.8% in August, to an annual pace of 4.82 million, the fastest increase in a year, with supply falling to 6.1 months, aided by median prices down 0.2%.  New housing starts increased 2.3% in August to a 750k pace, aiding in the soft recovery, though slightly below estimates.  Housing permits fell 1.0% in August, inline with estimates, to an 803k pace.
  • Jobs: jobless claims fell 3k to 382k for the week ended 9/15/2012, with continuing claims at 3.272 million.  While economists hoped for a better reading, the figure is still the lowest since May.
  • Fiscal Cliff: the mandatory spending cuts (sequestration, austerity) and tax increases scheduled to take place at year end if the federal government cannot agree on an alternative solution, could reduce GDP by 4-5%.  The most likely scenario is to ease in the measures, however, failure to act could have adverse consequences on the economy.  Neither party has proposed a viable alternative.
  • Treasuries: domestic buying of Treasuries increased 10.7% through July of 2012, and foreign buying increased 6.9%.  The high demand helps keep Federal borrowing costs low, though may be difficult to keep up with inflation; and does little to spur entrepreneurship and private sector growth, with the exception of government contracts.  Treasuries are a reasonable choice for the risk adverse investor more concerned with return of principal, than return on principal.
  • Greece: the next installment of Greek bailout funds is due shortly, contingent upon budgetary and austerity agreements.  Der Spiegel, a German magazine, reported the Greek budget deficit is €20 billion, twice previous estimates, though Greek officials argue the figure does not include €2 billion in tax increases, and €11.5 of vaguely disclosed budget cuts.
  • Economic highlights for the week ahead:
    • Tuesday, 9/25/2012: Case Shiller, Consumer Confidence.
    • Wednesday, 9/26/2012: New Home Sales.
    • Thursday, 9/27/2012: GDP, Durable Goods, Jobless Claims, Pending Homes Sales.
    • Friday, 9/28/2012: Personal Income, Consumer Sentiment.

Municipal market themes: Nevada Public Works, Atwater, California Cities

  • The Public Works Board of the State of Nevada recommended $100 million in infrastructure improvements across the State.  Projects of this scale have historically been paid for using property tax revenues, however with little excess, expect innovative financing methods.
  • Atwater, CA: the City is considering declaring a fiscal emergency due to severe declines in property taxes, high unemployment, and rising pension and healthcare benefit related expenses.  The City’s debt mostly consists of tax allocation and water revenue bonds, which have debt service payments secured from separate and distinct lines of revenue from the general fund.     
  • Fitch Ratings Service: many California Cities remain constrained by weak revenues matched with rising pension and healthcare costs.  As has been the case, the market already largely priced in the news.  Keying in on management actions, and willingness to pay, is critical to assessing the debt of the more distressed credits.

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