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Schmohl Talk: Weekly Bullets

October 1, 2012

Economic themes: GDP, manufacturing, jobs, durable goods, personal income, new homes, Europe.

  • Gross domestic product (GDP): the broad measure of economic activity grew 1.3% in the second quarter of 2012, below estimates of 1.7%, and down from the 2.0% rate in the first quarter.  The figure gives some merit to the belief we are in a slow growth economic environment.
  • ISM Manufacturing Index: had a 51.5 figure for September, reflecting modest growth.  A figure over 50 reflects expansion.  The figure was boosted by new orders and new hires, but held back by new exports and backlog orders, implying weak markets abroad.
  • Initial jobless claims: fell to 359k, below estimates of 376k, with continuing claims at 3.271 million, the best since May.
  • Durable goods: new factory orders fell 13.2% in August, reflecting a decline in manufacturing, largely due to cancelled aircraft orders from Boeing. Excluding transportation, orders fell 1.6%.
  • Personal income: salaries were up 0.1% in August, with consumer spending up 0.5% due to rising fuel costs.
  • New homes sales: fell 0.3% in August, inline with estimates, to an annual pace of 373k units, due to a slight uptick in prices.  The low 4.5 month supply of inventory, or 141k units, should begin to encourage homebuilders.
  • European sovereign debt:  after experiencing lower yields across the region in September, European nations could be stressed in October with Spain seeking guidance on conditions of a bailout.  A summit of European leaders is scheduled for October 18-19.
  • Economic highlights for the week ahead:
    • Thursday, 10/04/2012: Jobless claims, FOMC minutes.
    • Friday, 10/05/2012: Employment situation.

Municipal market themes: foreign investment in munis, Hercules Municipal Utility, San Francisco City College.

  • Foreign holdings: investors outside of the United States have been buying municipal bonds in record volume, increasing their holdings from $8 billion in 2001, to $89 billion through the end of the second quarter.
  • Hercules Municipal Utility (HMU): the City has posted their HMU up for sale.  The enterprise has struggled to generate sufficient revenue to cover debt service, and debt service is scheduled to be tied to the sale.  If proceeds are sufficient, a possible outcome would be to have the outstanding bonds defeased due to the possibility of losing tax exemption.
  • San Francisco City College: despite severe budgetary pressures, the bonds associated with San Francisco City College continue to carry an investment grade rating due to being general obligation bonds, which constitute voter approved, pre-petitioned debt.

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