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Economic Update

October 20, 2014

Economic themes: Market Volatility, Housing, Industrial Production, PPI, Retail Sales.

  • Market Volatility: Markets have continued their more than 4-week risk on trade, as the S&P 500 has slid 6.2% since its 9/18/2014 peak. The 10-year Treasury has rallied 43 basis points since the 9/17/2014 low, as markets weigh the slowdown in Europe, the potential end of quantitative easing, Ebola, geopolitical risk, and earnings season. The volatility index declined to 20.2 on 10/20/2014, after reaching 26.25 last week.  Corporate bonds have fluctuated in price by the most in more than a year, as primary dealers have reduced their net holdings by $1.7 billion over the past two weeks to a net $6.3 billion.  Speculators had a record amount of bearish wagers against U.S. Treasuries last week, as prices rallied, with some unwinding their positions.
  • Housing: Housing starts rebounded by 6.3% in September to a 1.017 million unit pace, up 17.8% over the past year, following a 12.8% slide in August. Much of the volatility has been attributed to the multifamily component.  The NAHB (National Association of Home Builders) housing market index posted a 54 reading in October, below forecasts of 59, led by a decline in the traffic component, as first time homebuyers have been declining.
  • Industrial Production: Good news continues out of manufacturing, as industrial production increased by 1% in September, above forecasts of a 0.4% increase. Beyond manufacturing, strength was seen in utilities and mining.  Capacity utilization increased 0.6% to 79.3%.
  • PPI: The Producer Price Index declined by 0.1% in September, and is up 1.6% over the past year. Food, energy, transportation, and warehousing led the index lower.  The figures give the Fed some fuel to maintain quantitative easing.
  • Retail Sales: The consumers slowed down in September, with retail sales declining 0.3%, led by weakness in automobiles, gasoline, and building materials. Strength was seen in food services, and electronics.
  • Economic highlights for the week ahead:
    • Tuesday, 10/21/2014: Existing Home Sales.
    • Wednesday, 10/22/2014: CPI.
    • Thursday, 10/23/2014: Jobless Claims.
    • Friday, 10/24/2014: New Home Sales.

Municipal market themes: California Tobacco, San Joaquin Hills.

  • California Tobacco: Kern County will bring a California County Tobacco Securitization Agency bond on 10/21, to refund the County’s Series 2002 bonds. The bond is structured to withstand a 7% annual decline in cigarette consumption.  The bonds are secured by Kern County’s 1.01% share of California’s settlement under the master settlement agreement.
  • San Joaquin Hills: The transportation corridor agency will be refinancing existing debt.  Under the restructuring, the agency will have a more subtle increase in debt service requirements over the 2025 – 2035 periods, by extending the debt’s final maturity.  Fitch assigned a BBB- rating on the senior debt, and a BB+ rating on the junior debt, reflecting debt service coverage of 1.41x and 1.22x respectively.

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This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Past performance does not guarantee future results.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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