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Economic Update

May 12, 2014

Economic themes: Earnings Season, Ukraine, International Trade.

  • Earnings season: Of the 453 S&P 500 companies to have reported as of this morning, 76% beat profit forecasts, and 53% beat revenue forecasts.  Optimists reference positive outlooks on the economy and the Fed’s willingness to support it.  The leaders of the 5-year bull market, including technology, growth, and small cap companies, have continued to sell off in a bit of a herd mentality.  Among the best performing asset classes in the S&P 500 this year have been those shunned by equity analysts, such as value tilted utilities.  A recent Morningstar study indicated that more than 80% of active equity portfolio managers have failed to keep up with their respective indexes this year.
  • Ukraine: In two disputed referendums over the weekend, residents in eastern Ukraine overwhelmingly backed independence.  Russia “respects” the results, though Ukraine, the E.U., and the U.S. do not.  The E.U. has imposed sanctions on companies in Crimea for the first time.  A Ukrainian presidential election is scheduled for May 25th.
  • International Trade: The trade deficit fell to -$40.4 billion in March, in line with expectations, led by a shrinking in the oil deficit and an increase in the services surplus.  The deficit with China fell to -$20.4 billion, from -$20.9 billion in February.
  • Economic highlights for the week ahead:

o    Tuesday, 5/13/2014: Retail Sales.

o    Wednesday, 5/14/2014: PPI.

o    Thursday, 5/15/2014: CPI, Jobless Claims, Industrial Production.

o    Friday, 5/16/2014: Housing Starts, Consumer Sentiment.

Municipal market themes: Stockton, California.

  • Stockton: The bankrupt city has reached agreements with major creditors including Assured Guaranty and National Public Finance Guaranty, although is being challenged by Franklin Advisers, to whom the city offered $94k on $35 million in lease revenue bonds.  Franklin argues the city is discriminating against them, and failed to make a reasonable effort to provide a reasonable recovery.  Pension obligations remain unimpaired under the proposal, though post-employment healthcare benefits have.  Of interest, there is not much in the way of established court precedence on the subject.  Many analysts believe Stockton is likely to return to bankruptcy if they fail to modify pension obligations, and that current financial challenges in Vallejo should be used as an example.
  • California: The State of California collected $13.9 billion in revenue in April, above forecasts of $13.6 billion, due to a strong economy, increases in personal state income taxes, and strong corporate income taxes.  The legislative analysts office reported California faces $340 billion in long-term obligations, of which $140 billion is adequately addressed, including general obligation and lease revenue debt.  They believe the state has to more adequately address $200 billion in liabilities including to CALSTRS, post-employment healthcare benefits for state employees, and the University of California pension system.  The LAO stated that a failure to address the obligations could impair the State’s ability to provide essential services over the long-term.

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