July 22, 2013
Economic themes: Earnings Season, Housing, U.S. Debt, CPI, Industrial Production.
- Earnings Season: of the 108 S&P 500 companies to have reported as of this morning, 71% have beat profit estimates and 52% have beat sales projections. Approximately 150 S&P 500 companies are reporting this week. As tapering and sequestration concerns slowly ease, expect market participants to be focused on earnings season.
- Housing: Existing homes sales slowed 1.2% to a 5.08 million annual pace in June, below estimates of 5.27 million, with supply increasing slightly to 5.2 months, from 5.0. The median price is up 13.5% to $214.2k. Housing starts fell 9.9% in June to an 836k pace, and permits fell 7.5% to a 911k pace, both led by the multifamily component. Lack of supply and rising mortgage rates are weighing in on the housing market.
- U.S. Debt: Moody’s Investors Service affirmed the U.S. government debt ‘Aaa’ rating, and revised the outlook to stable from negative, citing successful deficit reduction measures and a resilient economy. However, they mentioned concerns in regards to escalating Social Security and Medicare expenses, particularly in the face of baby boomers retiring.
- CPI: headline inflation increased 0.5% in June, and is up 1.8% year-over-year, led by energy prices, though the core remains relatively flat. Other rises were seen in housing, medical care and apparel.
- Industrial Production: June was positive for industrial production, as it posted a 0.3% month-to-month production increase, led by machinery, automobiles and mines. The figure remains somewhat soft though as wood, metals, aerospace and transportation equipment experienced declines.
- Economic highlights for the week ahead:
- Wednesday, 7/24/2012: New Home Sales.
- Thursday, 7/25/2013: Durable Goods Orders, Jobless Claims.
- Friday, 7/26/2013: Consumer Sentiment.
Municipal market themes: Detroit, SFCCD, California Redevelopment.
- Detroit: In a somewhat expected move, the City of Detroit filed for the largest Chapter 9 bankruptcy in history on Thursday. The City is reporting liabilities of $18.5 billion, including $9.2 billion in post-employment benefits (which could change depending on the actuarial rate used), $5.85 billion in water/sewer bonds, $1.43 billion in pension obligation bonds, and $1.13 billion in general obligation bonds. The one curve ball is the Emergency Manager’s (EM) attempt to treat general obligation bondholders as unsecured creditors, which challenges court rulings from previous Chapter 9 bankruptcies in other states, including California. The EM is also proposing leasing the water/sewer enterprise to a private entity, and restructure the debt in accordance to the new lease payments. Unions have already put forth plans to challenge the Chapter 9 eligibility.
- SFCCD: As San Francisco City College goes through the appeals process regarding their terminated accreditation, Moody’s Investors Service said the pending action is a credit negative, however, regardless of the decision, they do not expect any interruption in debt service.
- California Redevelopment: Efforts to revive redevelopment and tax allocation financing in California are rampant, as three such bills are currently moving through the legislature, though none are likely to be approved by Jerry Brown as he remains focused on unwinding existing obligations. Of note, all tax allocation municipal bonds in California have been identified under the recognized obligation payment schedule, and so long as the respective project areas generate sufficient tax increment revenues, the positions have been performing as designed.
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