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Economic Update

January 6, 2014

Economic themes: S&P 500, Manufacturing, Non-manufacturing, Housing

  • S&P 500: 460 of the 500 companies in the index advanced last year, the most since 1990, helping the S&P post a remarkable 30% return in 2013, with P/E ratios up 19%.  Since 1936, the index has posted a positive gain 69% of the time following quarters where valuations widen, and has averaged a 14% return in the year following a year when 400+ constituents increased. Bernanke stated last week that headwinds for the economy may be subsiding, although many analysts are encouraging caution.  While there is no telling how long the equity rally will last, it may be an optimal time to rebalance portfolios.
  • Manufacturing: Factory orders increased by 1.8% in November, above forecasts of a 1.6% increase, as strong domestic demand and rising exports contributed to a surge in capital goods.  Despite rises in inventories over the past few months, the inventory/shipments ratio fell to 1.28 from 1.29.
  • Non-manufacturing: The ISM non-manufacturing index posted a 53 reading in December, below forecasts of 54.8, as new orders posted a sub 50 reading for the first time since July 2009.  Strength was seen in employment, although the report implies the economy could be softening heading into the first quarter.
  • Housing: The S&P Case-Shiller home price index posted a 1% gain in October, in-line with forecasts, and is up 13.6% year-over-year, with gains observed across all 20 cities in the index.  The price increases are good for home owners, but may harm home sales in the coming months.
  • Economic highlights for the week ahead:
    • Tuesday, 1/07/2014: International Trade
    • Wednesday. 1/08/2014: FOMC Minutes
    • Thursday. 1/09/2014: Jobless Claims
    • Friday. 1/10/2014: Employment Situation

Municipal market themes: Puerto Rico, Detroit

  • Puerto Rico: Forbes posted an article by a former Lehman Brother’s trader, Larry McDonald, discussing how a Puerto Rico default could hurt the $3.7 trillion municipal bond market.  Some comparisons have been made between him and Meredith Whitney, as he is analyzing the commonwealth as if it is a for profit entity.  While Puerto Rico is a troubling situation, McDonald does not acknowledge the improvements made under the Padilla administration and did not put forth any evidence that has not been substantially priced in.  The success of Puerto Rico will depend on their ability to access capital markets and grow their economy.
  • Detroit: Emergency Manager Orr is working to settle outstanding swap agreements and has requested that the SEC investigate the agreements, as their termination is critical for the City to emerge from bankruptcy.  Negotiations with bondholders and bond insurers are scheduled to continue this week.

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