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Economic Update

July 20, 2015

Economic themes: Greece, China, Commodities, CPI/PPI.

  • Greece: Greek banks have now reopened, though extensive capital controls remain, and they look poised to make a €6.25 billion payment to the ECB and IMF, as well as a €500 million payment to its central bank. July 20th was seen as a deadline, as a default on the ECB payment would have forced them to pull support from Greek lenders, which would have likely resulted in an exit from the Eurozone. Greek stock and bond markets will remain closed until at least 7/23/2015.  A vote on a second set of prerequisites will be held on 7/22/2015, in an effort unlock €86 billion in aid.  Members of the IMF and ECB have encouraged debt relief, but Germany will not allow it.
  • China: The Shanghai Composite Index has been responding favorably to government intervention to stabilize the market. Of the 2,800 companies in the index, 633 remain suspended, after as many as 1,400 were suspended two weeks ago.  The index peaked in value on 6/12/2015, fell 28% from then until 7/03/2015, and has rebounded 9% since.  The index remains up 25% ytd.
  • Commodities: The Bloomberg Commodity Index is in the midst of a 5-day losing streak, bringing the index to its lowest level since 2002, with gold hitting its lowest level in 5-years, as the strong dollar has been hurting raw materials.
  • CPI/PPI: The Consumer Price Index posted a 0.3% gain in June, and is up 0.1% over the past year, as energy, gasoline, rent, food, and airfare posted gains, though held back by declines in healthcare and apparel. The Producer Price Index posted a 0.4% gain in June, and is down 0.7% over the past year, with similar gains in energy and food.
  • Economic highlights for the week ahead:
    • Wednesday, 7/22/2015: Existing Home Sales
    • Friday, 7/24/2015: New Home Sales

Municipal themes: Daughters of Charity, Puerto Rico, California.

  • Daughters of Charity: The nonprofit hospital chain will receive a $250 million infusion from BlueMountain Capital, not to be confused with Blue Wolf Capital, and will transfer control to an independent board of directors led by affiliates of BlueMountain, pending Attorney General Kamala Harris approval, which is scheduled to be announced in November. The chain will remain nonprofit, and BlueMountain will have the option to purchase it in three years.  They have also pledged to honor existing union contracts, and to do a better job managing the municipal debt outstanding.
  • Puerto Rico: The commonwealth did not appropriate $36.3 million to make a 8/01/2015 Public Finance Corp payment for their Series 2004 bonds, though it is not certain whether or not the payment will be made, though the government may be posturing to do a debt exchange. Congress is mulling over proposals to enable Puerto Rico public agencies to be eligible for Chapter 9 bankruptcy, which has a fair amount of Democrat support, though is lacking Republican support.  The Aqueduct and Sewer Authority has stated they are “optimistic” that they may be able to access the capital markets by late August to pay of lines of credit and to finance capital improvements.
  • California: Jerry Brown signed AB 222, which is designed to secure general obligation bondholders statutory liens on pledged ad valorem revenues in the event of bankruptcy. While decisions in cases such as Sierra Kings implied such a law, AB 222 would formalize the decision.

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