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Economic Update

July 27, 2015

Economic themes: China, Greece, Durable Goods, Housing, Commodities.

  • China: Pull over Greece, China was far scarier on Monday, July 27, 2015. The Shanghai Composite experienced its sharpest one-day slide since June 2007, falling 8.5%.  While no one reason can be blamed for the decline, a combination of unprecedented government intervention, weak manufacturing data, a lack of transparency, and fears of a general economic slowdown appear to be the primary culprits.  Such concerns have created a flight to quality rally in treasuries, and have sent global equities lower.   Optimists are speculating that the government may step back in and prop up prices after government intervention had sent the stock market up 16% from the 7/08/2015 lows; though more pain could be felt if they don’t, as the IMF has encouraged the government to back off and allow market forces to settle valuations.  China Securities Corp, a state-backed agency that provides market support, has not made a statement one way or another yet on the 7/27/15 drop.  The median trailing PE ratio for the Shanghai Composite stands at 66, and was at 68 when China’s previous bubble burst in 2007.
  • Greece: The Greek stock and bond markets remain closed as they begin a new round of talks on the bailout agreement to release €86 billion of aid over the next three years. The next ECB payment is due in two weeks, and many are pessimistic that an agreement of structural and economic reforms will be achieved in time, which could require a bridge loan.  In a July 5th referendum vote, the people of Greece voted against further austerity measures, which the government would likely have to agree to in order to release more aid.
  • Durable Goods: Durable goods surged 3.4% in June, above forecasts of 3.1% growth, led by civilian aircraft orders, with gains also seen in vehicles, electronics, and machinery. The figure represents the third positive reading in the past year, as the sector has been hurt by the strong dollar and weak oil prices.
  • Housing: Existing home sales surged 3.2% in June to a 5.49 million unit pace, the highest since February 2007, and are up 9.6% over the past year, with prices up 3.3% on the month and 6.5% over the past year. Much of the price appreciation is attributed to tight inventory, standing at 5.0 months, and a weak distressed inventory.  First-time home buyers continue to be absent.  New home sales plummeted 6.8% to a 482k unit pace, well below forecasts of 550k, led by declines in the multi-family component.
  • Commodities: Commodity prices continue to tumble with gold, oil, platinum, aluminum, copper, and iron ore, among others, nearing or in a bear market, as many have been hit by weak demand, particularly out of China, as well as oversupply. The Thomson Reuters CRB commodities index is at its lowest level in six years.
  • Economic highlights for the week ahead:
    • Wednesday, 7/29/2015: FOMC Meeting Announcement.
    • Thursday, 7/30/2015: GDP.

Municipal market themes: Puerto Rico.

  • Puerto Rico: A report conducted by three former IMF officials, commissioned by a group of hedge funds, concluded that Puerto Rico could manage its existing debt load if it utilized budget cuts and tax increases. While the report recognized short-term liquidity issues, they stated that calls for a debt restructuring are, “absolutely not substantiated.”  The report follows dueling proposals from the Puerto Rico Electric Power Authority and its creditors.  PREPA’s proposition includes offering holders of debt inside of 5-years $0.7/$1, and debt outside of 5-years $0.65/$1.  An alternative plan calls for a five-year debt service moratorium, with surplus cash going towards bondholders.  Expect fireworks between now and a pending September 1st restructuring deadline, with such talks likely foreshadowing proposals for other Puerto Rico debt.

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