November 12, 2013
Economic themes: Earnings, Employment, GDP, Personal Income/Outlays, Consumer Sentiment.
- Earnings: Of the 450 S&P500 companies to have reported thus far, 74% have beat analyst estimates. Combined with the Fed’s accommodative policies and strong economic numbers, both the Dow and S&P have been hovering at or near record levels. As of now, economists project tapering to commence after the Fed’s March meeting, although many market participants are eyeing Vice Chairman Janet Yellen’s testimony to the Senate Banking Committee, on 11/14/2013, for clues otherwise.
- Employment: Nonfarm payrolls increased by 204k in October, well above forecasts of 120k, with the unemployment rate moving back to 7.3%. Growth was seen in the business services, leisure, and retail sectors, with a weakness in government jobs. Wage growth increased by a modest 0.1%, and the average workweek had little in change at 34.4 hours. There was reportedly very little impact from the government shutdown.
- GDP: Third quarter gross domestic product grew by 2.8%, well above expectations of 2.0%, led by a mix of inventories, exports, personal consumption expenditures, and housing. The GDP price index increased by 1.9%, above expectations of 1.4%. The report was stronger than expected, although held back by weak demand.
- Personal Income/Outlays: Consumer spending increased by 0.2% in September, in line with expectations, led by nondurable goods and services, and held back by durables. Personal income increased by 0.5%, above estimates of 0.3%. Inflation was weak, increasing by 0.1%, with the core up 0.9% year-over-year.
- Consumer Sentiment: The Reuter’s/University of Michigan consumer sentiment index posted a 72 reading in early November, below expectations of 75, representing the 7th consecutive decline, led by the expectations component. Declines in gas prices have been a positive, but the consumer would be more upbeat with better wage growth.
Municipal market themes: Chicago, Desert Hot Springs, Stockton, San Bernardino.
- Chicago: Fitch Ratings lowered the City of Chicago’s general obligation bonds three notches to A- from AA-, citing increasing underfunded pension obligations, and a refusal to adequately create solutions. Concessions need to be negotiated with labor unions and the state legislature, to make the benefits sustainable for the long term.
- Desert Hot Springs: The desert resort town reported that revenues will be 16.3% short of forecasts, resulting in a $2.7 million short fall. The interim director of finance recommended that the city declare a fiscal emergency and warned the city could run out of cash by 3/31/2014.
- Stockton: Moody’s Investors Service stated the voter approved ¾ cent sales tax increase for the City of Stockton, increasing the probability of the city’s reorganization plan being approved by the bankruptcy court. The plan is also a positive for insurers, who stand to lose as much as 22% on the lease revenue bond, and as much as 60% on the pension obligation bonds. Some fear the failure to reduce pension obligations could be a credit negative for the next generation of residence.
- San Bernardino: CalPERS wants the judge to reconsider the City of Stockton’s eligibility ruling. The judge responded saying it would be more appropriate for an appellate court to hear the appeal. CalPERS may be better served figuring out how to make the benefit sustainable for the long term.
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