Tower Private Advisors
- Detroit, Europe, Congress
- Slow economics week
Capital Markets Recap
One story I did not comment on last week that deserves one this week is the bankruptcy filing by Detroit. I don’t think this was a surprise to anyone. Rather, it was a slow-motion train wreck. Other than the usual finger pointing, there was at least one troubling development. That is the decision by the city’s emergency manager, Kevyn Orr, to lump general obligation municipal bond debt in with all other unsecured creditors. This is sort of sending shock waves through the municipal bond market, where investors have considered the unlimited taxing authority of a municipality a seal of safety. Mr. Orr had this to say.
My job, the contract I signed, the covenant I have with the state and the governor…doesn’t say put the city on sustainable footing while taking into consideration the impact this might have on the broader general-obligation market. No, it’s just: put the city on sustainable footing.”
Michigan’s governor didn’t do much to quell fears when he said that the bond holders should have recognized the risks when they bought the bonds (Wall Street Journal). Still, this event does little to reinforce the idea that municipal bonds, in general, are risky and that there’s a municipal bond crisis coming.
The cover story of this week’s Barron’s magazine argued that Europe can be expected to emerge from recession in 2013, and that the risk of a PIGS-induced bond crisis is greatly reduced. That was supported by reports from purchasing managers in Europe that showed the area had crossed the line from contraction to expansion–at least in that sector. Don’t tell that to the French, however. The unemployment rate in that country reached 11.2% recently; that means 3.3 million people are out of work. France is in trouble.
According to a Wall Street Journal/NBC News poll, disapproval ratings for Congress reached their highest levels ever, at 83%. And yet, voter turnout in Congressional elections is terrible and the same folks keep getting reelected. Likely a case of voters disapproving of others’ Congress persons.
There weren’t a whole lot of economic releases this week. Housing data was mixed, with Existing Home Sales coming up short of economists’ estimates and New Home Sales coming up better. Mortgage Applications fell slightly. Initial Jobless Claims came in about as expected, and Durable Goods Orders were sharply higher than expected because of large transportation orders. Because those can be volatile, durable goods orders are also reported net of transportation orders, and those were flat in the month of June. Finally, University of Michigan Consumer Confidence rose. It is now back at August 2007 levels.
Different story next week, with a slew of indicators due to come out. The most important of these will be Friday’s Nonfarm Payrolls report, which includes the Unemployment Rate and some other tea leaves. With the Fed focusing on this report to know when to implement its so-called Tapering [of bond purchases] this report takes on increasing importance. We’ll get a preview of this report when ADP releases its Employment Change index.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors