It was a bit of a light week from an economic news standpoint.<\/p>\n
The University of Michigan Consumer Confidence<\/strong> survey was weaker for July, falling from 73.2 to 72.0, which wasn\u2019t a complete surprise.\u00a0 The \u2018expectations\u2019 part of the survey fell by a few points, while the \u2018current conditions\u2019 component rose.\u00a0 Consumers\u2019 expectations for future inflation have fallen between 2.7-3.0% for almost every month for the past several years.\u00a0 This is in line with current inflation, and historical averages.\u00a0 Of course, as with many measures, the most-often guessed expected future figure is today\u2019s number.<\/p>\n Obviously, this data is conditional, so should be looked at accordingly.\u00a0 A critical piece, and what makes this useful, would be a pattern of increasing negativity, which could certainly lead to a self-fulfilling spiral of more negativity.\u00a0 We\u2019re not seeing that yet, and consumers seem surprisingly resilient, although still reactive to shorter-term conditions.<\/p>\n The trade balance<\/strong>, the difference\/deficit between domestic imports and exports, improved a bit in May (fewer imports compared to exports) mostly due to cheaper petroleum, which is, by far, our largest imported item by volume.\u00a0 Producer prices<\/strong> rose in June by +0.1%, which was a bit of a surprise, as consensus called for a decline.\u00a0 The main factor was a rise in food prices which offset the already-anticipated energy price drop.\u00a0 The core figure was up +0.2%, resulting in a year-over-year figure of +2.6%.<\/p>\n Initial jobless claims<\/strong> came in sharply lower than expected for the July 7 week, at 350k, as opposed to the expected 372k.\u00a0 Continuing claims were generally as anticipated.\u00a0 The main reason for the drop appears to be a rash of fewer auto factory shutdowns, which has affected the data somewhat.\u00a0 It was also a short holiday week, which likely had an impact as well.<\/p>\n Lastly, the FOMC minutes<\/strong> from the June 19-20 meeting were released, with very few surprises.\u00a0 The main point of interest from investors is how close\/far away we are to another round of quantitative easing.\u00a0 At the time of the meeting, several economic data points were mixed, and generally did not show a consistent trend of slowing; since that time, we have seen additional indicators decelerate.<\/p>\n It appears several members are open to the possibility; however, only \u2018a few\u2019 seem ready to ease at this time.\u00a0 There are several issues here:\u00a0 one, as additional easing costs money, the Fed is reluctant to head down this path unless it is absolutely necessary; and, two, there is debate as to whether such further easing would really be that productive.\u00a0 The intended outcome of bond asset purchases is keeping rates low (and simulative) for a longer period.\u00a0 It is debatable whether even lower rates, say a 1.0% versus a 1.5% 10-Year Treasury yield, would provide that much more of a benefit.\u00a0 Other measures, such as the ECB\u2019s action to lower the discount rate, providing banks with less of an incentive to hoard cash rather than lending, might be more effective in steering specific actions.\u00a0 Another factor, which is unavoidable, is time.\u00a0 Delevering from a financial crisis takes time…years, in fact, if not a decade…making the process a long one.\u00a0 We have made progress, but are still in it.<\/p>\n What the Fed, and Chairman Bernanke specifically (based on his background as a student of the Great Depression), would like to avoid is a loss of momentum from low growth into a deflationary episode.\u00a0 That is a more difficult scenario to crawl out of, since the downward spiral of delaying purchases and hoarding cash would make consumer spending and business efforts much more challenging.\u00a0 This is not a likely scenario by any means, but this \u2018worst case\u2019 is where their thinking stems from.<\/p>\n The following news item was more related to specific bond markets than the economy, but the state of California has certainly experienced its share of bad news over the past few weeks.\u00a0 First, the city of Stockton declared bankruptcy (the largest city ever to do so), vacation hotspot Mammoth Lakes was next, now followed by San Bernardino.<\/p>\n It\u2019s important to remember a few things about municipal bankruptcies and how that affects the muni bond world.\u00a0 Unlike the Treasury or even corporate markets, where economic conditions affect corporations more homogeneously, the municipal market in America contains 50,000 different issuers and several million unique bond issues.\u00a0 This represents all types of debt:\u00a0 general obligation (where payments are based on taxing power of the municipality\/state\/etc.), revenue (backed by a specific project\/utility district) as well as more unique hybrid public\/ \u2018private activity bonds\u2019 (the kind that sometimes don\u2019t qualify as tax-free under AMT rules).\u00a0 On top of that, every municipality\/state is in a different financial condition, making the range of credit qualities quite large.<\/p>\n The evaluation of municipal bonds has become more difficult in recent years now that the pool of \u2018insured\u2019 bonds has shrunk in the wake of the financial crisis.\u00a0 Regardless, defaults remain extremely rare\u2014even for the quirkiest and worst-thought-out bonds\u2014and often end up being more of a black-eye news event than a financial one.\u00a0 In fact, according to Moody\u2019s, there have only been 71 defaults from 1970 to 2011\u2014and most of these have originated from the family affordable housing and non-profit healthcare areas.\u00a0 Meredith Whitney\u2019s prediction two years ago of massive defaults has not yet come to pass.\u00a0 Most historical defaults have occurred for specific reasons:\u00a0 fraud\/corruption\/bad business decisions (Jefferson Co., AL), a large lawsuit against a city that renders it insolvent (Mammoth Lakes, CA case most recently), bad investments (Orange Co., CA), or a budget deficit between costs and tax revenues that couldn\u2019t be closed (Stockton and San Bernardino).\u00a0 Unlike the Federal government, states and municipalities (with a few exceptions) are generally required to balance their budgets annually.\u00a0 So, the depth of the recession and popping of the housing bubble (which caused anticipated property taxes to fall off dramatically) has affected many communities, but to different degrees.<\/p>\n Filing \u2018Chapter 9,\u2019 the special type of bankruptcy for cities\/counties requires a judge to assign a trustee of sorts to handle the city\u2019s affairs and ensure that essential services continue, like police and fire.\u00a0 Other assets are rearranged (or sold in the worst case), and other city financial affairs, such as pensions and salaries, are often restructured, which requires union negotiations.\u00a0 These don\u2019t often go well.\u00a0 Debt service may be suspended or stopped entirely, but this isn\u2019t always the norm, and even if interest is suspended, recovery rates on defaults are a lot higher than we see for corporate bonds.\u00a0 These end up being very unusual situations for many reasons, but the final outcome is often better than the initial headlines.<\/p>\n In cases other than the high-profile examples mentioned above, what you tend to find is that bankruptcies have catalysts of huge, overreaching urban renewal projects or similar financially ill-planned activities.\u00a0 Also, public\/private partnerships like stadiums and convention centers, or \u2018land bonds,\u2019 which are leveraged on future development that may or may not occur tend to be problematic.<\/p>\n Historically, net financial losses from municipal bankruptcies have been quite small compared to other asset classes.\u00a0 What these do is create other collateral damage, such as a media frenzy, embarrassed politicians and a disenchanted citizen base and generally poor sentiment.\u00a0 What they don\u2019t do is necessarily direct affect anyone else in the market.\u00a0 For example, while one particular city might suffer, a neighboring town right across the street might be humming along just fine.\u00a0 So, while we might see more bankruptcies in coming months\/years, an epidemic doesn\u2019t have to be the result.<\/p>\n Market Notes <\/em><\/strong><\/p>\n 1 Week (%)<\/strong><\/p>\n<\/td>\n YTD (%)<\/strong><\/p>\n<\/td>\n<\/tr>\n 0.04<\/p>\n<\/td>\n 6.07<\/p>\n<\/td>\n<\/tr>\n 0.17<\/p>\n<\/td>\n 9.15<\/p>\n<\/td>\n<\/tr>\n -0.75<\/p>\n<\/td>\n 8.91<\/p>\n<\/td>\n<\/tr>\n -0.75<\/p>\n<\/td>\n 1.52<\/p>\n<\/td>\n<\/tr>\n -2.10<\/p>\n<\/td>\n 1.06<\/p>\n<\/td>\n<\/tr>\n 0.38<\/p>\n<\/td>\n 3.30<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n 3 Mo.<\/strong><\/p>\n<\/td>\n 2 Yr.<\/strong><\/p>\n<\/td>\n 5 Yr.<\/strong><\/p>\n<\/td>\n 10 Yr.<\/strong><\/p>\n<\/td>\n 30 Yr.<\/strong><\/p>\n<\/td>\n<\/tr>\n 0.02<\/p>\n<\/td>\n 0.25<\/p>\n<\/td>\n 0.83<\/p>\n<\/td>\n 1.89<\/p>\n<\/td>\n 2.89<\/p>\n<\/td>\n<\/tr>\n 0.08<\/p>\n<\/td>\n 0.27<\/p>\n<\/td>\n 0.64<\/p>\n<\/td>\n 1.57<\/p>\n<\/td>\n 2.66<\/p>\n<\/td>\n<\/tr>\n 0.10<\/p>\n<\/td>\n 0.25<\/p>\n<\/td>\n 0.63<\/p>\n<\/td>\n 1.52<\/p>\n<\/td>\n 2.58<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Markets this week were mixed, as large-caps squeezed out a small positive return, and outperformed both small caps and foreign stocks.\u00a0 Domestically, financials and utilities were the best performers on the week, while technology and materials lagged the most.<\/p>\n Emerging market stocks were down strongly on the week, as China\u2019s growth slowed from 8.1% pace in the first quarter to 7.6% in the second.\u00a0 Brazil was also down, due to their tie-in to Chinese exports.\u00a0 Some surprisingly, considering the negative sentiment around Europe, the second-worst performing region this year in equities has been Latin America.<\/p>\n Long-government bonds were up with lower rates, as were most international bonds\u2014both developed and emerging market.\u00a0 Credit was mixed.<\/p>\n In commodities, agricultural contracts were up strongly again (+5% on the week, 15% for the past three months), as drought conditions in the Midwest raised concerns over harvest conditions.\u00a0 Other commodities were all positive, but more moderately.<\/p>\n Have a good week.<\/p>\n Karl Schroeder, RFC, CSA, AACEP<\/p>\n Investment Advisor Representative<\/p>\n Schroeder Financial Services, Inc.<\/p>\n 480-895-0611<\/p>\n Sources:\u00a0 FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder\u2019s, Standard & Poor\u2019s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research, Forbes.\u00a0 Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return\/excluding dividends.\u00a0 Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.<\/p>\n The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.\u00a0 All information and opinions expressed are subject to change without notice.\u00a0 Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.\u00a0 Schroeder Financial Services, Inc. is a registered investment advisor.<\/p>\n","protected":false},"excerpt":{"rendered":" It was a bit of a light week from an economic news standpoint. The University of Michigan Consumer Confidence survey was weaker for July, falling from 73.2 to 72.0, which wasn\u2019t a complete surprise.\u00a0 The \u2018expectations\u2019 part of the survey fell by a few points, while the \u2018current conditions\u2019 component rose.\u00a0 Consumers\u2019 expectations for futureRead more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-889","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/889","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/comments?post=889"}],"version-history":[{"count":1,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/889\/revisions"}],"predecessor-version":[{"id":890,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/889\/revisions\/890"}],"wp:attachment":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/media?parent=889"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/categories?post=889"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/tags?post=889"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n Period ending 7\/13\/2012<\/strong><\/td>\n \n \n \n DJIA<\/td>\n \n \n \n S&P 500<\/td>\n \n \n \n Russell 2000<\/td>\n \n \n \n MSCI-EAFE<\/td>\n \n \n \n MSCI-EM<\/td>\n \n \n \n BarCap U.S. Aggregate<\/td>\n \n \n \n\n
\n U.S. Treasury Yields<\/strong><\/td>\n \n \n \n \n \n \n 12\/31\/2011<\/td>\n \n \n \n \n \n \n 7\/6\/2012<\/td>\n \n \n \n \n \n \n 7\/13\/2012<\/td>\n \n \n \n \n \n