February 8, 2013 Update

DJIA:13,944 NASDAQ:3,165 10-YR TRS: 4/32, yield 1.951% Oil:$95.83 EURO:$1.3398 YEN:93.63

The Beauty in the Muni

Chief Justice John Marshall once said, “the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create...” While many believe the statement to be axiomatic, it is most relevant to the municipal bond market. Treasuries are taxed because the federal government can tax itself. However, the same cannot be said when it comes to municipal bonds because it is against constitutional rights for the federal government to tax the states. The policy has not only created an arbitrage market where investors use corporate bonds as a hedge, but it has also transformed the municipal bond into a safe haven for investors in high tax brackets reaching for yields. As the federal deficit continues to mount, there have been talks in the Obama administration to strip the bond of its tax-free title. But with the constitution backing its right of tax-exemption, it is unlikely the Obama administration will be successful in sucking the joy from trading municipal bonds. 

Domestic News

• Market Update. Futures are flat as investors remain weary about the release of today’s economic data and earnings and a fresh round of earnings. 
• The Commerce Department will report December trade figures at 8:30am. Economists expect the trade deficit to have eased more than 6% to $45.5B, on behalf of weaker imports.

International Updates

Asia

• Market Update. Majority of Asian stock markets advanced as upbeat economic indicators from China generated some optimism over the health of the Chinese economy. Japanese equities fell on behalf of poor earnings from Sony. 
• China’s exports and imports accelerated at a faster-than-expected rate in January. Shipment of goods and services grew 25% from December, Y/Y 14.1% increase. 

Europe

• Market Update. Trading in the green as optimism from China lures investors into taking more risk. Mining firms and banks are benefiting the most from the rally.  
• France’s central state budget deficit, which excludes local authority and healthcare spending, fell 3.9% to €87.2B in 2012, with tax revenues +3.9% to €286B and spending +2.4% to €374.2B. The deficit is €1B higher than predicted in the last budget law in November.\
• German manufacturing turnover Y/Y is -3.1%. December is -0.9% compared to November’s -1%. Domestic turnover is -3.1%, business with foreign customers is +1.6%. Sales to eurozone is -1.1%.  

Corporate

• A federal appears court is expected to hear an argument today over when software is patentable. Google (GOOG) and Facebook (FB) believe the patent office has been overly generous with the distribution of patents. On the other side, IBM (IBM) argues that stricter patent laws will curb innovation. The case itself is between CLS Bank and Australian firm Alice Corp. 
• Airlines have canceled at least 2,000 flights for today and another 500 for tomorrow ahead of this over broad casted snow storm (which is forecast to leave 2.5ft of snow). United Continental (UAL), JetBlue Airways (JBLU), Delta Air Lines (DAL), and AMR (AAMRG.PK).