Q2 Slow But Steady/Detroit Bankruptcy

Q2 Earnings, Slow But Steady

As of Friday night, 108 companies had reported results in this Q2 earnings season, and they have been decent-not great, not bad, but decent. Of the companies that had reported as of Friday’s close, earnings growth has come in better than expected at 3.6%, according to S&P’s Senior Index Analyst, Howard Silverblatt.

Also of note is the fact that about 71% of the companies that have released results have exceeded analysts’ earnings expectations, and slightly over half have done better than expected on sales. Another 150 S&P 500 constituent companies will report results this week, and many will be industry leaders (e.g., Amazon and Apple).

Detroit Bankruptcy

The other major story of last week was Detroit, which filed for Chapter 9 bankruptcy protection. After years of political scandals, population decline, strikes, shuttered industrial complexes, blight and growing entitlement obligations, Detroit took over the dubious title as largest municipal bankruptcy in American history.

Detroit’s outstanding obligations are estimated at about $18 billion, and in March of this year, the city declared a financial emergency that put its finances under the control of a state appointed emergency manager. The emergency manager attempted to negotiate partial debt forgiveness with Detroit’s creditors (e.g., bond holders and unions), but failed. In June, Detroit stopped making payments to its creditors.

The bankruptcy proceeding has been declared illegal by a Circuit Court judge for now, but that ruling is likely to be appealed. Similar to what we saw in Greece, Spain and Cyprus, either cuts will come, or a bailout will come, though we aren’t sure how much appetite President Obama or Congress will have for a bailout given that Detroit’s auto industry was just bailed out in 2009.

What does it mean for municipal bond investors? So far, not much, as evidenced by only minimally changed prices in broad municipal bond indexes as of this writing (9a.m. PST). Longer term, municipal bond investors will be watching the courts, as municipal bankruptcies, especially of this size, are new territory. How much power do creditors have? How much power do unions have? How much power do the taxpayers have? To be sure, this script is still being written.

To Our SEI Portfolio Investors

The city of Detroit has filed for bankruptcy. While the news is garnering plenty of headlines, the situation should come as no surprise. SEI holds no Detroit general-obligation debt, and as a result, we do not expect the city’s Chapter 9 filing to have any impact on performance.

To read more on SEI’s view of the situation in Detroit, please follow this link.


Source: Edited remarks of Kane Cotton, CFA, Bellatore Financial, Inc.


Security First Advisors is a locally owned, independent, fee-based investment advisory firm located in Portland, Oregon offering comprehensive financial planning and money in transition services.