Smith's Research & Gradings



MSA Payment Amount Tracks Well, But Distributions

Are Messy


When it comes to Tobacco Bonds, careful credit analysis is the key, according to Nuveen Investments.

The National Association of Attorneys General released the amount paid under the Master Settlement Agreement on April 11, 2017. Nuveen's projections almost nailed it perfectly.  However, the distributions to various States has tobacco analysts waiting for phonecalls to be returned. Ohio, Illinois, and Idaho seem to be short-changed this time around.

A high-yield portfolio manager (not at Nuveen) said, "We have spent quite bit of time this past week discussing tobacco bonds with pricing services and index managers.  It is up to them to decide how they are going to handle it."

In May of 2016, Nuveen published a report on Tobacco Bonds that still provides one of the market's best primers on the tricky subject. Written by Nuveen's award wining analysts, Glen Anderson and Cathryn Steeves, the report found that  since 1999, Municipal Issuers have sold over $48 billion in bonds backed by payments due under the Master Settlement Agreement (MSA) between the states and the major tobacco companies. At the time of issuance, these bonds were each rated investment grade, but many have since been downgraded deep into speculative grade territory.


Investors Killing It With Muni Bonds

By almost any measure, the municipal bond market is having a record setting run over the past nine weeks.

Bloomberg noted that municipal bonds have outperformed US Treasuries by almost 1% year-to-date.

Back in January, Barron's featured an article documenting how well municipal bonds had performed during December. However, Barron's wondered if municipal bonds could continue to outpace other securities.  Steve Winterstein at Wilmington Trust described the municipal sector's returns as "a reprieve" following the awful third quarter performance.

A Surprise to the Upside

BlackRock's Municipal Market Update for April 2017  noted "Munis bucked the seasonal trend and posted a positive return in March."   BlackRock's update is authored by Peter Hayes, head of the municipal bond group, James Schwartz, head of municipal credit, and Sean Carney, strategist. The surprising performance was attributed to limited supply and solid demand setting the stage for the favorable outcome. "We remain constructive on the asset class, even amid potential tax reform," BlackRock reported.



From Russia With Love

The US-Russia Chamber of Commerce (USRCC) hosted a luncheon at an "undisclosed" location in New York City last Tuesday. The occasion was the 3rd annual CEO Panel: U.S. and Worldwide Market Expansion of Russian Companies.  Admission to the program was by "invitation only".  What Smith's Research & Gradings learned was the  U.S. sanctions and border tax may have unintended (and unforeseen) consequences.

Andrew Pidgirsky, Chairman of the USRCC provided the opening remarks at 11:30 AM.  The audience was almost entirely filled with professionals from Russia or professionals who work with Russia very closely.  "We want to talk about how Russia can work with the U.S.," Mr. Pidgirsky said, "and I am not talking about hacking."

Indeed. At the same time as the luncheon, Rex Tillerson, U.S. Secretary of State, was visiting Moscow, Russia, to discuss the souring relationship with the U.S. and, President Trump described the U.S.-Russia relationship at a new low.

Against the grim background, Smith's Research & Gradings resolutely maintained its longstanding relationships with Russia to communicate on the shifting business practices and changing regulatory regimes between the two economies.

Aleksander Stadnick, Trade Representative of the Russia Federation in the USA, provided remarks that were aspirational given the backdrop. A Russian diplomat, appointed by Russia's Prime Minister Dmitry Medvedev, he spoke for a very brief time.






5 Years  Ago

10 Years Ago

15 Years Ago

20 Years Ago

SMITH's identified several events related to the polar regions, in general, and the Arctic/ Alaska area more specifically. First, the sovereign rights of the US are being lost due to the lack of a single icebreaker capable of conducting passages across the Arctic Ocean throughout the year.

Second, is an economic event risk, which is deriva­tive and related to the sovereign risk. The U.S. commercial interests in the Arctic region are being eroded. A new NASA study revealed that the oldest and thickest Arctic sea ice is disappearing at a faster rate than the younger and thinner ice at the edges of the Arctic Ocean's floating ice cap. Further declining Arctic sea ice would increase possibilities to use Northern Sea Route from Europe to Asia and reduce shipping emissions by more than one-third.

Third, SMITH's discovered a technology risk in the lack of the United State's ability to manufacture an icebreaker of sufficient size and power to project its sovereign rights into the Arctic.

The collapse of the U.S. real estate markets has prompted sub-prime bond investors to start seeking deep pockets for a bailout. A Citigroup report in March estimated that bond investors stand to lose about $100 billion from defaults on the more than $10 trillion in U.S. home loans outstanding. The report includes losses from subprime and the "alt A" categories of mortgages. In March of 2006, SMITH's Research & Gradings predicted that U.S. taxpayers will bear the brunt of the burden for the sub-prime misadventures.

Beyond the misdeeds of mortgage originators, the bond investors might want to learn more about the role of rating agencies by purchasing a copy of a paper written by Joshua Rosner, a managing director of Graham Fisher & Co., an investment research firm in New York, and Joseph Mason, an associate finance professor at Drexel University in Philadelphia.

From a forensic perspective, the rating agencies allegedly have their fingerprints all over the structuring of sub-prime mortgages, according to the paper.

SEC has commenced a formal inquiry into market practices concerning research analysts and the potential conflicts that can arise from the relationship between research and investment banking. The inquiry will be conducted jointly with the New York Stock Exchange, the National Association of Securities Dealers, New York Attorney General Eliot Spitzer, the North American Securities Administrators Association and the states. The inquiry will help determine the necessity of additional rulemaking and whether any laws have been violated.

The Commission's active review of analyst practices was undertaken in conjunction with the legislative oversight of the House Financial Services Committee. "The recent disclosures that resulted from the investigation by the New York State Attorney General, as well as the practices uncovered by the staff of the SEC, the NYSE and NASD, reinforced the Commission's conclusion that further inquiry is warranted," SEC Chairman Pitt said.

The Red River Valley has the lowest elevation of three distinct geographic regions, rising in steppe like fashion from east to west, in North Dakota. The Red River Valley is the former bed of glacial Lake Agassiz and the river drains a watershed region that extends north until the river reaches the Hudson Bay.

The North Dakota portion of the Red River Valley varies from 16 to 64 km (10 to 40 mi) in width from north to south along the North Dakota and Minnesota border. The valley is relatively flat, with an average elevation of 275 m (900 ft) in North Dakota and a low point of 750 feet.

Last week, the Red River was more than 26 feet above flood level in Grand Forks, North Dakota. Roughly 75% of the town's 50,000 population was forced to comply with a mandatory evacuation order. A 24-hour curfew was put into effect.

Grand Forks's drinking water system and electric power system were completely shutdown, which meant a small fire in the business district eventually grew into a huge conflagration.

May 1, 2017, Vol. XXV, Issue 7  Municipal Edition


The Global Economic Doctor

May 12, 2017, Vol. 2, Issue 8



Whatever Happened to Infrastructure?


Infrastructure is an ongoing political issue in the United States and the Trump administration has indicated that it is a priority. There are good reasons for this. As James Toscas, president and CEO of the Portland Cement Association, noted in The Hill in early May 2017: "Americans have lost tires and wheels to potholes, have put up with mounting flight delays, have been evacuated from their homes due to floods and dam failures, and they have had their health threatened by outdated water networks. Our systems cannot handle the demands of today's America, let alone those of tomorrow."

 Brian Pallasch, Managing Director, Government Relations and Infrastructure Initiatives for the American Society of Civil Engineers (ASCE) spoke at Smith's State & Local Conference on America's Infrastructure. According to the ASCE, U.S. infrastructure received a D+ in 2017, hardly a great number. Indeed, the report noted: "Deteriorating infrastructure is impeding our ability to compete in the thriving global economy, and improvements are necessary to ensure our country is built for the future. While we have made some progress, reversing the trajectory after decades of underinvestment in our infrastructure requires transformative action from Congress, state, infrastructure owners, and the American people."

The ASCE also noted that failing to close the infrastructure investment gap brings serious economic consequences:

$3.9 trillion in losses to U.S. GDP by 2025;

$7 trillion in lost business sales by 2025; and

$2.5 trillion lost American jobs by 2025.

During the 2016 presidential campaign infrastructure was one of the major planks that then candidate Donald Trump stressed.  Although various numbers were given out, the one that remained in the press was $1 trillion.  The U.S. economy is certainly in need of a massive infrastructure overhaul — it is probably one of the few things that both Democrats and Republicans can agree. However, infrastructure seems to have quietly slipped from the agenda.

Or has it?  President Trump indicated in an interview with CBS News that something is cooking: "We've got the plan completed, and we'll be filing over the next two or three weeks, maybe sooner."  Additionally, in early April, Transportation Secretary Elaine Chao suggested that there was a package of transportation infrastructure, water, broadband, energy and electrical grid, and upgrade to veterans' hospitals in the wings.





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