Quick Search Tags
Smith's Research & Gradings
Michael Ross
May 22, 2023

Smith's Research & Gradings

What Can Artificial Intelligence Do for You?

What Can Artificial Intelligence Do for You?

Can Artificial intelligence deliver for municipal bond analysts? The answer is a resounding yes! But, the first challenge for the municipal bond analyst is to maximize the beneficial aspects of AI rather than view it as a competitor, or as a longer-term replacement. AI is no substitute for the talents and insights of a skilled, well-equipped municipal analyst who is well-attuned to the goals and objectives of the portfolio strategy being implemented by an asset manager or trader pursuing an active management strategy. But, AI can be useful as part of passive/indexing portfolio strategies.

For active managers, surveillance is paramount. Ticker systems can trigger periodic reviews, but may not be linked to timely EMMA filings, local media coverage, or relevant social media commentary released by the issuer or municipality. Most municipal governments boast Twitter or Facebook handles. The analyst will still be required to scrutinize and assess the validity and accuracy of the information and determine if credit risk assessments may be impacted. New information could result in the widening or narrowing of the spread relative to its peers or the MMD curve.

AI can complement the surveillance review process by producing written narratives of recent events by reviewing periodic financials. For many moderate-to-low risk municipal credits, the CAFR is about as good as it gets. But for high-yield municipal project finance startups, investors may demand quarterly, or semi-annual updates. With AI it will be an easier process to verify whether the issuer can adhere to the periodic update requirements. AI supplements the analysts' skills and allows for greater coverage of the multiple bond issues that populate a portfolio. And when there are hundreds of line items, streamlining the process via surveillance can be beneficial to both the analyst and asset manager.

Special purpose municipal agencies that have limited purposes such as Tax Increment Financing Districts, Redevelopment Agencies, Transportation Development Districts and Flood Irrigation Districts have always been disclosure challenges for municipal bond analysts and are often unrated municipal securities. Categorically, these kinds of issuers are low-profile with extraordinarily little institutional coverage, yet their bonds are priced by multiple pricing services.

Given the recent levels of precipitation in Florida, for this article we wanted to gain information about a few of the Florida flood irrigation districts. Such information would be useful in identifying portfolio holdings. According to the AI inquiry web search, flood irrigation districts are regions that have a water management system to protect residents and businesses from floods and droughts. In Florida, five water management districts are responsible for the administration of water resources at the regional level. They are:

• Northwest Florida Water Management District

• Suwannee River Water Management District

• St. Johns River Water Management District

• Southwest Florida Water Management District

• South Florida Water Management District

The municipal analyst now has a starting point to investigate the impact of the recent rains on the five water management districts. AI also provided a link to the Florida Department of Environmental Protection Water Management Districts. This link provides information that requires the analyst to exercise judgment about the usefulness of the supporting data. The initial AI search provided valuable links to information that will require analytical insight. Such information would not be available on EMMA.

The municipal credit analyst community now has an additional tool in its arsenal to combat the historically slow to non-existent disclosure history of issuers to provide timely information.

When a new issue is coming to market, there is a wealth of information to assist in the decision-making process. However, the ability to use AI to scan a broader base of source data, when combined with the skills of a seasoned municipal credit analyst of small single-purpose entities, could be a game changer for the surveillance process.

With the proliferation of AI-powered search engines, there are many choices. We are not recommending a preference toward any of the multiple AI platforms. One search engine we found was Andi (https://andisearch.com). It is described as a "smart search assistant." The key operative word is "assistant," meaning its purpose is to complement the skills of the user. We think a pairing of an analyst's skills with the power of an AI search partner is the best tool, providing the analyst with access to information requiring only some additional keystrokes — It is only a matter of increasing analytical proficiency.

Take notice

Stay on top of the latest global news that can impact your investment strategy.

Big Bucks for Infrastructure

The $1.2 trillion Bipartisan Infrastructure Framework, which has garnered the support of the Biden Administration, calls for billions in funding for traditional infrastructure.

Jobs Number May Indicate Covid Economy is Over

Wow! The U.S. economy added 467,000 jobs last month, keeping the unemployment rate in the 4.0% area. Also impressive is that there were large upward revisions from previous months. We say 'wow' because there was such negative sentiment prior to the release of the jobs number.

Beirut’s Agony: Ports, Food, and China

On August 4th the port of Beirut was the scene of a horrific explosion, which killed more than 150 people, injured 6,000 and left some 300,000 homeless. The damages are estimated to be in excess of $15 billion. The city’s hospitals, already struggling due to the COVID-19 pandemic, were damaged by the blast and swamped with injured. On top of already raging economic and political crises, the explosion now raises the question of food security. Prior to the explosion, 80 percent of Lebanon’s imports passed through Beirut’s port. Without a functioning port in Beirut, the country now relies on a handful of secondary ports, chief among them being Tripoli in the north, to import food and to export its products.

Subscribe Today to unlock insights that could impact you tomorrow!

With your monthly or yearly Subscription you will unlock online articles and have the ability to download the full PDF files for the publication.
$79.95 / Per Month
$850 / Year (Save 30%)
* Discounted Rates for Issuers and Governmental Entities

Smith's Research & Gradings focuses on the people, sectors and news that matter the most to you. Smith's analysis is an indispensable part of Wall Street and the world's capital markets. Our approach was inspired by the need for a consistent analytical approach across all asset classes.

$79.50 / Per Month
$850 / Year (Save 30%)
* Discounted Rates for Issuers and Governmental Entities

Let a subscription to The Global Economic Doctor provide you with access to sovereign news, analysis and insights. Concise and powerful, the Global Economic Doctor spans the globe, giving you a read on how today’s market developments and key players are impacting your business around the planet.