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Puerto Rico Attempting to Fix PREPA

 Puerto Rico Gov. Ricardo Rosselló announced two weeks ago that he intends to privatize PREPA, calling it "a heavy burden on our people, who are now hostage to its poor service and high cost."

Smith's Research & Gradings (SRG) affirmed its "NEGATIVE" political event risk grading on the Puerto Rico Electric Power Authority following the Governor's announcement. SRG's political event risk grading measures the likelihood of non-payment due to political turmoil, such as war or political insurrection.

 

Governors of New York and Puerto Rico

The Governor of Puerto Rico's announcement followed New York Gov. Andrew Cuomo's Empire State Relief and Recovery effort was launched after Hurricane Maria, bringing together a wide range of civic, business and industry partners to provide critical personnel, supplies and expertise to help the people of Puerto Rico recover and rebuild.

New York State helped Puerto Rico create their $94.4 billion Build Back Better Plan — a comprehensive plan to rebuild the island's infrastructure with the resiliency to withstand future storms. But this plan continues to be roadblocked by Congress.

The Empire State Relief and Recovery Effort will continue to support Puerto Rico with supplies and other resources, but says the federal government must act immediately to fully fund a comprehensive recovery program.

 

 

U.S. Energy Dominance and Municipal Credit Quality

"We have ended the war on American energy, and we have ended the war on beautiful clean coal,"  U.S. President Donald Trump said in his first State of the Union address. "We are now very proudly an exporter of energy to the world."

Indeed. America's policy has gone beyond independence to energy dominance. U.S. oil production for January is seen averaging more than ten million barrels per day (b/d) for the first time since November 1970, bolstering Trump's call for "energy dominance." Last week, production reached 9.88 million b/d, its highest weekly rate since 1983, according to the Energy Information Administration (EIA).

U.S. shale production has created vast amounts of natural gas for export and, with U.S. oil production close to exceeding Saudi Arabia, has shaken the very foundations of the new world order.

The EIA projects U.S. crude output will reach an average of 10.8 million b/d next year, before surpassing an estimated 11 million b/d in November 2019.  By 2020, the EIA predicts the U.S. will become a net exporter of oil.

 

 

Losers Average Losers

Smith's Global Economic Doctor ranked the risk from rising interest rates at No. 5 this past week.  Dr. Scott MacDonald, Smith's Chief Economist, said, "Although we did not raise interest risk this time, it is likely to head up as the year progresses. The bond market has baked into its outlook, four Federal Reserve rate hikes in 2018 and some economists are looking for two to three more in 2019.  While the bond market was first to take interest rates into consideration, as reflected by the sell-off in U.S. Treasuries and the 10-year yield shooting out to 2.80%."

Equity markets joined the stampede from the watering hole-like behavior at the end of January and early February.

Currency markets also got into the act, with the culprit being data indicating that wages are likely to continue to rise in 2018, forcing the Federal Reserve to act in more rapid fashion in its taking away of the punch bowl of liquidity. And if other central banks are set to follow, which some think likely, then the era of cheap money is over and investors are preparing for a great re-pricing — somewhere out there on the horizon.

 

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American Airlines (AMR) is nearing an agreement with US Airways that would merge the two airlines and form the world's largest carrier.  AMR is under the protection of the U.S. bankruptcy court and the merger is considered critical to its ability to successfully restructure its obligations and emerge. In 2002, SMITH's Research & Gradings stated that other airlines would "fly in and out of bankruptcy court in order to discharge agreements with labor unions" if United Air Lines and US Airways were allowed to file for bankruptcy in order to jettison pensions and other obligations.  Today, SMITH's said, "It is a sad moment when the private sector shareholders cheer the shifting of long-term labor obligations onto the shoulders of the American taxpayer.  UAL, AMR, US Airlines and others made promises in the good times and subsequently received the protection of courts to abrogate those contracts. Nothing good can come from this toothless management style of negotiations that guts the fair labor practices."

 

 

 

 

As the effects of the housing slowdown shift into the broader economy, even the best-prepared state and local governments will face significant fiscal challenges that will require strong management, according to a report by Moody's Investors Service.

The report outlines how declining property values and deflating home sales volumes have slowed growth in real estate taxes, pressuring local government budgets. Tighter lending standards, higher foreclosure rates, slack disposable income growth, and higher energy prices are dampening consumer spending, with adverse effects on sales tax collections in many states.

"On the upside, states are better prepared for the current downturn than they were for the 2001 recession," said Samuels. "The housing slowdown has been developing for a while, allowing states to temper revenue forecasts, and the preceding strong economy enabled states to build reserve funds to record levels."

 

 

 

 

 

 

 

 

 

 

In the time and markets before the creation of the Merrill Lynch Prepayment Study, there was darkness throughout the land of municipal housing bond investment. During those dark days, SMITH's Housing Bond Regulars first started to meet to discuss the darkness and the bonds within.

ML released the 23rd volume since the creation of the ML Prepayment Indices for single-family mortgage revenue bonds in 1990.

Kurt van Kuller, director at Merrill Lynch and first-team All-Star Municipal Housing Bond Analyst, explained, "The mortgage markets are at the height of the most intense prepayment boom in history. Almost half of all residential mortgage debt has been refinanced over the last two years. According to the Merrill Lynch Municipal Prepayment Redemption Index, prepayment calls on Single Family Mortgage Revenue Bonds (SFMRBs) have reached new highs across all mortgage coupons."

 

 

 

 

 

Harold Kuplesky, vice president of finance at the New York State Housing Finance Agency, updated Regulars attending SMITH's New York State Issues & Issuers Conference on affordable housing in the State. NYS HFA was organized in 1960 and it has issued $4 billion in multifamily housing bonds. Proceeds of NYS HFA's bonds have financed 240 projects with 82,000 units.  SONYMA was organized in 1970 and it has issued $5.5 billion in single-family housing bonds, which financed 100,000 home mortgage loans. In 1998, NYS HFA has a pipeline of $800 million of rental projects, while SONYMA expects to finance $500 million of home mortgage loans.

The biggest issue facing NYS HFA during 1998 is, of course, the bond volume cap. New York State's private activity bond volume cap is almost exhausted.  Set at $1.25 per capita, Mr. Kuplesky noted initiatives in Washington, D.C., would raise the cap to $1.75 per capita.

 

 

February 12, 2018, Vol. XXVI, Issue 2  Municipal Edition

 

The Global Economic Doctor

February 8, 2018, Vol. 3, Issue 3

 

 

Markets, Central Banks and Trade

Summary: Three themes are dominating markets and the global economic outlook in early February 2018: central bank policy, Washington's increasingly fractious politics, and trade.  The new Federal Reserve chairman, Jerome Powell, was immediately challenged by a substantial plunge in the stock market and the return of volatility (the Vix climbing over 40 on February 6th). The main driver is the worry that inflationary pressures will force the central bank to raise rates at a faster-than-expected pace, which could be destabilizing to markets and possibly heavily-indebted companies that could find the higher rate environment more difficult to borrow in. At the same time, analysts are increasingly looking at the European Central Bank to determine when it starts tightening monetary policy.

While the stock market has long been overdue for a downturn, is this the big meltdown?  Although the February 5th-6th downturn was brutal, it is a shot across the bow and should remind investors that while markets can go up, they can also go down. For the market to shift to bear territory other problems with the economy would need to be manifest. They would include poor GDP numbers, an aggressive downturn in manufacturing, a sharp spike in bankruptcies, an evaporation of credit, and the failure of financial firms.  None of these has occurred yet and does not appear ready to happen in the short-term. However, markets, in particular the bond market tend to look several months ahead. And there is a nervousness over how the Federal Reserve will handle higher inflation.  While taking away the punch bowl of cheap money is necessary in an expanding economy, the trick is in removing it in such a fashion that markets are not disrupted.

What investors should take away is that we have entered a new market regime in which volatility becomes the norm, the Powell Fed will be tested on a more regular basis, and investors will adopt a more healthy paranoia akin to prey at the watering hole, watching for hungry predators.

That takes us to the other two parts of the narrative. While Democrats and Republicans argue over the Nunes memo, its release does two things — it raises the sense of political polarization in the country and erodes the public's confidence in the nation's political institutions. Moreover, the toxic nature of Washington's politics only further complicates the economic policymaking environment at a time when there are pressing issues, such as the new March 27 deadline on funding for the government (kicking the can down the road again). Other issues at the forefront include the debt ceiling and the Deferred Action for Childhood Arrivals (DACA) program, plus financial deregulation, infrastructure and criminal system reform. The stock market usually discounts political risk, but it is going to increasingly impinge on markets as key dates come closer. Last but not least in our narrative is trade. Although it may not be as immediate as the stock market, the Trump administration is in trade talks with Canada and Mexico over NAFTA; with South Korea over trade; and it is considering new measures against China. The potential for negative headlines is high, which could negatively feed into sentiment over the stock market.  We expect more volatility ahead and more pronounced risk.

As the great Scottish bard Robert Burns said, "There is no such uncertainty as a sure thing."

 

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Smith's Research & Gradings,  has become a bellwether research company, often predicting significant trends and spotlighting controversial subjects sometimes months before they come to light elsewhere. Smith’s provides independent research and third-party analysis for institutional investors. Smith's analysis is an indispensable part of Wall Street and the world's capital markets.

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