Smith's Research & Gradings
The Role of Analysts and the Rise of Machines
What is the role of the analysts in an environment that is increasingly using machines to make recommendations from restaurants to workouts and investments?
Smith's Research & Gradings has published a series of articles designed to provide thought leadership on how computers are changing the way analysts work as well as potential credit implications for the investment community. Perhaps most controversial is SRG's examination of how computers and technology will be replacing analysts.
We recently had an opportunity to attend an ESRI sponsored briefing to the Intelligence National Security Alliance (INSA) in Washington DC. INSA provides a nonpartisan forum for collaboration between the public, private, and academic sectors of the intelligence and national security communities that bring together committed experts in and out of government to identify, develop, and promote practical and creative solutions to national security problems. Smith Information Services (SIS), a sister-company (pun) to Smith's Research & Gradings, works with the public sector and intelligence community.
A panel of intelligence and national security subject matter experts discussed how user self-confidence and trust are essential prerequisites for strong human-machine team performance — particularly when tasks demand significant collaboration that include both risks and vulnerabilities.
Smith's Research & Gradings hopes the Cadre of Regulars can appreciate the investment community has similar concerns about self-confidence and trust when working with machines. Clearly, the use of machine learning and AI is going to have major implications for how analysts work on Wall Street.
Puerto Rico's Plan of Adjustment
Puerto Rico, owner of the largest United States bankruptcy in history, released a plan to cut its $129 billion debt by 33 percent Friday, according to the New York Times.
Puerto Rico's Governor Wanda Vazquez Garced made an address regarding the debt restructuring proposal filed in court by the oversight board, in San Juan, Puerto Rico, September 27, 2019.
Confirmation of the plan by U.S. Judge Laura Taylor Swain, who is hearing Puerto Rico’s bankruptcy cases, is expected in the first half of 2020, according to Natalie Jaresko, the board’s executive director.
"This is the beginning of the end of Puerto Rico’s bankruptcy process," José Carrión, chairman of the oversight board, told reporters following a public hearing on the plan.
Bill Kannel, member of the prestigious Boston-based law firm Mintz LLP, will be hosting a panel discussion on Puerto Rico this coming Thursday morning.
In 2016, Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), so the plan now goes to a federal judge, who will review the fairness and feasibility of the proposal.
An important caveat to remember is a federal court found the creation of PROMESA violated the Constitutional appointment's clause, which is far from being a settled matter. But, many analysts believe it won't be a major stumbling block.
Senator Carmelo Rios of Puerto Rico will be speaking at Smith's High Yield Conference on Thursday morning. Perhaps he will share some insights into the events over the summer and what the reaction on the island is to the plan of adjustment.
Fitch Warns: The Coming Financial Storm
Opening the Floodgates: The U.S. federal deficit widened from a low of 2.4% of GDP in 2015 to an estimated 4.5% for full-year 2019, amid an economic expansion of record length after the end of the last recession in 2009. With both major political parties already focused on 2020 elections, recent passage of a two-year agreement on both spending and debt ceiling expansion progressed quickly and with limited regard for this widening deficit. Notwithstanding the relative ease of achieving a combined debt and budget deal in July 2019, episodes of partisan brinksmanship are likely to recur in future debt ceiling and federal budget cycles.
Recent agreements, including the Bipartisan Budget Act of 2019, were achieved by increasing discretionary spending. Low borrowing costs have tempered concerns about the federal debt load across the political spectrum and policymakers are now engaged in a wider debate about the appropriate mix of fiscal and monetary policy.
While there is currently no sign of this, public finances could emerge as a greater concern for U.S. elected officials in the event that borrowing costs start to rise or if the deficit rises sharply during a future downturn.
Municipal Bond Analyst Survey, 2019 (click link for full survey)
— by Tom Kozlik
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TODAY IN SMITH'S
5 Years Ago
10 Years Ago
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20 Years Ago
The Detroit Bankruptcy makes a complete mockery of the rule of law and threatens to set a precedent that will send a shiver through the municipal bond market in search of a spine to tingle.
What is so very sad, to date, is the lack of any real moral outrage on the part of investors.
Blatant violations of contracts and the complete repudiation of bond opinions have been greeted by silence or exceptionalism that sounds like the bleating of sheep before the shears.It doesn't matter if Detroit is the only City in America that would dare to steal money from investors on such a gigantic scale. What matters is the City of Detroit's attempts to repudiate $18 bln. in debt service payments go without chastisement, rebuke, or revile.
"The Federal Deposit Insurance Corporation (FDIC) is running out of time and money, "according to Terence M. Smith, founder and CEO of Smith's Research & Gradings. This week, Smith's reported the FDIC is undercapitalized by $250 bln. Mr. Smith added, "As the U.S. government and G-20 member states move to unwind their economic stimuli over the coming months, the FDIC is ill-prepared to provide the necessary depositor protection." Smith's reported the FDIC was inadequately capitalized in late 2008 and, again, early in 2009. Moreover, Smith's Research expected the number of bank failures to be greater than the FDIC's estimate of 40 banks.
Currently, Smith's Gradings has placed the FDIC Guarantee under review for possible downgrade below 100/10/-1. Based on preliminary analysis, the FDIC Guarantee is significantly undercapitalized while at the same time the FDIC's forecast for bank failures is optimistic.
In May, the FDIC's request for a longer credit line from the U.S. Treasury was approved — increasing from $30 bln. to $100 bln.
A hot topic among institutional investors is price transparency. More specifically, the Municipal Securities Rulesmaking Board (MSRB) tape and the real time reporting system.
The Bond Marketing Association (BMA) has endorsed the real time requirement for high quality, frequently traded issues (i.e. insured bonds). BMA's official policy position is non-rated deals, defaulted bonds, and "illiquid" securities should not be posted.
A buyer said, "If you are going to have real time reporting, then it has to be for all of the trades. Otherwise the MSRB and BMA are creating a two-tiered market. You cannot have it both ways."
The MSRB agrees with institutional investors because the reporting requirement is across the board.
Rule G-14 will require brokers, dealers and municipal securities dealers ("dealers") to report transactions in municipal securities within 15 minutes of the time of trade execution.
Kevin Taylor, municipal analyst at Prudential Securities, documented the latest trend in tax reform up the coast from California to Oregon and now Washington. "The trend is an effort to cap taxes and having greater governmental accountability to tax payers," Mr. Taylor said.
State of Washington voters will be presented with a major tax revision proposal this Fall: Initiative 695. The initiative reads: "Shall voter approval be required for any tax increase, license tab fees be $30 per year for motor vehicles, and existing vehicle taxes be repealed?"
Smith's believes the author(s) of the initiative might well have queried voters whether they want an extra $100 in their pay checks every month. Without some voter education initiative about the implications of 695, the answer will probably be a resounding: "Yes!"
Mr. Taylor was more diplomatic. He suggested the reason the initiative may appear to be readily acceptable is the strong financial position of many governments.
September 30, 2019, Vol. XXVII, Issue 15 Municipal Edition
The Global Economic Doctor
August 1, 2019
Scott B. MacDonald, Ph.D.
The Fed in an Era of Competitive Central Banking
Summary: On July 31st the Federal Reserve met and decided to cut interest rates by 25 bps, to a 2.0%-2.25% range. So far, so good. That was generally expected. What was not expected was the language and tone that followed during Chairman Jerome Powell’s news conference. In particular, the Fed head sought to reassure his audience that the U.S. central bank had not ruled out further cuts if “uncertainties” about the economic outlook remain, but he then cautioned that the cut was only a “mid-term policy adjustment.” To put it mildly, Powell left a major question mark as to whether the central bank will follow up with an aggressive rate-reducing regime. In an era of competitive global central banking (which resembles a race to the bottom by central banks lowering their rates) Fed efforts to be prudent (i.e. moving in a slow and deliberate way), leaves the U.S. at a disadvantage of being too slow in cutting rates, making the dollar less competitive in what is becoming a more sharper-elbowed global trade system, and generates uncertainty over the future of economic expansion.
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