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Affordable Housing Bonds Are Good Investments

(If You Can Find Them)

 Smith's Affordable Housing Finance Conference returned to Fort Lauderdale, Florida, this year.  It was another great year for housing bond investors as the S&P Muni Bond Housing Index illustrated by posting a 250.85% Ever To Date  Total Return and 2.95% Annual Total Return.

More than double your money AND no worries about credit problems given the very strong average credit quality.

Compare those investment parameters to the increasingly volatile stock market moves over the past week and its easy to see why housing bonds play a role in the municipal investment process. (//

The U.S. stock market has gone berserk in the face of national public policy positions that undermine global trading strategies.  It shouldn't come as any surprise since Smith's Regulars know that stocks are inherently more volatile.


McDonnell Investment Management Reports on US Ports

Our nation’s ports serve a critical purpose in numerous supply chains and the global economy. U.S. ports, however, are being challenged by volatile global trade policies as well as increasing trade volumes, larger vessels used by shipping companies, technological advancements and the associated capital costs required to remain competitive. While the recently completed Panama Canal expansion has boosted traffic in the Gulf Coast ports, U.S. ports of all sizes and on both coasts have been experiencing strong traffic growth. We believe U.S. ports will continue to experience favorable revenue trends and have the resources and market access to make the capital improvements necessary as changes occur in the global shipping industry.

Imports and exports have both grown at a compounded annual rate of 3.6% over the 18-year period from 1999 to 2017.(1) The recent growth in imports and exports reflects the ongoing U.S. and global economic expansion and increased demand for goods from consumers. While the current economic expansion is close to becoming the longest economic expansion on record, we believe trade should continue to expand both locally and globally through at least 2018.


Connecticut Snoozes Clock on Doomsday "Bond Lock"

The State of Connecticut was facing a May 15th Doomsday Deadline, when the Finance, Revenue, and Bonding Committee approved a bill last Thursday to delay implementation of what the local politicians called a “bond lock.”

The vote was passed straight down party lines, 26-25, as the bond covenant clock was ticking down to begin on May 15, 2018.

The bill delays, from May 15, 2018, to July 1, 2019, the application of the bond covenant to the state spending cap and the caps on general obligation and credit revenue bond authorizations, allocations, issuances, and expenditures. However, it does not eliminate those caps, which were put in place by the two-year budget signed on Oct. 31, 2017.

Glen Anderson, All-Star Analyst at Nuveen Investments, noted the "bond lock" required Connecticut to use the  bond covenants as a mechanism to control state spending and bonding. "It gives the force of a legally binding contract to ensure the State's budget does not exceed, say, 99% of the projected revenues.

"Sure, there are ways around the limitations, such as inflating the projected revenues,"  Mr. Anderson said, "but I don't think people are giving Connecticut credit for the bond covenant. I don't think a lot of people even knew the bond resolution was included in the Governor's budget last year."





5 Years  Ago

10 Years Ago

15 Years Ago

20 Years Ago

SMITH's Research & Gradings (SRG) announced the worldwide economic cycle has entered "The Middle of the End".   In September of 2012, SRG told attendees of SMITH's High-Yield Conference the economy had entered the "Beginning of the End", which was projected to last 18 months.

Terence M. Smith, CEO of SRG, said, "The Middle of the End will be characterized by a currency war, trade wars, commodity market manipulation, deflationary pressures and regional armed conflicts.  Events are moving more swiftly than during the beginning and middle phases, which may overwhelm the attempts by central banks to control outcomes."

Indeed.  "The Beginning of the End" was characterized by Mr. Smith as period of persistent eonomic problems.  He described, in detail, how the uncertainty associated with the durability of the revenues from the federal programs would lead to low/no growth.  The federal spending could not offset the lack of job creation in the private sectors of the economy.








After missing a January 15 payment to bondholders, North Oakland Medical Centers (NOMC) in Pontiac, Michigan, is in default on $35.8 million in bond debt issued on its behalf by the Pontiac (Mich.) Hospital Finance Authority, according to Standard & Poor’s.  S&P lowered its rating on the hospital to 'D' from 'B'.

The 166-bed hospital, located about 30 miles north of Detroit, finished its fiscal 2007, ended Dec. 31, with an operating loss of $13.4 million and just 18 days of cash on hand, according to Standard & Poor’s.

Moody’s Investors Service and S&P had already warned investors of problems by downgrading the bonds to non-investment grade ratings.  The downgrades were due to declines in revenue that led to increasing losses, despite reductions in expenses accomplished by new management, led by President and Chief Executive Officer John Graham.











SMITH's increased its event risk ratings on infrastructure credits in the aftermath of the terrorist attacks on September 11th, 2001.

On October 16, 2001, President George W. Bush signed Executive Order 13231 "Critical Infrastructure Protection in the Information Age" which continued many of the 1998 Presidential Decision Directive 63 activities by focusing on cyberthreats to critical infrastructures.  GAO recommended that the agencies take steps to complete the identification  of their critical assets, including setting milestones and developing plans to address vulnerabilities.  Also, GAO recommended that selected sectors' lead agencies assess the need for public policy tools to encourage increased private-sector CIP activities.  The GAO's report confirmed slow progress in ensuring the nation's critical infrastructure is safe from cyber attacks or physical destruction.

SMITH's heightened event risk ratings for facilities and essential services related to critical infrastructure will remain at escalated levels until steps are taken to correct these weaknesses.








The Asian Contagion has made its landfall in the U.S. economy, based on the durable goods report for February, according to David Hensley, economic analyst for Salomon Smith Barney. "The growing dichotomy between the consumer and manufacturing sectors is the most obvious hint that the economy has reached an inflection point," he added.

As SMITH's predicted, the trade deficit is growing wildly, reaching a new high of $12 billion in January.

Mr. Hensley believes  net exports will subtract one or two percentage points from GDP growth in the first quarter. "Price effects hid a much sharper decline in the real deficit, which tracks trade volumes. Import prices are collapsing at a 9.4% annual rate this quarter, versus a 4.2% rate of decline in export prices," he said.






April 11, 2018, Vol. XXVI, Issue 6  Municipal Edition


The Global Economic Doctor

April 11, 2018, Vol. 3, Issue 7



Trade Wars, Hog Prices and Cuba's Changing of the Guard

Victory belongs to the most persevering.

   — Napoleon Bonaparte


Summary: The beginning of April 2018 was marked by an escalating Sino-American trade war, turmoil in tech land and positive economic data. Looking into the short term, the headlines are likely to be the same, but trade will dominate. Considering that global supply chains are what one observer called "an interwoven tapestry of parts, worldwide manufacturing, and global markets", the threat of pulling this apart has clearly injected a massive dose of uncertainty into markets.  As The Guardian's Linda Yeuh (April 5, 2018) neatly summarized, "Any disruption to supply and distribution chains, which are a key part of world trade, could have a lasting impact. In the worst-case scenario, companies may have to relocate factories or distribution centers. Investment decisions affect employment and taxes raised, and are in some ways more disruptive than tariffs, which can be reversed more easily."  With those consequences in mind, the idea of a real trade war is horrifying. Chances for such a development have gone up and as this plays out markets are going to remain volatile and investors skittish.

But trade is not the only issue spooking investors. The taming of big tech looms large in investment circles, as companies like Facebook, Amazon, Google (now known as Alphabet) and Apple have for a decade been seen as growth stocks due to the continued emergence of technological devices like cloud storage devices, big data, social media and e-commerce tools. Although there has been some periodic concern that these companies will stumble like the earlier era stocks, they are likely to remain very much on the landscape as new areas of technology open up, such as Artificial Intelligence (AI) and Machine Learning. These tie in with driverless cars, space travel and fintech in the broader sense. In the short term, the problem is that the polish they once had has worn off, as consumers are undergoing a reassessment of how much they should trust these companies — something that was brought to the fore by Facebook's recent fall from grace. At the same time, many of these companies have become massive and have considerable economic clout, able to leap over small countries in a single bound. However, governments in larger countries are pushing back, dealing with a thicket of regulatory issues around the sheer size of these companies, how they act in cross-border transactions and whether they have they become too monopolistic or oligopolistic. Once the darlings of investors, the big tech companies are being reassessed by investors, regulators and consumers.

What has kept markets from making even deeper dives has been positive economic data. Last week's news on U.S. nonfarm payrolls was relatively positive as unemployment remained constant at 4.1%, staying at a multiyear low. Manufacturing data, consumer sentiment and home prices remain positive and this provides a basement for investor worries. The challenge ahead is if there are some negative economic data releases which coincide with bad headlines on trade and tech — a combination which could result in a major market correction.

Perhaps we should take comfort in the words of science fiction writer Ursula K. Le Guin, "The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." Sadly, we are in for a lot of not knowing what is next.











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