The Global Economic Doctor

May 31, 2016

Global Economic Doctor_thumb



The Global Economic Doctor – Click link for a quick checkup.



Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Goodbye May, Hello June!
Step with care and great tack, and remember that Life’s a Great Balancing Act!
— Dr. Seuss

Summary: As May winds down, June looms.  It has great potential to be one those memorable months for investors, corporate chiefs and economic policymakers. Just to provide the high points: OPEC meets and US ISM manufacturing index reports both occur on June 2th; the FOMC meets June 14th-15th; the UK goes to the polls on June 23rd to vote on whether to remain in the European Union (EU); the European Central Bank begins its corporate bond buying program; and Spain goes to the polls to hopefully undo the deadlock from the December 2015 parliamentary elections.  Heading into the month, there has been a considerable build-up by Fed officials that rates are going up in June or July. A relatively forgettable G7 meeting in Tokyo in late May achieved little (probably pointing more to the preoccupation of leaders trying to cope with populist movements). And, there is a growing sense of disequilibrium in parts of the developing world (Brazil, Venezuela and Thailand come to mind). China’s growing debt burden is becoming more of a market focus as investors and policymakers ponder the ability of Beijing to manage it through a slowdown. In securities markets, what has been noticeable is the outflow of money from equities into fixed income and cash.  According to Lipper Fund capital flows, for the week ended May 25th, equity funds saw a net outflow of $4.8 billion, while there was a net inflow into investment grade bond funds of $873 million and $7.3 billion net inflow into money market funds. Another data provider, EPFR Global, indicates that equity funds have seen total outflows of over $100 billion year-to-date.  The VIX index (which measures volatility) ended last week at a low 13.12; we don’t expect that to last the month. Considering the economic and political landscape for June, there is a strong likelihood that volatility is going to return. It is probably a good time to put on the seatbelts.



The Global Economic Doctor

May 20, 2016

Global Economic Doctor_thumb



The Global Economic Doctor – Click link for a quick checkup.



Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

The Witches Gather
Double, double toil and trouble;
Fire burn, and caldron bubble.
— From Shakespeare’s Macbeth

Three narratives are likely to dominate global markets in the next several months: mixed economic signals are likely to maintain an elevated level of uncertainty about U.S. economic growth and how the Federal Reserve responds to it; uneasiness about macroeconomic direction will reinforce the quiet flow of money out of equity markets and into cash, gold-related funds and the investment grade corporate bonds; and the ongoing importance of political risk (i.e., Brexit, terrorism, South China Sea and Russia) which could be disruptive to markets.  The tone of the narratives depends on upcoming data, such as U.S. housing starts, manufacturing numbers and consumer activity as well as real GDP numbers for Japan, China and key Emerging Market countries.

Along these lines, we believe that the Federal Reserve will make at least one more raise in 2016, but it will most likely come in December.  Considering the release of the minutes from the April FOMC meeting, chances have probably increased for a rate hike at the June 14-15th FOMC meeting, but we would have to question why U.S. central bankers would want to act only days before the June 23rd Brexit vote.  Polls indicate a close vote in the UK and if the British opt to cut their ties to Europe, markets are more than likely to take a tumble.  That would not exactly make the Federal Reserve look on top of their game.

At the same time, Chinese geopolitical issues (and there are a lot) will remain in the headlines, Russia remains a major geopolitical factor on Europe’s eastern borderlands and Brazil’s as well as Turkey’s politics remain in flux.  We also have our concerns over the wobbly nature of Italy’s banks and the ability of the government to gain any more traction on reforms.

The cauldron is bubbling and if you listen hard enough you can them chanting, “Double, double toil and trouble….”


The Global Economic Doctor

May 9, 2016

Global Economic Doctor_thumb

The Quick and Dirty

May 9, 2016

Summary: Another busy week ahead with plenty of headline risk – China, Greece and oil stealing the front pages.  Add in Donald Trump’s comments last week on US debt (there is too much and it should be reduced possibly via negotiations with creditors), Puerto Rico’s debt epic, Greece’s ups and downs with its creditors (including this past weekend’s vote to pass new austerity measures), China’s economic data, and earnings and we have the potential for greater volatility in markets in the short term.  The lineup of potential event risk increasingly points to a long hot summer – Brexit, more fun with Greece, a new government in the Philippines, and elections in Spain.  Never a dull moment.

* China’s trade numbers spooked markets overnight in Asia. In April exports contracted by 1.8%, a real downturn from March’s 11.5% expansion.  Imports marked their second month of contraction coming in at -10.9%, on the heels of March’s 13.8% upswing.  This is a point of concern for those who worry that China’s economy is stalling out or sitting on the brink of a credit-fueled collapse. Real GDP growth in Q1 was 6.7% and the government is looking to 6.7% for Q2, with growth being driven by services, consumer spending and infrastructure spending.  While we share the concerns over China’s financial system and the build-up in debt, this remains an economy that is still controlled by the government.  This functions as a brake to a hard landing (for now) and provides cover for the government to continue to push on structural reforms.  All the same, China is an ongoing point of concern and investors need to closely watch data and official announcements.

* Oil prices are driving markets, caught between change of Saudi oil minister (one of the Kingdom’s most powerful positions) and Canada’s wildfires hitting the North American country’s oil production.  Although Canada’s production hit posibly impacts supply, it is probably being overstated at this stage.  Oil is down from last week’s $45 to around $44.  Nigeria and Venezuela really need oil prices to rise, considering the troubled state of their economies and fiscal situation, though the Latin American country is in far worse shape.  The new Saudi oil minister Khalid al-Falih, a Texas A&M University graduate, is regarded as a highly competent technocrat and faces major challenges with depressed oil prices, economic diversification efforts, and the Iran-Saudi Cold War.  In other news, oil discoveries have fallen to a 60-year low as companies have drastically cut their budgets.  This raises the question of a potential oil shortage, but that would be down the road by two decades.

*Real estate news in the US: Home prices climbed in 87% of U.S. metropolitan areas in the first quarter as buyers competed for a tight supply of listings, the National Association of Realtors said. This points back to the issue of a shortage of housing for middle income families, which remains a concern vis-à-vis more fulsome US economic expansion.

* Brazil is near the senate’s vote to start the impeachment investigation for President Dilma Rousseff this week, which means that by week-end, the country could have a new leader, Vice President Michel Temer.  He faces big challenges – the economy is in its worse recession since the 1930s, inflation is on the rise, parts of the corporate sector are in disarray, and Brazil’s political landscape is polarized.  Temer’s first actions have to be forming a new cabinet, regaining public and investor confidence, and creating a working majority in Congress.  Temer’s rise is probably a positive step for markets and the country, but the action certainly leaves Rousseff supporters feeling as though there was a constitutional slight-of-hand of questionable constitutional legality. Stay tuned as there is much more to come.

* “Dirty Harry” and the Philippines:  The Philippines presidential election appears set to result in the victory of the law and order populist mayor of Davao City, Rodrigo Duterte, known for his vulgar comments and staunch nationalism. The Philippines had made considerable strides in structural reforms, strong real GDP growth and infrastructure improvements under outgoing President Benigo Aquino.  However, many Philippinos have felt left behind by the economic changes and the hard-charging Duterte (also know as Dirty Harry) has struck a responsive chord, though he has admitted that he really doesn’t understand economics and would copy the plans of his opponents. His election could have a negative impact on this Southeast Asian economy with a GDP of $290 billion.

Puerto Rico on the Mind:  US Secretary of the Treasury Jack Lew is off to Puerto Rico to see what he can do for the debt-troubled island.  Good luck with that.  Sadly the $72 billion debt issue has entered the Twilight Zone— I mean the US Congress, where most pressing issues are responded to with a glacier-like sense of urgency (on a good day).  This crisis has several more steps down before resolution.  Republicans are expected to come up with a bill this week for managing the Commonwealth’s debt, but that has yet to be seen.

This week’s headlines:


Earnings – Walt Disney and Hertz Global (equals mice in rental cars)

West Virgina and Nebraska hold primaries


Earnings – Wendy’s, Aramark, and Ambac Financial

Brazil’s Senate votes on the President’s status


Earnings – Kohl’s, Ralph Lauren, Nordstrom and Symantec

The Bank of England meets

The World Gold Council publishes a report for Q1 global demand


Earnings – J.C. Penny

The University of Michigan Consumer Sentiment reports

Standard & Poor’s reviews Italy credit rating

Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.). During his time on Wall Street, he was ranked by Institutional Investor magazine as one of the top sovereign analysts.
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

The Global Economic Doctor

May 6, 2016

Global Economic Doctor_thumb

Quick Market View:

Markets Searching for Direction – Caution Is the Word of the Day

May 6, 2016

Summary:  Global equity and debt markets continue to seek a clear direction, but economic data and earnings are sending contradictory signals.  This leaves a situation in which investors want to assume risk and push markets up, but they have one eye to the door in case bad news disrupts shallow confidence and starts a nervous stampede.  The reasons for this state of affairs are numerous – uneasiness over the strength of global economic growth, yet another poor earnings season (the 4th in a row), geopolitical risks, and big questions over Fed policy (will it raise rates in June or not?).  The US April jobs report did not help matters: unemployment stayed at 5.0% and the 160,000 print on jobs was below expectations. We think this leaves the Fed holding off at their June meeting, but moving later in the year, possibly in September.

We expect investors to remain cautious, adding risk strategically. One indicater of caution about direction is that gold prices (and gold miners like IamGold, Kinross Gold and Yamana) have been on the rise. They have benefited from growing uncertainty over the global economy and the geopolitical calendar. Caution is also mirrored by U.S. 10-year Treasury yields remaining low at around 1.78%. Consequently, caution is the word of the day and this sentiment is likely to increase as we shift gears past the earnings season to the political season beginning in June. (See last item below)

  • US employment data: Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30.  This was the largest increase since February 2015.  However, the next day’s April jobs report disappointed as the U.S. economy added the fewest number of jobs in seven months. Nonfarm payrolls rose by 160,000 jobs last month, with a marginal increase in construction and a downturn in retail employment. Unemployment remained constant at 5.0%, but that was due to Americans dropping out of the work force. Furthermore, employers added 19,000 fewer jobs in February and March than previously reported.  One of the few bright spots in the April jobs report was a slight uptick in wages. Based on this report and other mixed data as well as a looming Brexit vote two weeks (June 23rd) after the scheduled June FOMC meeting, it appears that the U.S. central bank might put off a rate increase to September.
  • Fitch Pans negative interest rates: Fitch rating agency released a study in which it noted that the almost $10 trillion of negative yielding government bonds are costing investors about $24 billion annually.  This situation is raising challenges to investors, such as pension funds and insurance companies that rely on sovereign debt as a core area for their portfolios.  If nothing else, the adoption of negative interest rates forces investors to take on riskier assets or provide their clients with poorer returns.  At the same time, negative interest rates punish savers and retirees.  Moreover, it is dubious that negative interest rates are encouraging economic growth.  It does not seem to be working in Japan. More to come on this.
  • Markets and US Politics:  Now that Donald Trump and Hillary Clinton have emerged as their respective parties candidates, there is growing talk about how the two will impact markets. The dominant view (at least based on opinion polls and a lot of talking heads in the financial press) is that the Democratic candidate is likely to win and would probably be more market-friendly as she represents the least amount of change in policies. As this line of reasoning goes, markets hate uncertainty and Trump represents uncertainty.  The American Banker has been up front saying it does not know what a Trump presidency would mean for the financial industry, while exporting companies are deeply worried that protectionism and efforts to re-write trade treaties (like NAFTA) would be highly disruptive.  At the same time, Washington has been highly dysfunctional over the past 8 years and change is badly needed, which would probably play more to Trump than Clinton. Markets have yet to factor in the outcome of the US November election, but that will change once we move past the conventions and head into the fall season. Stay tuned.
  • Japan Weaker, Weaker: Japan’s economy continues to be a weak patch. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) fell to 48.9 in April from March’s 49.9.  This is significant in that services account for roughly 65% of Japan’s GDP as opposed to 21% for manufacturing. The recent spate of bad economic data indicates the pressing need for more fiscal policy and structural reforms as opposed to the heavy reliance on monetary policy to lift the economy.
  • Turkey’s Power Plays: Turkey’s Prime Minister, Ahmet Davutoglu, announced that he would be stepping down from his position.  The Prime Minister and President Erdogan have been bumping heads over how much power their respective offices have.  In the past, the constitution gave greater power to the prime minister, with the president serving in largely ceremonial role.  However, Erdogan has increased the authority of the presidency and dominates the political landscape.  It has been reported that the two leaders increasingly held differences over the opening of talks with Kurdish separatists, the appointment of an independent central bank governor, and relations with the European Union.  With Davutoglu out, Erdogan remains the undisputed power in Turkey, which means that Turkey’s policies could be less friendly to the European Union, more hardline vis-à-vis the Kurds and even less tolerant of opposition voices. Last, but hardly least, the ongoing political drama undercuts Turkey’s attractiveness for investment.
  • Brazil’s Ratings Down, Again: Fitch downgraded Brazil from BB+ to BB and maintained a negative outlook.  As the rating agency noted: “The continuing deep economic contraction reflects the high level of political uncertainty, depressed confidence, deteriorating labor markets and strong external headwinds. Medium-term prospects also appear subdued, as the country’s investment rate has fallen in recent years and microeconomic reforms to improve competitiveness and the business environment have not made material process.”  More political drama looms ahead as the Senate moves next week on whether to investigate President Dilma Rousseff for a possible impeachment, an action that would suspend her from office.  Brazilian ratings remain under pressure and one should approach the country’s securities with a degree of caution.

The Looming Political Season:  Looking for uncertainty, look no further than the following votes:

May 9, 2016   Philippine Presidential elections

May 11, 2016   Expected date for the Senate vote in Brazil to advance investigation into whether or not to impeach the President

May 15, 2016   Dominican Republic – Presidential, congressional and local elections

May 22, 2016   Turkey – the ruling AK party will hold an extra-ordinary congress to select a new party leader and prime minister

June 23, 2016   UK – Referendum on whether or not to remain in the European Union

June 26, 2016   Spain goes to the polls again after the last vote (December 2015) failed to result in a government

June 30, 2016   Iceland presidential vote

September 18, 2016   Russian parliamentary elections

November 8, 2016   US presidential and congressional election


Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.).
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

The Global Economic Doctor

May 2, 2016

Global Economic Doctor_thumb



The Global Economic Doctor                                       – Click link for a quick checkup.


We are proud to be able to offer the thoughts and written works of Scott MacDonald, Ph.D. as the Chief Economist at Smith’s Research & Gradings.   Dr. MacDonald has U.S. government, investment bank, and asset management experience as well as keeping a finger in the academic world.  He’s refreshingly honest, while being intelligently sophisticated – we cannot promise that you will always agree with his opinions, but we are confident that you will find it is time well spent.

Yes, the Global Economic Doctor is “In”.  He dissects three major bodies in the inaugural edition: Brazil, the U.S. Economy and Coal.  Topics so toxic that most chief economists resort to babbling platitudes designed to assuage the fears of the great unwashed masses.  He won’t insult your intelligence by telling you the U.S. Treasury is triple-A rated and everything is going to be “okay” in Brazil because China is a willing buyer of all commodities.

Think of Scott MacDonald as the consummate professional to add depth to your bench of investment professionals. We like to think of him as the engaging dinner companion you bring along for an evening out in New York or London with prospects or long-term clients.

Smith’s Research & Gradings provides the intelligence gathering, cogent analytics, and knowledge-based event risks that support the Doctor’s work and can nourish your understanding.  Moreover, Smith’s Sovereign Gradings can provide radical transparency into cross-border decision making.

Global Economic Doctor

April 26, 2016

Quick Market View:

April 26, 2016

This is a busy week on the economic front. The FOMC gets underway today and concludes with its Rate Decision on Wednesday, followed by post-meeting Press Conference, which will be closely watched with an eye to any cryptic wording that hints about when rates go up again. This is followed by the BoJ policy meeting release on Thursday as well as well as the Commerce Department releases its first estimate of Q1 2016 GDP. We see 0.6% for Q1, which is consensus. We expect the FOMC meeting to reinforce views already in the market – no immediate FOMC rate hike (though still possibility later in the year), while the BoJ meeting will reflect that the Asia Pacific country will continue to struggle against deflationary pressures. Overall, the general thrust of economic data indicates that the U.S. economy is in muddle through mode, with 2016’s real GDP growth likely to struggle to make it to 2.0%. 

Also today:

* Voters go to the primary polls in 5 states in the U.S., with Trump and Clinton seeking to consolidate their hold on their party’s respective nominations.

* About 10% of the S&P 500 reports earnings, including Apple, Chipotle Mexican Grill, eBay, Lockheed Martin, Twitter and Whirlpool. BP beat earnings (which was a surprise) due to cost-cutting, improved refining margins, and trading business did well.

* S&P downgrades ExxonMobil to AA+.  The company had been put on watch in February. This is expected to increase the company’s cost for financing.

* EU may fine Spain and Portugal for missing budget targets.  Spain still has not formed a government since the inconclusive December 2015 elections and Portugal’s leftwing government is struggling on a number of fronts, the economy and handling of bad bank debt in particular being problems.

* China state firms Q1 profits fall 13.8%.  Although the number looks a little frightening this should be expected, considering the structural changes being made in the Chinese economy and the slowdown in growth.

* The Washington-based Institute of International Finance (IIF) forecasts that China will see $538 billion in capital exodus in 2016. Some of this no doubt is being put away in Caribbean offshore financial centers or European real estate, but some of it is also going into corporate M&A activities. It is something that needs to be watched.

* Saudi prince announces new plans to end “addiction” to oil. Diversification is the key to a new Saudi Arabia, but lower oil prices and restructuring the economy also has a social dimension as many Saudis are now being asked to step up their productivity and think differently about the workplace.

The rest of the week has more earnings, the National Association  Realtors data on pending home sales (Wednesday), U.S. jobless claims (Thursday), the University of Michigan consumer sentiment survey (Friday).

Scott B. MacDonald

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.).
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

You’re Invited: Utility Sector Carbon Regulation and Innovation Webinar

March 30, 2016


Sponsored by:
Hunton & Williams LLP, Smith’s Research & Gradings, Moody’s Investors Service, Wells Fargo Securities

Monday, April 4, 2016
10:30 a.m. – 12:00 p.m.

 Register Now

The future of electric generation is being shaped by carbon dioxide regulation, which is currently in an uncertain posture. On the heels of the historic Paris agreement, the Clean Power Plan – centerpiece of US carbon reduction policy – has been stayed by the Supreme Court. Moreover, meaningful carbon reductions cannot be made without deployment of carbon capture, utilization, and storage technology (CCUS), a technology that may generate new wealth as it captures emissions. What is the future of US carbon policy, and how is CCUS technology central both to the future of fossil fuels and to meeting climate reduction targets? 

We will hear from industry leaders and two CEOs about how their utility is responding to reducing carbon.

Speakers include:

Bill Wehrum, Partner and Head of the Administrative Law Group, Hunton & Williams

Fred Eames, Partner, Hunton & Williams

Terence M. Smith, CEO, Smith’s Research & Gradings

Randy Gerardes, Director, Municipal Securities Research, Wells Fargo Securities

Dan Aschenbach, Senior Vice President, Global Project & Infrastructure Finance, Moody’s Investors Service

Paula Gold-Williams, Interim President and CEO, CPS Energy (San Antonio)

Pat Pope, CEO, Nebraska Public Power District

Hunton Williams




Smith’s US Political Event Risk Alert: Terrorism

December 7, 2015

Smith’s Research & Gradings (SRG) published a U.S. Political Event Risk Alert for terrorism on November 26, 2015.   Only a handful of these alerts have been issued in the past 20 years. Smith’s Research & Gradings was founded in 1992 to provide independent conflict-free credit analytics. Smith’s Grades for municipal bonds are used as part of Smith’s Sentinel System for the protection of America’s critical infrastructure assets. 

Smith’s Terrorism Alert (-1)  26 November 2015  Great Falls, VA  USA


The terrorism attacks in Paris, France on Friday night, 20 of November 2015, will serve to inspire terrorism in the United States and elsewhere around the globe. SRG’s elevated alert status is based on indications that a potential attack may be underway by Daesh (aka ISIL or ISIS).

SRG is watching for terrorists to seek to infiltrate the  United States along the southern border.  Elevated awareness must be given to all flights from Central America, particularly Panama, to Miami and Sarasota.

SRG believes municipal bonds can offer investors significant protections and opportunities to profit if the conflict in the Middle East spins into a more global war.

Shiite/Sunni Conflict
SRG’s alert is not signaled based solely upon the events in Paris. The escalation of the Shiite/Sunni conflict is reaching a critical juncture.

More specifically Smith’s Terrorism Alert is being issued in connection with the potential arming of Saudi Arabia with nuclear bombs from Pakistan.

Years ago, Saudi Arabia entered into a diplomatic agreement with Pakistan, whereby it could request Pakistan deliver four nuclear bombs to the kingdom. The United States of America has never recognized the treaty agreement and is not a party to the document. The treaty was done in conjunction with Saudi Arabia providing $2 bln. of oil to Pakistan during the period of United States sanctions against Pakistan  in the late 1990s.

Even without a formal treaty, the Saudi monarchy is credited with having saved current Pakistan Prime Minister Nawaz Sharif’s life. In 2000, the kingdom provided him asylum after the Saudis convinced then-President Pervez Musharraf to release him from jail, where he had been held since the military ousted Sharif in 1999.

Two years ago, SRG was in a chatroom on the darkweb when the delivery of plans for a small “suitcase” atomic bomb were mentioned in connection with the United States sanctions against Russia. The source claimed Russia had designed  and improved plans for a small backpack delivery device.  Pakistan had purchased the plans (for more than $100 mln) and hired the Chinese (PRC) to build several (i.e. many) of these devices, the source claimed.

For more than a year, SRG’s Sentinel System has been monitoring for the development of the Pakistan-Saudi Arabian nuclear bombs.

Earlier this November, Pakistan’s chief of army staff, General Raheel Sharif, made a visit to Saudi Arabia to meet with King Salman in Riyadh, where he stressed Islamabad’s commitment to ensuring the safety and protection of Mecca and Medina, as well as Saudi Arabia’s territorial integrity.

Last week, a source in Riyadh reported an entire floor of the Four Seasons Hotel was being occupied by members of a high level mission from Pakistan. While it is not exactly clear as to the purpose of Pakistan mission, a separate source has indicated the United States of America is working to have Pakistan turnover the control and security of its entire inventory of nuclear bombs to Saudi Arabia.

Meantime, Russia has continued to build its forces in  Syria and form an alliance with Shiite forces, such as members of the Iranian Guard and the Syrian government forces are hardened troop.  In early November, France announced it was sending its nuclear aircraft carrier, Charles de Gaulle, to the eastern Mediterranean Sea to support and coordinate with the Russians. Christened in 2013, the Charles de Gaulle can launch more than 40 planes and is a fearsome fighting machine.

Whenever one considers the Syrian conflict, Jordan figures prominently in the calculations.  The Kingdom of Jordan not only stopped accepting refugees from Syria, but ordered hundreds of thousands be expelled from the camps. The displaced population has turned to Europe for refuge.

Given these events, Daesh is likely to adopt the same approach as Al Quaeda and create a disparate command structure while launching asymmetrical terrorist attacks against the United States.

Puerto Rico Conversations

November 5, 2015
James Colby

James Colby, Van Eck Global

Jim Colby, Senior Municipal Strategist and Portfolio Manager at Van Eck Global, was the leader of a panel discussion on Puerto Rico at Smith’s High-Yield Conference in Greenwich, Connecticut on October 1. Mr. Colby started the discussion with a brief introduction of the panelists.

Jim Colby:
The interesting feature about this particular panel is that we’re represented by two on the investment side — myself from Van Eck High Yield ETF and John Schorle of Invesco.

We have the insurance industry covered with Tom Weyl from National Public Finance Guarantee.  And, we have excellent legal representation  with Bill Kannel, partner at Mintz Levin in Boston.

We have a past president of the Puerto Rico GDB, Jorge Irizarry. Jorge served as president of the Government Development Bank for two terms and 8 years.

And, we have Terry Smith, founder of this conference 10 years ago and CEO of Smith’s Research & Gradings.

Manny Mirabal is from Puerto Rico and a principal of Gray Global Advisors in Washington, D.C.  Manny has spent well over 20 years of his career in and around The Hill, in and around Washington D.C., with some influential and important people in congress and on island in Puerto Rico.

So, the topic is almost like a sports page, because every single day, there are headlines. To just throw out a couple, I happened to see on Bloomberg today, which I’m sure our analysts will be talking about and discussing.

One headline reads:
Puerto Rico Talks Are Positive and Ongoing.

Puerto Rico Working to Obtain Liquidity by November

There is another positive headline: Puerto Rico to Introduce Professional Services and Business Tax.

In fact, Manny corrected me in interpreting this headline because it has already passed and I understand that it has in fact, been signed. So, just today those three headlines popped up on Bloomberg along with many more issues and topics.

I would like to invite Manny, who has just come state-side from San Juan to give us a little picture as to exactly what discussions have been had.  And, maybe give us a quick update on the bill that was just signed by the government.

Manny Mirabal:
I’m a government relations specialist and I basically represent clients before various bodies, whether it’s here in Washington, DC and New York or in Florida.  And unfortunately for me, since February, in Puerto Rico dealing with a lot of what’s being talked about it here today.

I have also been dealing with a number of other items related to bills that are being passed, which all converge and dovetail in some way with the fiscal situation in Puerto Rico.

Last year when I was here, I made a comment that I felt that Lisa Donahue [restructuring agent] was going to find out soon that she was in over her head.  Unfortunately, for Puerto Rico, that came to pass, but she made a hell of a lot of money by extending her contract.

If there was one door in a room with four walls, they’re sure gonna have a tough time finding their way out that door. Because those four walls have to do with politics on one side, unions who control employees — everything from vacation time, work time, break time, bonus time, whatever. And the rates that are being charged to individuals in Puerto Rico for a record service at PREPA, which had been helped tremendously because of lowering of the price of oil.  But it doesn’t take away the fact that as of today, PREPA is still negotiating to try to settle its $9 billion worth of debt.

The entities that hold/control their bonds expect to get paid.  The governor started out by saying, we are going pay our debts and there’s a general constitution obligation for GO bonds that they get paid first.

One of the things that’s so interesting about what the governor and his people have done up till now — they passed four sets of increases in taxes. The governor very conveniently, did a number of things, including increasing taxes four times since January: crude oil tax, increase the tax on consumption, currently impose new business to business (B2B) taxes, and a couple of others, all in an effort to raise additional dollars.

He also lowered some government spending.  So all told, that saved about a billion dollars.  The one thing he did not do was related to the unions.  He’s consistently said, I will not layoff anyone. It is the reason the last governor didn’t win reelection. He layed-off about 20,000 people to close the gap, because the government was employee heavy.

And this governor, learned a lesson from that, because he is trying to beat the last guy.  And he’s consistently said, I’m not laying anybody off, that is clearly part of Puerto Rico’s problem.

Smith’s Stadium Bond Gradings

July 16, 2015

Stadium bonds have been the subject of several articles in Smith’s Research & Gradings over the years. What started as a curious endeavor quickly became a more serious work upon discovering even the most serious Stadium Bond analysts appear to have overlooked the history of stadiums in Western Civilization.

Smith’s Stadium Bond Gradings reflect decades of researched on the subject matter. We have developed several interesting conclusions about the nature and durability of the revenue streams.

To begin, the word “Stadium” is a Latinization of the Greek word for the distance of a race (which measured 660 feet and is a distance of one “stadia”). For track fans, this race is still run today — the 220 yard or 200 meter dash — which is still the measure of endurance, cunning, and speed amongst sprinters. In contrast, the Greeks built amphitheaters for public festivals and ritualized plays, constructed so views were unobstructed on a steep incline, so even the highest tier of seats was within earshot of the stage.

The Greek stadiums eventually grew larger, but retained a horse-shoe shape. This allowed participants at earlier sporting events to compete both on the track and in the field — quite literally. The most famous of Greek stadiums was the Hippodrome.

However, the stadiums eventually became the site of horse races — more specifically, chariot races. The largest and greatest expression of this type of stadium is arguably the Circus Maximus.The first Etruscan King, Lucius Tarquinius Priscus, drained the swamps beneath the Capitoline Hill for the construction of the first Circus Maximus around 600 B.C. Perhaps the Circus Maximus was conceived as an engine of social homogeneity at a time when Etruscans ruled the larger population of Latins — within two generations, the Latins had overthrown the Etruscan Kings (ostensibly for the rape of the virtuous Lucretia).

Circus Maximus

Circus Maximus

Eventually, the horse-shoe shaped Circus Maximus was expanded — larger than the Yale Bowl by one and one half times — with a seating capacity of 250,000 (plus the “sky boxes” on Palatine hill). Indeed, standing on the patio of the home thought to belong to Julius Caesar, which is situated high atop the Capitoline Hill, visitors can well imagine the throngs of working class Romans filling the Circus Maximus. The vantage point provides a glimpse into a vibrant Roman economy, where people cheered for the chariots drawn by four horses on a track 2,000 feet long and 600 feet wide. It was the Indianapolis Speedway and the demolition derbies of the old Charlotte Motor Speedway on a grand scale.

Surely, societies that are growing are fascinated by machines that are driven dangerously fast. Speed was everything, whether you were digging ditches or laying bricks, in ancient Rome.

The Roman Coliseum — the first of the modem day “stadiums” — was constructed to provide unobstructed seating for 50,000. The “sport” at the Coliseum was the death of gladiators and Christians; seating bespoke a person’s station in life — Patricians, Senators, Tribunes, Equites, and Publicans. Indeed, the Coliseum had little to do with “sport” and everything to do with the exaltation of ego. It was about “seeing people and being seen.”  Stadium-building did not stir the public’s imagination again until late in the 1800s.

Perhaps the construction of Cathedrals and Universities provided sufficient employment for stone workers?

Modern Era
In any event, the modem era of stadium building began with the construction of a stadium in Athens for the Olympics in the late 1890s. It was built on a foundation from an earlier Greek stadium.

At the turn of the century, America embarked on a stadium-building binge that is still unrivaled by today’s construction craze. A whole series of massive stadiums were constructed, with seating capacity in excess of 100,000 people: The Yale Bowl, Ohio State University’s Stadium, The Los Angeles Coliseum, Soldier’s Field, JFK Stadium, Notre Dame’s Stadium. These were built as great football and Olympic stadiums.

Yankee Stadium became known as “The House That Ruth Built” and decks were constructed to accommodate more fans. However, baseball stadiums remained intimate environments that allowed fans to nurture the national past-time. Only Camden Yards and Wrigley Field remained relatively unaffected by stadium construction during the later half of the century. Cleveland’s municipal stadium was built as the largest baseball stadium in the world with seating over 70,000.  Dubbed “The Mistake By the Lake”, the Cleveland Municipal Stadium funneled winds from Lake Erie toward homeplate, making it a pitcher’s park.

These fields were largely financed by the fortunes of the various teams. And, it was the ancient allure of unobstructed views that sent the Brooklyn Dodgers to Los Angeles: “Dodger Stadium” was the first three-tiered stadium constructed without columns. Such sedentary concerns had turned Ebbets Field into an apartment complex and sparked a stadium building craze.

Enter the “Astrodome”, which was the first completely enclosed stadium, in the early 1960s. Baseball franchise movement stirred the imagination of stadium builders and municipal finance executives. However, television increasingly put pressure on the margins of stadium and franchise owners, while the lucrative contracts provided enormous compensation. But, the profit motif inspired owners to fill every seat, which is still used by owners to cover the fixed costs.

Gradually, the public’s capital was used to entice private sector franchises to play at stadiums in “new” cities, such as New Orleans and Miami. The people approved bond referendums and politicians promoted the concept by stating “a major league town” moniker was necessary to attract corporations to a city — which has nothing to do with the love of sports and everything to do with power.

Cleveland Browns Leave Town
The Browns football team’s announcement that it wanted to move to Baltimore from Cleveland (eventually leading to buses leaving in the middle of the night)  prompted a lot of guffaws among backbench analysts who have been skeptical about the creditworthiness of stadium bonds. But, to understand the creditworthiness of stadium bonds, investors need to know that in many cases, repayment has little to do with revenue streams like stadium gate receipts.

For example, MBIA insured bonds that constructed a stadium for the winter “cactus” baseball league in the Southwest. However, repayment is largely secured by a tax on car rentals in the Phoenix area.

Indeed, a better name for “stadium bonds” might be “enterprise bonds”, which would lump them in with convention centers and other erstwhile endeavors by municipalities to stimulate economic enterprise. Municipal investors and analysts know that municipalities have a somewhat dubious track record in managing enterprises.

As a result, in the mid 1990s, rating agencies forced investment bankers to cobble together various revenue streams to support the debt service repayment of stadium bonds. In the 1990’s, Ernest Perez, who was one of SRG’s Regulars, provided several insights into the stadium bond financing frenzy. In 1995, he noted the St. Louis Rams -related financing essentially included a G.O. pledge from the State, which gives an indication of the importance given professional sports.

Mr. Perez agreed with SRG’s suggestion that bondholders should ideally have a “put” if the professional team leaves the stadium. But, to date, no exit signs have appeared for bondholders if a team fires the stadium.Stadium Cost

Preliminary work at S&P yielded an interesting feature, which is a sort of travelling first lien on the team’s revenues. Basically, the team ownership would agree to pay enterprise-type fees for a stadium, even if it moves to another stadium.

The Doghouse
Fresno State (California State University, Fresno) issued municipal bonds to finance the construction of a new arena. Hence, the Bulldog’s last game on March 1, 2003, at the old Selland Arena proved to be a sweet farewell as Fresno State finished atop the regular season in the Western Athletic Conference (WAC).

The WAC winning press release from Fresno State said, “Next year, the ‘Dogs will play in their new Doghouse…the Save Mart Center on campus.”

On the following Wednesday, Fresno State took harsh action by self-imposing sanctions to ban participation in the NCAA or NIT postseason tournaments because of academic fraud.

The next day, Thursday, the WAC announced the WAC-champion Fresno State Bulldog’s season would end on Saturday against Rice.

The Fresno Bee, a local newspaper, reported allegations made by some players that assistance was provided in completing writing assignments by an individual who was paid to complete those assignments. Subsequent investigations by the NCAA and Fresno State found the allegations to be true.

Yes, the Bulldogs were in the real doghouse.

Reaction among existing bondholders was one of absolute denial. “It means nothing. Well, not nothing. But, it’s not a professional franchise. If the team doesn’t have a winning season, Fresno State isn’t going to leave town.”

A trader said, “There isn’t any other form of entertainment in the region.”

NHL Strikes
Fitch Ratings determined that in the event of a complete cancellation of the National Hockey League’s 2004-2005 season, Fitch would place all currently rated sports arena debt associated with a NHL team on Rating Watch Negative.

The two publicly rated arena transactions — L.A. Arena Funding (Staples Center, Los Angeles) and the Denver Arena Trust (Pepsi Center, Denver) were both rated ‘A’.

Of course, the NHL did cancel the entire 88th season in 2004-2005. It was the first time a professional sport league cancelled an entire season due to labor disputes.

Once again, the NHL had a lockout (strike) in 2012-2013. Fitch placed one private arena rating with a NHL anchor franchise on Rating Watch Negative and continued to closely monitor the operations of other arenas with a NHL anchor franchise. Currently, Fitch rates L.A. Arena Funding’s (Staples Center, Los Angeles) $201 million revenue backed notes ‘BBB+’, Stable Outlook and the Denver Arena Trust’s (Pepsi Center, Denver) approximately $46.7 million revenue backed notes ‘BBB-‘, Stable Outlook.

Fitch did not rate the NHL league-wide borrowing facility secured by national television contracts and other league revenues.

Despite the canceled games Fitch said that the Pepsi Center, Staples Center and other Fitch-rated private arenas with an anchor NHL franchise retain some, albeit limited, financial flexibility. Fitch noted that the above-mentioned arena ratings also have an NBA franchise as an anchor tenant and host a significant amount of other events, providing some level of revenue certainty to support operations. Additionally, the arenas maintain a significant level of contractually obligated revenue in the form of multi-year suites and club seats, sponsorship and advertising and other long-term contracts. However, renewals of these revenue agreements may be impacted in the event of a canceled season. The pressure on renewal rates stemming from local economic conditions and, in some cases, recent on-ice performance could be exacerbated by labor uncertainty.

The lockout shortened the 2012–13 NHL season, originally scheduled to begin on October 11, 2012, from 82 to 48 games, a reduction of 41.5 percent.

Troubled Stadiums and Towns
Standard & Poor’s Ratings Services downgraded Bridgeview Illinois’ bond rating on general obligation (GO) bonds in 2014. The outlook is negative, S&P reported:

“The downgrade reflects the significant level of stress placed on the village’s finances by its underperforming soccer stadium. To minimize property tax increases, the village has used general fund revenues and issued additional debt to pay debt service on its GO bonds related to the stadium. The village’s very high debt level is mainly due to its series 2005 GO bonds, of which $128.4 million is outstanding, to build a soccer stadium.

The village also issued $50 million of variable-rate GO bonds in 2008, proceeds from which the village mostly used to refund economic development notes and bank lines that it incurred to buy land around the stadium and other parts of the village for future development. Because of the uncertainty about the extent to which the stadium fund will be able to support debt service from net revenues, the village is faced with either levying property taxes or using general fund resources to make up the difference.

The city of Glendale, Arizona, tried to sell its City Hall so they could pay off their hockey arena in 2013. They also considered mortgaging the police station. The city had already tapped out its land-fill fund and the water and sewer fund to pay sports debts. When Glendale residents collected signatures for a referendum, city council changed the rules. They placed the proposed City-Hall sale on the agenda as an “emergency measure” in order to bypass the referendum and prevent the voters from having a voice.

The city’s promise of economic development, stores and restaurants, vanished in the recession. Glendale’s reserve fund is gone, and the city has now approved another sales-tax hike.

Many other cities suffer from crushing debt as a result of bad stadium investments.

Hamilton County, Ohio, sold a municipal hospital to pay just one year’s worth of stadium debt. They also cut their operating budget, slashed social services, and raided the rainy-day fund.

The town of Harrison, just across the Passaic River from Newark, had its bond rating cut a rare eight notches in a single year, when it was unable to pay the debt on a soccer stadium.


Stadiums are the coronation of public construction on a grand scale in the history of Western Civilization.  The public’s capital provides a glorious return to great and growing cities by promoting civic pride in the community. For medium scale cities, smaller scaled stadiums (“right sized”) support local sports and attracted world class entertainment.

However, Smith’s Research & Gradings has found stadiums provide little in the way of economic development.  Moreover, the use of tax-incentives to lure sports teams to play in stadiums in tiny townships can lead to financial ruin.  Particular attention needs to given to claw-back mechanisms and make-whole provisions that will allow the municipality (and bondholders) to recoup their capital investments in the event a sports team wants to leave.

When it comes to stadium finance, the broader the base, the better the bonds.