Think Strategically: Increased Market Risk, Tax Reform in Life Support, US Household Ramp Up Debt & PR Update

By Francisco Rodriguez-Castro, President & CEO of Birling Capital Advisors LLC (


Publicado en: febrero 2017


Increased Market Risk & Tax Reform on Life Support

We have come across data that shows that even with all the chaos that Washington and the White House seem to be experiencing with President Trump, we see signals that a significant number of investors are putting their cash to work. Some equity mutual funds have been seeing their first inflows in the last 12 months. To this, we need to add that we see the best month for the stock market since Lyndon Johnson was President. The boundless optimism that is driving the market right now is primarily based on the proposed tax reform, the much mentioned fiscal stimulus and the $1 trillion infrastructure investment that President Trump promised during his campaign.  With stocks continuing to hover close to their record levels, one must wonder when a market correction will occur. Some argue that the market could continue to increase to as high as 22,000 for the Dow Jones Industrial average. In others, there is concern that the actions that the Trump Presidency will embark on will lead to chaos and cause to the market into a correction, sooner rather than later. We will continue to monitor market developments.


Is the Tax reform on life support or is it only moving slowly? Most discussions of Taxation are focused on “border adjustability” that, as we have mentioned in the past, is a tax on imports. While it may seem attractive to some, this tax only works well if the Trump White House enacts the much-debated Tax reform, said produce north of $1 trillion in new revenue. The fact remains that the more this tax is discussed, the more detractors it adds, so our conclusion is that this Tax is on Life Support at best. We must wait and see what kind of reform the White House finally presents and what would it mean to Puerto Rico and investors in general.


US Households Ramp Up Debt & Puerto Rico Mortgage Stats

The FED has made subtle indications that It could raise interest rates in the very near future. The response from borrowers has been dramatic. The data we have examined from the Federal Reserve Bank of NY shows that most US households have increased their leverage to $12.58 trillion which is the fastest pace of the last three years. Total debt increases include consumer, mortgage, credit card, auto loans, and student debt. Although the levels of the 2008 crisis have not been reached, it makes us wonder if the US consumer learned from the 2008 financial crisis.

For Puerto Rico, a key indicator is mortgage loan originations. We had access to the Office of the Commissioner of Financial Institutions data that showed that during the month of January sales of new houses slowed to 65 units when compared with December, when there were 98 new units sold. Total sales of new and existing houses reached 698 units, also down from December when 852 units were sold.


Puerto Rico Update-Focus on the University of Puerto Rico

Moving on to Puerto Rico, this was a week of many actions in Puerto Rico, we saw the resignations of the University of Puerto Rico interim President Celeste Freytes as well as most of the Chancellors of the UPR system. This is an action that is entirely unwarranted given the nature of the financial crisis, we face. The University will have to come up with expenditure cuts as goes for most agencies. As you will see in the table below the UPR lags behind every statistic when compared to other State Universities.


UPR vs. US Public University Trends

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Since 2004 most State Universities adjusted to the effects of reduced endowment market values, lost stimulus funding, and as State aid began to decrease and audited financials have improved or are now stabilizing. Public Institutions that used the past few years to refocus strategic plans, slim down operating budgets, and rebuild financial resources have remained well-positioned. The UPR chose to mostly ignore these trends and continued operating under the assumption that “business as usual” would do.


Final Word

The UPR is an institution of a need of a $500 million restructuring to adapt to the large changes that a global economy has imposed and more specifically to the Fiscal crisis Puerto Rico faces. The questions are Should the UPR increase tuition? Yes, it must, and it should have done so twenty years ago, is it appropriate to shed some of its operations, Yes, it must eliminate or restructure most campuses while conducting a review of its process, expenses, salary and benefits and overall operational efficiency to achieve proposed reductions and seek to become a leaner and more focused institution.