THINK STRATEGICALLY: Change…Change…Are You Ready?

Protesters turn up in droves to demand Gov. Ricardo Rosselló’s resignation, July 18, 2019. (CB)

Rally Behind new Governor and Allow Economy, Investments to Improve; Political Turmoil Cost Economy $1 Billion

We might think Puerto Rico has had a tough summer, and yes, in every measure, most every Puerto Rican can agree. It is not reasonable to have had three governors since Aug. 2, with now-former Secretary of Justice Wanda Vázquez sworn in as governor on Aug. 7 by presiding Supreme Court Chief Justice Maite Oronoz. The path is set for a radical change in the manner in which politics is conducted in Puerto Rico. Since 1948, all our governors have been elected by popular vote and, in the view of the New Progressive Party (NPP) majority in the legislature, for the post of governor, an elected official is favored rather than an appointed one. In Resident Commissioner Jenniffer González’s case, she received the most votes, 718,591, in the 2016 elections, compared to former Gov. Ricardo Rosselló, who got 660,510 votes. In other words, González received 58,087 more total votes.

In the days that followed the new governor’s ascension to the post, the NPP leadership rallied behind the resident commissioner to request she be named secretary of State, to then allow her to become governor. Gov. Vázquez stated she could designate González as secretary of State but intended to finish her term as governor on Jan. 2, 2021.

While this new political situation is being sorted out, depending on how Gov. Vázquez manages her latest post, we may find it refreshing to have a governor who does not respond to usual party pressures, does not care about getting re-elected, who would assume the hard decisions that have eluded most elected officials, and the stage is set for Gov. Vázquez to rise to the occasion and prove every skeptic wrong.

Week in markets: Volatility rising; China goes nuclear with its renminbi

The stock market’s volatility has risen sharply in the past three weeks as the U.S.-China trade war has taken a turn for the worse. As all global markets reacted negatively to China going nuclear with its renminbi (official currency of the People’s Republic of China) and weaponizing the trade war.

The U.S. Department of the Treasury took the step of labeling China a currency manipulator when that nation took concrete steps to devaluate its currency as a direct effect of the U.S.-China trade war. The renminbi fell to the lowest level in more than 12 years. According to U.S. Treasury Secretary Steven Mnuchin, the U.S. will now engage with the International Monetary Fund to eliminate any unfair advantage created by China’s currency manipulation actions.

The U.S. stock market finished lower for the third-consecutive week, with bond yields falling to their lowest level in three years. However, the outlook is still positive based on resilient economic expansion, modestly rising corporate profits and still-low interest rates.

The Dow Jones Industrial Average closed the week at 26,287.44, for a loss of 197.57, or minus-0.75 percent, and a year-to-date (YTD) return of 12.70 percent. In addition, the S&P 500 closed the week at 2,918.65, for a loss of 13.55, or minus-0.46 percent, and a YTD return of 16.40 percent. The Nasdaq closed the week at 7,959.14, for a loss of 44.93, or minus-0.56 percent, and a YTD return of 20.00 percent. Meanwhile, the U.S. Treasury’s 10-year note took a loss during the week, closing at 1.74 percent, or a drop of minus-5.43 percent, with a YTD return of minus-0.95 percent.

Final word: Improving P.R. investment climate

A reliable, stable and consistent investment climate fosters productive private investment from every sector, which is the engine for gross domestic product growth, jobs growth and eradicating poverty. An improved investment climate expands the depth and variety of corporations while creating new, enhanced services; it improves the goods available and ultimately reduces the cost of doing business. The summer of 2019 and its political turmoil have cost the private sector more than $1 billion in decreased economic activity and investments. This cost is a significant impact. An improved investment climate creates efficient financial markets, improves infrastructure investment and improves the lives of people who directly or indirectly work or benefit from the establishment of new entrepreneurial concerns. If you have any doubt, take a drive from Caguas to Humacao or from Cataño to Manatí, and you will note how every community has benefited from the growth of the pharmaceutical sector in each of these areas.

Firms that invest in Puerto Rico are here to make profits, and the capital activity they create allows the island to grow. Their investment decisions are impacted by their ideas, capabilities, strategies and assessment of the opportunities and incentives for particular taxes and locations.

Puerto Rico was once the king at attracting foreign investment. Since the late 1990s, the island has lost its way.

Seeking to improve government policies and behaviors that shape the investment climate matters not only for the fi rm but should also matter to every citizen. To improve Puerto Rico’s investment climate, it is key to consider all areas where the government has a strong influence, including:

Costs

•Corruption;

•Taxes;

•Regulatory burdens, red tape;

•Infrastructure and finance costs;

•Labor market regulation.

Risks

•Political risk;

•Policy predictability and credibility;

•Macroeconomic stability;

•Rights to property;

•Contract enforcement;

•Expropriation.

Barriers to competition

•Regulatory barriers to entry and exit;

•Competition law and policy;

•Functioning financial markets;

•Infrastructure.

Our investment climate has been suffering in the same way our country has over the past few years. Improving the investment climate has to be the highest priority of the government of Puerto Rico. We must be open to increased entrepreneurship, innovation and exports while breaking into new markets.

We must work hard to recover our credibility, brilliance and strengths in attracting new activities to Puerto Rico that, in turn, create thousands of jobs and new investment.

The best way to eliminate inequality and poverty is by creating and distributing wealth all around Puerto Rico, and that is an aspiration we should all join to achieve.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

—Views expressed in this section do not represent the opinion of Caribbean Business.




Honoring the Office

Editor’s note: The following was first published in the July 18-24, 2019, issue of Caribbean Business.

Let’s put this in perspective. There was a time, it seems now to have been long ago, when a Puerto Rican Governor was given the Presidential Medal of Freedom, recognizing him, in the words of President Lyndon B. Johnson, as a “poet, politician, public servant, patriot, he has led his people on to new heights of dignity and purpose and, transformed a stricken land into a vital society.” Those are heavy words, and Luis Muñoz Marín deserved every single one of them. Whether you supported him or not, Muñoz made all of us proud, made all of us better. But that was then.

After these past three weeks, there will be no similar accolades for Gov. Ricardo Rosselló Nevares. In the most critical moment in our modern history, when Puerto Rico needs to restore its credibility, when it must begin a long climb back to respectability, the person who represents all of us has taken his office to new lows of dishonor. In one scandal after another, the picture that emerges so far is that our country is being run by an inept and immature man.

What then is to be done? Re-electing him seems like a foregone conclusion. Ricardo Rosselló could have—and I believe quite effectively—finished out his short political career. His own party has turned against him; it appears he will not even be able to obtain the nomination. But he still has 17 months left in his term and all signs are that it will only get worse for him. (Note that in last week’s indictments neither Julia Keleher, nor Angie Ávila were charged with profiting from giving out the illegal contracts; that means someone ordered them to do so, and big questions remain unanswered.)

All things considered, it is best for Puerto Rico if the Governor is removed from office. That can only occur through resignation or impeachment. The impeachment route is protracted and will require a careful articulation of violations of law to be justified. The Puerto Rico House of Representatives would need two-thirds of its members to bring an indictment. In the current climate, that is achievable. But removing him from office as a result of the indictment would require three-fourths of the senators to find that his conduct in the chats constitutes a felony or a misdemeanor involving moral turpitude. He has insulted women, denigrated homosexuals and, so, on in the most undignified manner, but whether he did so in violation of any law will be highly debatable.

In the end, the only option might be his resignation.

Undoubtedly, the Puerto Rico Constitution is on “High Alert.” We have never seen a Governor resign during his tenure nor have we ever impeached one. We have a Constitution for a reason, and we must let the Constitution lead the way. Moving beyond the outrage and disdain, our institution of government must be preserved. Governors come and go, but the institution remains. That is our obligation now—to protect and preserve the Rule of Law.

—Roberto L. Prats Palerm is an attorney with RPP LAW PSC and a 2020 gubernatorial candidate for the primaries of the Popular Democratic Party.

—The views expressed in the Opinion section are the writers’ own and do not necessarily reflect those of Caribbean Business.




Puerto Rico’s Governance Crisis

Editor’s note: The following was first published in the July 18-24, 2019, issue of Caribbean Business.

Puerto Rico is on high alert. With the FBI’s recent arrests of government cabinet members and disclosure of their private “chats,” the past 10 days have evidenced the highest levels of corruption and theft, and the lowest levels of morals, decency and ethics by a governor in the island’s history. There is a growing call for Gov. Ricardo Rosselló to immediately resign his office. And he should.

The ingredients of this corruption scandal are troubling:

First, on June 25, Gov. Rosselló’s then-Chief of Staff, Treasury Secretary & CFO Raúl Maldonado publicly stated in a radio interview that the government of Puerto Rico “acts like the mob” (“mafia institucional”). Maldonado also stated that corruption, fraud, bribery, extortion and influence-peddling abound at the highest levels in the government of Puerto Rico. Within hours, Rosselló fired Maldonado. A couple of days later, Maldonado’s son, Raúl Jr., stated that the governor is part of this orchestrated corruption. In response, the Puerto Rico Police Department, violating all protocols and civil rights, disclosed that they would start an investigation of Maldonado Jr., who had a gun owner’s license and multiple registered firearms in his home. His home address was also published by the police. The American Civil Liberties Union (ACLU) and private attorneys jumped to Maldonado’s defense and the “investigation” was dropped.

Second, on July 10, the FBI issued warrants for the arrest of six people, including Gov. Rosselló’s former Education secretary and the former director of Puerto Rico’s Medicaid program. The charges stem from an inappropriate relationship to obtain contracts with the accounting and consulting firm BDO Puerto Rico, a member of BDO Global. It became clear that private lobbyists were placed inside government agencies to direct contracts their way. Trials have been scheduled for the summer of 2020.

Third, on July 13, more than 880 pages of a private chat among the governor and his closest advisers were published. The chat shows private conversations full of insults against many public officials, acts of corruption, misogyny, strategies to destroy reputations, homophobia, orders by the governor to manipulate public opinion and bribe journalists and, the worst, making fun of the those who died after Hurricane Maria, whose bodies were lying on the floor in the state morgue.

After reading the 889 pages of the “chat,” the statements from Raúl Maldonado and the federal indictments, it is evident the current administration of the government of Puerto Rico is acting like a bunch of thugs. Ricardo Rosselló and his cronies are unfit to govern. There are no adults in La Fortaleza. There is no honor. There is no integrity. It could not have come at a worse time, as Puerto Rico is in financial bankruptcy and recovering from the horrible effects of Hurricane Maria.

The governor must resign.

We must restore honor and credibility in Puerto Rico. During a 2018 commencement speech at my alma mater, Princeton University, I stated that the lesson is loud and clear: Lack of integrity always has dire consequences. Silence is not an option. We must all learn to denounce what needs to be denounced; fix what is broken; right what is wrong and not allow anyone, regardless of their agenda, to weaken democracy. We must all become vital voices to restore our democratic principles and institutions. I am ready to lead.

—Eduardo Bhatia is an attorney-at-law, former 15th president of the P.R. Senate and a former executive director of the Puerto Rico Federal Affairs Administration. He is the Senate’s minority leader and is running for governor in the 2020 primaries under the Popular Democratic Party.

—The views expressed in the Opinion section are the writers’ own and do not necessarily reflect those of Caribbean Business.




Puerto Rico: Radical Transparency for Economic Recovery

Editor’s note: The following was first published in the July 11-17, 2019, issue of Caribbean Business.

The past few weeks have been very difficult for Puerto Rico. Widespread allegations of corruption have been levied at the island’s Government. The allegations—under investigation by the FBI and other Federal and U.S. State agencies—come at a terrible time. They reinforce an unfortunate bipartisan perception in Washington that the island government has been unable to root out a corruption problem decades in the making.

The island is still reeling from the impact of Hurricane Maria almost two years past. Billions in federal recovery funding, crucial for meeting economic recovery goals, have yet to be released, in part because of concerns on how the funding will eventually be used. Puerto Rico still desperately needs funding for widespread repair of critical infrastructure affected by years of neglect and hurricane damage. But the federal government is unable to bear the full cost, and thus expects private capital to have a substantial role. These private investors are understandably reluctant to invest in an island mired in federal investigations without the backstop of the federal government. Puerto Rico is in an endless hold, where federal lack of trust in the local government prevents the disbursement of recovery resources that will unlock the private investment that the U.S. citizens in Puerto Rico desperately need.

The only solution is Radical Transparency for Puerto Rico. During recent congressional testimony, I addressed one transparency initiative in particular: the creation of an Office of a Federal Coordinator for Recovery for Puerto Rico to speed up disbursement of recovery funds. A growing bipartisan group of us—public officials, investors, developers, federal executives, lawmakers—have brought this option to the U.S. Congress, the U.S. Senate, HUD (the U.S. Department of Housing & Urban Development) and other federal agencies. The concept is simple: Anytime the government of Puerto Rico considers projects funded with federal recovery funds, the federal government has a senior representative at the table to fully understand how these funds are awarded. Nothing more, and nothing less.

The Federal Coordinator is not another bureaucratic step—it is a catalyst, with visibility deep into P.R.’s procurement process, determining whether federal funds are allocated appropriately and transparently to deserving stakeholders. If the government of Puerto Rico takes active steps to find and expose corruption, the federal coordinator would act as an advocate, reporting that information to the federal government, external stakeholders, business leaders, media and capital providers. Likewise, if the federal coordinator discovers that contract awards are less than fully transparent, the office would again report such activity to federal agencies, the Senate, Congress, the media and capital providers. It would be up to those stakeholders to apply corrective action. This federal coordinator would work closely with the Financial Oversight & Management Board (FOMB) and the federal agencies providing recovery funds for Puerto Rico. Implementing this “sunlight pressure”—a concept welcomed by private citizens and the vast majority of P.R. government employees—is a necessary solution for the island’s problems.

As Machiavelli and Churchill correctly said: “Never waste the opportunity afforded by a good crisis.” History has provided Gov. Rosselló the perfect opportunity to regain the trust of the federal government by unconditionally “opening the books” of the government’s procurement processes, applying sunlight pressure to historically opaque, shadow processes that have existed for decades. The governor can welcome, with open arms, full federal overwatch of all recovery funds for the island. Everyone knows this will not be easy, but it will be the right thing to do. In doing so, we can still create the bright economic future that all of Puerto Rico deserves.

—Noel Zamot is the president of Atabey Group, an advisory firm focused on ethical investment in emerging markets. He is a son of Puerto Rico, a former business executive, retired Air Force colonel and combat veteran. He previously served as the Revitalization Coordinator for the Financial Oversight & Management Board for Puerto Rico. He has twice testified before Congress on rebuilding the island’s power grid, and the need for widespread structural reform of the Government of Puerto Rico.




A Call to Revisit the Prepa RSA

Editor’s note: The following was first published in the July 11-17, 2019, issue of Caribbean Business.

We traveled to Puerto Rico in March with several of our congressional colleagues to hear from the public on how best to rebuild civil society and a functioning economy. The same theme came up again and again: As much as anything, Puerto Rico needs relief from its crushing debt burden.

For a hurricane-ravaged community whose needs the Trump administration has neglected, the bloodless term “debt relief” might not sound to outside observers like a top priority. In fact, it is key to any hope for Puerto Rico’s future, and the people there know it.

Under previous Puerto Rican governments, the Puerto Rico Electric Power Authority (Prepa) and other agencies on the island issued billions of dollars in bonds that they cannot now repay. Any hope for Puerto Rico’s recovery lies in reducing that debt burden in a way that does not cause more people to permanently leave the island for lack of essential services or an excessive cost of living.

The public rightly demands a debt solution that does not put all the burden on working people. For that reason, we strongly oppose the recently announced agreement to restructure Prepa’s debts, and we urge the parties involved to go back to the negotiating table.

As Democrats on the U.S. House Natural Resources Committee documented in a 2015 report (naturalresources.house.gov/download/profit-at-any-cost) called “Profit at Any Cost,” much of Puerto Rico’s debt is owed not to disinterested lenders who just want their money back but to investment firms that spent millions of dollars on risky, high-yield bonds with a well-advertised risk of default. Those firms, which claim to want no more than justice, are hoping politics or the courts will bail them out on a bad bet. The May 3 Prepa deal represents exactly this kind of bad politics, and if it goes into effect, the result will be disastrous.

The agreement, which must be confirmed by a federal judge before taking effect, has many parties, none of whom are giving the public’s needs enough consideration. The deal, formally known as the Restructuring Support Agreement (RSA), includes Prepa; the Puerto Rico Fiscal Agency & Financial Advisory Authority; the Financial Oversight & Management Board for Puerto Rico; the Ad Hoc Group of Prepa Bondholders; and Assured Guaranty Corp., one of the bond-insurance companies that enabled Puerto Rico’s former leaders to issue excessive debt in the first place.

One way or another, these actors have to find a way to restructure $8 billion of Prepa’s legacy debt. This RSA is not the way to do this, and we recently wrote (twitter.com/NRDems/status/1140654859248656384) to the leaders of the Puerto Rican House and Senate urging them to oppose the deal.

The problems with the RSA are almost too numerous to lay out here. The agreement makes it impossible to meet the affordable energy goals laid out in the Puerto Rico Energy Public Policy Act of 2019, which recently became law. By all accounts, it will result in higher electricity rates for average Puerto Ricans, which will make businesses less able to expand or hire new employees, among other problems.

Despite an analysis by a Nobel Prize-winning economist for the National Bureau of Economic Research suggesting Puerto Rican debt needs to be reduced by about 80 percent, the RSA reduces the Prepa debt principle by only 22.5 percent—a drop in the bucket if the goal is to make Puerto Rican society able to flourish rather than to maximize third-party returns on bad investments.

Treating Puerto Rico as no more than a source of investor revenue will lead to a downward spiral and destroy what is left of Puerto Rico’s economic foundation. Unfortunately, that is what the RSA does. It ensures the first-priority use of every dollar that comes into Prepa from ratepayers goes toward paying off debt, not in building a more sustainable energy system or repairing the severe hurricane damage to the island’s infrastructure.

Like any other community, Puerto Rico cannot rebuild a modern power grid, provide good schools or offer attractive terms for potential investors without enough money to operate. Unfortunately, much of the money that should be spent on those programs is now earmarked for debt repayment. If that dynamic does not change, it is not too strong to say that Puerto Rico as a functional society will cease to exist.

People are already leaving Puerto Rico in record numbers. If we allow the island to become nothing more than a shell from which wealthy investors can squeeze money, it ceases to be an attractive business destination or a livable community.

The judge overseeing the case is expected to rule in July. Anyone who cares about avoiding an economic collapse for millions of American citizens should very carefully watch the next few weeks—and make their voices heard on the need to prevent the Prepa RSA from going into effect.

—Rep. Raúl M. Grijalva (D-Ariz.) chairs the House Committee on Natural Resources. Rep. Nydia Velázquez (D-N.Y.) chairs the House Committee on Small Business.




THINK STRATEGICALLY: The Thin Veneer of Civilization

Stock Market Roaring Back to new Highs; Earnings Increase; U.S.-China Trade Tensions Appeasing; More Stable Monetary Policy

Thin veneer of civilization: It turns out the ‘Fake News’ was true

The “thin veneer theory” is a term coined by Dutch primatologist Frans de Waal to place a label on the Hobbesian view of human morality. The idea of the veneer theory was advocated by biologists such as George C. Williams and, more recently, used by Former CIA Director General Michael Hayden. We have viewed in dismay how a mature democracy like the United States has morphed during the 827 days of President Donald Trump’s tenure toward a behavior similar to an oppressive egalitarian state identical to Venezuela, Cuba or Nicaragua. In our view, the thin veneer of civilization that protects us as U.S. Americans is fractured and fragile. It is that veneer that protects us from radical groups such as neo-Nazis, white supremacists, bigots and other discriminatory instances from showing up and being heard.

One of the most daunting images in our recent memory was the day of hate, rage, violence and death that occurred in Charlottesville, Va., during a “Unite the Right Rally.” This occurrence happened on Aug. 11 & 12, 2017, and led to the death of Heather D. Heyer.

In President Trump’s initial remarks on Charlottesville, he did not denounce the marchers explicitly; instead, he condemned “hatred, bigotry and violence on many sides.” He stated there were “very fine people on both sides,” much to the country’s dismay. In our view, this was only the beginning of a troublesome set of actions that have singled out the President as a racist and bigot. I have often thought that if you have a single doubt about whether a person is racist, the balance leans toward that person being racist. As it turns out, the so-called “Fake News” by President Trump was indeed true, as it turned out that Russia was attempting to tip the balance of U.S. elections toward Trump. The Trump campaign was actively sharing polling data results with Russia. Even though the President and his team have attempted to spin the story as a vindication, in my view, the President of the United States betrayed the country. What will Congress do about it?

Week in markets: Roaring back to new highs

After the Easter holiday, the U.S. stock market came back with a bang as both the S&P and Nasdaq reached new highs and, with it, put last year’s market decline into memory. The Dow Jones Industrial Average (DJIA) closed the week at 26,543.33, a loss of 16.21, or minus-0.06 percent and a year-to-date (YTD) return of 13.80 percent; and the S&P 500 closed at 2,939.88, a gain of 34.85, or 1.20 percent, and a YTD performance of 17.30 percent. The Nasdaq closed at 8,146.40, an increase of 148.34, or 1.85 percent, and a YTD return of 22.80 percent. Meanwhile, the U.S. Treasury’s 10-year note fell to 2.50 percent with a YTD return of minus-0.18 percent. The main drivers of growth are Corporate America providing increased earnings, U.S.-China trade tensions appeasing and a more stable monetary policy. North of 50 percent of U.S. public corporations have reported their first quarter (1Q) 2019 results, and most are on track with gains over 4Q 2018.

As we have stated in our recent columns, we predict that the market will continue to reach new highs based on the following:

•Strong 2019 market fundamentals. Increased earnings, fueled by economic growth.

•Corporate America delivering growth. Corporate profits are on the path for gains.

•U.S. economic growth. The U.S. economy grew at a 3.2 percent pace.

U.S. economy increases growth to 3.2 percent GDP

The United States economy defied skeptics and delivered a 3.2 percent gross domestic product (GDP) increase during 1Q 2019, which easily beat economic predictions that pointed to 2.3 percent growth, which was 45 percent better than the 2.2 percent rate recorded during 4Q 2018. The recent financial data destroys the recession fears and places the U.S. to reach its longest-ever expansion.

Final word: Birling ‘Stock to Watch’ at end of 2019

Birling Capital’s “Stock to Watch” includes an array of companies from Biotech, Banks and Technology, and you will note below how our portfolio of stocks have performed since Oct. 19, 2019, with an 8.06 percent return on the average.

We want to concentrate on two local bank stocks that have been perennial favorites in the portfolios of many Puerto Rico investors, Popular Inc. (BPOP) and Firstbank Corp. (FBP). Below are their 1Q 2019 results.

Popular Inc. (BPOP). Price as of April 26, 2019: $57.08

•1Q 2019 Results: Popular reported 1Q 2019 net income to common stockholders of $167.0 million, an increase of 58.3 percent when compared to the $106.4 million earned in 4Q 2018.

•Gross loans increased to $26.6 billion.

•Total deposits increased by $1.2 billion to $40.9 billion.

•Net interest income fell $5.3 million, or 1.1 percent, from the prior quarter, caused by lower fair-value accretion income on the acquired Wells Fargo auto loan portfolio.

•Regulatory Tier One capital ratios stood at 16.39 percent and is considered a “well-capitalized” institution.

First Bancorp (FBP). Price as of April 26, 2019: $11.28

•1Q 2019 Results: First Bancorp reported 1Q 2019 net income of $42.6 million, compared to the $100.4 million recorded in 4Q 2018.

•Gross loans rose to $138.7 million. The state of Florida region saw an increase of $50.3 million while Puerto Rico grew $74.1 million and the Virgin Islands experienced growth of $4.3 million.

*Total deposits increased $76.1 million to $9.01 billion.

*Net interest income increased to $140.2 million.

*The Regulatory Tier One capital ratio stood at 20.85 percent and is considered a “well-capitalized” institution.

As the recovery of Puerto Rico continues, we should expect both banks to play a significant part in all developments.

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.




THINK STRATEGICALLY: The Behavioral Perspective

Until P.R. Gov’t is Able to Seek Investment-Grade Rating, Investors Exploring New Strategies, Diversifying Exposure Beyond One Asset

The behavioral perspective: New P.R. investment trends

The behavioral perspective is often explained in theoretical terms in which learning and behavior are described and explained as stimulus-response relationships.

Thus, the behavioral perspective of the Puerto Rican investor has significantly changed because the Government of Puerto Rico lost its investment- grade rating. With this downfall, it had an impact on any and all securities that have large amounts of exposure to the Government of Puerto Rico, which creates billions in losses to most investors that relied solely on these instruments. For years, this was the standard way to invest, and it was very profitable for those investors that could realize 6 percent returns from tax-free bonds or Puerto Rico mutual funds. Until the government can seek an investment-grade rating, investors have been exploring new strategies for their assets.

Below are some of the strategies being implemented:

•Money managers with diverse strategies. This strategy was often used by large institutional clients and, some years ago, became quite feasible for retail investors to select five or six money managers with a diverse array of strategies to professionally manage their portfolios. Some include BlackRock, Vanguard, State Street, Fidelity and Pimco.

•Exchange-traded funds (ETFs). These funds have become popular because they allow investors to quickly own a diversified set of securities, such as stocks, at a meager cost. They also allow investors to get exposure to areas of the market, such as countries, industries and asset classes.

•U.S. municipal bonds, funds. There are hundreds of issuers in the U.S. with solid credit quality, which are rated “AA” and higher, with prospective growth; there are also mutual funds that include in their strategies a 100 percent U.S. focus or an 80 percent U.S. focus, as well as many other mutual funds with a diverse set of investment strategies.

•U.S. Treasuries. The United States, with a “AAA” rating, has always been a safe-harbor investment that produced decent returns with minimal risk. Currently, the 10-year note closed Friday at 2.50 percent.

•Alternative P.R. investments. With private equity, loan funds and other new opportunity funds, there is much to consider when forced to change strategies, and this is one of those instances. When investors are accustomed to tax efficiency, favorable inheritance laws, high yields and names you knew and trusted; when changing all you know, you need trusted expert advice.

Week in markets: DJIA, S&P 500, Nasdaq show double-digit growth

There was significant activity in the markets globally as most stocks and indices finished the week on a very high note. The Dow Jones Industrial Average (DJIA) closed the week at 26,424.99, a rise of 496.36, or 1.91 percent, and a year-to-date (YTD) return of 13.30 percent; and the S&P 500 closed at 2,892.74, a gain of 18.34, or 0.64 percent, and a YTD performance of 15.40 percent. The Nasdaq closed at 7,928.69, an increase of 199.37, or 2.58 percent, and a YTD return of 19.60 percent. Meanwhile, the U.S. Treasury’s 10-year note increased to 2.50 percent, or a rise in yield of 4.17 percent.

Emerging markets growing faster than expected

We must look at the pace of growth for international stocks. Most emerging markets have outperformed all others. We note that most cyclical sectors have outpaced the defensive sectors, which is a clear sign that there is trust in current economic conditions. The principal thrust for the global rally was positive news coming from China. One of the items we review is the China Purchasing Managers’ Index and, for the month of March, it showed a return to expansion after more than six months of contraction. This is a clear signal that the tax cuts and other policies in China’s domestic market are producing modest growth.

U.S. adds 196,000 jobs in March

The U.S. Bureau of Labor Statistics reported that total nonfarm payroll employment increased by 196,000 in March, with the unemployment rate unchanged at 3.8 percent. Jobs growth occurred in healthcare, and professional and technical services. With hiring strongly rebounding in March, the fears of a dramatic slowdown of the labor market have subsided.

Final word-diversify, diversify: The discipline of protecting life’s work

As we have discussed many times, diversification is the discipline of protecting your life’s work. In our view, there are at least three critical benefits of diversification, and they include:

•Minimizing risk of loss. If some of your investments perform poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

•Preserving capital. Similar to our lives at various stages, investing must be tied to our lifespan in the same way. For young people, this is about accumulation and, for older folks near retirement age, they must have goals toward preserving their capital to last through retirement and diversification, which is the key to help protect their savings.

•Generating returns. Investments often do not always perform as expected, and when you apply the benefits of diversification, you are expanding your sources of income. Just like you do not have just bread and water in your fridge, your investments must be a vast array designed to balance your risks in times of market turmoil.

The key with all portfolios is always to diversify them in a way that the investor does not have any more than 10 percent exposure to one strategy or asset class.

Probably the best way to present diversification is with a story. In 2006, we visited the patriarch of an ultra-high-net-worth family, and we had a great visit that I will never forget.

During that visit, the client was explaining that he was so well-diversified that he did not need to worry. We asked him how so? He explained that in addition to his general construction, he had a block and paver factory, an industrial hardware company, a quarry, a sand and gravel operation and a scaffolding renting operation.

We told him that what you are describing is not diversification. You are vertically integrated into the construction sector. If a construction crisis emerges, your entire business will suffer. He was startled and asked us how we could help. We developed an action plan that involved performing an enterprise valuation on all his business. After many discussions, we implemented the plan, which called for selling some of the assets and keeping the real estate for development and rental income. In two years, we were able to increase his holdings in the millions of dollars while maintaining some assets that were part of his original operations. When the construction crisis arrived, our clients had zero debt, income had grown by 35 percent, and the exposure to construction was only the development company, which is in the business of developing real estate for rental income.

This is the power of sound advice using diversification.

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.




The University of the Future

Former Gov. Rosselló: Education must be recognized as a basic human right

Editor’s note: The following originally appeared in the April 4-10, 2019, issue of Caribbean Business.

Free college for all qualified students. Courses accessible anytime, anywhere. Programs and degrees available from the best universities on Earth. Is this a utopia?

Until recently, education as a life-long fundamental human right (from preschool to post-graduate) was only a noble aspiration. And the typical questions surrounding this ideal would always come up: How would it be implemented? Would there be enough resources available? What structure could make it possible?

Today, we have the answer: technology.

Considering Puerto Rico’s recent history with natural disasters and an unprecedented fiscal challenge, our universities are focused on present-day affairs, and are naturally inclined to return to how things used to be; to go back to a reality that no longer exists. As colleges recognize the urgency and need to face current issues—such as the feasibility of maintaining and/or increasing current levels of enrollment, the costs for students, the availability and access to courses, among other concerns—they also need to analyze their present situation. However, at the same time, they are obligated to trace a new, ambitious pathway to what will be the university of tomorrow.

It is no longer enough to rebuild and re-establish the same institutions. We need to imagine the future, rethink it, and aspire to something greater.

And this must all take place within the framework of the globalized world in which we live, immersed in exponential innovations in science and technology, in new discoveries about our understanding of the universe and human nature itself. We are experimenting with fantastic systemic transformations in every economic and social sector: in essential utilities such as power and water, in transportation and housing, in health and functional longevity, in artificial intelligence and robotics, to which we can add the disappearance of traditional jobs and an increase in available leisure time, among other socioeconomic areas.

These drastic transformations are warning us that the university of tomorrow will have to be radically different than it is today, both quantitatively and qualitatively. The education we know today as preschool, elementary and high school, and more importantly, higher education, will have to transform from the ground up and evolve at today’s exponential speeds.

According to Dr. Michelle Weise, a renowned researcher and expert in disruptive changes in higher education, the education we are offering today, in a linear fashion, with two, four or six years of learning at the beginning of a career, does not work for a turbulent job marketplace, where the average worker will be working more years, and will be changing careers several times throughout their productive life. Dr. Weise emphasizes that higher education needs to offer students numerous learning alternatives, with continuous easy access in and out of the educational system, as the student-worker evolves in his or her professional trajectory.

If higher-learning institutions have the responsibility to educate, train and develop the maximum potential of the professionals who will be leading a globalized world, mired in dizzying socioeconomic changes, then, how should the university evolve over the next decade? Let’s imagine what our universities would be like in the next 10 years.

I submit that the University of 2029 must recognize education as a basic human right, and should provide it for life, from birth until death, not parceled out and limited by time. It should offer universal access to all qualified individuals, and should be free for everyone, thus eliminating the accessibility obstacle. It should also recognize the student (regardless of age or grade level) as the center of action, allowing them to study whenever it is most convenient, anytime, anywhere.

So, again, we must ask: Is this a utopia?

The truth is that we already have the technological wherewithal to start steering our universities toward the future. The key is technology. Educational portals such as Coursera, EdX and Udacity, in addition to countless well-established universities, are already offering thousands of courses, programs and even full degrees completely online. Students study online, at their own pace and within the established parameters of the course or grade, and they can get their diploma or certificate without necessarily having to step into a classroom or campus.

Our government can become a platform for our students to access education by using a technological model like the one used by companies such as Uber (the world’s largest transportation provider, without owning a single vehicle) or Airbnb (world’s largest lodging provider, without owning a single piece of real estate). This educational platform can become the link between our students and the most advanced academic offerings around the world.

Why not start this inevitable transformation on our island today? I propose not only that we can, but that we need to do it—urgently.

The future starts today.

–Dr. Pedro Rosselló served as governor of Puerto Rico (1993-2001). He has a master’s degree in public health, a doctorate in medicine and a second doctorate in education. He is a lecturer and scholar at Universidad Ana G. Méndez, Gurabo Campus.




THINK STRATEGICALLY: Selling, Selling, Sold…and It’s Gone

Tech Impacts Economy; Telling P.R. and U.S. Investors Apart; Entrepreneur X-Ray

Technological disruption to double down

As technology changes, the alteration of the status quo is due to be highly disruptive in the next five years. More often than not, the way the technology impacts the economy is more about the changes it creates in society than the actual technology. “Game Changing Technology” will both alter and increase people’s efficiencies. Game Changing Technology includes robotics, smartphones and artificial intelligence (AI). Technology will make existing tasks even more accessible and faster than ever before.

Key Enabling Technologies include aerospace, agriculture, automotive, building construction, food, healthcare, mining, minerals, oil and gas, specialty chemicals and textiles.

Some of the disruption technologies include:

  • Web 3.0, the next iteration of the internet. This technology capitalizes on interactivity, and doing away with such words as artificial intelligence.
  • The Market of One. This trend will create mass personalization, and the key is doing away with current target marketing and meeting the individual needs of every customer.
  • Voice Technology. As much as we dislike computerized voices that answer phones and perform other tasks, this technology is creating an entirely new ecosystem of marketing, branding and consumer engagement with voices that are here to stay.
  • 3D Printing. This process has changed from printing novelty items to creating life-saving items, prosthetics and even spacecraft engines. The technology has secured its place in manufacturing.

Week in markets: S&P records best 1Q in 10 years

Most stocks finished the week, month and quarter with a bang, with most markets rising globally. The Dow Jones Industrial Average closed the week at 25,928.63, a rise of 426.31, or 1.67 percent. The S&P 500 closed at 2,874.40, a gain of 73.69, or 2.63 percent. The Nasdaq closed at 7,729.32, or an increase of 86.65, or 1.13 percent. Meanwhile, U.S. Treasury’s 10-year note went down to 2.40 percent, or a decrease in yield of minus-12.00 percent. The S&P 500 marked its best quarterly return in the past 10 years with a 13 percent increase. During 1Q 2019, the market reacted to Federal Reserve Bank changes in monetary policy related to rate hikes; the corporate sector’s strong performance in earnings, stock prices and job creation; and renewed positivism toward a U.S.-China trade deal.

The 1Q 2019 is probably the best example we have seen of the benefit of taking a long-term view to invest, and why it matters to stick to your goals. As we often comment, the power in investing lies in having a well-diversified portfolio. We live through periods like 4Q 2018, which caused losses across the board, and those who sold and got out only recorded losses; however, those who remained in the market and put in additional money as stocks and indices became cheaper, gained back their losses and recorded lofty gains.

What differentiates P.R., U.S. investors?

The profile of Puerto Rico investors differs significantly from a typical U.S. investor. Puerto Rican investors have favored government bonds, local mutual funds, preferred stocks and bank common stocks. One main goal for most investors is to seek tax-exempt income in most of their investments and, through government bonds and most local mutual funds, most investors were able to obtain a significant part of their investment income as tax-exempt. Below is a chart that outlines the profile of the Puerto Rico investor, and in the current market with Puerto Rico in default, this profile has to change to one that is more similar to that of the U.S. investor, who favors stocks and mutual funds. As we examine most portfolios from U.S. investors, note that 75 percent or more of their portfolios are composed of stocks, mutual funds and index funds.

Final word: Selling, selling, sold…and it’s gone.

When and how to sell your business? In the current business environment, it is always a good idea to be one step ahead of the herd. The world is a combination of business, technology and politics that impact commerce without mercy. When is the right time to sell or transfer the market to the next generation of leaders?

Key questions include:

  • How much is my business worth?
  • What could my exit strategy be?
  • How do we transition to the next generation?

Background: Currently, More than 60 percent of businessowners are baby boomers, who were born between 1946 and 1964, with most of them between the ages of 56-74, and by most metrics could be more than ready to sell their business.

The five types of entrepreneurs:

  • Lifestyle Entrepreneur. It is those entrepreneurs, once they reach this lifestyle, who stop growing their business. For everyone, it is a different bar. For some, it is having a house, beach house, boat and plane. For others, it is being debt-free, for others it is having 2,000 store branches. The key is that once they reach the goal, they stop growing and it may be time to sell.
  • Innovator. This type of entrepreneur creates original ideas and can turn them into viable business models. Some come to mind, such as Apple, Google, Uber, Amazon and Microsoft.
  • Hustler. The entrepreneurs start small, with little or no capital, and work their way up. They are opposed to other stockholders, capital raises up or even partners. They focus on building their business from the ground up.
  • Me Too. These entrepreneurs copy ideas from other entrepreneurs and improve them enough to make them feel new and innovative. Innovators are 50 percent hustlers and 50 percent lifestyle, and won’t stick to anyone else’s terms but their own.
  • Buying into Entrepreneurship (BIE). These individuals have the resources to purchase a business because they have both the wealth and savvy to do so. More often than not, they avoid risks and don’t worry about innovation, and their focus is building upon what is already there. Cemeteries are full of all types of entrepreneurs, but the most common kind is the BIE.

What are the challenges to sell a business?

As that time draws closer, the businessowner faces challenges that include:

  • What happens to my family who works here?
  • Is the money I saved enough to help support my lifestyle?
  • How do we clean up my financials to show their real business value?
  • What happens to me next?

Entrepreneurs navigate the waters of selling the business, including:

  • Enterprise valuation;
  • Business review and planning;
  • Revenue and profit improvement;
  • Asset base analysis and optimization;
  • Corporate simplification; and
  • Transformation of the finance function.

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.




THINK STRATEGICALLY: The Show About Nothing

Markets Demonstrate Reversal of Fortune Over Previous Week’s Congressional Community Listening Session

Still from the 1980s’ “Where’s the Beef?” ad

Merger in works for two German titans: Deutsche Bank, Commerzbank

Over the weekend, news broke that a possible merger may be in the works between Deutsche Bank and Commerzbank. The merger has been widely speculated since the financial crisis and even more so after the restructuring that Deutsche has been implementing.

At least on paper, the merger appears to make sense from strategic, financial and opportunities for growth points of view.

The merger of Deutsche Bank and Commerzbank appears to have the backing of the German government. This implicit approval comes as officials seek to solidify the domestic banking sector with a new German titan that would rule over the nation’s economy, protect its export model and prevent an exodus of much-needed foreign capital.

Key Highlights

While is still too early to tell when the merger will go through, we are safe to assume that Deutsche Bank will absorb Commerzbank in an all-share deal with current Commerzbank shareholders receiving new Deutsche Bank shares and one of the keys to this merger is the fact the German government is Commerzbank’s largest shareholder.

Week in markets: Strong reversal of previous week’s losses

The markets experienced a substantial reversal of last week’s losses driven by global markets reaching a four-month high, mostly positive economic data and little signs of inflation. The scenario supports the world’s central banks following suit with the U.S. Federal Reserve Bank and are now in sync with a weaker outlook toward interest-rate increases. Moving on the market performance, we note U.S. equities finished the week in positive territory and were marked by the celebration of the bull markets’ 10th anniversary. The Dow Jones Industrial Average closed the week at 25,848.87, a rise of 398.63 or 1.57 percent for the week, and a year-to-date (YTD) return of 9.1 percent; the S&P 500 closed at 2,822.48, a rise of 79.41 or 2.89 percent, and 12.60 percent YTD. The Nasdaq closed at 7,688.53 or an increase of 280.30 or 3.78 percent, and a YTD return of 15.9 percent. Meanwhile, the U.S. Treasury’s 10-year note went down to 2.59 percent, or a decrease in yield of minus-1.53 percent.

S&P 500 bull market now 10 years young, should we worry?

Will it help to worry? The answer is no; the S&P has delivered 412 percent return over the past 10 years and is just below all-time highs. One of the better ways to understand this growth and any market cycle is to know that every cycle is driven by a series of events, and these events usually follow each other with a predictable sequence. In this case, our current period originated after the Great Recession. To describe it, we should point out what causes the next cycle and what accompanies each cycle.

Macro environment: Includes trends in the gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy.

Corporate growth rates: Overall stock prices and profitability of corporations in the market.

Access to capital: Not being able to borrow enough can be as impactful as borrowing too much.

The popularity of investing: In positive cycles, the popularity of investing becomes a driving force that attracts large amounts of capital.

Investor sentiment and outlook: The predictive power of investor sentiment in the cross-section of stock returns across economic expansion and recession states.

The key message that everyone must understand is that volatility is an integral part of investing and, if you have a well-diversified portfolio, you may weather the storm.

Final word: The show about nothing

The U.S. House Natural Resources Committee, as expected, arrived to Puerto Rico headed by Chair Raúl Grijalva (D-Ariz.) along with several members of Congress.

The committee held its initial meeting at the Roberto Clemente Coliseum where hundreds filled the coliseum to speak at an unprecedented public hearing. The Congressmen were visiting the island after a slew of complaints about the P.R. Oversight, Management & Economic Stability Act’s (Promesa) lack of progress, including its austerity measures directed at University of Puerto Rico, retirees and all government agencies, which is having an impact on more than those that have outstanding bond issues. The other topic is the snail’s pace of federal hurricane-recovery funds nearly two years after Hurricane Maria.

Those in attendance, who came from towns across the island, included students, retirees, construction workers and executives. Others even brought their gamecocks to protest the federal ban on the cockfighting industry.

The committee heard numerous speeches from Puerto Ricans claiming unfair treatment, slow response and inequality by the federal government. Some mentioned losing their homes, while for others, the biggest concern was the loss of their hard-earned government pension. The crowd had numerous signs requesting the Government’s $72 billion debt be canceled while others demanded that Promesa be eliminated.

While to some it seems unfair that pensions and other benefits may be cut, including housing and Medicaid, these slashes are the product of the Government’s fiscal imprudence and aggressive spending over the past 20 years or so.

To some, it appeared the audience was supporting statehood for Puerto Rico, and many of them booed loudly when San Juan Mayor Carmen Yulín Cruz addressed the committee.

In addition to Chair Grijalva, in tow were Reps. Rob Bishop (R-Utah), Nydia Velázquez (D-N.Y.) and Darren Soto (D-Fla.), and Resident Commissioner Jenniffer González (R-P.R.).

The legislators were focusing on the effects of decisions taken by the Financial Oversight & Management Board and its management of the finances of the government of Puerto Rico.

Chair Grijalva stated that the committee will soon revise Promesa, and to him it was important to hear directly from the people most affected by the economic crisis and the aftermath of the hurricanes, and his plan is to create, as he stated, “A law that is more humane, more equal and less oppressive.” The hearing was held following the U.S. Government Accountability Office’s (GAO) issuance of a report stating obvious facts about how our 78 municipalities are struggling financially because they have not been fully reimbursed for work already completed after the hurricanes.

The GAO said Puerto Rico has estimated it needs $132 billion to rebuild from the hurricanes, and the U.S. Federal Emergency Management Agency has earmarked nearly $4 billion in public assistance grant funding. Both the hearings and study made me think about a Seinfeld episode in which Jerry Seinfeld and George Constanza pitch “a show about nothing.” While it is our sincere hope that something significant does develop from both the study and the hearings, until something dramatic happens, the first thought on my mind will be that “the show was about nothing.”

–Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.