Continued on Page 2

In this Issue

Will Donald Trump be the “Hero of

Haarlem”? 1

Economic and Interest Rate

Forecast—January 2017 3

Market Review Data Diffusion |

ADS Index 4

Are States Jumping on the Trump

Bandwagon? 5

Cybersecurity: An Emerging State

and Local Government Risk and

Opportunity 6

Fast Start to New Year's Volume 8

Repatriation of Untaxed Foreign

Earnings 10

Market Review Historical Monthly

Bond Price Changes 12

Market Review The Yield Curve 13

Market Conditions 15

Loop Capital Markets Upcoming

Negotiated Calendar 16

Municipal Strategy Report

A Monthly Analytical Services Division Publication January 2017

Will Donald Trump be the “Hero of Haarlem”?

Often confused with “Hans Brinker and the Silver Skates”, it is the “Hero of

Haarlem” that tells the tale of a Dutch boy that saves his country by putting his

finger in a dike that has sprung a leak. The Dutch boy saves the community and is a hero. Wouldn’t it have been better if someone had had the foresight to spend a few

guilders on routine maintenance? We can be the heroes of the moment, reacting to

each crisis as it arises like the Dutch Boy, or we can be guided by a set of beliefs that

can allow us to create a more lasting environment of safety, security and prosperity. Plugging the dike is the default position. Our President’s public harassment of

companies lawfully planning to relocate jobs to Mexico is not a policy that can be

applied uniformly, consistently and fairly; it is a finger in the dike. Will President

Trump continue to be the Dutch boy, or will he find a set of guiding beliefs?

By Chris Mier, CFA | Strategist

President Trump represents a GOP

constituency of one—the pragmatic,

impatient, pro-business corner of the party.

He is at odds with the GOP orthodoxy of

small government, balanced budget, low debt,

free trade, and free markets. Untethered by

ideology, Trump’s impulsive and id-driven

actions give him the advantage of speed. They

do not assure outcomes that are consistent,

fair or enduring, however.

The Congressional gatekeepers, Mitch

McConnell and Paul Ryan, are functional

opposites of the President. They are the

torchbearers of the Reagan legacy and are

strongly committed to the basic values of

conservative politicians in the Republican

Party. The tension between the

Administration’s proclivities to “Impulsive

Pragmatism”, with its anti-establishment

temperament, is already highlighting the

challenges that will arise when the

administration’s id collides with the

Congressional leadership’s super-ego.

Luigi Zingales’ Pro-Market article entitled

“Donald Trump’s Economic Policies: Pro-

Business, Not Pro-Market”, contrasts the

difference between Trump’s pro-business

approach and a pro-market approach. Pro-

business, is a short-term, crisis-driven, finger-

in-the-dike approach to policy. Pro-market is

allowing your understanding of how free

markets work to guide your policy-making in

order to achieve long-term outcomes. The

pro-business approach solves one problem at

a time, seeks short-term results, and is

oblivious to inconsistencies that occur down

the road. Pro-market is long-term, recognizes

that the short-term may not produce results,

and has faith that long-term outcomes will

reflect the basic belief that competition is

good and leads to efficient, favorable

economic outcomes.

January 2017

Municipal Strategy Report

Page | 2

Will Donald Trump be the “Hero of Haarlem”?

The difference, a point Mr. Zingales makes very effectively, is that

there is a long-term cost to being pro-business as opposed to pro-

market, and that pro-business actions can come back to haunt the

performance of the economy over time. In the pro-business world,

inefficient companies are bailed out, in the pro-market world the

inefficient must be allowed to die so that that the market can

reallocate resources optimally.

The current proposal regarding the Border Adjustment Tax

highlights the peril between the two approaches. The Border

Adjustment Tax is designed specifically to address the trade deficit

and its impact on manufacturing jobs in the US. It provides for a tax

on imported goods and subsidizes exports. The tax is a destination-

based tax that levies taxes based on the difference between firms’

domestic revenues and domestic costs.

In the short-run, this tax policy may produce some desirable results.

The initial impact on financial markets would be to boost the value

of the dollar as the trade deficit is reduced. The reduction in the

trade deficit adds to GDP growth, functioning the same way as an

increase in fiscal spending. The boost in aggregate demand would

increase domestic inflation through the dual effect of increasing the

inflation rate of imported goods and through increasing strength in

aggregate demand. The dollar would rise as a result, along with

inflation and interest rates.

Moving out the time-line, rising growth, inflation, and interest rates

would likely prompt the Fed to increase the speed of their monetary

policy adjustment, putting investors at risk for a significant sell-off

in bonds.

Source: FRED

A stronger dollar hurts nations that have borrowed in dollars or that

rely on US dollar investment for economic development. A rise in

the dollar would also depress commodity prices, hurting countries

that rely on commodity exportation as a source of national income.

The net result is that the tax likely encourages a host of nations to

engage in a protectionist battle against the US.

The favorable impact of the tax may be very short-lived, however.

The narrowing of the US trade deficit would be slowed as the dollar

rises. Foreign central banks would respond with their own actions.

Global trade institutions may find the tax in violation of world trade

agreements and may take actions to counter US tax policies.

In the world of frictionless markets that adjust quickly and return to

equilibriums, a border adjustment tax that includes taxes on

imports and subsidies on exports would face a dollar increase

related directly to the size of the tax rate. This would have the effect

of fully offsetting the improvement in the trade balance. In the

meantime, the US would be facing a backlash for instituting

protectionist policies. Global growth would be slower.

Bond yields rise not only as a result of the rise in the dollar, but in

this case, as a result of the improvement in the trade balance. While

yields are often observed to fall when the dollar strengthens, they

also can be observed to rise, as has occurred recently and is shown

in the chart below.

Source: FRED

The Border Adjustment Tax is but one example of the peril of

selective application of solutions drawn from different and often-

conflicting ideologies. It reflects a desire to make good on campaign

promises and to please constituencies, but not to build enduring

policies based on market principles. This pro-business approach

will lead President Trump to assume the role of the Dutch Boy,

providing short-term solutions as long as he has fingers to spare.

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January 2017

Municipal Strategy Report

Page | 3

Economic and Interest Rate Forecast—January 2017

Figure 1 Economic and Interest Rate Forecast—January 2017

1Q’16 2Q’16 3Q’16 4Q’16 1Q’17 2Q’17 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18 4Q’18 A v g'16 A v g'17 A v g'18

Econ om ic Foreca st s

Rea l GDP 0.8 1.4 3.5 2.3 2.1 2.5 2.6 2.7 2.5 2.6 2.4 2.3 1.6 2.4 2.5

Cor e PCE Defla tor 1.6 1.6 1.7 1.7 1.8 1.8 1.9 2.0 2.2 2.1 2.1 2.0 1.7 1.9 2.1

Un em ploy m en t Ra te* 4.9 4.9 4.9 4.7 4.6 4.6 4.6 4.5 4.6 4.5 4.4 4.4 4.9 4.6 4.5

Non fa r m Pa y r olls (ch g in 1 000s) 587 439 636 495 510 500 490 495 480 470 460 450 2,157 1,995 1,860

S&P 5 00 1,951 2,075 2,162 2,185 2,290 2,319 2,348 2,377 2,407 2,437 2,467 2,498 2,093 2,333 2,452

Sh ort -T erm In t erest Ra t es*

Fed Fu n ds Ta r g et (%) 0.37 0.37 0.40 0.45 0.70 0.90 1.09 1.15 1.15 1.35 1.40 1.60 0.40 0.96 1.38

3 -Mon th LIBOR (%) 0.62 0.64 0.79 0.92 1.15 1.33 1.50 1.54 1.52 1.70 1.73 1.90 0.74 1.38 1.71

7 -Da y SIFMA (%) 0.08 0.40 0.55 0.66 0.75 0.85 1.05 1.10 1.10 1.30 1.35 1.55 0.42 0.94 1.33

T rea su ry In t erest Ra t es*

2 -Yea r Tr ea su r y (%) 0.83 0.77 0.72 1.00 1.17 1.40 1.57 1.60 1.58 1.75 1.78 1.94 0.83 1.43 1.76

3 -Yea r Tr ea su r y (%) 1.02 0.91 0.84 1.23 1.41 1.66 1.82 1.85 1.84 2.02 2.05 2.22 1.00 1.69 2.03

5 -Yea r Tr ea su r y (%) 1.36 1.24 1.12 1.61 1.85 2.06 2.22 2.25 2.24 2.43 2.46 2.65 1.33 2.10 2.45

7 -Yea r Tr ea su r y (%) 1.68 1.53 1.39 1.93 2.16 2.35 2.50 2.53 2.53 2.72 2.75 2.94 1.63 2.39 2.74

1 0-Y ea r Tr ea su r y (%) 1.91 1.74 1.56 2.13 2.35 2.64 2.78 2.81 2.81 3.00 3.03 3.22 1.84 2.65 3.02

3 0-Y ea r Tr ea su r y (%) 2.72 2.57 2.28 2.83 2.95 3.11 3.23 3.25 3.26 3.38 3.41 3.55 2.60 3.14 3.40

Mu n icipa l In t erest Ra t es*

3 0-Y ea r MMD (%) 2.76 2.42 2.15 2.86 2.96 3.10 3.20 3.20 3.19 3.29 3.30 3.41 2.55 3.12 3.30

Mu n i Yield Cu r v e Slope (%) 2.31 1.85 1.60 2.02 2.02 2.06 1.96 1.91 1.90 1.80 1.76 1.67 1.95 1.99 1.78

Factors Supportive of Lower Rates

Q4 GDP growth decelerated to a 1.9% annual rate from 3.5% in

Q3, with trade subtracting 1.7% from expansion.

New home sales tumbled 10.4% in December, while existing home sales are down 2.8%, as recent increase in mortgage rates reduced affordability.

Durable goods orders fell for second consecutive month on

reduced Pentagon orders.

Increasingly protectionist sentiments reflected in the American withdrawal from the Trans Pacific Partnership, as well as looming trade war with Mexico, could cause dislocations that will hurt economic growth.

Factors Supportive of Higher Rates

U.S. job growth was solid in December, while hourly earnings rose

0.4% to 2.9% YoY, the fastest pace in 7 years.

Consumer spending expanded at 2.5% rate in Q4, while retail sales rose 0.6% last month.

Vehicle sales in December expanded at 18.3 million annual rate,

pushing 2016 total to record 17.5 million.

Business investments rose in Q4 for the first time in five quarters.

U.S. construction spending increased 0.9% to the highest level since April 2006.

President Trump’s proposals for across-the-board tax cuts,

infrastructure spending and rebuilding the military would boost economic growth, if implemented.

P: Preliminary Data * 3-month average Source: Loop Capital Markets’ Analytical Services Division and Short-Term Desk. Black Text: Actual Blue Text: Forecast as of January 10, 2017

January 2017

Municipal Strategy Report

Page | 4

Market Review Data Diffusion | ADS Index

Figure 2 Data Diffusion Index vs. 10-Yr Treasury Yield

After Treasury rates surged in the

aftermath of November election, the long-

run relationship between the data

diffusion index and 10-yr Treasury yield

was restored.

Data Diffusion Index: We calculate the

Data Diffusion Index based on 30 different

weekly and monthly economic releases,

such as construction spending, capacity

utilization and new home sales. If the

number came above the consensus

estimate (which is positive for economic

growth) the index would increase by one,

and vice versa. The Treasury yield is

expected to track the data diffusion index

(the yields would increase as the economy

exceeds expectations and vice versa).

Source: FRED, Loop Capital Markets

Figure 3 Aruoba-Diebold-Scotti Business Conditions Index (12/31/2007—1/14/2017)

Since the election, ADS business

conditions index rose from -0.40 to 0.26.

The comparison is relative to trend growth

rate of about 2%, represented by the flat

line.

Reading the ADS Index: The index is

designed to track real business conditions

at high frequency. Its underlying

(seasonally adjusted) economic indicators

(weekly initial jobless claims; monthly

payroll employment, industrial

production, personal income less transfer

payments, manufacturing and trade sales;

and quarterly real GDP) blend high and

low-frequency information and stock and

flow data.

Source: Federal Reserve Bank of Philadelphia

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January 2017

Municipal Strategy Report

Page | 5

Are States Jumping on the Trump Bandwagon?

By Rachel Barkley | Vice President

Infrastructure was a key component of the new federal administration’s

campaign platform. As touted, the $1T plan would focus on transportation, water, electric, telecommunications and security infrastructure. While many of the details of such a plan are unknown, the Administration has proposed using approximately $137B in federal tax cuts to generate private-sector investment to complete projects with

revenues attractive to investors, such as toll roads, bridges and airports. Conventional municipal financing would be available for projects not suitable for private investment. Representatives from both sides of the political aisle will debate the

feasibility of the proposed federal plan in months to come. However, no matter whether the President’s plan materializes as advertised, some market participants have speculated this might lead to an increased concentration of infrastructure investment at the state and local level.

As states are now in the process of delivering their annual State of the State addresses and unveiling their proposed budgets, this gives us an opportunity to see if states are jumping on the infrastructure bandwagon.

So far, this doesn’t seem to be the case. To date 26 states have delivered their annual addresses. Of these, 54% have noted infrastructure as a priority for the coming year. This is lower than the past two years, when 75% and 67% of states highlighted the issue in their 2016 and 2015 State of the State addresses, respectively. Of the ten topics we track in these

addresses, infrastructure currently ranks only the seventh most commonly discussed item behind education, economic development, budgets, taxes, healthcare and public safety, as shown below. Over the past four years, it had ranged from third to fifth most popular focus for governors, echoing this year’s decline in focus.

Of the 14 states that have highlighted infrastructure efforts this year, 11 of them had made it a focus of the 2016 State of the State address as well, indicating their prioritization of infrastructure needs had been set

before the Trump proposal came out. Of the three new states highlighting infrastructure needs this year, two (New Mexico and North Dakota) did not give State of the State addresses last year. Only New

Mexico concentrated on the issue this year after not discussing it in

2016. Moreover, the majority of states discussed similar levels of infrastructure investment as in the prior year. The two states that have detailed the largest infrastructure plans, New York and Indiana, both have programs that are continuations of those

unveiled in 2016. New York’s Governor Cuomo introduced a $100B capital plan last year, Built to Lead. The plan is the largest in the state’s history, including a new Tappan Zee Bridge, replacing LaGuardia Airport and major renovations to the other state airports, improvements to the MTA, LIRR and Metro-North as well as roads and

bridges. This year, Cuomo discussed plans to renovate JFK International Airport through a similar manner as the ongoing LaGuardia Airport project, with $7B of private sector revenues. Regional airports, including the Plattsburgh International Airport and

the Syracuse Hancock International Airport, will also be a focus. The state plans to invest $2B on water infrastructure. Indiana’s new Governor Holcomb, meanwhile, focused on infrastructure as a means for economic development. He means to

develop a state master infrastructure plan that includes improving highway access to Chicago, encouraging more routes from the state’s airports and creating a fourth water port. For comparison, in 2016 then-Governor Pence also detailed plan to invest additional funding roads and bridges as well as proposing the creation of an additional water

port. Conversely, Virginia, West Virginia and Wisconsin have had the most notable increase in planned infrastructure from the past year. Virginia and Wisconsin went from having rather limited infrastructure plans,

related to higher education facilities and broadband, respectively, to advocating for more substantial investments in rail and road projects. West Virginia may have come the closet in jumping on the Trump infrastructure bandwagon. In 2016, then-Governor Tomblin discussed

legislation that would allow sales tax revenues which were deposited into the Road Fund to be moved to the General Fund to help the state balance its budget. This year, Governor Justice, announced plans to pool $225MM of state funds and then leverage this with private investors to produce $1.4B of total funds for infrastructure.

Despite the comparative lack of increased focus on infrastructure from prior years, it is worth noting that some states are focusing on infrastructure to a greater degree than others. While the taking on of substantial additional debt can be a credit negative, infrastructure is key

to all states’ long-run competitiveness and needs to be addressed. States compete to offer the most productive environment for businesses and residents, which in turn create jobs and economic activity. Physical infrastructure, including roads, bridges, airports, and of increasing importance, broadband internet, are high quality business inputs that

directly impact economic efficiencies.

100% 100%

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January 2017

Municipal Strategy Report

Page | 6

Cybersecurity: An Emerging State and Local Government Risk and Opportunity

By Rachel Barkley | Vice President

After Russian interference in the recent federal election,

cybersecurity is becoming a frequently discussed issue at the state

level as well. To date, a quarter of governors have included

cybersecurity in their 2017 State of the State addresses, up for 15% a

year prior. However, state and local governments have already been

compromised or have endured attempts to be comprised on a

number of occasions in recent years, including a June 2016 attack

on the Illinois Board of Elections that results in up to 90,000 voters’

data being leaked.1 At the beginning of 2017, Burlington Electric

Department, one of Vermont’s two largest electric utilities, found

malware on one of its computers that was originally believed to be

linked to a cyberattack effort.2 While the power grid was not found

to have been penetrated, it highlighted the potential danger state

and local governments face from cyber-threats. Information

systems, power, water and wastewater utilities, emergency call

centers and hospitals are among the government divisions that

require cybersecurity.

The University of Cambridge Centre for Risk Studies looked at the

potential impact of a cyberattack on the US power grid in 2015.

Assuming such an attack would be able to inflict physical damage

on 50 generators in the Northeast, including New York City and

Washington, D.C., 93 million people could be without power for up

to two weeks. This would temporarily halt production in an area

that accounts for a third of the country’s economic output, leading

to a negative economic impact ranging from $243B to $1T.3 A

significant portion of this would adversely impact governmental

entities, including a loss of sales revenue to electric utilities and a

loss of sales revenues to business, leading to reduced sales tax

revenues for state and local governments. Other areas directly

under government management, including water, airports, health

and safety, would also be affected with road traffic, crime rates and

hospitals impacted.

Cyber risk is not expected to recede in the coming years and may

increase as technology continues to evolve, making governments’

response to it increasingly important. The National Association of

Chief Information Officers (NASCIO) and Deloitte released a report

in 2016 detailing the state of cybersecurity across the states, the

2016 Deloitte-NASCIO Cybersecurity Study. As indicated by its

increased focus in State of the State addresses, governments are 1 Arizona Cybersecurity Incident the Latest in a Growing List of Attempts. Government Technology.

January 13, 2017. 2 US States focus on cyber security as threat by Russian hackers increase. Tech First Post. January 2,

2017. 3 Business Blackout. University of Cambridge Centre of Risk Studies. 2015.

ratcheting up their cybersecurity efforts. Roughly 29% of governors

are currently briefed on cybersecurity measures on a monthly basis,

up from 17% two years ago. 4 In April 2016, the Connecticut Public

Utilities Regulatory Authority published updated cybersecurity

standards for utilities within the state. 5 New York’s Governor

Cuomo called for increasing the state’s cyber protection efforts in

his January 2017 State of the State address, including modernizing

cybercrime laws and establishing a Cyber Incident Response Team.

Top Five Barriers to States Addressing Cybersecurity Challenges

According to Chief Information Officers

Going forward, a lack of funding and a lack of adequate staff are

seen by state Chief Information Officers (CIOs) as preventing them

from adequately addressing cyber threats.6 In 2016, CIOs reported

that cybersecurity accounted for only 0%-2% of state’s overall IT

budget, while cybersecurity funding has remained stagnant in

roughly a third of states over the past two years. Apportioning

larger portions of the budget to cybersecurity may be tough for

states in the near future. State revenues have had tepid growth at

best over the best year, with tax revenues up only 0.2% YTD (chart

shown on the next page).7 Rising pension and Medicaid costs may

require some difficult choices regarding cybersecurity funding.

Some states, however, are looking at the evolving cybersecurity field

as an economic opportunity. The cybersecurity sector is expected to

increase from $75B in 2015 to $170 by 2020. Meanwhile industry

job postings have increased 74% in 2015 alone.8 CISCO, the

4 2016 Deloitte-NASCIO Cybersecurity Study. Deloitte and the National Association of Chief

Information Officers. 2016. 5 PURA Cybersecurity Compliance Standards and Oversight Procedures. Connecticut Public Utilities

Regulatory Authority. April 6, 2016. 6 Deloitte and NASCIO. 2016. 7 U.S. Census. 8 One Million Cybersecurity Job Openings In 2016. Forbes. January 2, 2016.

0%

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professionals

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Source: Deloitte-NASCIO

January 2017

Municipal Strategy Report

Page | 7

technology company, has estimated that there are roughly one

million unfilled job openings in the field,9 leading many states to

actively recruit cybersecurity companies. The National

Cybersecurity Intelligence Center, a public-private partnership, has

recently opened office in Colorado, resulting in 1,000 new job

openings. Idaho is set to finance and own two research facilities, the

Cybercore and the Collaborative Computing Center, which will be

paid for with lease payments by the Idaho National Lab, a federal

nuclear energy and national security research facility,10 while

Georgia’s Governor Deal announced in his State of the State address

that the National Security Agency has begun construction on a new

cyber command headquarters at Fort Gordon in Augusta. The

facility is expected to cost $2B. To complement this, the proposed

state budget includes $50MM for a state-owned facility, the Georgia

Cyber Innovation and Training Center, which will soon begin

construction, allowing the state to be a national center for public

and private cybersecurity.

However, a skills gap prevents some of these jobs from being

filled.11 To address the skills gap, as well as attract students,

universities are offering cybersecurity training. Wichita State

University announced this month is will add a new undergraduate

program as well as a graduate certificate in cybersecurity. The

University of Maryland, Wayne State University, Oklahoma State

University and Texas A&M University are among the universities

also offering cybersecurity related courses, while George

Washington University Law School and the University of Maryland

Law School are among the schools offering Masters of Laws (LLM)

degrees with concentration in cybersecurity.

Going forward, how states and local governments address potential

cybersecurity challenges, balance funding needs and potentially use

the cybersecurity industry as a catalyst for economic development,

should be of increased focus for analysts.

9 Mitigating the Cybersecurity Skills Shortage. CISCO. 2015. 10 Gov. Otter Addresses Cyber-security Concerns in State of the State Address. KPVI.com. January 9,

2017. 11 CISCO.

State Tax Collections YoY% Change

Source: US Census

5.6%

7.6%

4.6%

2.7%

1.5%

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2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3YoY

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January 2017

Municipal Strategy Report

Page | 8

Fast Start to New Year's Volume

By Ivan Gulich | Senior Vice President

New issue volume in the first few weeks of 2017 was surprisingly

strong, outpacing the respective weekly volumes in 2016 (which saw

record issuance) by about 23%, on average.

January volume is traditionally weak, representing about 72% of

average monthly volume through the rest of the year. But 2017 is

different, with January volume likely surpassing $31.2 billion issued

in the same month in 2007. Depending on private placement

issuance, which has not been tallied yet, and additional deals that

may come to market, this month’s volume may be close to, or even

surpass record $32.6 billion issuance in January 2010, which was

boosted by BABs.

Going into 2017, refunding volume was expected to decline

significantly, as yields rose after November election on expectations

of stronger economic growth and rising inflation. This was

accompanied by muni fund outflows. However, as rates have

stabilized and fund flows turned positive again, there is evidence

that issuers who have missed an opportunity to refund in 2016,

decided to do so in 2017.

For example, the largest 5 bond series issued year-to-date are

refundings:

Potential savings are large enough to justify refundings of some

outstanding bonds even at yields that are significantly higher than

they were in January 2016.

0

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2016 2017

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January Volume

Date Issuer Description State Amt (MM)

1/9/2017 TRIBOROUGH BRDG & TUNNEL NY 902.98

1/16/2017 CHICAGO ‐A           ‐REF IL 886.00

1/9/2017 TSASC INC   ‐REV ‐REF ‐A NY 613.37

1/9/2017 NEW JERSEY ECO DEV AUTH‐B NJ 563.60

1/2/2017 UNIV OF PITTSBURGH‐A‐TXBL PA 512.48

1/16/2017 LOS ANGELES DEPT WTR PWR CA 500.00

1/16/2017 TRANS COMMISION ‐B ‐REF TX 474.14

1/16/2017 DENVER CITY & CO SD #1 CO 466.68

1/9/2017 MICHIGAN UNIV REGENTS ‐A MI 464.75

1/10/2017 WASHINGTON ST ‐SER D WA 462.76

1/24/2017 NASHVILLE AND DAVIDSON CO TN 457.25

1/25/2017 LOS ANGELES CO MTA ‐SER A CA 455.71

1/2/2017 LOS ANGELES ARPT DEPT ‐B CA 451.17

1/16/2017 TSASC INC‐REV‐REF‐B‐SUB NY 450.00

1/9/2017 WISCONSIN ST ‐REV     ‐A WI 427.77

1/2/2017 TX ST UNIV SY‐REF‐A TX 425.55

1/9/2017 TEXAS A&M UNIV SYS‐A‐TXBL TX 388.71

1/19/2017 UNIV OF HOUSTON SYS BRD TX 379.45

1/9/2017 UNIV OF CONNECTICUT ‐A CT 311.20

1/2/2017 DIST OF COLUMBIA  ‐ REF DC 301.58

1/12/2017 OHIO ST  ‐ COMMON SCH ‐A OH 300.00

1/9/2017 TRIBOROUGH BRDG & TUNNEL NY 300.00

1/23/2017 BAY AREA TOLL AUTH ‐ F‐1 CA 300.00

1/9/2017 CHICAGO TRANSIT AUTH IL 296.22

1/16/2017 TRANS COMMISSION ‐A ‐REF TX 296.02

TOTAL 11,387.35

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Trading Day #

10-Yr MMD (%)

Jan-16

Jan-17

January 2017

Municipal Strategy Report

Page | 9

As yields rose again last week, the volume declined, although it is

still above the respective volume a year ago.

By comparing largest 25 bond series issued year-to-date versus the

same period last year, we also noticed that:

Deals that came to market in 2017 were larger, on average,

than last year.

The share of revenue bonds that came to market rose from

56% of the total in 2016 to 71%.

Taxable issuance rose this year.

While it is too early to draw broad conclusions about issuance

trends for the entire year, a strong 2017 start is very encouraging. It

signals that the refunding volume may be larger than expected,

despite the increase in rates, which are still low by historical

standards.

The implementation of stimulative economic policies by the new

administration (tax cuts, infrastructure spending, regulation

overhaul, etc.) would likely improve state and local government tax

revenues as well. This dynamic would support new money

issuance, as state and local government officials have more

confidence to borrow and invest when fiscal conditions are

favorable.

January 2017

Municipal Strategy Report

Page | 10

Repatriation of Untaxed Foreign Earnings

By Ivan Gulich | Senior Vice President

Repatriation

The federal government taxes U.S. companies based on their

worldwide income at 35% corporate rate. But, if the company

leaves their overseas earnings in foreign countries, either in cash or

in plants and equipment, these assets are exempt from taxation

until the firm brings them back (repatriates) to the U.S.

When companies repatriate earnings, they receive credit for foreign

corporate taxes paid. However, since corporate tax rates in other

countries are lower than in the U.S., the tax bill from repatriation

would still be significant. Repatriated earnings would be subject to

state taxation as well.

To avoid the tax hit, companies have “parked” large amount of

accumulated earnings in foreign countries. It is estimated that S&P

500 firms held $2.246 trillion in untaxed foreign earnings at the

end of 2015.12 By adding 2016 earnings and those accumulated by

smaller companies, total untaxed foreign earnings are estimated to

be around $2.6 trillion currently.13 Much of this amount is invested

in plants or used as working capital for foreign subsidiaries. Cash

that could be repatriated under favorable legislation is estimated

between $1 trillion and $1.5 trillion.

Information technology and healthcare (pharmaceuticals) account

for more than ½ of accumulated foreign earnings.

Source: The Analyst’s Accounting Observer

12 Jack Ciesielski: S&P 500: Untaxed Foreign Earnings in 2015 Kept Growing, The Analyst’s

Accounting Observer, May 24, 2016 13 Shawn Tully: The Best Stock to Own If Trump Brings Foreign Cash Home, Fortune, Jan 23, 2017

Apple alone was sitting on $231.5 billion pile of cash as of August

2016. CEO Cook said he wouldn't bring overseas funds to the U.S.

"until there’s a fair rate”. 14 Accumulating cash outside the U.S.

presents a problem for companies such as Apple, which pay a large

portion of their cash flow as dividends to shareholders. Unwilling

to tap its overseas cash, Apple has borrowed money in capital

markets to pay the dividends, boosting its long-term debt from

nearly zero in 2013 to $75 billion in 2016.15

Plans to Facilitate Repatriation

The ability to repatriate overseas cash at a favorable tax rate ranks

high on business community’s wish list for the next legislative

session. With GOP controlling Congress and fellow CEO in the Oval

Office, business leaders are optimistic that the tax holiday on

repatriated profits would become a reality. The measure would

most likely not be enacted as a stand-alone legislation, but become

part of a comprehensive tax reform.

House Republican Proposal

The tax reform “blueprint” developed by Ways and Means

Committee Chairman Brady, published in June 2016, envisions

massive overhaul of the tax code. Even though this document is not

a legislative proposal that the House can act upon, it indicates the

direction of the potential legislation.

The House proposal would replace the existing system, where U.S.

corporations are taxed on their worldwide income, to a territorial

system, under which companies would be taxed based on where

they sell products.

Earnings accumulated under the old system would be repatriated at

8.75% rate if held as cash. Earnings invested in plant and

equipment would be taxed at a one-time 3.5% rate, payable over 8

years.16

Trump’s Proposal

On the campaign trail, Trump proposed repatriation of overseas

cash at a one-time rate of 10%. Windfall tax, along with tax credits,

would be used to fund infrastructure projects.

14 Jena McGregor: Tim Cook, the interview: Running Apple ‘is sort of a lonely job’, Washington Post,

August 13, 2016 15 Shawn Tully: The Best Stock to Own If Trump Brings Foreign Cash Home, Fortune, Jan 23, 2017 16 KPMG: House Republican tax reform “blueprint—initial observations, June 28, 2016

30.4%

20.6%12.0%

10.2%

9.6%

6.9%

6.0%4.2%

Accumulated Foreign Earnings by Sector (2015)

Information Technology

Healthcare

Industrials

Consumer staples

Financials

Energy

Consumer Discretionary

Materials

January 2017

Municipal Strategy Report

Page | 11

Potential Impact of Repatriation Legislation

In assessing the 2004 repatriation tax holiday, implemented by the

Bush administration, Senate Permanent Subcommittee on

Investigations found that the top 15 companies that repatriated

earnings cut a net 20,931 jobs between 2004 and 2007, slightly

decreased the pace of their spending on research and development

and increased executive compensation. The effective tax rate on

repatriated earnings was roughly 5%, instead of 35% corporate tax

rate.17

It should be noted that the legislation was promoted as a vehicle for

hiring workers and conducting research and prohibited using the

money for share buybacks and executive compensation.

In assessing the impact of potential new legislation, analysts doubt

that repatriating profits would boost investments in plants or R&D

among technology and pharmaceutical companies since these

companies already have access to all the cash they need for

investments. Instead of boosting economic growth, the windfall

would most likely flow to shareholders in the form of dividends,

share buybacks and M&A deals.

While repatriation of profits may not materially improve U.S.

economic growth, it would boost revenue in states that tax

corporate income by companies that would repatriate cash. It

would seem that California, where many high tech companies are

located, could benefit significantly from repatriation of overseas

cash, as the state corporate tax rate is 8.84%. It should be noted,

though, that corporations are skilled at sidestepping state taxes by

opening offices in states that don’t tax corporate income.18

17 Kristina Peterson: Repatriation Tax Holiday a 'Failed' Policy, The Wall Street Journal, Oct 10, 2011 18 Duhig, Kocieniewski: How Apple Sidesteps Billions in Taxes, New York Times, April 28, 2012

January 2017

Municipal Strategy Report

Page | 12

Market Review Historical Monthly Bond Price Changes

Figure 4 Muni Benchmark Callable Scale — Average Bond Price Changes (January)

We show historical bond price changes for

each point on the muni benchmark callable

curve during the month of January for the

last 16 years.

March returns were positive about ½ of

the time, with bond prices appreciating, on

average, 0.40% across the curve.

Sources: Loop Capital Markets

Figure 5 Muni Benchmark Callable Scale — Average Bond Price Changes (January)

The 10-yr point has the highest expected

return as well as standard deviation. The

returns are more volatile in the 10 to 20-yr

range than on the long end of the curve.

Source: Loop Capital Markets

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Mea

n R

etu

rn

Sta

ndar

d D

evia

tion

St Dev

Mean Return

AAA MMD - MO NTHLY PRICE CHANGE

Maturity 5 10 15 20 25 30Jan-01 1.36% 0.39% -0.08% -0.23% -0.15% -0.08%Jan-02 0.04% 1.09% 0.70% 0.85% 1.00% 1.00%Jan-03 -1.29% -2.52% -1.72% -0.94% -0.70% -0.70%Jan-04 -0.40% -1.11% -0.87% -0.63% 0.16% 0.24%Jan-05 -0.62% 0.32% 0.72% 0.95% 1.35% 1.42%Jan-06 -0.18% -0.16% -0.32% -0.39% -0.63% -0.47%Jan-07 -0.66% -1.42% -0.95% -0.95% -0.87% -0.79%Jan-08 2.20% 2.18% 0.24% -0.47% -0.47% -0.31%Jan-09 3.09% 4.76% 1.99% 0.71% 0.47% 0.31%Jan-10 -0.27% 0.08% -0.88% -0.95% -0.55% -0.63%Jan-11 -0.98% -1.20% -1.96% -1.33% -0.62% -0.78%Jan-12 0.64% 1.24% 3.89% 3.94% 3.42% 3.34%Jan-13 0.09% -0.82% -0.81% -0.49% 0.00% -0.24%Jan-14 0.63% 1.96% 2.02% 2.34% 2.65% 2.73%Jan-15 1.73% 2.65% 1.64% 1.88% 2.63% 2.95%Jan-16 1.18% 1.74% 1.15% 0.90% 0.49% 0.57%

Mean 0.41% 0.57% 0.30% 0.32% 0.51% 0.53%St Dev 1.22% 1.84% 1.57% 1.44% 1.35% 1.38%

January 2017

Municipal Strategy Report

Page | 13

Market Review The Yield Curve

Figure 6 1-Year Forward Roll-down—Muni Benchmark Curve* (January 17, 2017)

The yield curve shows rich (8 to 11-yr, 22+

yr) and cheap (13 to 19-yr) points on the

AAA MMD curve, based on one year

holding period returns and assuming no

change in the yield curve. 19-yr maturity

offers the highest expected total return.

Source: Loop Capital Markets | *Callable AAA-rated G.O. bonds

Figure 7 Monthly Price Change — AAA GO Bonds* (12/23/16 — 1/23/17)

Yields declined on the front and back ends

of the yield curve and were flat in the

middle. This resulted in a somewhat

unusual distribution of returns over the

last 4 weeks.

Source: Loop Capital Markets | *Price Change Only

Figure 8 Implied Municipal Volatilities

Implied volatilities rose from mid-

December to mid-January, as yields

declined across most of the curve. Since

non-callable bonds appreciate faster in

declining interest rate environment than

their callable counterparts, the price

differential between the two, and the

respective implied volatilities, increased as

a result.

Source: Loop Capital Markets | *10-year call

0.00%

1.00%

2.00%

3.00%

4.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Yie

ld &

Tot

al R

etu

rn

Maturity (Yr)Ideal YC Ideal YC RolldownActual YC Actual YC Rolldown

* Callable AAA rated G.O. bonds

Cheap

Rich

(20)

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

2-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Yie

ld C

han

ge (

bp

s)

Bo

nd

Pri

ce C

han

ge

Maturity (Yr)Price Change Yield Change

10%

15%

20%

25%

30%

35%

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Maturity (Yr)12/19/16 1/17/17

January 2017

Municipal Strategy Report

Page | 14

Figure 9 Current vs. Historical Municipal Yield Curves (%)

Yields are about 45 bps higher, on average,

across the curve, then they were 12 and 24

months ago.

Figure 10 3-Month Average Benchmark Muni Curve Yield

Yields are currently above their average

values over the last 3 months. Yields

moved within 82 to 89 bps range for

maturities 6-yr and above in the last 3

months.

Figure 11 Muni and Treasury Yield Curves and Ratios

Muni/Treasury ratio curve retains a

somewhat unusual shape. On the front

end muni yields are lower than Treasury

yields, while in the 15 to 30-yr area of the

curve the ratios are above 100%.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Maturity (Yr)1/23/15 1/22/16 1/23/17

Source: MMD

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Average Yields (10/24/16-1/23/17) Current Yields (1/23/17)Maturity

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

80%

90%

100%

110%

120%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Yie

ldRat

io

Muni Benchmark Curve Treasury Curve Ratio Ratio = 100% Ratio = 110% Ratio = 90%

January 2017

Municipal Strategy Report

Page | 15

Market Conditions

Figure 12 2 to 30-Yr Muni Spread (bps)

Flattening is expected in 2017, consistent

with tighter monetary policy.

At the end of previous 2 tightening cycles,

the slope has flattened to 92 and 109 bps,

respectively.

Currently, the 2 to 30-yr spread is 196 bps,

62 bps more than in July ‘16, when yields

reached historic lows.

Figure 13 Declining Inflation Expectations

Fed's five-year forward breakeven inflation

rate, derived from TIPS and regular

Treasury yields, has jumped close to 2.0%

on expectations of higher economic

growth.

Source: FRED

Figure 14 Lipper Weekly Municipal Mutual Fund Flows ($ Billion)

As yields declined, investors returned to

the muni market, with muni bond funds

boosting their assets by about $1.5 billion

in two weeks and then increasing

marginally last week.

Source: Lipper

125

150

175

200

225

250

275

300

325

350

375

Jan-99 Jan-01 Jan-03 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18

(BPS

)

1.2%

1.5%

1.7%

2.0%

2.2%

2.5%

2.7%-3.25

-2.75

-2.25

-1.75

-1.25

-0.75

-0.25

0.25

0.75

1.25

1.75

2.25

Dec

-14

Jan

-15

Feb-

15

Mar

-15

Ap

r-15

May

-15

Jun

-15

Jul-

15

Au

g-15

Sep

-15

Oct

-15

No

v-15

Dec

-15

Jan

-16

Feb-

16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

Au

g-16

Sep

-16

Oct

-16

No

v-16

Dec

-16

Jan

-17

Feb-

17

10 Yr A

AA

MM

D -

Scale Inverted

Mu

ni F

un

d F

low

s ($

Bil

lio

n)

Lipper Flows ($ Billion) 10-Yr AAA MMD (%)

January 2017

Municipal Strategy Report

Page | 16

Loop Capital Markets Upcoming Negotiated Calendar

DatePar Amount

($ mil)Issue Loop Capital’s Role

1/31/17 300.0 DC Water and Sewer Authority Senior Lien Revenue Bonds Co-Senior Manager1/31/17 330.0 New York City Municipal Water Finance Authority W&S System Revenue Bonds Co-Manager2/1/17 478.5 Oklahoma Turnpike Authority Second Senior Revenue Bonds Selling Group2/2/17 24.4 Illinois Housing Development Authority Co-Manager2/6/17 75-90.0 New Jersey Educational Facilities Authority, Ramapo College of New Jersey Co-Manager2/7/17 800.0 The City of New York General Obligation Bonds Fiscal 2017 Series C & D Co-Senior Manager

Analytical Services Division

Loop Capital Markets’ Analytical Services Division (ASD), established in 2002, publishes a variety of reports that

provide clients with relevant and timely information about the bond market and investor demand. The ASD is one of

the largest analytics groups dedicated to investment banking, providing analytics and commentary on the economy,

monetary policy, and a variety of public finance issues.

Chris Mier, CFA, Managing Director 312.356.5840 | christopher.mier@loopcapital.com

Ivan Gulich, CFA, Senior Vice President 312.913.2204 | ivan.gulich@loopcapital.com

Rachel Barkley, Vice President 312.913.2297 | rachel.barkley@loopcapital.com

Eliana Yun, Junior Analyst 312.913.2236 | eliana.yun@loopcapital.com

Vania Petkova, Analyst 312.913.2229 | vania.petkova@loopcapital.com

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“Senator, are you going to

believe me, or what you

see with your lying eyes.”*

* Line courtesy of Groucho Marx