America Needs Small Apartment Buildings. Nobody Builds Them

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America Needs Small Apartment Buildings. Nobody Builds Them

Single-family homes and high-rises are all the rage. Meanwhile, the vanishing middle bodes ill for the future.

by

March 30, 2017, 5:45 AM EDT

Urbanists often lament that developers no longer erect the small apartment buildings that were once a staple of city neighborhoods. Instead, they construct single family homes or large apartment buildings.

There are good reasons to revive this “missing middle,” however: Small buildings are a good way to add density without compromising the character of quiet, single-family districts. They also provide a convenient way for older homeowners to downsize without leaving their neighborhoods.

But the best reason is that smaller apartment buildings are often cheaper for renters.

According to new research from Enterprise Community Partners, an affordable housing nonprofit, and the University of Southern California, apartment buildings with between two and nine units offer the lowest prices available to U.S. renters.

The chart above uses data from the U.S. Census Bureau’s 2013 American Housing Survey to show average monthly rents based on the number of apartments in a building. The paper categorizes buildings with between two and 49 apartments as “small and medium multifamily housing”—a grouping that makes up 54 percent of the U.S. rental stock.  

As noted, America isn’t building as much of this kind of housing as it used to. Small- and medium-size apartment complexes account for a quarter of existing units built in the 1970s and 1980s, according to the report. Since 1990, though, the category has accounted for just 15 percent of new housing stock.

There are a few reasons for that shift, according to Andrew Jakabovics, vice president for policy development at Enterprise Community Partners and one of the authors of the paper. Another author is Raphael Bostic, who was just named president of the Federal Reserve Bank of Atlanta.

Zoning rules have developed to favor single-family construction, making it harder to win approval for larger projects. There are regulatory costs to building multifamily housing, and developers that go through all the trouble to win approvals want to build more than just a few apartments.

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In general, there are economies of scale in operating larger complexes. If two units are vacant in an 8-unit building, the landlord is missing out on a quarter of her potential income. In a 100-apartment high-rise, a couple of vacancies are less of a big thing. Those operating efficiencies also make lenders look more favorably on larger apartments, Jakabovics said. It’s a virtuous circle for ever-bigger residential developments, though not so much for smaller ones.    

Seeing why builders have abandoned the small apartment complex is easier than figuring out how to rekindle interest in the concept. Rewriting zoning codes to favor the missing middle would be a good start, Jakabovics said.

The flip side is that if builders don’t develop more small- and medium-sized buildings, an important source of unsubsidized, affordable housing may dry up. Rental units tend to get cheaper as they age. The trend in recent decades toward single-family homes and high-rise apartment buildings means that there are fewer smaller apartment buildings to age into affordability. 

“We need to build stuff today that’s affordable today,” Jakabovics. “We also need to future-proof ourselves by building stuff today that will be affordable 10 or 20 years from now.”



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    Australia hasn't had a recession for over 25 years

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    Australia is close to seizing the global crown for the longest streak of economic growth thanks to a mixture of policy guile and outrageous fortune. But the nation is creaking under the weight of its own success.

    While growth is being underpinned by population gains and resource exports to China, failure to spur productivity has meant stagnant living standards and electoral discontent; a property bubble fueled by record-low interest rates has driven household debt to levels that threaten financial stability; and a timid government facing political gridlock could lose the nation’s prized AAA rating as early as May because of spiraling budget deficits.

    Australia’s last recession -- defined locally as two straight quarters of contraction -- occurred in 1991 and was a devastating conclusion to eight years of reform designed to create an open, flexible and competitive economy. But it also proved cathartic, paving the way for a low-inflation, productivity-driven expansion.

    As momentum started waning, China’s re-emergence as a pre-eminent global economic power sent demand for Australian resources skyrocketing, helping shield the nation from the worst of the global financial crisis. But the post-crisis return of the boom proved ephemeral, failing to boost government coffers and pushing the local currency higher, eroding competitiveness and driving another nail into the coffin of a fading manufacturing sector.

    “There’s no country on Earth that’s derived more benefit from the rapid growth
    and industrialization of China over the last 30-odd years than Australia,” said Saul Eslake, an independent economist who’s covered Australia for over three decades. “After the end of the mining-investment boom, high immigration is helping us avoid a statistical recession, but it’s also contributing to other problems” like soaring property prices and household debt.

    Outside post-war Japan, the modern economic growth record is held by the Netherlands, stretching from 1980 to 2008 and fueled by the discovery of North Sea oil.  Ian Harper, an economist who sits on the board of the Reserve Bank of Australia, says the nation’s two key drivers are best summed up by how it coped following the collapse of Lehman Brothers Inc. -- the crisis that saw the Netherlands finally succumb to recession.

    “We benefited from the Chinese stimulus, we benefited from the exchange rate being allowed to depreciate, we benefited from direct intervention in the financial markets, we benefited from government spending,” said Harper. “That’s good management and good luck.”

    Australia also didn’t have a huge jobless spike -- as in 1991 -- that would’ve precipitated housing foreclosures and threatened the banks. “Had housing prices collapsed we would’ve been in much deeper doo-doo,” said Harper.

    ‘White Trash’

    It was very different almost 30 years ago. Australia was a basket case, with Singapore Prime Minister Lee Kuan Yew warning it risked becoming “the poor white trash of Asia.” 

    A 17-year stretch of reform driven by Labor titans Bob Hawke and Paul Keating ensued. Starting with the currency’s free float in 1983, it included financial deregulation, tax reform, slashing tariffs, ending centralized wage fixing and creating a private pension system. When Labor lost office in 1996, Liberal leader John Howard took up the cudgels, making the RBA officially independent, returning the budget to surplus and liberalizing labor laws. The introduction of a goods and services tax in 2000 was the last major successful reform. 

    From then on, Howard would turn fiscally flippant as cash rained from the China-driven spike in commodity prices, allowing him to spend hard while keeping the budget in surplus.

    The Labor government that succeeded Howard in late 2007 was widely hailed for its response to the global financial crisis a year later, steered by Treasury officials whose anti-crisis program was forged in the fires of 1991: get cash directly to households to spend and maintain confidence. Yet from that success, Labor would stumble on climate policy and then vacate the policy field altogether.

    The current Liberal government has followed suit: avoiding tough decisions for fear of electoral backlash, then being pilloried for failing to tackle problems like a budget deficit that both sides have promised to fix since 2010. As a result, ratings agencies are now circling Australia’s top credit score ahead of the treasurer’s next budget in May.

    The nation has seen five changes of prime minister since 2010 -- compared with just three from 1983 to 2007 -- raising questions about whether its politics can still produce reformist administrations. But this has happened before. Australia had five leaders between 1966 and 1972 after just three between 1941 and 1966. Simply put, following periods of dominant leadership, the system takes some time to rebalance.

    In the economy, time is less forgiving. A record-low 1.5 percent cash rate designed to steer Australia from mining investment back toward services is creating problems of its own. Sydney house prices have more than doubled since 2009 and Melbourne’s have also soared, sending private debt to a record-high 187 percent of income. The RBA frets that anemic wage growth will force heavily indebted households to slash consumption, which could prove disastrous given their spending accounts for more than half of gross domestic product.

    While China’s demand for resources should keep Australia’s growth ticking over for many years yet, much of the spoils are going to overseas investors now that the mining boom’s investment phase is done. As iron ore prices surged from 2004 in response to Chinese steel demand, cash poured into new Western Australian mines and, together with associated industries, mining employed about 10 percent of the workforce.

    Australia has since become the developed world’s most dependent economy on China, which buys a third of its exports, compared with just 2 percent back in 1991. But iron ore prices have more than halved since 2011, when the local dollar hit a post-float record of $1.10. The Aussie would hover at or above parity with the greenback for the next two years.

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    The currency’s strength then saw off the car industry: two of the three manufacturers in 2013 said they were quitting Australia, with the last following suit the next year. While the currency would eventually retreat to the 70s, the damage had been done. Worse still, the trillion-dollar windfall from the boom had been spent, not saved, leaving no cash to plug yawning budget deficits or build much-needed infrastructure for an expanding population that would also support growth.

    So while Australia’s ability to avoid recession is lauded, it’s also been argued it missed the cleansing fires of a slump to shake out areas of excess such as housing. Serious casualties of 2008 such as the U.S. and U.K. are now at or near full employment and growing robustly having cleared out their dead wood.

    RBA’s Harper disagrees. Economists, at least since John Maynard Keynes, have been “raised on a steady diet of stabilization policy” because its alternative is “extremely destructive” due to the indiscriminate nature of recessions, he says.

    “Central banks have published data -- well look at Andy Haldane’s work at the Bank of England -- just estimating the economic cost of downturns, particularly financial market collapses relative to the cost of intervention,” he said. “And you pretty soon see that this is a good bargain, being stabilized.”

    There’s also debate on consecutive quarters of contraction as a definition of recession. Eslake says his preferred measure is whether unemployment has risen by 1.5 percentage points or more in 18 months or less. “It doesn’t really give any false signals,” he says of his measure, which occurred in Australia during the financial crisis.

    Head Start

    In truth, Australia pretty much has a healthy starting point of 2.5 percent expansion each year: about 1.5 percent from population growth and 1 percent from increased resource-export volumes due to the mining investment.

    Australia’s then-Treasury Secretary Martin Parkinson highlighted the approaching growth record in a 2014 speech, when he put the Netherlands’ expansion at 26.5 years. That’s one year away from where Australia stands now. However, OECD data shows the Dutch grew from the fourth quarter of 1980 through the second quarter of 2008, or 27 and 3/4 years. 

    Eslake has crunched his own numbers and found that once OECD data is taken to two decimal points, the Netherlands had a technical recession in 2003 and so is already behind Australia. His analysis also has the Dutch tying with Austria, and includes Taiwan.

    As for Australia’s recession risk, slumps have traditionally come from the RBA slamming on the brakes to try to rein in inflation -- as before 1991 when interest rates hit 18 percent. Given low wage growth and weak inflation, that seems less likely now.

    Bob Gregory, a professor at Australian National University in Canberra who specializes in the labor market and has studied the economy for almost half a century, shares Eslake’s skepticism about two negative quarters to define recession. He instead focuses on full-time employment as a share of population, a measure which has been sliding markedly.

    “What’s happening in Australia now is a long, drawn out, sort of slow recession,” said Gregory, who was on the RBA board from 1985 to 1995. “Nothing dramatic is happening, but each year it’s not quite so good as it was the year before.”



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      Wages for college graduates across many majors have fallen since the recession

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      U.S. College Grads See Slim-to-Nothing Wage Gains Since Recession

      Petroleum engineers and philosophy majors are bucking the trend

      by

      March 30, 2017, 12:01 AM EDT

      The bachelor's degree — long a ticket to middle-class comfort — is losing its luster in the U.S. job market.

      Wages for college graduates across many majors have fallen since the 2007-09 recession, according to an unpublished analysis by the Georgetown University Center on Education and the Workforce in Washington using Census bureau figures. Young job-seekers appear to be the biggest losers.

      What you study matters for your salary, the data show. Chemical and computer engineering majors have held down some of the best earnings of at least $60,000 a year for entry level positions since the recession, while business and science graduates's paychecks have fallen. A biology major at the start of their career earned $31,000 on an annual average in 2015, down $4,000 from five years earlier.

      "It has been like this for the past five, six years now," said Ban Cheah, a research professor at Georgetown who compiled the data. "It's a little depressing."

      The outlook for experienced graduates, aged 35 to 54, is brighter, with wages generally stable since the crisis.

      The economic premium of a bachelor's flattened after the recession, according to a 2016 National Bureau of Economic Research paper by Robert Valletta, an economist at the Federal Reserve Bank of San Francisco.



      Among the factors at play are advances in technology and automation, which are not only taking away U.S. manufacturing jobs, but also having an impact on white collar workers, Valletta found. Legal clerks and researchers are increasingly finding their jobs supplanted by computers, for example.

      Some majors are bucking the wage-stagnation trend. An experienced petroleum engineering major earned $179,000 a year on average in 2015, up $46,000 from five years prior, according to the Georgetown analysis. Beyond those with special technical skills, philosophy and public policy majors have also seen their earnings rise.

      So how can you boost your career earnings potential? A graduate's level degree is increasingly offering the bigger salary bump, according to Cheah. The wage gap between graduate degree-holders and undergrads has been growing, he said.

      It's also important to remember that a student's major is just one determinant of their future earnings potential. The training experience from internships, debt levels and soft skills also help shape salary and job prospects, said Jeff Selingo, who writes about higher education and is a professor of practice at Arizona State University.

      "Just getting a degree doesn't matter anymore," said Selingo. "What matters more are the undergraduate experiences that you have."



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        What’s so bad about Scientism?

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        In their attempt to defend philosophy from accusations of uselessness made by prominent scientists, such as Stephen Hawking, some philosophers respond with the charge of “scientism.” This charge makes endorsing a scientistic stance a mistake by definition. For this reason, it begs the question against these critics of philosophy, or anyone who is inclined to endorse a scientistic stance, and turns the scientism debate into a verbal dispute. In this paper, I propose a different definition of scientism, and thus a new way of looking at the scientism debate. Those philosophers who seek to defend philosophy against accusations of uselessness would do philosophy a much better service, I submit, if they were to engage with the definition of scientism put forth in this paper, rather than simply make it analytic that scientism is a mistake.

        Harvard Thinks It's Found the Next Einstein – And She's 23

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        Pasterski

        [DIGEST: Futurism, Chicago Tribune, Marie Claire, OZY]

        Harvard University believes the world’s next Einstein is among us — and she’s a millennial.

        At age 23, Sabrina Gonzalez Pasterski is already one of the most well-known and accomplished physicists in the U.S.


        The Cuban-American Chicago native graduated from the Massachusetts Institute of Technology in just three years with a 5.0-grade point average, the highest possible, and is currently a Ph.D. candidate at Harvard with full academic freedom — meaning she can pursue her own study on her own terms without staff interference.

        Pasterski first attracted the attention of the scientific and academic community after single-handedly building her own single-engine airplane in 2008, at age 14, and documenting the process on YouTube.

        MIT professors Allen Haggerty and Earll Murman saw the video and were astonished. “Our mouths were hanging open after we looked at it,” Haggerty recalls. “Her potential is off the charts.”

        At age 16, she piloted the aircraft herself over Lake Michigan, becoming the youngest person  ever to fly their own plane.

        “I couldn’t believe it,” recalls Peggy Udden, an executive secretary at MIT. “Not only because she was so young, but a girl.”

        Pasterski had first flown a plane at age 9, an experience she casually relayed to a teacher at her public high school, the Illinois Mathematics and Science Academy in Aurora. The teacher replied: “That’s nice, but what have you done lately?”

        “That’s become my mantra ever since,” Pasterski told the Chicago Tribune in a 2016 interview. “That’s nice, but what have you done lately?”

        To read more, please continue to page 2.

        About The Author

        Kat

        Kat Merck is a freelance writer and editor based in Portland, Oregon. An amateur naturalist who studied forestry and natural resources at Cal Poly State University in San Luis Obispo, she writes on a wide range of topics for local and national publications.



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        Do Millennial Men Want Stay-At-Home Wives?

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        The political scientist Dan Cassino suggests that the increased support for male leadership in home life among 18- to 25-year-olds may reflect an attempt to compensate for men’s loss of dominance in the work world. Youths surveyed in 2014 grew up in the shadow of the financial crisis, which accelerated the longstanding erosion of men’s earning power. During the 2016 primaries, when Professor Cassino asked voters questions designed to remind them that many women now earn more than men, men became less likely to support Mrs. Clinton. Perhaps a segment of youth is reacting to financial setbacks suffered by their fathers. Indeed, a 2015 poll commissioned by MTV found that 27 percent of males aged 14 to 24 felt women’s gains had come at the expense of men.

        It’s not just the youngest millennials who seem resistant to continuing the gender revolution. Overall, Americans aged 18 to 34 are less comfortable than their elders with the idea of women holding roles historically held by men. And millennial men are significantly more likely than Gen X or baby boomer men to say that society has already made all the changes needed to create equality in the workplace.

        Are we facing a stall or even a turnaround in the movement toward gender equality? That’s a possibility, especially if we continue to pin our hopes on an evolutionary process of generational liberalization. But there is considerable evidence that the decline in support for “nontraditional” domestic arrangements stems from young people witnessing the difficulties experienced by parents in two-earner families. A recent study of 22 European and English-speaking countries found that American parents report the highest levels of unhappiness compared with non-parents, a difference the researchers found is “entirely explained” by the absence of policies supporting work-family balance.

        No wonder some young people think that more traditional family arrangements might make life less stressful. Tellingly, support for gender equality has continued to rise among all age groups in Europe, where substantial public investments in affordable, high-quality child care and paid leave for fathers and mothers are the norm.

        The availability of such options increasingly outweighs cultural support for traditional gender arrangements. When young Americans are asked about their family aspirations, large majorities choose equally shared breadwinning and child-rearing if the option of family-friendly work policies is mentioned.

        Furthermore, the financial advantages of dual-earner couples over male-breadwinner families have increased significantly in recent years, and an unequal division of housework has become progressively more damaging to relationships. The minority of couples who do manage to divide chores and child-rearing equally report higher levels of marital and sexual satisfaction, and more frequent sex, than do men and women in homes where the wife does most of the housework and child care.

        But most young parents will not be able to sustain egalitarian values and practices without better work-family policies. Those should be possible to attain, given that more than 80 percent of Americans — and strong majorities of both sexes — support paid leave for mothers, with 70 percent favoring it for fathers, too. Among 18- to 29-year-olds, that rises to 91 percent favoring paid leave for mothers and 82 percent favoring it for fathers.

        If, but only if, we can win such reforms, we may find that rather than growing out of youthful egalitarian idealism, as the popular view of aging might lead us to expect, more young Americans may grow into it, creating the most egalitarian family arrangements yet.



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        Even if you're rich, you could die poor

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        When people talk about the poor, especially people who haven’t experienced poverty, it’s often without context or compassion.

        President Trump’s budget, which thankfully faces steep resistance from Congress, says a lot about what he thinks of struggling Americans.

        The poor don’t work hard enough.

        The poor don’t need federally funded employment programs. They just need to get a job.

        The poor should learn to feed themselves. Food programs only enable them to rely on government handouts.

        Out of context, the statements seem reasonable to many people. I know, because I’ve heard from them. After recent columns in which I discussed Medicaid, I was particularly astounded by the comments from readers who came from poor backgrounds themselves and can’t fathom why others haven’t followed their footpath to self-sustainability.

        I pulled myself up, their refrain goes, so why can’t other poor Americans do the same?

        But in the debate about how to help the poor, context matters.

        You can’t judge our country’s response to the needy by looking only at how you overcame obstacles. This reasoning ignores so many things, such as the pounding effects of abuse, the fallibility of being human and the crushing bad luck of a major health crisis.

        For this month’s Color of Money Book Club selection, I’ve chosen an essay that explains how, under different circumstances and choices, the face of poverty could be your face. “Falling,” written by novelist and former Washington Post journalist William McPherson, was printed in 2014 in The Hedgehog Review and can be found on the journal’s website, at http://ift.tt/2nDD2A0.

        McPherson, who died last week at 84, was an American success story. After dropping out of college and serving as a Merchant Marine, he eventually got a job at The Post writing literary criticism, for which he was later awarded the Pulitzer Prize. His two novels also earned him wide acclaim.

        But McPherson’s life is literally the tale of rich man, poor man. As the essay details, his professional accomplishments were followed by a descent into poverty that was just as profound.

        “The rich are all alike, to revise Tolstoy’s famous words, but the poor are poor in their own particular ways,” he writes. “I started life comfortably middle-class, maybe upper-middle class; now, like a lot of other people walking the streets of America today, I am poor. To put it directly, I have no money. Does this embarrass me? Of course. . . . It’s humiliating to be poor, to be dependent on the kindness of family and friends and government subsidies.”

        I read McPherson’s obituary and was captivated by the context of his life. It’s how I found my way to the essay.

        How could someone so successful sink so low?

        McPherson says he miscalculated his money and financial skills. In 1987, at 53, he decided to leave The Post and write about Eastern Europe as a freelance journalist.

        “I chose retirement because I was under the illusion — perhaps delusion is the more accurate word — that I could make a living as a writer and The Post offered to keep me on their medical insurance program, which at the time was very good and very cheap,” he writes. “The pension would start 12 years later when I was 65. What cost a dollar at the time I accepted the offer, would cost $1.44 when the checks began.”

        He had investments — a 401(k), a Keogh — money from some real estate ventures, and even some inheritances. It would all have been enough.

        Except, it wasn’t.

        He spent more than he should have in Europe, and the cost of recovering from a major heart attack further drained his finances.

        “Poverty, my mother used to say, is a state of mind,” McPherson wrote. “She never stood in line to apply for welfare, or Medicaid, or food stamps. Then she would have learned, as I did, that it may be a state of mind — and to some degree I believe it is — but it is also a harsh daily reality for millions of her fellow citizens of this country and on this planet. And now for her son.”

        To make do, he needed subsidies to pay his rent and medical insurance payments.

        McPherson, a man of privilege, met poverty. And he found himself an insider in a world that outsiders often misunderstand. His essay should be mandatory reading for anyone who questions how people end up in poverty. It really could happen to anyone.

        I’ll be hosting a chat on “Falling” at noon Eastern time on April 27 at http://ift.tt/1We9JOs. I hope you’ll join me.

        Write Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or singletarym@washpost.com. To read more, go to http://wapo.st/michelle-singletary.



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        Assured Guaranty: An Undervalued Book Value Compounder

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        Investing is all about paying a much lower price for a security than the value that you are receiving in return. While this seems sensible enough, many people ask why are certain securities undervalued in the first place? Usually they are undervalued due to short-term concerns that mask the obvious disconnect between price and value. When people are concerned that a stock might drop from $36 to $33, they may miss out on it appreciating to $50, as the valuation ultimately should approximate intrinsic value and business fundamentals. The common stock of Assured Guaranty (NYSE:AGO) is once again on sale to anyone willing to look past the toxic mess of Puerto Rico and instead focus on the actual value of the enterprise, which has been growing rapidly despite Puerto Rican problems.

        Source: AGO 2016 10-K

        What is an industry-leading insurance company's common stock worth with a GAAP and non-GAAP book value of $50.82 and $49.89 per share, respectively? These figures have grown from $25.74 and $28.08 as of year-end 2012. Adjusted book value per share stood at $66.46 as of the end of 2016 compared to $44.84 at the end of 2012. Assured Guaranty guarantees payments on bonds at the time that they are due and in return is paid a premium. These premiums are invested generating investment income. AGO's net par outstanding has dropped from $518.772 billion at the end of 2012 to $296.318 billion at the end of 2016. Meanwhile, claims-paying resources have only dropped from $12.328 billion to $11.7 billion during the same time period. The riskier and more capital-intensive Structured Finance exposure has dropped from $93.303 billion to $25.139 billion, mainly due to amortization and remediations.

        In 2016, AGO showed continued improvement in generating new business with the total present value of new business production (PVP) reaching $214MM, which was the highest figure in the last five years, up 20% YoY. This performance occurred despite some of the lowest interest rates we have seen historically, which reduces demand for bond insurance. As rates go higher, and we have already seen two rate hikes over the last few months, demand should pick up even further. In 2016, AGO insured more par issued than the rest of the industry combined while collecting six times the premiums written by the nearest competitor. Despite insured par being down less than 2% from 2015, PVP was up by 30% in U.S. public finance, because of disciplined pricing principles and the respect for the value of the insurance provided. Assured is really the only bond insurer able to handle the largest transactions, and in 2016, the company guaranteed 18 U.S. public finance transactions where it provided over $100MM of bond insurance for a total of $2.8 billion. These were among the 57 municipal transactions issued with $50MM or more with the company's insurance. Assured is also unique in that is has the capability to insure international infrastructure and structured finance deals. These deals are lumpier in nature than U.S. public finance, but they are high margin and add diversification to the insured portfolio.

        Because Assured is not writing enough new business to fully offset the natural amortization of the insured portfolio, the company continues to generate excess capital. As of 12-31-2015, AGO estimated that it had $2.6 billion of excess capital above the AAA requirement under the S&P capital adequacy model. Despite completing $306MM in share repurchases in 2016, management believes that this number has increased YoY. Since the beginning of 2013, AGO has repurchased approximately 72.2MM common shares, or roughly 37% of shares outstanding. In November of 2016, the board of directors approved another $250MM in share repurchases. In the first quarter of 2017, the board approved an additional $300MM, which brought the remaining repurchase authorization to $407MM as of 2-23-17. Share repurchases will be partially funded by $300MM that the AGM subsidiary upstreamed to the holding company level after receiving regulatory approval to redeem shares of AGM's common stock held by its holding company. Even after releasing the AGM capital, and also paying $184MM in net claims in 2016 to protect holders of defaulting Puerto Rico-related bonds, AGO's group statutory capital increased $231MM during the year and insured leverage ratios declined.

        In addition to stock buybacks, another key pillar of AGO's shareholder value creation strategy is acquisitions. In prior years, the company bought FSA and Radian Guaranty, which were both enormously accretive. In 2016, AGO completed the acquisition of CIFG, which added approximately $310MM to its statutory capital, in addition to $4.2 billion of net insurance exposure, with the related unearned premiums. In January of 2017, AGO closed on the acquisition of MBIA UK, which should add a similar amount of statutory capital and will certainly be very accretive to earnings and book value metrics.

        Loss mitigation is another essential element in AGO's strategy. Many of the Puerto Rican debt exposures have defaulted, and AGO has made $226MM in claim payments through February of 2017 thus far. The company and other creditors have begun lawsuits to remedy violations by the Puerto Rican government of its obligations to creditors. In 2016, the U.S. government passed the PROMESA legislation, which establishes an Oversight Board to supervise Puerto Rico's financial affairs and debt negotiations, and it has created a process for both consensual and non-consensual restructurings. Importantly, PROMESA requires the respect for existing constitutional and statutory priorities and contractual liens, which is essential to maintain the rule of law and preserve the contractual rights of creditors and other stakeholders.

        Source: AGO Fourth-Quarter Financial Supplement

        AGO, other bond insurers, and creditors have already made efforts to work with the government to reduce debt and assist with liquidity. A perfect example is the restructuring agreement with PREPA, where all constituents agreed on terms, but now the new Puerto Rican governor and the Fiscal Control Board are throwing this deal into contention. This change of heart along with the recently approved budget, which allows non-essential government services to be paid prior to creditors, despite this being flagrantly contradictory to the constitution and bond agreements, has thrown gasoline on the Puerto Rican fire. Creditors are fighting back, and I'd expect to either see consensual settlements or the island is going to face a litany of lawsuits, which seem to have very strong cases against how the government is treating creditors.

        While there is undeniably tremendous uncertainty, AGO has a strong track record in navigating these types of difficult situations to reach outcomes that are better than what was projected at the outset of negotiations. This is largely due to the company's willingness to defend its legal rights and also leverage the immense value that is provided through enabling the island to access credit markets via the company's bond insurance. Critically, S&P, Moody's and Kroll have all concluded that AGO has the financial strength to manage the potential losses under severely stressed Puerto Rico scenarios while retaining current ratings.

        AGO has just under $5 billion of total net par outstanding in Puerto Rican debt. The company has been adding reserves each quarter for about the last two years. The full impact has been negated slightly by the fact that RMBS loss reserves have declined due to more favorable developments. I estimate that AGO has around $1 billion reserved for Puerto Rico thus far. $724MM of the exposure is to PREPA where if the initial RSA were to hold, AGO wouldn't lose anything. If the deal falls apart, they may need to add to reserves, but Puerto Rico may also lose the ability to access credit markets, which will be an essential element to any successful economic recovery. PREPA has had massive liquidity issues, which have only been assuaged by forbearance and loans provided by creditors including the bond insurance companies. AGO has a history of being conservatively reserved, and much of the rumors percolating right now are simply that. What actually matters is what deals are finally agreed upon and approved. Importantly, AGO cannot be accelerated, so payments are only made when due. This allows the company to keep generating its $400MM plus of investment income, which can handle any payments that must be made. Even in the virtually impossible case that AGO is under-reserved by $1 billion, the impact would be manageable. Based on 131MM shares outstanding, the pretax loss would be $7.63 per share. The after-tax hit assuming a 30% tax rate would be roughly $5.34. Expect AGO to earn at least half that in the first quarter of 2017 alone as the impact of the MBIA UK acquisition is reflected on the balance sheet, so no matter what happens, AGO is going to be fine.

        This gets us to AGO's valuation. While the stock performed exceptionally well last year and the beginning of 2017, it has pulled back recently as Puerto Rico has been in the news to a recent price of $36.64. This is only 73.5% of operating book value and a paltry 55% of adjusted book value per share. Both these metrics should be up materially after the first quarter even though I do believe the company will probably add another $100MM or so to Puerto Rican reserves. AGO is aggressively on the lookout for acquisitions and it structures these to be very accretive. There is no sense in Syncora (OTCPK:SYCRF) for example having a Financial Guaranty business at this point. AGO can buy it off the company to provide much needed cash, which would help the company invest in a business to monetize its very large net operating losses. You can say the same thing for the majority of the legacy bond insurers that are still out there. Also, the recent selloff has provided a great opportunity for aggressive stock buybacks, which are also enormously accretive. Look for AGO to keep compounding book value in spite of Puerto Rico, and when we get resolution there, the stock should rocket higher as the rest of credit book is in outstanding condition. I believe the company should be trading in the mid-$40s, but should compound intrinsic value by 10-15% per annum over the next three years. This could put intrinsic value around $60 within a three-year period.

        This article is part of Seeking Alpha PRO. PRO members receive exclusive access to Seeking Alpha's best ideas and professional tools to fully leverage the platform.

        Disclosure: I am/we are long AGO.

        I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

        Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



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        Should You Invest In Mexico's Stock Exchange?

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        An Ian's Insider Corner member asked me: If I like investing in Mexico, what about investing directly in Mexico's stock exchange? It is in fact listed - in Mexico, not surprisingly - as Bolsa Mexicana de Valores (Mexico:BOLSAA) (OTC:BOMXF).

        Important note: The Pink sheet listing doesn't trade frequently. If you want to buy or sell shares, you are highly advised to do so via the Mexican exchange. If you do trade in the pink sheet listing, be aware it's a simple one - no ADR ratio: One Mexican share = one pink sheet share. The current correct price for BOMXF is $1.60 (M$30.04/divided by exchange rate).

        Mexico's stock exchange. Source

        Mexico's stock market is a middleweight by global standards. According to World Bank data, the total market capitalization for Mexican stocks as of 2015 was $402 billion. There are multiple ways to view that. Let's start with the negative. Apple (NASDAQ:AAPL), by comparison, is worth more than $700 billion; thus, all of Mexico's market is just more than half an Apple.

        In the country rankings, Mexico's market is the 19th biggest in the world, ranking just behind Belgium and ahead of Russia. It's also just behind Brazil despite Brazil having twice the population of Mexico. Not bad. To Mexico's credit, its market and corporate governance are generally quite respected, and as a result, Mexican companies tend to trade at higher valuations than you'd see in a median emerging market.

        On the downside, much of Mexico's wealth and industry are controlled by family-run operations. These tightly-held businesses have little need for outside capital and don't want minority shareholders telling them how to run their affairs. As a result, there are just 51 Mexican listed businesses that did $1 billion or more in revenues in 2014 – as compared with thousands in the US and other developed markets.

        This family dynamic may be changing; more and more family-run businesses have gone public in Mexico over the past decade. However, the market still has quite a ways to go to reach the same level of popularity/competitiveness that you'd find in more mature economies.

        On the plus side, the government has privatized quite a few state-run assets. The country's three listed airport operators, for example, are a novel and innovative approach to privatizing big infrastructure. Since going public in 2006, the Mexican airport players have shown remarkable growth, demonstrating how private management can find opportunities that a state bureaucrat might miss.

        My 2017 top pick, Grupo Aeroportuario del Pacifico (NYSE:PAC) - operator of Guadalajara, Tijuana, Cabos, and Puerto Vallarta's airports, among others - has put up 17.1%/year annualized since its IPO in 2006. You'll struggle to find listed infrastructure plays in developed markets offering that sort of potential.

        PAC investor day at the stock exchange March 29, 2017. Source: Bolsa Mexicana de Valores.

        New and innovative listings aside, a huge chunk of Mexico's businesses remain privately-held. And the exchange is not all the developed. Derivatives markets, for example, generate barely any trading volume.

        That lack of development may make the Mexican stock exchange a steal at today's prices. Many sources of profits for western market operators, such as NASDAQ (NASDAQ:NDAQ), simply don't move the needle yet in Mexico. Listed stock options are virtually non-existent in Mexico for example.

        Walmex (WMMVY) - one of the exchange's largest companies - saw a grand total of 34, 3, and 3 stock options trades in the months of October, November, and December, respectively. Femsa (NYSE:FMX) saw 3, 13, and 4 options trades over that same time-span. As far as options markets go, in some cases, you'd find better liquidity for Mexican companies' options on the NYSE than you would on their home exchange. That could change for the Mexican exchange going forward (but no guarantees).

        Similarly, futures are hardly traded in Mexico. 30-year bond futures - a hot contract in the US - haven't traded a single time since mid-2015 in Mexico. 10-year swaps have witnessed exactly three trades over the past two years.

        The flagship dollar/peso currency contract counts volume in the hundreds on a monthly basis; that's nothing given the amount of currency hedging the country needs with its vast trade flows to and from the United States. Only the IPC futures contract (equivalent to the ES S&P 500 contract in the US) does real volume, and even that one only moves about 100k contracts a month.

        For now, the listed equities are the main business driver for the stock exchange. Volume there has been steadily building over the years. The most recent quarter was particularly good, you can thank volume doubling(!) in Nov. '16 versus the same month last year presumably since traders were reacting to Trump.

        But even excluding the Trump bump, revenues have been steadily and strongly growing. The business has doubled in size since 2008, and tripled since 2005. Margins have been rising; there haven't been any issues there as operations pick up.

        If you're bullish on Mexico, this is the sort of investment that should bring pleasing results over time. 2016 was a slow year for Mexican IPOs, this year could be better, it's already off to a good start with Becle (OTCPK:BCCLF), the maker of Jose Cuervo, and one other new listing.

        Valuation

        There's only one stock market in Mexico at the moment so there's no direct comparable. There are plans for a second exchange, so consider this as a risk factor, though I'm skeptical the second exchange could achieve critical mass, given the overall low level of volumes in Mexican trading currently.

        As compared with developed market exchange operators, there is more concentrated economic cycle risk here; Mexican markets could be badly crippled if the government took a turn toward socialism, for example. While center-right politicians continue to rule the political scene in Mexico, a socialist came fairly close to winning in the last election before fading late. And current president Enrique Peña Nieto has seen his popularity slip for a variety of reasons including economic weakness, a perceived inability to manage the narco situation, and the goings on with the U.S. since Trump's victory. Mexico votes for president again in 2018.

        However, that risk, I'd argue, is outweighed by the upside should Mexico continue down the road toward becoming a developed market. An advanced capitalist economy should have a far higher market cap than Mexico does for its equities, and there should be massive amounts of activity in derivatives such as futures and options. If Mexico can continue liberalizing financially (and signs still point to good odds on that proposition), there should be plenty of low-hanging fruit.

        Yes, Mexico's stock market isn't particularly cheap. With the recent rebound, it's now back up to about 19x earnings (and was at 25x prior to last quarter's unusually good results). That's not expensive compared to western markets in general, but you're not getting all that much of a discount either. The balance sheet comes with net cash, which makes the valuation picture a bit better. Still at 12x EV/EBITDA and more than 6x sales, you're paying full price to get in this name here.

        Given the near-complete lack of liquidity for the Mexican exchange's US listing, and the stock's relatively decent performance over the past year, this isn't the lead idea I want to champion out of Mexico. It really doesn't do much to diversify one's portfolio if you already own a fair bit of Mexican exposure; it's hard to imagine scenarios where a portfolio of Mexican holdings such as those I've discussed previously go one way and the exchange itself does the opposite.

        That said, if my bullish call on Mexico is right, you'll make money owning this. No question about that. The 3.7% dividend yield is also nice. If you want more Mexican exposure, I can endorse its stock exchange with no reservations. You won't find many businesses with this good a natural growth profile. And it's still so small - net income was just $50 million last year - that the scope of the upside is huge if Mexico evolves into a far larger financial market.

        The Economist Intelligence Unit forecasts that by 2050, Mexico will overtake Russia and Italy to become one of the world's 10 largest economies. Its stock market in that scenario is likely to move up nicely from its current 19th place ranking globally by market cap.

        Zooming in on the near term, what should we expect in the short run? As for this year, I think the rebound in the Mexican peso is just about played out. When the peso hit 22 in the height of Trump fears, I stuck a 19 target on the peso for year-end 2017. We're already back up to 18.7 today - beyond what even I, a Mexico bull, had expected. Upside from here is limited unless the dollar breaks down more generally.

        For 2017, let's suppose the peso moves up to 18.5 and Bolsa Mexicana de Valores trades back up to 32 pesos a share - where it was just before the election. That'd bring the BOMXF pink sheet listing up to $1.73 - a respectable gain from today's $1.60 price but hardly the biggest upside you can find in a Mexican share today.

        Bolsa's stock - Mexican listing in pesos:

        This article is part of Seeking Alpha PRO. PRO members receive exclusive access to Seeking Alpha's best ideas and professional tools to fully leverage the platform.

        Disclosure: I am/we are long FMX, PAC.

        I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

        Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



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