Month: December 2015

December 18 – December 24, 2015

2015 sets the global Mergers and Acquisition record. How much will the financing for these mega deals cost? The economic blue print for China in 2016.

Happy Holidays everyone and as this will be my last post of 2015, I wish you a happy and meaningful 2016.

I recognize that this post is coming to you early this week, but frankly I am being honest with myself that the likelihood of me writing this post either on Christmas Eve or Day is slim.  Rest assured that in my next submission I will post any article that I come across through the remainder of the year that is of particular merit.  Fortunately for this post I already have ample material from the past few days.

Before I get to that, if you enjoy my postings, please share my posts with others that you think would gain value from the posts and consider signing up for the email distribution.

Now on to it.

This week three themes that stood out were 1) that global deal making attained an all-time record in 2015 as highlighted by James Fontanella-Khan and Arash Massoudi in The Financial Times (“Global dealmaking breaks 2007 record”), 2) which of course requires lots and lots of financing, hence Henny Sender’s article “Mega deal financing will test bond market in 2016” also in The Financial Times, and 3) was Lingling Wei’s “China Unveils Economic Blueprint for 2016” in The Wall Street Journal discussing the steps that China intends to implement as it shifts from an investment-led economy to a consumption-led economy.  Additionally, I want to bring attention to Josh Barbanel’s “Luxury Condo in Manhattan Resells at Loss of More Than $1 Million” in The Wall Street Journal that serves as a reminder that buying real estate (or in this case a condominium) on spec is not a guarantee of profits.

*Note: bold emphasis is mine, italic sections are from the articles.

Global dealmaking breaks 2007 record. James Fontanella-Khan and Arash Massoudi. The Financial Times. 21 Dec. 2015.

“This year, global mergers and acquisition volumes have surged to a new record level, with the total value of announced transactions climbing to $4.6tn, compared with $4.3tn eight years ago, according to Thomson Reuters data.”

Why… because,

“Hunger for growth in a weak economic environment, cheap financing and continued pressure from activist shareholders to boost returns drove many companies to combine.”

See this graphic provided by Thomson Reuters in the article:

Note the Median value to ebitda multiple on the left axis.  Prices are high, but the sentiment is that there is still room to run.

“It doesn’t feel like we are in bubble territory yet because the transactions you’re seeing have industrial logic,” said Scott Barshay, a Cravath, Swaine & Moore lawyer, who has worked on more than $250bn worth of deals this year. “Momentum on strategic deals is strong… it feels like 2016 is going to look a lot like 2015.”

Mega deal financing will test bond market in 2016. Henny Sender. The Financial Times. 17 Dec. 2015.

Basically, all this M&A activity requires a LOT of capital and much of it in debt.  The thing is that financing is cheap and there are numerous incentives to use debt in the capital structure, but costs of debt have been climbing since some of these deals were penned both as a result of the Fed and the commodities slump which is pushing up delinquencies and hence yield expectations.

For example,

“Sometime in early 2016 Dell will seek almost $50bn from the debt market to finance its $67bn acquisition of EMC, just one of many mega deals looming in the coming months.”

“Most of the money, or $40bn, will be borderline investment grade, while the underwriters are targeting a 13% yield for the junk rated remainder.”

It doesn’t help that

“With spreads at their widest level in four years, Triple C rated debt rose above a yield of 18% this week, up from less than half that level not so long ago.”

“We are seeing a shadow tightening of financial conditions…”

“There is a disconnect between the central bank, which is programmed to worry about inflation and the markets, and business people who see many more signs of deflation.”

“The Oil & Gas and Metals & Mining sectors have pushed the US distress ratio to its highest level in six years, according to S&P US high yield corporate bond index.”

“Central banks have pumped a lot of money into financial markets and among the biggest beneficiaries were private equity firms, whose fortunes are directly tied to the high yield market. Now that they have sold almost everything that could be sold, they have little left to harvest, and their shares have dropped to the point that some investors are wondering whether they might cut their dividends.

China Unveils Economic Blueprint for 2016. Lingling Wei. The Wall Street Journal. 21 Dec. 2015.

“The plan, laid out at a closed-door conclave of senior party officials led by President Xi Jinping, comes as the country’s massive buildup of debt and legions of factories pumping out unwanted goods astride towers of empty apartments have become severe drags on economic output.”

The gist of it is:

“The economy will follow an L-shaped path, and it won’t be a V-shaped path going forward,” the official said, while ruling out any chances of China launching another round of aggressive stimulus measures like the one initiated in late 2008 to combat the global financial crisis.”

“The plan calls for reducing industrial overcapacity, slashing its stockpile of unsold homes, lowering costs for businesses and mitigating financial risks, according to a communique released by China’s official Xinhua News Agency after the conclusion of the meeting Monday.”

“Corporate debt now amounts to 160% of China’s gross domestic product, according to ratings firm Standard & Poor’s Ratings Services. That’s up from 98% in 2008 and compares with a current U.S. level of 70%.”

“It also said the government will encourage developers to lower prices.”

As my partners often like to say, ‘I hear the words.’  Stating and achieving are two different things.  However, China is no democracy and the government’s power over its citizens reaches far and wide.  But the ‘market’ is not an easily tamed beast.

Luxury Condo in Manhattan Resells at Loss of More Than $1 Million. Josh Barbanel. The Wall Street Journal. 21 Dec. 2015.

“At One57, the first of the new slender towers to open with picture-window views of Central Park, a four-bedroom condo bought by a European investor for $20.3 million in April is about to sell for a loss of more than $1 million.”

For some background on One57 or about the towers along “Billionaire’s Row” in Manhattan, Paul Goldberger did a great piece (Too Rich, Too Thin, Too Tall?) in Vanity Fair in April 2014.

“”For sure we weren’t able to sell it for what he bought it for,” said James C. Cox Jr., a broker with Compass who along with colleague Frank Giordano had listed the sprawling condo, which features a 43-foot-long glass-walled grand salon.”

“Mr. Cox said the apartment attracted little interest when it was listed at $21.9 million in May by another brokerage firm”

The owner seeking a closing before year-end accepted a deal below the current asking price of $18.995 million.  Often to attain liquidity when there is a lack of it, price is hurt.

One57 at 1,004 feet tall has raised its prices 11 times since it started sales resulting in total asking prices of $2.39 billion a 19% increase from its original pricing.

“Now, Extell is still listing its final units available, along with nine listings by other purchasers ranging in price from just under $5 million to $32.5 million.”

“Most sellers are asking for millions of dollars more than they paid, but a condo on the 62nd floor that cost $31.7 million is now listed at just under $30 million after being offered for as much as $38.9 million last year.”

As a developer, it’s never fun to sell against your buyers.

Other Interesting Articles

Bloomberg Businessweek


Bloomberg: Westfield Sells Five U.S. Malls for $1.1 Billion to Cut Gearing 12/20

FT: Emerging market economies downgraded across the board 12/17

FT: Discovering the destructive force of excess capital 12/17

FT: America’s reading problem 12/18

FT: Tumbling commodities prices shake index 12/20

FT: Azerbaijani manat collapses after government abandons dollar peg 12/21

FT: Crude oil sinks to 11-year low as oversupply fears intensify 12/21

Investment News: Raising the bar for nontraded REITs 12/20

NYT: As a New High Society Climbs in Manhattan, It’s a Race to the Top 12/21

WSJ: Hong Kong Retailers Lost in Currency Translation 12/17

WSJ: Congress Eases Curbs on Foreign Real-Estate Investors 12/20

WSJ – Rising in the Mideast: The World’s New Landlord 12/20

WSJ: Why Markets Aren’t in the Holiday Spirit 12/21

WSJ: In China’s Property Takeover Tussle, the Best Move Is to Wait 12/22

WSJ: The Trouble With Sovereign Wealth Funds 12/22

WSJ: U.S. Existing Home Sales Plunge in November 12/22


Special Reports


December 11 – December 17, 2015

The Fed did it! Diversify, diversify, diversify. Technology offers a chance at low hanging fruit. High Ground Looking over a Swamp, aka Cheniere.

The Fed finally raised interest rates!  Definitely one of the three themes from the week, which I’ll cover only briefly in Christopher Condon’s coverage in BloombergBusiness“Fed Ends Zero-Rate Era, Signals 4 Quarter-Point 2016 Increases,” simply because I’m sure you’ve already read about this.  The other two themes covered 1) “Beyond Property: Chinese Developers Look to Diversify” by Esther Fung in The Wall Street Journal and 2) “Digital advances uneven across US economy” by Sam Flemington in The Financial Times.  In addition, I think it’s worth noting the dismal of Cheniere’s founder and CEO, Charif Souki, this past week – see below.

*Note: bold emphasis is mine, italic sections are from the articles.

Fed Ends Zero-Rate Era, Signals 4 Quarter-Point 2016 Increases. Christopher Condon. Bloomberg. 16 Dec. 2015.

In a nutshell:

“The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25% to 0.5%, up from zero to 0.25%.  Policy makers separately forecast an appropriate rate of 1.375% at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.”

“Prior to 2008, the effective fed funds rate had never dropped below 0.63%, according to data compiled by the St. Louis Fed dating back to 1954.”

While the commentary is that the raising of rates will be gradual, I’m fairly certain that if rates make it to 1.375% by end of next year, it will be jarring.  Granted, hopefully the economy will be firing on all cylinders to justify that rate.  Already Wells Fargo and others have raised their Prime Rate by a quarter point to 3.50%.  The Bank of Mexico has increased rates for the first time since 2008 in order to prevent further weakening of the peso relative to the US dollar.  Hong Kong which has a currency peg to the US dollar is also raising rates. This is only part of the knock-on effects – clearly there is a lot at stake.

Beyond Property: Chinese Developers Look to Diversify. Esther Fung. The Wall Street Journal. 10 Dec. 2015.

For those that don’t know, real estate development in China got “a little” over its skis. As result, it’s been tough for real estate developers, especially those not in the first tier cities.

“… a growing number of developers who see no end to the pain in Chinese real estate and are looking to get out. Other developers are branching off into everything from banking to cosmetic surgery to women’s soccer.”

“Some even suggest a long-term de-emphasis on property as China’s birthrates slow and the population ages.”

“According to Moody’s Analytics, housing and its related industries contributed 18% of the country’s gross domestic product in 2014, down from 23% in 2013.”

“The property sector has turned from being China’s economic growth engine into its burden.” – Ma Guangyuan, a Beijing-based independent economist.

“While housing sales are up 7.9% by volume in the first 11 months this year from a year ago, construction starts have been declining at double-digit levels. Growth in investment in residential property slowed to 0.7% growth in the first 11 months of this year, down from 9.2% for last year.”

Consider the “ghost cities” and all of the empty building inventory that is meant to house the hundreds of millions of rural citizen when they migrate into the cities.  What happens if they don’t migrate?  Consider that the allure of higher wages and the “iron rice bowl” (China’s implicit understanding that companies will look after the welfare of their employees – at least the State-Owned-Enterprises) is fading.  See Mark Magnier’s “China’s Workers Are Fighting Back as Economic Dream Fades” in The Wall Street Journal.

It is no surprise that developers are diversifying.  Real estate development is a cyclical business (even if this cycle in China has been cranking for decades since Deng Xiaoping came to power).

“In May, real-estate firm Shanghai Duolon Industry changed its name to P2P Financial Information Service Co. to diversify into Internet finance and consultancy services, driving its shares sharply higher.”

“Evergrande Real Estate Group Ltd. (also one of the China’s largest developers), which recently spent $2.1 billion buying uncompleted property projects, has delved over the past two years into mineral water, dairy, grains and oil.”

Other examples include Dalian Wanda’s purchase of the Ironman triathlon group, its creation of a financial holding company and its crowdfunding project “Stable Earner No.1” (promising investors annualized returns of 12% – 6% from income and 6% from appreciation).

However, even if the developers themselves are not excited about their prospects, Chinese insurers feel differently. See Jacky Wong’s article in The Wall Street Journal “Why China’s Insurers Are Bidding Up Property Stocks” (it was also listed in last week’s “Other Interesting Articles.”)

Digital advances uneven across US economy. Sam Flemington. The Financial Times. 16 Dec. 2015.

“Research from the McKinsey Global Institute finds that digitization could add $2.2tn to US gross domestic product by 2025 as companies lift productivity by exploiting advanced technologies.

However, the flipside will be further dislocation in the jobs market. Automation could displace between 10-15% of middle-skilled occupations such as clerical, sales and production roles over the period from 2015-25, equivalent to 8m-12m jobs, the report predicts.

That would be nearly twice the displacement rate of recent decades. The report finds that 60% of occupations could have 30% or more of their activities automated.”

The room for improvement in production efficiencies is a case for optimism, but the prospects of job rationalization is cause for concern.  Consider that US median wage has been flat for 45 years (GMO third quarter newsletter) largely due to advances in technology, globalization, and policies that have favored capital over labor (as Ice-T said, “don’t hate the player, hate the game.”)

“Looking at just three big areas of potential – online talent platforms, big data analytics and the internet of things – we estimate that digitization could add up to $2.2tn to annual GDP by 2025, although the possibilities are much wider.”

But digitization is happening “unevenly” with “the US only reaching 18% of its digital potential.”

Industries that have a lot of catching up to do: agriculture, construction, and hospitality.

“After the IT sector itself, the most digitally advanced companies are in media, professional services, finance and insurance, and wholesale trade, the report says.”

Cheniere Energy

The reason I bring this up is because it wasn’t long ago that Bloomberg Businessweek had a feature on Cheniere and Charif Souki, “America’s Most Unlikely Energy Project Is Rising From a Louisiana Bayou” (9/2/15), profiling Souki’s rise and decent and rise again – and now post script decent.

From that article:

“Cheniere Energy, based in Houston, has spent more than a decade, and upwards of $20 billion, turning 1,000 acres of swamp into the first LNG export terminal in the continental U.S.”

Still yet to make any money (the terminal is about to be activated).

To get a sense of the scale of the operation, “Sabine Pass makes its own power. Cheniere paid General Electric $1 billion for 24 gas-fired turbines that were initially designed as jet engines. By the time the terminal is fully operational, they’ll generate about 450 megawatts of electricity, enough to power a city of almost 300,000 homes.”

FYI, America’s natural gas pipeline network leads right to the facility.

A little on Souki, Charif Souki after a stint in investment banking used own/run Mezzaluna in Aspen and LA along with two other restaurants in LA . In 1996 he became and oil and gas executive by purchasing a defunct public company.  The article is really worth the read. Oh and,

“In 2013 his total compensation was $142 million, good enough to make him the highest-paid CEO of a U.S. public company. About $130 million of that came in the form of company stock.”

As Howard Marks, of Oaktree Capital, says “To succeed in the markets you need 1. Aggressiveness, 2. Timing, and 3. Skill.  If you are Aggressive enough and Time it right, you don’t need skill.  Only when the market declines or the timing is bad do you see who had/has skill.”

I’m not implying that Souki doesn’t have skill.  He clearly has grit (aggressiveness).  His timing has been good and bad, but ultimately the commodity slump has been too much and too long leading to Carl Icahn and the board of directors to can him.

Other Cheniere and Souki related articles:


Other Interesting Articles

Bloomberg Businessweek

The Economist


BloombergBusiness: Blackstone Seeking to Raise $4 Billion for Real Estate Debt Fund 12/10
FT: Wells Fargo warns of ‘stresses’ in its energy portfolio 12/14

FT: Yields on junkiest US bonds breach 18% 12/15

FT: Any end in sight for the big oil slide? 12/15

FT: Celebrate the rise of flawed, febrile China 12/16

FT: Banks raise prime rates after Fed move 12/17

FT: Fed rise – Hong Kong caught between US tightening and China slowdown 12/17

FT: Second rating agency cuts Brazil to junk 12/17 Interest Rates, Cap Rates Don’t Move in Lockstep 12/15

National Real Estate Investor: Net Lease Buyers Develop Bigger Appetite for Medical Properties 12/14

National Real Estate Investor: Private Equity Real Estate Fundraising Surges in 2015 12/16

NYT: China’s Coastal Cities, Underwater 12/11

NYT: Why Very Low Interest Rates May Stick Around 12/14
NYT: Battered, Apologetic and Still Pitching Their Hedge Funds 12/15

WSJ: Private Equity’s ‘Hidden’ Fees Totaled $20 Billion 12/13

WSJ: China’s Workers Are Fighting Back as Economic Dream Fades 12/14

WSJ: The Government’s Financial Watchdog Just Warned Us That Another Third Avenue-Style Bond Fund Run Is Likely 12/15

WSJ: Even as Oil Plummets, China Keeps Prices High 12/16

WSJ: Rent Your Place on Airbnb? The Landlord Wants a Cut 12/16

WSJ: Fed Rate Increase to Cool Hong Kong Property Prices 12/16

Special Reports

December 4 – December 10, 2015

Negative corporate outlooks in light of commodity woes, debt downgrades, and declining global GDP. Oil and gas shake down. It seems that the natural cycle of things is that the new/upcoming global hegemon exploit its former developing nation peers.

Before I focus on what I perceive to be the main themes from the week, I want to draw special attention to a few of the “Other Interesting Articles” at the bottom of the post.

  1. Several large Chinese insurance companies are buying large and controlling stakes in public Chinese real estate development companies (WSJ: Why China’s Insurers Are Bidding Up Property Stocks 12/9) – prior to 2010 they were not allowed to own property assets. Unlike many insurers in Western markets that take debt positions or will buy properties outright due to their risk-averse nature, these insurers are buying direct stakes in speculative developers at heightened stock market valuations (largely due to the bidding among insurers) at time when there is an oversupply of product in the market.
  2. Thought your home interest rate was low, imagine being paid to borrow. That’s the situation that many Dutch are finding themselves in (those with floating rate mortgages – very common in Europe). WSJ: Less Than Zero – Living With Negative Interest Rates 12/8.
  3. If you’re in real estate, check out this article (The Real Deal: Can Blackstone’s real estate business keep growing? 8/26) from August that I just came across. Note the comment about the lack of margins in the net lease business, especially with interest rates likely to increase (really these investments are macro positions on the direction of cap rates considering you have very minimal control over the income). Related to this, see a post in ValueWalk about Kyle Bass accusing United Development Funding (a public non-traded mortgage REIT) as a Ponzi scheme, and comments in general about the public non-traded REIT sector.
  4. As a compliment to one of the themes from this week, The Economist put out “Pipelines in America – Running on empty” highlighting that the mid-stream model is not as secure as many believe, which of course led to Kinder Morgan (one of the leaders in the pipeline business) to cut its dividend by 75% this week (see the Lex Column in The Financial Times “Kinder Morgan – plus ça change”).

On to the three overarching themes that will pull in a number of articles.  First a continued decline in corporate growth prospects has now led to two venerable companies (DuPont and Dow Chemical) merging, see Dennis Berman’s “Dow-DuPont Merger – Better Living Through Layoffs” in The Wall Street Journal.  Further continued corporate debt downgrades have resulted in there being only three US companies with a AAA credit rating, see Eric Platt’s “Corporate debt downgrades hit $1tn worth of issues” in The Financial Times, which of course due to the commodities slump (see Clifford Krauss and Ian Austen’s “If It Owns a Well or a Mine, It’s Probably in Trouble” in The New York Times) has one of the three – ExxonMobil – being reviewed for a possible downgrade.  Second just how bad is it in the oil and gas business…Asjylyn Loder’s “Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke” in BloombergBusiness points to the coming reckoning in how oil companies recognize reserves on their books.  Third is an article (“In Nigeria, Chinese Investment Comes With a Downside”) by Keith Bradsher and Adam Nossiter in The International New York Times that points to the double edge sword that is globalization.

*Note: bold emphasis is mine, italic sections are from the articles.

Dow-DuPont Merger – Better Living Through Layoffs. Dennis Berman. The Wall Street Journal. 9 Dec. 2015.

In this article Berman aptly describes this merger and the many that have preceded it this year as “An America playing not to lose.”  For three main reasons:

  1. “The economy at large isn’t producing enough growth to keep stockholders content. For the largest companies – who are more or less indexed directly to U.S. and global growth – there is little they can do but keep cutting costs. Eventually, this takes the form of mergers, and 2015 has produced over $4 trillion of transactions. The vast majority of them are ‘in industry,’ which is banker-ese for cost cutting exercises.”
  2. Activist investors… they have forced boards into an intellectual sameness, and certainly a fear of reproach.”
  3. American companies are concerned by the likes of Huawei, Haier, Xiaomi, and others.

“And then perhaps the final, creeping fear: If the likes of Pfizer Inc., Anheuser-Busch, DuPont, UnitedHealth Group Inc. and American Airlines Group Inc. have lost faith in the future, why should we feel any different?”

Corporate debt downgrades hit $1tn worth of issues. Eric Platt. The Financial Times. 4 Dec. 2015.

“More than $1tn in US corporate debt has been downgraded this year as defaults climb to post-crisis highs, underlining investor fears that the credit cycle has entered its final innings.”

“S&P has cut its ratings on US bonds worth $1.04tn in the first 11 months of the year, a 72% jump from the entirety of 2014. In contrast, upgrades have fallen to less than $500bn, more than a third below last year’s total.” S&P has more than 300 US companies on review for downgrade.

Basically, “The Fed’s quantitative easing program helped to defer a default cycle and with the Fed poised to increase rates, that may be about to change.” – Bonnie Baha, head of global developed credit at DoubleLine Capital.

“Some 102 companies have defaulted since the year’s start, including 63 in the US. Only three companies in the country have retained a coveted triple A rating: ExxonMobil, Johnson & Johnson, and Microsoft, with the oil major on review for a possible downgrade. Keep in mind that in 2010 there were over 20, over 40 in 2009, and close to 80 in 2000.

Then of course the Third Avenue Focused Credit Fund has just blocked the remainder of its investors from redeeming their money.  As David Reilly of The Wall Street Journal aptly put it “canary in the high-yield coal mine or an isolated blowup?”

If It Owns a Well or a Mine, It’s Probably in Trouble. Clifford Krauss and Ian Austen. The New York Times. 8 Dec. 2015.

“Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year. More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States.”

International mining company Anglo American is cutting its workforce by 60%.  “In July, the company outlined plans to cut 53,000 jobs after reporting a loss of $3 billion for the first half of the year. Now, Anglo American plans to reduce its current work force of 135,000 to 50,000 employees.”

“Even with prices falling rapidly, American oil production has only declined to 9.2 million barrels a day, from a record high of 9.6 million barrels a day in June.”

“Many international oil projects have been canceled and production should fall more rapidly next year. But it probably won’t be quickly enough to stabilize prices. That is because companies are getting more production out of their investments as efficiency has improved. And some need to keep producing to keep up with their debt payments.”

Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke. Asjylyn Loder. BloombergBusiness. 9 Dec. 2015.

“In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books.”

“Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.

“The reckoning is coming in the next few months, when the companies report 2015 figures.”

“There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute and formerly a scientist with the Geological Survey of Canada. “It was a great game while it lasted.”

The rule change will cut Chesapeake’s inventory by 45%.  Denver-based Bill Barrett Corp. will lose as much as 40%. Houston-based Oasis Petroleum Inc. will lose as much as 33%.

“Drillers met the rule’s profitability provision last year due to a quirk in the SEC’s pricing formula. The agency’s yardstick is an average of the prices on the first day of each month during the calendar year. The price came to $95 a barrel at the end of 2014, even though oil was trading below $50 by the time the companies reported reserves in February and March. The 2015 average, including the Dec. 1 price, comes out to $51 a barrel.”

“Writedowns, which are reported on a quarterly basis, point to sizable revisions. The 61 companies in the Bloomberg North American Independent Explorers and Producers index have announced impairments of $143.8 billion in the past year.”

“Some of the wells may never be drilled, while others may return to inventories if prices rise.”

“The question is, how are these reserves going to come back?” said Subash Chandra, an energy analyst with Guggenheim Securities in New York. “Because if you have to spend within cash flow, those reserves aren’t coming back. Not unless we get a spike in prices, or we return to levered growth.”

In Nigeria, Chinese Investment Comes With a Downside. Keith Bradsher & Adam Nossiter. The International New York Times. 5 Dec. 2015.

Don’t misunderstand, China is not unique in seeking to capitalize on the natural resources of developing countries while also creating new markets for its national companies to sell their wares and to build infrastructure – in effect sending its capital infusions back home.  Great Britain and the United States are old hands at this game as are many others.  What’s interesting is how aggressively China has stepped into the void when others have pulled back.

“President Xi Jinping of China, who was in Africa this week emphasizing economic diplomacy, just committed $60bn in development assistance to the Continent.”

However, Africa is not a place for the faint of heart.

“Nigeria endured coups and a civil war in the 1960s, then effectively nationalized many foreign-owned companies in the 1970s. Nigeria developed a reputation for breaking or renegotiating contracts, antagonizing many foreign partners.

 The risks have prompted Western companies to demand very fat profits before putting money into the country – returns on the order of 25 to 40% a year. Their Chinese counterparts have been willing to accept 10% or less.”

Doesn’t mean the risk has gone away – rather it is more likely that they have increased.

Mostly state-owned Chinese construction companies have started $24.6bn worth of projects since 2005, the highest of anywhere in the world, according to American Enterprise Institute.”

“A little-known Chinese government agency, Sinosure, has guaranteed the loans. Sinosure insured $427bn worth of Chinese exports and overseas construction projects around the world in 2013, the most recent year available. The Export-Import Bank of the United States, by comparison, issued just $5bn worth of credit in each of the last two years.”

Yes, the Export-Import Bank lost its funding briefly in 2015 (which has since been restored), but the magnitude in contribution differences in meaningful.  Further, China has to be wary of Africa’s bite.

In Nigeria (the largest economy in the continent) “Government revenue has dropped by more than half since the fall in world oil prices, so the country may not have the money to make good on the Chinese deals.”

Other Interesting Articles

The Economist


A Wealth of Common Sense: What Happens When There Are Fewer Suckers at the Poker Table? 12/3

BloombergBusiness: Manhattan Apartment Vacancies Rise to the Highest in Nine Years 12/9

BloombergBusiness: Here’s How Much the U.S. Middle Class has Changed in 45 Years 12/10

FT: The fall and rise of technology juggernauts 12/3

FT: Losses mount in China’s overcrowded steel sector 12/4

FT: Sovereign wealth funds withdraw $19bn from asset managers 12/6

FT: China working age population ‘to fall 10% by 2040’ 12/9

FT: Kinder Morgan – plus ça change 12/9

GlobeSt.: REITs Prefer Asset Sales to Stock Issues 12/8

NYT: Beijing, With Red Alert for Smog in Full Force, Closes Schools and Limits Traffic 12/8

NYT: Chinese Glacier’s Retreat Signals Trouble for Asian Water Supply 12/8

NYT: High-Yield Fund Blocks Investor Withdrawals 12/10

The Real Deal: Can Blackstone’s real estate business keep growing? 8/26

WSJ: Surprise – Your Life-Insurance Rates Are Going Up 12/4

WSJ: China’s Reserves: Blink and Miss It 12/7

WSJ: Where Rich Chinese Are Stashing Their Cash – America’s Hotels and Strip Malls 12/8

WSJ: Less Than Zero – Living With Negative Interest Rates 12/8

WSJ: Chanel Pays Record Price for Retail Space 12/8

WSJ: World’s Biggest Wealth Fund Given Property Push 12/8

WSJ: China Economy – Easing Cycle Keeps on Spinning 12/9

WSJ: Why China’s Insurers Are Bidding Up Property Stocks 12/9

WSJ: Junkyard Dog: How Oil-Fueled Debt Caught Up With Chesapeake 12/10

November 27 – December 3, 2015

Moral Hazard in the Chinese bond markets. Chinese buying US real estate. The new global oil economy. So just how much do Airbnb hosts in NYC make?

Another big week… the renminbi will be added to the IMF’s Special Drawing Rights basket of currencies (currently made up of four currencies: USD, Euro, Yen, and Pound Sterling) in October of next year – importantly it will be given a greater weight than both the Yen and the Pound Sterling – and the ECB cut its deposit rate to -0.3% from -0.2% (granted less than the financial markets had expected).  Even with these happenings, the four articles I am going to cover this week are 1) “China’s bond market – Pricing Risk” in The Economist, 2) “Chinese Cash Floods U.S. Real Estate Market” by Dionne Searcey and Keith Bradsher in The New York Times, 3) “Understanding the new global oil economy” by Martin Wolf in The Financial Times, and 4) ““Five Numbers From Airbnb’s Just-Revealed New York City Data” by Eric Newcomer in Bloomberg Business.

*Note: bold emphasis is mine, italic sections are from the articles.

China’s bond market – Pricing Risk. The Economist. 28 Nov. 2015.

Essentially as China continues to employ quantitative easing in its economy the cost of funds continues to decrease, regardless of increasing use of leverage. Sounds familiar.

“China’s domestic bond market has never been riskier. It was only last year that it suffered its first default. This year at least six companies have defaulted.”

While six is barely any in comparison to developed world economies, it is a dramatic shift from the status quo.  Credit risk is increasing and the economy on the whole is slowing with some sectors in meaningful decline (particularly those that are capital intensive).

“A gloomy outlook of this kind would normally lead investors to demand a premium before buying bonds. Instead, they have lapped them up, making it cheaper for China’s companies to borrow. Bond issuance has boomed this year, reaching almost 12 trillion yuan ($1.9 trillion) so far, up from the record 7.7 trillion sold in all of 2014, according to Wind Information, a data provider.”

China has become the world’s third-largest bond market behind the U.S. and Japan.

“For most of the past five years, yields on highly rated corporate bonds were two or three percentage points higher than on government bonds of the same maturity. This year the spread has narrowed, hitting a low in early November of just 1.3% points. This implies that investors think corporate bonds have become less risky, despite the proliferation of defaults.”

Granted, much of the activity is from existing borrowers rolling over higher cost loans.

“The increase in issuance has been exaggerated by a debt swap: local governments are on track this year to replace about 3 trillion yuan of expensive loans with cheaper bonds. The average interest rate paid on outstanding debt in China has fallen from nearly 7% last year to just over 6% this year, according to Hua Chuang Securities.”

To be sure,

“China is willing to let some companies fail, but so far no big firms in which the central government retains a sizeable shareholding have met that fate. Instead, those that have got into trouble have been rescued, leading investors to treat their bonds as virtually risk-free.”

Chinese Cash Floods U.S. Real Estate Market. Dionne Searcey and Keith Bradsher. The New York Times. 28 Nov. 2015.

Faced with these conditions and the prospect of declining currency relative to the greenback as the People’s Bank of China (PBOC) implements measures to further reduce capital controls in accordance with IMF guidelines prior to the renminbi being integrated into the SDR basket, it is no surprise that Chinese nationals are placing cash abroad.  The news is that their presence is increasing and it is effecting more and more markets across the country.

“This year, Chinese families represented for the first time the largest group of overseas home buyers in the United States.”

This is also due to the drop in the value of the Canadian dollar, curbing Canadians enthusiasm for U.S. real estate.

“While Chinese purchases make up a small sliver of overall sales in the United States, they have had a disproportionate impact on the market for more expensive properties, buying one in 14 homes sold for more than $1 million. On average, buyers from China, including the mainland, Taiwan and Hong Kong, pay $831,800 for a home, more than three times as much as Americans spend, according to a National Association of Realtors survey.”

“The price of property in Beijing is very high, the stock market is crashing, and the real economy is not stable… The people here have some money, but they don’t have enough good ways to invest their money.” – Eric Du, a management and investment consultant from Beijing.

“Chinese buyers spent $28.6 billion on American homes in the year ended in March, more than double their purchases two years before, according to the Realtors association. Chinese purchases in overseas commercial real estate jumped 49% last year, Jones Lang LaSalle, a big real estate brokerage firm, has estimated.”

“An estimated $590 billion moved out of China in the 12 months through June, according to Fitch Ratings… In the past, they tended to stay under $200 billion a year.”

“But the highflying deals may have only just begun. By the end of last year, Chinese insurers had only 1.44% of their money overseas (they can now allocate up to 15%).”

“A majority of home purchases by Chinese buyers – 69% – are entirely cash, according to the Realtors association.”

“Outside the United States, the Chinese demand has been so great that some places are trying to temper it.

Hong Kong and Singapore have each imposed 15% taxes on nonresident buyers of residential real estate. In Australia, the State government of Victoria, which includes Melbourne, introduced a 3% tax on overseas buyers.”


“Overseas real estate speculation by Chinese investors started to rise after the recession in America began to recede in 2009. The two markets have been out of sync, creating opportunities. American home prices have been in a recovery phase, while the Chinese boom has been fading.”

Understanding the new global oil economy. Martin Wolf. The Financial Times. 1 Dec. 2015.

Are the drop in oil prices temporary or structural?

“With US consumer prices as deflator, real (oil) prices fell by more than half between June 2014 and October 2015. In the latter month, real oil prices were 17% lower than their average since 1970, though they were well above levels in the early 1970s and between 1986 and the early 2000s.”

Spencer Dale, chief economist of BP (and former chief economist of the Bank of England), believes that the general belief of oil as an exhaustible resource with prices that tend to rise over time is false. The key disrupter has been the US shale revolution.

“…the global supply capacity is not only enormous but expanding. Forget peak oil. As Mr Dale notes: ‘In very rough terms, over the past 35 years, the world has consumed around 1tn barrels of oil. Over the same period, proved oil reserves have increased by more than 1tn barrels.‘”

An important byproduct of the US shale revolution “… is a huge shift in the direction of trade. In particular, China and India are likely to become vastly more important net importers of oil, while US net imports shrink. Quite possibly, 60% of the global increase in oil demand will come from the two Asian giants over the next 20 years.”

“By 2035, China is likely to import three-quarters of its oil and India almost 90%…. If it does, it demands no great mental leap to assume that US interests in stabilizing the Middle East will shrink as that of China and India rises. The geopolitical implications might be profound.”

“The problem is not that the world is running out of oil. It is that it has far more than it can burn while having any hope of limiting the increase in global mean temperatures over the pre-industrial levels to 2⁰C. Burning existing reserves of oil and gas would exceed the global budget threefold. Thus, the economics of fossil fuels and of managing climate change are in direct opposition. One must give.”

Five Numbers From Airbnb’s Just-Revealed New York City Data. Eric Newcomer. Bloomberg Business. 1 Dec. 2015.

I’ve included this article because it provides some real stats on Airbnb in NYC.

Due to requests from New York City, Airbnb just released anonymized host data for approximately 59,000 listings in the city between November 1, 2014 and November 1, 2015 outlining the information on the type of listings in the City offered by its users and their earnings from the activity.

  • 16% of hosts list their full time home or apartment on Airbnb for more than 121 days per year. 3% of hosts list for 271 days or more and more than half list their full homes or apartments for between 1 and 30 days.
  • The median annual earnings by hosts in NYC is $5,110.  SoHo and East Village hosts have the highest median rent ($6,558) and the Bronx the lowest ($3,249).
  • 126 New York City hosts made between $100,001 and $350,000 a year from Airbnb. 888 hosts made between $50,000 and $100,000 and the majority less than $10,000 a year.
  • 25% of the revenue going to active hosts went to those with more than two listings.  Airbnb projects that this number will decline to 7% in the future.
  • The median Airbnb property is rented out 42 nights a year or approximately 3.5 nights per month.


Other Interesting Articles

The Economist


BloombergBusiness: World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout 11/29

FT: Classic cars and fine wines leave Warren Buffett trailing 11/26

FT: John Cryan is right, bankers’ pay has to fall further 11/29

FT: The rise of liberal intolerance in America 11/29

FT: IMF gives renminbi strong weighting in currency basket 11/30

FT: Sovereign wealth fund pullback hits Aberdeen Asset Management 11/30

FT: Brazil’s economy shrinks by record 4.5% 12/1

FT: Our virtual reality future is bigger than it appears 12/1

FT: Signs of froth in China’s debt market 12/1

FT: Global defaults climb to 6-year peak of $95bn 11/30

FT: ECB pledges to extend easing until March 2017 ‘or beyond’ 12/3

FT: Google steps up push into wind, solar energy 12/3

FT: Saudi Arabia throws down challenge on oil production cuts 12/3

Globe Street: Underwriting Relaxes in Multifamily: Trepp 11/25

Investment News: How Vanguard pulls billions from Wall Street every year 12/1

National Real Estate Investor: No Reason Yet to Fear a Bubble, CRE Industry Pros Say 12/2

NYT: Macau Gambling Industry Faces Challenges on Multiple Fronts 11/26

NYT: Private Equity Market Is Expected to Attract $629 Billion in 2015 11/30

WSJ: China’s Globetrotting Tourists Face Trouble at Home 11/30

WSJ: European Retail Property Deals Surge 12/1

WSJ: Bottom Keeps Falling for Energy-Debt Investors 12/2

WSJ: China’s Property Rally Has Dubious Foundations 12/3