Month: March 2016

March 18 – March 24, 2016

Chinese companies looking for cash flow. The knock on effects of low oil prices. U.S. Commercial Real Estate starting to get that sinking feeling.

Happy Easter! This week the three major themes/articles are 1) James Kynge, Gabriel Wildau and Don Weinland’s “China Inc: The quest for cash flow” in the Financial Times, followed by a three separate articles in the Financial Times discussing the impact of low energy prices 2a) Eric Platt and Laura Noonan’s “Bondholders suffer $150bn oil price hit”, 2b) Simeon Kerr’s “Gulf states will be forced to tap debt markets, warn Moody’s” and 2c) Henny Sender’s “Lower oil tests sovereign wealth funds” all in the Financial Times, and 3) is Peter Grant’s “Turning Point? U.S. Commercial-Property Sales Plunge in February” in the Wall Street Journal.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

  • Following up on the coverage on Anbang from last week, Marriott has since upped its offer ($13.6bn up from $11bn in November 2015) for Starwood and has ‘won’ the bid.  While I’m sure Marriott isn’t too happy with the higher price, the shareholders of Starwood are gleeful.  As an aside, it is also looking like Anbang may not have been able to consummate the deal and may have difficulties closing the Strategic Hotels deal.  Have to be mindful of that capital flight…
  • Foreign media sources in China are on edge.
    • “New Chinese regulations aimed at dramatically restricting the publication of foreign content have introduced a new chill into an already frigid press environment in China.”
    • “The directives, which entered force last week, give China’s government draconian powers to stop foreign companies or partly foreign-owned companies from publishing online material unless they have approval from the broadcast regulator – the State Administration of Press, Publication, Radio, Film and Television.”
    • Industry analysts say the rules fit a new pattern: whereas formerly the government’s press censorship was widely denied and hidden from view, today the government is making its powers and the limits of dissent more explicit and public.
  • Entertaining read in the FT, “Every cycle is defined by a hubris trade.”  I.E. Julian Robertson’s position in US Airways in the dotcom era and now Bill Ackman’s Valeant position.
  • Think it’s expensive where you live?  In Hong Kong median home prices are around 19 times gross income levels.  As a result it’s not uncommon for married couples to live separately with their respective parents.
  • Transamerica is being sued for cost increases on universal life insurance contracts.  Basically high annuities are hard to cover in a zero to negative interest rate world, so life insurance companies are having to increase fees for certain products, even on existing contracts.
  • And I would recommend each of the Special Reports below.

Interesting graphics:

From the Financial Times’s “Oil and gas: Debt fears flare up.

FT_American Energy Junk Bond Issuers_3-21-16

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

China Inc: The quest for cash flow. James Kynge, Gabriel Wildau and Don Weinland. Financial Times. 18 Mar. 2016.

This article followed Anbang’s flurry of activity last week and serves up something of an explanation of why Anbang and other Chinese companies have been aggressive in pursuing foreign acquisitions of late.

In 18 months Anbang, the Chinese Insurance company, “has signed $32bn in overseas acquisitions deals.”  To give you a sense, “Since 2014, Anbang has outbid competitors to snap up the Waldorf Astoria hotel, a US landmark, for $1.95bn; paid $1.6bn for US insurer Fidelity and Guaranty Life; $1bn for a controlling stake in Korean insurer Tongyang Life; and scooped up trophy properties in London and companies in Europe.”

“Within this surge of Chinese deals – which have totaled $102bn since January compared with the record $106bn for all of last year, according to Dealogic – lies a paradox for target companies. While the cash offers can seem too big to refuse, they may also appear to come from the corporate equivalent of deep space, so sparse is the information available on the bidder.”

“Anbang, which is just 12 years old, astounded the Chinese insurance world in 2014 with successive fundraising rounds that expanded registered capital from Rmb12bn ($1.8bn) to Rmb62bn in less than a year, introducing 31 new investors. This propelled it to first place among insurers, outstripping the likes of China Life and the People’s Insurance Co of China, even though they far eclipse it in terms of premiums.”

“The lack of transparency, analysts say, may be linked to the preference among many Chinese bidders for all-cash offers.”

“The serious flaws in Chinese corporate disclosure are why all-cash offers are often required.  The cash is less to make the bid more attractive than to compensate for the fact that these companies either don’t have a desirable level of assets or can’t properly document the assets.” – Derek Scissors, China analyst at the American Enterprise Institute.

“To a significant degree, analysts say, the exodus of Chinese investment capital is in fact a ‘quest for cash flow.'”

“Data from 1,627 domestically listed companies, or 58% of the total, that have reported their 2015 earnings show a clear deterioration in fortunes. Average operating revenues per share fell to their lowest level so far this decade, sliding to Rmb5.4 from Rmb6.55 in 2014, according to Wind Information, a data provider.”

“In addition, just over one-fifth of listed Chinese companies reported negative cash flows during 2015 and about one-third owed at least three times as much in debts as they owned in assets, according to Wind.”

“Nevertheless, it would be wrong to assume that Chinese corporate investments overseas are driven solely by a dash for cash, or by capital flight because of fears that the value of the renminbi may slump. Distinct strategic thinking also underlies the moves.”


Bondholders suffer $150bn oil price hit. Eric Platt and Laura Noonan. Financial Times. 21 Mar. 2016.

While I try not to bog you down with too much to read, these three interrelated articles pertaining to the energy sector are well worth the read (if you want more, see the Special Report below “Oil and gas: Debt fears flare up.

First the investors…

Investors have suffered losses of at least $150bn in the value of oil and gas company bonds, as the slump in crude prices since the summer of 2014 has fueled fears of a wave of defaults in the US and emerging markets.”

The 300 largest global oil and gas companies have also seen $2.3tn sliced from their stock market value over the same period, a 39% slide since oil began its decline, an analysis by the Financial Times has found.”

“Borrowing by oil and gas companies has soared over the past decade. Their total debt, including loans, almost tripled from $1.1tn in 2006 to $3tn in 2014, according to the Bank for International Settlements.”

“Low oil prices fuel a reduction in risk-taking, and when there is less risk-taking, asset prices will fall. It can lead to a downward asset price spiral.” – Hyun Song Shin, chief economist of the BIS

“Twenty of Europe’s biggest banks have energy loans totaling almost $200bn between them – enough to wipe out a quarter of their common equity. In the US, twenty of the leading banks have loans totaling $115bn, or 11% of their common equity.”

Gulf states will be forced to tap debt markets, warn Moody’s. Simeon Kerr. Financial Times. 21 Mar. 2016.

Next the resource rich countries…

“Oil-rich Gulf governments will be forced to rely on debt markets as their fiscal deficits rise to $270bn amid an extended period of low oil prices over the next two years, Moody’s has said.”

“Last year, the Gulf states largely used reserves and local banks to finance the deficits that are the largest in their history, widening from 9% of GDP last year to 12.5% this year.”

“Saudi Arabia, for example, faces a forecast deficit of $88bn this year and $65.3bn in 2017, according to Moody’s. In 2009, the deficit was $23bn and the previous oil slump of the late 1990s saw the deficit peak at $13bn in 1998.”

“Moody’s forecasts that the kingdom, which has had negligible debt levels for years, is expected to see government debt rise to around 20% of GDP by next year.”

According to Mathias Angonin, a Dubai-based senior sovereign analyst with Moody’s, “proposed subsidy reforms, capital expenditure cuts and the introduction of sales tax from 2018 would not be enough to balance the deep GCC budget deficits.”

Lower oil tests sovereign wealth funds. Henny Senders. Financial Times. 21 Mar. 2016.

And lastly, the sovereign wealth funds that derive their capital from the resource rich countries…

“Circumstances have changed in the Gulf, bringing in their wake a host of ripple effects. A while ago, the biggest headache for the sovereign wealth funds of the Middle East was finding safe but profitable homes for their portion of swelling oil revenues.”

“That will mean both downward pressure on the prices of some assets that has little to do with fundamentals, and more attractive valuations for new money coming in.”

“Moreover, most governments in the region will probably prefer to run down their reserves than to see their currencies lose value, analysts say. That is another reason these giant pools of money will have less to put to work globally going forward.”

“Global liquidity will shrink because global liquidity basically means dollar liquidity and all the GCC and Saudis need dollars.” – Mohamad Al Hajii, a macro strategist for EFG Hermes UAE in Dubai.

“Already Qatar has been quietly selling commitments to private equity funds and public shares, according to people familiar with the matter.”

“The reduced presence of the regional sovereign wealth funds will be felt more strongly in asset classes that have an especially long-time horizon, such as private equity and infrastructure.”

“Weak exports and slowing domestic economies mean that sovereign funds and other deep pools of money in Asia also have less money to invest globally. That means pension funds in countries from Canada to Korea will have more opportunity. But managers at some of these funds say they are still waiting, convinced that if they are patient, there will be even more bargains in coming months.”


Turning Point? U.S. Commercial-Property Sales Plunge in February. Peter Grant. Wall Street Journal. 22 Mar. 2016.

“Sales of U.S. commercial real estate plummeted in February, sending the clearest signal yet that a six-year bull market might be coming to an end.”

“Just $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands last month, compared with $47.3 billion in the same month a year earlier, according to deal tracker Real Capital Analytics Inc. In January, sales were $46.2 billion.”

“Overall, commercial-property values are leveling off. Green Street’s broad valuation index in February was 8.7% higher from one year earlier, but in the previous year the index rose 11%.”

“The market has slowed primarily because of forces at work in the global capital markets rather than problems stemming from real estate itself. These forces, which also caused global markets to plummet in the first two months of this year, have made debt – the lifeblood of real estate – more expensive and more difficult to obtain.”

“The most dramatic sign has been the sharp decline in bonds backed by commercial mortgages. In 2015, about $100 billion of commercial mortgage-backed securities were issued. This year experts believe volume will fall to $60 billion to $75 billion.”

“As yields of junk bonds soared, real estate became a less attractive investment. At the same time, the spreads between real-estate borrowing rates and Treasury bonds widened greatly.”

“Today loans that would have been made with interest rates in the 4.5% to 5% range are now being made above 5%, market participants say. Borrowers who would have lent up to 75% of a property’s value have reduced their so-called loan-to-value ratios to between 65% and 70%.”

“Buyers have been hearing ‘no’ from lenders for the first time in a while,” said Jim Costello, senior vice president at Real Capital Analytics.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Fidelity Calls U.S. Fairly Attractive as Yield Premium Climbs 3/20
Bloomberg – How Satisfying Millennials Could Save PwC $850 Million 3/23

Civil Beat – Can We Grow Our Economy, Not Our Population (Luke Evslin) 3/18

Daily Commercial News – Twenty major upcoming Hotel/Motel and Retail/Shopping Center construction projects – U.S. 3/23

FT – Emerging market debt: A trawl for yield 3/17

FT – China’s rising exports: less about growth, more about exporting deflation 3/17

FT – Every cycle is defined by a hubris trade 3/18

FT – Hong Kong cost of living forces married couples into separate beds 3/20

FT – China bank governor warns over corporate debt 3/20

FT – CBI chief says Brexit would leave economy weaker 15 years on 3/20

FT – China plays ball with its development lending 3/22

FT – Beijing scrambles to contain vaccine scandal 3/22

FT – Anbang’s bids for US hotel chains thrown into doubt 3/22

InvestmentNews – Transamerica sued for cost increases on universal life insurance contracts 3/23

NYT – Cities to Untangle Traffic Snarls, With Help From Alphabet Unit 3/17

NYT – Scientists Warn of Perilous Climate Shift Within Decades, Not Centuries 3/22

WSJ – Starwood Says Boosted Anbang Bid Tops Marriott Agreement 3/18

WSJ – Lessons in Chinese Debt Restructuring: The Debtor Always Wins 3/18

WSJ – Japanese Land Prices Rise for First Time Since Global Financial Crisis 3/22

WSJ – Big Oil’s Next Big Energy Problem 3/23

Special Reports


March 11 – March 17, 2016

Chinese cracking down on P2P lenders. Anbang is off to a bang in U.S. real estate. Tick, tick, tick – CMBS not looking so good.

Happy St. Patrick’s Day!  To add a bit of good news, the Dow Industrials turned positive for the year yesterday and U.S. crude closed above $40 a barrel for the first time this year.  Woohoo.  This week will cover more real estate articles than usual, actually all three have ties to real estate – that’s just how it goes sometimes.  Starting in China  is 1) Don Weinland and Yuan Yang’s  “China to crack down on P2P lenders” in the Financial Times, followed by 2) Arash Massoudi, James Fontanella-Khan, and Lucy Hornby’s “China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone” in the Financial Times, which really goes hand-in-hand with Joshua Jamerson’s “Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal” in the Wall Street Journal, and 3) is Diana Olick’s “Real estate’s ticking bomb: Who gets hurt” in CNBC.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

  • Following up on the difference between pro forma earnings and GAAP earnings and particularly for Tech companies, “Stock-based compensation isn’t a real expense – or so tech companies would have investors believe.”
    • “The difference between pro forma results and those reported under general accepted accounting principles, or GAAP, has been widening. Facebook’s GAAP net income was only 56.6% of its pro forma net income in 2015 down from 62% in 2014. For S&P 500 tech companies as a whole, there was a 19% gap between the two earnings measures in 2015, nearly double the difference in 2014.”
    • “That may have been why Warren Buffett again felt compelled to address the issue in his annual letter to Berkshire Hathaway shareholders. Excluding stock-based compensation is ‘the most egregious example’ of ‘managers telling their owners to ignore certain expense items that are all too real,’ he wrote. ‘If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?'”
  • It’s getting hot in here. “Last month was the hottest February in 137 years of record keeping, according to data released Thursday by the National Oceanic and Atmospheric Administration (NOAA). It’s the 10th consecutive month to set a new record, and it puts 2016 on course to set a third straight annual record.”
    • “The El Nino that started that started last year produced some of the hottest temperatures ever witnessed across great swaths of the equatorial Pacific. By some measures, this may now be the most extreme El Nino on record.”

Bloomberg_Global Heat Wave_3-17-16

  •  At China’s ‘two sessions,’ the party leadership is pushing more stimulus. It appears that the party leadership wants to keep the good times rolling at least until Xi Jinping has the opportunity to appoint his own nominees to the Standing Committee of the Politburo (the highest committee of the political system – 5 of 7 seats will be open) in 2017.
    • “China is aiming for just 3% growth in government revenue this year, suggesting that more of the deficit will come from tax cuts to private firms.”
    • “Promises to slim industries such as steel and coal sound tough – the government expects nearly 2m workers will be laid off-but the planned reduction would make only a small dent in oversupply. Instead the government seems to be doubling down on its well-worn recipe of debt-and investment-fueled growth.
    • “Credit is growing at twice the rate of nominal GDP, in a country already overburdened by private debt.”
  • $81 million was stolen from Bangladesh this week.  Turns out the money was routed to the Philippines, specifically to some casinos.  Why, because the Philippines, and especially their casinos, have the toughest privacy laws around – ‘don’t ask, don’t tell.’
  • Otto Warmbier, a U.S. college student was sentenced to 15 years of hard labor for attempting to steal a poster from a hotel in North Korea.
  • Brazilian President Rousseff had appointed her predecessor (Lula) to a cabinet position to provide him with a degree of legal immunity – prosecutors are seeking to indict him for involvement with the Petrobas scandal, but just before the appointment took hold, a judge barred the position.  Not so fast…
  • With negative yields taking hold in Japan, Japanese institutional investors are looking to invest funds in overseas real estate.

Interesting graphics:

From Barry Ritholtz’s The Big Picture blog.

Bianco Research_Negative Interest Rates in the World_3-17-16

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

China to crack down on P2P lenders.  Don Weinland and Yuan Yang. Financial Times. 14 Mar. 2016.

“Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

As a result, “Home sales in Beijing, Shanghai, Guangzhou and Shenzhen, China’s “first-tier” cities, grew 14% last year compared with about 7% nationwide. In Shenzhen, the average price per square meter in February increased by about 50% compared with a year earlier, according to Soufun, a real estate consultancy.”

FT_Chinese residential property prices_3-14-16

As Xia Le, chief economist for Asia at BBVA, a bank, puts it “I have been very nervous about this because it reminds me of the US subprime crisis. In the past, people buying houses paid using their own money but now they’re using speculative shadow finance.”

Basically, Peer-to-Peer (P2P) companies have allowed borrowers to circumvent government controls – requirements for buyers to have a 30% down payment for their first home and up to 50% for subsequent properties – meant to slow property price growth.  The challenge is that the P2P sector is loosely regulated and its size is not fully known. Further, P2P loans are not cheap.  “P2P loans typically mature in 90 days and carry hefty interest rates of up to 12%.”

FT_Chinese P2P Market_3-14-16

China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone. Arash Massoudi, James Fontanella-Khan, and Lucy Hornby. Financial Times. 13 Mar. 2016.

There was a lot of press about Chinese insurer Anbang this past week.  It started with Anbang buying Strategic Hotels & Resorts from Blackstone for $6.5bn. Blackstone only just closed on the 16 luxury US hotels (includes the Hotel del Coronado in San Diego and the JW Marriot Essex House Hotel in NYC) three months ago for $6bn.  Not a bad way to make a buck for Blackstone – especially considering the odds are high that a good deal of leverage was used in the initial purchase.

Who is Anbang? Anbang was founded and is led by politically connected (married to the granddaughter of Deng Xiaoping) 40-something Wu Xiaohui has grown from a small car insurer with approximately $60m in assets 12 years ago into a financial services conglomerate with over $123bn in assets (as of February of last year).

But don’t stop there.

Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal. Joshua Jamerson. Wall Street Journal. 14 Mar. 2016.

Before the ink could dry on the Strategic Hotels & Resorts deal, Anbang along with Chinese investment firm Primavera Capital Group, and J.C. Flowers & Co, submitted (March 10) a $12.8bn unsolicited bid for Starwood Hotels & Resorts Worldwide Inc, about $1.8bn more than the currently agreed to (in November 2015) deal that Marriott had made with Starwood.

Per Starwood’s current deal with Marriott, they have until March 17 to talk with rival bidders.  Don’t feel bad for Marriott.  “Marriott noted that if Starwood were to terminate the deal, it would owe Marriott a $400 million termination fee.”  Also not a bad way to make a buck – for Marriott and Starwood.

Shareholders of each company are scheduled to vote on the deal on March 28.

Geez Louise.

“Chinese companies have done more than $84 billion in deals since the start of the year, according to Dealogic, setting them up to top the record $108 billion of Chinese outbound acquisitions reached last year.”

Well that’s one way to get money out of China.


Real estate’s ticking bomb: Who gets hurt. Diane Olick. CNBC. 10 Mar. 2016.

Last week I made mention of defaults starting to show up in the commercial property sector.  Well a large part of that has to do with demand for commercial mortgage backed securities (CMBS) which effects property owners and developer’s abilities to refinance and acquire assets.  Bottom line, demand for CMBS bonds is drying up at the current yield offerings, especially considering the yield offered relative to other high-yield debt products.

In reference to ‘cracks’ showing up in CMBS financing, Willy Walker, Chairman and CEO of Walker & Dunlop – one of the largest suppliers of multi-family loans in the country, had this to say, “I think cracks is a little bit of an understatement for where the market has been for January and February, where, for all practical purposes, the market was frozen.”

CMBS “maturities are expected to surpass $400 billion annually this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year. CBRE “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year could have problems refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially troubled loans over these two years.”

Though, “the real refinancing wave doesn’t kick in until June, but starting in June there’s about $10 billion a month that needs to be refinanced, so unless the CMBS market finds its level and starts to price and transact again, we’re going to have more than cracks,” – Walker.

Interestingly and relatedly, “Commercial real estate prices have been strong for a few years now, thanks to high occupancy and strong demand, but in January they fell nationally for the first time in seven years, according to the Moody/RCA Commercial Property Index.”

“This is a significant milestone that signals that a shift in sentiment among commercial-property investors is under way.” – Moody’s

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – US oil producers lock in high prices 3/10

FT – China property, Tier-1 vs the rest 3/10

FT – Equity funds draw investors for first time in 2016 3/10

FT – Bangladesh central bank governor quits over $101m cyber heist 3/15

FT – Weak Japan wage demands deal blow to Abenomics 3/15

FT – ‘Lion may be lurking’ in markets, warns BlackRock 3/15

FT – Anbang’s Starwood bid shines light on China’s deal gate-crashers 3/15

FT – Dubai property developer Nakheel in talks over push into Asia 3/15

FT – North Korea sentences US student to 15 years’ hard labor (for attempting to steal a poster) 3/16

FT – Valeant backer Sequoia Fund’s value plunges 3/16

FT – Judge’s bar on Lula puts Brazil on edge of constitutional crisis 3/17

National Real Estate Investor – Foreign Buyers of U.S. Assets Show No Signs of Slowing Down 3/16

Nikkei Asian Review: Mitsubishi Estate eyes 100bn-yen overseas real estate fund 3/13

NYT – The Assets of the Ultrarich Come Closer to Earth 3/10

NYT – China Weighs Letting Banks Sell Bad Debt to Investors 3/12

NYT – Investors Increasingly Bullish on Energy Sector 3/14

NYT – Brazen Heist of Millions Puts Focus on the Philippines 3/16

ValueWalk – SEC Charges Fund Executives In Alleged Oregon Ponzi Scheme 3/14

WSJ – Aging Bull Market Has Fed in Its Corner 3/10

WSJ – Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales 3/13

WSJ – How Google Could Put Pay-TV in a Box 3/13

WSJ – Why China Real-Estate Giant (Vanke) is Going Back to its Roots in Bid Defense 3/14

WSJ – Why China’s Bad Debt Solution Isn’t Magic 3/15

WSJ – The Big Valeant Asset That Could Disappear 3/16

Yahoo Finance – The chilling math of inequality 3/15

Special Reports


March 5 – March 10, 2016

Chinese exports plunge – and a glimpse of China in 2025.  $5 trillion of negative-yielding Japanese debt, but that’s only part of the problem.  Midstream energy companies feeling a bit exposed.

Three articles that stood out this week are 1) Shawn Donnan, Chris Giles, and Gabriel Wildau’s “IMF issues warning on global growth as China exports plunge” in the Financial Times, which goes hand-in-hand with a special report that Daniel Rohr did for Morningstar “What Will China Look Like in 2025?”, 2) Kevin Buckland, Masaki Kondo, and Shigeki Nozawa’s “The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles” in Bloomberg, and related to this article is a bomb-shell of a report by Kevin Wilson of Blue Water Capital, “Japanese Policy Failure Means Disaster For Us All” that was featured in Mauldin Economics, and 3) is piece by Gregory Meyer “Pipeline investors shaken by bankruptcy ruling” in the Financial Times that points to a major concern for the mid-stream energy companies.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • Bottom line, the State Administration of Foreign Exchange (SAFE) has asked banks to reduce foreign currency transactions – verbally of course.  As Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp, puts it “There appears to be a real crackdown on money flowing out of China. Even normal business transactions which are ongoing are getting delayed.”
    • Seriously… somebody has a sick sense of humor.

Interesting graphics:

From the Wall Street Journal, U.S. real estate has become quite a bit more expensive for foreign buyers.

WSJ_Change in US home prices for foreign buyers_3-8-16

From Barry Ritholtz’s The Big Picture blog.

Ritholtz_Negative European Govt Bonds_3-10-16

From the Economist, bad things tend to happen when debt to GDP levels get too high.

Economist_Credit as % of GDP_3-10-16

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

IMF issues warning on global growth as China exports plunge.  Shawn Donnan, Chris Giles, and Gabriel Wildau. Financial Times. 8 Mar. 2016.

“The world faces a growing ‘risk of economic derailment’ and needs immediate action to boost demand, the International Monetary Fund warned on Tuesday as new figures pointed to the worst monthly collapse in Chinese exports since 2009.”

“Among the ‘most disconcerting’ signs of trouble in the world economy, he said, were ‘a sharp retrenchment in global capital and trade flows’ over the past year.”

The news that triggered this article was that “In dollar terms China’s exports fell 25.4% in February from a year earlier, the worst one-month decline since early 2009 and down from a 11.2% drop in January.”

The IMF has “already said it is likely to lower its 3.4% growth forecast for this year when it issues its next round of predictions in April.”

However, not all economists feel so downtrodden. Olivier Blanchard, former chief economist of the IMF, and his colleagues at the Peterson Institute of International Economics say that Fears on global downturn are overdone.

Though, here is a link to a Morningstar report by Daniel Rohr’s Morningstar’s on What Will China Look Like in 2025?  A very timely report that is worth the read.  Here is a little teaser.

“The country’s working-age population will shrink by 43 million by 2030, by which time China will have more seniors than the European Union, Japan, and the United States combined.”


The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles. Kevin Buckland, Masaki Kondo, and Shigeki Nozawa. Bloomberg. 7 Mar. 2016.

“The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than 600 trillion yen ($5.3 trillion) and that’s a major headache for the finance industry.”

According to the Bank for International Settlements, “the experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are… Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”

FT_Japanese 30-year bond yield_3-8-16

And the bombshell of a report by Kevin Wilson of Blue Water Capital, Japanese Policy Failure Means Disaster For Us All…  This article was originally published in Seeking Alpha and does an excellent job at highlighting the precariousness of the Japanese economy and does so with many illustrative charts. I recommend reading the whole thing, but here are some of the highlights.

“…it seems to me that the Japanese economy, as noted years ago by author John Mauldin, is ‘a fly in search of a windshield.'”

“It was already evident that there was a problem with Abenomics even before the NIRP decision. The velocity of money has continued to fall, inflation has stayed stubbornly low or negative, household incomes were declining rather than rising, household spending declined sharply as the tax increases from Abenomics kicked in, and as a result, consumer confidence in Japan has been negative for years on end.”

Japanese Velocity of Money_Q3 2015

Japanese v US HH Incomes_March 2016

Due the hording of cash and bonds “…for Japanese investors, the total return on the JGB 30-year bond has beaten that from the MSCI Global Equity Index over the last 15 years.”

JGB 30y Bond vs MSCI Equities_March 2016

“Demand for cash in Japan, always relatively high, has increased since the NIRP decision, according to Naohiko Baba, Tomohiro Ota, and Yuriko Tanaka at Goldman Sachs. They not that demand for cash is now very sensitive to interest rates, even to the point that cash and deposits are nearly perfect substitutes.  Since deposit rates are so low now, there is little penalty or downside in holding cash. Not coincidentally, sales of household safes for storing (hoarding) cash have soared in Japan since the NIRP decision.”

“Hoarding is about the worst consumer outcome one can imagine, relative to the ultimate success or failure of Abenomics… The number of banknotes in circulation in Japan is extremely high relative to GDP and to other national economies, such as those of the USA, Switzerland, the eurozone, Denmark, and Sweden.”

Bloomberg_Japanese 10,000 Yen notes in circulation_March 2016

“Virtually every aspect of Abenomics is now in failure mode, and since the reform part of the package has never been enacted, it is unlikely that the government can regroup in a meaningful way under present conditions.”

Look at this demographic projection…

Japanese Demographic Chart_March 2016


Pipeline investors shaken by bankruptcy ruling. Gregory Meyer. Financial Times. 8 Mar. 2016.

“A judge has allowed a US oil and gas company to abandon pipeline contracts while in bankruptcy, in a first-of-its-kind decision that has rattled investors in energy infrastructure.

Sabine Oil & Gas, a shale energy producer under Chapter 11 bankruptcy protection, sought permission to break contracts with two pipeline companies so it could pursue better deals and save as much as $115m.”

“The decision has important implications for the midstream energy sector, which gathers, processes, transports and stores oil and gas. Income-hungry investors had flocked to midstream companies on the belief that their generous payouts were backed by long-term, immutable contracts with customers.”

The mantra has been over the past year or so as oil prices have plummeted, that ‘we’re fine, oil is still flowing through our pipes.’ We’ll just ask retail landlords across the country how that’s going with the whole Radio Shack, Blockbuster, Sports Authority, etc. lease.

“Haynes and Boone, a law firm, said 48 North American oil and gas producers filed for bankruptcy in 2015 and more will follow this year.”

Now expect more mid-stream companies (think MLPs) to be at risk.

Other Interesting Articles

Bloomberg Businessweek

The Economist


Bloomberg – Blackstone’s Gray Sees Lower Real Estate Returns as CMBS Falters 3/4

Bloomberg View – Falling Earnings, Recession Warning 3/9

Bloomberg – Manhattan Luxury Rents Slide as Condo Buyers Seek Tenants 3/10

CFO – $300B Capex Lost in Recession Goes Unreplaced 3/9

FT – Macau’s annual GDP contracts by 14.4% in 4Q 3/2

FT – Commodity prices signal market bottom 3/4

FT – US high yield: back in the game 3/6

FT – Hong Kong and China ‘heading for bigger showdown’ 3/6

FT – Wall St in for a hawkish Fed surprise – Goldman 3/7

FT – Goldman Sachs says commodity rally is unlikely to last 3/8

FT – Long-term Japanese yields set new record lows 3/8

FT – Has the cold US-Sino trade war just got piping hot? 3/8

FT – Bombed pipeline to hit Nigeria oil output 3/8

FT – Re-assessing the classic risk-return trade off 3/8

FT – Moody’s to withdraw from Russian domestic market 3/9

FT – UL MLPs: courting disaster 3/9

FT – China provinces rail against Beijing plan to tackle overcapacity 3/10

FT – US Treasury market shows signs of stress 3/10

Mauldin Economics – The Roots of Trump’s Strength (George Friedman) 3/7

Nikkei Asian Review – China-related bankruptcies spike in Japan 3/5

NYT – Brazil’s Lula Detained in Corruption Probe; Rousseff Objects 3/4

NYT – In New Economic Plan, China Bets That Hard Choices Can Be Avoided 3/5

Project Syndicate – Is the Perfect Storm Over for Markets? (Mohamed A. El-Erian) 3/9

Value Walk – BDC Losses, MLPs and REITs – Slow Motion Melt (David von Leib) 3/10

WSJ – China’s Falling Reserves Catch a Break 3/7

WSJ – Shopping-Center REITs Are on Many Investors’ Lists 3/8

WSJ – What’s Twitter Worth? It’s Complicated 3/8

WSJ – Foreign Buyers Are Pulling Back, Realtors Say 3/8

WSJ – WeWork Targets Asia as Valuation Hits $16 Billion 3/10

WSJ – ECB Cuts Rates and Expands Stimulus – Recap 3/10

WSJ – The Most Expensive Cities in the World to Live 3/10

Special Reports


February 26 – March 4, 2016

Evergreening of debt in China. Japan becomes second country to sell negative 10-year bonds. Structural changes in global trade.

Three articles that stood out this week are 1) Alex Frangos’ “How China’s Big Lending Push Comes Up Short” in The Wall Street Journal, 2) Lew Lewis and Dan McCrum’s “Japan sells negative yield 10-year bonds for first time” in the Financial Times, and 3) is Shawn Donnan’s “Global trade: structural shifts” in the Financial Times.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • “Late Monday, the People’s Bank of China lowered the amount of deposits that banks must hold in reserve by 0.5 percentage points, freeing up an estimated 700 billion yuan ($107bn) in funds for banks to make loans.”
    • “The timing of the easing measure, just after China assured Group of 20 finance chiefs it wouldn’t deliberately weaken the yuan, quickly raised eyebrows.”
    • However, a liquidity shortage is of greater concern to the central bank than the yuan stability. “The first sign of a cash squeeze came late last week, when China’s overnight money-market rates, a key gauge of liquidity, surged and caused Chinese stocks to plunge.”
    • As an indication of the outflows, China’s foreign-exchange reserves plunged by $99.5bn in January, to $3.23tn.
    • “As for the Malaysian attorney general’s conclusion that the $681 million deposited to Mr. Najib’s account was a Saudi royal-family donation, the international investigators have found no evidence any of this came from Saudi Arabia, according to those familiar with their probes.
    • A person familiar with 1MDB’s dealings also said the deposit didn’t come from Saudi Arabia. A Saudi official said in January the kingdom’s ministries of finance and foreign affairs had no knowledge of such a donation to Mr. Najib.

WSJ_1MDB money trail_2-29-16

    • “Since peaking at $19.6 billion in 2013, fundraising among public, non-listed REITs has dropped significantly in the past two years. In 2014, fundraising fell to $15.6 billion, followed by another sharp decline last year to $10.0 billion, according to data from Robert Stanger & Co., an investment banking and financial advisory firm. The company is forecasting another dip this year to between $7.0 billion and $8.0 billion.”

Non Traded REITs Battle Fundraising Woes_3-2-16

    • “Aside from the negative press, there are some big regulatory changes ahead for the sector. A new rule set to go into effect in April will require non-traded REIT funds to report the investment balance-net of fees-on customer statements. Non-traded REITs, for the most part, have a heavy burden of front-end fees of 10 to 12 percent.

Side note: for those that have been reading my posts via LinkedIn, first, thank you, and second, it just came to my attention that the WordPress connection with LinkedIn had been disconnected.  My apologies.  There have been a few weeks of posts that you have missed.  You can check out the posts at and while there you may consider signing up for the email – you’ll have the posts sent directly to your email when they’re made, that way there won’t be any further mix ups.

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

How China’s Big Lending Push Comes Up Short Alex Frangos. The Wall Street Journal. 29 Feb. 2016.

This article follows on the note in the top section about measures to increase banks loans into the economy.

“The problem is that China has reached an inflection point. A substantial chunk of new debt is increasingly going to pay old debt, creating less activity in the real economy aside from bankers’ fees and commissions.”

“A measurable effect is the so-called evergreening of credit, where lenders essentially roll loan maturities or provide credit simply to pay off old debt.”

“The result is a massive shortfall in the debt service compared with the sources of cash, to the tune of about 10% of corporate debt last year. That gap is filled with more borrowing.”

WSJ_China's Evergreening of Debt_2-29-16

As the saying goes, “borrow a million dollars and it’s my problem, borrow a billion and it’s yours.”


Japan sells negative yield 10-year bonds for first time. Leo Lewis and Dan McCrum. Financial Times. 1 Mar. 2016.

“Japan crossed a ‘financial rubicon’ on Tuesday as the country sold new 10-year bonds with a yield below zero for the first time at a government auction.”

FT_Japanese Govt Bond Yield_3-1-16

“The European Central Bank is expected to announce further monetary easing next week, and 10-year Bunds yield only 13 basis points.

Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first to do so in April last year.

The auction, of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024%, means investors have paid a fee to lend money for a decade to the government, the most indebted G7 nation (gross debt/GDP ratio of 250%).

“The buying appears to have been almost entirely dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield dropping into negative territory.”

Large pension funds have stayed away; however “they cannot stay away from the auctions forever if their mandates include following particular bond indices.”


Global trade: structural shifts. Shawn Donnan. Financial Times. 2 Mar. 2016.

“Last year say the biggest collapse in the value of goods traded around the world since 2009.”

“Barring a spectacular turnaround in the global economy, the subpar performance is likely to be repeated in 2016, making it the fifth straight year of lackluster growth in global trade, a pattern not seen since the doldrums of the 1970s.”

“Some economists note that the plateau in worldwide trade in goods and capital has coincided with a surge in data flows – an indicator, they say, that the digital economy of the 21st century is starting to overturn the old order.”

The silver lining.

“Even as flows of finance, goods and services have slowed – falling from a peak of 53% of global output in 2007 to 39% in 2014 – the world has seen a surge in cross-border data. The flow of digital information around the world more than doubled between 2013 and 2015 alone, to an estimated 290 terabytes per second, McKinsey says. That figure will grow by a third again this year, meaning that by the end of 2016 companies and individuals around the world will send 20 times more data across borders than they did in 2008.

“General Electric, which is using 3D printers to make fuel nozzles for jet engines and expects its aviation unit to be manufacturing 100,000 parts using the technology by 2020.”

“By its (McKinsey’s) calculations cross-border flows of capital, goods, services and data added an extra $7.8tn to the global economy in 2014. The added value of data flows alone accounted for $2.8tn of that total, slightly more than the $2.7tn attributed to the global trade in goods.”

Simultaneously global supply chains have shortened. As highlighted by the IMF and World Bank in a 2014 report, “as much as half the post-crisis slowdown in global trade could be attributed to “structural” rather than cyclical reasons.” I.E. decisions by countries and companies to bring production of component parts close to home.

Other Interesting Articles

Bloomberg Businessweek


FT – Share prices of big private equity houses point to pain 2/25

FT – Chinese house prices continue recovery 2/25

FT – Private equity taps into M&A insurance 2/25

FT – Hanergy Thin Film warns on 2015 profits 2/27

FT – Saudi Arabia seeks US investment to plug gap in oil revenues 2/28

FT – China tycoons fear ‘Cultural Revolution-type’ censure 2/28

FT – Former BoE chief King predicts collapse of the eurozone 2/29

FT – Argentina strikes deal with holdouts 2/29

FT – ExxonMobil sells $12bn of bonds amid rise in borrowings 2/29

FT – China data signal deepening slowdown 2/29

FT – Australia’s Great Barrier Reef hit by coral bleaching 2/29

FT – The fear and despair of Spain’s young jobseekers 3/1

FT – Hotel industry braced for demand crunch 3/1

FT – Moody’s warns on possible China downgrade 3/1

FT – US life insurers shaken by rock-bottom rates 3/2

FT – Oil crash takes heavy toll on midstream energy companies 3/3

Hotel News Now – Hoteliers, the party is over; act now 3/1

Project Syndicate – 2008 Revisited? (Nouriel Roubini) 3/2

WSJ – Hilton to Spin Off Hotels Into REIT, Separate Timeshare Business 2/26

WSJ – Bond Markets Reach a Tipping Point on Yields 2/26

WSJ – China Easing: Where Has All The Money Gone? 3/1

WSJ – Giant Chinese Developer Evergrande Real Estate Goes Out on Banking Limb 3/1

WSJ – Indicted Ex-Chesapeake Energy CEO Aubrey McClendon Dies in Car Crash 3/2

Yahoo Finance – U.S. incomes are finally growing 2/29