Month: April 2016

April 22 – April 28, 2016

Even Apple isn’t immune to Chinese oversight. China debt load is piling high. Retailer existential crisis.



    • Despite the growing number of bond defaults in China, “the fact is that China has the tools to manage these ‘defaults’ one way or another. As UBS’s Wang Tao has said, ‘the country’s high domestic saving, under-developed capital markets, government ownership  of banks and many larger borrowers, and relatively closed capital account mean that no one can easily ‘pull the plug’ on its credit cycle.'”
    • “More broadly, not much has changed in China in recent months…it remains a big, slowing economy, with a lot of debt, and all other things equal remains a deflationary force on the global economy (keeps commodity prices much lower than recent years). And most likely China continues to follow Japan in 1990s…periodically nasty for global financial markets but most of the time domestic policy keeps any problems local, and as with Japan it very rarely has a big negative impact on global growth. Latter changes of course with a genuine credit crunch.” 
  • While Keohane has a point, it doesn’t mean that toxic debt is anything other than that as Anjani Trivedi points out in the Wall Street Journal Why China Will Struggle to Turn Toxic Loans into Beautiful Bonds.
    • “The People’s Bank of China said recently one of its top priorities for the year is to advance a program to let banks securitize toxic loans into asset-backed securities, a type of bond. Unlike subprime bonds that triggered the financial crisis in the U.S., the banks openly acknowledge the loans are terrible before the bond is created.” 
    • “The last rub is that the banks will be managing the loans that make up these new securities. If they couldn’t work them out when they were on their balance sheets, investors should wonder what will make them be able to when they are packaged in a bond.”
  • Further, don’t forget about accounts receivables… Gabriel Wildau with the Financial Times highlights the growing amounts of unpaid bills from receivables.
    • “Listed companies had to wait a median 70 days to receive payment last year, the longest delay in 14 years, as cash flows tightened amid slack final demand. That compares with a median 60 days in 2014 and 46 days in 2011, according to Wind Information, a Chinese financial database.” 
    • “Ms Yu (Shanghai Caison Color Material Chemical) says that an increasing share of customers now insist on paying with a bankers’ acceptance rather than cash. Similar to a postdated check, bankers acceptances are a kind of IOU from a company and its bank. Ms Yu says that a few years ago, 5 to 10% of her sales were paid this way, but that has now risen to 20 to 30%. Most cannot be cashed for 90 or 180 days.”
    • “It looks like liquidity is very ample, but a lot of that is being used to help the real estate sector refinance. It’s not circulating widely through the economy.” – Shao Yu, economist at Oriental Securities in Shanghai.
  • Sorry if it feels like I’m harping on China here…not intentional.  Edward Wong of the New York Times points to a new set of rules that will restrict operations of foreign Non-Government Organizations (NGOs) in China starting January 1, 2017.
    • “More than 7,000 foreign nongovernmental groups will be affected, according to state news reports.” 
    • “Foreign groups working across Chinese civil society – on issues including the environment, philanthropy and cultural exchanges, and possibly even in educations and business – will now have to find an official Chinese sponsor and must register with the police.
    • “Those organizations that do not receive official approval will be forced to stop operating in the country. Many groups will probably curtail or eliminate programs deemed politically sensitive, such as training lawyers, in order to remain.”
    • “The new law is the latest in a series of actions taken by Mr. (President) Xi against the kind of Western influences and ideas that he and other leaders view as a threat to the survival of the Communist Party, such as an independent judiciary and media.”
    • “The most draconian aspect of the earlier drafts remained, despite widespread outcry from foreign groups and governments. It requires that foreign nongovernmental organizations register with the Ministry of Public Security and allow the police to scrutinize all aspects of their operations, including finances, at any time.”
    • “The law states that any employee of such a group can be interrogated at any time.”
  • Back to the U.S… John Authers of the Financial Times drew attention to the rising use of debt by U.S. corporates over the past few years for stock buy-backs and acquisitions that are starting to be more of an issue now that earnings are stalling.
    • “According to Andrew Lapthorne of Societe Generale, the reality is that “US corporates appear to be spending way too much (over 35% more than their gross operating cash flow, the biggest deficit in over 20 years of data) and are using debt issuance to make up the difference.” The decline in earnings and cash flows in the past year has accentuated the problem, and brought it to the top of investors’ consciousness.” 
    • “A further issue is the uses to which the debt has been put. As pointed out many times in the post-crisis years, it has generally not gone into capital expenditures, which might arguably be expected to boost the economy. It has instead been deployed to pay dividends, or to buy back stock – or to buy other companies. Shifts in these uses of cash are now affecting markets.”

Special Reports

  • Knowledge @ Wharton – PIMCO’s Former CEO Mohamed El-Erian on the ‘Delusion of Liquidity’ 4/21
    • “In a world where you’re facing this T junction, you need three things. You need resilience. You need agility. And you need optionality. And I go through them in the book – resilience, agility, and optionality. The only thing that gives you these three things is cash. So suddenly cash becomes a part of the strategic asset allocation, which again is putting conventional wisdom on its head.” 


FT – SOE you think you can default? – David Keohane 4/21

FT_Source of Chinese bond money_4-21-16

FT_Accumulated shadow banking defaults - China_4-21-16

FT – China debt load reaches record high as risk to economy mounts – Gabriel Wildau and Don Weinland 4/23

FT_China debt woes - annual change_4-23-16

FT_China debt ratio_4-23-16

FT – Alphaville: “What if China lands hard?” they asked in 2013 – David Keohane 4/27

FT_Credit Expansion in China_4-27-16

FT – Unpaid bills add to China debt problems as receivables mount – Gabriel Wildau 4/26

FT_China accounts receivables_4-26-16

FT_China cash conversion cycle_4-26-16

FT – Alarm over corporate debt and stalled earnings 4/27

FT_Net Debt to Operating Cash Flow_4-27-16


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

Apple Services Shut Down in China in Startling About-Face. Paul Mozur and Jane Perlez. New York Times. 21 Apr. 2016.

Not only did Apple just have its first quarterly fall in sales in 13 years, but business is getting tougher for the corporate innovator in China – which is why legendary investor Carl Icahn just dumped his entire stake.

“Last week, Apple’s iBooks Store and iTunes Movies were shut down in China, just six months after they were started there.”

“China’s pushback against Apple shows that the company may finally be vulnerable to the heightened scrutiny that other American tech companies have faced in recent years.”

As reported by Xinhua, the state-run news service, President Xi is quoted as saying “China must improve management of cyberspace and work to ensure high-quality content with positive voices creating a healthy, positive culture that is a force for good.”

The news is the news.  Content is both good and bad…

“Since the Snowden leaks, China’s state media identified eight American companies that it has labeled guardian warriors and that it has said were too deeply established in the country’s core industries such as energy, communications, education and military.”

“Sales in China for those companies, including Cisco, IBM, Microsoft and Qualcomm, have slid as government oversight has increased. Some have grappled with raids, investigations and fines. Some have also been pressured to sell of holdings, hand over technology and work with local partners to expand their China business.”

“Though Apple is one of the eight, it has had a much easier time.”

“Apple’s recent battle with the F.B.I over unlocking an iPhone for a terrorism investigation is unlikely to help it in China. Chinese lawyers have pointed out that the country’s antiterrorism law requires companies to help with decryption when the police or state security agents demand it for investigating or preventing terrorist acts.”

China debt load reaches record high as risk to economy mounts. Gabriel Wildau and Don Weinland. Financial Times. 23 Apr. 2016.

In case you were wondering why Keohane felt the need to clarify why China has the tools to handle its debts, consider that “Beijing has turned to massive lending to boost economic growth, bringing total net debt to Rmb163tn ($25tn) at the end of March (237% of GDP according to the FT).”

“While the absolute size of China’s debt load is a concern, more worrying is the speed at which it has accumulated – Chinese debt was only 148% of GDP at the end of 2007.”

“New borrowing increased by Rmb6.2tn in the first three months of 2016, the biggest three-month surge on record and more than 50% ahead of last year’s pace, according to central bank data and FT calculations.”

“Economists say it is difficult for any economy to deploy productively such a large amount of capital within a short period, given the limited number of profitable projects available at any given time.”

For comparison, according to the Bank for International Settlements (BIS), Chinese debt at 249% of GDP, is “broadly comparable with the eurozone’s figure of 270% and the US level of 248%.”

“Economists widely agree that the health of the country’s economy is at risk. Where opinion is divided is on how this will play out.”

“At one end of the spectrum is acute financial crisis – a ‘Lehman moment’ reminiscent of the US in 2008, when banks failed and paralyzed credit markets. Other economists predict a chronic, Japan-style malaise in which growth slows for years or even decades.”

For those that believe in the likelihood of an acute financial crisis, a key concern is the amount of credit expansion that has occurred through high-yield wealth management products.  For the Japan-style scenario people point to the sheer amount of reserves the country has and the high savings rates of Chinese citizens.

Though, “it is wrong to assume that ‘too much debt’ is bad only if it causes a crisis, and this is a typical assumption made by almost every economist,” according to Michael Pettis, a professor at Peking University’s Guanghua School of Management.  Pettis points out “the most obvious example is Japan after 1990. It had too much debt, all of which was domestic, and as a consequence its growth collapsed.”

Department Stores Need to Cull Hundreds of Sites, Study Says. Suzanne Kapner. Wall Street Journal. 24 Apr. 2016.

Highlighting the existential crisis that the retail industry is facing is a report just put out by Green Street Advisors.  Essentially, “department store need to close hundreds of locations (roughly 800 or about 1/5 of all anchor space in U.S. malls) if they want to regain the productivity (sales per sq. ft.) they had a decade ago.”

“Sears Holdings Corp. alone would need to close 300, or 43%, of its Sears stores to regain the sales per square foot it had in 2006, adjusted for inflation, according to Green Street.”

WSJ_Department Store Excess Capacity_4-24-16

“Sales at the nation’s department stores averaged $165 a square foot last year, a 24% drop since 2006, according to company disclosures and Green Street estimates.”

But department stores are loathe to close physical locations considering many stores still make money, the physical locations facilitate their online sales within the same market, and when they do close stores it doesn’t mean that the same shoppers then migrate to their other retail channels.

“It may be unrealistic to expect that department stores could ever return to historical levels of sales or profits given the changing dynamics of retailing. Many retailers say they make less money selling goods online than they do in their physical stores. And with the Internet making it easier for consumers to comparison shop, discounts have become the norm.”

“The store glut has important implications for the country’s weaker malls, which rely on their anchors to drive foot traffic. ‘If department stores were to move forward and aggressively streamline their physical presence it could result in several hundred malls no longer being relevant retail destinations.’ – DJ Busch, senior Green Street analyst.”

Other Interesting Articles

The Economist

Bloomberg – Blackstone Weighs Opening Up Real Estate to Individual Investors 4/21

Bloomberg – Japan Post to Fight Negative Rates With Shift to Risk Assets 4/21

FT – China’s debt: not a cheap American copy 4/21

FT – Europe should forget Google and investigate its own shortcomings (Michael Moritz) 4/22

FT – Caterpillar says business in Brazil has ‘basically tanked’ 4/22

FT – US Reits: a sector to buy in May and then enjoy the summer 4/24

FT – Fund star Sudhir Nanda warns of threat to human role in finance 4/25

FT – Ant Financial raises $4.5bn in record fintech private placement 4/25

FT – China to unroll nationwide soil pollution survey 4/25

FT – Japan’s negative rate experiment is an alarm bell for the US 4/25

FT – Nigeria’s import curbs drain life from bustling Lagos ports 4/26

FT – Daniel Loeb warns of hedge fund ‘killing field’ 4/27

InvestmentNews – Schorsch’s AR Global looking to consolidate $10.5 billion of REITs 4/26

Mauldin Economics – Xi Jinping Takes Command of the People’s Liberation Army 4/25

NYT – Renewable Energy Stumbles Toward the Future 4/22

NYT – Fantasy Math Is Helping Companies Spin Losses Into Profits 4/22

NYT – Jimmy Buffett’s ‘Margaritaville’ Is a State of Mind, and an Empire 4/23

NYT – Don’t Blame Silicon Valley for Theranos 4/27

ValueWalk – Carl Icahn Dumps Entire Apple Inc. (AAPL) Stock, Blames China 4/28

WSJ – Everyone Wants a Raise – Except Investors 4/22

WSJ – Alphabet’s Next Big Thing: Building a ‘Smart’ City 4/26

WSJ – No One Believes It, but Inflation Is a Pretty Good Bet 4/27

WSJ – Chinese Property Giant Evergrande Invests in Financial Folly 4/28

WSJ – The U.S. Homeownership Rate Falls Again, Nearing a 48-Year Low 4/28

Zero Hedge – Why Goldman Expects The Japanese Yen To Collapse Within 12 Months 4/24


April 15 – April 21, 2016

The Wall Street Oil Crash in charts. Chinese $3tn bond market not looking so good.

This week is a very graphic heavy week, just happens that way sometimes.  Additionally, I want to call attention to a report that me and my business partner put out for our real estate development and management business (FP Honolulu Condominium Market Insights) in the Special Reports section.  While it is geared to those interested in the Honolulu Condo market, there is a good deal of text and charts that are pertinent to macro issues at large.  Enjoy.



    • “Driving all this activity: easy money. Real interest rates have fallen. And nominal GDP grew faster than real GDP for the first time in five quarters, which in theory makes servicing debt easier.”
    • “What should trouble investors is that while China’s economic activity is ticking up, debt is piling up faster. The stock of total financing in the economy, including bond issuance as part of a local government bailout program, rose 15.8% in March from a year ago, the fastest rate since mid-2014. With nominal GDP growing 7.2%, Beijing’s plans to deleverage the economy continue to be overwhelmed by the need to support growth.”
  • In the Wall Street Journal, Madeleine Nissen and Paul Davies point to how negative interest rates are taking their toll on German insurance companies.
    • “German regulators are so concerned about the impact of negative interest rates on the country’s life insurers that they have said they can only be sure the sector is safe through 2018.”
    • “Some insurers need to earn a continuing investment yield of more than 5% to meet guarantees to their policy holders, a report from Germany’s central bank found in 2014.”
    • “What is dangerous is that the return on many investments is no longer reflective of the underlying risk involved. Many investors feel forced into taking higher risks.” – Nikolaus von Bomhard, chief executive of Munich Re
  • If you think it’s been hotter than usual.  You’re right.  As Tom Randall of Bloomberg illustrates, the Earth’s Temperature Just Shattered The Thermometer.
    • “The Earth is warming so fast that it’s surprising even the climate scientist who predicted this was coming.”
    • “Last month was the hottest March in 137 years of record keeping, according to data released Tuesday by the National Oceanic and Atmospheric Administration. It’s the 1th consecutive month to set a new record, and it puts 2016 on course to set a third straight annual record.”
  • Turns out Millennials – like their predecessors before them – want to own their own home.  But, there is a ‘tiny’ problem for millennials living in the big cities.  The down payment.  As Catarina Saraiva of Bloomberg shows us, for many it will take years to save the down payment necessary to buy a home.
    • “Of the generation known for renting everything from designer handbags to desks in a shared office space, 79% say they want to purchase a home, according to a report published Wednesday by Apartment List, an online rental marketplace.”
    • In San Francisco, a 20% down payment on a median priced home equates to $142,800. “Surveyed millennials reported current savings at $14,469, monthly savings of $360 and help from outside sources of $8,264, on average. At that pace, it’ll take them nearly 28 years to save enough money for a down payment, even though 37% of millennials said they’re planning to buy between three and five years from now.”
  • It’s been tough to be a hedge fund lately.  Mary Childs and Lindsay Fortado of the Financial Times point out that $15bn has been pulled out from hedge funds by investors in the last quarter.
    • “Hedge funds have suffered their worst quarter in seven years after more than $15bn was pulled out by investors starting to fight back against the high fees being charged across the industry.”
    • “The total amount invested in hedge funds fell to $2.86tn in the first three months of the year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows, according to data from Hedge Fund Research.”
    • But I wouldn’t go predicting the demise of hedge funds.  Ben Carlson of the blog A Wealth of Common Sense did a great job of explaining Why People Invest in Hedge Funds in October 2015.
  • Want to see what arbitrage looks like…Jacky Wong of the Wall Street Journal paints a picture with the reverse migration of many Chinese companies moving their public stock listings from Hong Kong to Mainland China.
    • “A reverse migration by Chinese companies from Hong Kong to mainland stock markets is under way. Juicy valuations are the main draw. But the winners are unlikely to be these companies’ current shareholders.”
    • “Dalian Wanda Commercial Properties, China’s largest shopping-mall owner, said last month its major shareholder is considering delisting the company from Hong Kong, less than two years after its initial public offering. The minimum takeout price is the same 48 Hong Kong dollars (US$6.19) a share that the company listed at in 2014. Meanwhile, a document sent to prospective investors on the mainland said Wanda expects its valuation to more than triple once it is relisted there.”

Special Reports


WSJ – China’s Economy Faces Recovery Without Legs – Alex Frangos 4/15

WSJ_China Housing Starts_4-15-16

WSJ – Germany: Where Negative Rates Are Lethal – Madeleine Nissen and Paul J. Davies 4/14

WSJ_Negative yielding debt_4-14-16

WSJ – Why the Great Divide Is Growing Between Affordable and Expensive U.S. Cities – Laura Kusisto 4/18

WSJ_Home value divergence_4-18-16

ValueWalk – 98% of U.S. PE Funds Closed in 1Q Hit Or Exceeded Their Target 4/18

ValueWalk_98% of US PE Funds Hit Target_4-18-16

Bloomberg – It Could Take Years for Big-City Millennials to Save for a Down Payment – Catarina Saraiva 4/20

Bloomberg_Millennials saving for a home_4-20-16

WSJ – Upscale Shopping Centers Nudge Out Down-Market Malls – Suzanne Kapner 4/20

WSJ_Mall Valuations_4-20-16

FT – Beijing rent ranked world’s least affordable 4/20

FT_Beijing is least affordable city for rentals_4-20-16

WSJ – Chinese Reverse Migration Leaves Investors in the Cold – Jacky Wong 4/20

WSJ_Hong Kong v Mainland China listings_4-20-16


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

Wall Street’s Oil Crash, a Story Told in Charts. Asjylyn Loder. Bloomberg. 15 Apr. 2016.

“JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup Inc., with a combined $190 billion in energy loan exposure, all announced this week that they’re setting aside more money to cover losses.”

Bloomberg_Bank Energy Exposure_4-15-16  

“Many independent drillers, the small producers that drove the shale boom, outspent cash flow even when oil was $100 a barrel, and made up the difference with bank-loans and high-yield bonds. Put simply: No banks, no boom.

Bloomberg_Shale Cash Shortage_4-15-16 

“Of the four big banks to report results this week, Wells Fargo has the biggest reported exposure to those sub-sectors, at about $14 billion, or 79% of their energy loans outstanding. The bank boosted loan-loss provisions for oil and gas to about $1.7 billion and reported net-charge offs of $204 million.”

Bloomberg_Shrinking credit lines_4-15-16

“Regulators and investors are pushing banks to limit their exposure to the industry. Since the start of the year, lenders have yanked $5.6 billion in credit from 36 oil and gas companies, according to data compiled by Bloomberg.”

It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market. Bloomberg News. Bloomberg. 18 Apr. 2016.

This is a good follow up to the FT article from last week.

“The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel.”

“Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 60.6 billion yuan ($9.4 billion) of bond sales in April alone, while Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.”

“Listed firms’ ability to service their debt has dropped to the lowest since at least 1992.”

“The spreading of credit risks is only at its early stage in China. Many people have turned bearish.” – Qiu Xinhong, a Shenzhen-based money manager at First State Cinda Fund Management Co.

“Economic figures for March reveal a growing dependence on debt. China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth.”

“The reaction has been swift in China’s 18.8 trillion yuan corporate bond market (a figure that excludes certificates of deposit). The extra yield investors demand to hold seven-year onshore corporate bonds with top ratings over similar-maturity government notes has jumped by 28 basis points from an almost nine-year low in January, to 91 basis points as of Monday.”

Still, very little yield premium compared to the spreads in developed markets.

“Analysts, meanwhile, are getting more downbeat. Twelve-month earnings forecasts for Shanghai Composite companies have dropped by 7.8% this year, the most since 2009, according to data compiled by Bloomberg. S&P has cut its credit ratings or reduced its outlook on 63 Chinese companies this year while upgrading just two, on course for the highest annual ratio of downgrades to upgrades in 13 years.”

“Rising defaults are actually healthy for China’s bond market, said Xia Le, the chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.”

“It shows the government is taking away the implicit guarantee. Now risk awareness is rising, so we will see which issuers are swimming naked.” – Xia Le

Other Interesting Articles

The Economist

Bloomberg – America’s Wealth Effect From Rising Home Prices Has Been Cut in Half 4/21

CNBC – Miami real estate is melting down – Robert Frank 4/14

FT – US banks spell out toll of low oil prices 4/14

FT – Foreign governments up US Treasury holdings 4/15

FT – Defaults send chill through China’s bond market 4/15

FT – Will China transform the world’s energy market? 4/17

FT – China’s house prices surge as efforts to cool market fall flat 4/17

FT – Saudi warning on 9/11 law adds to US frictions 4/17

FT – Collapse of Doha talks highlight the rise of Mohammed bin Salman 4/18

FT – 1MDB dispute intensifies as Abu Dhabi ends relationship 4/18

FT – India knocks China from top of FDI league table 4/20

FT – China internet finance crackdown targets fly-by-night operators 4/20

National Real Estate Investor – Foreign Buyers of U.S. Real Estate: By the Numbers 4/14

NYT – Fight to Impeach Brazil’s Leader Tears at Fabric of Daily Life 4/15

NYT – As China’s Growth Slows, Banks Feel the Strain of Bad Debt 4/15

NYT – In Cramped and Costly Bay Area, Cries to Build, Baby, Build 4/16

NYT – Brazil’s Lower House of Congress Votes for Impeachment of Dilma Rousseff 4/17

Reuters – ‘Let them sell their summer homes’: NYC pension dumps hedge funds 4/14

ValueWalk – Is George Soros, 85, Looking For A Fight With China? 4/21

WSJ – How Housing Stacks Up on the Upper West Side 4/13

WSJ – Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage 4/14

WSJ – Why the Great Divide Is Growing Between Affordable and Expensive U.S. Cities – Laura Kusisto 4/18

WSJ – Investors All Mixed Up About Chinese Property Bonds 4/19

WSJ – Negative Rates and Patches of Trouble for Japanese Insurers 4/21


April 8 – April 14, 2016

We burn cash for you – China tech. Mom & Pop investors in China are getting hosed. Water Wars in India.

The feedback has been positive for the new format, so it is here to stay.  Lots of good reads this week. Enjoy.



    • “Hong Kong insurance agent Raymond Ng sold HK$28 million ($3.6 million) in insurance policies to a mainland Chinese client in March. It took more than 800 credit card swipes to complete the transaction.
    • “Making multiple swipes can defeat a cap of about $5,000 per transaction set by Chinese authorities in February.”
    • “Chinese customers are accelerating the pace of moving assets outside China, especially through insurance products.” – Ng
    • “Mainland Chinese are coming to Hong Kong to also buy life insurance policies with an investment component that can be cashed out in a few years. The money can then be invested in property or other assets, raising fewer questions about how it got out of the mainland. Large portions of the premiums can be paid upfront. Sales of insurance policies to mainland visitors jumped 30% last year, according to Hong Kong’s insurance commission.”
  • John Gittelsohn of Bloomberg covered Calstrs intention to shift more of its real estate focus to Europe.
    • “The $180 billion California State Teachers’ Retirement System is buying more equities and real estate in Europe while selling U.S. properties, which are “priced to perfection,” according to the fund’s chief investments officer.
    • “Europe looks pretty reasonable and inexpensive compared to the U.S.A.”
  • What happens when a currency position moves against you…Neil Buckley of the Financial Times highlights a precarious development in Poland where about half a million people have home mortgages denominated in Swiss francs.
    • Poland’s newly empowered (came to power 7 months ago) political party ‘Law and Justice,’ is looking to convert $42bn of mortgages from Swiss francs to Polish zlotys.  About half a million Poles had taken out mortgages in Swiss francs pre-crisis “to take advantage of lower Swiss interest rates. But after the Swiss central bank scrapped its currency cap in January 2015, many found themselves struggling to meet higher repayment costs.”
    • Thing is, Law and Justice is proposing a measure that would force Polish banks to take on the loans and convert the currencies at historical exchange rates and bear the resulting losses, approximately €10.3bn – which Marek Belka, the governor of Poland’s central bank, called “evil” and a “recipe for a banking crisis.”
  • As highlighted by Steve Johnson of the Financial Times, China’s robot army is set to surge.
    • According to analysis by Citi and the Oxford Martin School, “more than 75% of jobs in China are at a ‘high risk’ of computerization.”
    • “The number of robots per 1,000 employees in China, as of 2013, was just 30% of the level of North America, 11% of the German figure, 9% of Japan’s tally and 7% of that in South Korea.”
    • Raul Chadha, chief investment officer of Mirae (an Asia-focused investment firm with $75bn of assets), projects that robots will replace around 3.5m Chinese workers over the next five years as companies seek to improve their productivity in light of falling demand.
  • On-shore corporate bond defaults by state-owned groups in China are starting to pop up and people are rightfully concerned as Gabriel Wildau points out in the Financial Times.
    • “Since the start of April, two SOEs have missed scheduled bond payments, while a third suspended trading of its notes as it warned of difficulty in making a payment due next month.”
    • “For years bond defaults were unheard of in China’s onshore corporate bond market, with the government reliably stepping in to bail out troubled issuers. The first-ever onshore corporate bond default occurred in March 2014 when privately-owned Chaori Solar missed an interest payment.”
    • The first SOE default, by power equipment manufacturer Baoding Tianwei, came last April.
    • “The defaults are also creating fundraising difficulties for other would-be borrowers. In the first 12 days of April, at least 18 bond issues worth a combined Rmb17.8bn ($2.8bn) have been cancelled, according to a tally of public filings by China Business News. That follows 62 cancellations worth Rmb44.8bn in March. In total, 12 publicly issued bonds have defaulted since 2014, according to Haitong Securities.”
    • “Many economists say SOE defaults are healthy for the long-term development of China’s debt market because they reduce moral hazard caused by the widespread assumption of a limitless government backstop for the bond market.”
    • “Yet bailouts have not disappeared. On Tuesday, Shanxi Huayu said it would pay out on its overdue bonds this week after receiving a capital injection from its parent company. Central government-owned China National Erzhong Group received a bailout last year, days of warning of imminent default.”

Special Reports


Washington Post – “What the iPhone has done to cameras is completely insane” – 4/7

WP_iPhone destroys camera sales_4-7-16

Source: CIPA/

FT – China’s robot army set to surge 4/8

FT_Chinese wage appreciation_4-8-16


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

China tech: Renminbi to burn. Charles Clover. Financial Times. 10 Apr. 2016.

“Burning cash has become alarmingly fashionable among Chinese internet companies, many of whom have taken to paying customers massive subsidies to use their services in hopes that their competitors go out of business before they run out of money.”

A recent ad from, an online platform for car dealerships: “We burn cash from our investors to win the hearts of car shoppers.”

According to Cheng Wei the chairman of Didi Kuaidi, the China ride-sharing app, “the company spent $4bn last year in what he called ‘market fostering.’ Uber also disclosed it was losing more than $1bn a year in China.

“‘Burning cash’ may not sound like a viable business model, but these young companies argue that paying customers to use their services is necessary to build their brands and achieve the scale needed to compete.”

“‘A lot of these companies will be forgotten when the money runs out,’ said Ma Jihua, founder of Datareal consulting, who estimates that as much as Rmb50bn a year is being poured into subsidies aimed at connecting Chinese consumers via their smartphones to taxis, massages and car washes.”

“But he concedes that companies have little choice. ‘In this market, if you don’t burn cash you won’t get market share which means you won’t get funding, consequently meaning you won’t stand a chance against competitors that do burn.’

Damned if you do, damned if you don’t.  Also reminds me of the phrase ‘a fool with money is one hell of a party.’

“The potential benefits to the market leaders help explain why they are so willing to spend: according to HSBC, China’s online-to-offline (O2O) sector is a Rmb10tn market that is only 4% penetrated, and grew 80% year-on-year in the first half of 2015. HSBC estimates that in five years the “profit pie” in the industry would be worth Rmb26bn.”

“Start-ups are busy raising funds from investors at ever more dizzying valuations, only to plough them back into subsidies. Recent funding rounds have valued Didi Kuaidi at $20bn, up from $15bn last July. Uber china was valued at $7bn in a January funding round, while the merger of Meituan and Dianping, the two largest food delivery and group discount sites, was valued at $15bn-$17bn in November.”

However, as Ken Xu of Gobi Capital, a VC firm in Shanghai, points out “the user has no loyalty to anybody in these sectors; they only go for the apps that have the subsidies…”

“A driver for both Uber and Didi, who gave his name only as Mr. Guo, says both companies pay subsidies that often amount to two to three times the cost of the ride.”

“A lot of these companies have one thing in common – their perceptions of the odds of success are higher than they actually are.” – Brian Viard, economist at Cheung Kong Graduate School of Business in Beijing

China’s New Security Challenge: Angry Mom-and-Pop Investors. Chuin-Wei Yap. Wall Street Journal. 12 Apr. 2016.

“Small investor, angry over lost savings, are emerging as a new security threat to Chinese authorities, who are watching warily as investors around the country hit the streets in protest and picket government offices to demand their money back.”

“A common thread: Protestors are convinced government officials and the ruling Communist Party encouraged their investment of money and labor in ways that helped build modern China, and now they feel betrayed.”

“Since the People’s Republic of China was established in 1949, the Communist Party has always been something that the people viewed as trustworthy.  Who can you trust, if you can’t trust the government?” – retired army Lt. Col. Guo Bojin, 72, who has claims to have lost approx. $120,000 to Henan Tengfei Investment Wealth Management, which collapsed in 2014.

For a sense of scale “the outstanding balance in wealth-management products was 18.4 trillion yuan ($2.8 trillion) at the end of the first half of 2015, according to Moody’s Investor Service – about the size of the U.S. money-market-fund industry.”

“The government hasn’t provided a count of the losses to investors. A Wall Street Journal tally of cases reported over the past year shows at least $24.3 billion owed to 1.6 million investors in wealth-management products, about $15,000 each on average.

“Many small investors the Journal interviewed say they hadn’t understood the nature of their investments. They considered it a government stamp of approval that state media ran advertisements by Tengfei and other such companies, and that government officials attended some of the companies’ public gatherings.”

It is interesting to see how smartphones and social media has changed the ability of people to organize; however, police forces are infiltrating the instant-messaging groups and are showing up in mass to prevent gatherings.

“Authorities have also sought to forestall protests, say investors, who contend they have been followed and threatened by police, and sometimes beaten and detained. Police and public-security officials have told some journalists not to report on the collapsed lenders.”

India: Water Wars Victor Mallet. Financial Times. 13 Apr. 2016.

“Ten of India’s 29 states from Uttar Pradesh in the north to Karnataka in the south have declared droughts this year; dams, canals and sacred rivers in some places have run dry; and groundwater in parts of India is being pumped out at an alarming rate that has sharply lowered the water table.”

“Neither the political class nor the intelligentsia have understood that a water crisis is literally staring us in the face.” – Shashi Shekhar, secretary at the Indian water ministry

“He and other experts warn that conflicts – not just between nations but also between states inside India – are already brewing because of competition over scarce river water.”

“‘It’s a crisis now and if we don’t arrest it, then 10 years down the line we’ll have water wars,’ says a senior official in Delhi. ‘Punjab and Haryana will be in flames in no time.’ Indeed, activists in Haryana recently sabotaged a canal supplying water to Delhi. ‘We are having water wars in India already,’ says Brahma Chellaney, author of books on the fight over water.”

“According to Arunabha Ghosh, chief executive of the Council on Energy, Environment & Water, a research group, the average Indian had access to 5,200 cubic meters a year of water in 1951, shortly after independence when the population was 350m. By 2010, that had fallen to 1,600 cu m, a level regarded as ‘water-stressed’ by international organizations. Today it is at about 1,400 cu m and analysts say it is likely to fall below the 1,000 cu m ‘water scarcity’ limit in the next two to three decades.”

“As in neighboring Pakistan, the problem is not an absolute shortage of water. In fact rainfall in India is high, albeit seasonal, and northern rivers are also filled with melted snow from the Himalayas. The real causes of India’s dearth of water are the country’s rapid population growth; its inefficient transport and use of the stored surface water in some 5,000 large dams; the planting of water-intensive crops such as rice and sugar cane in dry areas by politically powerful landowners; and a failure to control demand for water because of free electricity and subsidized diesel provided to hundreds of millions of farmers for their pumps.”

“Landowners can pump as much as they want from the ground.”

“A recent European Commission study on Indian water legislation noted that the number of boreholes or tube wells had risen from a few tens of thousands in the 1960s to more than 20m today.

“India, the report said, pumps 230bn cu m of groundwater, more than any other country. More than 60% of India’s irrigated agriculture, and 85% of its drinking water, depend on this groundwater.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – China’s GDP Data Shows a Very Predictable Pattern 4/12

Bloomberg – China’s Stock-Market King Reveals Some Trade Secrets 4/13

Bloomberg – It’s Been Rough Coming of Age in the New Century 4/13

FT – Oil price: ‘Shot in the arm’ misses economic target 4/5

FT – Investors, first catch your unicorn then hang on to it (Michael Moritz) 4/7

FT – Global company bond defaults at highest level since 2009 4/8

FT – Emerging markets face significant capital outflows 4/8

FT – Interest rates might not stay low for much longer 4/9

FT – What we have learnt from Tesla’s sale of the century 4/10

FT – Opec’s days as economic force are ‘over’ 4/10

FT – Active asset managers knocked by shift to passive strategies 4/10

FT – Negative rates may be nearing a political limit 4/11

FT – Caesars Entertainment bankruptcy shines light on law firm 4/11

FT – The old bets on defaulted bonds won’t work this cycle 4/11

FT – US economy in charts: gloom versus data 4/13

IPE Real Estate – CalPERS to ramp up real estate development 4/14

National Real Estate Investor – Rental Yields, Not Price Appreciation, Drive Current Single-Family Investments 4/11

NYT – Chinese Scions’ Song: My Daddy’s Rich and My Lamborghini’s Good-Looking 4/12

ValueWalk – Is There A US Corporate Credit Bubble? Yes Says UBS 4/12

WSJ – Apartment Market in the U.S. Shows Signs of Losing Steam 4/7

WSJ – Housing Bust Lingers for Generation X – 4/8

WSJ – China’s Missed Opportunities to Kill Zombie Companies 4/11

WSJ – Bets on San Francisco Office Boom Face Risks 4/12

WSJ – More Luxury-Home Sellers Drop Their Asking Prices 4/12

WSJ – What China’s Massive Insurers Are Doing With Their Money 4/14


April 1 – April 7, 2016

The virtuous cycle of Chinese real estate development. Global liquidity trap. What’s driving the China M&A boom?

In an effort to ease readability and to assist with navigation of the weekly posts I have updated the format this week.  I am removing the featured articles/themes from the introductory paragraph – so there may at times not be an introductory paragraph, rather I will get right into Headlines (article links with a headline of what the article is about), followed by Briefs (currently featured as the “other items” section), Special Reports, Graphics, Featured (the featured themes/articles from the week), and will conclude with the Other Interesting Articles.  Happy readings.



    • The IMF predicts that inflation will be 720% in Venezuela this year, a figure Zimbabwe hit in 2006. By 2008 Zimbabwe was racked by hyperinflation so crippling that beggars who were offered billion-Zimbabwe-dollar bills would frown and reject them.”
    • “Suppliers, rather than giving goods away at the official price, prefer to sell them on the black market.”
    • In the case of a tanker of subsidized gasoline, “you can sell the cargo legally in Venezuela for $100, or drive across the border to Colombia and sell it for $20,000. The pitifully paid border police will be easy to square.”
    • “By the most overvalued official exchange rate, ten bolivares are worth one American dollar. On the black market, the same dollar fetches 1,150 bolivares. Zimbabwe abandoned its worthless currency not long after monthly inflation hit 80 billion percent in November 2008.”
  • Konrad Putzier of The Real Deal illustrated the growing cash piles of private real estate funds and their lack of placement opportunities.
    • “As of March, private real estate investment funds worldwide had $231 billion in aggregate dry powder – or capital commitments from fund investors ready to be spent – according to research firm Preqin. That’s the highest figure in history and a 10% increase since December.”
    • “Dry powder has grown in part because fund managers are having an increasingly difficult time finding profitable investments – not just because they are raising huge sums from investors.”
    • “In a year-end Preqin survey, 56% of fund managers polled said they see finding attractive investment opportunities as their biggest challenge – far ahead of raising funds (27%).”
    • 2015 was the year of the unicorn, 2016 may be the year of the dead unicorn (private companies with valuations in excess of $1bn).
    • In late 2013 there were 39 unicorns (a phrase introduced by Aileen Lee, founder of Cowboy Ventures – a venture capital firm), now there are 156 globally “with a cumulative valuation of $550bn, according to CB Insights.”
    • Interesting thing is growing investment amounts by non-traditional VC investors, specifically large money managers like Fidelity and BlackRock.  So called “crossover investments in private technology companies rose 51% last year, to more than $40.9bn across 800 deals, CB Insights data show.”
    • While crossover investments still make up a small portion of the VC funds in private companies, the question is whether the investors in these fund managers are equipped for VC investing?  “58 tech start-ups suffered “down rounds” since the start of 2015.” Not to mention the lack of liquidity in these investments.
    • Natural gas goes through two primary seasons, an “injection season” when gas is put into storage during the warmer months of the year and a “withdrawal season” when gas is drawn down for use during the winter months for heating and the like.
    • Well two things have happened, 1) record amounts of gas is being produced, and 2) it’s been a lot warmer than usual during the winter months.
    • “The problem is that there is so little room to put gas between now and November. On Thursday, with one week to go in withdrawal season, the amount in underground storage was at an all-time record of 2.47 trillion cubic feet, some 52% higher than the five-year average. That is a whopping trillion cubic feet more than a year ago.”
    • “Last year, so much excess gas was produced in the following seven months that storage reached its theoretical limit. If this year is like 2015, then storage might be full by the middle of August. Gas would have nowhere to go, and producers would have to “shut in” production or sell it for nearly nothing until heating demand appears.”
    • “The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds – it’s companies buying their own stock, by a 6-to-1 margin.”
    • Companies have “executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012.”
    • “Peer-to-peer lenders, who raise money from investors and then lend it out at higher interest rates, made 924 million yuan ($143 million) in down-payment loans in January, more than three times the amount made in July, according to Shanghai-based consultancy Yingcan.”
    • “Agents say these loans can attract annual interest rates of up to 24%.”
    • “Trying to reduce housing inventory by encouraging individuals to increase borrowing is a dangerous experiment. Enormous risks are lurking behind the surging property prices in first-tier cities.” – Ming Zhang, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
    • “Industrywide, nonperforming loans rose to 1.67% of total loans last year from 1.25% in 2014, according to official data. But analysts estimate the true ratio this year could be 8% or more. In the U.S., 14.6% of subprime loans made in 2005 defaulted, according to the Federal Reserve Bank of Chicago.”
    • “Steven Woods of Moody’s, the credit rating agency, says the entire US oil industry is under financial stress with prices at today’s levels.”
    • “At $40, the industry doesn’t work. Companies can’t earn an adequate return on capital.” – Mr. Woods
    • “The number of rigs drilling for oil and gas in the US has dropped 77% since September 2014, falling a further 14 last week to 450, the lowest level since the data were first collected in 1940.”
    • “To stabilize total US production and stop it falling, oil would need to be about $40 to $50 a barrel, he adds. To go back to the boom years of 2012-2014, when the US was adding about 1m barrels a day of additional supply every year, oil would need to be more than $80.”
    • “The shale revolution will not be reversed; in fact, the technology is continuing to advance. But every revolution needs to be followed by a period of consolidation, and this one is no different. The high-growth period of the industry’s history is over, perhaps for a long time.”
    • “Government subsidies have helped wind and solar get a foothold in global power markets, but economies of scale are the true driver of falling prices: The cost of solar power has fallen to 1/150th of its level in the 1970s, while the total amount of installed solar has soared 115,000-fold.”
    • “Just since 2000, the amount of global electricity produced by solar power has doubled seven times over. Even wind power, which was already established, doubled four times over the same period. For the first time, the two forms of renewable energy are beginning to compete head-to-head on price and annual investment.”
    • “The International Consortium of Investigative Journalists (ICIJ) this weekend went public with its findings that the firm (Mossack Fonseca) had, wittingly or unwittingly, helped clients evade or avoid tax, launder money or mask its origins. More astonishing than their methods, which are well known, was the scale of activity and the people involved. The 2.6 terabytes of data are thought to contain information about 214,500 companies in 21 offshore jurisdictions and name over 14,000 middlemen (such as banks and law firms) with whom the law firm has allegedly worked.”
  • Hannah Kuchler of the Financial Times covered Facebook’s plan to expand its live streaming service.
    • Here is a link from the horse’s mouth.
    • Just imagine how much content Facebook is going to put out in the near future. “Live is like having a TV camera in your pocket. Anyone with a phone now has the power to broadcast to anyone in the world.” – Mark Zuckerberg, founder and chief executive of Facebook.
    • This is a game changer. Think the Kardashian’s get too much play, you ain’t seen nothing yet.

Special Reports


The Real Deal – Private real estate funds have a record $231B to spend – but few places to put it.

Real Deal_Real Estate Dry Powder_3-31-16

Wall Street Journal – No Mercy Rule for Glutted Natural-Gas Market.

WSJ_Natural Gas Glut_4-1-16

Financial Times – US oil and gas sector reboots to survive.

FT_US oil and gas guidance_4-4-16

Bloomberg – Wind and Solar Are Crushing Fossil Fuels. Investment in Power Capacity, 2008-2015 (Source: BNEF, UNEP)

Bloomberg_Investment in Power Capacity_4-5-16


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

Price falls keep China’s property developers grounded. Ben Bland. Financial Times. 4 Apr. 2016.

Seeking an example of the credit boom in China fueling property developments that maybe should not be undertaken?  Look no further than Hong Kong developer Goldin Properties’ Goldin 117 a $10bn project in Tianjin (30 minutes by high-speed train from Beijing).

Founder Pan Sutong (also the individual who had $13bn wiped off his paper fortune in a single day due to stock market girations) and China Cinda Asset Management “one of the state-run ‘bad banks’ with a mission to lend to distressed companies” are putting in Rmb9bn ($1.4bn) each recapitalize the project.

“Anne Stevenson-Yang of China-focused research house J Capital, argues that the use of government-backed funds to support Goldin is symptomatic of the wider misallocation of capital weighing upon China’s economy.”

“It’s a miniature picture of what China is all about, demonstrating scale in order to capture more financing. China’s asset management companies and banking establishment are dedicated to maintaining the value of their collateral because if they allow it to drop and they have to mark their real estate holdings to market, it would be a disaster for banks, depositors and cities.” – Ms. Stevenson-Yang

Because “Chinese banks are reluctant to continue lending to ambitious and overstretched developers,” the “government is pushing asset managers such as Cinda to extend more credit to ailing companies and has proposed allowing Chinese banks to swap debt in struggling enterprises for equity.”

“The government is using its financial arms to provide further guarantees to the real estate sector and other industries that are plagued by overcapacity. It’s setting a bad precedent and there is a very big risk of moral hazard because developers know that, in the end, the government will bail everyone out.” – Zhu Ning, a professor at the Shanghai Advanced Institute of Finance

The global liquidity trap turns more treacherous. Scott Minerd (global chief investment officer at Guggenheim). Financial Times. 5 Apr. 2016.

“…when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.”

“There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money.”

“The empirical data support this view – the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth.”

Recall Kevin Wilson’s article: Japanese Policy Failure Means Disaster For Us All from the March 5 – March 10 post.

Japanese Velocity of Money_Q3 2015

“As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher.

“The Bank of Japan and the European Central Bank are already executing massive quantitative easing programs, but as their balance sheets expand, assets available to purchase shrink.”

“The BoJ now buys virtually all of the Japanese government bonds that are issued every year, and has resorted to buying exchange traded funds to expand its balance sheet.”

China’s M&A boom – Money bags. Economist. 2 Apr. 2016.

Subheader: China’s global investment spree is fueled by debt

“Chinese firms with little international experience and lots of debt have emerged as the biggest buyers of global assets. They have announced nearly $100 billion in cross-border M&A deals this year, already more than their $61 billion of foreign acquisitions last year.”

What is being missed are the motivations. General theories are concern over the Chinese economy or a pending yuan devaluation; however, what it really comes down to is that foreign acquisitions are a cheap (relative to what’s available in China) source of growth.

“Chinese buyers, by and large, are far more indebted than the firms they are acquiring. Of the deals announced since the start of 2015, the median debt-to-equity ratio of Chinese buyers has been 71%, compared with 44% for the foreign targets, according to The Economist’s analysis of S&P Global Market Intelligence data. Cash cushions are generally also much thinner for Chinese buyers: their liquid assets are roughly a quarter lower than their immediate liabilities. The forbearance of their creditors makes these heavy debts more bearable in China than they would be elsewhere. But the Chinese buyers are financially stretched, all the same.”

“Chinese banks see lending to Chinese firms abroad as a safe way of gaining more international exposure. The government has encouraged them to support foreign deals. As long as the firms to be acquired have strong cash flows…”

“For the buyers, there are two strong financial rationales for the deals…

“First, debt-funded buyouts can actually make their debt burdens more tolerable. Take the case of Zoomlion, a construction-equipment maker with 83 times more debt than it earns before interest, tax, depreciation and amortization. It wants to buy Terex, an American rival with debt just 3.5 times larger than its earnings, for $3.4 billion. Even if the purchase consists entirely of borrowed cash, the combined entity would still have a debt-to-earnings multiple of roughly 18, a marked improvement for Zoomlion.”

“Second, Chinese buyers know that one key financial metric works to their advantage: valuations in the domestic stock market are much higher than abroad. The median price-to-earnings ratio of Chinese buyers is 56, twice that of their targets. In effect, this means they can issue shares domestically and use the proceeds to buy what, from their perspective, are half-price assets abroad.”

“…so long as their banks and shareholders are willing to stump up the cash, Chinese companies see a window of opportunity.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Saudi Arabia Plans $2 Trillion Megafund for Post-Oil Era: Deputy Crown Prince 3/31

Bloomberg – Norway Frees Wealth Fund to Add $17 Billion in Real Estate 4/4

CoStar – REITs Reverse Course on Investment Strategy, Become Big Net Sellers 4/6

FT – China group seals record trove of M&A deals 3/31

FT – Hong Kong’s retail sales drop hardest in 17 years 3/31

FT – What is the Petrobas scandal that is engulfing Brazil? 3/31

FT – Anbang chairman Wu Xiaohui’s ‘wings clipped’ by regulators 4/1

FT – Even oil barons are giving up on fossil fuels 4/2

FT – Whatever you read about alternative investing is true 4/2

FT – Russia learns to live with the fallen rouble 4/2

FT – Business is right to use its superpowers for social change 4/3

FT – Investors should ignore the hype about fintech 4/3

FT – Investment strategy: The new property barons 4/3

FT – Panama Papers: what we know so far 4/3

FT – PE investors face tougher exit environment 4/4

FT – Currency wars backfire for Japan and Europe 4/5

FT – M&A failures: deep breaths 4/6
FT – Japan lashes out against rise of yen 4/7

LinkedIn – Learning to Code Yields Diminishing Returns (Douglas Rushkoff) 3/30

NYT – With ‘Gigs’ Instead of Jobs, Workers Bear New Burdens 3/31

NYT – The Cities on the Sunny Side of the American Economy 3/31

NYT – Insider’s Account of How Graft Fed Brazil’s Political Crisis 4/3

WSJ – NYSE Margin Debt Falls to Lowest Since 2013 3/30

WSJ – Why Oil and Gas Companies Are Bracing for Bad News From Banks 3/31

WSJ – Why Investors Are Crazy to Chase This Bond Yield Lower 4/5

WSJ – How the Reserve Bank of India’s Policy Might Finally Be Paying Off 4/5

WSJ – Chinese Developers Aim to Expand in China 4/5

WSJ – Surge in Land Prices Adds Froth to Vancouver Market 4/5

WSJ – Pfizer Walks Away From Allergan Deal 4/6

WSJ – Another Reason Investors Should Fear a Strong Yen 4/6

WSJ – China’s Currency Victory Hides Scars of War 4/7


March 25 – March 31, 2016

Bank exposure to the oil patch. Dalian Wanda cuts contracted sales target. Anbang’s source of funds. Alibaba and Tencent, those numbers seem suspicious.

I’m going to break trend this week and cover four topics/articles (it’s just been one of those weeks) 1) is Bradley Olson’s, Emily Glazer’s, and Matt Jarzemsky’s “Coming to the Oil Patch: Bad Loans to Outnumber the Good” in the Wall Street Journal, 2) is Yuan Yang’s “Wanda cuts sales target amid cooling China property market” in the Financial Times, 3) is Gabriel Wildau’s “Anbang global shopping spree fueled by leverage” in the Financial Times, and 4) is Charles Clover’s “Big numbers behind Chinese internet leave some unconvinced” in the Financial Times.

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

  • It is looking like the oil industry has reached its ‘Minsky moment.’
    • “The history of the oil industry over the past decade fits very closely the model for speculative booms set out by Hyman Minsky, the great American economist.  A period of stability leads to rising investment, financed by borrowing, which drives up asset prices until cash flows generated by those assets can no longer support the debt taken on to buy them. Eventually there is what has been dubbed the “Minsky moment”: a dash for the exits as asset prices plunge. After the bubble bursts, the debt burden remains and can depress activity for a long time.”
    • “The job cuts – equal to more than 30% of the staff the banks currently employ – come on top of the 730,000 jobs that Citi says US and European banks have already shed from their peak staffing levels.”
  • Related to Wildau’s article on Anbang is Sebastian Mallaby’s piece in the FT on the hidden costs of the insurance company’s spending spree.  Mallaby draws an interesting parallel with the current acquisition spree of the Chinese to the experience of Japanese in the late-1980s into the mid-1990s acquiring trophy assets with little discretion, i.e. Rockefeller Center in New York and the Hotel Bel-Air in Los Angeles, ultimately offloading these assets “…for less than 60 cents on the dollar. In all, Japan is thought to have lost $400bn on US property during this period.
    • “Inevitably, copious bidding is foolish bidding: the median Chinese bid last year valued the target company at 33 times earnings, implying a yield of 3%. Given that investors could secure a higher yield with less risk by buying investment-grade corporate bonds, the Chinese were offering what fee-happy dealmakers call strategic acquisition premiums or, mockingly, ‘saps’.”
    • Further it should be noted that Anbang raised its offer to $14bn for Starwood after Marriott upped its offer last week only to walk away from the offer on Thursday.  Most likely due to capital controls and the reasons raised below in Wildau’s article.
  • It looks like Brazilian president Dilma Rousseff is going to have a tough time of it at an upcoming impeachment vote in Congress now that the biggest political party (Brazilian Democratic Movement Party) has withdrawn their support.
  • Thought real estate prices were crazy in your neighborhood…not so compared to many of the ultra-luxury condos being developed in NYC.  Yet demand has softened and rather than condo developers hitting the brakes or dropping prices (like Related in Miami – the city is facing another condo bust), developers in Manhattan are continuing to build and they’re going to wait on selling until they have sunk more dollars in the ground.
  • The U.S. economy has gained 10,628,000 jobs between 2010 and 2015.  Nice. However, upon a closer look 10,058,540 of those jobs (94.6%) have been in the unsecure ‘gig’ economy. This jives with what we’ve being seeing in regard to the strategic acquisitions of the last few years that are often accompanied with downsizing and general cost cuts.
  • An update on the Malaysian prime minister investigations.  Turns out that investigation documents have provided a more complete picture of the money flows relating to 1MDB and Prime Minister Razak, including $15 million spent on clothing, jewelry, and a car.
    • “Swiss authorities, who along with the U.S., Hong Kong, Abu Dhabi and Singapore are probing the fund, say 1MDB-related losses from misappropriations could reach $4 billion.”
  • Lastly, see the Special Reports below for some rather interesting stories.

Interesting graphics:

From the Economist’s “Asset managers: The tide turns.”

Economist_Asset managers tide turns_3-24-16

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

Coming to the Oil Patch: Bad Loans to Outnumber the Good. Bradley Olson, Emily Glazer, and Matt Jarzemsky. Wall Street Journal. 24 Mar. 2016.

Knock on effects…not only are the energy companies having difficulties, think about the exposure to the banks that lent them the money.

“The number of energy loans labeled as “classified,” or in danger of default, is on course to extend above 50% this year at several major banks, including Wells Fargo & Co. and Comerica Inc., according to bankers and others in the industry.”

“Fifty-one North American oil-and-gas producers have already filed for bankruptcy since the start of 2015, cases totaling $17.4 billion in cumulative debt, according to law firm Haynes and Boone LLP.”

“About 175 companies are at high risk of not being able to meet loan covenants, according to Deloitte LLP.”

WSJ_Energy Reckoning_3-24-16

“The situation is particularly acute in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom and are now weighed down with debt as low oil and gas prices have made their assets unprofitable to produce.”

“Regional banks that lent heavily to energy companies have the most concentrated exposure….the lending shakeout could be significant for U.S. oil-and-gas producers, which face a biannual review by banks of their reserves that is widely expected to curtail their revolving credit lines. That credit, which has been critical for capital flexibility in the downturn, may be cut 20% to 30%, analysts said.”


Wanda cuts sales target amid cooling China property market. Yuan Yang. Financial Times. 24 Mar. 2016.

“Dalian Wanda Commercial Properties cut its 2016 contracted sales target almost 40% year-on-year, as China’s biggest commercial property group said it would stop developing and selling some properties in lower tier cities.”

“The developer on Thursday said it expected a 39% year-on-year drop in contracted sales in 2016 to Rmb100bn ($15.3bn), as it increasingly moves into property management.”

“Because of this, the company was restricting its activity in such cities to “asset-light investment properties” – it will not own the land or real-estate assets, but merely develop and manage the properties on behalf of third-party investors.”

“The group’s “asset-light” strategy includes last year’s launch of 99Bill – an internet-finance subsidiary of Wanda Group – which manages funds for investors buying into Wanda Commercial Properties’ shopping malls.”

How is that which is bad for the Goose good for the gander?

“Local housing bureau data collected by Wigram Capital, an economic advisory firm, shows that China’s third-tier cities have piled up a stock of residential property that will take an average of 3.5 years to sell off at current sales rates.

An aside, but related point, Wang Jianlin (founder and China’s richest man) is considering taking Dalian Wanda Group private.  The company is currently listed in Hong Kong (it was listed 15 months ago), the shares are down since the listing and Wang is offering to make shareholders whole (23% premium to close on Wednesday) and would then likely list the company on the Chinese mainland where shares trade at an average premium of 33% to their Hong Kong counterparts.  Note that Wanda Cinema was listed on the Chinese mainland in January of 2015 and the shares are up 656%.


Anbang global shopping spree fueled by leverage. Gabriel Wildau. Financial Times. 29 Mar. 2016.

For Anbang Insurance Group, “costly borrowing has played a significant role in its global shopping spree.”

“Anbang collects 44% of its insurance premiums from the sale of so-called universal life policies, high-yielding wealth management products (WMPs) that combine a death benefit with an investment component that guarantees a payout during the policyholder’s lifetime.”

“Anbang’s premiums from universal insurance products grew by 306% in 2015 to Rmb49bn ($7.5bn), compared with industry-wide growth of 95%, according to regulatory data. Such growth helped Anbang climb the Chinese premium ranks among life insurers from 40th in 2012 to 4th place last year.”

“Sam Radwan, partner at Enhance, a consultancy that advises several midsized Chinese insurers, says his clients fear the entry of Anbang to markets where they are active.” 

“They basically told me, ‘once Anbang comes to town, we know we’re not going to be able to compete.’ They tend to offer higher returns.” – Radwan

“Higher yields enable Anbang to grab market share but also force the group to chase higher returns – and take on greater risk – to meet promises to investors.”

“Anbang more closely resembles a private equity fund, where capital is expensive and investment returns drive profits.”

“There are also worries about liquidity risk… Universal insurance policies from Anbang and other insurers carry a headline maturity of 5 or 10 years but carry an option to cash out after 1 or 2, sometimes with no penalty.”

“Bank WMPs with guaranteed payouts currently offer yields of about 3-4%, while those from insurers reach 5-6%. Yet the true cost of WMP funding to insurers is even higher than the product yield. When sales commissions to banks or online platforms such as Alibaba’s Taobao are included, the cost to insurer may reach 7-8%.”

“(Mr Wu) is building an atomic bomb. It may work out fine, or it may explode in a big way.” – Radwan

“China’s insurance regulatory agency has already stated concerns about the usage of funds raised from insurance products to support these bids.” – Vincent Chan, head of China research at Credit Suisse

Reminds me of the rapid rise (and subsequent fall) of American Realty Capital and Nick Schorsch.


Big numbers behind Chinese internet leave some unconvinced. Charles Clover. Financial Times. 28 Mar. 2016.

“Last Monday, ecommerce group Alibaba announced that it had hit a target of Rmb3tn ($462bn) in annual sales, a number that is more than the entire US’s ecommerce market for 2015, estimated last month by the census bureau at $341bn.”

“The next day, Didi Kuaidi, China’s largest internet ride-hailing platform, announced it had hit a milestone of 10m rides per day, with the company saying this made it “the largest mobile-based transportation platform in the world.”

“Shaun Rein, founder of the Shanghai-based China Market Research Group, says China’s internet is “undeniably huge,” but adds that there is a persistent perception the numbers may be over-egged.”

“For example, many merchants on Alibaba’s virtual market place fake sales in order to boost their rankings.  ‘The merchants all want five stars, and the way to do that is to fake orders,’ – Rein.”

“He estimates the amount of faked orders on Alibaba at 20-30% of gross merchandise value (GMV). Anne Stevenson Yang, head of Beijing-based J Capital Research, goes even further, charging that Alibaba’s GMV is up to 50% overstated.”

Alibaba dismisses these estimates.

According to government data of the 668m internet users in China, 86% have incomes less than Rmb5,000 ($769) per month and yet according to Credit Suisse research they managed to spend Rmb12tn ($1.9tn) in transactions on Alipay (Alibaba’s payment affiliate) in 2015.

“That $1.9tn compares to $282bn total transaction volume for PayPal in 2015, and equivalent to 2/3 of the global total, according to Juniper Research. The Alipay totals ‘seem very high,’ according to Windsor Holden, the author of the Juniper Research report.”

“While companies like Alibaba and Facebook report “active users” for their services, social media and gaming giant Tencent reports monthly “active user accounts” for its social media sites QQ and WeChat. The company reported 850m QQ monthly active user accounts in September, or 127% of China’s internet users as measured by the governmental China Internet Network Information Centre.”

When Joe Tsai, Alibaba’s executive vice-chairman, announced the GMV milestone last week, he indicated “Our focus on quality and sustainable growth means how we measure success is no longer dependent on a simplistic view of GMV growth.” This to Duncan Clark, chairman of BDA, a Beijing-based consultancy and author of a book on Alibaba, “…was an odd thing. They seemed to be announcing a number that they didn’t want us to focus on in the future.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Starwood Gets Higher $14 Billion Offer From Anbang-Led Group 3/28

Bloomberg – Brazil’s Biggest Party Abandons Rousseff Ahead of Impeachment (vote) 3/29

Bloomberg – How to Sell a $60 Million Penthouse: Don’t Try 3/30

Bloomberg – The U.S. Is a Big Oil Importer Again 3/31

Civil Beat – A New Way To Detect Tsunamis: Cargo Ships 3/28

Contra Corner – Gig Economy Take II: Nearly Entire Increase in Employment Since 2010 is in Gigs! 3/28

FT – IMF: ‘puzzled’ at lack of silver lining in oil drop 3/24

FT – Norway’s oil fund increases bet on property markets 3/26

FT – China industrial profits grow fastest since 2014 3/26

FT – Energy shortage dims outlook in Colombia and Venezuela 3/27

FT – Accuracy of Theranos’s blood tests fall short 3/28

FT – The challenge posed by oil’s ‘Minsky moment’ 3/28

FT – Japan’s negative rate bounty sparks calls for fresh spending 3/28

FT – Saudi Arabia loses oil market share to rivals in key nations 3/28

FT – World watches Britain’s ‘living wage’ experiment 3/28

FT – China’s future challenge for the world economy 3/29

FT – Fidelity Investments cuts valuations on start-ups 3/30

FT – Wang Jianlin’s Wanda Group weighs taking property arm private 3/30

NYT – Climate Model Predicts West Antarctic Ice Sheet Could Melt Rapidly 3/30

WSJ – Investing Red Flag: Pro Forma Results and Share-Price Performance 3/24

WSJ – Rates Down, Risk Up at China Life 3/24

WSJ – Can Stocks Cope With a Profits Pinch? 3/25

WSJ – U.S. Immigration Program for Foreign Investors Sees Demand Surge 3/26

WSJ – Oil Firms Slow Exploration to Weather Low-Price Era 3/28

WSJ – Starwood’s Chinese Bidder Remains Opaque Both at Home and Abroad 3/28

WSJ – Another Condo Bust Looms in Miami 3/29

WSJ – Venture-Capital Firms Draw a Rush of New Money 3/29

WSJ – 1MDB Probe Shows Malaysian Leader Najib Spent Millions on Luxury Goods 3/30

WSJ – Distorted Markets: Why Banks Are Better Off Than You Think, And Real Estate Isn’t 3/30

WSJ – China’s Anbang Tells Starwood It Is Walking Away 3/31

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