May 20 – May 26, 2016

Venezuela about to become a formal dictatorship. Container shipping industry going through one of its (if not the worst) downturns. A handful of US tech companies are flush with cash.

Headlines

Briefs

    • “The plunge in yields on corporate and sovereign bonds in Europe and Asia – the value of bonds with a negative yield is nearly $10tn, according to Fitch – has sent investors racing into the US market.”
    • “The hunt for yield is very high.” – Bob Michele, chief investment officer at JPMorgan Asset Management
    • “The inflows have suppressed corporate borrowing costs at a time when new debt issuance is accelerating…”
    • “More than $900bn of corporate bonds have been sold in 2016, including $411bn in the US, according to Dealogic. Seven of the 20 largest bond offerings of the year have been completed this month alone.”
    • “The latest figures for the loans-to-bonds swap, and the debt-to-equity swap initiated last year, show a subtle bailout is already under way.”
    • “Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.”
    • So far this year the number of swaps has hit $220bn at the end of April, up from approximately $120bn at the beginning of March, according to Wind Information.
    • “Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website.”
    • “The Opec member’s gold reserves have dropped almost a third over the past year and it sold over 40 tones in February and March, according to IMF data. Gold now makes up almost 70% of the country’s total reserves, which fell to a low of $12.1bn last week.”
    • “The IMF forecasts the economy will shrink by 8% this year, and 4.5% in 2017, after a 5.7% contraction in 2015. Inflation is forecast to exceed 1,642% next year, fueled by printing money to fund a fiscal deficit estimated at about 17% of GDP.”
    • Remember that Venezuela has larger crude reserves than Saudi Arabia…
  • One of the articles from the print edition of the Economist this week profiled the rapid rise of the insurance industry in China and how the regulators are implementing measures to keep things from getting out of hand.
    • “Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion). Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016. Most remarkable has been the increase in their workforce. Over the past six months alone, they have added 2m to their sales force. They now employ some 7.2m people, up 120% since the start of last year. Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.
    • “The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products.”
    • In an effort to curb speculative behavior, regulators have “barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.”
    • “The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers. ‘The government saw the danger early enough before it got out of control.’ If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment. That is a safer bet, but a harder sell.”

Special Reports

Graphics

Selfstorage.com – Inside America’s Gig Economy (and how to work it) – Alexander Harris 5/17

Selfstorage.com_The Gig Economy_5-17-16

FT – Triple A quality fades as companies embrace debt 5/24

FT_Near extinction of the US AAA company_5-24-16

FT – US productivity slips for first time in three decades 5/25

FT_US productivity slips_5-25-16

Economist – Insurance in China: Safe or sorry? 5/21

Economist_Insurance in China_5-21-16

Featured

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

Venezuela: Trouble on the streets – The country is poised between chaos and dictatorship. Economist. 21 May 2016.

Over the next month, expect Venezuela to become a dictatorship or the current regime will be overthrown.

Currently the government forces are blocking all routes to the National Electoral Council (CNE) to keep any opposition/protestor group from being able to submit a petition that would initiate a process to recall the embattled president (Nicolas Maduro) through a referendum.

“Almost 70% of Venezuelans want Mr. Maduro to leave office this year, according to a recent poll… Venezuela is suffering the world’s deepest recession.”

“After the May 18th protests he (Maduro) threatened to supersede the current economic state of emergency (announced five days earlier) with a ‘state of internal commotion'” which would give the government the “…ability to impose something closer to military rule across the country.”

“Mr. Maduro has already indicated that he will govern without regard to the National Assembly, which came under the control of the opposition after elections last December. ‘It is a matter of time before it disappears,’ he said blithely at a press conference on May 17th.”

The thing is that while opposition politicians are seeking to appeal to the military’s sense of deference to the constitution, Maduro and his predecessor Chavez make sure and made sure that the military is generously compensated while the rest of the country suffers.

“Venezuela’s neighbors are appalled by the prospect that the country might implode. They may not be able to stop it.”

Container shipping lines mired in crisis. Robert Wright. Financial Times. 19 May 2016.

“The industry (container shipping), a vital link in the world’s supply of manufactured goods, is suffering what could well turn out to be the deepest and longest downturn in its 60-year history.”

FT_Container shipping earnings_5-19-16

“Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerized Freight Index – one of the few public sources of information on what lines are charging to ship a container – last month reached the lowest level since its inception in 1998.”

“Over the next few years, [container shipping is] a sector that’s going to really get slammed,” says Ron Widdows, a shipping consultant and former chief executive of Neptune Orient Lines, the Singapore-based line.”

Consolidation and cooperation (alliances) are common place as container lines are seeking to achieve better efficiencies to cut costs.

FT_Container shipping alliances_5-19-16

“This month, three Japanese lines – Mitsui OSK, K Line and NYK – outlined plans to form a new alliance with Hapag-Lloyd, South Korea’s Hanjin Shipping and Taiwan’s Yang Ming, to be known as The Alliance.”

“CMA CGM announced last month it was forming a new partnership, called the Ocean Alliance, with China Cosco, Taiwan’s Evergreen and Hong Kong’s Orient Overseas Container Line.”

This is all to compete against the P2 Alliance of the two largest container fleets of Maersk Line and Mediterranean Shipping Company.

“In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25% less than one year earlier, and $203 below the average cost of moving each box.”

FT_Container shipping expanding faster than trade_5-19-16

US companies’ cash pile hits $1.7tn. Eric Platt. Financial Times. 20 May 2016.

“Apple, Microsoft, Alphabet, Cisco and Oracle had amassed $504bn of cash by the end of 2015, nearly a third of the total $1.7tn held on the balance sheets of US non-financial companies, according to a new report from rating agency Moody’s.”

FT_US corporate cash_5-20-16

“It is the first time the top five cash hoarders have been made up exclusively of tech groups, an industry that generates more of its sales abroad than any other sector and one that has been embroiled in tax disputes in both the US and Europe.”

“The ever increasing amount of cash also highlights how US boardrooms are reticent to invest in their businesses, choosing instead to increase dividends, in a sign of the continued anxiety that economic activity could still slow at home or in China.”

“Apple accounted for more than a tenth of the total cash reserves, holding $216bn, 93% of which is overseas.”

FT_US Top 20 cash rich cos_5-20-16

“But the rising cash piles mask a rapid increase in debt.”

“Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.”

“While the top 25 cash hoarders hold cash in excess of their obligations, the cash-to-debt ratio fell to 12% for low-rated junk companies. In 2010, that figure stood above 20%.”

“‘Companies aren’t exactly flush with cash,’ S&P analyst Andrew Chung added. ‘As the credit cycle ages, rates rise and macroeconomic growth slows, that’s when companies in the bottom 99% who levered up [could have] funding issues.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Sugar Is So Scarce in Venezuela That Coca-Cola Will Stop Production 5/23

FT – Elizabeth Warren slams Uber and Lyft 5/19

FT – China reopens securitized bad-debt market 5/19

FT – Hanergy founder resigns one year after stock plunge 5/20

FT – Liquid alternative mutual funds leave investors disappointed 5/22

FT – Negative interest rates fuel record Japan share buybacks 5/23

FT – Triple A quality fades as companies embrace debt 5/24

FT – Regulators accuse Swiss bank BSI over 1MDB scandal 5/24

FT – Investing in China debt? Do not forget to factor in the politics 5/24

FT – US fracking bust sparks surge in car debt 5/24

FT – Olivier Blanchard and Adam Posen believe a recovery is on track 5/25

FT – Viacom’s battle is a warning to Silicon Valley 5/25

 

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