May 27 – June 2, 2016

Loans taken out by commodity rich countries in the good old days to be paid back in oil have become a major liability. The financial outlook for Chinese firms isn’t looking so good. Negative yields on corporate bonds – hey, it’s better than what you can get for the government stuff.



    • “A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker”
    • “8,000 units are under construction and nine towers were completed since the end of 2013.”
    • “Condo purchases from January through April slid 25% from a year earlier, while the average price fell 6% on a per-square-foot basis, CraneSpotters data show.”
    • “The concern is we’re in a price-discovery phase, and the prices people are trying to get for their condos is a lot higher than the market will bear. That may signal a coming price correction.” – Andrew Stearns, founder of, a provider of residential mortgages for foreign nationals.
  • So what do you do if you’re a pension fund (or an individual investor for that matter) that ‘needs’ to achieve a certain rate of return (if you don’t want to save more or increase your unfunded liabilities)… as Timothy Martin in the Wall Street Journal points out, you pile on the risk and cross your fingers.
    • “What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.”
    • “In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc., which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.”
    • Brazil’s economy contracted 5.4% year-over-year leading economists to “say the once high-flying emerging market is suffering a deep recession that is starting to show characteristics of a depression.”
    • “GDP contracted for the fifth straight quarter in the three months to March and has declined or been virtually flat in eight of the past 10 quarters.”
    • “Goldman Sachs economist Alberto Ramos said a depression was defined as a recession that lasts eight or more straight quarters in which there is a decline in real GDP of 10% or more.”  Well, according to Ramos, “Brazil’s recession has been running for two years and has reduced the size of the economy to the level of late 2010 with a decline in real per capita GDP of 9%.”
    • Thing is it won’t be easy to turn this ship around.  “Marcos Casarin of Oxford Economics predicted it would take 10 years for Brazil to recover the level of per capita GDP of 2013.”  That’s even taking into consideration the government’s new economic team that has decent credibility.
    • Hopefully the Summer Olympics help… ole, ole, ole, ole…

Special Reports


Bloomberg – Miami’s Condo Frenzy Ends With Inventory Piling Up in New Towers – Prashant Gopal 5/26

Bloomberg_Downtown Miami Condo Boom cooled_5-26-16

FT – Big oil groups raise net debt by a third to cope with low prices – Ed Crooks 5/29

FT_Big oil, bigger borrowing_5-29-16

FT_Net debts of largest US and Euro oil cos_5-29-16

WSJ – Pension Funds Pile on Risk Just to Get a Reasonable Return – Timothy Martin 5/31

WSJ_Rolling the dice on investment returns_5-31-16

FT – China – FTCR Underground Lending Index falls after credit boom 5/31

FT_China Underground Lending Index_5-31-16

FT – Earnings fall betrays shaky state of China’s economy – Yusho Cho and Kenji Kawase 5/31

FT_Chinese profits down_5-31-16

FT – Brazil’s GDP reveals depths of recession – Joe Leahy and Samantha Pearson 6/1

FT_Brazil's economy in crisis mode_6-1-16


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

Debt repayments in crude cripple poorer oil producers. Libby George and Dmitry Zhdannikov. Reuters. 24 May 2016.

“Poorer oil-producing countries which took out loans to be repaid in oil when the price was higher are having to send three times as much to respect repayment schedules now prices have fallen.”

“Angola, Africa’s largest oil producer has borrowed as much as $25 billion from China since 2010, including about $5 billion last December, forcing its state oil firm to channel almost is entire oil output toward debt repayments this year.”

“This year Angola, Nigeria, Iraq, Venezuela and Kurdistan are due to repay a total of between $30 billion and $50 billion with oil…”

“Repaying $50 billion required only slightly over 1 million barrels per day (bpd) of oil exports when it was trading at $120 per barrel but with prices of around $40, the same repayment would require exports of over 3 million bpd.”

“All of those oil nations – Angola, Nigeria, Venezuela – have taken money for survival but haven’t got any money left for investments. That is very damaging to their long-term growth prospects. People tend to look at current production volumes but if you have committed your entire production to China or other buyers under loans – then you cannot invest to keep growing and won’t benefit from higher prices in the future.” – Amrita Sen from Energy Aspects, a think-tank.

“China has also become Venezuela’s top financier via an oil-for-loans program which since 2007 has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel, including a $5 billion deal last September.”

“While details of the loans have not been made public, analysts from Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.”

“Iraq is trying to renegotiate contracts for investment and development of new oil fields that it has with companies including Exxon, Shell and Lukoil. It was supposed to repay the companies $23 billion this year with oil but is now arguing that it will only have enough crude to repay $9 billion.”

“In contrast, OPEC’s Gulf Arab members – Saudi Arabia, the United Arab Emirates, Kuwait and Qatar – have very few joint ventures with oil companies, do not have pre-payment deals with China and do not need to borrow from trading houses.”

“It may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing.” – Helima Croft, head of commodity strategy at RBC Capital

Chinese firms’ financial outlook worsens at record rate. James Kynge. Financial Times. 26 May 2016.

“The share of rated issuers in China with a negative outlook bias…has increased to a record high of 69%,” according to a Moody’s report authored by Michael Taylor, Moody’s chief credit officer for the Asia Pacific region, and colleagues. This proportion was up from 15.7% at the end of last year and 33.3% at the end of March this year.”

“The previous peak proportion of rated Chinese debt issuers with a “negative outlook bias” was 45.5%, a level hit in May 2009 as the Chinese economy suffered in the aftermath of the financial crisis.”

FT_Negative ratings basis for Chinese issuers_5-26-16

“But, in spite of the growing worries, Moody’s said in its report that China had the capacity to avoid a financial unravelling.”

As to the reasons for the spike in the negative outlook, 1) the amount of capital now required to generate growth, 2) increasing debt levels, and 3) returns on assets are on the decline.

“In 2014, 6.3 units of capital investment were required to generate a unit of growth, the highest level since the 2008 crisis and far above the pre-crisis 2.9 times seen in 2007.”

FT_Declining productivity for capital investment in China_5-26-16

In regard to debt, “the rising interest burden from elevated debt levels could eventually crowd out productive investment, reducing the economy’s long-run growth potential” according to the Moody’s report.

As to returns on assets, “overall state-owned enterprises (SoE) returns on assets slipped to 2.9% in 2015 from a post-crisis high of 5.9% hit in 2010.”

FT_Declining profit margins for Chines cos_5-26-16

Corporate bonds join negative yield club. Eric Platt and Gavin Jackson. Financial Times. 2 Jun. 2016.

“More than $36bn of corporate bonds with a short-term maturity currently trade with a sub-zero yield…”

“The yield on a host of short-term paper sold by groups including Johnson & Johnson, General Electric, LVMH Moet Hennessy Louis Vuitton and Philip Morris now trade below zero in the secondary market. While no corporate bond has yet been sold with a negative yield, recent debt offerings from French pharmaceuticals market Sanofi and consumer goods conglomerate Unilever were issued as zero coupon securities.”

“Separate data tracked by Tradeweb put the value of negative yielding corporate bonds at $380bn – a figure that includes euro denominated bonds maturing in the next year that are not captured by some of the main index providers. The total sum could be greater when counting bonds issued in Swiss franc or Japanese yen, data provider Markit noted.”

As Iain Stealey, a portfolio manager with JPMorgan Asset Management so aptly put it “as bonds get to a shorter and shorter maturity, you’ll see more trade with a negative yield. Everything is relative and zero is not the lower bound anymore.

“As a dealer, you are happy to bid through zero because you know the ECB (European Central Bank) will keep buying.” – Barnaby Martin, head of European credit strategy at Bank of America Merrill Lynch

Bottom line, “the central bank has said it will be permissible for it to purchase investment grade corporate bonds so long as they yield more than the ECB’s deposit rate of minus 0.4%.”

“Companies have sought to take advantage of the drop in borrowing costs. More than $1tn of corporate debt has been issued globally since the year began, the fourth consecutive year bond sales crossed that threshold by the start of June, according to Dealogic.”

“Maybe a highly-rated company can issue a two or three year bond with a zero coupon, but if they can issue a 10-year bond with a 1% coupon, that might be a better long-term relative value.” – Marc Fratepietro, head of Americas investment grade debt capital markets at Deutsche Bank

Other Interesting Articles

The Economist

Bloomberg – Apartment Owners Fall as NYC, San Francisco Rents Seen Soft 6/1

Bloomberg – Hilton Property Spinoff to Create Park Hotels & Resorts REIT 6/2

FT – Malaysia letters deepen mystery over fate of 1MDB cash 5/27

FT – Age survey underlines pressures on Japan 5/28

FT – Collusion keeps debt problems at bay in China’s private sector heartland 5/29

FT – Abe rolls dice on delay to Japan sales tax rise 5/30

FT – US peer-to-peer lending model has parallels with subprime crisis 5/30

FT – Russian and Saudi investors cut US assets 5/31

FT – Chinese students ‘brainwashed by western theories’, say scholars 6/1

InvestmentNews – Report says REIT changes proposed by AR Global would remove investor protections 5/31

NYT – In China, Homeowners Find Themselves in a Land of Doubt 5/31

WSJ – U.S. Home Prices Jump as Supply Pinch Plays Out 5/31

WSJ – China’s Real-Estate Firms Rush to Tap Capital Markets 5/31


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