Month: January 2017

January 27, 2017January 25, 2017

January 20 – January 25, 2017

San Francisco becoming a childless city. Now China is making it difficult for banks to move currency overseas.

This week’s post is going to be short a day – I’ll cover it in next weeks’ post – as me and my family are in the process of moving to Phoenix, AZ. Enjoy.

Headlines

FT – China GDP hits 2016 target as Trump headwinds loom 1/19. Like clockwork.

Bloomberg Businessweek – Drug Cartels Are Looting Mexican Gas Pipelines 1/12. A reduction in fuel subsidies has caused the price of gas to jump about 20% in Mexico, a side effect – cartels and entrepreneurs are siphoning about $1 billion a year from Pemex (the state oil utility).

WSJ – BT’s Italian Scam Is Just One of Many Problems 1/24. British Telecom’s Italian subsidiary had some shady practices, specifically borrowing cash and disguising it as sales, about £500 million in sales actually…

CoStar – Blackstone’s New REIT Makes First Acquisition 1/25. Blackstone’s new non-traded REIT bought a hotel at UC Davis, more importantly are the different characteristics of Blackstone’s non-traded REIT versus the industry norms. Specifically, fees capped at less than 8.75% and a hurdle rate of 5% before Blackstone participates in the upside.

NYT – When Snap Goes Public, Some Shareholder’s Voting Rights May Disappear 1/24. Sounds like a good deal… for the founders.

Briefs

Yuan Yang and Xinning Liu of the Financial Times highlighted Didi Chuxing’s recent dramatic workforce cuts following Shanghai’s and Beijing’s new anti-migrant rules.
- “Didi Chuxing, China’s dominant car-sharing company, is gutting its fleet of drivers in Shanghai to comply with the city’s new regulations restricting car-sharing platforms to the use of local drivers and locally-registered cars.”
- “Less than 3% of Didi’s 410,000 drivers in Shanghai have a local hukou (household registration) that would allow them to continue picking up passengers via the platform, according to the company.”
- “Compliance with the new regulations will further discourage Didi’s already-disgruntled drivers, who have seen subsidies plummet since Didi bought out its major competitor Uber in August. Last month, two Didi drivers were arrested in Fujian province for protesting the reduced subsidies. Drivers in Liaoning staged a similar protest.”
Leslie Hook of the Financial Times covered the recent $20m fine paid by Uber for misleading drivers about their potential earnings.
- “Uber has agreed to a $20m fine to settle claims that it misled drivers with inflated promises about potential earnings, the latest in a series of fines and settlements the company has faced around the world.”
- “According to the FTC (Federal Trade Commission) statement, Uber had claimed its drivers in New York had a median income of more than $90,000, while drivers in San Francisco made over $74,000. Instead, the FTC found that the drivers’ actual median income in those cities was just two-thirds of what Uber had claimed.”
- “The suit over misleading earnings claims highlights a persistent complaint from many Uber drivers who say they barely make enough to cover their costs.”
Mehreen Khan of the Financial Times discussed rating agency Fitch’s recent report on economic growth in China being fueled by unsustainable stimulus.
- “Responding to official government figures which showed the Chinese economy expanded by 6.8% in annualized terms in the fourth quarter, Fitch said developments in the Chinese economy are becoming a ‘significant risk to medium-term macroeconomic stability.'”
- “In particular, the agency noted Beijing’s attempts to pump ‘direct fiscal expansion and quasi-fiscal stimulus’ into its state-owned enterprises (SOE’s), where the annual pace of investment growth climbed to 19.1% from 10.7% from 2015.”
- “‘Outside of the SOE sector, fixed-asset investment growth slowed markedly, underlining the importance of stimulus in propping up demand and highlighting the risk that the economy might lack self-sustaining growth momentum,’ said Fitch.”
- “It pointed to climbing credit growth, capital outflows, and depreciation pressures on the currency which could all combine to result in slowing growth. China should however avoid an ‘outright financial crisis’ due to the over-sized role of the state in managing economic decline, said Fitch.”
Esther Fung of The Wall Street Journal pointed out how many Mall Owners are divesting themselves of their less desirable malls by giving back the keys to the lenders.
- “Mall landlords are increasingly walking away from struggling properties, leaving creditors in the lurch and posting a threat to the values of nearby real estate.”
- “In the period from January to November 2016, 314 loans secured by retail property – totaling about $3.5 billion – were liquidated, 11% more loans than in the same period a year earlier, according to data from Morningstar Credit Ratings. The liquidations resulted in a loss of $1.68 billion.”
- And it’s not just companies with financial difficulties. Retail landlords with billions in market cap and plenty of cash are walking away from properties, i.e. Simon Property Group and Washington Prime Group. But don’t you worry, their credit ratings haven’t been effected…
- “Despite a strengthening economy in 2016, the delinquency rate for loans backing retail property rose by 0.6% point last year to 5.76%, according to Trepp LLC, a real-estate data service. Special servicers, which deal with troubled commercial mortgage securities, managed $3.1 billion worth of mall-backed loans last year, up from $2.9 billion in 2015, according to Trepp.”
- “One reason mall owners struggle to restructure loans is that many were packaged into commercial mortgage-backed securities, and these bonds in turn are owned by numerous investors, making it difficult to negotiate new deals.”
Alan Rappeport of the New York Times reported on the recently released report by the CBO indicating that the Federal Debt is projected to grow by nearly $10 Trillion over the next decade.
- “After seven years of fitful declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office. The numbers reveal the strain that government debt could have on the economy as President Trump presses to slash taxes and ramp up spending.”
- “The deficit figures released Tuesday will be a major challenge to House Republicans, who were swept to power in 2010 on fears of a bloated deficit and who made controlling red ink a major part of their agenda under former President Barack Obama.”

Graphics

WSJ – Daily Shot: India’s Currency in Circulation 01/22

WSJ – California Housing Crunch Prompts Push to Allow Building – Chris Kirkham 1/25

Featured

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

San Francisco Asks: Where Have All the Children Gone?. Thomas Fuller. New York Times. 21 Jan. 2017.

“A few generations ago, before the technology boom transformed San Francisco and sent housing costs soaring, the city was alive with children and families. Today it has the lowest percentage of children of any of the largest 100 cities in America, according to census data…”

“As an urban renaissance has swept through major American cities in recent decades, San Francisco’s population has risen to historical highs… at the same time, the share of children in San Francisco fell to 13%, low even compared with another expensive city, New York, with 21%. In Chicago, 23% of the population is under 18 years old, which is also the overall average across the United States.”

“In an interview last year, Peter Thiel, the billionaire Silicon Valley investor and a co-founder of PayPal, described San Francisco as ‘structurally hostile to families.'”

“Prohibitive housing costs are not the only reason there are relatively few children. A public school system of uneven quality, the attractiveness of the less-foggy suburbs to families, and the large number of gay men and women, many of them childless, have all played roles in the decline in the number of children, which began with white flight from the city in the 1970s. The tech boom now reinforces the notion that San Francisco is a place for the young, single and rich.”

China clamps down on banks moving currency overseas. Tom Mitchell, Gabriel Wildau, and James Kynge. Financial Times. 22 Jan. 2017.

“Chinese regulators are stamping out moves by banks to shift renminbi out of the country as they attack one of the few loopholes remaining in the country’s strict new capital controls regime.”

“According to several people briefed on rules introduced this month, banks in Shanghai must ‘import’ Rmb100 for every Rmb100 they allow a client to remit overseas, ensuring no net outflows of the Chinese currency. Shanghai-based banks had been allowed to remit Rmb160 overseas for every Rmb100 they brought back into China.”

“The clampdown goes even further in Beijing where banks must import Rmb100 for every Rmb80 they remit overseas on behalf of clients, ensuring a net inflow into the capital.”

“Overseas banks, whose domestic market share in China is tiny, have been more affected by the clampdown because they derive a higher percentage of revenues from cross-border business. ‘This regulation is a bigger nightmare for foreign banks because we are more reliant on cross-border business than Chinese banks,’ one banker said.”

“Bankers have also complained that the central bank and Safe are only communicating regulatory ‘window guidance’ over the phone or during face-to-face meetings, rather than in writing.”

“They added that Safe (State Administration for Foreign Exchange) has instructed banks not to inform clients why their overseas remittances are being rejected and is checking their net renminbi flows on a weekly basis, compared with every month previously.”

Other Interesting Articles

Bloomberg Businessweek

The Job Market Is Heating Up for Fast-Food Workers

The Economist

Bloomberg – Hedge Funds Risk Treasuries Wipeout After Bearish Bets Soar 1/22

FT – ECB to buy bonds below deposit rate: but what does it mean? 1/20

FT – China’s ‘Kamikaze Squad’ hedge fund leader jailed for five years 1/22

FT – Hong Kong SFC to take legal action against Hanergy directors 1/23

FT – Hong Kong watchdog seeks disqualification of Hanergy founder 1/23

FT – Hedge funds’ bets on rising oil prices hit record high 1/23

FT – China corruption prosecutions drop for first time in five years 1/24

NYT – Doubts Arise as Investors Flock to Crowdfunded Start-Ups 1/24

NYT – In Its Third Month, India’s Cash Shortage Begins to Bite 1/24

WSJ – How Electric Vehicles Could End Car Ownership as We Know It 1/15

WSJ – The Mortgage Market’s $1 Trillion Pocket of Worry 1/19

WSJ – Amazon Expands Into Ocean Freight 1/25

January 20, 2017January 19, 2017

January 13 – January 19, 2017

China’s maritime footprint. Judicial independence in China – don’t count on it. Music streaming to the rescue.

Headlines

NYT – Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President 1/15. It appears that no one is ‘safe’ if the arguably the most powerful person in the country can be taken down – it’s like watching House of Cards.

NYT – Earth Sets a Temperature Record for the Third Straight Year 1/18. “The heat extremes were especially pervasive in the Arctic, with temperatures in the fall running 20 to 30 degrees Fahrenheit above normal…”

FT – China’s 2016 capital outflows estimated at over $700bn 1/18. A recent report from Standard Chartered puts the 2016 total at $728bn, slightly less than the record $744bn in 2015.

Briefs

Sue-Lin Wong and Lusha Zhang of Reuters highlighted the continued flow of credit by Chinese banks and the concerning increase in debt levels.
- “China’s banks extended a record 12.56 trillion yuan ($1.82 trillion) of loans in 2016 as the government encouraged more credit-fueled stimulus to meet its economic growth target, despite worries about the risks of an explosive jump in debt.”
- “In December alone, Chinese banks extended 1.04 trillion yuan in net new yuan loans, far more than economists had expected, central bank data showed on Thursday.”
- “Analysts polled by Reuters had expected new lending would fall to 700 billion yuan from November’s 794.6 billion yuan.”
- “New bank loans last year surpassed the levels of China’s massive credit-led stimulus during the global financial crisis in 2009, according to Reuters calculations based on central bank data. The 2016 total was some 8% above the previous all-time high of 11.72 trillion yuan set just the year before.”
Dexter Roberts of Bloomberg Businessweek brought attention to the crisis facing China’s aging rural poor.
- “Unlike people in much of the rest of the world, China’s citizens spend less on their health as they grow older, not more, says Albert Park, an economist at the Hong Kong University of Science and Technology.”
- Why, simply because they seek to avoid healthcare costs due to the cost relative to their incomes.“The average cost of a hospital visit is 50% of the annual income of a city dweller; for rural residents it’s 1.3 times annual income, according to Gerard La Forgia, the lead author of Healthy China: Deepening Health Reform in China, a joint report by the World Bank, the World Heath Organization, China’s finance ministry, and other government agencies.”
Onur Ant and Benjamin Harvey of Bloomberg Businessweek covered the purge that is paralyzing Turkey.
- Following the failed coup in Turkey,“at least 100 media outlets have been closed and more than 36,000 suspected Gulenists detained.”
- The markets are not amused.“The lira has tumbled more than 18% since the coup attempt, the largest depreciation among major currencies worldwide, data compiled by Bloomberg show. The Borsa Istanbul 100 index fell as much as 28% in dollar terms by early December.”
- Further“on Dec. 12 the Turkish government released third-quarter numbers for gross domestic product, which contracted for the first time in seven years, by 1.8%.”
- Bottom line, now is a terrible time to have any affiliation with Gulenists. If you do have any, be prepared to have assets seized.“If a seizure is endorsed by the courts, the Savings Deposit Insurance Fund, a government-backed fund that manages companies the government takes over, will prepare the underlying assets for sale. The fund estimates the collective value of all the companies seized to date at about $10 billion.”
- As Sevket Pamuk, an economist at Bogazici University in Istanbul puts it“what I find most striking is how easily ownership rights are being ignored. Why would local businesses invest in such an environment?”
Art Patnaude of The Wall Street Journal illustrated the growing amounts of ‘dry powder’ being accumulated by real estate funds as for-sale supply has been limited.
- “Investors are piling money into real-estate funds – but fund managers are finding it a challengeto spend it.”
- “Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.”
- “Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2015 and 2008 in the run-up to the global financial crisis, Preqin said.”
- However, there simply has not been enough property to buy. “One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.”
- Another are the“potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.”
- Further, don’t forget that if they do sell, then there are the taxes to pay and what to do with the proceeds?
Tom Hancock of the Financial Times highlighted a recent acknowledgement by a Chinese provincial governor that they had been falsifying fiscal data.
- “The Chinese province of Liaoning fabricated fiscal data for four years, a senior official has admitted, the latest blow to the already shaky reputation of China’s economic statistics.”
- “Fiscal revenues in the province were inflated by at least 20% from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily.”
- “Economists and investors have long expressed doubts about Chinese economic data, particularly gross domestic product figures.Compared with other countries, China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter.”
- “Following Mr. Chen’s admission, respected Chinese financial publication Caijing said it had already exposed Liaoning’s fake data in a 2015 report… that report dated the falsification of the data back to 2009, earlier than the 2011 date given by Mr. Chen, who became provincial governor in 2015.”
Yuan Yang of the Financial Times covered that China’s housing boom appears to have ended now that prices have fallen in its top cities.
- “House prices have fallen across most of China’s hottest property markets for the first time in almost two years, marking an end to the enormous growth that saw prices rise as much as 40% last year.”
- “Prices of newly built residential properties dropped between 0.1 and 0.4% in December from the previous month in 12 out of 15 ‘hotspot’ cities, according to data released by the National Bureau of Statistics on Wednesday.”
- “Although many analysts expect property prices to fall at most 5% year on year in the current downturn, local governments are ready to move to avoid sharper crashes.”

Graphics

WSJ – Daily Shot: China’s credit-driven Growth Model 01/12

WSJ – Forecasters See Upside Risks to Their Economic Outlooks at Highest in More Than Two Years – Josh Zumbrun 1/12

WSJ – Daily Shot: FRED Retail Department Store Sales 01/15

FT – The problem with US healthcare in one chart – Federica Cocco 1/16

NYT – How 2016 Became Earth’s Hottest Year on Record – Jugal K. Patel 1/18

WSJ – Daily Shot: US Cost of Living Changes by Category 01/17

Featured

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

How China rules the waves. James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari. Financial Times. 12 Jan. 2017.

“Investments into a vast network of harbors across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation – five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels.”

“China understands maritime influence in the same way as Alfred Thayer Mahan, the 19th century American strategist. ‘Control of the sea,’ Mr. Mahan wrote, ‘by maritime commerce and naval supremacy, means predominant influence in the world; because, however, great the wealth of the land, nothing facilitates the necessary exchanges as does the sea.”

“‘There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,’ says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. ‘They are great for the soft projection of hard power.’“

“Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18% of all container shipping handed by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group.”

“In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010, according to FT research.”

“And those ports handled 67% of global container volumes, up from 42% in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists.”

“Rounding out a picture of China’s merchant fleet dominance is the country’s fishing fleet, which is by far the largest in the world, according to a recent paper by Michael McDevitt, a former rear admiral in the US navy and now a senior fellow a CNA Strategic Studies, a US think-tank.”

Bottom line, “analysts say that China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the South, a natural maritime barrier called the ‘first island chain’ within which China identifies its strategic sphere of influence.”

China’s top judge denounces judicial independence. Lucy Hornby. Financial Times. 16 Jan. 2017.

“China’s top judge has fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

“‘Bare your swords towards false western ideals like judicial independence,’ Mr Zhou told a gathering of higher court officials. Only two months before, he had said that party committees should not interfere in the judicial process.”

“‘This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary,’ said Jerome Cohen, an 86-year old American lawyer who has spent most of his career promoting legal exchanges between the US and China. ‘It has already provoked some of China’s most admirable legal scholars to speak out in defiance, and I fear not only for their academic careers but also for their personal safety.'”

“Mr. Zhou, once seen as a reformist, is one of the highest-ranking members of the Communist Youth League faction, which Mr. Xi moved to neutralize last summer ahead of a leadership reshuffle later this year.”

Further, “a crackdown on lawyers has intensified since 2015, ‘disappearing’ hundreds of lawyers. The most recent is Jiang Tianyong, a particularly active civil rights lawyer, who has been missing since November.”

How streaming saved the music industry. Anna Nicolaou. Financial Times. 16 Jan. 2017.

“Thanks to growth in Spotify and Apple Music, music streaming has passed the milestone of 100m paying subscribers worldwide, a feat few imagined possible a few years ago. The US music industry is on track to record a second consecutive year of growth – something that has not happened since 1999, the year Napster launched. Some analysts and executives are beginning to confidently predict a new golden age.”

“It has been hard to imagine how the music industry could ever match its pre-Napster performance in the 1990s, when compact disc sales ruled. But now one monthly payment zaps 30m songs into your smartphone, tablet or desktop app, enabling artists like Drake to notch up streams by the billions. The Canadian rapper’s music was streamed more than 4.7bn times on Spotify alone last year. Every hour, his songs are streamed more than 500,000 times on the service.”

“Artists like Drake helped power Universal to profitability last year, earning the company $.1bn in streaming revenues in the first nine months – enough to offset the fall in sales of digital downloads and CDs.”

“In a research note called Music in the Air, Goldman Sachs projected that streaming will help revenues double to $104bn by 2030.”

“Each year more people are buying access to digital music; Americans streamed 431bn songs on demand in 2016.”

Doesn’t mean there aren’t detractors – i.e. Taylor Swift – but the format continues to gain momentum.

As to control of this pipeline, “the music groups hold the leverage. The source of their power is…through ownership of the rights to… master recordings, Vivendi-owned Universal, Warner Music and Sony together control 80% of all recorded music, with Universal having a one-third share.”

Further, “streaming is a high-margin business. The labels no longer face the costs of hauling truckloads of CDs to Walmart. Instead of ownership, they are selling access to a digital music fortress.”

“This compares well with television studios, which have lost some grip over content as video streaming services like Netflix make shows and offer a limited selection of programs. Music fans, though, expect streaming services to offer more comprehensive digital back-catalogues, forcing them to cut deals with the labels. As one label executive puts it: ‘TV and film studios have to coexist with Netflix now. We haven’t made that mistake.'”

However, the “one large thorn in the labels’ side is Google-owned YouTube, whose music draws more regular listeners than Spotify and Apple Music combined. Most music consumption on YouTube takes place on its free, ad-supported tier, a revenue stream vulnerable to the fortunes of the advertising market.”

At this point “streaming is the industry’s latest white knight but after decades of grappling with pirates, new technologies and evaporating sales, music executives know there will be twists to come.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – How smartphones are transforming healthcare 1/12

FT – Over half of China’s white-collar workers go without year-end bonus 1/12

FT – Toyota marks break from past with fund for tech investments 1/15

FT – US companies rush to reprice debt as higher rates loom 1/15

FT – China’s energy strategy: power and independence 1/15

FT – Fingerprint theft points to digital danger 1/16

FT – Saudi Arabia energy minister downplays US shale threat 1/17

FT – Mall staple Claire’s pulls IPO 1/17

FT – Capital Group chief says post-Trump change in markets ‘is real’ 1/17

NYT – With the Rain Comes Hope That 6-Year California Drought Is Ending 1/13

WSJ – Pulling Retirement Cash, but Not by Choice 1/16

WSJ – Mall Owners Find Relief From Unlikely Source: Online Retailers 1/17

WSJ – Mortgage-Rate Rise Hits Coastal Property Markets Hardest 1/18

January 13, 2017January 13, 2017

January 6 – January 12, 2017

Saudi Arabia looking for savings where it can find them.

Headlines

FT – Venezuela’s president raises minimum wage 50% 1/8. Despite minimum salary raises of 322% since February of 2016, Venezuelan workers now earn about $60 a month on the legal exchange rate or $12 a month at the black market exchange rate – bottom line is that goods inflation is outpacing wage inflation.

FT – Tillerson sets stage for clash with Beijing over South China Sea 1/11. In his confirmation hearing, US secretary of state nominee – Rex Tillerson, said in regard to the South China Sea “we’re going to have to send China a clear signal that, first, the island-building stops and, second, your access to those islands also is not going to be allowed.” If he is confirmed, you can bet there will be more tension to come.

Special Reports / Opinion Pieces

FT – The long and painful journey to world disorder – Martin Wolf 1/5
Two Views on the New Year from Across the Pond – John Mauldin 1/6
- The Telegraph – Trump, Interest Rates and Chinese Panic: Why Euphoria Could Turn to a Credit Crunch in 2017 – Ambrose Evans-Pritchard 1/2
  - “Such is the currency paradox. As the Fed’s board dollar index pushes towards an all-time high of 130, the mechanical effects will expose the Achilles Heel of an international system that has never been more dollarized – and never been more sensitive to US interest rates since the end of the Bretton Woods era.”
- Absolute Return Partners – Hiccup of the Year? – Niels Jensen 1/3
  - “USD 890 billion of EM bonds and syndicated loans (an all-time high) are coming due in 2017 with almost 30% of that denominated in US dollars.”
FT – Trump and dollar strength will accelerate the Great Reckoning – Paul Hodges 1/11
FT – How China rules the waves – James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari 1/12

Briefs

Ben McLannahan of the Financial Times illustrated the growing discrepancy between GAAP and non-GAAP reporting at public companies.
- “According to research company Audit Analytics, 96% of companies in the S&P 500 presented non-GAAP metrics in their earnings releases in the fourth quarter of last year. That was up from 88% in the third quarter.”
- “Most of those non-GAAP numbers make the company look better. Last year a FactSet study found that the average difference between non-GAAP and GAAP profits reported by companies in the Dow Jones Industrial Average was 31%, up from 12% in 2014.”
- Worse, “problems arise when companies go off-piste, using metrics that bear no relation to GAAP.”
- Granted not all do this. “Telsa Motors, which is reckoned to be among the fastest and loosest with its anti-GAAP measures, said three months ago it would stop recognizing revenues according to its own peculiar formula.”

John Gittelsohn of Bloomberg covered Bill Gross’ recent comments regarding the importance of 10-Year rate reaching 2.6% being a bigger deal than the Dow at 20,000.
- “Investors should watch for 10-year Treasuries to move above 2.6%, a threshold that would mark an end to the three-decade bond bull market and be a more important barometer than the Dow Jones Industrial Average passing 20,000, according to billionaire bond manager Bill Gross.”
- “‘It is the key to interest rate levels and perhaps stock price levels in 2017,’ Gross, manager of the $1.8 billion Janus Global Unconstrained Bond Fund, wrote in a monthly investment outlook released Tuesday. ‘Investment happiness and/or despair may lie ahead over the next 12 months depending on it.'”
The Economist brought attention to recent research into “stand-your-ground” laws in America.
- According to research published in the current Journal of the American Medical Association, soon after the 2005 “stand-your-ground” law passed in Florida (which allows “citizens who ‘reasonably believed’ their lives to be threatened were given the right to ‘meet force with force, including deadly force’ – even in public places and, critically, without the duty to try and retreat first”), “there was a sudden and sustained 24% jump in the monthly homicide rate. The rate of homicides caused by firearms increased by 32%.”
- “The authors found that in states without a stand-your-ground law over the same time period those rates remained flat, suggesting that a nationwide crime wave was not to blame for the abrupt increase.”

Graphics

WSJ – Developers Build on Home Rental Success With Whole Communities – Chris Kirkham 1/6

Business Insider – This Goldman Sachs chart sums up the global fallout from the 2008 financial crisis – Ben Moshinsky 1/9

WSJ – Daily Shot: FRED Revolving Credit v Hourly Earnings 01/09

WSJ – Daily Shot: FRED Student Loans 01/09

WSJ – Daily Shot: Northern Migration 01/09

WSJ – Daily Shot: Business Insider – US Income Disparity by State 01/09

WSJ – A Dark Day for Chinese Inflation – Nathaniel Taplin 1/10

WSJ – Daily Shot: PitchBook U.S. Venture Capital Activity 01/11

Featured

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

Saudi Arabia to cull billions of dollars of projects. Simeon Kerr. Financial Times. 11 Jan. 2017.

“Saudi Arabia is planning to cull billions of dollars of projects as part of its latest cost-cutting measures to narrow a gaping budget deficit and balance the books by 2020.”

In this effort PwC has been engaged to find savings between SR50bn and SR75bn ($13bn – $20bn). “The focus of the cuts will be on capital expenditure, such as infrastructure projects, as Riyadh hopes to avoid any politically sensitive spending reductions after austerity measures last year triggered an outburst of public discontent.”

Bad for contractors – but really they just want to be paid what they’re already owed. As it is “the government has halted or restructured hundreds of projects across the kingdom over the past two years. It has also delayed payments to companies, exacerbating the problems in the private sector and helping drive non-oil growth to less than 1% last year, its lowest level in years.”

“The finance ministry has pledged to finalize SR105bn in late payments by February.”

Saudi Arabia is not the only Gulf state making cuts. “The value of infrastructure contracts awarded in the Gulf last year fell 44% to $100bn, compared with $178bn in 2015, according to data from the Middle East Economic Digest. That compares with a high of $186bn in 2014.”

Other Interesting Articles

The Economist

CoStar – Blackstone Breaks Escrow on New Non-Traded REIT with Net Proceeds of $279 Million 1/4

FT – Vanguard is best-selling fund manager of 2016 1/7

FT – China’s coming property oligopoly, charted 1/8

FT – German bonds offer the best way to bet on a break-up of the euro 1/9

NYT – Department Stores, Once Anchors at Malls, Become Millstones 1/5

WSJ – Why Beijing’s Grip on the Yuan Is Becoming Tenuous 1/6
WSJ – How the Auto Makers Can Survive the Self-Driving Car 1/9

WSJ – Time to Start Worrying Again About Chinese Property 1/9

WSJ – America’s Fastest – Growing Loan Category Has Eerie Echoes of Subprime Crisis 1/10

WSJ – More Home Buyers Backed Out of Offers in 2016 1/11

January 6, 2017January 5, 2017

December 30, 2016 – January 5, 2017

China insurance crackdown – meaningful implications. Fewer and fewer U.S. public companies.

Headlines

FT – India takes stock after first phase of cash crunch 1/1. Despite the chaos of the demonetization, citizens and politicians are giving Indian prime minister Narendra Modi a long leash because they agree with the aims of seeking to clean up the system.
WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 1/2. It’s the basic Supply and Demand equilibrium at play – supply has finally gotten to the point of exceeding demand.
WSJ – China Has Too Many Shopping Malls 2017 1/3. I suppose the question is what will become of all the surplus space when the problem is fully acknowledged.
FT – Turkey orders arrest of hundreds of businessmen in Gulenist purge 1/5. Never waist a good coup attempt – whether it was real or not.

Special Reports / Opinion Pieces

FT View – Offer Maduro’s allies a safe exit from Venezuela 12/29
Wired – The Year in Housing: The Middle Class Can’t Afford to Live in Cities Anymore – Emily Dreyfuss 12/31
- “‘It’s very hard to get people to understand that the affordable housing crisis is not for the very poor,’ says lawyer Mechele Dickerson of the University of Texas, an expert in housing and the middle class. It’s for people with good jobs who are not poor enough to qualify for subsidized housing prices. ‘A family that makes $100,000 can’t afford to buy a house in most US cities,’ Dickerson says.”
FT – The political price of Xi Jinping’s anti-corruption campaign 1/3
FT – Cities offer a glimpse of China’s economic future – Gabriel Wildau, Yuan Yang, and Tom Mitchell 1/3

Briefs

Yuan Yang of the Financial Times highlighted recent promises made by Beijing’s mayor that house prices will not rise in 2017.
- So here’s a new approach, with prices haven risen by more than 25% in 2016 “Beijing’s mayor has promised that house prices in the capital will not rise in 2017 in an attempt to ease concerns over the city’s property bubble.”
- Good for people wanting to get in on the action, bad for those that own property.
- “We must be firm in stamping out speculative investment [in property], increase the supply of residential housing, and guarantee that there will be no month-on-month increases in house prices.” – Mayor Cai Qi
- This message is consistent with national policy that “houses are for living in, not for speculating with.”
- The trick though will be to apply the break and the gas in a manner that keeps pricing static and not falling.
Tom Hancock of the Financial Times covered the new NGO regulation in effect in China.
- In a previous post I highlighted Edward Wong’s article on China’s new regulations on Non-Government Organizations (NGOs) requiring each NGO within the country to have an official sponsor. Well the policy is in effect as of January 1, and guess what…
- “China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China – ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation – will meet the law’s conditions before the January 1 deadline.”
- Oh and there is no grace period.
- As a result organizations are dialing down their operations to shuttling out personnel before December 31.
- At issue is that “the law puts foreign organizations under direct supervision of Chinese police, who in the last two years have detained scores of human rights lawyers and cracked down on local groups advocating for reform via the courts. This month an office of the MPS promoted a video accusing foreign governments of using civil society to promote ‘color revolution’ in China.”
- Bottom line, “the law says: ‘Foreign NGOS carrying out activities within mainland China shall abide by Chinese laws, must not endanger China’s national unity, security or ethnic unity; and must not harm China’s national interests.'”
- As it stands “the MPS has said there are 7,000 foreign NGOs in China, suggesting it has a more expansive definition of the term than foreign experts who put the number closer to 1,000.”
Jacky Wong of The Wall Street Journal illustrated an interesting ploy by China Evergrande to sell equity that acts a lot like debt.
- In a word, shenanigans.
- “China Evergrande Group, the country’s largest developer by assets, said Monday that it has agreed to sell a 13.2% stake in its major subsidiary, Hengda Real Estate, to eight investors for 30 billion yuan ($4.3 billion). This values Hengda, which owns Evergrande’s core property development business, at $33 billion – almost four times the parent’s current market capitalization.”
- So the rest of the company is worth much less than $0?
- “The investment is basically a form of bridge financing in preparation for the company to list Hengda in mainland China, something the developer proposed back in October.”
- Basically, the company is “effectively guaranteeing the investors an average 7.8% yield for the next three years. That is more cash drain for a company that hasn’t had a full year of positive operating cash flow since 2009 and has net debt equal to more than four times its equity, counting perpetuals as debt, among the highest in the sector.”
Dave Gershgorn of Quartz pointed to the automation of Japanese white-collar workers in the insurance industry.
- “One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with ‘IBM Watson Explorer,’ starting January 2017.”
- “Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on investment in less than two years.”
- “Watson AI is expected to improve productivity by 30%, Fukoku Mutual says.”
- “Artificial intelligence systems like IBM’s are poised to upend knowledge-based professions, like insurance and financial services, according to the Harvard Business Review, due to the fact that many jobs can be ‘composed of work that can be codified into standard steps and of decisions based on cleanly formatted data.’ But whether that means augmenting workers’ ability to be productive, or replacing them entirely remains to be seen.”

Graphics

WSJ – Daily Shot: Cities Where Rent Swallows Your Salary 12/29

WSJ – Daily Shot: Selfie-Fatalities 12/29

FT – China/US real estate: safe as houses – Lex 12/30

WSJ – China and the Debt-Refinancing Game in 2017 – Nathaniel Taplin 1/3

WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 – Laura Kusisto 1/2

Featured

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

How China’s Insurance Crackdown Spawns More Risks. Anjani Trivedi. The Wall Street Journal. 4 Jan. 2017.

“Following a year in which Chinese insurers aggressively built risky and illiquid portfolios, acquired real estate, companies and stakes in companies at home and across the world, under loose regulation, China’s insurance regulator has taken to severe tightening measures in recent weeks. Regulators have effectively barred insurers from making risking investments and banned certain insurers and insurance products with high cash value and low protection.”

“The repercussions could cause trouble far and wide. Almost 60% of China’s wealth-management products are invested in bond and money-market funds and a growing portion of these products are backed by bonds. And, they account for almost 20% of banking-system deposits.”

“China’s unlisted insurers-infamous among them, Anbang-will now see their wealth-management, product-backed financing platforms squeezed under new rules that bar investing cash raised from investment products. With policyholder deposits accounting for more than 70% of written premiums, more asset-selling may be on the cards.”

Chinese insurers under pressure to rein in overseas deals. Henny Sender. Financial Times. 3 Jan. 2017.

Adding to the WSJ article.

“Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod, acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.”

“Until recently, many analysts expected Chinese insurers to increase their offshore activity.”

Further, due to low interest rates worldwide, insurance companies have been seeking higher return investment categories. As Boston-based consultancy Cerulli Associates notes “investments in the ‘others’ category – which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate – rose from 23.7% in 2014 to 34.2% in June 2016.”

“Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that ‘the insurers have shifted to investing in riskier assets to sustain investment yields. This make their credit profiles more vulnerable to unfavorable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.”

Thus considering these insurers will find it quite difficult purchase overseas assets with capital from China, they will have to already have the cash overseas, have a means to raise cash abroad, or they will need to sell overseas assets to pursue continued investments.

“Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US ratings agencies suggested that it was likely to receive a non-investment grade rating.”

In fact, “Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed (to). That in turn would crimp its ability to buy more.”

“In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued (hurting SWF liquidity), and the US focused inward, it is not clear who will take their place.”

America’s Roster of Public Companies Is Shrinking Before Our Eyes. Maureen Farrell. The Wall Street Journal. 4 Jan. 2017.

“With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.”

“The U.S. is becoming ‘de-equitized,’ putting some of the best investing prospects out of the reach of ordinary Americans.”

“The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.”

“In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.”

“‘There’s no great advantage of being public,’ says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of ‘The Vanishing American Corporation.’ ‘The dangers of being a public company are really evident.'”

“Among them, Mr. Davis and other say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.”

“While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds-pools of capital invested by nations-have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.”

“Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic.”

“Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.”

“With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014… the average public company is more than three times as large as it was in 1997, after adjusting for inflation.”

Unfortunately for investors, it is unlikely that they’re going to be able to invest in a start-up with huge upside potential through the public markets…