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Worthy Insights / Opinion Pieces / Advice
- ZeroHedge – Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History – Tyler Durden 4/27
- “Call it Canada’s ‘New Century’ moment.”
- “We first introduced readers to the company we said was the ‘tip of the iceberg in Canada’s magnificent housing bubble‘ nearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada’s largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices – most prominently noted short-seller Marc Cohodes – would constantly remind traders and investors about the threat posed by HCG.”
- “Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.”
- “As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17%, Street Capital Group Inc. fell 13%, while First National Financial Corp. declined 7.6%. In short, the Canadian mortgage bubble has finally burst.”
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Markets / Economy
- “Corporate Japan achieved a rare feat in the fiscal year that ended in March. Not one of its almost 4,000 publicly-traded firms filed for bankruptcy protection.”
- But they’re not alone.
- “In China, roughly 10% of the country’s publicly-traded companies are ‘among the walking dead,’ being kept alive by continuous support from government and banks, according to research by He Fan, an economist at Beijing’s Renmin University.”
- “Across much of Europe, inefficient bankruptcy laws are partly to blame for rising numbers of undead companies. The problem is especially acute in Italy, where zombies represent 6% of all businesses, double the rate in 2007, according to the OECD report.”
- “A 2016 academic paper co-authored by University of Maryland economist John Haltiwanger showed the rate of business start-ups has been falling steadily since the 1980s. The drop has been so steep since the financial crisis that in some recent years more U.S. companies have closed than opened-there’s destruction but not much creation.” Referencing Austrian economist Joseph Schumpeter’s concept of ‘creative destruction.’
- “Paul Donovan, global chief economist at UBS Wealth Management in London, says that cheap credit has made business around the world less efficient, and that the real walking dead will remain hidden until borrowing costs begin to climb.”
Real Estate
WSJ – The Hedge Fund Manager Who’s Shorting America’s Malls – Serena Ng and Esther Fung 4/26
WSJ – S&P’s Warning: Here Are 10 Public Retailers Most in Danger of Default – Khadeeja Safdar 4/26
- “The number of bankruptcies so far this year has already come close to the total in 2016, with 14 retailers filing compared with 18 last year, according to S&P Global Market Intelligence.”
- Further, “researchers at S&P Global Market Intelligence last week released a list of 10 publicly traded retailers they consider most at risk of default within the next 12 months.”
- Sears Holdings Corp.
- DGSE Companies Inc.
- Appliance Recycling Center of America Inc.
- The Bon-Ton Stores Inc.
- Bebe Stores Inc.
- Destination XL Group Inc.
- Perfumania Holdings Inc.
- Fenix Parts Inc.
- Tailored Brands Inc.
- Sears Hometown and Outlet Stores Inc.
Finance
WSJ – There’s Trouble in Capital One’s Wallet 4/26
- “Credit losses aren’t at dangerous levels, though the rising charges are a bit worrisome given the strong jobs market. More concerning is the inability of Capital One to predict its own losses. Investors should be on guard for more nasty surprises from the entire credit-card industry.”
Bloomberg – Wells Fargo, JPMorgan Wary of Auto Loans, Pack Them in Bonds – Matt Scully 4/27
- “Depending whose money they’re using, Wells Fargo & Co. and JPMorgan Chase & Co. either love subprime car loans or fear them.”
- “Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29% after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans ‘dramatically.'”
China
- “According to the media reports, the investigation into Wu is connected to a $14.5 billion loan the Anbang chairman allegedly obtained illegally from Minsheng Bank. Wu used the illegal loan to invest in the stock market, the reports say. He may also have partly funded Anbang’s acquisitions with the loan, according to the reports.”
- Oh by the way, “in January 2015, Reuters reported that Anbang had upped its stake in Mingsheng, the country’s largest private lender, to nearly 20%.”
- Isn’t there a conflict of interest there?
Other Links
Bloomberg Businessweek – This Lawsuit Goes to 11 – Robert Kolker 4/20