Month: July 2017

July 31, 2017

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – Sharif’s Ouster Is Bad News – Mihir Sharma 7/28

  • “Whatever one thinks of Pakistan’s former prime minister, the circumstances of his ouster are troubling.”

Markets / Economy

WSJ – Daily Shot: Total US Mortgages Outstanding as % of GDP 7/28

WSJ – Daily Shot: Total US Nonrevolving Debt as % of GDP 7/28

Bloomberg – New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring – Gabrielle Coppola 7/17

  • “Subprime auto financing has expanded quickly since 2009, and the strains are beginning to show in cases of fraud and rising delinquencies.”

Environment / Science

NYT – It’s Not Your Imagination Summers Are Getting Hotter. – Nadja Popovich and Adam Pearce 7/28

Middle East

WSJ – Daily Shot: Saudi Arabia Bank Lending Growth 7/28

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July 28, 2017

If you were to read only one thing…

Daily Mail – Has this man found the secret of happiness? – Mo Gawdat 7/20

  • A very moving personal account of success, loss, and perspective.

Perspective

NYT – Behind an $18 Billion Donation to a New York Charity, a Shadowy Chinese Conglomerate – Michael Forsythe and Alexandra Stevenson 7/26

  • “At first glance, it appears to be one of the most generous donations in the history of philanthropic giving in America.”
  • “A Chinese man has transferred more than 29% of HNA Group of China — the equivalent of as much as $18 billion — to a New York-based private foundation. The donation puts him in the same league as donors like Bill Gates and Warren E. Buffett and almost matched the combined giving of all American corporations in 2016.”
  • “But it has not been disclosed how that man, Guan Jun, who is in his 30s, came to own such a large piece of one of China’s biggest conglomerates. His registered address in Beijing is a modest apartment at the end of a dingy hallway littered with discarded furniture and bags of trash.”
  • As an aside, the charity was only just set up in December of 2016. Basically, lots of open questions at this point.

FT – Can an electric shock help curb your spending? – Aime Williams 7/25

  • “Tech companies believe that knowledge is power, and the digital banks vying for the world’s savers are no exception. By offering colorful apps that promise users control over their finances, companies such as Atom, Monzo and Tandem think that giving people more information will help them make smarter decisions.”
  • “But a dark question stalks these ambitions: what if people have no self-control? What if, when told they spend a third of their monthly salary on takeaway coffee, they continue overspending? When it comes to money, sometimes people just don’t want to know.”
  • There are apps that subtly set aside money into your savings accounts when you don’t spend all of your earnings, but for some that is not enough.
  • Enter “Pavlok — its name inspired by Russian psychologist Ivan Pavlov — is a bracelet that gives you a mild electric shock if you do something you don’t want to do. This method has no interest in your comfort and dignity, only in ‘allowing you to achieve 100 per cent of your goals 100 per cent of the time’ (in the words of its creator).”
  • “None of this is particularly sophisticated, of course. But perhaps it’s the logical conclusion of the never-ending clamor for our attention and cash. Maybe our willpower is weaker than before, just as our attention spans are shorter, and the Pavlok is both the result of a tech-powered information overload and an antidote to it.”
  • “There is only one more problem but Sethi (Maneesh Sethi, Pavlok’s inventor) seems to have considered it already. What if I just decide to take off the bracelet? ‘We’re developing a lock,’ he replies.”

Worthy Insights / Opinion Pieces / Advice

Oaktree – There They Go Again…Again – Howard Marks 7/26

  • Looking for a thorough explanation of the current investment environment right now and thoughtful opinion on the risks that lie within… look no further.

The Reformed Broker – Tennis with Howard Marks – Joshua Brown 7/27

  • An epilogue to the memo from Mr. Marks.

Energy

WSJ – Daily Shot: eia – Per capita residential electricity sales in U.S. 7/27

July 27, 2017

Perspective

NYT – The Cost of a Hot Economy in California: A Severe Housing Crisis – Adam Nagourney and Conor Dougherty 7/17

  • “A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families. The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state.”
  • “The extreme rise in housing costs has emerged as a threat to the state’s future economy and its quality of life. It has pushed the debate over housing to the center of state and local politics, fueling a resurgent rent control movement and the growth of neighborhood ‘Yes in My Back Yard’ organizations, battling long-established neighborhood groups and local elected officials as they demand an end to strict zoning and planning regulations.”
  • “For California, this crisis is a price of this state’s economic boom. Tax revenue is up and unemployment is down. But the churning economy has run up against 30 years of resistance to the kind of development experts say is urgently needed. California has always been a desirable place to live and over the decades has gone through periodic spasms of high housing costs, but officials say the combination of a booming economy and the lack of construction of homes and apartments have combined to make this the worst housing crisis here in memory.”
  • “Housing prices in Los Angeles, San Francisco, San Jose and San Diego have jumped as much as 75% over the past five years.”
  • Thus democratic State Senator Scott Wiener has sponsored “…one of 130 housing measures that have been introduced this year, would restrict one of the biggest development tools that communities wield: the ability to use zoning, environmental and procedural laws to thwart projects they deem out of character with their neighborhood.”
  • “’We’re at a breaking point in California,’ Mr. Wiener said. ‘The drought created opportunities to push forward water policy that would have been impossible before. Given the breadth and depth of the housing crisis in many parts of California, it creates opportunities in the Legislature that didn’t exist before.'”
  • “For the past several decades, California has had a process that sets a number of housing units, including low-income units, that each city should build over the next several years based on projected growth. Mr. Wiener’s bill targets cities that have lagged on building by allowing developers who propose projects in those places to bypass the various local design and environmental reviews that slow down construction because they can be appealed and litigated for years.”
  • “The bill applies only to projects that are already within a city’s plans: If the project were higher or denser than current zoning laws allow, it would still have to go through the City Council. But by taking much of the review power away from local governments, the bill aims to ramp up housing production by making it harder to kill, delay or shrink projects in places that have built the fewest.”

Worthy Insights / Opinion Pieces / Advice

FT – China’s credit squeeze sends warning on global growth – William Sterling (Trilogy Global Advisors) 7/18

  • “China has sent a deflationary chill through global markets this year by engineering a major slowdown in the growth of bank credit in the country.”
  • “In fact, we would argue that the unravelling of many of the so-called ‘Trump trades’ in global markets this year reflects the deflationary chill that China’s credit squeeze is creating, rather than simply registering skepticism about Trump administration policies.”
  • “Over the course of little more than a year, China went from exporting deflation to helping create the “global reflation” theme that was evident in global equity markets in the second half of 2016.”
  • “The most important global policymaker nobody has ever heard of is Guo Shuqing, the recently appointed chief of the China Banking Regulatory Commission (CBRC).”
  • “With the implicit support of President Xi Jinping, Mr Guo has issued a flurry of new regulations aimed at tackling corruption and speculation, including a requirement that banks account for previously lightly regulated ‘wealth management products’ in line with capital adequacy regulations.”
  • “The result is that the credit impulse, best understood as ‘the rate of change of the rate of change’ of credit relative to GDP, has declined by a whopping 17.5% of GDP in the first quarter of 2017.” 
  • “In the meantime, expect weaker commodity prices and less upward pressure on US interest rates.”
  • “China’s impact on the world economy is significant. Over the past five years its nominal GDP has expanded by $3.7tn, an amount that exceeds the GDP of Germany. In contrast, the entire global economy has expanded its nominal GDP by only $2.2tn.”
  • “As well as accounting for nearly 170% of the growth in the world’s nominal GDP in this period, it seems that China may have made US corporate earnings great again. Per Commerce Department figures, rest-of-world profits for US corporations were up by 25% in the first quarter of 2017, while domestically generated profits were down slightly and well below their peak of 2014.”
  • “The key concern for global investors is that even though China’s credit policy may be almost as important to the global economy as shifts in Federal Reserve or European Central Bank monetary policy, China’s economic policymaking remains far less transparent than in many other key nations.”
  • “Monitoring China’s credit impulse, therefore, is perhaps the best means open to investors to ‘watch what they do, not what they say’.”

FT – Ignore the Cassandra chorus, rates won’t skyrocket – Scott Minerd (chief investment officer Guggenheim Partners) 7/17

  • “The simple truth is that, while rates may trend higher in the near term, the risk is that we have not reached the point where the macro economy can sustain persistently higher rates. If anything, political, military and market uncertainties would more likely lead to another sudden decline in rates rather than a massive spike upward.”
  • “Investors would be wise to ignore the growing chorus of Cassandra cries and look through the noise to the fundamentals. There are many things to be concerned about in the world but skyrocketing rates is not likely among them.”

A Teachable Moment – Numbers Can Lie – Tony Isola 7/20

  • “Narratives without statistics are blind, statistics without narrative are empty.” – Steven Pinker

NYT – Behind a Chinese Powerhouse (HNA) a Web of Family Financial Ties – David Barboza 7/18

NYT – Saudi King’s Son Plotted Effort to Oust His Rival – Ben Hubbard, Mark Mazzetti and Eric Schmitt 7/18

  • A family matter made public.

Project Syndicate – Why Do Cities Become Unaffordable? – Robert Shiller 7/17

  • “The question, then, is why residents of some cities face extremely – even prohibitively – high prices.”
  • “In many cases, the answer appears to be related to barriers to housing construction. Using satellite data for major US cities, the economist Albert Saiz of MIT confirmed that tighter physical constraints – such as surrounding bodies of water or land gradients that make properties unsuitable for extensive building – tend to correlate with higher home prices.”
  • “But the barriers may also be political. A huge dose of moderate-income housing construction would have a major impact on affordability. But the existing owners of high-priced homes have little incentive to support such construction, which would diminish the value of their own investment. Indeed, their resistance may be as intractable as a lake’s edge. As a result, municipal governments may be unwilling to grant permits to expand supply.”
  • “Insufficient options for construction can be the driving force behind a rising price-to-income ratio, with home prices increasing over the long term even if the city has acquired no new industry, cachet, or talent. Once the city has run out of available building sites, its continued growth must be accommodated by the departure of lower-income people.”
  • “But this tendency can be mitigated, if civil society recognizes the importance of preserving lower-income housing. Many of the calls to resist further construction, residents must understand, are being made by special interests; indeed, they amount to a kind of rent seeking by homeowners seeking to boost their own homes’ resale value. In his recent book The New Urban Crisis, the University of Toronto’s Richard Florida decries this phenomenon, comparing opponents of housing construction to the early-nineteenth-century Luddites, who smashed the mechanical looms that were taking their weaving jobs.”
  • “In some cases, a city may be on its way to becoming a ‘great city,’ and market forces should be allowed to drive out lower-income people who can’t participate fully in this greatness to make way for those who can. But, more often, a city with a high housing-price-to-income ratio is less a ‘great city’ than a supply-constrained one lacking in empathy, humanitarian impulse, and, increasingly, diversity. And that creates fertile ground for dangerous animosities.”

Real Estate

WSJ – Foreign Buyers Pump Up U.S. Home Prices – Laura Kusisto 7/18

  • “Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages.”
  • “In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report released Tuesday.”
  • “That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property.”

WSJ – Property Developers Push for Open Drinking on City Streets – Esther Fung 7/18

FT – Retail woes lead to rising commercial mortgage delinquencies – Joe Rennison 7/17

  • “We see a lot of retail loans defaulting at maturity. Borrowers are just unable to re-finance their loans.” – Mary MacNeill, managing director – Fitch Ratings

FT – Will the death of US retail be the next big short? – Robin Wigglesworth 7/16

  • “Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust. The downturn is hitting the largely healthy US labor market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.”

FT – Blackstone warns of internet impact on US shopping malls – Robin Wigglesworth 7/16

  • “’The retail industry is clearly facing headwinds. And it’s the first time we’ve seen secular rather than cyclical headwinds,’ said Nadeem Meghji, head of North American real estate at Blackstone. ‘We’re now seeing pressures even on luxury retailers, which I didn’t expect to happen as fast as it has.’”
  • “The market for second-tier enclosed malls has virtually frozen given how concerned investors are, but Mr. Meghji estimated that in the past two years prices may have plunged as much as 40% on average for the 1,100 enclosed regional malls in the US. Even for the top 50, prices have probably declined by 20%, the Blackstone executive said.”
  • “The private equity firm’s $102bn real estate arm still owns some grocery shop-anchored malls in high-density population areas, but no longer has any exposure to the enclosed shopping mall sector.”

Energy

FT – California confronts solar power glut with novel marketplace – Gregory Meyer 7/17

  • “California is a leader in solar and wind power. The Golden State is well on its way to reaching a self-imposed goal of getting a third of its electricity from renewable sources by 2020, part of an aggressive agenda to cut greenhouse gas emissions.” 
  • “Yet this bold strategy is causing complications. At noon on clear spring days, too much solar power courses through the state’s electrical grid. Generators must pay customers to take excess supply — a condition called “negative prices” — or unplug their plants. Still, California consumers have some of the highest electricity rates in the country.” 
  • “Amounts of electricity generated by the sun and wind can vary in the space of hours, however, as clouds darken the skies or breezes die down. Every day, solar power fades towards dusk just as people come home and turn on lights, air conditioners and televisions.” 
  • “The imbalance market helps to iron out utilities’ power scramble as supply and demand shift during the day. It builds on longstanding markets for power delivered hours, days or months ahead by offering power delivered between five and 15 minutes in advance. When California suddenly finds itself with too much electricity, other states can now absorb it, and vice versa.”
  • “Participants say the imbalance market lowers overall costs for customers, makes grids more reliable and reduces carbon dioxide emissions by using clean energy that might otherwise be shut off. The ISO says the market has used 412,000 megawatt-hours of surplus California renewable energy since 2015, displacing 176,000 tons of carbon.” 

Environment / Science

WSJ – Daily Shot: statista – 20 Worst Cities Worldwide for Air Pollution 7/26

Health / Medicine

FT – ‘Urgent wake-up call’ for male health as sperm counts plummet – Clive Cookson 7/25

  • “The sperm count of men in the western world has fallen by more than half over a period of 40 years, according to an international study described by its authors as ‘an urgent wake-up call’ about declining male health.”
  • “’Decreasing sperm count has been of great concern since it was first reported 25 years ago,’ said senior author Shanna Swan of Icahn School of Medicine at Mount Sinai, New York. ‘This definitive study shows . . . that the decline is strong and continuing.’”
  • “Professor Allan Pacey of Sheffield university, who has been skeptical about previous research showing declining sperm counts, said the latest research dealt with many of his criticisms. But he urged people to ‘treat this study with caution as the debate has not yet been resolved and there is clearly much work still to be done’.”
  • “Prof Pacey pointed out too that the reported decline from 99m to 47m sperm per milliliter still left the average count within what fertility clinics regard as the ‘normal’ range.”
  • “In northern Europe today more than 15% of young men had a sperm count low enough to impair their fertility, Prof (Richard) Sharpe (of Edinburgh University) added, and ‘this is likely to get worse rather than better’.”
  • “The combination of declining male sperm counts and a growing delay in couples trying for a baby — often until the woman is in her 30s and her own fertility is declining — created ‘a double whammy’ for natural conception in modern western societies, he said.”

Bloomberg – China’s Sperm Count Problem Has Created a Billion-Dollar Market 7/12

  • While the above article focused on samples from North America, Europe, Australia and New Zealand, China too has its problems.

Britain

FT – UK plans to ban sale of new petrol and diesel cars by 2040 – Jim Pickard and Peter Campbell 7/26

  • “UK environment secretary Michael Gove has announced plans to ban the sale of new petrol and diesel cars in Britain by 2040.”
  • “The announcement follows the lead set by France two weeks ago and will be set out in the UK government’s long-awaited ‘air quality plan’ on Wednesday.”
  • “Mr. Gove will say that all new cars will have to be fully electric within a quarter of a century. His promise to ban other engine types — including hybrids — shifts the government further from its existing position, which was an ‘ambition’ for all new cars to be zero-emissions by 2040.”
  • “The coalition government’s ‘carbon plan’ in 2011 also predicted that all new cars sold after 2040 would have to be emission free, to meet a target of having no petrol or diesel cars on the roads by 2050.”
  • “The announcement is a milestone in the shift towards electric cars, which currently account for less than 1% of UK sales.”

China

FT – Wang Qishan: China’s enforcer – Tom Mitchell, Gabriel Wildau, and Henny Sender 7/24

  • Arguably the second most powerful person in China.

WSJ – China’s Visible Hand Starts to Squeeze -Jacky Wong 7/18

  • “Macau looks likely to be another target of China’s efforts to contain leverage and capital outflows.”

FT – China’s railway diplomacy hits the buffers – James Kynge, Michael Peel and Ben Bland 7/17

  • “China’s ability to build high-speed railways more cheaply than its competitors gave the technology a central place in ‘One Belt, One Road’, Beijing’s ambitious scheme to win diplomatic allies and open markets across more than 65 countries between Asia and Europe by funding and building infrastructure.”
  • “But less than two years after these hopeful words were uttered, a Financial Times investigation has found that China’s high-speed rail ambitions are running off the tracks. Far from blazing a trail for One Belt, One Road, several of the projects have been abandoned or postponed. Such failed schemes, and some that are under way, have stoked suspicion, public animosity and mountains of debt in countries that Beijing had hoped to woo.”
  • “In terms of scale, the rail push ranks as one of the biggest infrastructure undertakings in history. The total estimated value of 18 Chinese overseas high-speed rail schemes — including one completed (the Ankara-Istanbul service), five under way and 12 more announced — amounts to $143bn, according to a study by the Center for Strategic and International Studies, a Washington-based think-tank, and the Financial Times. To put this number in context, the US-led Marshall Plan, which helped revive Europe after the second world war, was completed with $13bn in American donations, a sum equivalent to $130bn today.”
  • “The size of China’s grand design has made its many shortcomings all the more eye-catching. The combined value of cancelled projects in Libya, Mexico, Myanmar, the US and Venezuela is $47.5bn, according to FT estimates.”
  • “This is almost double the $24.9bn total value of the five projects under way in Laos, Saudi Arabia, Turkey and Iran, where two lines are under construction, according to CSIS estimates.”
  • “So why is it that so many rail projects backed by China’s unrivalled financing firepower, huge construction companies and advanced technology fall by the wayside? The answers reveal much about the limitations in Beijing’s global development vision.”
  • Mostly it’s “…the vastly divergent capacities to take on and absorb debt. China’s economic heft and authoritarian system allows companies that enjoy effective government guarantees to load up on loans and operate at a perennial loss. China Railway Corporation, the state-owned rail operator and investor in the country’s high-speed networks, has debts of Rmb3.8tn ($558bn), much more than the national debt of Greece. This is partly because much of the 22,000km of high-speed rail in China runs at a loss, officials say.”

FT – China’s Xi orders debt crackdown for state-owned groups – Tom Mitchell 7/15

  • “’Deleveraging at SOEs is of the utmost importance,’ the Chinese president said at this weekend’s National Financial Work Conference, which convenes only once every five years. He added that the country’s financial officials must also ‘get a grip’ on so-called ‘zombie’ enterprises kept alive by infusions of cheap credit.” 

FT – Chinese purchases of overseas ports top $20bn in past year – James Kynge 7/15

South America

FT – Venezuela’s economic and political crisis in charts – Lauren Leatherby 7/25

July 26, 2017

If you were to read only one thing…

NYT – 110 N.F.L Brains 7/25

  • “Dr. Ann McKee, a neuropathologist, has examined the brains of 202 deceased football players. A broad survey of her findings was published on Tuesday in The Journal of the American Medical Association.”
  • “Of the 202 players, 111 of them played in the N.F.L. – and 110 of those were found to have chronic traumatic encephalopathy, or C.T.E., the degenerative disease believed to be caused by repeated blows to the head.”
  • “The brains here are from players who died as young as 23 and as old as 89. And they are from every position on the field – quarterbacks, running backs and linebackers, and even a place-kicker and a punter.”

Perspective

WSJ – Daily Shot: Forbes – Large Tech Firm Lobby Budgets 7/25

WSJ – U.S. Military’s Space in Trump Tower Costs $130,000 a month – Paul Sonne 7/19

  • It’s a 3,475 sq. ft. space, so $37.41 per sq. ft. per month. Mind you, “the most expensive Trump Tower listing recently was a 3,725 sq. ft., three-bedroom apartment on the 62nd floor. It was listed in the spring of 2016 for $50,000 a month unfurnished and $60,000 a month furnished, according to Streeteasy.com.”
  • Basically, Trump’s neighbor recognizes they have a captive audience.

FT – Google and Facebook lay foundations for modern-day company towns – George Hammond 7/19

Worthy Insights / Opinion Pieces / Advice

Bloomberg – Fund Managers and Strategists Think the Bull Market Is Ending Next Year – Adam Haigh, Natasha Doff, Dani Burger and Julie Verhage 7/25

  • “We have had a liquidity-fueled bull market. If that is taken away, there is a pressure point.” – Remi Olu-Pitan, Schroder Investment Management Ltd.

WP – Disabled and disdained – Terrence McCoy 7/21

  • “In rural America, some towns are divided between those who work and those who don’t.”

FP – The argument to be a buyer of the Saudi Aramco IPO – John Dizard 7/21

  • “As one international oil analyst says, though: ‘The Permian is preventing high prices today, but ensuring high oil prices tomorrow. The low prices are holding back investment in most of the world, and that is storing up a significant problem in meeting demand in the future.'”
  • “That is the argument to be a buyer of the Saudi Aramco IPO.”
  • “There are two bets involved in the listing. Can Saudi Arabia contain the social and strategic pressures caused by cheap oil? And will the capital markets eventually stop subsidizing shale producers?”

WSJ – Investors, Stop Worrying About Why ‘Nobody’ Is Worrying – Jason Zweig 7/21

Markets / Economy

WSJ – In Reversal, Colleges Rein In Tuition – Josh Mitchell 7/23

  • “U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.”
  • “Abundant supply is running up against demand constraints. The number of two-year and four-year colleges increased 33% between 1990 and 2012 to 4,726, Education Department data show. But college enrollment is down more than 4% from a peak in 2010, partly because a healthy job market means fewer people are going back to school to learn new skills.”
  • “Longer-running economic and demographic shifts also are at play. Lower birthrates and the aging of baby boomer children have reduced the pool of traditional college-age Americans. The number of new high-school graduates grew 18% between 2000 and 2010 but only 2% in the first seven years of this decade, Education Department data show.”
  • “Another factor: Congress last increased the maximum amount undergraduates could borrow from the government in 2008. Some economists have concluded schools raise prices along with increases in federal financial aid. A clampdown on aid, in turn, could limit the ability of schools to charge more.”
  • “But other factors could keep cost pressures rising. George Pernsteiner, head of State Higher Education Executive Officers, a trade group that tracks state funding for schools, notes that many states are on track to experience budget crunches as the population ages and health-care and public pension costs rise. That could squeeze public support for schools.”

Real Estate

WSJ – Americans Pour Record Sums Into Home Improvements – Laura Kusisto and Sarah Chaney 7/25

  • “A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market. The silver lining: a boom in renovations of existing homes.”
  • “Americans are expected to pour a record $316 billion into home remodeling this year, up from $296 billion a year earlier, according to Harvard University’s Joint Center for Housing Studies.”

FT – Funds hunt for cracks in most-prized US shopping malls – Miles Johnson 7/21

  • “A defining feature of the financial crisis was a group of hedge funds making vast sums by wagering against supposedly AAA-rated mortgage debt well before markets imploded in 2008.”
  • “Now some believe a similar story will play out for US shopping malls — that the most risky investments will end up being those that investors now believe to be the safest. Central to their premise is the idea that too much faith may be being placed in a classification system used for shopping malls that is little known outside of the real estate sector.”
  • “Malls are given ratings by a small group of property consultants generally ranging from A++ to C based on factors that include their sales per square foot and location. While there is no universally accepted system for ranking the malls, with each consultant having slightly different methodologies, banks and investors tend to rely on these ratings to make decisions over how secure each mall is as a creditor or investment.”
  • “The stock market has until recently appeared to believe that prime ‘A’ malls are largely insulated from the pain being felt across a US retail sector being shaken by e-commerce.”
  • “Yet there is growing evidence to suggest that these prime malls, which have been treated by investors and lenders alike as rock solid bets in the face of the internet headwinds, are not as protected as once thought.”
  • “The hedge funds wagering against the highest quality malls believe that the wider market will come to believe these A-quality malls are far more similar to lesser ranked ones. ‘This idea that there are these magic malls in America that are immune to secular change is a myth,’ the US-based hedge fund manager says.”
  • “Some argue that the market underappreciates that A class mall operators and B and C class mall operators all have very similar tenant bases, in spite of being in different locations.”

Energy

BloombergGadlfy – Venezuela’s Perfect Storm for Oil May Be About to Break – Liam Denning 7/21

  • “We may be about to see the first sovereign producer to unequivocally fail.”
  • “The oil producer in question is Venezuela, and that assessment comes courtesy of Helima Croft, who is global head of commodity strategy at RBC Capital Markets and formerly worked with both the Council on Foreign Relations and the CIA.”
  • “But things are building to a head, partly due to the relentless logic of the bond market and partly due to the more proprietary logic of U.S. foreign policy.”
  • “Venezuelan bonds, which haven’t looked rock-solid for a few years, crashed this week as embattled President Nicola Maduro renewed calls to rewrite the country’s constitution, which would effectively disenfranchise the millions of Venezuelans who oppose him and entrench his regime. The U.S. has warned it may impose much tougher sanctions if Maduro goes ahead with his plan.”
  • “Venezuela’s economy is in free-fall: By the end of this year, it will have shrunk by 32% compared to where it was at the end of 2013, according to International Monetary Fund forecasts. Also by the end of this year, the government is on the hook to pay back more than $5 billion in debt — including bonds owed by the state-owned oil champion, Petróleos de Venezuela, S.A., or PdVSA — plus billions more in interest. As of this week, Venezuela’s international reserves stood at less than $10 billion.”
  • “Meanwhile, mismanagement, a lack of investment and re-nationalization of foreign oil companies’ interests have caused Venezuela’s oil production to slump from around 3.3 million barrels a day a decade ago to about 2 million now. Even allowing for the fact that domestic consumption has dwindled along with GDP, Venezuela’s surplus of oil available for earning export dollars has shrunk considerably.”
  • “Compounding this is the fact that the country must devote a lot of its output to paying off loans from China and Russia, further reducing the actual amount it can use to generate cash. Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute for Public Policy, estimates that could be as little as 800,000 barrels a day.”
  • “For three years, oil watchers have been waiting for a chaotic wave of bankruptcies in places like Texas and North Dakota to jolt the market. They’ve been looking in the wrong place.”

FT – Coal has no future, says US railroad boss – Gregory Meyer 7/19

  • “One of the largest haulers of US coal says fossil fuels have no future, despite pledges to the contrary from President Donald Trump.”
  • “CSX, a freight railroad company with origins in the bituminous coal seams of Appalachia, will not buy a single new locomotive to pull coal trains, chief executive Hunter Harrison told analysts on Wednesday.”
  • “’Fossil fuels are dead,’ Mr Harrison said. ‘That’s a long-term view. It’s not going to happen overnight. It’s not going to be in two or three years. But it’s going away, in my view.’” 
  • “North American railroads have reshaped their asset holdings in acknowledgment that coal’s apex has passed.”
  • “Lance Fritz, chief executive of the Union Pacific railroad, said in a recent interview that Mr Trump’s move to scrap Clean Power Plan regulations was unlikely to grow its coal business. ‘It takes away a headwind,’ he said.”

Tech

NYT – Silicon Valley Giants Confront New Walls in China – Paul Mozur and Carolyn Zhang 7/22

  • “It’s basically like someone who has been training for Olympic taekwondo going up against a street fighter. The Olympic fighter is waiting for the whistle, and the street fighter already has him on the ground hitting him with elbows. There’s no rules.” – Andy Tian, co-founder of Asia Innovations Group and former general manager of Zynga China

FT – Uber, Amazon and Microsoft braced for accounting shake-up – Leslie Hook and Richard Waters 7/19

  • “Uber’s reported revenues are being cut in half and sales at Amazon and Microsoft could be higher than previously stated — all thanks to a forthcoming change to accounting rules.”
  • “An update to generally accepted accounting principles (GAAP) for US companies is turning out to have particularly large consequences in parts of the tech industry, which is having to overhaul the way it reports revenues and costs.”
  • “One of the more dramatic impacts will affect car-booking services such as Uber, a private company whose GAAP revenue drops by more than half when it adopts the new standard, which it plans to do this year.”
  • “Uber’s first-quarter revenue this year was $3.4bn under old GAAP accounting, but it says that under the new rules its revenue would have been just $1.5bn for the same period. Uber has already started sharing the lower figure with investors.”
  • “Under the old standard, car-booking services such as Uber and Lyft counted their commissions from regular rides, plus the entire fare of carpool rides, as revenue. Under the new standard, only the commissions from both regular and carpool rides will count as revenue.”
  • “The shift is due to changes to the ‘principal versus agent’ rules that determine when a company is acting as a principal and when it is acting as an agent. The car-booking services were previously considered the ‘principal’ for carpooled rides. As private companies, they must adopt the new standard by the beginning of 2019, although Uber has moved to do so much earlier.”
  • “The new standard, known as Revenue from Contracts with Customers, is designed to narrow the distance between US GAAP rules and International Financial Reporting Standards (IFRS).”

Agriculture 

WSJ – Daily Shot: CBOT Soft Red Winter Wheat Futures 7/24

  • “The recent wheat rally has been almost entirely reversed.”

Asia – excluding China and Japan

FT – Jailed Duterte foe prepares for long haul – Michael Peel 7/20

  • “Philippine Senator Leila de Lima, 57, was arrested at her senate office in February on charges that she received payoffs from jailed drug lords. She has branded the allegations ‘simply surreal’ and said they were part of a ‘personal vendetta’ by a president who is ‘rather obsessed with me’.”
  • “Ms. de Lima has certainly earned implacable enmity from Mr. Duterte for her efforts to probe his bloody drugs wars first as a provincial mayor and now as president. She maintains her innocence but also accepts her stay in jail could be a long one. The same day she marks five months in detention next week, Mr. Duterte will give an annual state of the nation speech against a background of soaring approval ratings.”
  • “I think as long as Duterte is president (5 more years), I will be locked up in jail,” Ms. de Lima says. “I have no false hopes about achieving justice very soon.”

China

NYT – In China, Herd of ‘Gray Rhinos’ Threatens Economy – Keith Bradsher and Sui-Lee Wee 7/23

  • “Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast.”
  • “The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.”
  • “Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”

FT – China’s LeEco appoints new chairman from Sunac – Emily Feng 7/21

  • Sunac continues to be busy. In addition to its property acquisitions from Dalian Wanda, Sunac’s chairman – Sun Hongbin, is adding a new chairmanship to his belt, that of the struggling Chinese tech company, LeEco.

WSJ – The Saga Isn’t Over for Dalian Wanda – Jacky Wong 7/20

NYT – At the Finish, Dalian Wanda of China Rewrites a Blockbuster Sale – Sui-Lee Wee and Zhang Tiantian 7/19

  • “Dalian Wanda Group, the Chinese conglomerate, tore up a $9.3 billion agreement to sell a portfolio of hotels and theme parks, unexpectedly reaching new deals on the properties that highlighted uncertainty over the financial health of the country’s biggest companies.”
  • “Wanda had reached an overall agreement with the property firm Sunac China Holdings last week, but Wanda announced at a signing ceremony on Wednesday that it was backtracking and would instead sell just the theme parks to Sunac. The hotels will instead be sold to R&F Properties, based in the southern Chinese city of Guangzhou.”
  • “The hasty reorganization of the deals has raised concern about the due diligence conducted by many of China’s first-generation dealmakers as they seek to become bigger players domestically and around the world.”
  • “The signing was dominated by the announcement that Sunac would pay $6.5 billion for a 91% stake in Wanda’s 13 theme parks across China, while R&F Properties would buy 77 hotels from Wanda for $3 billion. In a sign of the wildly fluctuating valuations of assets, however, Wanda had said last week that it was selling Sunac only 76 hotels, but that they were worth $5 billion.”

South America

WSJ – Daily Shot: Venezuelaecon.com – Venezuelan Bolivar Black Market Exchange Rate 7/25

Turkey

NYT – Turkey Sees Foes at Work in Gold Mines, Cafes and ‘Smurf Village’ – David Segal 7/22

  • “Since then (after the failed attempt to overthrow the government of President Recep Tayyip Erdogan on July 15, 2016), more than 950 companies have been expropriated, all of them purportedly linked to Fethullah Gulen, the Muslim cleric who Turkish leaders say masterminded the putsch.”
  • “About $11 billion worth of corporate assets — from small baklava chains to large publicly traded conglomerates — have been grabbed by the government, a systematic taking with few precedents in modern economic history. Several thousand dispossessed executives have fled overseas to cities as far-flung as Nashville and Helsinki. The less fortunate were imprisoned, part of a mass incarceration campaign that has included purged members of the military, judiciary, police and news media, adding 50,000 new inmates to the prisons.”

July 25, 2017

Perspective

WSJ – Daily Shot: Amazing Maps – Median age by continent 7/16

WSJ – Daily Shot: FRED – US Department Store Sales 7/16

WSJ – Daily Shot: Valuewalk – Global Bitcoin Mining Energy Consumption 7/20

WSJ – Daily Shot: howmuch – Cost of Olympic Games 7/20

WSJ – Daily Shot: Number of US Colleges that award federal student aid 7/21

Worthy Insights / Opinion Pieces / Advice

WSJ – Daily Shot: Bloomberg Businessweek – US Private School Enrollment Rate by Family Income bracket 7/21

The Registry – Over-Storing America – John McNellis 7/24

  • Developers are going to develop. Cities without structural advantages are going to seek activity for activity’s sake. Sought after locales will seek to keep nearly anything and everything from being built. And as a result, some places are over supplied – so much so, that the aggregate whole is over supplied.

Real Estate

WSJ – Daily Shot: Pew – US Share of Households who rent 7/20

WSJ – Daily Shot: Credit Suisse – Office & Retail Cap Rate Trends 7/23

WSJ – Daily Shot: John Burns RE Consulting – Construction Hourly Wages by Trade 7/23

WSJ – Daily Shot: John Burns RE Consulting – Construction Labor Shortages 7/23

WSJ – Daily Shot: John Burns RE Consulting – US Housing Supply Overview 7/23

Energy

WSJ – Daily Shot: eia – US Crude Oil Production by Region 7/20

Finance

WSJ – Daily Shot: Haver & IIF – Central Bank Liquidity Injections 7/19

China

NYT – In Urban China, Cash Is Rapidly Becoming Obsolete – Paul Mozur 7/16

  • “In 2016, China’s mobile payments hit $5.5 trillion, roughly 50 times the size of America’s $112 billion market, according to consulting firm iResearch.”

Other Links

WSJ – Daily Shot: Vox – Marijuana laws in the US 7/20

July 17, 2017

Perspective

Bloomberg – Italy’s Poor Almost Triple in a Decade Amid Economic Slumps – Lorenzo Totaro and Giovanni Salzano 7/13

Markets / Economy

WSJ – Daily Shot: CBOT Soft Read Winter Wheat Futures 7/13

  • Things aren’t as bad as they seemed to be…

Real Estate

WSJ – Daily Shot: Real Housing Prices US v Canada 1975-2016 7/14

South America

FT – Venezuela’s crisis drains its foreign reserves – Gideon Long 7/14

  • “Venezuela’s foreign reserves have dropped below $10bn for the first time in 15 years as chronic mismanagement, corruption and subdued oil prices continue to batter what used to be the wealthiest country in South America.”
  • “The reserves stood at $9.983bn, according to figures published on Friday from the central bank, representing a 77% decrease since January 2009 when they hit a peak of $43bn.”
  • “…the fall in the reserves is likely to rekindle fears that Venezuela might default on its debt obligations this year. The state and its oil company PDVSA are due to make capital and interest repayments of $3.7bn in the fourth quarter.”
  • “Over the longer term, Venezuela also owes money to Russia, China, the Latin American development bank CAF and to companies that have taken it to court over broken promises and expropriation of assets.”
  • “Francisco Rodríguez, chief economist at Torino Capital in New York, says the Maduro government could raise about $14.5bn through a variety of other measures, however.” 
  • “It could recall loans made to small Caribbean and Central American nations during the Chávez years. Of these, its biggest debtor is Nicaragua, which owes about $2.9bn.”

July 14, 2017

Perspective

WSJ – Daily Shot: Statista – Canada’s Positive Global Influence 7/13

FT – IPOs: forlorn unicors – Lex 7/13

  • “Perhaps the recent IPOs will rebound, as Facebook did after its initial dip. Or maybe a stronger company, such as Airbnb, will manage to make a success of going public. The evidence so far is that private valuations are still inflated and should fall.”

Worthy Insights / Opinion Pieces / Advice

NYT – What We Lose When the World Moves On From Email – Farhad Manjoo 7/12

WSJ – Gig Workers Pose Danger to Consumer Lending Boom – Paul Davies 7/12

  • “For banks and regulators, as flexible working grows, they will need to find other indicators of looming payment problems. Difficulties may already be happening. Delinquency rates on some forms of subprime credit and auto loans are rising according to New York Fed data, at a time when unemployment rates are still trending down.”
  • “That is very unusual, but it may be a sign of things to come.”

Finance

WSJ – Daily Shot: German 10yr Government Bond Yield 7/13

  • “While Treasury prices have stabilized, the selloff in Bunds persists. Here is the 10yr German bond yield approaching 60 bps.”

July 13, 2017

If you were to read only one thing…

WSJ – China’s Bid to Curb Its Booming Housing Market Has Only Made It Hotter – Lingling Wei and Dominique Fong 7/12

  • “The more China tries to rein in its roaring housing market, the more obsessed people get about buying.”
  • “With each new policy intended to restrict home purchases, buyers are piling in. Stressed about the prospect of being left behind, many are borrowing heavily, believing prices will continue to rise despite the restrictions and will soar if the government has to lift restrictions to spur economic growth.”
  • “Another article of faith is that the Communist Party won’t allow housing prices to collapse. ‘The government will spare no effort to make sure there are no big swings in the property market,’ says Ni Pengfei, a housing expert at the Chinese Academy of Social Sciences, a government think tank.”
  • “The desperate home buyers are exposing Beijing’s inability to control a housing market it has been relying on for economic growth. A decade ago, the real-estate sector, including construction and home furnishings, accounted for about 10% of China’s gross domestic product, according to Moody’s Investors Service . It now accounts for almost one-third, reflecting both a dearth of other investment options and the petering out of manufacturing growth.”
  • “At one time, low levels of household debt reassured government officials and economists that a property slump wouldn’t trigger a wider financial crisis. But the property-buying binge has changed that equation. Long-term household loans, mostly mortgages, now account for one-third of all new bank loans. Household debt stands at more than 42% of GDP, according to Moody’s. That ratio has grown 9 percentage points in three years and now surpasses levels in China’s emerging-market peers including Brazil, Mexico, Turkey and Russia. In the U.S., that ratio hit about 85% during the housing crisis.”
  • “Policy makers want to prevent the property bubble from getting worse, worried that any collapse could send defaults cascading through the banking system, infecting the overall economy perhaps for years to come. On the other hand, they are concerned that an investment slowdown could hamper growth. Economists already are warning that the recent property controls are starting to cause developers to scale back on new projects, potentially denting growth later this year.”
  • “Chinese government data show that prices across 70 Chinese cities were 9.7% higher in May than a year earlier, a larger year-over-year increase than the 9.3% last September, when the current round of housing controls were instituted.”
  • “At the end of last year, real estate accounted for 68.8% of China’s household assets, Moody’s says. In the U.S., it is less than 60%.”
  • “Mr. Ni, the housing expert at the Chinese Academy of Social Sciences, estimates that as much as 50% of China’s home sales today are for investment, a situation that worries the Communist Party leadership.”
  • “Nonetheless, the government has stopped short of imposing a property tax, which would discourage people from buying homes as an investment and leaving them empty by making it more expensive to own a home. Beijing has shown little political will to force a move that would raise costs for already stretched homeowners.”

Perspective

WSJ – Daily Shot: Data Is Beautiful – 5% of US physicians prescribe 60% of opioids 7/12

WSJ – Daily Shot: WEF – Time for trash to degrade in water 7/12

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Markets Are Right More Often Than You Think – Ben Carlson 7/12

  • “Investors are constantly questioning whether the market is wrong. It would be far more helpful if more investors also questioned whether they are wrong about the markets.”

Real Estate

WSJ – Startups Help Landlords Turn Apartments Into Hotel Rooms – Laura Kusisto 7/11

  • “A handful of startups are betting they can help apartment-building owners convert empty units into hotel rooms, a controversial practice that could help landlords generate more revenue.”
  • “The services are sprouting up just as the red-hot U.S. apartment market is beginning to cool.”
  • “In all, there are roughly 29 million apartment units in the U.S., according to the National Multifamily Housing Council. Nearly 800,000 new units have been built since the beginning of 2014, according to CoStar Group Inc.”
  • “But the vacancy rate for apartments in downtown markets rose to 8.1% in the first quarter from 6.8% a year ago, according to CoStar. Some 45% of buildings completed in the first quarter of 2016 were more than 10% vacant after a year, compared with 38% for those built in the first quarter of 2015, suggesting properties are taking longer to lease.”
  • “The startups, which are expected to typically operate eight to 16 months in a building, see potential in helping the developers of those buildings wring revenue out of units that aren’t yet leased.”
  • “These new services aim to get around an issue that Airbnb has been confronted with: Historically, landlords have been reluctant to allow tenants to rent out units because they didn’t receive any of the revenue. Most apartment leases forbid tenants from subletting units without permission.”
  • “Airbnb has been trying to recruit owners of big apartment buildings, which represent a crucial growth opportunity for the company because the sleek modern buildings with doormen, fitness centers and contemporary finishes are likely to appeal to business travelers.”

Environment / Science

NYT – An Iceberg the Size of Delaware Just Broke Off a Major Antarctic Ice Shelf – Jugal Patel and Justin Gillis 7/12

Health / Medicine

NYT – F.D.A Panel Recommends Approval for Gene-Altering Leukemia Treatment – Denise Grady 7/12

Europe

WSJ – Daily Shot: Moody’s Investors Service – Real GDP (select European countries) 7/12

South America

NYT – Ex-President of Brazil Sentenced to Nearly 10 Years in Prison for Corruption – Ernesto Londono 7/12

  • And that just happened…
  • “The case against Mr. da Silva, who raised Brazil’s profile on the world stage as president from 2003 to 2010, stemmed from charges that he and his wife illegally received about $1.1 million in improvements and expenses for a beachfront apartment from a construction company.”
  • “Mr. da Silva can appeal the conviction, but the ruling could deliver a serious blow to his plans for a political comeback. He had been widely considered a leading contender in next year’s presidential election.”

July 12, 2017

If you were to read only one thing…

Bloomberg News – Shoppers Can Buy Bad Debt on China’s Equivalent of Ebay – 7/11

  • “Used by millions of Chinese to buy everything from clothes to food and electronics, the platform (Taobao), known for its bargains, typically markets more than 1 billion yuan of soured assets a day, according to Bloomberg calculations. Recent listings include a portfolio of 118 non-performing loans from some companies in Yunnan province, a villa seized by a bank in the southern canal city of Shaoxing, and a property in central Beijing that’s also in default.”
  • “China’s embrace of e-retailing is helping it tackle another byproduct of the country’s rapid economic evolution: the rise of bad debt.”
  • “Slowing growth and an uptick in corporate defaults has fueled the market, with NPLs at commercial banks more than doubling over the past two years to 1.6 trillion yuan as of the end of March. As Beijing pushes lenders to find market-oriented ways of dealing with soured loans, interest in distressed debt has climbed, spurring banks and asset managers to look beyond traditional venues like auction houses and exchanges to dispose of the assets.”
  • “China Cinda Asset Management Co. — one of the country’s biggest distressed asset managers, and the firm marketing the steel company’s debt — said last month that it’s collaborating with Alibaba to set up a special section on Taobao to auction its wares.”
  • “Following Taobao’s lead, more than 50 other websites marketing their services to banks and other sellers of bad loans emerged in China in the first half of last year, according to a March report from PricewaterhouseCoopers LLP. More than 20 financial institutions are listed as partners on Taobao’s auction platform for soured assets, including Shenzhen-based Ping An Bank Co., Beijing’s China Minsheng Banking Corp. and China Citic Bank Corp.”
  • “E-commerce platforms provide access to more investors and the lender has garnered interest for assets marketed on Taobao that failed to yield inquiries offline. But while they can bring a level of transparency to bad loan trading, sites like Taobao also attract individual investors who don’t typically have the skills needed to do full due diligence on an NPL deal…”

Perspective

WSJ – Daily Shot: FRED – 2015 Median Household Income Adjusted by RPP 7/11

Bloomberg – America’s Pension Bomb: Illinois Is Just the Start – Laurie Meisler 6/30

  • “We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015 fiscal year, Illinois had promised its employees $199 billion in retirement benefits. Right now, it’s $119.1 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey—states that, to most of the world, seem like oases of prosperity—are under growing financial strain, too.”

Worthy Insights / Opinion Pieces / Advice

NYT – How We Are Ruining America – David Brooks 7/11

  • “Over the past generation, members of the college-educated class have become amazingly good at making sure their children retain their privileged status. They have also become devastatingly good at making sure the children of other classes have limited chances to join their ranks.”

Bloomberg Businessweek – The Next Job Humans Lose to Robots: Real Estate Appraiser – Joe Light 7/11

  • “Advances in big data at Zillow and elsewhere are helping automation creep into knowledge-based professions.”

Silicon Beat – World’s 10 least affordable housing markets include San Jose (least affordable in the US) and SF – Richard Scheinin 7/10

  • Using the Median Multiple (median house price / median household income), the Demographia International Housing Affordability Survey (2017) has ranked the following cities as the least affordable in the world.
  1. Hong Kong
  2. Sydney, Australia
  3. Vancouver, Canada
  4. Auckland, New Zealand
  5. San Jose, USA
  6. Melbourne, Australia
  7. Honolulu, USA
  8. Los Angeles, USA
  9. San Francisco, USA
  10. Bournemouth and Dorset, UK

Markets / Economy

WSJ – Daily Shot: FRED – US Consumer Credit as Percentage of GDP 7/11

WSJ – Daily Shot: FRED – US Student Loans Owned by Federal Govt 7/11

  • “Student loans owned directly by the government now total $1.1 trillion, representing about 30% of the overall consumer credit. Note that this figure does not include student debt that is guaranteed but not directly owned by the federal government.”

WSJ – Daily Shot: FRED – Nonrevolving Consumer Loans owned by Credit Unions 7/11

  • “Starting in 2013, credit unions have built up a sizeable auto loan portfolio. This is quite a bet on the US consumer for these small lenders.”

Real Estate

WSJ – Daily Shot: Calculated Risk – Number of Negative Equity Mortgages 7/11

China

FT – China trial paves way for ‘unhackable’ communications network – Yuan Yang 7/10

  • “Success of Jinan project points to commercial application for quantum communications.”

WSJ – Here Comes Another Chinese Company on a Buying Binge – Jacky Wong 7/10

  • “China wants its biggest, most acquisitive, highly leveraged companies to tone it down — apparently by selling assets to other big, acquisitive highly leveraged companies.”
  • Case in point, Sunac’s purchase of 76 hotels and 13 theme parks from Dalian Wanda.
  • “But the deal won’t reduce the overall risks in China’s financial system. Sunac has been loading up on debt over the past year as it bought land aggressively. Its net debt, including perpetual securities, had more than tripled in 2016 to $7.8 billion — more than twice its shareholders’ equity.”
  • “Sunac has just enough cash, including restricted cash, to finance the Wanda purchase, but that would more than double its net debt. This seems to defeat the purpose to contain runaway debt within China’s financial system. But unlike Wanda, Sunac has raised all debt to buy domestic land and properties, important drivers for China’s economy, instead of splurging on overseas assets.”
  • “Capital outflows, instead of leverage, are Beijing’s real worry.”

WSJ – Dalian Wanda Rides China’s Financial Merry-Go-Round with Latest Deal – Anjani Trivedi and Jacky Wong 7/11

  • “When it comes to managing debt burdens, Chinese companies know how to keep it all between friends.”
  • “In a maneuver that will reduce the need for external financing, Wanda is lending some 29.6 billion yuan ($4.4 billion) to Sunac to buy its own assets.”
  • “The structure of the loan is a typical example of so-called entrusted lending, a common form of shadow banking in China in which one company lends money to another. Because that isn’t strictly legal, such loans are arranged via a bank that acts as a middleman, often earning a cut of the deal for its pains. Entrusted lending has ballooned to account for some 10% of credit in China, led by cash-rich state-owned companies that have branched out to loans as they struggle to find growth in their core businesses.”
  • “With the current Sunac-Wanda deal, Sunac should book the loan as debt, although it could bury it in one of its many joint ventures. Wanda will presumably record the loan as an asset, meanwhile. The ultimate effect is that most of Wanda’s debts haven’t been dealt with; they have just been shifted elsewhere within China Inc.”
  • “Wanda is lending the cash cheaply too. The three-year loan will be at the benchmark lending rate, now around 5%. Typically such loans are priced at a premium, especially those to indebted borrowers like Sunac, which has an eye-popping net debt-to-equity ratio of over 160%.”
  • “Still, if one of your friends is helping you out, it is rude to make them pay over the odds.”

FT – Sunac receives fresh ratings warning after $9.3bn Wanda deal – Nicholas Megaw 7/11

July 11, 2017

Perspective

Fortune – This Is the Average Pay at Lyft, Uber, Airbnb and More – Erika Fry & Nicolas Rapp 6/27

Worthy Insights / Opinion Pieces / Advice

WSJ – How Fixing Italy’s Banks Is Helping Europe Heal – Paul Davies 7/10

NYT – How the Growth of E-Commerce Is Shifting Retail Jobs – Robert Gebeloff and Karl Russell 7/6

Markets / Economy

WSJ – Tesla Sales Fall to Zero in Hong Kong After Tax Break Is Slashed – Tim Higgins and Charles Rollet 7/9

  • “Tesla Inc.’s sales in Hong Kong came to a standstill after authorities slashed a tax break for electric vehicles on April 1, demonstrating how sensitive the company’s performance can be to government incentive programs.”
  • “Not a single newly purchased Tesla model was registered in Hong Kong in April, according to official data from the city’s Transportation Department analyzed by The Wall Street Journal.”
  • “In March, shortly after the tax change was announced and ahead of the April 1 deadline, 2,939 Tesla vehicles were registered there—almost twice as many as in the last six months of 2016.”
  • “As a result of the new policy, the cost of a basic Tesla Model S four-door car in Hong Kong​ has effectively risen to around $130,000 from less than $75,000.”
  • “Hong Kong’s decision is effective through March 2018, and the government has said it would review the policy before then.”

China

NYT – China’s Wanda Signals Retreat in Debt-Fueled Acquisition Binge – Sui-Lee Wee 7/10

  • “A year ago, the Chinese billionaire Wang Jianlin declared the dominance of his vast entertainment empire, Dalian Wanda Group, boasting that his theme parks were a ‘pack of wolves’ that would defeat the lone ‘tiger’ of Disney’s Shanghai resort.”
  • “Now, Mr. Wang is retreating, in a sign that Wanda could be reaching the limits of its debt-fueled expansion.”
  • “Wanda said on Monday that it would sell the theme parks as part of a $9.3 billion deal that includes 76 hotels and a major chunk of 13 tourism projects. The cash from the deal, with the property developer Sunac China, would be used to pay down debt.”
  • “The deal announced on Monday would help Wanda pay off some of its debt.”
  • “Sunac would pay $4.4 billion for a 91% stake in each of the 13 tourism projects, all in China, and would take over the loans for the projects. Wanda also agreed to sell 76 hotels for $4.9 billion.”
  • “In the deal with Sunac, Wanda would continue to operate all of the projects under the company’s brand name, and it would own fewer underperforming hotels.”
  • About the assets…
  • “…Only four of the 13 theme parks being sold are up and running; most are in the planning stages. Wanda opened its first theme park, an indoor one, in the Chinese city of Wuhan. But it closed after 19 months for ‘upgrades and renovations,’ and it has yet to reopen.”
  • So why would Sunac buy underperforming hotels and theme parks – at a premium? You’ll note that Dalian’s hotel stock (Wanda Hotel) price was up 155% on the news…
  • “I don’t understand this move by Sunac. Where are they getting this endless flow of money?” – Deng Zhihao, a real estate economist with Fineland Assets Management Company based in Guangzhou, China.
  • “’Last year, they were the property developer that bought the most number of properties,’ he added. ‘And this year, they’ve spent a lot of money to save LeEco.’”
  • LeEco is an embattled company with a charismatic founder with grand ambitions but appears to be insolvent (which would result in a $2.2 billion loss to Sunac).