November 2, 2017

If you were only to read one thing…

WSJ – Backlog in EB-5 Immigration Program Creates Cash Hoard for Property Developers – Peter Grant 10/24

  • “A backlog in the controversial EB-5 immigration program, which enables foreigners who invest in the U.S. to get green cards, is making billions of dollars of new money available for investments in real estate and other businesses.”
  • “The backlog is primarily in China, where the EB-5 program has become so popular that applicants can face delays of more than 10 years from the time they make their investment of at least $500,000 to the time they get their visa.”
  • “The U.S. government limits the number of EB-5 visas to 10,000 a year, and per-country cutoffs can get imposed on countries like China where the application rate is high.”
  • “This had created a problem for applicants: 10 years is such a long time that some U.S. developers want to repay the investors’ money before visas are issued. But doing do would disqualify the EB-5 application.”
  • “The solution—which was spelled out by the U.S. Citizenship and Immigration Services in a June policy memo—is a process known as redeployment. Essentially, the government said, EB-5 applications remain in good standing if the repaid money is reinvested in an active business and remains ‘at-risk’.”
  • More than $16.6 billion is expected to become available for redeployment between now and 2020, according to NES Financial, of San Jose, Calif., one of the leading providers of EB-5 servicing and administration.”
  • “Investment companies have begun to position themselves to take advantage of billions of dollars now available for reinvestment. For example, in July, a venture of Greystone & Co., NES and Capital United LLC created a way for EB-5 money to be redeployed into a fund of real-estate bridge loans originated by Greystone.”
  • “The EB-5 program was created in 1990 and has been popular among U.S. real-estate developers, who have flocked to it as a source of low-cost financing. The program requires investments of at least $500,000 to create at least 10 jobs, making it appealing to city and state economic development agencies as well.”
  • “Now the redeployment of funds has raised new concerns about the EB-5 program, which is facing reauthorization by Congress. For example, the June policy manual ‘appears to allow’ developers to invest redeployed funds in projects that don’t get as much vetting as the original EB-5 project, according to Gary Friedland, a scholar-in-residence at New York University who has written about the program.”
  • More than 4,400 petitions for EB-5 status were filed in the third quarter of fiscal year 2017, which ended in June, according to Invest In the USA, a trade association. The number of pending petitions was up 11% from the second quarter to over 24,600, the group said.”
  • “There is no job-creation requirement on the redeployed funds. But the necessary jobs have been created after the original EB-5 investments are made, Ms. Berman (Allison Berman, head of Greystone’s EB-5 business) pointed out. ‘Each investor already has created at least those 10 jobs,’ she said.”
  • “Ms. Berman says the fund targets a 4% return after fees. Redeployment is good for the U.S. economy because it is keeping the EB-5 money ‘in commerce for longer than initially anticipated.'”


WSJ – Chinese Banks’ Capital Cushion Isn’t So Comfy – Anjani Trivedi 10/26

  • “Prudent as Chinese banks’ capital-raising binge may seem at first blush, investors should keep an eye on what’s driving their buffer-building.”

Worthy Insights / Opinion Pieces / Advice

NYT – Expelling Immigrant Workers May Also Send Away the Work They Do – Eduardo Porter 10/24

  • “This is how the growers will respond to President Trump’s threatened crackdown on immigration: They will lobby, asking Congress to provide some legal option to hang on to their foreign work force. They will switch to crops like tree nuts, which are less labor-intensive to produce than perishable fruits and vegetables. They will look for technology to mechanize the harvest of strawberries and other crops. And they will rent land in Mexico.”
  • “There is one thing they won’t do. Even if the Trump administration were to deploy the 10,000 immigration agents it plans to hire across the nation’s fields to detain and deport farmhands working illegally, farmers are very unlikely to raise wages and improve working conditions to attract American workers instead.”
  • “’Foreign workers will always be harvesting our crops,’ Tom Nassif, who heads the Western Growers Association, told me. The only question for policymakers in Washington is whether ‘they want them to be harvesting in our economy or in another country.’ If they choose the latter, he warned, they might consider that each farmworker sustains two to three jobs outside the fields.”
  • “Most of what we know about the effect of immigration on American-born workers is based on studies of what happens when immigrants arrive. Almost 30 years ago, the economist David Card found that the Mariel boatlift of 1980, in which more than 100,000 Cubans fleeing the island landed in Florida, did little damage to either the employment or the wages of the Americans they competed with.”
  • “A flurry of research since then has tried to find fault with that counterintuitive conclusion. Yet despite the claims from the Trump administration that immigrants have decimated the working class, Mr. Card’s analysis has emerged pretty much unscathed: With few exceptions, economists agree that even less-educated natives suffer little when immigrants arrive.”
  • “What if the shock goes the other way, though? We know less about what happens when immigrant workers are kicked out. But a series of studies over the past year are also coming to something of a consensus: Expelling immigrants does not open opportunities for workers born in the United States, either. Rather, the shock leaves them worse off than when the immigrants were here.”

NYT – America Is Not a ‘Center-Right Nation’ – Eric Levitz 11/1

The Republic – Mafia in our midst: A mob soldier turned Phoenix businessman – Robert Anglen 10/31

  • A very thorough and salacious report on Phoenix businessman Frank Capri (formerly a mobster by the name of Frank Gioia Jr.).
  • “Frank Capri, who persuaded developers to give him millions to build Toby Keith restaurants, had a violent history…”

WSJ – The Morningstar Mirage – Kirsten Grind, Tom McGinty, and Sarah Krouse 10/25

WSJ – WeWork’s Lord & Taylor Deal: Savvy Move or Top of the Market? – Dan Gallagher and Justin Lahart 10/24

Markets / Economy

WSJ – Daily Shot: Bitcoin 10/31

FT – Subsidies help China sell the most electric cars – Charles Clover 10/23

  • “Few countries have done more than China to push towards an electric future for the car industry. Beijing announced last month that it was looking at when to implement a ban on petrol and diesel cars, following announcements by France and Britain, which said they would ban traditional fuel vehicles by 2040, and Germany’s parliament, which has called for a ban by 2030.”
  • “Beijing also announced wide-ranging regulations forcing carmakers to start to meet steadily increasing production quotas for battery-powered cars, beginning in 2019.”
  • “Reactions to the announcement illustrate how China has managed to grow so quickly to become such a significant market for electric vehicles. China uniquely possesses the means to implement its will — it is the world’s largest car market, meaning it has unprecedented leverage over the global car industry, and also has a massive central planning mechanism.”
  • “Electric vehicles (EVs), both fully electric and hybrids, are part of a new industrial policy known as Made in China 2025, by which year Beijing wants to have national champions in 10 high-tech industries, including robotics, semiconductors and electric vehicles.”
  • “To achieve this, local and central governments have allotted subsidies that last year were worth up to Rmb100,000 ($15,000) per vehicle, according to Yale Zhang of Auto Foresight, a Shanghai consultancy specializing in the car industry.”
  • “Fitch, the rating agency, has found that average electric vehicle subsidies in China are the second most generous in the world after Norway.”
  • “China has also introduced a preferential vehicle licensing system in several cities. License plates are given out either by auction, lottery or after payment of a high fee in an effort to halt car congestion, but EV buyers get license plates free and without a wait in at least six Chinese cities. These centers account for 70% of domestic EV purchases, Fitch says.”
  • “China’s national grid is investing in EV charging stations. It expects to put Rmb25bn ($3.75bn) into charging stations by 2020; there are already 171,000 nationwide according to Xinhua, China’s official news service. This compares with 45,000 charging outlets and 16,000 electric stations in the US, according to official data.”
  • “In response to Beijing’s measures, the industry has boomed: sales of electric vehicles and hybrid vehicles were up 53% in 2016 to 507,000, according to the China Association of Automobile Manufacturers, which estimated that the number accounted for 45% of all such vehicles sold worldwide in that year.”

Real Estate

WSJ – Daily Shot: Homebuilder Index Relative Performance to S&P 500 10/31

WSJ – Chinese Property Shopping Spree Fades as Beijing Hits the Brakes – Dominique Fong and Esther Fung 10/31

  • “Since late 2016, policy makers in Beijing have been tightening restrictions on overseas investments and scrutinizing some of the country’s most ambitious deal makers, voicing concerns that deals in certain sectors were disguises for capital flight into havens.”
  • “Outbound capital from China into foreign properties and development sites reached a record $36.8 billion in 2016, according to data firm Real Capital Analytics. Volume for the first three quarters of this year was $19.7 billion. In the U.S. real-estate market, capital from China slowed to $5.1 billion in the same nine-month period, down from a total of $14.8 billion in 2016, said Real Capital. These are deals that are $10 million and greater.”
  • “Real-estate companies based in Hong Kong also appear to be less affected by the capital controls. Companies based in Hong Kong this year bought two high-profile London buildings, nicknamed the ‘Cheesegrater’ and ‘Walkie Talkie’.”
  • “But increasingly, firms are toeing to the party line. ‘Investors with capital already outside of China will continue to show strong interests allocating capital to U.S. real estate…though those in this category, even ostensibly private companies, are progressively less free to ignore what goes on in China,’ said Andrew Levy, senior counsel at law firm DLA Piper.”

WSJ – Driverless Cars Could Slam Brakes on Self-Storage Sector – Peter Grant 10/24

  • “The approaching transportation revolution is going to have major repercussions in the commercial real-estate sector as driverless vehicles and ride-hailing services such as Uber and Lyft gain more widespread adoption.”
  • “The property type expected to be hurt the most: Self-storage. Because people will own fewer cars, they will have more storage spaces in their garages, so they won’t need to rent it.”
  • “That is one of the conclusions of a new report on the future of transportation and real estate by the Urban Land Institute and real-estate investment research firm Green Street Advisors. The report says ride-hailing services already are having a big effect on consumer behavior and predicts that ‘mass adoption’ of driverless vehicles will begin around 2030 and be completed about 15 years later.
  • “…transportation revolution could be a mixed bag for industrial space. Demand from e-commerce should explode, the report says, but driverless trucks will improve efficiency.”
  • “’Goods should spend less time sitting idly in warehouses, likely resulting in a drag on industrial real-estate demand,’ the report says.”
  • “The report points out that investors need to be savvy about the impact of transportation trends because valuing a property today depends heavily on the long-range future. Because issues that go beyond seven years ‘are usually ignored, mispricing can result,’ the report states.”
  • “The opportunity is significant for investors who can figure out these trends now. ‘But, uncertainty is huge, so humility is in order,’ the report states.”

WSJ – Big Law Firms Look to Shrink Their Office Space Use – Esther Fung 10/24

  • “Of the 14 million square feet of office space leased to law firms between the first quarter of 2016 and the second quarter of 2017, 40% was the result of a contraction by the tenant, according to a CBRE Group study of 26 markets.”
  • “On average, the law firms reduced their leased space by 27%.”
  • However, “top law firms that lease more than 50,000 square feet of office space are more likely the ones that are reducing their physical office space, rather than their smaller peers.”

WSJ – More People Think Renting Is a Better Deal Than Buying – Laura Kusisto 10/24

  • “A growing percentage of renters believe it is cheaper to rent than to buy a home, which helps explain why the homeownership rate remains persistently low nearly a decade after the housing crash.”
  • “In the Freddie Mac survey, the view that renting is more affordable increased significantly across all age groups. Some 76% of millennials said renting is an affordable option, up more than 10 percentage points from a year ago. Roughly 82% of baby boomers said they view renting as a more affordable option, up 11 percentage points from a year ago. And the share of Generation Xers who see renting as more affordable jumped to 75% from 56%.”
  • Never forget that these surveys or comparisons are a snap shot in time. At times renting is more affordable than buying (it should always be more affordable than buying); however, once you buy (of course coming up with the down payment is no easy accomplishment) you generally have fixed your cost of occupancy (increases in property taxes and maintenance costs will get you in either case). Further, the forced savings element of a mortgage is hands down one of the best ways to build wealth. I recognize that it helps to have a relatively stable life to do this. However, if you’re renting, that cost will NEVER go away, and don’t forget the power of compounding costs – which will eat your savings eventually once you’re no longer making money, or stop receiving raises.
  • Rent if you have to or while your life is in transition, but homeownership is the goal (unless, if governments make property taxes prohibitively expensive and/or push to a model where the state owns all housing).

WSJ – Commercial Property Transactions Dry Up as Sellers Hold Out for Better Prices – Esther Fung 10/24

  • “Big U.S. real-estate companies have been selling assets at a slower pace this year, as the gap widens between their views on what their properties are worth and buyers’ willingness to pay high prices.”
  • “After an eight-year bull run for commercial real estate, some investors have been anticipating a correction. But that hasn’t happened yet, and there is little consensus on how much longer the bull market has to run.”
  • “Buyers, facing tighter lending conditions and slower income growth, are expecting lower prices and bidding accordingly, but sellers, including publicly traded property owners, are holding out for better deals.”
  • “Listed real-estate investment trusts have sold $46.7 billion in assets as of Oct. 23 this year compared with $71 billion in assets sold in all of 2016, according to data from Real Capital Analytics. Acquisitions, on the other hand, have been at a roughly similar pace at around $44.6 billion as of Oct. 23 this year compared with $47.9 billion in 2016. There have been fewer major transactions especially in the office and retail real-estate sector.”
  • “Unlike previous cycles, property owners aren’t overly leveraged and are still able to access the debt markets rather than be compelled to sell at unattractive prices.”
  • “For REITs, there is the added burden of making sure any sales proceeds can be deployed for other uses quickly, given their inability to hoard cash. These landlords are hesitant to sell in part because of the lack of attractive assets to buy as well as a general reluctance to do share buybacks.”
  • It should be noted that one major buyer of assets from listed REITs has been having issues in its fund raising mechanisms. That is the public non-traded REIT.


FT – US oil producers: Shale safe – Lex 10/23

  • “From Silicon Valley to the shale patch, the fundamental laws of corporate finance have been suspended for years. Such a calculus only works, however, if investors are willing to shoulder heavy losses on uneconomic investment in the hopes that pricing power ultimately ensues. Reality may have begun to weigh upon US oil producers. A renewed focus on spending within cash flow is taking hold in 2017.”
  • “Shareholders have turned off the funding spigot, with US E&P companies raising only $6bn in equity this year compared with more than $30bn in the same period last year. The perverse practice of tying oil executive compensation to production growth, not profits or cash flow, has also finally received the attention it deserves.” 
  • “The acreage obsession in the energy industry was always predicated on the idea that somebody else’s company would succumb before one’s own. But last man standing no longer beats cash is king as a mantra.”

FT – US shale investors tire of ‘growth at any cost’ model – Ed Crooks 10/22

  • “In a recent presentation at the New York Stock Exchange, Doug Suttles, chief executive of Encana, spelt out the new reality for North American oil and gas producers. The industry had gone, he said, from ‘resource capture’ to ‘value maximization’.”
  • “This is a profound change. Since the shale oil revolution began in the late 2000s, management teams have mostly focused on growth at any cost, and investors have mostly been prepared to back them.”
  • “This year, however, investor sentiment has shifted. Shareholders are less dazzled by the excitement of the shale boom, and more interested in orthodox measures of success including returns on capital and cash generation.”
  • “The whole shale industry is being pushed in the same direction. If companies fail to improve shareholder return, says Stephen Trauber, global head of energy at Citi, ‘investors will start to question what management is doing’.”
  • “For the past eight years, the US exploration and production industry has outspent its cash flows in drilling costs, requiring a constant inflow of debt and equity financing to keep going. But the industry has given shareholders very little in return.”
  • “Given those numbers, it is unsurprising that investor interest appears to have waned. US exploration and production companies raised $34.3bn from share sales in 2016, making it a record year, but just $5.7bn in the first nine months of 2017, according to Dealogic.”
  • “The pressure from investors for more discipline — a word used 17 times by Encana in its presentation — already seems to be having an effect. The number of active rigs in the US drilling the horizontal wells used for shale oil production has been dropping since the beginning of August.”
  • “Jamaal Dardar, an analyst at Tudor Pickering Holt, says just six months ago he would have expected US oil and gas producers to go on outspending their cash flows into next year at least. He now expects that in 2018 the larger exploration and production companies will in aggregate earn positive free cash flow, after capital spending but before dividend payments.”
  • “’We all like growth, but it must be profitable growth,’ Mr Holt says. ‘They might be able to grow at 5 or 10% per year, but not at 20%.’”
  • “If companies bow to that pressure from investors, it could work out very neatly. Slower oil production growth in the US would help push crude prices higher, making it possible for the industry to deliver the returns that shareholders want.”
  • “But Citi’s Mr Trauber warns the history of the oil industry shows it rarely delivers such tidy outcomes.”
  • “’We have been here before,’ he says. ‘At times over the past 30 years, investors have demanded discipline from the industry. But then as soon as the oil price picks up again, they have forgotten all about it and the industry has rushed back to growth again.’”


WSJ – Wealthier Depositors Pressure Banks to Pay Up – Telis Demos and Christina Rexrode 10/24

  • “As the Fed has raised rates, banks have been reluctant to do the same on their deposits. But for wealth-management customers, that’s starting to change.”

FT – DRW leads high frequency trading charge into cryptocurrencies – Gregory Meyer and Joe Rennison 10/22

  • Having a hard time finding enough volatility to trade in the markets, some are now trading Bitcoin…


NYT – Xi Jinping Vows No Poverty in China by 2020. That Could Be Hard. – Javier C. Hernandez 10/31

  • For China’s – and the world’s – sake, I hope that they succeed.

NYT – China’s Entrepreneurs Squirm Under Xi Jinping’s Tightening Grip – Sui-Lee Wee 10/23


FT – Reality dawns on India’s solar ambitions – Kiran Stacey 10/31

  • “The country has one of the world’s biggest solar sectors, but now faces the risk of a bubble.”

NYT – The Uninhabitable Village – Geeta Anand and Vikram Singh 10/26

  • “Hotter temperatures are forcing families in southern India to decide: Try to survive here, or leave?”
  • A very unique way to report on a story. A video slide show with text.

Other Interesting Links

FT – Spot the difference: why lab-grown diamonds pose a threat to big miners – Henry Sanderson 10/30

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