“S&P 500 companies have spent $1.1tn on share repurchase programs over the past two years, as executives struggled to turn modest economic growth into higher earnings. Lacking opportunities to invest, or at least shareholder support to do so, companies have spent money buying their own stock, which provides a boost to the size of profits reported per share.”
“Fresh records for buybacks are likely to be set, with changes to the US tax regime expected to trigger a repatriation of profits that have been held offshore for years.”
“A string of companies, including Boeing and Honeywell, have announced close to $90bn worth of share buyback programs since the reforms were agreed in December. Bank of America Merrill Lynch estimates that of $1.2tn parked overseas, perhaps half of the post-tax total, or around $450bn, could be devoted to share buybacks.”
“Shareholders are going to be banging on doors saying we want some of that money,’ says Howard Silverblatt, senior index analyst at S&P Dow Jones. No matter that stock markets have set record highs of late, the expectation that spare cash must be returned to its rightful owners is putting managers under pressure.”
“They almost have to buy when the stock is high. Timing the market is not something most companies can do,’ adds Mr Silverblatt. But the new flood of dollars raises an old question about whose interest the practice serves.”
McCrum does an excellent job of outlining some of the motives and outcomes of the practice. Some highlights:
“The only year in the past 14 when big US companies spent less on buybacks than dividends was 2009, when the S&P 500 index hit rock bottom. ‘The best time to do [a buyback] is in a recession, but that’s when everyone is scared stupid,’ says Andrew Lapthorne, a quantitative strategist for Société Générale.”
“If a company has more cash than it needs, and nothing better to invest in, it should consider whether buying its own stock is a good investment. Yet the time when companies have plenty of spare cash tends to be when business is good and shares are overvalued.”
“Apple has admitted that a primary purpose of its buybacks is to neutralize the impact of stock compensation.”
“The company has spent $151bn on repurchasing stock in the past decade, about 17% of its almost $900bn market valuation. The number of shares has dropped by about the same amount — 17%. Yet when Apple started to buy in 2012, the shares could be bought for half today’s price. The difference has been handed to employees.”
“Some companies have managed to spend more on buybacks in recent years than the shares are worth today.”
“Since 1995 IBM, the consulting and supercomputer group, has spent $162bn to repurchase more than half of its outstanding shares. What is left, for those who did not sell, is a company now valued at $154bn, suggesting the money was spent in the wrong place.”
“Any company will wonder what its valuation might have been, were different decisions taken. Prof Lazonick (William Lazonick, professor of economics at the University of Massachusetts Lowell) points to the example of Cisco Systems, the world’s largest networking company. In two decades it has spent $75bn repurchasing stock, more than three times the total for capital investment in property or equipment. A serial acquirer of other businesses, it has long struggled to grow sales.”
Markets / Economy
WSJ – Daily Shot: Trading activity at retail-focused brokerages 1/29
“Retail investor trading activity has accelerated recently. It’s starting to look like the late 90s.”
More on the Tencent investment below. However, wanted to call attention to…
“Separately, Wanda put its last two overseas property developments up for sale, according to people familiar with the matter, in the latest unwinding of a decade-long overseas buying spree that drew scrutiny from Chinese regulators. The group is seeking buyers for a hotel, office and apartment complex in Chicago and a development in Beverly Hills, California, said the people, who asked not to be identified because discussions are private.”
Presumably the Beverly Hills site is the “One Beverly Hills,” aka Robinson May, site that was previously purchased by New Pacific Realty Corporation for $33.5m in 2004, sold to the Candy Brothers for $500M in 2007, bought out of foreclosure by Hong Kong based Joint Treasure International for $148M in 2010 and then sold to Dalian Wanda for $420M in 2014.
“Anyone looking for an explanation of the recent uptick in the oil price towards $70 a barrel need look no further than the unhappy state of Venezuela. Oil production in the country fell 13% in 2017 (against the 2016 average), with the drop accelerating towards the end of the year. In the last three months alone output has fallen by more than 500,000 barrels a day to a 28-year low of just over 1.6m a day.”
“On any normal measure, Venezuela should be one of the world’s richest countries. With proven oil reserves of over 300bn barrels and a wealth of other natural resources, the 30m citizens of the Bolivarian Republic should be the beneficiaries of a secure regional market for oil supplies and of the skills accumulated in the industry over the last 80 years.”
“Instead, the country is on the verge of bankruptcy. The government is toying with inventing a currency — the petro — securitized against the contents of an oilfield in the Orinoco basin. But the first requirement of cryptocurrencies is trust and there is little or none of that for the government of President Nicolás Maduro. Inflation rate is running at 1,178%, according to unofficial estimates — the government has stopped publishing inflation data.”
“The collapse of Venezuela as a viable state has accelerated over the past six months and its effects have begun to hit the country’s core business — the production of oil. The state company PDVSA is deeply in debt. Including bonds, notes and other loans, it owes around $56bn. Schlumberger the international oil services company, took a write down of $938m last month because of bills the country has failed to pay.”
“Cuba, once the closest ally of Venezuela’s hard-left leadership, has taken control of PDVSA’s stake in a local refinery to offset unpaid debts. Russia and China have at times propped up the Maduro government but now the limit of generosity seems to be some relief on repayment terms rather than new loans.”
“In the absence of regime change there will be no rescue funds from the International Monetary Fund or anyone else. Meanwhile, the opposition, although vocal, lacks any effective power. In these circumstances, the country’s oil production is likely to stay down, and could well fall further during 2018.”
“For Venezuela the situation is a deepening tragedy. For the oil market, and Opec in particular, the loss of production from one of the most important producers outside the Middle East is a source of salvation.”
“China’s $4tn bond market faces a refinancing challenge over the next five years as more than half of the outstanding debt matures, heightening concerns over default risk by some borrowers.”
“In the space of just 12 months, Chinese airline-to-finance conglomerate HNA has morphed from a symbol of the ambition and wealth of China Inc into a cautionary tale of corporate indebtedness.”
“About $20bn in US dollar-denominated bonds issued by HNA and its subsidiaries are due to mature in 2018 or 2019. The yields on three of those dollar bonds issued by HNA’s main Hong Kong subsidiary have spiked, doubling this month to more than 18%.”
“There are also signs of a cash crunch rippling through the group’s complex structure, which includes 16 listed entities and many layers of shell companies and crossholdings. Several have raised debt from Chinese banks and HNA has also turned to high-interest peer-to-peer loans, making its renminbi-denominated debt harder to quantify.”
“After years of deflation, Japan’s labor market is the tightest it has been in decades and the Bank of Japan is still providing significant stimulus to the economy. But with inflation still well below target, central bankers are finding themselves between a rock and hard place.”
“A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow.”
“Almost a third of cars traded in last year were worth less than the loans that had been financing them, according to car-shopping website Edmunds. That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S.”
“Underwater trade-ins are just one example of the greater risks that lenders are taking now. New vehicle sales fell 1.8% to 17.2 million in 2017, but lending volume for new and used car purchases was on track to be higher than ever, according to data from the Federal Reserve Bank of New York and consumer credit bureau Experian. The growth in the average amount financed for a new car outpaced median income growth between 2013 and 2016, Moody’s said, suggesting borrowers are getting more strained.”
“Any pain from car-loan trouble will likely be just a shadow of the housing bubble collapse, because the auto debt market is much smaller. There were around $9 trillion of mortgages outstanding at the end of the third quarter, compared with $1.2 trillion of auto debt, the New York Fed said. And so far, many of the bonds backed by subprime auto loans are performing well thanks to built-in protections for investors. Wells Fargo analysts said in a note Wednesday that bonds issued by two of the biggest subprime auto lenders — Santander Consumer USA Holdings Inc. and General Motors Co.’s finance arm — have room to reach prices not seen since before the financial crisis.”
“The higher percentage of underwater loans on trade-ins may be a sign that car owners are trading in their vehicles sooner than they had previously. A consumer is often the most underwater on his or her auto loan in the first few years of ownership, because the value of the vehicle drops fastest over that time.”
“For borrowers who do trade in their underwater cars, lenders are essentially giving them the money to pay down their loan. The dealer sells the used car, and whatever balance remains on the old loan is folded into the new loan. The borrower might get a longer-term loan than he or she had before to help keep monthly payments manageable.”
“Aspen REIT Inc. has been given approval by the Securities and Exchange Commission for a $33.5 million initial public offering allowing investors to buy shares in the luxury St. Regis Aspen Resort in Colorado.”
“Upon closing of the IPO, Aspen REIT will be the first single-asset REIT to list on a national securities exchange in the U.S., according to the company.”
“Aspen REIT is offering 1,675,000 shares at $20 per share in the Regulation A+ IPO. The REIT applied to list its common stock on the NYSE American stock exchange under the ticker symbol AJAX. Aspen REIT intends to use substantially all of the net proceeds from the IPO, together with equity in Aspen REIT’s subsidiary operating partnership, to acquire the St. Regis Aspen Resort, a full-service, 179-key luxury hotel at the base of Aspen Mountain in the Rocky Mountains.”
Well that’s another way to ‘crowd source’ / syndicate funds.
“There has been a lot of talk lately about trendlines, key levels and breakouts by some of the big names… Ray Dalio, Jeffrey Gundlach, Bill Gross. But anyway, you don’t need to be a famous hedge fund manager to see the writing slowly showing up on the wall here across the major global sovereign bond markets. The charts below show US and German 10-year bond yields have already broken out, and Japan/UK are getting close.”
“The devastation wrought by Hurricane Maria has made Puerto Rico’s already dire financial situation even worse: The island’s leaders acknowledged late Wednesday that they will not be able to pay down any portion of their more than $70 billion debt for the next five years because of the damage.”
“Just before the hurricane, Puerto Rico had made plans to pay creditors a total of $3.6 billion through 2022. That was a fraction of the amount due, had the island, a United States territory, not gone into default.”
“Now, Puerto Rico expects its budget to be $3.4 billion in the red this year — a deficit that will take five years to close — because of the storm’s toll.”
“Nearly a third of customers remain without electricity, more than four months after the storm.”
“The government projects its population will shrink by 19.4% over the next five years, with a total exodus of over 600,000 people.”
“Katerra aims to transform homebuilding by applying precepts of electronics outsourcing.”
“The company, which operates from a factory in Arizona, already has $1.3bn of committed orders from developers and hopes to build another four or five facilities by the end of next year…”
“Katerra hopes to drive down costs by ordering materials for multiple developments at once, giving it negotiating leverage over suppliers, and by developing manufacturing techniques to lower overall construction costs.”
“In one sign of its ambition, Katerra recently broke ground on an $85m factory in the US state of Washington that it said would be the world’s biggest maker of cross-laminated timber, a more ecologically friendly building material that is increasingly being used instead of concrete and steel.”
“The investment, which lifts the total amount Katerra has raised to almost $1.2bn, values the company at more than $3bn, including the latest round…”
“A reader sent me a link to a video of a presentation given by former hedge fund manager and quant Robert Frey (whose firm was actually bought out by legendary hedge fund manager Jim Simons in the 90s) called 180 Years of Market Drawdowns.”
“Frey discusses the many changes that have taken place in the stock market over the years — the creation of the Fed, monetary policy, fiscal policy, the end of the gold standard, tax rates, valuations, the industry make-up of the markets and a number of other things.”
“But there has been one constant going back all the way to the early 1800s — risk. More specifically, drawdowns or losses. Frey presented a couple of different charts on the market to make his point. First, here’s the long-term growth of the stock market with losses shaded in red:”
“Now here are those losses visualized in another way without the benefit of a log scale chart:”
“Obviously, the crash during the Great Depression stands out here, but look at how consistent losses have been over each and every decade or economic environment. Losses are really the one constant across all cycles.”
“Frey says in his talk that in stocks, ‘You’re usually in a drawdown state’.”
“Stocks don’t make new highs every single day, so most of the time you’re going to be underwater from your portfolio’s high water mark. This means there are plenty of chances to be in a state of regret when investing in stocks.”
“This makes sense when you consider that stocks are positive just a little over half the time when looking at returns on a daily basis, but it can be difficult to wrap your head around this fact.”
“I used monthly total returns on stocks for these numbers and found that an investor would have been down from a prior peak over 70% of the time. The majority of your time invested in stocks could be spent thinking about how you coulda, shoulda, woulda sold at that previous high price (which of course gets taken out to the upside eventually).”
“Over the last 90 years or so the market have been in a bear market almost one-quarter of the time. Half the time you’re down 5% or worse. It’s difficult to appreciate this fact when looking at a long-term log scale stock chart that seems to only go up and to the right.”
“This is why stocks are constantly playing mind games with us. They generally go up but not every day, week, month or year.”
“No one can predict what the future returns will be in the market. No one knows what the future holds for economic growth. And we certainly can’t predict how investors will decide to price corporate cash flows at any given point in time out into the future.”
“But predicting future risk is fairly easy — markets will continue to fluctuate and experience losses on a regular basis. As an investor in stocks you will spend a lot of time second-guessing yourself because your portfolio has fallen in value from a previously seen higher level.”
“Market losses are the one constant that don’t change over time — get used to it.”
“The Solar Energy Industries Association said it expected the tariffs to cost about 23,000 jobs, based on modeling by IHS Markit, the research group. That is about 9% of the estimated US solar workforce of about 260,000.”
“Where has the $3bn raised in ‘initial coin offerings’ over the last year and a half actually gone?”
“A group of academics led by experts from the University of Luxembourg and the European Banking Institute, have been pondering that very question for months. And what they found out could alarm investors who have been buying into companies using an instant digital ledger (aka blockchain) and cryptocurrencies instead of investing on the stock markets with hard cash.”
“On the crucial question of who is ‘behind’ an ICO, the researchers found that 21% of the 300 ICO deals in their database ‘failed to convey any information at all about the issuing entity’. About 52% of the issuers did not provide valid postal addresses.”
“The authors stress that they have only looked at 300 ICOs, and therefore their findings should not be taken as ‘any more than very broadly indicative, given that the total universe of ICOs’ is more than 1,000.”
“Regulators around the world have found ICOs’ rise troubling, especially since the rewards promised by ICO issuers are often obtuse and can range from use of their product (in exchange for the tokens investors buy) to a share in profits. In some cases, investors hold on to the tokens hoping for a Bitcoinesque rise in value.”
“Despite the high level of regulatory uncertainty, most issuers have so far done little to make things clearer for buyers.”
“Nearly 83% of the ICOs give no regulatory status for the offerings, the report says. That means the buyer does not know under what laws the ICO is regulated, or what their legal rights are after making a purchase. The researchers could not determine in what jurisdiction 93 of the ICOs, were based.”
“WeChat, China’s most frequently used mobile app, today started offering ‘miniprograms’ within the app from third-party developers. Users can now book a shared ride with Didi, order a gift from JD.com, or rent a bicycle from Mobike — and use over 100 other ‘apps within the app’ — without leaving the WeChat platform.”
Note that WeChat now has over 580,000 apps within its universe – up from 100 when it started.
“The new miniprogram function makes WeChat, or Weixin in Chinese, the first big platform to provide an alternative to the App Store from Apple, which has tightly controlled what programs can be installed on an iOS device.”
“The miniprograms can be used almost instantly and provide stripped-down functions compared to the original full apps.”
“Rather than the 30% cut that Apple takes from App Store purchases, developers have not been asked to give any cut to WeChat, according to Matthew Brennan of the tech consultancy ChinaChannel.”
“In addition, miniprograms are ‘device-neutral’, meaning they will run in exactly the same way on Android and iOS.”
“WeChat’s captive audience makes it a more plausible candidate to crack open in-app app distribution. The platform accounts for 35% of all time spent on mobiles in China, according to QuestMobile, the tech research lab. More than 750m people log into WeChat daily, and half of them use it for more than an hour and a half each day.”
“’Tencent is winning the mobile war. Miniprograms will come to have a material impact on Apple’s App Store revenues; around 15% of China’s mobile market are iOS users. Tencent is Apple’s number one source of income from the App Store globally,’ said Mr Brennan.”
“Now the Chinese government is considering adopting something that, while familiar to homeowners in the United States and elsewhere, could dramatically reshape the world’s second-largest economy: a property tax.”
“Living in a place without property taxes may sound appealing, but a growing number of experts and policymakers in China say the absence of one has helped destabilize a vast and crucial part of the Chinese economy.”
“Many investors snap up homes — in China, they are mostly apartments — hoping to ride a price surge. In the biggest cities, property prices on average have at least doubled over the past eight years. But vast numbers of apartments in many cities lie empty, either because the buyers have no intention of moving in or renting out, or because speculators built homes that nobody wants.”
“A property tax could have a profound impact on a crucial part of the nation’s economy. Real estate makes up nearly three-quarters of the assets of Chinese households, according to the Survey and Research Center for China Household Finance, an academic institute in Chengdu, in southwestern China. That compares with a bit more than one-third for United States households. Roughly a fifth to a quarter of China’s annual economic output comes from property and related industries, like furniture making.”
“But housing is also the source of some of the country’s biggest booms and busts. Local investors — many of whom do not trust the country’s stock markets and are forbidden by Beijing to move most of their wealth abroad — simply throw money at housing. Real estate broker fees, often as low as 1%, are a small fraction of the typical 6% in the United States. Mortgage lending has leapt over the past two years, adding to the potential for financial turbulence.”
“In the virtual currency world this creation process is called ‘mining.’ There is no physical digging, since Bitcoins are purely digital. But the computer power needed to create each digital token consumes at least as much electricity as the average American household burns through in two years, according to figures from Morgan Stanley and Alex de Vries, an economist who tracks energy use in the industry.”
“The energy consumption of these systems has risen as the prices of virtual currencies have skyrocketed, leading to a vigorous debate among Bitcoin and Ethereum enthusiasts about burning so much electricity.”
“All of the computers trying to mine tokens are in a computational race, trying to find a particular, somewhat random answer to a math algorithm. The algorithm is so complicated that the only way to find the desired answer is to make lots of different guesses. The more guesses a computer makes, the better its chances of winning. But each time the computers try new guesses, they use computational power and electricity.”
“The lure of new Bitcoins encourages people to use lots of fast computers, and lots of electricity, to find the right answer and unlock the new Bitcoins that are distributed every 10 minutes or so.”
“This process was defined by the original Bitcoin software, released in 2009. The goal was to distribute new coins to people on the Bitcoin network without a central institution handing out the money.”
“Early on, it was possible to win the contest with just a laptop computer. But the rules of the network dictate that as more computers join in the race, the algorithm automatically adjusts to get harder, requiring anyone who wants to compete to use more computers and more electricity.”
“These days, the 12.5 Bitcoins that are handed out every 10 minutes or so are worth about $145,000, so people have been willing to invest astronomical sums to participate in this race, which has in turn made the race harder. This explains why there are now enormous server farms around the world dedicated to mining Bitcoin.”
“The rules have kept attackers at bay in the nine years since the network got going. Without this process, most computer scientists agree, Bitcoin would not work.”
“But there is disagreement over the real value of Bitcoin and the network that supports it.”
“Mr. de Vries, who keeps track of the use on the site Digiconomist, estimated that each Bitcoin transaction currently required 80,000 times more electricity to process than each Visa credit card transaction, for example.”
“The figures published by Mr. de Vries have been criticized by Mr. Bevand (Marc Devand, a miner and analyst) and other Bitcoin fans, who say they overstate the energy costs by a factor of about three. Many critics add that producing and securing physical money and gold also require lots of energy, in some cases as much as or more than Bitcoin uses.”
“$1 trillion or more is the expected price tag, the New Yorker’s Evan Osnos reports. That’s seven times as costly as the Marshall Plan, on which the U.S. spent $130 billion to rebuild Europe after World War II.”
“70 countries will be involved in the initiative, Chinese news outlet Xinhua reports.”
“At least 36 planned or existing ports outside of China are involved.”
“$786 billion in trade took place between China and Belt and Road partners in the first three quarters of 2017, a 15% increase from 2016.”
“In Pakistan: China is partnering with Pakistan to build $60 billion worth of infrastructure as part of the initiative, CNBC reports.”
“In Thailand: The Chinese partnership with Thailand is expected to yield a 542-mile railroad, carrying high-speed trains that’ll move at up to 150 miles per hour, per CNBC.”
“In Malaysia: One Belt, One Road will spend about $40 billion on four railroad projects, per Xinhua.”
“The rise: The U.S. controls 24% of the global economy and China 15%, compared to 31% and 4% respectively in 2000.”
“There’s usually two forms of ideological rhetoric that accompany low interest rates. The first is that the Fed has ‘manipulated’ interest rates lower. And the second is that the Fed is ‘punishing savers’. These myths have scared people away from stocks and bonds and left them frozen in cash or worse, chasing commodities and gold. So let’s take a look at each of these ideas because some clarity might help put things in a more practical perspective.”
“The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008.”
“In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind.”
“The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday.”
“This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields.”
“At 2.66%, the 10-year yield has reached its highest level since April 2014, when the ‘Taper Tantrum’ was winding down. That Taper Tantrum was the bond market’s way of saying ‘we’re shocked and appalled,’ when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called ‘QE Infinity’.”
“The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):”
“Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet.”
“But it has impacted the mortgage market. On Friday, the average 30-year fixed-rate mortgage with conforming loan balances ($417,000 or less) for top-tier borrowers, according to Mortgage News Daily, ended at 4.23%, the highest in nine months.”
“But historically, 4.25% is still very low. And likely just the beginning of a long, uneven climb higher.”
“And the impact on mortgage payments can be sizable. When rates rise for example from 3.5% to 4.5%, the payment for a $250,000 mortgage jumps by $144 to $1,267 a month (a 13% increase).”
“A one-percentage-point increase takes on larger proportions in a place like San Francisco, where it might take a mortgage of $1.25 million to buy a median home. At 3.5%, the monthly payment is $5,613. At 4.5%, it jumps to 6,334, an increase of $721 a month and an increase of $8,652 a year.”
“A mortgage rate of 4.5% is still very low! And it is likely headed higher.”
“Since the Financial Crisis, the ultra-low mortgage rates were among the factors that have caused home prices to soar. But as rates are heading higher, the housing market is in for a big rethink. These higher rates are going to be applied to the now prevailing sky-high home prices.”
“There’s another aspect to this equation: Homebuyers who are willing and able to stretch to cough up those higher mortgage payments can’t spend this money on other things. Falling mortgage rates gave a huge boost to home prices and to the entire economy in numerous ways. But that process will go into reverse.”
“The city set a value of $1.26 trillion for its more than one million properties for the fiscal year beginning in July, an increase of 9.4% over the previous period that promises to boost the government’s tax collections.”
“Residential and commercial property value in Brooklyn rose 12%, the most of New York’s five boroughs, to $335.5 billion, according to the city’s finance department. Manhattan property rose 7.3% to $483.6 billion, the slowest growth.”
We’ll see if the values hold up in Brooklyn as rents – hence revenues – soften; see below.
“’It’s the greatest shock to the affordable-housing system since the Great Recession,’ said Michael Novogradac, managing partner of Novogradac & Company, a national accounting firm based in San Francisco.”
“According to an analysis by his firm, the new tax law will reduce the growth of subsidized affordable housing by 235,000 units over the next decade, compounding an existing shortage.”
“Chinese house prices have been booming for two years and shares of the country’s home builders—which have made big leveraged bets on the market—have likewise been on a tear. The question now, as the market shows signs of cooling, is: Should they hold or fold?”
“Some of the sector’s best performers are also the most indebted. Shares in China Evergrande, which sits on net debt of $63 billion, have surged nearly six times in value since the beginning of 2017 (this has led to the company’s chairman – Hui Ka Yan – becoming the wealthiest person in China). Likewise, Sunac China’s shares have risen more than five times in the same period. Its net debt is equivalent to four times its equity, while the ratio is 240% for Evergrande. The average for U.S. real-estate firms, by contrast, is 96%, according to S&P Global Market Intelligence.”
“There have been signs of developers deleveraging. Evergrande raised a total of $20 billion last year by selling about a third of its property business in three rounds—the latest in November. Sunac raised $1 billion from issuing new shares last month.”
“More remedial action will be needed if the cooling of China’s housing market continues. Data this week showed housing prices in China ticked up slightly in December; but growth is much slower now than a year ago, and prices are heading down in major markets such as Beijing. Lower revenues mean developers will have to reduce their already sky-high debt-servicing costs: Evergrande’s interest bill in the first half of last year was equal to about half its operating profit, for example. The company has reported negative operating cash flow ever since it was listed in 2009.”
“Digital currencies and the software developed to track them have become attractive targets for cybercriminals while also creating a lucrative new market for computer-security firms.”
“In less than a decade, hackers have stolen $1.2 billion worth of Bitcoin and rival currency Ether, according to Lex Sokolin, global director of fintech strategy at Autonomous Research LLP. Given the currencies’ explosive surge at the end of 2017, the cost in today’s money is much higher.”
“Blockchain records are shared, making them hard to alter, so some users see them as super-secure. But in many ways they are no safer than any other software, Matt Suiche, who runs the blockchain security company Comae Technologies, said in a phone interview.”
“And since the market is immature, blockchains may even be more vulnerable than other software. There are thousands of them, each with its own bugs. Until the field is winnowed to a few favorites, as happened with web browsers, securing them all will be a challenge.”
“Many blockchains started as forks that diverged from existing crypto ledgers, and as Taiwanese security researchers have pointed out, every fork gives hackers a new way to try to falsify data.”
“In a Dec. 25 paper, researchers at the Institute of Electrical and Electronics Engineers outlined ways hackers can spend the same Bitcoins twice, the very thing blockchains are meant to prevent. In a Balance Attack, for instance, hackers delay network communications between subgroups of miners, whose computers verify blockchain transactions, to allow for double spending.”
“In short, a water crisis — whether caused by nature, human mismanagement, or both — can be an early warning signal of trouble ahead. A panel of retired United States military officials warned in December that water stress, which they defined as a shortage of fresh water, would emerge as ‘a growing factor in the world’s hot spots and conflict areas’.”
“’With escalating global population and the impact of a changing climate, we see the challenges of water stress rising with time,’ the retired officials concluded in the report by CNA, a research organization based in Arlington, Virginia.”
“Crude oil production fell 12% in December from the month before, according to government figures released Thursday. Over all of 2017, output was down 29%, among the steepest national declines in recent history, driven by mismanagement and under investment at the state oil company, say industry observers and oilmen.”
“The drop is deeper than that experienced by Iraq after the 2003 war there—when the amount of crude pumped fell 23%—or by Russia during the collapse of the Soviet Union, according to data from the Organization of the Petroleum Exporting Countries.”
“’In Venezuela, there is no war, nor strike,’ said Evanán Romero, a former director of government-run Petróleos de Venezuela SA. ‘What’s left of the oil industry is crumbling on its own’.”
“The parents of teen internet celebrities get a crash course in a new kind of fame while trying to maintain boundaries for their newly rich and powerful children.”
“Hyperinflation is disorienting. Five or six years ago, the 500 bolivars on the floor would’ve bought you a meal for two with wine at the best restaurant in Caracas. As late as early last year, they would’ve bought you at least a cup of coffee. At the end of 2016, they still bought you a cup of café con leche, at least. Today, they buy you essentially nothing … well, except for 132 gallons of the world’s most extravagantly subsidized gasoline.”
“Prices are now rising more than 80 percent per month, according to the opposition-led National Assembly’s Finance Committee. (The government itself stopped publishing official inflation data long ago.) At that rate, prices double every 34 days or so. Salaries lag far behind, leaving more and more of the country to face outright hunger. Thus, the looting.”
“Rule No. 1 of surviving hyperinflation is simple: Get rid of your money. Given the speed with which money is shedding its value, holding on to it means you’re losing out. The second you’re paid you run out as fast as you can to buy something – anything – while you can still afford it. It’s better to hold almost any asset than money, because assets hold their value and money doesn’t.”
“I think this is what’s so hard to wrap your mind around if you’ve never experienced hyperinflation. It sounds like it’s about prices rising fast, but it really isn’t. It’s about money breaking down. Under hyperinflation, money no longer works. It doesn’t store value. It just stops doing the basic things people expect money to do. It stops being something you want to have and turns into something you’ll do anything to avoid having: something so worthless you won’t even bend down and scoop it up off the floor while you’re looting.”
“For years, the likes of Apple Inc. and Microsoft Corp. have stashed billions of dollars offshore to slash their U.S. tax bills. Now, the tax-code rewrite could throw that into reverse.”
“The implications for the financial markets are huge. The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends.”
“It’s hard to say how much money the companies might repatriate, but the size of their overseas stash is staggering. An estimated $3.1 trillion of corporate cash is now held offshore. Led by the tech giants, a handful of the biggest companies sit on over a half-trillion dollars in U.S. securities. In other words, they dwarf most mutual funds and hedge funds.”
“The $14.5 trillion Treasury market, of course, can absorb the selling pressure of even the largest corporate holders. There’s little to suggest multinationals will immediately liquidate their investments. Many analysts say companies, rather than selling, could just let their holdings gradually mature.”
“Yet even at the margin, a drop-off in demand could add to the government’s burgeoning funding costs. Not only are interest rates on the rise, but the most sweeping tax cuts in a generation, which could end up mostly benefiting shareholders, risk leaving the government with trillion-dollar shortfalls for years to come — an expense that taxpayers would ultimately have to bear.”
“And since Treasury yields are the global lending benchmark, any upswing could also ripple through the real economy in the form of higher rates on everything from credit cards to mortgages. Since September, 10-year yields have climbed over a half-percentage point, hitting a high of 2.595% this month.”
“Of course, it’s important to understand that for most multinationals, offshore cash is really only ‘offshore’ for accounting purposes. Under the old tax system, earnings attributed to foreign subsidiaries, often based in jurisdictions with low taxes or lax regulations like Ireland or Luxembourg, could be repatriated and remain earmarked as ‘held overseas’ — so long as it was stashed in U.S. securities. Apple, for example, manages its hoard from Reno, Nevada, where its internal investment firm, Braeburn Capital, is located.”
“’The term overseas cash can be a bit of a misnomer, as it doesn’t have to be overseas and in fact a lot of it isn’t,’ said Michael Cahill, a strategist at Goldman Sachs Group Inc. That should limit any appreciation in the dollar related to repatriation over the longer term.”
“Big multinationals have good reason to bide their time, according to Richard Lane, a senior analyst at Moody’s Investors Service. Because their debt investments are so extensive, companies could end up inflicting losses on themselves with any large-scale selling.”
“’I don’t think there will be a rush to the door by these companies to sell this debt and causing increasing yields and lower pricing,’ said Lane.”
“It also said Wednesday it would spend more than $30 billion to create 20,000 jobs and open a new campus at a U.S. location to be announced later this year.”
“According to figures released on January 4th by Munich Re, a reinsurer, global, inflation-adjusted insured catastrophe losses reached an all-time high of $135bn in 2017. Total losses (including uninsured ones) reached $330bn, second only to losses of $354bn in 2011.”
“A large portion of the losses in 2011 was caused by one catastrophe: the earthquake and tsunami in Japan. Losses in 2017 were largely traceable to extreme weather. Fully 97% were weather-related, well above the average since 1980 of 85%.”
“Last year’s disasters were particularly concentrated in North America (including the Caribbean), with 83% of global losses; half of those were in America alone, hitting that country’s insurers particularly hard. Fitch, a ratings agency, expects the ‘combined ratio’ for American property-and-casualty insurers to rise from 100.7% in 2016, meaning costs and claim payouts just exceeded premium revenue, to 104.4% in 2017. That implies a substantial underwriting loss for the industry. Even Warren Buffett’s Berkshire Hathaway looks poised for its first full-year underwriting loss in 15 years. It took a $3bn hit from the three hurricanes and an earthquake in Mexico.”
“For all the gloom, the 2017 losses were also proof of the resilience of the reinsurance industry. Insurers have long spread catastrophe risk by taking out reinsurance policies. This time, reinsurers had such ample capital buffers that they are expected to suffer only a small dent, of around 5-7% of capital.”
“Battered by losses, long-term-care insurers hit policyholders with steep rate increases that many never saw coming.”
“Only a dozen or so insurers still sell the coverage, down from more than 100. General Electric Co. said Tuesday it would take a pretax charge of $9.5 billion, mostly because of long-term-care policies sold in the 1980s and 1990s. Since 2007, other companies have taken $10.5 billion in pretax earnings charges to boost reserves for future claims, according to analysts at investment bank Evercore ISI.”
“When sales of long-term-care insurance were ramping up in the 1980s and 1990s, companies thought they had found the perfect product for middle-class families—and that’s how they pitched it.”
“The annual premium was designed to hold steady until a claim was filed and premiums then halted, though the rates weren’t guaranteed. Many policies paid out benefits for life.”
“Families flocked to what seemed like affordable peace of mind that would save them from draining their lifetime savings, leaning on children or enrolling in the federal-state Medicaid program for the poor.”
“Long-term care often costs more than $100,000 a year a person, financial advisers say. The nationwide total exceeds $200 billion, according to analysts at LTCG, a third-party administrator of long-term-care policies.”
“Almost every insurer in the business badly underestimated how many claims would be filed and how long people would draw payments before dying. People are living and keeping their policies much longer than expected.”
“After the financial crisis hit, nine years of ultralow interest rates also left insurers with far lower investment returns than they needed to pay those claims.”
“A new crypto-currency is born almost daily, often through an ‘initial coin offering’ (ICO), a form of online crowdfunding. CoinMarketCap, a website, lists about 1,400 digital coins or tokens, including PutinCoin, Sexcoin and InsaneCoin (worth $7m). Most are no more than curiosities, but by January 10th, around 40 had a market capitalization of more than $1bn.”
“Might any of these one day replace bitcoin as crypto-land reserve currency, something insiders call the ‘flippening‘? Given bitcoin’s governance problems (another ‘fork’, or split, may be in the offing) and limited capacity (a transaction now costs nearly $30, on average, in fees), this cannot be excluded. But the others have problems, too. Ethereum’s user fees have soared and the system has again hit technical snags. As for Ripple, some question the extent to which XRPs are actually used.”
WSJ – Daily Shot: Ripple 1/17
WSJ – Daily Shot: Capital Economics – Transactions Per Second 1/17
Authorities in the Japanese city of Toyama are encouraging migration to its city center through incentives. The goal being to reduce the cost of maintaining lightly-used infrastructure as its population declines.
“About 30% of Toyama’s 418,000 residents are 65 or older, an even higher proportion than in Japan as a whole, where it is 27%. By 2025, the proportion in Toyama is projected to be 32%. In addition to greying, the population is also declining. The city had 421,000 people in 2005; by 2025, it will have 390,000.”
“As the population ages and shrinks, the services residents need have changed. The Kadokawa Centre, for example, is built on the site of a primary school that closed in 2004. But overhauling public services is costly, and the declining number of people of working age means there is ever less tax revenue to help pay for the shift. To remain solvent, the city has decided to shrink not just in population, but in size, concentrating residents and services in the center.”
“Most of Japan is in a similar quandary. About 400 schools shut every year; some are being converted into retirement homes. In 2016 there were 300,000 more deaths than births. If Japan continues on its present course, it will have shed nearly a third of its population (and four out of every ten workers) by … 2065.”
“Surging shale production is poised to push U.S. oil output to more than 10 million barrels per day – toppling a record set in 1970 and crossing a threshold few could have imagined even a decade ago.”
“And this new record, expected within days, likely won’t last long. The U.S. government forecasts that the nation’s production will climb to 11 million barrels a day by late 2019, a level that would rival Russia, the world’s top producer.”
“The economic and political impacts of soaring U.S. output are breathtaking, cutting the nation’s oil imports by a fifth over a decade, providing high-paying jobs in rural communities and lowering consumer prices for domestic gasoline by 37% from a 2008 peak.”
“U.S. energy exports now compete with Middle East oil for buyers in Asia. Daily trading volumes of U.S. oil futures contracts have more doubled in the past decade, averaging more than 1.2 billion barrels per day in 2017, according to exchange operator CME Group.”
“The United States now exports up to 1.7 million barrels per day of crude, and this year will have the capacity to export 3.8 billion cubic feet per day of natural gas. Terminals conceived for importing liquefied natural gas have now been overhauled to allow exports.”
“Bitcoin fell as low as $9,966, down around 6% on the day and nearly half from its Dec. 17 record of $19,783.21, according to data from CoinDesk. A day earlier, the cryptocurrency plunged as much as 25%. Later in the U.S. morning, the price bounced back above the $10,000 mark.”
“Wednesday’s drop spread quickly to other major digital currencies. Ether was down as much as 33%. XRP was down 47%. Litecoin was down 35%. Newer tokens like Cardano, EOS and Monero were down 35% or more.”
“’We have very fast-moving weather systems in the crypto world,’ said Charles Hayter, the chief executive of research firm CryptoCompare. ‘One moment it’s absolute exuberance, and then it’s pure fear and panic, running for the exits. It’s quite interesting’.”
“’This is what you’d expect in a nascent market with a lot of misinformation,’ said Mr. Hayter.”
“For all the volatility, bitcoin prices remain in a general uptrend, measured by technical analysis. ‘Suggestions that this is the start of the demise of cryptos is very premature,’ said Fawad Razaqzada, a market analyst at Forex.com.”
“The first of Cboe’s (Chicago Board Options Exchange) futures contracts expired on Wednesday, prompting a flurry of trading as market makers rushed to settle transactions and roll over some contracts into next month. Futures traders make a profit if the value of prices and futures diverge when they expire.”
“But the assumption that opening a path for bitcoin to institutional buyers would accelerate that momentum hasn’t happened. In fact, the ability to short bitcoin appears so far to be a winning bet. Bitcoin touched its record high the day before futures began trading on Dec. 11 and has been falling since then.”
“Many people believe that college costs more than it actually does.”
“Average net tuition at community colleges is less than zero — seriously — once financial aid is taken into account. Average in-state tuition at public colleges will be just $4,140 this year. And many elite private colleges cover much of their sky-high list-price tuition through scholarships.”
“Yet many middle-class and low-income families believe tuition will cost them tens of thousands of dollars a year. This misperception has a serious downside. It keeps some people from attending college, even though the financial (and nonfinancial) benefits of a degree are enormous.”
“Fortunately, a growing number of colleges are starting to take tuition misperceptions seriously. Sixteen top colleges are announcing this morning that they’re joining an effort called MyIntuition — an online calculator that lets people answer just a few questions, anonymously, and receive an estimate of how much attending each college would cost.”
“The 16 include Boston College, Brown, Davidson, Duke, Johns Hopkins, Northwestern, St. Olaf and Yale. They’ve joined 15 others that already participate. The calculator was created by Phillip Levine, an economist at Wellesley College.”
