Tag: Bonds

April 15 – April 21, 2016

The Wall Street Oil Crash in charts. Chinese $3tn bond market not looking so good.

This week is a very graphic heavy week, just happens that way sometimes.  Additionally, I want to call attention to a report that me and my business partner put out for our real estate development and management business (FP Honolulu Condominium Market Insights) in the Special Reports section.  While it is geared to those interested in the Honolulu Condo market, there is a good deal of text and charts that are pertinent to macro issues at large.  Enjoy.

Headlines

Briefs

    • “Driving all this activity: easy money. Real interest rates have fallen. And nominal GDP grew faster than real GDP for the first time in five quarters, which in theory makes servicing debt easier.”
    • “What should trouble investors is that while China’s economic activity is ticking up, debt is piling up faster. The stock of total financing in the economy, including bond issuance as part of a local government bailout program, rose 15.8% in March from a year ago, the fastest rate since mid-2014. With nominal GDP growing 7.2%, Beijing’s plans to deleverage the economy continue to be overwhelmed by the need to support growth.”
  • In the Wall Street Journal, Madeleine Nissen and Paul Davies point to how negative interest rates are taking their toll on German insurance companies.
    • “German regulators are so concerned about the impact of negative interest rates on the country’s life insurers that they have said they can only be sure the sector is safe through 2018.”
    • “Some insurers need to earn a continuing investment yield of more than 5% to meet guarantees to their policy holders, a report from Germany’s central bank found in 2014.”
    • “What is dangerous is that the return on many investments is no longer reflective of the underlying risk involved. Many investors feel forced into taking higher risks.” – Nikolaus von Bomhard, chief executive of Munich Re
  • If you think it’s been hotter than usual.  You’re right.  As Tom Randall of Bloomberg illustrates, the Earth’s Temperature Just Shattered The Thermometer.
    • “The Earth is warming so fast that it’s surprising even the climate scientist who predicted this was coming.”
    • “Last month was the hottest March in 137 years of record keeping, according to data released Tuesday by the National Oceanic and Atmospheric Administration. It’s the 1th consecutive month to set a new record, and it puts 2016 on course to set a third straight annual record.”
  • Turns out Millennials – like their predecessors before them – want to own their own home.  But, there is a ‘tiny’ problem for millennials living in the big cities.  The down payment.  As Catarina Saraiva of Bloomberg shows us, for many it will take years to save the down payment necessary to buy a home.
    • “Of the generation known for renting everything from designer handbags to desks in a shared office space, 79% say they want to purchase a home, according to a report published Wednesday by Apartment List, an online rental marketplace.”
    • In San Francisco, a 20% down payment on a median priced home equates to $142,800. “Surveyed millennials reported current savings at $14,469, monthly savings of $360 and help from outside sources of $8,264, on average. At that pace, it’ll take them nearly 28 years to save enough money for a down payment, even though 37% of millennials said they’re planning to buy between three and five years from now.”
  • It’s been tough to be a hedge fund lately.  Mary Childs and Lindsay Fortado of the Financial Times point out that $15bn has been pulled out from hedge funds by investors in the last quarter.
    • “Hedge funds have suffered their worst quarter in seven years after more than $15bn was pulled out by investors starting to fight back against the high fees being charged across the industry.”
    • “The total amount invested in hedge funds fell to $2.86tn in the first three months of the year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows, according to data from Hedge Fund Research.”
    • But I wouldn’t go predicting the demise of hedge funds.  Ben Carlson of the blog A Wealth of Common Sense did a great job of explaining Why People Invest in Hedge Funds in October 2015.
  • Want to see what arbitrage looks like…Jacky Wong of the Wall Street Journal paints a picture with the reverse migration of many Chinese companies moving their public stock listings from Hong Kong to Mainland China.
    • “A reverse migration by Chinese companies from Hong Kong to mainland stock markets is under way. Juicy valuations are the main draw. But the winners are unlikely to be these companies’ current shareholders.”
    • “Dalian Wanda Commercial Properties, China’s largest shopping-mall owner, said last month its major shareholder is considering delisting the company from Hong Kong, less than two years after its initial public offering. The minimum takeout price is the same 48 Hong Kong dollars (US$6.19) a share that the company listed at in 2014. Meanwhile, a document sent to prospective investors on the mainland said Wanda expects its valuation to more than triple once it is relisted there.”

Special Reports

Graphics

WSJ – China’s Economy Faces Recovery Without Legs – Alex Frangos 4/15

WSJ_China Housing Starts_4-15-16

WSJ – Germany: Where Negative Rates Are Lethal – Madeleine Nissen and Paul J. Davies 4/14

WSJ_Negative yielding debt_4-14-16

WSJ – Why the Great Divide Is Growing Between Affordable and Expensive U.S. Cities – Laura Kusisto 4/18

WSJ_Home value divergence_4-18-16

ValueWalk – 98% of U.S. PE Funds Closed in 1Q Hit Or Exceeded Their Target 4/18

ValueWalk_98% of US PE Funds Hit Target_4-18-16

Bloomberg – It Could Take Years for Big-City Millennials to Save for a Down Payment – Catarina Saraiva 4/20

Bloomberg_Millennials saving for a home_4-20-16

WSJ – Upscale Shopping Centers Nudge Out Down-Market Malls – Suzanne Kapner 4/20

WSJ_Mall Valuations_4-20-16

FT – Beijing rent ranked world’s least affordable 4/20

FT_Beijing is least affordable city for rentals_4-20-16

WSJ – Chinese Reverse Migration Leaves Investors in the Cold – Jacky Wong 4/20

WSJ_Hong Kong v Mainland China listings_4-20-16

Featured

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

Wall Street’s Oil Crash, a Story Told in Charts. Asjylyn Loder. Bloomberg. 15 Apr. 2016.

“JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup Inc., with a combined $190 billion in energy loan exposure, all announced this week that they’re setting aside more money to cover losses.”

Bloomberg_Bank Energy Exposure_4-15-16  

“Many independent drillers, the small producers that drove the shale boom, outspent cash flow even when oil was $100 a barrel, and made up the difference with bank-loans and high-yield bonds. Put simply: No banks, no boom.“

Bloomberg_Shale Cash Shortage_4-15-16 

“Of the four big banks to report results this week, Wells Fargo has the biggest reported exposure to those sub-sectors, at about $14 billion, or 79% of their energy loans outstanding. The bank boosted loan-loss provisions for oil and gas to about $1.7 billion and reported net-charge offs of $204 million.”

Bloomberg_Shrinking credit lines_4-15-16

“Regulators and investors are pushing banks to limit their exposure to the industry. Since the start of the year, lenders have yanked $5.6 billion in credit from 36 oil and gas companies, according to data compiled by Bloomberg.”

It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market. Bloomberg News. Bloomberg. 18 Apr. 2016.

This is a good follow up to the FT article from last week.

“The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel.”

“Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 60.6 billion yuan ($9.4 billion) of bond sales in April alone, while Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.”

“Listed firms’ ability to service their debt has dropped to the lowest since at least 1992.”

“The spreading of credit risks is only at its early stage in China. Many people have turned bearish.” – Qiu Xinhong, a Shenzhen-based money manager at First State Cinda Fund Management Co.

“Economic figures for March reveal a growing dependence on debt. China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth.”

“The reaction has been swift in China’s 18.8 trillion yuan corporate bond market (a figure that excludes certificates of deposit). The extra yield investors demand to hold seven-year onshore corporate bonds with top ratings over similar-maturity government notes has jumped by 28 basis points from an almost nine-year low in January, to 91 basis points as of Monday.”

Still, very little yield premium compared to the spreads in developed markets.

“Analysts, meanwhile, are getting more downbeat. Twelve-month earnings forecasts for Shanghai Composite companies have dropped by 7.8% this year, the most since 2009, according to data compiled by Bloomberg. S&P has cut its credit ratings or reduced its outlook on 63 Chinese companies this year while upgrading just two, on course for the highest annual ratio of downgrades to upgrades in 13 years.”

“Rising defaults are actually healthy for China’s bond market, said Xia Le, the chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.”

“It shows the government is taking away the implicit guarantee. Now risk awareness is rising, so we will see which issuers are swimming naked.” – Xia Le

Other Interesting Articles

The Economist

Bloomberg – America’s Wealth Effect From Rising Home Prices Has Been Cut in Half 4/21

CNBC – Miami real estate is melting down – Robert Frank 4/14

FT – US banks spell out toll of low oil prices 4/14

FT – Foreign governments up US Treasury holdings 4/15

FT – Defaults send chill through China’s bond market 4/15

FT – Will China transform the world’s energy market? 4/17

FT – China’s house prices surge as efforts to cool market fall flat 4/17

FT – Saudi warning on 9/11 law adds to US frictions 4/17

FT – Collapse of Doha talks highlight the rise of Mohammed bin Salman 4/18

FT – 1MDB dispute intensifies as Abu Dhabi ends relationship 4/18

FT – India knocks China from top of FDI league table 4/20

FT – China internet finance crackdown targets fly-by-night operators 4/20

National Real Estate Investor – Foreign Buyers of U.S. Real Estate: By the Numbers 4/14

NYT – Fight to Impeach Brazil’s Leader Tears at Fabric of Daily Life 4/15

NYT – As China’s Growth Slows, Banks Feel the Strain of Bad Debt 4/15

NYT – In Cramped and Costly Bay Area, Cries to Build, Baby, Build 4/16

NYT – Brazil’s Lower House of Congress Votes for Impeachment of Dilma Rousseff 4/17

Reuters – ‘Let them sell their summer homes’: NYC pension dumps hedge funds 4/14

ValueWalk – Is George Soros, 85, Looking For A Fight With China? 4/21

WSJ – How Housing Stacks Up on the Upper West Side 4/13

WSJ – Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage 4/14

WSJ – Why the Great Divide Is Growing Between Affordable and Expensive U.S. Cities – Laura Kusisto 4/18

WSJ – Investors All Mixed Up About Chinese Property Bonds 4/19

WSJ – Negative Rates and Patches of Trouble for Japanese Insurers 4/21

 

March 18 – March 24, 2016

Chinese companies looking for cash flow. The knock on effects of low oil prices. U.S. Commercial Real Estate starting to get that sinking feeling.

Happy Easter! This week the three major themes/articles are 1) James Kynge, Gabriel Wildau and Don Weinland’s “China Inc: The quest for cash flow” in the Financial Times, followed by a three separate articles in the Financial Times discussing the impact of low energy prices 2a) Eric Platt and Laura Noonan’s “Bondholders suffer $150bn oil price hit”, 2b) Simeon Kerr’s “Gulf states will be forced to tap debt markets, warn Moody’s” and 2c) Henny Sender’s “Lower oil tests sovereign wealth funds” all in the Financial Times, and 3) is Peter Grant’s “Turning Point? U.S. Commercial-Property Sales Plunge in February” in the Wall Street Journal.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

  • Following up on the coverage on Anbang from last week, Marriott has since upped its offer ($13.6bn up from $11bn in November 2015) for Starwood and has ‘won’ the bid.  While I’m sure Marriott isn’t too happy with the higher price, the shareholders of Starwood are gleeful.  As an aside, it is also looking like Anbang may not have been able to consummate the deal and may have difficulties closing the Strategic Hotels deal.  Have to be mindful of that capital flight…
  • Foreign media sources in China are on edge.
    • “New Chinese regulations aimed at dramatically restricting the publication of foreign content have introduced a new chill into an already frigid press environment in China.”
    • “The directives, which entered force last week, give China’s government draconian powers to stop foreign companies or partly foreign-owned companies from publishing online material unless they have approval from the broadcast regulator – the State Administration of Press, Publication, Radio, Film and Television.”
    • “Industry analysts say the rules fit a new pattern: whereas formerly the government’s press censorship was widely denied and hidden from view, today the government is making its powers and the limits of dissent more explicit and public.“
  • Entertaining read in the FT, “Every cycle is defined by a hubris trade.”  I.E. Julian Robertson’s position in US Airways in the dotcom era and now Bill Ackman’s Valeant position.
  • Think it’s expensive where you live?  In Hong Kong median home prices are around 19 times gross income levels.  As a result it’s not uncommon for married couples to live separately with their respective parents.
  • Transamerica is being sued for cost increases on universal life insurance contracts.  Basically high annuities are hard to cover in a zero to negative interest rate world, so life insurance companies are having to increase fees for certain products, even on existing contracts.
  • And I would recommend each of the Special Reports below.

Interesting graphics:

From the Financial Times’s “Oil and gas: Debt fears flare up.”

FT_American Energy Junk Bond Issuers_3-21-16

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

China Inc: The quest for cash flow. James Kynge, Gabriel Wildau and Don Weinland. Financial Times. 18 Mar. 2016.

This article followed Anbang’s flurry of activity last week and serves up something of an explanation of why Anbang and other Chinese companies have been aggressive in pursuing foreign acquisitions of late.

In 18 months Anbang, the Chinese Insurance company, “has signed $32bn in overseas acquisitions deals.”  To give you a sense, “Since 2014, Anbang has outbid competitors to snap up the Waldorf Astoria hotel, a US landmark, for $1.95bn; paid $1.6bn for US insurer Fidelity and Guaranty Life; $1bn for a controlling stake in Korean insurer Tongyang Life; and scooped up trophy properties in London and companies in Europe.”

“Within this surge of Chinese deals – which have totaled $102bn since January compared with the record $106bn for all of last year, according to Dealogic – lies a paradox for target companies. While the cash offers can seem too big to refuse, they may also appear to come from the corporate equivalent of deep space, so sparse is the information available on the bidder.”

“Anbang, which is just 12 years old, astounded the Chinese insurance world in 2014 with successive fundraising rounds that expanded registered capital from Rmb12bn ($1.8bn) to Rmb62bn in less than a year, introducing 31 new investors. This propelled it to first place among insurers, outstripping the likes of China Life and the People’s Insurance Co of China, even though they far eclipse it in terms of premiums.”

“The lack of transparency, analysts say, may be linked to the preference among many Chinese bidders for all-cash offers.”

“The serious flaws in Chinese corporate disclosure are why all-cash offers are often required.  The cash is less to make the bid more attractive than to compensate for the fact that these companies either don’t have a desirable level of assets or can’t properly document the assets.” – Derek Scissors, China analyst at the American Enterprise Institute.

“To a significant degree, analysts say, the exodus of Chinese investment capital is in fact a ‘quest for cash flow.'”

“Data from 1,627 domestically listed companies, or 58% of the total, that have reported their 2015 earnings show a clear deterioration in fortunes. Average operating revenues per share fell to their lowest level so far this decade, sliding to Rmb5.4 from Rmb6.55 in 2014, according to Wind Information, a data provider.”

“In addition, just over one-fifth of listed Chinese companies reported negative cash flows during 2015 and about one-third owed at least three times as much in debts as they owned in assets, according to Wind.”

“Nevertheless, it would be wrong to assume that Chinese corporate investments overseas are driven solely by a dash for cash, or by capital flight because of fears that the value of the renminbi may slump. Distinct strategic thinking also underlies the moves.”

 

Bondholders suffer $150bn oil price hit. Eric Platt and Laura Noonan. Financial Times. 21 Mar. 2016.

While I try not to bog you down with too much to read, these three interrelated articles pertaining to the energy sector are well worth the read (if you want more, see the Special Report below “Oil and gas: Debt fears flare up.”

First the investors…

“Investors have suffered losses of at least $150bn in the value of oil and gas company bonds, as the slump in crude prices since the summer of 2014 has fueled fears of a wave of defaults in the US and emerging markets.”

“The 300 largest global oil and gas companies have also seen $2.3tn sliced from their stock market value over the same period, a 39% slide since oil began its decline, an analysis by the Financial Times has found.”

“Borrowing by oil and gas companies has soared over the past decade. Their total debt, including loans, almost tripled from $1.1tn in 2006 to $3tn in 2014, according to the Bank for International Settlements.”

“Low oil prices fuel a reduction in risk-taking, and when there is less risk-taking, asset prices will fall. It can lead to a downward asset price spiral.” – Hyun Song Shin, chief economist of the BIS

“Twenty of Europe’s biggest banks have energy loans totaling almost $200bn between them – enough to wipe out a quarter of their common equity. In the US, twenty of the leading banks have loans totaling $115bn, or 11% of their common equity.”

Gulf states will be forced to tap debt markets, warn Moody’s. Simeon Kerr. Financial Times. 21 Mar. 2016.

Next the resource rich countries…

“Oil-rich Gulf governments will be forced to rely on debt markets as their fiscal deficits rise to $270bn amid an extended period of low oil prices over the next two years, Moody’s has said.”

“Last year, the Gulf states largely used reserves and local banks to finance the deficits that are the largest in their history, widening from 9% of GDP last year to 12.5% this year.”

“Saudi Arabia, for example, faces a forecast deficit of $88bn this year and $65.3bn in 2017, according to Moody’s. In 2009, the deficit was $23bn and the previous oil slump of the late 1990s saw the deficit peak at $13bn in 1998.”

“Moody’s forecasts that the kingdom, which has had negligible debt levels for years, is expected to see government debt rise to around 20% of GDP by next year.”

According to Mathias Angonin, a Dubai-based senior sovereign analyst with Moody’s, “proposed subsidy reforms, capital expenditure cuts and the introduction of sales tax from 2018 would not be enough to balance the deep GCC budget deficits.”

Lower oil tests sovereign wealth funds. Henny Senders. Financial Times. 21 Mar. 2016.

And lastly, the sovereign wealth funds that derive their capital from the resource rich countries…

“Circumstances have changed in the Gulf, bringing in their wake a host of ripple effects. A while ago, the biggest headache for the sovereign wealth funds of the Middle East was finding safe but profitable homes for their portion of swelling oil revenues.”

“That will mean both downward pressure on the prices of some assets that has little to do with fundamentals, and more attractive valuations for new money coming in.”

“Moreover, most governments in the region will probably prefer to run down their reserves than to see their currencies lose value, analysts say. That is another reason these giant pools of money will have less to put to work globally going forward.”

“Global liquidity will shrink because global liquidity basically means dollar liquidity and all the GCC and Saudis need dollars.” – Mohamad Al Hajii, a macro strategist for EFG Hermes UAE in Dubai.

“Already Qatar has been quietly selling commitments to private equity funds and public shares, according to people familiar with the matter.”

“The reduced presence of the regional sovereign wealth funds will be felt more strongly in asset classes that have an especially long-time horizon, such as private equity and infrastructure.”

“Weak exports and slowing domestic economies mean that sovereign funds and other deep pools of money in Asia also have less money to invest globally. That means pension funds in countries from Canada to Korea will have more opportunity. But managers at some of these funds say they are still waiting, convinced that if they are patient, there will be even more bargains in coming months.”

 

Turning Point? U.S. Commercial-Property Sales Plunge in February. Peter Grant. Wall Street Journal. 22 Mar. 2016.

“Sales of U.S. commercial real estate plummeted in February, sending the clearest signal yet that a six-year bull market might be coming to an end.”

“Just $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands last month, compared with $47.3 billion in the same month a year earlier, according to deal tracker Real Capital Analytics Inc. In January, sales were $46.2 billion.”

“Overall, commercial-property values are leveling off. Green Street’s broad valuation index in February was 8.7% higher from one year earlier, but in the previous year the index rose 11%.”

“The market has slowed primarily because of forces at work in the global capital markets rather than problems stemming from real estate itself. These forces, which also caused global markets to plummet in the first two months of this year, have made debt – the lifeblood of real estate – more expensive and more difficult to obtain.”

“The most dramatic sign has been the sharp decline in bonds backed by commercial mortgages. In 2015, about $100 billion of commercial mortgage-backed securities were issued. This year experts believe volume will fall to $60 billion to $75 billion.”

“As yields of junk bonds soared, real estate became a less attractive investment. At the same time, the spreads between real-estate borrowing rates and Treasury bonds widened greatly.”

“Today loans that would have been made with interest rates in the 4.5% to 5% range are now being made above 5%, market participants say. Borrowers who would have lent up to 75% of a property’s value have reduced their so-called loan-to-value ratios to between 65% and 70%.”

“Buyers have been hearing ‘no’ from lenders for the first time in a while,” said Jim Costello, senior vice president at Real Capital Analytics.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Fidelity Calls U.S. Fairly Attractive as Yield Premium Climbs 3/20
Bloomberg – How Satisfying Millennials Could Save PwC $850 Million 3/23

Civil Beat – Can We Grow Our Economy, Not Our Population (Luke Evslin) 3/18

Daily Commercial News – Twenty major upcoming Hotel/Motel and Retail/Shopping Center construction projects – U.S. 3/23

FT – Emerging market debt: A trawl for yield 3/17

FT – China’s rising exports: less about growth, more about exporting deflation 3/17

FT – Every cycle is defined by a hubris trade 3/18

FT – Hong Kong cost of living forces married couples into separate beds 3/20

FT – China bank governor warns over corporate debt 3/20

FT – CBI chief says Brexit would leave economy weaker 15 years on 3/20

FT – China plays ball with its development lending 3/22

FT – Beijing scrambles to contain vaccine scandal 3/22

FT – Anbang’s bids for US hotel chains thrown into doubt 3/22

InvestmentNews – Transamerica sued for cost increases on universal life insurance contracts 3/23

NYT – Cities to Untangle Traffic Snarls, With Help From Alphabet Unit 3/17

NYT – Scientists Warn of Perilous Climate Shift Within Decades, Not Centuries 3/22

WSJ – Starwood Says Boosted Anbang Bid Tops Marriott Agreement 3/18

WSJ – Lessons in Chinese Debt Restructuring: The Debtor Always Wins 3/18

WSJ – Japanese Land Prices Rise for First Time Since Global Financial Crisis 3/22

WSJ – Big Oil’s Next Big Energy Problem 3/23

Special Reports

 

March 5 – March 10, 2016

Chinese exports plunge – and a glimpse of China in 2025.  $5 trillion of negative-yielding Japanese debt, but that’s only part of the problem.  Midstream energy companies feeling a bit exposed.

Three articles that stood out this week are 1) Shawn Donnan, Chris Giles, and Gabriel Wildau’s “IMF issues warning on global growth as China exports plunge” in the Financial Times, which goes hand-in-hand with a special report that Daniel Rohr did for Morningstar “What Will China Look Like in 2025?”, 2) Kevin Buckland, Masaki Kondo, and Shigeki Nozawa’s “The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles” in Bloomberg, and related to this article is a bomb-shell of a report by Kevin Wilson of Blue Water Capital, “Japanese Policy Failure Means Disaster For Us All” that was featured in Mauldin Economics, and 3) is piece by Gregory Meyer “Pipeline investors shaken by bankruptcy ruling” in the Financial Times that points to a major concern for the mid-stream energy companies.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • Bottom line, the State Administration of Foreign Exchange (SAFE) has asked banks to reduce foreign currency transactions – verbally of course.  As Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp, puts it “There appears to be a real crackdown on money flowing out of China. Even normal business transactions which are ongoing are getting delayed.”
    • Seriously… somebody has a sick sense of humor.

Interesting graphics:

From the Wall Street Journal, U.S. real estate has become quite a bit more expensive for foreign buyers.

WSJ_Change in US home prices for foreign buyers_3-8-16

From Barry Ritholtz’s The Big Picture blog.

Ritholtz_Negative European Govt Bonds_3-10-16

From the Economist, bad things tend to happen when debt to GDP levels get too high.

Economist_Credit as % of GDP_3-10-16

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

IMF issues warning on global growth as China exports plunge.  Shawn Donnan, Chris Giles, and Gabriel Wildau. Financial Times. 8 Mar. 2016.

“The world faces a growing ‘risk of economic derailment’ and needs immediate action to boost demand, the International Monetary Fund warned on Tuesday as new figures pointed to the worst monthly collapse in Chinese exports since 2009.”

“Among the ‘most disconcerting’ signs of trouble in the world economy, he said, were ‘a sharp retrenchment in global capital and trade flows’ over the past year.”

The news that triggered this article was that “In dollar terms China’s exports fell 25.4% in February from a year earlier, the worst one-month decline since early 2009 and down from a 11.2% drop in January.”

The IMF has “already said it is likely to lower its 3.4% growth forecast for this year when it issues its next round of predictions in April.”

However, not all economists feel so downtrodden. Olivier Blanchard, former chief economist of the IMF, and his colleagues at the Peterson Institute of International Economics say that Fears on global downturn are overdone.

Though, here is a link to a Morningstar report by Daniel Rohr’s Morningstar’s on What Will China Look Like in 2025?  A very timely report that is worth the read.  Here is a little teaser.

“The country’s working-age population will shrink by 43 million by 2030, by which time China will have more seniors than the European Union, Japan, and the United States combined.”

 

The $5 Trillion Quandary as Negative-Yielding Japanese Debt Doubles. Kevin Buckland, Masaki Kondo, and Shigeki Nozawa. Bloomberg. 7 Mar. 2016.

“The amount of Japanese government bonds in the market offering negative yields has doubled this year to more than 600 trillion yen ($5.3 trillion) and that’s a major headache for the finance industry.”

According to the Bank for International Settlements, “the experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are… Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”

FT_Japanese 30-year bond yield_3-8-16

And the bombshell of a report by Kevin Wilson of Blue Water Capital, Japanese Policy Failure Means Disaster For Us All…  This article was originally published in Seeking Alpha and does an excellent job at highlighting the precariousness of the Japanese economy and does so with many illustrative charts. I recommend reading the whole thing, but here are some of the highlights.

“…it seems to me that the Japanese economy, as noted years ago by author John Mauldin, is ‘a fly in search of a windshield.'”

“It was already evident that there was a problem with Abenomics even before the NIRP decision. The velocity of money has continued to fall, inflation has stayed stubbornly low or negative, household incomes were declining rather than rising, household spending declined sharply as the tax increases from Abenomics kicked in, and as a result, consumer confidence in Japan has been negative for years on end.”

Japanese Velocity of Money_Q3 2015

Japanese v US HH Incomes_March 2016

Due the hording of cash and bonds “…for Japanese investors, the total return on the JGB 30-year bond has beaten that from the MSCI Global Equity Index over the last 15 years.”

JGB 30y Bond vs MSCI Equities_March 2016

“Demand for cash in Japan, always relatively high, has increased since the NIRP decision, according to Naohiko Baba, Tomohiro Ota, and Yuriko Tanaka at Goldman Sachs. They not that demand for cash is now very sensitive to interest rates, even to the point that cash and deposits are nearly perfect substitutes.  Since deposit rates are so low now, there is little penalty or downside in holding cash. Not coincidentally, sales of household safes for storing (hoarding) cash have soared in Japan since the NIRP decision.”

“Hoarding is about the worst consumer outcome one can imagine, relative to the ultimate success or failure of Abenomics… The number of banknotes in circulation in Japan is extremely high relative to GDP and to other national economies, such as those of the USA, Switzerland, the eurozone, Denmark, and Sweden.”

Bloomberg_Japanese 10,000 Yen notes in circulation_March 2016

“Virtually every aspect of Abenomics is now in failure mode, and since the reform part of the package has never been enacted, it is unlikely that the government can regroup in a meaningful way under present conditions.”

Look at this demographic projection…

Japanese Demographic Chart_March 2016

 

Pipeline investors shaken by bankruptcy ruling. Gregory Meyer. Financial Times. 8 Mar. 2016.

“A judge has allowed a US oil and gas company to abandon pipeline contracts while in bankruptcy, in a first-of-its-kind decision that has rattled investors in energy infrastructure.

Sabine Oil & Gas, a shale energy producer under Chapter 11 bankruptcy protection, sought permission to break contracts with two pipeline companies so it could pursue better deals and save as much as $115m.”

“The decision has important implications for the midstream energy sector, which gathers, processes, transports and stores oil and gas. Income-hungry investors had flocked to midstream companies on the belief that their generous payouts were backed by long-term, immutable contracts with customers.”

The mantra has been over the past year or so as oil prices have plummeted, that ‘we’re fine, oil is still flowing through our pipes.’ We’ll just ask retail landlords across the country how that’s going with the whole Radio Shack, Blockbuster, Sports Authority, etc. lease.

“Haynes and Boone, a law firm, said 48 North American oil and gas producers filed for bankruptcy in 2015 and more will follow this year.”

Now expect more mid-stream companies (think MLPs) to be at risk.

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – Blackstone’s Gray Sees Lower Real Estate Returns as CMBS Falters 3/4

Bloomberg View – Falling Earnings, Recession Warning 3/9

Bloomberg – Manhattan Luxury Rents Slide as Condo Buyers Seek Tenants 3/10

CFO – $300B Capex Lost in Recession Goes Unreplaced 3/9

FT – Macau’s annual GDP contracts by 14.4% in 4Q 3/2

FT – Commodity prices signal market bottom 3/4

FT – US high yield: back in the game 3/6

FT – Hong Kong and China ‘heading for bigger showdown’ 3/6

FT – Wall St in for a hawkish Fed surprise – Goldman 3/7

FT – Goldman Sachs says commodity rally is unlikely to last 3/8

FT – Long-term Japanese yields set new record lows 3/8

FT – Has the cold US-Sino trade war just got piping hot? 3/8

FT – Bombed pipeline to hit Nigeria oil output 3/8

FT – Re-assessing the classic risk-return trade off 3/8

FT – Moody’s to withdraw from Russian domestic market 3/9

FT – UL MLPs: courting disaster 3/9

FT – China provinces rail against Beijing plan to tackle overcapacity 3/10

FT – US Treasury market shows signs of stress 3/10

Mauldin Economics – The Roots of Trump’s Strength (George Friedman) 3/7

Nikkei Asian Review – China-related bankruptcies spike in Japan 3/5

NYT – Brazil’s Lula Detained in Corruption Probe; Rousseff Objects 3/4

NYT – In New Economic Plan, China Bets That Hard Choices Can Be Avoided 3/5

Project Syndicate – Is the Perfect Storm Over for Markets? (Mohamed A. El-Erian) 3/9

Value Walk – BDC Losses, MLPs and REITs – Slow Motion Melt (David von Leib) 3/10

WSJ – China’s Falling Reserves Catch a Break 3/7

WSJ – Shopping-Center REITs Are on Many Investors’ Lists 3/8

WSJ – What’s Twitter Worth? It’s Complicated 3/8

WSJ – Foreign Buyers Are Pulling Back, Realtors Say 3/8

WSJ – WeWork Targets Asia as Valuation Hits $16 Billion 3/10

WSJ – ECB Cuts Rates and Expands Stimulus – Recap 3/10

WSJ – The Most Expensive Cities in the World to Live 3/10

Special Reports

 

February 26 – March 4, 2016

Evergreening of debt in China. Japan becomes second country to sell negative 10-year bonds. Structural changes in global trade.

Three articles that stood out this week are 1) Alex Frangos’ “How China’s Big Lending Push Comes Up Short” in The Wall Street Journal, 2) Lew Lewis and Dan McCrum’s “Japan sells negative yield 10-year bonds for first time” in the Financial Times, and 3) is Shawn Donnan’s “Global trade: structural shifts” in the Financial Times.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • “Late Monday, the People’s Bank of China lowered the amount of deposits that banks must hold in reserve by 0.5 percentage points, freeing up an estimated 700 billion yuan ($107bn) in funds for banks to make loans.”
    • “The timing of the easing measure, just after China assured Group of 20 finance chiefs it wouldn’t deliberately weaken the yuan, quickly raised eyebrows.”
    • However, a liquidity shortage is of greater concern to the central bank than the yuan stability. “The first sign of a cash squeeze came late last week, when China’s overnight money-market rates, a key gauge of liquidity, surged and caused Chinese stocks to plunge.”
    • “As an indication of the outflows, China’s foreign-exchange reserves plunged by $99.5bn in January, to $3.23tn.”
    • “As for the Malaysian attorney general’s conclusion that the $681 million deposited to Mr. Najib’s account was a Saudi royal-family donation, the international investigators have found no evidence any of this came from Saudi Arabia, according to those familiar with their probes.
    • A person familiar with 1MDB’s dealings also said the deposit didn’t come from Saudi Arabia. A Saudi official said in January the kingdom’s ministries of finance and foreign affairs had no knowledge of such a donation to Mr. Najib.“

WSJ_1MDB money trail_2-29-16

    • “Since peaking at $19.6 billion in 2013, fundraising among public, non-listed REITs has dropped significantly in the past two years. In 2014, fundraising fell to $15.6 billion, followed by another sharp decline last year to $10.0 billion, according to data from Robert Stanger & Co., an investment banking and financial advisory firm. The company is forecasting another dip this year to between $7.0 billion and $8.0 billion.”

Non Traded REITs Battle Fundraising Woes_3-2-16

    • “Aside from the negative press, there are some big regulatory changes ahead for the sector. A new rule set to go into effect in April will require non-traded REIT funds to report the investment balance-net of fees-on customer statements. Non-traded REITs, for the most part, have a heavy burden of front-end fees of 10 to 12 percent.“

Side note: for those that have been reading my posts via LinkedIn, first, thank you, and second, it just came to my attention that the WordPress connection with LinkedIn had been disconnected.  My apologies.  There have been a few weeks of posts that you have missed.  You can check out the posts at www.thejanusobserver.com and while there you may consider signing up for the email – you’ll have the posts sent directly to your email when they’re made, that way there won’t be any further mix ups.

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

How China’s Big Lending Push Comes Up Short Alex Frangos. The Wall Street Journal. 29 Feb. 2016.

This article follows on the note in the top section about measures to increase banks loans into the economy.

“The problem is that China has reached an inflection point. A substantial chunk of new debt is increasingly going to pay old debt, creating less activity in the real economy aside from bankers’ fees and commissions.”

“A measurable effect is the so-called evergreening of credit, where lenders essentially roll loan maturities or provide credit simply to pay off old debt.”

“The result is a massive shortfall in the debt service compared with the sources of cash, to the tune of about 10% of corporate debt last year. That gap is filled with more borrowing.”

WSJ_China's Evergreening of Debt_2-29-16

As the saying goes, “borrow a million dollars and it’s my problem, borrow a billion and it’s yours.”

 

Japan sells negative yield 10-year bonds for first time. Leo Lewis and Dan McCrum. Financial Times. 1 Mar. 2016.

“Japan crossed a ‘financial rubicon’ on Tuesday as the country sold new 10-year bonds with a yield below zero for the first time at a government auction.”

FT_Japanese Govt Bond Yield_3-1-16

“The European Central Bank is expected to announce further monetary easing next week, and 10-year Bunds yield only 13 basis points.

Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first to do so in April last year.

The auction, of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024%, means investors have paid a fee to lend money for a decade to the government, the most indebted G7 nation (gross debt/GDP ratio of 250%).“

“The buying appears to have been almost entirely dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield dropping into negative territory.”

Large pension funds have stayed away; however “they cannot stay away from the auctions forever if their mandates include following particular bond indices.”

 

Global trade: structural shifts. Shawn Donnan. Financial Times. 2 Mar. 2016.

“Last year say the biggest collapse in the value of goods traded around the world since 2009.”

“Barring a spectacular turnaround in the global economy, the subpar performance is likely to be repeated in 2016, making it the fifth straight year of lackluster growth in global trade, a pattern not seen since the doldrums of the 1970s.”

“Some economists note that the plateau in worldwide trade in goods and capital has coincided with a surge in data flows – an indicator, they say, that the digital economy of the 21st century is starting to overturn the old order.”

The silver lining.

“Even as flows of finance, goods and services have slowed – falling from a peak of 53% of global output in 2007 to 39% in 2014 – the world has seen a surge in cross-border data. The flow of digital information around the world more than doubled between 2013 and 2015 alone, to an estimated 290 terabytes per second, McKinsey says. That figure will grow by a third again this year, meaning that by the end of 2016 companies and individuals around the world will send 20 times more data across borders than they did in 2008.“

“General Electric, which is using 3D printers to make fuel nozzles for jet engines and expects its aviation unit to be manufacturing 100,000 parts using the technology by 2020.”

“By its (McKinsey’s) calculations cross-border flows of capital, goods, services and data added an extra $7.8tn to the global economy in 2014. The added value of data flows alone accounted for $2.8tn of that total, slightly more than the $2.7tn attributed to the global trade in goods.”

Simultaneously global supply chains have shortened. As highlighted by the IMF and World Bank in a 2014 report, “as much as half the post-crisis slowdown in global trade could be attributed to “structural” rather than cyclical reasons.” I.E. decisions by countries and companies to bring production of component parts close to home.

Other Interesting Articles

Bloomberg Businessweek

 

FT – Share prices of big private equity houses point to pain 2/25

FT – Chinese house prices continue recovery 2/25

FT – Private equity taps into M&A insurance 2/25

FT – Hanergy Thin Film warns on 2015 profits 2/27

FT – Saudi Arabia seeks US investment to plug gap in oil revenues 2/28

FT – China tycoons fear ‘Cultural Revolution-type’ censure 2/28

FT – Former BoE chief King predicts collapse of the eurozone 2/29

FT – Argentina strikes deal with holdouts 2/29

FT – ExxonMobil sells $12bn of bonds amid rise in borrowings 2/29

FT – China data signal deepening slowdown 2/29

FT – Australia’s Great Barrier Reef hit by coral bleaching 2/29

FT – The fear and despair of Spain’s young jobseekers 3/1

FT – Hotel industry braced for demand crunch 3/1

FT – Moody’s warns on possible China downgrade 3/1

FT – US life insurers shaken by rock-bottom rates 3/2

FT – Oil crash takes heavy toll on midstream energy companies 3/3

Hotel News Now – Hoteliers, the party is over; act now 3/1

Project Syndicate – 2008 Revisited? (Nouriel Roubini) 3/2

WSJ – Hilton to Spin Off Hotels Into REIT, Separate Timeshare Business 2/26

WSJ – Bond Markets Reach a Tipping Point on Yields 2/26

WSJ – China Easing: Where Has All The Money Gone? 3/1

WSJ – Giant Chinese Developer Evergrande Real Estate Goes Out on Banking Limb 3/1

WSJ – Indicted Ex-Chesapeake Energy CEO Aubrey McClendon Dies in Car Crash 3/2

Yahoo Finance – U.S. incomes are finally growing 2/29

 

 

February 5 – February 11, 2016

Negative yielding government bonds. Lending to Emerging Markets hits the brakes. Japanese 10-year bond crosses the zero bound.

Three key articles that stand out this week are 1) Elaine Moore, Robin Wigglesworth, and Leo Lewis’ “Government bond yields send recession signal” in the Financial Times, 2) Jonathan Wheatley’s “Lending to emerging markets comes to halt” in the Financial Times, and 3) Richard Barley’s “Japan and the Strange Case of the Negative Bond Yields” in The Wall Street Journal.

Other items that are worth a mention:

  • Blackstone is considering entering the public nontraded REIT (Real Estate Investment Trust) market. No surprise considering the increased volatility in the world, lack of yield in traditional investment products, that Blackstone is probably one of the best (if not the best) suited Alternative Asset Managers with the best pedigree, and that the largest player in the market (ARC) has been brought down by an accounting scandal (only the tip of the iceberg).  Watch how quickly this product category grows for Blackstone.
  • Bank profit margins are hurting from the declining spread between 10-year and two-year U.S. Treasuries.

WSJ_Yield Squeeze_2-8-16

  • From a post that Nouriel Roubini did for Project Syndicate: “…financial markets haven’t reacted very much, at least so far, to growing geopolitical risks, including those stemming from the Middle East, Europe’s identity crisis, rising tensions in Asia, and the lingering risks of a more aggressive Russia. How long can this state of affairs – in which markets not only ignore the real economy, but also discount political risk – be sustained?”

Interesting graphics:

From The Wall Street Journal, the Baltic Dry Index continues to fall (side note for the Hawaii readers, Matson just had its earnings call and indicated that while they’re having difficulties in its other markets – understandably considering the dramatic fall in shipping prices – things are going just swell for them in Hawaii.  Thank you Jones Act.)

WSJ_Baltic Dry Index - 2-9-16

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

Government bond yields send recession signal. Elaine Moore, Robin Wigglesworth, and Leo Lewis. Financial Times. 5 Feb. 2016.

“In Germany, the average yield on all government debt is now negative, while Japan is on course to become the first major bond market with a 10 year bond that yields nothing. In Europe and Japan, government bonds worth nearly $6tn now trade at such highs that buyers will make a loss if they hold the paper to maturity.”

FT_Amount of negative bonds_2-5-16

So shortly thereafter, the Japanese 10 year bond did cross the zero threshold.

“At these levels the bond market is forecasting recession.” – Marcus Brookes, a fund manager at Schroders

“The Janet and John way to explain it is that for the next 10 years you have to think inflation will be much, much lower than 2% to want to buy these bonds. Otherwise you’d be locking in a loss.” – Brookes

“Investors face the difficult prospect of assessing whether low inflation has become ingrained thanks to the collapse in commodity prices. A greater concern: has central bank interference in the financial markets made pricing so opaque that investors are risking the sort of losses incurred last April, when a European Central Bank driven rally in bond markets suddenly expired?”

“The lifespan of the rally in government bonds will depend on how long investors keep faith in central banks, says Tad Rivelle, chief investment officer for fixed income at TCW, a Los Angeles based asset manager. Every economic cycle has a grand narrative that eventually unravels, he says. In the late 1990s it was the information revolution, in the 2000s it was housing prices.

‘This cycle the narrative has been that central banks have got the ball, know what they’re doing and can keep the game going as long as they want,’ he says. ‘But humans have not found a way to abolish cycles.'”

 

Lending to emerging markets comes to halt. Jonathan Wheatley. Financial Times. 5 Feb. 2016.

More good news.

“The surge in lending to emerging markets that helped fuel their own – and much of the world’s – growth over the past 15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn, the Bank for International Settlements has warned.”

“That reversal has already taken place, according to BIS data released on Friday.

The total stock of dollar-denominated credit in bonds and bank loans to emerging markets – including that to governments, companies and households but excluding that to banks – was $3.33tn at the end of September 2015, down from $3.36tn at the end of June.

It marks the first decline in such lending since the first quarter of 2009, during the global financial crisis, according to the BIS.“

“The Institute of International Finance, an industry body, said last month that emerging markets has seen net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988.“

Hyun Song Shin, head of research at the BIS, noted that “while some advanced economies had reduced leverage after the crisis, debt had continued to build up in many emerging economies. ‘Recent events are manifestations of maturing financial cycles in some emerging economies.'”

Shin “noted that the indebtedness of companies in emerging markets as a percentage of GDP had overtaken that of those in developed markets in 2013, just as the profitability of EM companies had fallen below that of DM ones for the first time.”

“Now that the dollar is strengthening, we have turned into a deleveraging cycle in Ems. So there is a sudden surge in measurable risk; all the weaknesses are suddenly being uncovered.“

 

Japan and the Strange Case of the Negative Bond Yields. Richard Barley. The Wall Street Journal. 9 Feb. 2016.

“Japanese 10-year government bond yields turned negative for the first time ever Tuesday, and now stand at minus 0.03%. The feat has already been recorded elsewhere – the Swiss 10-year bond yields minus 0.4% – but this is the first time a member of the Group of Seven economies has seen such a development.”

“The JGB (Japanese Government Bond) market has for many over the years looked like an accident waiting to happen. The country’s debt stands at a staggering 2.4 times gross domestic product, a level far above its peers, and still rising. The International Monetary Fund thinks the ratio could reach 2.9 times by 2030. Japan lost its triple-A rating from Moody’s as long ago as 1998; it currently stands at A1.”

“Across global fixed-income markets, there are now $8.7 trillion of bonds sporting a negative yield, or 21.1% of the total outstanding, according to Bank of America Merrill Lynch data.”

And yet the Yen keeps getting stronger…. To help understand Why the Yen Just Keeps Getting Stronger, see Alex Frangos’ article in The Wall Street Journal.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – More Wall Street Strategists Are Cutting Their S&P 500 Estimates 2/6

Business Journals – Small businesses have the blues this winter 2/9

Forbes – China: Land of the Setting Sun (Gary Shilling) 2/8

FT – Why it would be wise to prepare for the next recession 2/4

FT – Hedge funds target a weaker renminbi 2/8

FT – Google passes significant barrier in its plan for driverless cars 2/9

FT – Outflows from China top $110bn in January 2/9

FT – Riksbank cuts rates deeper into negative territory 2/11

FT – BNP Paribas to curb lending to US energy sector 2/11

Investment News – Blackstone considering getting into nontraded REIT market 2/4

NYT – If There Is a Recession in 2016, This Is How It Will Happen 2/4

NYT – Stung by Low Oil Prices, Companies Face a Reckoning on Debts 2/9

Project Syndicate – The Global Economy’s New Abnormal (Nouriel Roubini) 2/4

WSJ – Corporate Credit: Less Than Angelic 2/8

WSJ – Tech Stocks: Why the Selloff Could Get Worse 2/8

WSJ – Bank-Stock Carnage: This Number Is Killing Them 2/8

WSJ – Global Recession? What This Key Indicator Says About It 2/9

WSJ – Voluntary Job-Quitting Hits Highest Level in Nine Years 2/9

WSJ – This Chinese City’s (Shenzhen) Property Market Is Out of Control 2/10

WSJ – As Economy Suffers, Economic Theory Flourishes 2/10

WSJ – Why the Yen Just Keeps Getting Stronger 2/11

 

Special Reports

NYT – Traveling Through Venezuela, a Country Teetering on the Brink 2/9

 

January 29 – February 4, 2016

Stagnant wages. Debt stress. Oh Venezuela.

Three key articles that stand out this week are 1) Patrick Gillespie’s “Wages fell in 80 of 100 biggest U.S. cities during recovery” in CNN Money, 2) Sally Bakewell’s “The $29 Trillion Corporate Debt Hangover That Could Spark a Recession” in Bloomberg, which goes hand-in-hand with Peter Eavis’ “Toxic Loans Around the World Weigh on Global Growth” in The New York Times, and 3) Ricardo Hausmann’s “It could be too late to avoid catastrophe in Venezuela” in the Financial Times.

Other items that are worth a mention:

  • Evergrande Real Estate is asking its bond holders to relax its borrowing limits despite the reality that it is paying out increasing dividends to its shareholders all the while having “reported negative operating cash flows over the past five years.”
  • ChemChina is acquiring Syngenta for $34bn should the authorities agree; it will be largest outbound acquisition by a Chinese company, but more importantly it appears to me that this will become a key method for wealthy Chinese to get around tightening capital controls for getting money out of China.
  • The liquid natural gas market should brace itself for a price war now that U.S. producers are sending their first shipments of LNG to Europe, Russia will be damn sure to make it unprofitable for U.S. companies like the Saudi’s have been doing to the Shale gas providers. Not so good for Cheniere…

FT_Gazprom production costs_2-3-16

  • Because I forgot to mention this last week, in case you were wondering, Malaysian Prime Minister Najib Razak was cleared by the newly appointed Attorney General (the last one was sacked) for the $680 million that was found deposited into his personal bank accounts. All a big misunderstanding.  The money was a personal donation by the Saudi royal family and all but $61 million has been returned.  Well the Swiss authorities are calling BS and have “found ‘serious indications’ that about $4bn was misappropriated” from Malaysia through the 1MDB investment fund.

Interesting graphics:

From Bloomberg Graphics, passive investment managers winning at the expense of active managers.

Bloomberg_Asset Manager Winners & Losers_2-3-16

From the Financial Times, US junk debt yields rated triple C and lower have jumped.

FT_High yield debt index_2-4-16

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

Wages fell in 80 of 100 biggest U.S. cities during recovery. Patrick Gillespie. CNN Money. 28 Jan. 2016.

This article really speaks to why for most people in the U.S. it does not feel that the economy is on firmer footing or is growing for that matter.  Bottom line, wages in most cities have not recovered in most cities and especially for minorities.

“American cities powered the U.S. economy out of the recession and into its recovery.  Out of America’s 100 largest metro areas, almost each one improved on some measure of economic growth, employment, productivity or average wealth per person. The one red flag: wages.”

“Median wages declined in 80 of those cities between 2009 and 2014, according to a new study released Thursday by the Brookings Institution. The wage declines were more pronounced among minorities than whites. Also, the wage gapes widened between races in cities with economies that ranked high overall.”

“Only eight cities out of the largest 100 saw median wages and employment rates rise while its poverty rate fell.”

“Denver, San Jose, Calif., Provo, Utah and Charleston, S.C. are among those few metro areas that saw economic inequality decrease overall… However, the median wages of white workers in Provo rose about 2% between 2009 and 2014. And the paychecks of black workers declined by nearly 20% in that time period.”

“Wage growth has been largely absent during the U.S. economic recovery, and it’s a big reason why many middle class Americans feel they haven’t benefited. Only in recent months has wage growth started to move in the right direction nationally.”

 

The $29 Trillion Corporate Debt Hangover That Could Spark a Recession. Sally Bakewell. Bloomberg. 28 Jan. 2016.

“There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.”

“Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.“

“While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too… Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years.”

“Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009.”

“Much of the cheap credit accumulated by companies was spent on a $3.8 trillion M&A binge, and to fund share buybacks and dividend payments. While that tends to push up share prices in the short term, bond investors would rather see that money spent on strengthening the business in the long term.”

But… “S&P’s global credit market outlook is stable and analysts estimate earnings will recover this year. Investment-grade firms have accumulated record amounts of cash, which will insulate them from market turbulence, according to a report from Citigroup Inc. this month.”

“At about 3%, overall borrowing costs for companies around the world remain below the average of 4.5% in the preceding two decades even as spreads have widened.”

“As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysis.”

A somewhat more pessimistic outlook on this…

Toxic Loans Around the World Weigh on Global Growth. Peter Eavis. The New York Times. 3 Feb. 2016.

“Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”

“Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.”

“In Europe, analysts say bad loans total more than $1 trillion.”

Bad loans are on the rise in the energy and commodities sectors, in Brazil and elsewhere…

“If you have a boom and then a bust, you create economic losses.  You can hope the losses one day turn into profits, but if they don’t, they are a drag on the economy.” – Alberto Gallo, head of global macro credit research at the Royal Bank of Scotland.

“China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.”

According to Chu, “the world has never seen credit growth of this magnitude over such a short time. We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

“Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be ‘nonperforming.’  In dollar terms, that works out to $6.6 trillion of troubled loans and assets.”

Ms. Chu “estimates that the bad loans could lead to $4.4 trillion of actual losses.”

 

It could be too late to avoid catastrophe in Venezuela. Ricardo Hausmann. Financial Times. 3 Feb. 2016.

For those that haven’t been following the falling knife that Venezuela has become…

“Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”

“Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugh Chavez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111.”

“The year 2015 was an annus horribilis in Venezuela with a 10% decline in gross domestic product, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit ballooned to 20% of GDP.”

“In the free market, the bolivar has lost 92% of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered.”

“As bad as these numbers are, 2016 looks dramatically worse.”

President Nicolas Maduro is at odds with the National Assembly (opposition candidates were recently elected despite the government controlling the media and many opposition members having been locked up as a matter of practice since Chavez and his successor have been in power) “…the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.“

“The fallout for Venezuela’s neighbors and the global economy will be substantial… Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.

Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable.”

While the IMF was set up to help avoid situations like this, Venezuela “has not let the IMF in (the country) since 2004.”

 

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Hong Kong Property Slump Worries Investors 2/1

Economist – GDP’d off: Weak American growth is probably a blip 1/29

FT – Nigeria asks for $3.5bn emergency loans 1/31

FT – Swiss wreck efforts by Malaysia to contain 1MDB scandal 1/31

FT – Putin lines up state sell-offs to plug budget hole 2/1

FT – Malaysia stifles dissent as public unrest grows 2/1

FT – China Vanke tale shows share class divide 2/1

FT – US millennials caught in the parent trap 2/1

FT – Global competitive easing leaves US alone 2/1

FT – ChemChina closes in on $34bn Syngenta deal 2/2

FT – Global gas market braced for price war 2/3

FT – Risk of US recession back on the agenda for markets 2/3

FT – US junk debt rated triple C yields 20% 2/4

NYT – China Company Accused of Fleecing Investors of $7.6 Billion 2/1

NYT – Walmart Sues Puerto Rico, Claiming an Unfair and Onerous Tax Burden 2/3

NYT – Xi Jinping Assuming New Status as China’s ‘Core’ Leader 2/4

Mauldin Economics – Tokyo Doubles Down 2/1

The Real Deal – Midtown (NYC) has more than 80 blocks of massive and very available office space 1/29

Reuters – Mid-tier Chinese banks piling up trillions of dollars in shadow loans 1/31

WSJ – Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan 1/31

WSJ – Credit Suisse, Barclays to Pay $154.3 Million to Settle ‘Dark Pool’ Investigations 1/31

WSJ – Japan’s Negative Rates Are Rocket Fuel for Property Stocks 2/2

WSJ – Amazon Plans Hundreds of Brick-and-Mortar Bookstores, Mall CEO says 2/2

 

Special Reports

 

January 8 – January 14, 2016

China’s credit binge. Evergrande Real Estate. This Bond is for you.

Not quite the roller coaster that was last week. Granted the Powerball Lottery added some excitement to the mix.  This week I’m going to focus on the following three articles, 1) George Magnus’ “China’s credit binge is the real concern” in the Financial Times, 2) Jacky Wong’s “This Chinese Developer Is No Grand Slam” in The Wall Street Journal, and 3) Eric Platt and Gavin Jackson’s “Demand soars to record $110bn for AB InBev bond deal” in the Financial Times.

Additionally, I want to call attention to a post in The Economist’s Buttonwood’s Notebook about Martin Taylor’s decision to close the $1.5 billion Nevsky Capital after averaging an annual return of 18.4% since 1995, definitely worth the read.  Basically, it’s hard to make investment decisions when you can’t trust the data from some of the most important elements in the market.  Further (and not to be a buzz kill), it’s worth reading Stephen King’s (not the thriller writer, rather HSBC’s senior economic adviser and author of ‘When the Money Runs Out’) Falling oil prices and a darker global economic outlook in the Financial Times.  Here is a little bit of it:

“Put another way, oil prices have come down not because of an outward move in the supply curve – which would be largely positive for the global economy – but, instead, because of an inward move in the demand curve. The price effect is much the same but the consequences are rather different: unlike the late-1980s, agony for oil-producing nations is not offset by ecstasy for oil-consuming nations.”

“Seen in this light, collapsing oil prices are less a sign that things are about to get a lot better and more a sign that things are in danger of getting a lot worse.”

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

China’s credit binge is the real concern. George Magnus. Financial Times. 10 Jan. 2016.

While all eyes are focused on China’s stock markets more focus should be on the growing level of debt in the country.

“It (debt) has risen from about 100% to about 250% of GDP but far from slowing down with the economy, the pace of debt accumulation has actually picked up in the last one to two years.”

“Total Social Financing, a broad measure of monthly credit creation, is growing at nearly three times the rate of officially recorded money GDP growth, or more if you don’t believe the official GDP data. Curiously, many private companies face tight credit conditions and so rapid credit creation may be largely for the benefit of the cash-flows of already highly indebted real estate sector, local governments and state enterprise sectors.“

In regard to policy initiatives,

“… all we are likely to see is more credit easing, in the wake of the six initiatives since late 2014 to cut interest rates and banks’ reserve requirements, albeit to no economic effect. The credit binge, then, will continue until it can’t.”

“It is in this context that we might reflect on the recent announcement of a $512bn fall in currency reserves in 2015. Since China has a current account and net direct investment surplus of about $600bn, implied capital outflows must have been close to $1tn.”

This Chinese Developer Is No Grand Slam. Jacky Wong. The Wall Street Journal. 11 Jan. 2016.

You’ll note that I’ve been covering Chinese Real Estate Developers quite a bit lately.  Expect more.  As the real estate and credit markets (for real estate) slow in China, expect more and more interesting behavior.  In this case, Evergrande.

“Evergrande Real Estate is borrowing for all the wrong reasons. That the leverage-laden Chinese developer hasn’t generated cash for five years is a warning to investors tempted to dabble in its debt.”

“Evergrande went on (a) buying binge last year, spending at least $9.5 billion acquiring projects from other developers. More than half that sum was spent in December alone.”

“The company has reported negative operating cash flow every year since 2010 as interest costs surged. Interest payments in the first six months of 2015 came to 8.3 billion yuan ($1.3 billion), a 43% increase from a year earlier and equal to roughly 11% of its revenue. That’s for a company with a gross profit margin of only 28%.”

“Evergrande’s reported net debt-to-equity ratio last June was 86%. But that level rises to 230% when perpetual bonds are counted as debt, as they should be, rather than as equity.”

“Standard & Poor’s expects Evergrande’s total debts, including perpetual securities, to rise to nearly 300 billion yuan this year, from around 250 billion yuan in mid-2015.”

Lately the company has been using debt issuance to buy back shares, despite their current lofty valuation.  Further, subsequent to this article Jacky Wong did a follow up article “Is Chinese Developer’s Trading Prowess Too Good?” in the Wall Street Journal that points to an interesting coincidence that the company seems to buy shares when its key insiders are selling…

Demand soars to record $110bn for AB InBev bond deal. Eric Platt and Gavin Jackson. Financial Times. 13 Jan. 2016.

Not all is bearish news.  There is still a ton of money out there looking for a home, especially if there is some yield available and it’s not tied to commodities.

“Anheuser-Busch InBev has pulled in a record $110bn of demand for an upsized $46bn bond deal, as investors rush to pile into the relative safety of high-grade US corporate debt at the start of a turbulent new year for markets.”

“The brewer’s offering, which will help fund its takeover of rival SABMiller, has eclipsed the $102bn order book that Verizon attracted when the telecoms group sold its $49bn deal in 2013. AB InBev initially set out to raise $25bn but increased the deal more than 80% to $46bn following heavy demand.”

FT - Top corporate bond issues_1-10-16

“Bankers tightened the pricing of the bonds across the yield curve as orders ratcheted higher, with AB InBev’s 10-year bond expected to yield 160 basis points above the benchmark US Treasury – implying a yield of 3.69%. The mega brewer spread its seven-part offering across three, five, seven, 10, 20 and 30-year maturities, comprised of both floating and fixed rate notes.”

“Rating agency Moody’s has assigned a provisional rating of A3 to the bonds.”

 

Other Interesting Articles

Bloomberg Businessweek

 

Bloomberg – Blackstone Becomes No. 1 NYC Real Estate Buyer, Sees More Deals 1/8

Contra Corner – Narrow Door, Crowded Hall – RBS Says Sell it All 1/12

Economist – Buttonwood’s Notebook: Is this really 2008 all over again?

Economist – Buttonwood’s Notebook: Nevsky’s prospects – China, fat tails and opaque markets

FT – US bond yields sound warning on economy 1/7

FT – China opens new front in war on speculators 1/11

FT – Brazil cans carnival as recession bites 1/11

FT – Swiss canton tells taxpayers to delay settling bills 1/11

FT – Philippines clears US defense agreement 1/12

FT – Delayed oil projects total nears $400bn 1/13

NYT – San Francisco Office Rents Pass Manhattan as Most Expensive in Country 1/8

NYT – U.S. Will Track Secret Buyers of Luxury Real Estate 1/13

WSJ – Oil Plunge Sparks Bankruptcy Concerns 1/11

WSJ – Bonds Signal Credit Turning Point 1/12

WSJ – How to Profit From Rising Rents: Build Apartments 1/12

WSJ – Why China’s Hefty Trade Surplus Is Dwarfed by Outflows 1/13

WSJ – China Drinks Up Oil and Spits It Out 1/13

WSJ – China’s Jittery Savers Could Pose Capital-Flight Threat 1/14

WSJ – Is Chinese Developer’s Trading Prowess Too Good? 1/14

 

December 25, 2015 – January 7, 2016

Sovereign-backed corporate debt. Chinese Real Estate Developers in America. Hanergy shares unloaded at a 95% discount. RCAP files for Chapter 11 bankruptcy.

The S&P 500 is down nearly 5% through Thursday, the circuit breakers in China have been triggered twice this week (market is closed for the day after a fall of 7% – the rule was just implemented at the start of 2016 and China is already suspending it), one gigabit/second WiFi kiosks are being rolled out in New York City, North Korea has detonated a nuclear bomb as a test (apparently not a hydrogen bomb, doesn’t make me feel all that better), Crude Oil dropped below $33 a barrel (good for consumers, bad for producers) Venezuela is quickly heading to hyperflation (monthly inflation greater than 50%), Sunni – Shia tensions have spiked in the middle east after Saudi Arabia executed a high profile Shia cleric… basically welcome to 2016.  Hope you had a restful holiday.

I recognize that these topics are getting a lot play in the press, so I won’t go into detail.  For those who haven’t been following: for more on the Chinese stock market and the knock on effect to the rest of world markets see “Why China Is Rattling the World” by Karl Russell and K.K. Rebecca Lai in the New York Times.  Note that China’s foreign exchange reserves fell $108bn in December to $3.33tn according to central bank figures (see graphic below from “China’s Shortest Day Will Prolong the Pain” in The Wall Street Journal).

WSJ - China's Forex Reserves_1-7-16

For context on the history between Sunni and Shia Muslims see “Sunni and Shia: explaining the divide” by Heba Saleh in the Financial Times.

And it’s worth showing the following graphic that was in the Financial Times that highlights the company valuations of the FANGs (Facebook, Amazon, Netflix, and Google Alphabet).  Irrational exuberance for some (note the PE multiples)…

FT Graphic - FANGs_1-6-16

Sorry, I digress.  Since it has been two weeks since the last post, there are many articles in the “Other Interesting Articles” category worth reading, but I’m only going to focus on 1) Elaine Moore and Jonathan Wheatley’s “Fears mount over rise of sovereign-backed corporate debt” in the Financial Times, 2) Eliot Brown and Esther Fung’s “Chinese Developers Build In America, but Look for Buyers at Home” in The Wall Street Journal, 3) Ben Bland’s “Hanergy Thin Film founder sells 6% stake” in the Financial Times, and 4) just because RCAP filed for bankruptcy this week, I’ll cover a little of the rise and fall of this once star of public non-traded REITs.

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

Fears mount over rise of sovereign-backed corporate debt.  Elaine Moore and Jonathan Wheatley. Financial Times. 5 Jan. 2016.

One way for a sovereign country to keep its debt levels down is to hide it in companies that are effectively (either explicitly or implicitly, but preferably implicitly) controlled by the government.

“More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research.”

Why not, especially considering the buyers of this debt have been willing to oblige.

“The growing use of such bonds suggests developing countries are increasingly transferring debt obligations to third parties that have taken advantage of historically low interest rates to load up with cheap debt.”

“Although official debt-to-GDP levels of countries such as India, Russia and China remain low by global standards, the growth of less visible debt which they might still have to guarantee in a crisis underlines the potential scale of their liabilities.”

“New figures from JPMorgan and Bond Radar show that issuance of quasi-sovereign bonds outpaced that of sovereign bonds in emerging markets last year, raising the stock of such debt from $710bn in 2014 to a record $839bn by the end of 2015.

By comparison, the stock of all external emerging market sovereign debt stood at $750bn at the end of last year, according to JPMorgan.”

For example,

“Quasi-sovereign borrowers include 100% state-owned entities such as Mexico’s Pemex, local governments in countries such as China and entities in which the government owns more than 50% of the equity or has more than 50% of the voting rights – a description that encompasses Brazil’s Petrobas.

However, the treatment of such debt is not uniform. Bonds issued by Pemex are included in debt-to-GDP calculations for Mexico, but this is unusual and only 19 of the 181 quasi-sovereign bonds tracked by JPMorgan carry an explicit sovereign gurantee.”

Therefore, it is of no surprise that the big ratings agencies have been down grading the sovereign debt of countries with large amounts of corporate debt tied up in semi-sovereign companies.

“What can really break the dam is the quasi-sovereign element in EM external debt,” says Gary Kleiman of Kleiman International, an emerging market investment consultant. “People have always assumed there is an implicit backing, but that capacity has not been called into question explicitly.”

“Analysts say the problem extends beyond that of dollar-denominated debt. Emerging market companies have issued an estimated $23.7tn including dollar and local currency debt, up from about $5tn a decade earlier. Many such issuers are quasi-sovereigns. About $16.7tn had been issued by companies in China, according to the BIS, almost all of which carry an implicit or explicit state backing.”

Chinese Developers Build in America, but Look for Buyers at Home. Eliot Brown and Esther Fung. The Wall Street Journal. 29 Dec 2015.

As real estate developing opportunities are becoming scarce (or more financially risky) in China, the large Chinese developers are expanding into various unrelated business lines and more naturally, have expanded into new markets abroad.  Interestingly, they tend to bring their buyers with them.

“Big Chinese development companies, including Greenland, Dalian Wanda Group and Oceanwide Holdings, are collectively planning billions of dollars of U.S. development, including Chicago’s third-tallest tower and a $5 billion apartment project in Brooklyn. Most of the large developers have ambitions one day to collect as much as 20% of their income from international markets such as the U.S. and England.”

“Buyers out of China thus far account for about 40% of Greenland’s Los Angeles project… Wanda is expecting foreign buyers – the bulk of which are Chinese – to buy about 30% of its 94-story, 406-unit condo and hotel project in Chicago.”

“Chinese purchases of commercial property grew to about $5 billion through the third quarter of 2015, already a record that is up from $2.5 billion in all of 2014 and $1 billion in 2010, according to real-estate services firm JLL.”

“Nowhere has the interest been more concentrated than in Los Angeles, where at least 10 Chinese developers have purchased large development sites, all within the last two years, according to JLL.”

Of course, savvy to Chinese demand for real estate in the U.S., several domestic developers of higher priced condo projects in the U.S. have set up sales offices in or agreements with listing agents in China as well.

Hanergy Thin Film founder sells 6% stake. Ben Bland. Financial Times. 29 Dec. 2015.

“Li Hejun offloaded the shares at a 95% discount to their last traded price in May, before they were suspended from the Hong Kong exchange after plunging 47% in one day.”

“This week’s share sale values HTF at $1.16bn, far below the $21bn market capitalization recorded in May.”

So here’s the skinny.  Hanergy Thin Film Power, once one of the most highly valued solar companies in the world utilized shell companies and accounting methods in an investment environment that was desperately looking for renewable-high tech investments particularly with a China tie.  The company’s leader, Li Hejun, in the process briefly became China’s richest person.

There is a good amount of coverage on the subject, but two articles that will help you get your head around it pretty quickly are Abheek Bhattacharya’s “Hanergy’s High Demands for Rehabilitation” in The Wall Street Journal (8/17) and Miles Johnson and Lucy Hornby’s “FT Investigation: The strange tale of ticker ‘566’” in The Financial Times (7/20).

Basically, Hanergy maintained the highest profit margins (near 50%) in the industry (despite continual sales price pressure in the industry) by selling almost all of its product to its unlisted parent company at above market pricing.  But no worry, the parent company didn’t actually pay for most of the product. Rather Accounts Payable and Accounts Receivables increased on both ends.  The “listed Hanergy racked up receivables equal to 101% of annual revenue.”  Still, to the investment community, the stock looked to be a winner and as a result several high profile emerging market funds added the stock and helped push the valuation to about 80 times trailing earnings.  Then of course the façade began to fade (particularly after the China stock market collapse in the summer).  The stock was suspended and now several months later…

“The founder and chairman of Hanergy Thin Film (Li Hejun), who was once briefly crowned China’s richest man, has sold a 6% stake in his solar power group for just US$70m – valuing the company at 1/40th of the $40bn it was worth at its peak.”

RCAP files for bankruptcy; Cetera to emerge as independent company. Bruce Kelly. Investment News – Crain Communications Inc. 4 Jan. 2016.

RSC Capital Corp (RCAP) said on Monday, January 4, that it is planning on filing for Chapter 11 bankruptcy protection by the end of the month.  The debt holders (Fortress Investment Group, Carlyle Investment Management, and others) will infuse $150 million of new capital and take Cetera Financial Group from the carcass and the equity holders will be wiped out.  At its peak RCAP reached $39.50 a share on April 1, 2014 (assuming the current number of shares outstanding that would have implied a market cap over $3.5bn). As of January 7 the shares are trading in the OTC market at $0.0335 a share for a $3m market cap.

For a great synopsis on the rise and fall of RCAP and particularly its founder, Nick Schorsch, Bruce Kelly’s “How Nick Schorsch lost his mojo” in Investment News is a great read.  In a matter of two years, Schorsch’s American Realty Capital Properties’ (ARCP) real estate portfolio went from $100 million to $21 billion (largely assisted by the related financing vehicle of RCAP).  Imagine the effort of buying that much property that quickly and the prices that would have to be paid to “win” that many properties.  Of course, the timing was perfect (with bottomed out pricing after the 2009 crash which subsequently rebounded meaningfully) until it wasn’t.

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – Manhattan Luxury-Home Prices in a Slide, Defying Broader Market 12/24

Bloomberg – The Return of the Affordable Starter Home 12/29

Bloomberg – Landlords Face Slowing Price Gains After U.S. Records Shattered 12/30

Bloomberg – U.S. Real Estate to Draw More Foreigners in 2016, Survey Says 1/3

Contra Corner – The Next Big Short: Jeff Bezos’ Brobdingnagian Bubble 12/31/15

FT – China orders SOEs to hire former soldiers 12/28

FT – Sydney property: pride or a fall 12/28

FT – Tokyo property: bargain basement 12/28

FT – Oil’s prologue likely to be a harbinger of worse things to come 1/3

FT – China’s currency remains on path to more downside 1/3

FT – Equities: And then there were nine 1/3

FT – Venezuela central bank curbs fuel fears over hyperinflation 1/5

FT – First WiFi kiosks set to land on New York’s streets 1/5

FT – Why global economic disaster is an unlikely event 1/5

FT – China to extend temporary share-sale ban to calm markets 1/6

Investment News – RCAP files for bankruptcy; Cetera to emerge as independent company 1/4

Mauldin Economics: Cubicle Hell Warning Signs Scream “Recession” 1/5/16

NYT – When a Unicorn Start-Up Stumbles, Its Employees Get Hurt 12/23

NYT – Private Capital Fund-Raising Goal Rises to a Record $946 Billion 1/6

WSJ – After a Down 2015, Real-Estate Stocks Hope for Savior in Indexes 12/29

WSJ – Fannie and Freddie Give Birth to New Mortgage Bond 12/29

WSJ – What Happens When Japan’s Central Bank Runs Out of Bonds to Buy? 12/30

WSJ – China’s Stock-Market Interventions Postpone Grim Reality 1/5

WSJ – Apple Scales Back Orders for Its iPhones 1/5

WSJ – Why Odds Are Long for Macau Recovery 1/6

WSJ – China’s Shortest Day Will Prolong the Pain 1/7

WSJ – Norway’s Oil Fund Is Finding it Hard to Spend $6 Billion 1/7

 

Special Reports

 

 

December 4 – December 10, 2015

Negative corporate outlooks in light of commodity woes, debt downgrades, and declining global GDP. Oil and gas shake down. It seems that the natural cycle of things is that the new/upcoming global hegemon exploit its former developing nation peers.

Before I focus on what I perceive to be the main themes from the week, I want to draw special attention to a few of the “Other Interesting Articles” at the bottom of the post.

  1. Several large Chinese insurance companies are buying large and controlling stakes in public Chinese real estate development companies (WSJ: Why China’s Insurers Are Bidding Up Property Stocks 12/9) – prior to 2010 they were not allowed to own property assets. Unlike many insurers in Western markets that take debt positions or will buy properties outright due to their risk-averse nature, these insurers are buying direct stakes in speculative developers at heightened stock market valuations (largely due to the bidding among insurers) at time when there is an oversupply of product in the market.
  2. Thought your home interest rate was low, imagine being paid to borrow. That’s the situation that many Dutch are finding themselves in (those with floating rate mortgages – very common in Europe). WSJ: Less Than Zero – Living With Negative Interest Rates 12/8.
  3. If you’re in real estate, check out this article (The Real Deal: Can Blackstone’s real estate business keep growing? 8/26) from August that I just came across. Note the comment about the lack of margins in the net lease business, especially with interest rates likely to increase (really these investments are macro positions on the direction of cap rates considering you have very minimal control over the income). Related to this, see a post in ValueWalk about Kyle Bass accusing United Development Funding (a public non-traded mortgage REIT) as a Ponzi scheme, and comments in general about the public non-traded REIT sector.
  4. As a compliment to one of the themes from this week, The Economist put out “Pipelines in America – Running on empty” highlighting that the mid-stream model is not as secure as many believe, which of course led to Kinder Morgan (one of the leaders in the pipeline business) to cut its dividend by 75% this week (see the Lex Column in The Financial Times “Kinder Morgan – plus ça change”).

On to the three overarching themes that will pull in a number of articles.  First a continued decline in corporate growth prospects has now led to two venerable companies (DuPont and Dow Chemical) merging, see Dennis Berman’s “Dow-DuPont Merger – Better Living Through Layoffs” in The Wall Street Journal.  Further continued corporate debt downgrades have resulted in there being only three US companies with a AAA credit rating, see Eric Platt’s “Corporate debt downgrades hit $1tn worth of issues” in The Financial Times, which of course due to the commodities slump (see Clifford Krauss and Ian Austen’s “If It Owns a Well or a Mine, It’s Probably in Trouble” in The New York Times) has one of the three – ExxonMobil – being reviewed for a possible downgrade.  Second just how bad is it in the oil and gas business…Asjylyn Loder’s “Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke” in BloombergBusiness points to the coming reckoning in how oil companies recognize reserves on their books.  Third is an article (“In Nigeria, Chinese Investment Comes With a Downside”) by Keith Bradsher and Adam Nossiter in The International New York Times that points to the double edge sword that is globalization.

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

Dow-DuPont Merger – Better Living Through Layoffs. Dennis Berman. The Wall Street Journal. 9 Dec. 2015.

In this article Berman aptly describes this merger and the many that have preceded it this year as “An America playing not to lose.”  For three main reasons:

  1. “The economy at large isn’t producing enough growth to keep stockholders content. For the largest companies – who are more or less indexed directly to U.S. and global growth – there is little they can do but keep cutting costs. Eventually, this takes the form of mergers, and 2015 has produced over $4 trillion of transactions. The vast majority of them are ‘in industry,’ which is banker-ese for cost cutting exercises.”
  2. Activist investors… they have forced boards into an intellectual sameness, and certainly a fear of reproach.”
  3. American companies are concerned by the likes of Huawei, Haier, Xiaomi, and others.

“And then perhaps the final, creeping fear: If the likes of Pfizer Inc., Anheuser-Busch, DuPont, UnitedHealth Group Inc. and American Airlines Group Inc. have lost faith in the future, why should we feel any different?”

Corporate debt downgrades hit $1tn worth of issues. Eric Platt. The Financial Times. 4 Dec. 2015.

“More than $1tn in US corporate debt has been downgraded this year as defaults climb to post-crisis highs, underlining investor fears that the credit cycle has entered its final innings.”

“S&P has cut its ratings on US bonds worth $1.04tn in the first 11 months of the year, a 72% jump from the entirety of 2014. In contrast, upgrades have fallen to less than $500bn, more than a third below last year’s total.” S&P has more than 300 US companies on review for downgrade.

Basically, “The Fed’s quantitative easing program helped to defer a default cycle and with the Fed poised to increase rates, that may be about to change.” – Bonnie Baha, head of global developed credit at DoubleLine Capital.

“Some 102 companies have defaulted since the year’s start, including 63 in the US. Only three companies in the country have retained a coveted triple A rating: ExxonMobil, Johnson & Johnson, and Microsoft, with the oil major on review for a possible downgrade.“ Keep in mind that in 2010 there were over 20, over 40 in 2009, and close to 80 in 2000.

Then of course the Third Avenue Focused Credit Fund has just blocked the remainder of its investors from redeeming their money.  As David Reilly of The Wall Street Journal aptly put it “canary in the high-yield coal mine or an isolated blowup?”

If It Owns a Well or a Mine, It’s Probably in Trouble. Clifford Krauss and Ian Austen. The New York Times. 8 Dec. 2015.

“Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year. More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States.”

International mining company Anglo American is cutting its workforce by 60%.  “In July, the company outlined plans to cut 53,000 jobs after reporting a loss of $3 billion for the first half of the year. Now, Anglo American plans to reduce its current work force of 135,000 to 50,000 employees.”

“Even with prices falling rapidly, American oil production has only declined to 9.2 million barrels a day, from a record high of 9.6 million barrels a day in June.”

“Many international oil projects have been canceled and production should fall more rapidly next year. But it probably won’t be quickly enough to stabilize prices. That is because companies are getting more production out of their investments as efficiency has improved. And some need to keep producing to keep up with their debt payments.”

Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke. Asjylyn Loder. BloombergBusiness. 9 Dec. 2015.

“In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books.”

“Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.“

“The reckoning is coming in the next few months, when the companies report 2015 figures.”

“There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute and formerly a scientist with the Geological Survey of Canada. “It was a great game while it lasted.”

The rule change will cut Chesapeake’s inventory by 45%.  Denver-based Bill Barrett Corp. will lose as much as 40%. Houston-based Oasis Petroleum Inc. will lose as much as 33%.

“Drillers met the rule’s profitability provision last year due to a quirk in the SEC’s pricing formula. The agency’s yardstick is an average of the prices on the first day of each month during the calendar year. The price came to $95 a barrel at the end of 2014, even though oil was trading below $50 by the time the companies reported reserves in February and March. The 2015 average, including the Dec. 1 price, comes out to $51 a barrel.”

“Writedowns, which are reported on a quarterly basis, point to sizable revisions. The 61 companies in the Bloomberg North American Independent Explorers and Producers index have announced impairments of $143.8 billion in the past year.”

“Some of the wells may never be drilled, while others may return to inventories if prices rise.”

“The question is, how are these reserves going to come back?” said Subash Chandra, an energy analyst with Guggenheim Securities in New York. “Because if you have to spend within cash flow, those reserves aren’t coming back. Not unless we get a spike in prices, or we return to levered growth.”

In Nigeria, Chinese Investment Comes With a Downside. Keith Bradsher & Adam Nossiter. The International New York Times. 5 Dec. 2015.

Don’t misunderstand, China is not unique in seeking to capitalize on the natural resources of developing countries while also creating new markets for its national companies to sell their wares and to build infrastructure – in effect sending its capital infusions back home.  Great Britain and the United States are old hands at this game as are many others.  What’s interesting is how aggressively China has stepped into the void when others have pulled back.

“President Xi Jinping of China, who was in Africa this week emphasizing economic diplomacy, just committed $60bn in development assistance to the Continent.”

However, Africa is not a place for the faint of heart.

“Nigeria endured coups and a civil war in the 1960s, then effectively nationalized many foreign-owned companies in the 1970s. Nigeria developed a reputation for breaking or renegotiating contracts, antagonizing many foreign partners.

 The risks have prompted Western companies to demand very fat profits before putting money into the country – returns on the order of 25 to 40% a year. Their Chinese counterparts have been willing to accept 10% or less.”

Doesn’t mean the risk has gone away – rather it is more likely that they have increased.

“Mostly state-owned Chinese construction companies have started $24.6bn worth of projects since 2005, the highest of anywhere in the world, according to American Enterprise Institute.”

“A little-known Chinese government agency, Sinosure, has guaranteed the loans. Sinosure insured $427bn worth of Chinese exports and overseas construction projects around the world in 2013, the most recent year available. The Export-Import Bank of the United States, by comparison, issued just $5bn worth of credit in each of the last two years.”

Yes, the Export-Import Bank lost its funding briefly in 2015 (which has since been restored), but the magnitude in contribution differences in meaningful.  Further, China has to be wary of Africa’s bite.

In Nigeria (the largest economy in the continent) “Government revenue has dropped by more than half since the fall in world oil prices, so the country may not have the money to make good on the Chinese deals.”

Other Interesting Articles

The Economist

 

A Wealth of Common Sense: What Happens When There Are Fewer Suckers at the Poker Table? 12/3

BloombergBusiness: Manhattan Apartment Vacancies Rise to the Highest in Nine Years 12/9

BloombergBusiness: Here’s How Much the U.S. Middle Class has Changed in 45 Years 12/10

FT: The fall and rise of technology juggernauts 12/3

FT: Losses mount in China’s overcrowded steel sector 12/4

FT: Sovereign wealth funds withdraw $19bn from asset managers 12/6

FT: China working age population ‘to fall 10% by 2040’ 12/9

FT: Kinder Morgan – plus ça change 12/9

GlobeSt.: REITs Prefer Asset Sales to Stock Issues 12/8

NYT: Beijing, With Red Alert for Smog in Full Force, Closes Schools and Limits Traffic 12/8

NYT: Chinese Glacier’s Retreat Signals Trouble for Asian Water Supply 12/8

NYT: High-Yield Fund Blocks Investor Withdrawals 12/10

The Real Deal: Can Blackstone’s real estate business keep growing? 8/26

WSJ: Surprise – Your Life-Insurance Rates Are Going Up 12/4

WSJ: China’s Reserves: Blink and Miss It 12/7

WSJ: Where Rich Chinese Are Stashing Their Cash – America’s Hotels and Strip Malls 12/8

WSJ: Less Than Zero – Living With Negative Interest Rates 12/8

WSJ: Chanel Pays Record Price for Retail Space 12/8

WSJ: World’s Biggest Wealth Fund Given Property Push 12/8

WSJ: China Economy – Easing Cycle Keeps on Spinning 12/9

WSJ: Why China’s Insurers Are Bidding Up Property Stocks 12/9

WSJ: Junkyard Dog: How Oil-Fueled Debt Caught Up With Chesapeake 12/10

November 27 – December 3, 2015

Moral Hazard in the Chinese bond markets. Chinese buying US real estate. The new global oil economy. So just how much do Airbnb hosts in NYC make?

Another big week… the renminbi will be added to the IMF’s Special Drawing Rights basket of currencies (currently made up of four currencies: USD, Euro, Yen, and Pound Sterling) in October of next year – importantly it will be given a greater weight than both the Yen and the Pound Sterling – and the ECB cut its deposit rate to -0.3% from -0.2% (granted less than the financial markets had expected).  Even with these happenings, the four articles I am going to cover this week are 1) “China’s bond market – Pricing Risk” in The Economist, 2) “Chinese Cash Floods U.S. Real Estate Market” by Dionne Searcey and Keith Bradsher in The New York Times, 3) “Understanding the new global oil economy” by Martin Wolf in The Financial Times, and 4) ““Five Numbers From Airbnb’s Just-Revealed New York City Data” by Eric Newcomer in Bloomberg Business.

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

China’s bond market – Pricing Risk. The Economist. 28 Nov. 2015.

Essentially as China continues to employ quantitative easing in its economy the cost of funds continues to decrease, regardless of increasing use of leverage. Sounds familiar.

“China’s domestic bond market has never been riskier. It was only last year that it suffered its first default. This year at least six companies have defaulted.”

While six is barely any in comparison to developed world economies, it is a dramatic shift from the status quo.  Credit risk is increasing and the economy on the whole is slowing with some sectors in meaningful decline (particularly those that are capital intensive).

“A gloomy outlook of this kind would normally lead investors to demand a premium before buying bonds. Instead, they have lapped them up, making it cheaper for China’s companies to borrow. Bond issuance has boomed this year, reaching almost 12 trillion yuan ($1.9 trillion) so far, up from the record 7.7 trillion sold in all of 2014, according to Wind Information, a data provider.”

China has become the world’s third-largest bond market behind the U.S. and Japan.

“For most of the past five years, yields on highly rated corporate bonds were two or three percentage points higher than on government bonds of the same maturity. This year the spread has narrowed, hitting a low in early November of just 1.3% points. This implies that investors think corporate bonds have become less risky, despite the proliferation of defaults.”

Granted, much of the activity is from existing borrowers rolling over higher cost loans.

“The increase in issuance has been exaggerated by a debt swap: local governments are on track this year to replace about 3 trillion yuan of expensive loans with cheaper bonds. The average interest rate paid on outstanding debt in China has fallen from nearly 7% last year to just over 6% this year, according to Hua Chuang Securities.”

To be sure,

“China is willing to let some companies fail, but so far no big firms in which the central government retains a sizeable shareholding have met that fate. Instead, those that have got into trouble have been rescued, leading investors to treat their bonds as virtually risk-free.”

Chinese Cash Floods U.S. Real Estate Market. Dionne Searcey and Keith Bradsher. The New York Times. 28 Nov. 2015.

Faced with these conditions and the prospect of declining currency relative to the greenback as the People’s Bank of China (PBOC) implements measures to further reduce capital controls in accordance with IMF guidelines prior to the renminbi being integrated into the SDR basket, it is no surprise that Chinese nationals are placing cash abroad.  The news is that their presence is increasing and it is effecting more and more markets across the country.

“This year, Chinese families represented for the first time the largest group of overseas home buyers in the United States.”

This is also due to the drop in the value of the Canadian dollar, curbing Canadians enthusiasm for U.S. real estate.

“While Chinese purchases make up a small sliver of overall sales in the United States, they have had a disproportionate impact on the market for more expensive properties, buying one in 14 homes sold for more than $1 million. On average, buyers from China, including the mainland, Taiwan and Hong Kong, pay $831,800 for a home, more than three times as much as Americans spend, according to a National Association of Realtors survey.”

“The price of property in Beijing is very high, the stock market is crashing, and the real economy is not stable… The people here have some money, but they don’t have enough good ways to invest their money.” – Eric Du, a management and investment consultant from Beijing.

“Chinese buyers spent $28.6 billion on American homes in the year ended in March, more than double their purchases two years before, according to the Realtors association. Chinese purchases in overseas commercial real estate jumped 49% last year, Jones Lang LaSalle, a big real estate brokerage firm, has estimated.”

“An estimated $590 billion moved out of China in the 12 months through June, according to Fitch Ratings… In the past, they tended to stay under $200 billion a year.”

“But the highflying deals may have only just begun. By the end of last year, Chinese insurers had only 1.44% of their money overseas (they can now allocate up to 15%).”

“A majority of home purchases by Chinese buyers – 69% – are entirely cash, according to the Realtors association.”

“Outside the United States, the Chinese demand has been so great that some places are trying to temper it.

Hong Kong and Singapore have each imposed 15% taxes on nonresident buyers of residential real estate. In Australia, the State government of Victoria, which includes Melbourne, introduced a 3% tax on overseas buyers.”

Basically,

“Overseas real estate speculation by Chinese investors started to rise after the recession in America began to recede in 2009. The two markets have been out of sync, creating opportunities. American home prices have been in a recovery phase, while the Chinese boom has been fading.”

Understanding the new global oil economy. Martin Wolf. The Financial Times. 1 Dec. 2015.

Are the drop in oil prices temporary or structural?

“With US consumer prices as deflator, real (oil) prices fell by more than half between June 2014 and October 2015. In the latter month, real oil prices were 17% lower than their average since 1970, though they were well above levels in the early 1970s and between 1986 and the early 2000s.”

Spencer Dale, chief economist of BP (and former chief economist of the Bank of England), believes that the general belief of oil as an exhaustible resource with prices that tend to rise over time is false. The key disrupter has been the US shale revolution.

“…the global supply capacity is not only enormous but expanding. Forget peak oil. As Mr Dale notes: ‘In very rough terms, over the past 35 years, the world has consumed around 1tn barrels of oil. Over the same period, proved oil reserves have increased by more than 1tn barrels.‘”

An important byproduct of the US shale revolution “… is a huge shift in the direction of trade. In particular, China and India are likely to become vastly more important net importers of oil, while US net imports shrink. Quite possibly, 60% of the global increase in oil demand will come from the two Asian giants over the next 20 years.”

“By 2035, China is likely to import three-quarters of its oil and India almost 90%…. If it does, it demands no great mental leap to assume that US interests in stabilizing the Middle East will shrink as that of China and India rises. The geopolitical implications might be profound.”

“The problem is not that the world is running out of oil. It is that it has far more than it can burn while having any hope of limiting the increase in global mean temperatures over the pre-industrial levels to 2⁰C. Burning existing reserves of oil and gas would exceed the global budget threefold. Thus, the economics of fossil fuels and of managing climate change are in direct opposition. One must give.”

Five Numbers From Airbnb’s Just-Revealed New York City Data. Eric Newcomer. Bloomberg Business. 1 Dec. 2015.

I’ve included this article because it provides some real stats on Airbnb in NYC.

Due to requests from New York City, Airbnb just released anonymized host data for approximately 59,000 listings in the city between November 1, 2014 and November 1, 2015 outlining the information on the type of listings in the City offered by its users and their earnings from the activity.

  • 16% of hosts list their full time home or apartment on Airbnb for more than 121 days per year. 3% of hosts list for 271 days or more and more than half list their full homes or apartments for between 1 and 30 days.
  • The median annual earnings by hosts in NYC is $5,110.  SoHo and East Village hosts have the highest median rent ($6,558) and the Bronx the lowest ($3,249).
  • 126 New York City hosts made between $100,001 and $350,000 a year from Airbnb. 888 hosts made between $50,000 and $100,000 and the majority less than $10,000 a year.
  • 25% of the revenue going to active hosts went to those with more than two listings.  Airbnb projects that this number will decline to 7% in the future.
  • The median Airbnb property is rented out 42 nights a year or approximately 3.5 nights per month.

 

Other Interesting Articles

The Economist

 

BloombergBusiness: World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout 11/29

FT: Classic cars and fine wines leave Warren Buffett trailing 11/26

FT: John Cryan is right, bankers’ pay has to fall further 11/29

FT: The rise of liberal intolerance in America 11/29

FT: IMF gives renminbi strong weighting in currency basket 11/30

FT: Sovereign wealth fund pullback hits Aberdeen Asset Management 11/30

FT: Brazil’s economy shrinks by record 4.5% 12/1

FT: Our virtual reality future is bigger than it appears 12/1

FT: Signs of froth in China’s debt market 12/1

FT: Global defaults climb to 6-year peak of $95bn 11/30

FT: ECB pledges to extend easing until March 2017 ‘or beyond’ 12/3

FT: Google steps up push into wind, solar energy 12/3

FT: Saudi Arabia throws down challenge on oil production cuts 12/3

Globe Street: Underwriting Relaxes in Multifamily: Trepp 11/25

Investment News: How Vanguard pulls billions from Wall Street every year 12/1

National Real Estate Investor: No Reason Yet to Fear a Bubble, CRE Industry Pros Say 12/2

NYT: Macau Gambling Industry Faces Challenges on Multiple Fronts 11/26

NYT: Private Equity Market Is Expected to Attract $629 Billion in 2015 11/30

WSJ: China’s Globetrotting Tourists Face Trouble at Home 11/30

WSJ: European Retail Property Deals Surge 12/1

WSJ: Bottom Keeps Falling for Energy-Debt Investors 12/2

WSJ: China’s Property Rally Has Dubious Foundations 12/3