Tag: Construction

October 30, 2017

The tally is in – daily (or at least close to it).

Perspective

WEF – This chart might change how you think about migration – Frank Chaparro 8/29

How Much – How Trump Tax Rate Changes Affect You – Raul 10/22

Economist – Globalization has marginalized many regions in the rich world 10/27

Worthy Insights / Opinion Pieces / Advice

Bloomberg Businessweek – Italians Have Perfected the Art of Waiting It Out – Vernon Silver 10/18

Bloomberg Businessweek – Amazon Is Getting a Good Deal in Ohio. Maybe Too Good – Mya Frazier 10/26

  • “Amazon’s nine-figure tax incentives in Ohio have strained local public services as the state’s employment growth continues to lag the national average.”

Bloomberg View – Morningstar’s Star System Was Always a Bright Shinny Object – Barry Ritholtz 10/26

  • “Retail and professional investor alike seem to ignore the fact that every single document ever generated by any investment-related firm has a warning on it to the effect that ‘Past performance is not an indicator of future returns.’ Every chart ever drawn, each investing idea back-tested and every single historical comparison is testament to how little mind humans pay to that disclaimer.”

Bloomberg View – Think the U.S. Has a Facebook Problem? Look to Asia – Editorial Board 10/22

  • “…its platform exacerbates the potential for violence and social breakdown.”

Economist – Globalization’s losers: The right way to help declining places – Leaders 10/21

  • “Mainstream parties must offer voters who feel left behind a better vision of the future, one that takes greater account of the geographical reality behind the politics of anger.”
  • “Economic theory suggests that regional inequalities should diminish as poorer (and cheaper) places attract investment and grow faster than richer ones. The 20th century bore that theory out: income gaps narrowed across American states and European regions. No longer. Affluent places are now pulling away from poorer ones. This geographical divergence has dramatic consequences. A child born in the bottom 20% in wealthy San Francisco has twice as much chance as a similar child in Detroit of ending up in the top 20% as an adult. Boys born in London’s Chelsea can expect to live nearly nine years longer than those born in Blackpool. Opportunities are limited for those stuck in the wrong place, and the wider economy suffers. If all its citizens had lived in places of high productivity over the past 50 years, America’s economy could have grown twice as fast as it did.”

Economist – Why Airbus’s tie-up with Bombardier is so damaging for Boeing 10/19

Economist – Firms that burn up $1bn a year are sexy but statistically doomed – Schumpeter 10/21

  • “Consider Tesla, a maker of electric cars. This year, so far, it has missed its production targets and lost $1.8bn of free cashflow (the money firms generate after capital investment has been subtracted). No matter. If its founder Elon Musk muses aloud about driverless cars and space travel, its shares rise like a rocket—by 66% since the start of January. Tesla is one of a tiny cohort of firms with a license to lose billions pursuing a dream. The odds of them achieving it are similar to those of aspiring pop stars and couture designers.”
  • Investing today for profits tomorrow is what capitalism is all about. Amazon lost $4bn in 2012-14 while building an empire that now makes money.”
  • Tell that to the mom and pop shops that are crowded out because they have to be profitable.
  • “Most billion-dollar losers today are energy firms temporarily in the doldrums as they adjust to a recent plunge in oil prices. Their losses are an accident.”
  • “But a few firms love life in the fast lane. Netflix, Uber and Tesla are tech companies that say their (largely unproven) business models will transform industries. Two others stand out for the sheer persistence of their losses. Chesapeake Energy, a fracking firm at the heart of America’s shale revolution, has lost at least $1bn of free cashflow a year for an incredible 14 years in a row. Nextera Energy, a utility that runs wind and solar plants, and which investors value highly, has managed 12 years on the trot.”
  • “Collectively these five firms have burned $100bn in the past decade, yet they boast a total market value of about $300bn… The experience of the five suggests that bending reality today has three elements: a vision, fast growth, and financing.
  • “…Sustaining a reality distortion field is possible, but the longer it goes on for, the harder it gets. More capital has to be raised and, in order to justify it, the bigger the firm’s projected ultimate size—its terminal value—has to be.”
  • “A few firms other than Amazon have defied the odds. Over the past 20 years Las Vegas Sands, a casino firm, Royal Caribbean, a cruise-line company, and Micron Technology, a chip-maker, each lost $1bn or more for two consecutive years and went on to prosper. But the chances of success are slim. Of the current members of the Russell 1000 index, since 1997 only 37 have lost $1bn or more for at least two years in a row. Of these, 21 still lose money.”
  • “To justify their valuations, the five firms examined by Schumpeter must grow their sales by an estimated 8-33% each year for a decade. Based on the record of all American companies since 1950, and the five firms’ present revenue levels, the probability of this happening ranges between 0.1% and 25%, using statistical tables from Credit Suisse, a bank.”

FT – The downside of the race to be Amazon’s second home – Richard Florida 10/23

  • For Amazon to really make an impact, forgo the offered public incentives, among other things.

Markets / Economy

Bloomberg Businessweek – Under Trump, Made in America Is Losing Out to Russian Steel – Margaret Newkirk and Joe Deaux 10/25

  • “Foreign steel imports into the U.S. are up 24% in 2017. As the industry grows angry at Trump’s lack of trade action, Russia’s Evraz continues winning pipeline contracts.

WSJ – Daily Shot: Overstock.com 10/24

  • Overstock.com which has been languishing for some time now is on a tear since it announced an initial coin offering (ICO). I suspect that other companies that have been struggling for growth will follow.

WSJ – Daily Shot: Banca Monte dei Paschi di Siena 10/25

  • “Shares of the bailed-out Italian bank Monte dei Paschi resumed trading on Wednesday and promptly declined 70% from the last closing price.”

Real Estate

WP – America’s affordable-housing stock dropped by 60 percent from 2010 to 2016 – Tracy Jan 10/23

  • “The number of apartments deemed affordable for very low-income families across the United States fell by more than 60% between 2010 and 2016, according to a new report by Freddie Mac.”
  • “The report by the government-backed mortgage financier is the first to compare rent increases in specific units over time. It examined loans that the corporation had financed twice between 2010 and 2016, allowing a comparison of the exact same rental units and how their affordability changed.”
  • “At first financing, 11% of nearly 100,000 rental units nationwide were deemed affordable for very low-income households. By the second financing, when the units were refinanced or sold, rents had increased so much that just 4% of the same units were categorized as affordable.”
  • “’We have a rapidly diminishing supply of affordable housing, with rent growth outstripping income growth in most major metro areas,’ said David Brickman, executive vice president and head of Freddie Mac Multifamily. ‘This doesn’t just reflect a change in the housing stock.’”
  • “Rather, he said, affordable housing without a government subsidy is becoming extinct. More renters flooded the market after people lost their homes in the housing crisis. The apartment vacancy rate was 8% in 2009, compared to 4% in 2017. That trend, coupled with a stagnant supply of apartments, resulted in increased rents.”
  • “The study defined ‘very low income’ as households making less than 50% of the area median income, and ‘affordable’ rent as costing less than 30% of household income.”
  • “Most new construction of multifamily housing generally serves high-income renters, according to Freddie Mac. The corporation — along with Fannie Mae, another government-sponsored enterprise with a similar mission — significantly reduced its role in financing multifamily housing after the Great Recession.”
  • “Together, they had financed about 70% of all original loans for multifamily properties in 2008 and 2009 as private capital pulled back, said Karan Kaul, a research associate at the Housing Finance Policy Center at the Urban Institute. By the end of 2014, their market presence declined to 30%.”
  • “‘The affordability issues are becoming more severe at the lower end of the market,’ said Kaul, a former researcher at Freddie Mac. ‘Absent some kind of government intervention or subsidy, there is just not going to be any investments made at that lower end of the market.'”

Energy

FT –  US oil floated on cheap money – John Dizard 10/28

Construction

WSJ – Daily Shot: CME Lumber Futures 10/23

  • “Lumber futures are soaring in response to the NAFTA jitters. US home construction/renovation costs are sure to rise.”

Middle East

Economist – The boycott of Qatar is hurting its enforcers 10/19

  • “If Saudis and Emiratis will not trade with Doha, Iranians will.”

October 12, 2017

Perspective

Business Insider – Trump’s net approval rating has dropped dramatically in every state – Allan Smith 10/10

Brookings – White, still: The American upper middle class – Richard Reeves and Nathan Joo 10/4

Economist – A new study details the wealth hidden in tax havens 10/7

  • “…A new study by Annette Alstadsaeter, Niels Johannesen and Gabriel Zucman, three economists, (using Bank for International Settlements data) concludes that tax havens hoard wealth equivalent to about 10% of global GDP. This average masks big variations. Russian assets worth 50% of GDP are held offshore; countries such as Venezuela, Saudi Arabia and the United Arab Emirates climb into the 60-70% range. Britain and continental Europe come in at 15%, but Scandinavia at only a few per cent.”
  • “One conclusion is that high tax rates, like those in Denmark or Sweden, do not drive people offshore. Rather, higher offshore wealth is correlated with factors such as political and economic instability and an abundance of natural resources.”
  • “Accounting for offshore holdings suggests wealth inequality is even greater than was thought. In Britain, France, and Spain the top 0.01% of households stash 30-40% of their wealth in tax havens. In Russia, most of it goes there. In America, the share of wealth held by the richest 0.01% is as high today as in early 20th-century Europe. Including offshore data increases the wealth share of the super-rich.”
  • “Yet plenty of data are still missing. A few big centers, including Panama and Singapore, still do not disclose these statistics. The BIS data also cover only bank deposits, not the securities in which most offshore wealth is held. Researchers made estimates to plug the gap, but their figures are likely to be conservative.”

Worthy Insights / Opinion Pieces / Advice

NYT – How Israel Caught Russian Hackers Scouring the World for U.S. Secrets – Nicole Perlroth and Scott Shane 10/10

Economist – The bull market in everything – Leaders 10/7

Economist – A deathly silence: After the massacre in Las Vegas, nothing is set to change – Leaders 10/5

Economist – Politicians choosing voters: The Supreme Court ponders whether gerrymandering has gone too far 10/7

Economist – Chiang Kai-shek’s former homes are open to tourists 10/5

Markets / Economy

Economist – From Uber to kinder 10/7

Economist – American public pensions suffer from a gaping hole 10/5

  • “Schools in Pennsylvania ought to be celebrating. The state gave them a $125m budget increase for 2017-18—enough for plenty of extra books and equipment. But John Callahan of the Pennsylvania School Boards Association says all the increase and more will be eaten up by pension costs, which will rise by $164m this year. The same happened in each of the previous five years; cumulatively the shortfall adds up to $586m. The pupil-teacher ratio is higher than in 2010. Nearly 85% of the state’s school boards said pensions were their biggest source of budget pressure.”
  • “A similar squeeze is happening all over America. Sarah Anzia, at the University of California, Berkeley, examined 219 cities between 2005 and 2014 and found that the mean increase in their real pension costs was 69%; higher pension costs in those cities were associated with falls in public-sector employment and capital spending.”
  • “The problem is likely to get worse. Moody’s, a rating agency, puts the total shortfall of American public-sector pension plans at around $4trn. That gap does not have to be closed at once, but it does mean that contributions by employers (and hence taxpayers) will increase even more than they already have (see chart).”
  • “Higher costs are the result of improved longevity, poor investment returns and inadequate past contributions.”
  • As to making plans…
  • “Experts can differ, it seems. But small changes in assumptions can make a huge difference to the amount employers need to contribute. According to the National Association of State Retirement Administrators, cutting the return assumption by a quarter of a percentage point increases the required contribution rate (as a proportion of payroll) by two to three points.”
  • “In consequence, it is in no one’s interest to make more realistic assumptions about future returns. Workers (and their unions) fear it might generate calls for their benefits to be cut; states worry it would require them to raise taxes. Don Boyd, the director of fiscal studies at the Rockefeller Institute of Government, a think-tank, reckons that with a 5% assumed rate of return, states would have to stump up an extra $120bn a year just to tread water—i.e., to fund their pensions without making any progress on closing the deficit. So the game of ‘extend and pretend’ continues.”
  • “As years go by, voters and legislators across the country will have to make a trade-off. They can pay more taxes and cut services; or they can reduce the benefits they pay people who teach their children, police their streets and rescue them from fires. There will be no easy answers.”

Real Estate

WSJ – Daily Shot: John Burns RE Consulting – Home Refinancing 10/11

Health / Medicine

FT – Global childhood obesity rises 10-fold in 40 years – Clive Cookson 10/10

  • “The number of obese children and teenagers across the world has increased 10-fold over the past four decades and is about to overtake the number who are underweight, according to the most extensive analysis of body weight ever undertaken.”
  • “The study, led by Imperial College London and the World Health Organization, used data on 31.5m children and adolescents worldwide to estimate trends in body mass index (BMI) from 1975 to 2016. The results are published in the Lancet.” 
  • “Over this period the number of obese girls, aged 5 to 19, rose from 5m to 50m, while the total for boys increased from 6m to 74m.”
  • “The world’s highest childhood obesity levels are in the Pacific islands of Polynesia and Micronesia. Nauru has the highest prevalence for girls and the Cook Islands for boys: both above 33%.”
  • “Among wealthy countries, the US has the highest obesity rates for girls and boys of about 20%. Levels in most of western Europe are in the 7% to 10% range.” 
  • “A further 213m children are overweight but not sufficiently so to meet the WHO’s obesity criteria, which vary by age. Forty years ago, 0.8% of the world’s children were obese; now the prevalence is close to 7%.” 
  • “The study also looked at adult obesity, which increased from 100m people in 1975 to 671m in 2016. A further 1.3bn adults were overweight (with a BMI above 25) but below the threshold for obesity (BMI above 30).” 
  • “But the authors are most concerned about the findings about childhood obesity, because of their implications for public health many decades into the future.”

Construction

WSJ – Daily Shot: NFIB Labor Quality 10/10

  • “Anecdotal evidence suggests that in some areas of the country, finding workers who can pass a drug test has been challenging.”

WSJ – Daily Shot: John Burns RE Consulting – Builder Labor Shortages 10/11

  • “Skilled (and drug-free) worker shortages in construction are especially acute.”

  • This will only get tighter in the continental U.S. as natural disasters continue to rack up, resulting in acute demand for labor in the affected areas. Harvey, Irma, Maria, Nate, and now wildfires in Northern California. Of course, this will have effects on the neighboring regional labor pools.

Shipping

Economist – How protectionism sank America’s entire merchant fleet 10/5

  • “In April 1956 the world’s first container ship—the Ideal X—set sail from New Jersey. A year later in Seattle the world’s first commercially successful airliner, Boeing’s 707, made its maiden flight. Both developments slashed the cost of moving cargo and people. Boeing still makes half the world’s airliners. But America’s shipping fleet, 17% of the global total in 1960, accounts for just 0.4% today.”
  • “Blame a 1920 law known as the Jones Act, which decrees that trade between domestic ports be carried by American-flagged and -built ships, at least 75% owned and crewed by American citizens. After Hurricane Irma, a shortage of Jones-Act ships led President Donald Trump on September 28th to waive the rules for ten days to resupply Puerto Rico. This fueled calls to repeal the law completely.”
  • Like most forms of protectionism, the Jones Act hits consumers hard. A lack of foreign competition drives up the cost of coastal transport. Building a cargo ship in America can cost five times as much as in China or Korea, says Basil Karatzas, a shipping consultant. And the cost of operating an American-flagged and -crewed vessel is double that of foreign ones, reckons America’s Department of Transportation.”
  • “Inflated sea-freight rates push most cargo onto lorries, trains and aircraft, even though these are pricier and produce up to 145 times as many carbon emissions. So whereas 40% of Europe’s domestic freight goes by sea, just 2% does in America. Lacking overland routes, Alaska, Guam, Hawaii and Puerto Rico are hardest hit. Hawaiian cattle ranchers, for instance, regularly fly their animals to mainland America. A recent report by the Government Development Bank for Puerto Rico found that the Jones Act inflated transport costs for imports to twice the level of nearby islands.”
  • “Jones-Act shipowners retort that the rules are to help producers, not consumers. Rail firms lobbied for the 1920 law, out of fear that an excess of foreign ships from the first world war was flooding the market. National security was also cited. German submarine warfare, it was argued, showed the need for a merchant fleet built and crewed by Americans. But the law has virtually wiped out American shipping. Between 2000 and 2016 the fleet of private-sector Jones-Act ships fell from 193 to 91. Britain binned its Jones-Act equivalent in 1849. Its fleet today has over three times the tonnage of America’s. Marc Levinson, an economic historian (and former journalist at The Economist ) notes that the laws also made American container lines less able to compete on international routes. Drawn by profits at home they underinvested in their foreign operations, and fell behind their foreign rivals because they lacked the same scale.”
  • “Recognizing the harm to their domestic fleets, countries from Australia to China are loosening the rules protecting their fleets. Not America.”

Africa

Economist – The birthplaces of African leaders receive an awful lot of aid 10/7

  • “Scholars have long had a hunch that Chinese aid could be more easily manipulated than the Western sort, which often comes with strings attached. A Chinese white paper in 2014 stated that the government would not impose any ‘political conditions’ on countries asking for help. The commerce ministry, China’s lead aid agency, says most projects are initiated by recipient states. This approach makes aid more vulnerable to misuse by local leaders, say critics.”
  • “In a working paper, the pundits show that China’s official transfers to a leader’s birth region nearly triple after he or she assumes power. Even when using a stricter definition of aid provided by the OECD, a club of mostly rich countries, an increase of 75% was found. They got similar results when looking at the birthplaces of presidential spouses. Crucially, they found no such effect with aid doled out by the World Bank, their benchmark for Western assistance. ‘We believe Chinese aid is special,’ says Andreas Fuchs, a co-author of the study.”
  • “China’s approach to aid has other side-effects. In a paper released earlier this year, Diego Hernandez, an economist, showed that China’s rise as a development financier has increased competition between donors. This, in turn, has strengthened recipients’ bargaining power, says Mr Hernandez. Traditional donors have responded by lowering conditionality, or the number of strings attached to aid. Using data from 1980 to 2013, he finds that African countries have received 15% fewer conditions from the World Bank for every 1% increase in Chinese aid.”

September 26, 2017

If you were to read only one thing…

NYT – How Did Marriage Become a Mark of Privilege? – Claire Cain Miller 9/25

  • “Marriage, which used to be the default way to form a family in the United States, regardless of income or education, has become yet another part of American life reserved for those who are most privileged.”
  • “Fewer Americans are marrying over all, and whether they do so is more tied to socioeconomic status than ever before. In recent years, marriage has sharply declined among people without college degrees, while staying steady among college graduates with higher incomes.”
  • “Currently, 26% of poor adults, 39% of working-class adults and 56% of middle- and upper-class adults are married, according to a research brief published today from two think tanks, the American Enterprise Institute and Opportunity America. In 1970, about 82% of adults were married, and in 1990, about two-thirds were, with little difference based on class and education.”
  • “A big reason for the decline: Unemployed men are less likely to be seen as marriage material.”
  • “As marriage has declined, though, childbearing has not, which means that more children are living in families without two parents and the resources they bring.”
  • “’The sharpest distinction in American family life is between people with a bachelor’s or not,’ said Andrew Cherlin, a sociologist at Johns Hopkins and author of Labor’s Love Lost: The Rise and Fall of the Working-Class Family in America.”
  • “Just over half of adolescents in poor and working-class homes live with both their biological parents, compared with 77% in middle- and upper-class homes, according to the research brief, by W. Bradford Wilcox and Wendy Wang of the Institute for Family Studies. 36% of children born to a working-class mother are born out of wedlock, versus 13% of those born to middle- and upper-class mothers.”
  • “The research brief defined ‘working class’ as adults with an adjusted family income between the 20th and 50th percentiles, with high school diplomas but not bachelor’s degrees. Poor is defined as those below the 20th percentile or without high school diplomas, and the middle and upper class as those above the 50th percentile or with college degrees.”
  • “Americans across the income spectrum still highly value marriage, sociologists have found. But while it used to be a marker of adulthood, now it is something more wait to do until the other pieces of adulthood are in place — especially financial stability. For people with less education and lower earnings, that might never happen.”
  • “Evidence shows that the struggles of men without college degrees in recent years have led to a decline in marriage. It has been particularly acute in regions where well-paying jobs in male-dominated fields have disappeared because of automation and trade.”
  • “’A bad economy lowers the cost of having bad values — substance abuse, engaging in crime, not looking for a job right away,’ said Gordon Hanson, an economist at the University of California, San Diego, who wrote the paper with David Autor of M.I.T. and David Dorn of the University of Zurich.”
  • “Never-married adults cite financial instability as a major reason for being single, especially those who are low-income or under 30, according to a new Pew Research Center survey. Most men feel it’s important for a husband to be a financial provider, especially men without college degrees, according to another new Pew survey.”
  • “Women, meanwhile, have learned from watching a generation of divorce that they need to be able to support themselves. And many working-class women aren’t interested in taking responsibility for a man without a job.”
  • “’They say, ‘If he’s not offering money or assets, why make it legal?’’ said June Carbone, a law professor at the University of Minnesota and the author with Naomi Cahn of Marriage Markets: How Inequality Is Remaking the American Family.”
  • “While researchers say it’s stability, not a marriage license, that matters for children, American couples who live together but don’t marry are generally less likely to stay committed.”
  • Clearly changing this momentum will take a lot. From an improved economy to strengthened cultural supports. A recommendation from Mr. Wilcox – “a bigger emphasis in high schools and pop culture on what’s known as the success sequence: degree, job, marriage, baby. ‘The idea is that if people follow that sequence, their odds of landing in poverty are much lower.'”

Perspective

NYT – The Best Investment Since 1926? Apple – Jeff Sommer 9/22

  • “The iPhone helped to catapult Apple into its position as the world’s most valuable publicly traded company. But now Apple has another and, arguably, more exalted stock market distinction.”
  • “In the history of the markets since 1926, Apple has generated more profit for investors than any other American company.”

Worthy Insights / Opinion Pieces / Advice

WSJ – Ray Dalio and the Market’s Pulse – Andy Kessler 9/24

  • “The core of investing is quite simple: Determine what everyone else thinks, and then figure out in which direction they are wrong. That’s it. No one tells you what they think. You’ve got to feel it.”
  • “It’s all about figuring out what is priced into a stock right now. That’s the pulse of the market, the collective mind meld aggregated into stock prices. I know from experience this is the hardest part of running a hedge fund. You can find the greatest story ever, but if everyone already knows it, there’s no money to be made.”
  • “And the pulse changes with each government statistic, each daily ringing of cash registers and satellite images taken of parking lots. That’s why stocks trade every day. Real-world inputs and the drifting pulse drive the psychotic tick of the stock market tape. Once you feel the pulse, then and only then can you figure out how everyone’s wrong about tomorrow, next month or next year. And believe me, they’re always wrong. Stocks rarely tread water.”
  • “How do you find that pulse? It’s hard enough to invest your IRA. Can you image managing $160 billion?”

FT – Plentiful oil will sustain the age of hydrocarbons – Nick Butler 9/24

  • “The aggregate message is that there is no shortage. Sporadic spikes and volatility will be driven by political instability but demand can be supplied at a relatively high level for many years to come. Oil is not going away any time soon. That will comfort those companies that are unprepared for the energy transition but is more disturbing in terms of emissions and climate change.”
  • “David Howell, the UK’s former energy secretary, writes in the new edition of his fascinating book on energy policy that there is a fundamental conflict between different views of the energy future — what he describes as the Black and the Green. That conflict will shape the public debate on energy for a long time to come. The age of hydrocarbons is far from over.”

Bloomberg Gadfly – Harvard Should Ignore the Freshman Slump – Nir Kaissar 9/25

  • “It doesn’t take fancy consultants to spot the problem. Harvard abandoned one of the stalwart adages in finance: Pick an investment philosophy and stick to it. With its revolving door of chief executives, the endowment has been anything but stable.”

Inc. – 6 High-Performance Habits Only the Most Extraordinary People Share, Backed by Science – Jeff Haden 9/19

Markets / Economy

WSJ – Daily Shot: Consumer Staples Selloff 9/25

  • Consumer push back against food incorporated.

Examples…

WSJ – Daily Shot: General Mills, Inc Stock Price 9/25

WSJ – Daily Shot: Kellogg Company Stock Price 9/25

WSJ – Daily Shot: Kraft Heinz Stock Price 9/25

FT – The return of the stock picker – Robin Wigglesworth 9/24

Energy

Bloomberg – In World’s Hottest Oil Patch, Jitters Mount That a Bust Is Near – Dan Murtaugh 9/25

  • “Ups and downs are so ingrained in this business that crazy success in the Permian Basin is seen as an omen that a crash looms.”

Finance

WSJ – The Global Stock Market’s Hidden Juice – Paul J. Davies 9/24

  • “One common sign of trouble ahead is people borrowing heavily to buy equities.”
  • “Investors should be worried then that stocks are being supported by record amounts of margin debt, according to research released last week from the Bank for International Settlements, the Switzerland-based central bank for central banks.”
  • “These kinds of loans secured against stocks have often proved dangerous in a downturn because when share prices fall borrowers are forced to sell.”
  • “In the U.S., margin debt is more than three-times the level ahead of the 2008 crisis and is greater even than its peak in 2000 before the dot-com crash, according to the B.I.S.”
  • “However, lending volume alone isn’t a clear indicator of risk because equity values have increased, too. In the U.S. at least, lending as a share of market capitalization has been relatively steady for the past four years, most recently at 2.12%. But that level is much higher than the period before 2007 and above even the dotcom-era peak of 2.05%.”
  • “Rich clients’ desire to borrow against stocks has been stoked by the low interest rates and rising stock markets. It is attractive for banks, too. Lending against shares is seen as less risky than mortgages because stocks can be sold more quickly than a house, so banks can hold less capital against margin loans. Also, if the borrowed money is invested with the bank, rather than spent on yachts or cars, that boosts assets under management.”
  • “The banks themselves all say that while lending looks high, their own approach is conservative and the general competition for clients is less aggressive than in the past. But neither the banks nor their investors have a full view of leverage across the system and the risk that may pose.”
  • “Equities have to fall 20% to 30% before margin loans are underwater. That protects the banks, but doesn’t stop a wave of selling to repay debt when a downturn comes. That could spell real pain for everyone else.”

WSJ – Leveraged Loans Are Back and on Pace to Top Pre-Financial Crisis Records – Christopher Whittall 9/24

Construction

San Gabriel Valley Tribune – California construction workers are among the highest paid in the nation – Kevin Smith 9/24

  • “Construction workers in California are among the highest paid in the nation, according to figures from the Bureau of Labor Statistics.”
  • “Fixr.com, an online website that provides cost guides, comparisons and other information for people looking to do remodeling or repair projects, crunched the Bureau of Labor Statistics numbers to create a state-by-state ranking of average hourly wages for workers in the industry.”
  • “California landed 10th on the list of the 10 Highest Wage States, with average hourly earnings of $21.26. Connecticut and Washington ranked just above California with slightly higher pay, and Hawaii and Illinois were tied for the top slot. Construction workers in both of those states earn an average of $27.01 an hour.”
  • “Massachusetts, followed with $25.84 an hour and New Jersey ranked fourth with an average hourly wage of $24.05. Construction workers in Arkansas are hurting the most, according to the report, as their average wage is just $12.38 an hour.”
  • “The national average wage for construction workers is $18.22 an hour, which equates to $37,897 a year. In California, construction workers earn an average of $44,221 a year.”
  • “Mike Balsamo, CEO of the Building Industry Association of Southern California, isn’t surprised that California ranks near the top. But he said wages can be considerably higher for someone with specific skills and more experience.”

China

NYT – As China Piles on Debt, Consumers Seek a Piece of the Action – Keith Bradsher and Ailin Tang 9/25

  • Get Chinese citizens to adopt the consumer and debt habits of the Americans. This has always been the goal – at least for the MNCs (Multi-National Corporations) and it takes a burden off the central government in regard to boosting demand.

FT – China property developers dip on new sales restrictions – Hudson Lockett 9/24

  • “Hong Kong-listed developers saw share prices drop on Monday as investors reacted to new property sales restrictions imposed across eight major Chinese cities in response to rising house prices.”
  • “The cities of Changsha, Chongqing, Guiyang, Nanchang, Nanning, Shijiazhuang, Wuhan and Xi’an had all tightened controls on housing sales since Friday, with state news agency Xinhua stating most had banned sales within two to three years of purchase.”
  • “Authorities in Shijiazhuang imposed particularly strict limits, requiring home buyers to wait for five years before reselling property.”

Puerto Rico

NYT – Puerto Rico’s Agriculture and Farmers Decimated by Maria – Frances Robles and Luis Ferre-Sadurni 9/24

  • “There is no more agriculture in Puerto Rico. And there won’t be any for a year or longer.” – Jose A. Rivera, farmer
  • “In a matter of hours, Hurricane Maria wiped out about 80% of the crop value in Puerto Rico — making it one of the costliest storms to hit the island’s agriculture industry, said Carlos Flores Ortega, Puerto Rico’s secretary of the Department of Agriculture.”
  • “Plantain, banana and coffee crops were the hardest hit, Mr. Flores said. Landslides in the mountainous interior of the island took out many roads, a major part of the agriculture infrastructure there.”
  • “The island suffered a loss of $780 million in agriculture yields, according to the department’s preliminary figures. Hurricane Georges in 1998 wiped out about 65% of crops and Hurricane Irma, which only grazed the island, took out about $45 million in agriculture production.”
  • “Puerto Rico already imports about 85 percent of its food, and now its food imports are certain to rise drastically as local products like coffee and plantains are added to the list of Maria’s staggering losses. Local staples that stocked supermarkets, school lunchrooms and even Walmart are gone.”

August 18, 2017

Perspective

FT – Over $9tn of bonds trade with negative yields – Eric Platt 8/16

  • “Along with central bank interest rate cuts — including setting unprecedented negative rates in Europe and Japan — the bond-buying programs explain why $9tn still trades with a negative yield, and why sub-zero rates are a reality that investors likely have to contend with for years to come.”

Tax Foundation – Which States Benefit Most from the Home Mortgage Interest Deduction? – Amir El-Sibaie 8/10

WSJ – Daily Shot: The New Right-Wing Extremism: Unified, Tech-Savvy and Emboldened – Dan Frosch, Cameron McWhirter and Ben Kesling 8/16

Worthy Insights / Opinion Pieces / Advice

Economist – The death of the internal combustion engine 8/12

  • “…electrification has thrown the car industry into turmoil. Its best brands are founded on their engineering heritage—especially in Germany. Compared with existing vehicles, electric cars are much simpler and have fewer parts; they are more like computers on wheels. That means they need fewer people to assemble them and fewer subsidiary systems from specialist suppliers. Car workers at factories that do not make electric cars are worried that they could be for the chop. With less to go wrong, the market for maintenance and spare parts will shrink. While today’s carmakers grapple with their costly legacy of old factories and swollen workforces, new entrants will be unencumbered. Premium brands may be able to stand out through styling and handling, but low-margin, mass-market carmakers will have to compete chiefly on cost.”
  • “Assuming, of course, that people want to own cars at all. Electric propulsion, along with ride-hailing and self-driving technology, could mean that ownership is largely replaced by “transport as a service”, in which fleets of cars offer rides on demand. On the most extreme estimates, that could shrink the industry by as much as 90%. Lots of shared, self-driving electric cars would let cities replace car parks (up to 24% of the area in some places) with new housing, and let people commute from far away as they sleep—suburbanization in reverse.”
  • “Even without a shift to safe, self-driving vehicles, electric propulsion will offer enormous environmental and health benefits. Charging car batteries from central power stations is more efficient than burning fuel in separate engines. Existing electric cars reduce carbon emissions by 54% compared with petrol-powered ones, according to America’s National Resources Defense Council. That figure will rise as electric cars become more efficient and grid-generation becomes greener. Local air pollution will fall, too. The World Health Organization says that it is the single largest environmental health risk, with outdoor air pollution contributing to 3.7m deaths a year. One study found that car emissions kill 53,000 Americans each year, against 34,000 who die in traffic accidents.”

Economist – The merits of going English – 8/10

  • “Why educationalists like the English system of tuition fees financed by loans on easy terms.”

LinkedIn – Acknowledging My Own Straight White American Male Privilege – Jim McCarthy 8/11

Markets / Economy

WSJ – Daily Shot: Bitcoin Valuation 8/16

Bloomberg – ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone – Adam Tempkin 8/15

  • “There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.”
  • “Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.”
  • “’We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,’ Chief Economist Amy Crews Cutts said in an email Tuesday. ‘In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.’”
  • “The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.”
  • “Cutts said Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years.”
  • “That’s not to say a repeat of the financial crisis is nigh. There might not even be cause for major concern over the auto loan market, Cutts said. Monolines and dealer-finance lenders accounted for just 4% of new originations in the second quarter.”
  • “Meanwhile, the overall rate of late payments exceeding 60 days on all types of auto loans came in at a still-healthy 0.91%, up just eight basis points from last year. The rate on prime loans was at 0.33%, an increase of three basis points.”
  • “’Risk in auto lending is actually very balanced,’ Cutts said. More than 90% of overall auto loans are made by banks, credit unions, and captive auto finance companies, and these entities have become increasingly conservative and discerning in their underwriting.”
  • “Still, the ‘rapid rise’ in deep subprime delinquencies should not go unnoticed, Cutts said.”
  • “’As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,’ Cutts said. ‘The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.’”

Real Estate

WSJ – Daily Shot: FRED – Multifamily Housing Under Construction 8/17

  • “Multifamily housing that is already under construction will be flooding the rental market in the months to come.”

WSJ – Daily Shot: Capital Economics – US National Home Price / Income Ratios 8/17

Finance

WSJ – Sale of Once Hot High-Frequency Trading Frim Reflects Industry Troubles – Alexander Osipovich 8/16

  • “These upstart firms use sophisticated computer algorithms to move in and out of stocks, futures and other positions in fractions of a second. Known as high-frequency traders, or HFT, they thrived in the years following the financial crisis by exploiting the markets’ big price swings.”
  • “But more recently, there have been fewer dramatic swings in stocks, commodities and other markets. The CBOE Volatility Index, a widely followed measure of expected U.S. stock-market volatility, has hovered near historic lows this year.”
  • “Now, one electronic trading firm’s deal to acquire a struggling rival shows how this persistently low volatility is upending the HFT world and forcing out weaker players.”

FT – Private equity fundraising hits post-crisis high – Attracta Mooney 8/16

  • “Private equity fundraising is at its highest level since the boom years in the run-up to the financial crisis, leaving companies in a ‘precarious position’ as they struggle to invest record sums.”
  • “More than $240bn has been raised across private equity and venture capital funds in North America and Europe in the seven months to the start of August, according to a report from Pitchbook, a data provider.”
  • “The company believes private market fundraising in 2017 could eclipse last year, when $344.8bn was raised. The last time private equity did this well was 2007, when managers attracted $419bn.”
  • “According to Pitchbook’s research, private equity funds are sitting on record ‘dry powder’ — sums that have yet to be invested — as managers struggle to find suitable businesses. Pitchbook estimates that the amounts were $739bn at the end of 2016, higher than in 2007-08.”

Tech

FT – Uber crafts share sale plan to prop up valuation – Richard Waters 8/16

  • “Uber is planning a new round of fundraising that would at least match the $68bn peak valuation it reached before this year’s round of scandals — though investors who take part would be able to buy into the ride hailing company at a lower overall price than the headline number suggests.”
  • “The plan would include a secondary sale of shares by existing investors at a current market valuation that is likely to be some way below $68bn.”
  • “The fundraising plan is part of an attempt by Uber’s board to bring more stability to the company’s shareholder base as it tries to recover from the departure of founder Travis Kalanick as chief executive officer.”
  • “Pairing it with a secondary share sale would also give existing investors, including employees, a chance to cash in part of their holdings at a time when the chances of an initial public offering in the near-term appear to be receding.”
  • “It could also reduce the influence of venture capital firm Benchmark, which owns 13% of Uber’s stock and earlier this month mounted a high-profile lawsuit against Mr. Kalanick.”
  • “The sale by Uber itself would raise about $1bn and be set at or above the valuation Uber achieved in June last year, when it sold a 5% stake to Saudi Arabia for $3.5bn. The secondary share sale, on the other hand, would be for as much as $10bn, and would reflect a market price that took into account the company’s struggles this year.”
  • “To enable Uber to sell the higher-priced shares, investors who bought in would be offered the chance to buy the secondary stock on a pro-rata basis, resulting in an average price per share at a discount to the headline valuation.”
  • “The arrangement — showing that Uber itself could still raise some money at the $68bn valuation — would save face for Saudi Arabia, which otherwise would be seen as having overpaid for its stake in the company last year, according to one person familiar with the plan.”
  • “Another person said the structure would also save other Uber investors from being forced to write down the value of their existing holdings.”

Construction

Economist – Efficiency eludes the construction industry – 8/17

  • “The global market is worth $10trn. Euler Hermes, an insurer, expects 3.5% growth this year. Yet more than 90% of the world’s infrastructure projects are either late or over-budget, says Bent Flyvbjerg of Saïd Business School at Oxford University. Even the sharpest of tech firms suffer. Apple’s new headquarters in Silicon Valley opened two years behind schedule and cost $2bn more than budgeted. Smaller projects have similar woes. One survey of British architects found that 60% of their buildings were late.”
  • “Construction holds the dubious honor of having the lowest productivity gains of any industry, according to McKinsey, a consultancy. In the past 20 years the global average for the value-added per hour has inched up by 1% a year, about one-quarter the rate of growth in manufacturing. Trends in rich countries are especially bad. Over the same period Germany and Japan, paragons of industrial efficiency, have seen nearly no growth in construction productivity. In France and Italy productivity has fallen by one-sixth. In America, astonishingly, it has plunged by half since the late 1960s.”
  • “Prices for building materials are not to blame. They are subtracted from measures of value-added (and have not risen in any case). The burden over time of complying with regulation—applying for permits, for instance—is only partly responsible. In America such rules account for one-eighth of the productivity lost since 1987, according to the Bureau of Labor Statistics.”
  • More culpable are two broader structural trends. First, the industry has become less capital-intensive, with workers replacing machinery. This shift is more understandable in countries with access to inexpensive labor. In Saudi Arabia, for example, it is cheaper to import workers from India or Pakistan than to buy machinery. In many countries, however, labor costs might be expected to spur firms to substitute workers with capital.”
  • Instead, volatility in demand for construction has trained builders to curb investment. ‘The industry has learned through bitter experience to prepare for the next recession,’ says Luc Luyten of Bain & Company, a consultancy. Capital-heavy approaches to construction bring high fixed costs that are difficult to cut in downturns. Workers, in contrast, can be fired.
  • The second big problem is that the industry has, for the most part, failed to consolidate. Efficient firms should theoretically squash laggards, yielding bigger, more productive companies. ‘But construction is an industry that appears to have defied Adam Smith,’ says Mr Luyten. That is partly because building codes differ not just between countries but within them, which makes it harder to reap the benefits of scale. The customized nature of most projects further limits the usual advantages of size. Because the designs of most projects differ, contractors have to start from scratch for each one.”
  • “America now has about 730,000 building outfits, with an average of ten employees each. In Europe there are 3.3m with an average of just four workers. Competition is fierce and profit margins are thinner than for any industry except retail. This fragmentation creates its own problems. Slim margins make investment even less likely. Often projects have more than a dozen subcontractors, each keen to maximize profit rather than collaborate to contain costs, says Thijs Asselbergs, a professor at Delft University of Technology.”
  • “The result is an industry that raises prices for clients and mostly ignores tools that might improve productivity. ‘While we are all using iPhones, construction is still in the Walkman phase,’ says Ben van Berkel, a Dutch architect. Many building professionals use hand-drawn plans riddled with errors. A builder of concrete-framed towers from the 1960s would find little has changed on building sites today, except for better safety standards.”
  • “Examples of how the industry might move forward are not hard to find. More builders could use computer-aided design, as is standard among architects. Other methods are in earlier stages, but show promise, such as remote-controlled cranes and self-driving bulldozers (Komatsu, a Japanese equipment-maker, is developing the latter). A few niches, such as maritime construction, have shown how investments in technology and mass production can boost efficiency.”
  • “On land, a few firms are mass-producing homes. BoKlok, a spin-off from IKEA, a Swedish flat-pack-furniture seller, does only one-fifth of its construction work on site; the rest is done in factories. Parts can be standardized and costs cut as a result. BoKlok reckons that it builds twice as quickly as the industry norm. An American firm called Katerra also builds prefabricated sections of apartments at a factory in Arizona. It helps that each firm does every stage of construction itself, rather than relying on a tangle of subcontractors.”
  • “However, such techniques remain unusual. For most firms, slim margins and the specter of future downturns continue to restrain investment. Even for companies that do adopt new methods, growth may be limited by doubts about the quality of new techniques. A few modular towers in China have seen water seep between units. In Britain, past attempts at mass-produced housing are a sour memory: poorly built modular social housing from the 1960s has been demolished. British mortgage lenders shun homes built with ‘non-traditional construction methods’. BoKlok and Katerra hope their buildings will last a century. But perceptions, like so much else in construction, can be slow to change.”

China

FT – Prominent China debt bear warns of $6.8tn in hidden losses – Gabriel Wildau 8/16

  • “One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked.”
  • “In her latest report, Ms. (Charlene) Chu (with Autonomous Research) estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34%, well above the official 5.3% ratio for those two categories at the end of June.”
  • “But Chen Long, China economist at Gavekal Dragonomics in Beijing, said this methodology implicitly assumes that an economic crash will eventually occur in China.”
  • “Mr. Chen argues that credit losses are highly correlated with economic performance: bad loans rise when growth slows. If China can prevent a sharp downturn, credit losses will be much smaller, despite the extraordinary increase in leverage.”
  • “Ms. Chu acknowledges that an acute crisis does not appear imminent. Government influence over both borrowers and lenders has allowed Beijing to delay problems much longer than would be possible in a more market-driven system.” 
  • “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities. The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.” – Charlene Chu

WSJ – Cleaning Up China With a Mountain of Debt – Nathaniel Taplin 8/16

Economist – The Communist Party is redefining what it means to be Chinese 8/17

  • “For most of its history the Communist Party wanted to smash China’s past, not celebrate it. During the Cultural Revolution in the 1960s and 1970s it sought to overturn the ‘four olds’: old customs, old culture, old habits and old ideas. Temples, mansions and tombstones were ravaged, along with any artefacts or people associated with the bourgeois way of life. Small wonder that Communist ideology lost its appeal. The blistering pace of change in recent decades has kindled an anxiety that China is suffering from moral decay and a concomitant yearning for a revival of ancient values. The government is harnessing those feelings, using ancient rites and customs to spread favored values.”

India

WSJ – How India’s Debt Could Kill Its Growth – Daniel Stacey, Kara Dapena and Jessica Kuronen 8/17

August 3, 2017

If you were to read only one thing…

WSJ – Indexers Push Back Against Wall Street – Ken Brown 8/1

  • “Give a small cheer to the index nerds at S&P. Their decision to ban companies that have different classes of stock is a rare instance of Wall Street protecting investors.”
  • “S&P said Monday that it would no longer consider companies with multiple share classes for its main U.S. stock indexes. The one that matters is the S&P 500, which is tracked by about $2.2 trillion worth of assets and which serves as a benchmark for more than $7.8 trillion of investments. The share structures S&P is targeting usually grant insiders control of the company by giving their shares far more votes than shares held by outside investors.”
  • “FTSE Russell, another big index provider, issued a proposal last month that requires a minimum amount of shares be in public hands, a step in the same direction as S&P.”
  • “The shift mainly targets Silicon Valley, where companies from Facebook to Google and, most recently, Snap , have sold shares while giving investors virtually no say in how the companies are run. Snap, now down more than 20% from its IPO price, was seen as the tipping point because it gave investors no say at all. Companies already in the index will be allowed to stay.”

Perspective

Knoema – World’s Most Visited Cities – 7/24

NYT – Debt-Ridden Chinese Giant Now a Shadow of Its Former Size – Keith Bradsher 8/1

  • Basically, at some point businesses and real estate development need to make money on their own accord… Ordinarily, lenders and investors don’t fund on the strategy of ‘if you build it, they will come.’

Worthy Insights / Opinion Pieces / Advice

Forbes – The Good Times For The Bulls May Be Coming To A Close, Here’s Why – Bert Dohmen 8/1

Markets / Economy

WSJ – Daily Shot: FRED – US Total Construction Spending YoY Change 8/2

WSJ – Daily Shot: FRED – US Total Nonresidential Construction Spending YoY Change 8/2

Real Estate

WSJ – Luxury Condos on ‘Billionaire’s Row’ Are Slow to Sell Out – Josh Barbanel 8/2

Finance

Economist – Bitcoin divides to rule – 8/2

  • “On August 1st, without much agonizing or awkward negotiation, a group of Bitcoin activists and entrepreneurs managed to create a second version of the crypto-currency. It immediately gained a following: in less than a day of existence, the value of a unit of ‘Bitcoin Cash’ jumped to over $600, and tokens worth more than $10bn were in circulation (although that is still much smaller than Bitcoin classic, which stood at about $2,700 and nearly $45bn).”
  • “This ‘fork’, as such events are called, came earlier than foreseen. But it is broadly how insiders had expected a two-year-old conflict over the future of Bitcoin to end. At the heart of this ‘civil war’ was the question of how to increase the capacity of the system, which can only handle up to seven transactions per second. The new version is able to process 56 per second, but otherwise works much like the original one.”
  • “This week’s fork has made bitcoin holders richer: they get an amount of the new version equal to their holdings of the old sort; and at least for now, both together are worth more than the old one alone. For this reason only, expect another split in November when an upgrade of the old Bitcoin system will kick in.”  

Environment / Science

NYT – Blistering Heat Wave Threatens Seattle, Where Only a Third Have Air-Conditioning – Maggie Astor 8/1

Health / Medicine

NYT – In Breakthrough, Scientists Edit a Dangerous Mutation From Genes in Human Embryos – Pam Belluck 8/2

South America

WSJ – Venezuelan Officials Tampered With Election, Voting-Software Firm Says – Kejal Vyas 8/2

  • “Based on the robustness of our system, we know, without any doubt, that the turnout of the recent election for a National constituent assembly was manipulated.” – Antonio Mugica, Smarmatic’s CEO

May 11, 2017

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – After Comey, Justice Must Be Served – Michael Bloomberg 5/10

  • “Congress needs to get serious about holding the president accountable.”

NYT – The Princeling in the West Wing – Jill Abramson 5/10

Economist – Schumpeter: Harvard Business School risks going from great to good – A confidential memorandum of warning to its senior faculty 5/4

Markets / Economy

Economist – The world’s most valuable resource is no longer oil, but data 5/6

Real Estate

WSJ – Labor Shortage Squeezes Builders – Peter Grant 5/6

  • “Construction labor costs are rising an average of 4% to 5% annually, outpacing inflation, according to Anirban Basu, chief economist of the Associated Builders and Contractors. ‘The situation is going to get worse,’ he said.”
  • “Overall, the association said the industry needs 500,000 more workers. The trade group estimates 600,000 additional workers would be needed for the $1 trillion in infrastructure building and improvement for which President Donald Trump has said he would seek funding.”

Health / Medicine

Economist – Fatal attraction: The link between pollution and heart disease 5/4

  • “An experiment suggests pollutants build up in arterial plaques.”

Britain

FT – Cash is king in homes market but leaves many unable to buy – Chris Giles 5/9

China

WSJ – Rich, Young Chinese Are Buying Overseas Properties on Their Smartphones – Dominique Fong 5/9

  • “Millennials acquire real estate in other countries as hedge against a weakening currency, homes for their own children when they study abroad.”

NYT – A Chinese Giant Is on a Global Buying Spree. Who’s Behind It? – David Barboza 5/9

  • “According to corporate filings, state-backed banks have given HNA a $60 billion line of credit, a level of lending usually reserved for state-owned enterprises charged with carrying out the government’s policies.”
  • Seriously? We’ll if you’re going to give me money to place, I’ll place it.
  • For reference, “when the company was founded in 1993, China had just begun experimenting with private ownership, opening new economic zones and allowing companies to sell shares to the public. The Hainan provincial government asked Mr. Chen, a former pilot with the People’s Liberation Army, to help develop a regional carrier, one that would be partly owned by the state and partly owned by private investors.”
  • It has since become a private company and part of the HNA Group.
  • “In 1993, the company had just $17 million in revenue. Today, it has about $90 billion in annual revenue, most coming from companies acquired outside China.”
  • “HNA, of late, has embraced the government’s push to ‘go global’ and invest overseas, focusing on shipping, hotels, logistics and retail, amassing a $145 billion portfolio. Over the past three years, it has spent more than $30 billion, according to Dealogic.”

Russia

Economist – A new kind of revolution: Russians rebel against plans to tear down their homes 5/4

  • Earlier this year Moscow city authorities unveiled plans to demolish as many as 8,000 buildings and move up to 1.6m residents from ageing low-rise apartment blocks known as khrushchevki. The ambitious urban makeover could touch some 25m square meters of housing, cost at least 3.5 trillion roubles ($61bn), and run for more than 20 years. The plan is the brainchild of Moscow’s mayor, Sergei Sobyanin, and comes with the blessing of President Vladimir Putin. For some residents, it means a chance to ditch dilapidated housing. Others fear being thrown out of their homes, and are furious at the prospect.”

January 15 – January 21, 2016

Dalian Wanda. Chinese Property Developers trading USD denominated debt for yuan debt. Construction input prices continue to fall.

As I mentioned last week, expect more interesting behavior from the Chinese property developers – granted, I’m sure the behavior has been going on for some time, it’s just that media coverage is increasing.  This week the three articles I am focusing on are, 1) Jill Mao’s “Wanda Group Plans Five ‘Substantial” Acquisitions as Sales Slump” covered in Bloomberg, 2) Fiona Law and Carol Chan’s “No Place Like Home for Chinese Property Companies’ Debt” in The Wall Street Journal, and 3) is an interesting piece put forth in AZ Big Media “Construction material prices continue free fall”.

Additionally, I want to call attention to a few other things that can be found in the Other Interesting Articles below.  First, as reported by Chris Flood in the Financial Times Vanguard continues to kick butt in terms of attracting cash to the low-cost index model. Last year they had net inflows of $256bn… “more than any rival and an increase of 5.3% on 2014. In the past five years total net inflows from investors are almost $1tn, substantially more than twice the sum attracted by the entire hedge fund industry over the same period.”  You can imagine the pressure this is having on industry fees.

Second, covered by Max Seddon and Jack Farchy in the Financial Times, the Russian rouble continues to slide against the U.S. dollar.  As of January 21, it had reached Rbs85.97 for each greenback as the Russian central banks has stepped back its intervention measures.  In the summer of 2014, the trading range was in the Rbs30s.  According to Ivan Tchakarov, chief economist for Russia and the CIS at Citibank “If the rouble gets to 100, we may see panic. But going from 30 to 80 is different from going from 70 to 85. People are psychologically adjusted.”  Crazy how that works – to my behavioral psychologist readers, reference points…

Third, for my property developer readers, apparently in India property developers can use buyers deposits raised from one project on completely unrelated projects.  WTF!  It should be no surprise that there are unfinished projects in India as reported in The Wall Street Journal.  Well rest assured, there is draft legislation “that would require builders to put 70% of the money they receive from home buyers into escrow for use on the project for which it was paid.”  That may help, but definitely doesn’t address the conflict of interests.

To help break up the monotony of all this text and because there were a lot of good graphics this week:

From Bloomberg Graphics, stock markets around the world are feeling pain.

Bloomberg_Fragile 40 Stock Indexes_1-21-16

From The Wall Street Journal, private-label MBS is starting to make a comeback, albeit not really.

WSJ_Private label MBS_1-18-16

In the Financial Times, you can see the effect low oil prices is having on delaying oil projects.

FT - Oil projects delayed_1-13-16

Lastly, before I get to the articles I’ll leave you with two quotes.  First in Tom Mitchell’s “The ugly subtext beneath China’s two-track economy tale” in the Financial Times.

“For years we have been waiting for China to make the tough choice and sacrifice near-term growth in order to stabilize macro balance sheets and stop its exploding debt cycle… the costs of taking real adjustment are clearly too high for the government to bear… Right now we put the initial potential crisis threshold at around five years.” – Jonathan Anderson at the Shanghai based Emerging Advisors Group

And second, as reported in the Lex column in the Financial Times’ “IBM: Where’s the growth?”

IBM duly racked up its 15th consecutive quarter of falling revenues on Tuesday evening. At least the technology company’s nuclear winter has helped eradicate a couple of cliches. ‘Nobody ever got fired for buying IBM,’ is now said by nobody.

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

Wanda Group Plans Five ‘Substantial” Acquisitions as Sales Slump. Jill Mao. Bloomberg. 17 Jan. 2016.

To be fair, Dalian Wanda Group took advantage of China’s industrialization by being in the property sector and now that it is a behemoth company and the breakneck pace of growth in the property sector is behind, they are transitioning into a conglomerate with a variety of business lines that have a shot at meaningful growth going forward.  I can imagine that many western public real estate companies are jealous as they are punished in the markets for not being anything but pure play real estate businesses in a specific sector.  However, the reason I call attention to this article is that if the ‘smart’ money property developers are reducing their exposure to Chinese real estate, you probably should too.

“Dalian Wanda Group Co., the property-to-entertainment conglomerate headed by Asia’s richest man, is planning five “substantial” acquisitions this year as the company braces for a drop in sales.”

“Wanda’s pursuit of targets will focus on companies in the entertainment and sports industries…”

“Wang is increasingly looking toward entertainment to spur growth as China’s slowing economy undermines his main property business.”

Last week Wanda agreed to buy Legendary Entertainment for $3.5bn in cash (movies include Godzilla, Jurassic World and the new Batman films.)

“Legendary will join Wang’s growing global entertainment portfolio that already includes the likes of U.S. theater chain AMC Entertainment Holdings Inc., Infront Sports & Media AG and a stake in Spain’s Club Atletico de Madrid soccer team.”

“Wanda forecasts that sales will fall 12% in 2016 as slumping revenue from its main real estate business overshadows gains from the burgeoning entertainment operations.”

“Wang said that his firm is diversifying away from property – currently Wanda’s biggest revenue generator – because it’s not a long-term growth business.

“Longer term, Wang said on Tuesday that Wanda’s revenue will climb at least 15% each year until it reaches $100 billion by the end of the decade as the group diversifies away from real estate property.”

No one would accuse Wang of not being ambitious.

No Place Like Home for Chinese Property Companies’ Debt. Fiona Law and Carol Chan. The Wall Street Journal. 19 Jan. 2016.

Property developers are large consumers of debt and Chinese developers have been large consumers of US dollar denominated debt. However, with the greenback appreciating against the yuan, many Chinese developers are raising yuan denominated debt to retire their US dollar obligations.  Side note: this will only exacerbate capital outflows from China.

“Late last year, the company (China SCE Property Holdings Ltd.) sold bonds domestically worth a combined 3.5 billion yuan ($531 million), at an interest rate just above 5%, much lower than the around 11% coupon it used to pay for its dollar bonds.”

It helps that cost of debt in China has been declining, regardless of credit quality.

“Property companies have on average raised funds at interest rates two to three percentage points lower than their offshore borrowing costs, partly thanks to a series of rate cuts by the country’s central bank since the end of 2014.

The lower cost of borrowing at home is also down to home builders gaining much higher credit ratings from domestic agencies; abroad they are often rated as “junk”, or below investment grade. Domestic investors are often more familiar with the companies they are investing in, and hence demand a lower coupon on bonds. Chinese local governments have a history of bailing out failing companies, meaning domestic investors are less worried about bond defaults.

What’s that phrase again? Oh yeah, moral hazard…

“Chinese property developers were given another boost last January when Beijing loosened restrictions on them raising debt in the domestic market, part of its efforts then to bolster the property sector.”

WSJ - Chinese developer issuance of yuan debt_1-19-16

Construction material prices continue free fall. AZ Big Media. 15 Jan. 2016.

Basically, the input prices into the source materials for construction continue to fall.  Yet, ask any property developer and follow the RLB cost indices and you’ll note that construction prices continue their quick ascent…  So if the cost of the raw materials are declining, either the cost of labor is jumping or profit margins are expanding. Go ahead and ask your construction laborer friends if their wage rates have been increasing 5 – 20% per year.  Granted, they may be making more simply by having more hours of work, but ask if their wage rates per hour have increased meaningfully over the past year and a half.

“Construction material prices fell for the sixth consecutive month in December, losing 1.2% on a monthly basis and 4% on a yearly basis, according to an analysis of the Bureau of Labor Statistics Producer Price Index released today by Associated Builders and Contractors (ABC).”

“Construction input prices have fallen 7.2% since peaking in August 2014, and have fallen in eleven of the previous sixteen months.”

“Construction input prices continued to sink to the end of 2015, due in large measure to global deflationary forces that have become increasingly apparent.” – ABC Chief Economist Anirban Basu

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