Tag: Corporate Profits

January 29, 2016January 29, 2016

January 22 – January 28, 2016

Challenges of being born a millennial. Continued struggles for Energy & Mining companies. Zika virus.

While these postings cover articles from Friday – Thursday, I would be remiss not to mention the Bank of Japan’s move to lower the interest rate on excess reserves from 0.1% to minus 0.1% today. Inflation has yet to gain traction in Japan (note that Q4 2015 GDP growth in the U.S. came in at a lower than expected 0.7% today as well), and so the policy makers are stepping up efforts. While the negative interest rates in Japan only apply to a portion of deposits, the key in this is that as Aaron Back of The Wall Street Journal points out in “Japan’s Negative-Rate Plunge More Like a Toe in the Water” is that this policy directive is modeled on the Swiss and it is likely that there is more to come. The world is at a challenging crossroads, desperately seeking economic growth central banks are trying to do their part resulting in monetary stimulus measures just trying to get something going. Note that US interest rates continue to drop (the 30-year fixed rate mortgage rate as reported by Freddie Mac came in at 3.79% yesterday down from over the 4% reached after policy rates were first raised) as investors expect US policy rates to stay unchanged or even to revert back to zero. Good for asset owners, but all this uncertainty continues to prove challenging for employees.

This week there was a special feature in The Economist and the Financial Times did a good article on the challenges the current economic environment has had on millennials. The brief from The Economist can be found in the Other Interesting Articles section below and I’ll go into Sarah O’Connor’s “Tragedy of the millennials is they are not entitled enough” in the Financial Times. The other article I am going to cover is Christopher Adams, James Wilson, and Mark Vandevelde’s “Moody’s puts 175 energy and mining companies on downgrade watch” in the Financial Times that highlights the continued symptoms of the energy crunch. Lastly, for those that haven’t been following the progress of the Zika virus, here are two good articles from The New York Times and The Washington Post to help you understand what’s going on and how quickly it’s spreading. As a parent, this scares me… especially considering the “first case of the mosquito-borne virus in a birth on U.S. soil” was here in Honolulu.

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

Tragedy of the millennials is they are not entitled enough. Sarah O’Connor. Financial Times. 26 Jan. 2016.

Full disclosure, I like Sarah O’Connor am a millennial (granted, at the very front end of the generation). Further, I always find it interesting when I hear or read ‘experts’ making statements that certain trends have changed forever because millennials have different tastes than their predecessors – millennials don’t want single family homes, they want to live in the city… millennials prefer flex work spaces rather than private offices… etc.. The thing is we’re not that different from those that have come before us. Yes technology has enabled certain behaviors that our parents couldn’t tap into as easily, but bottom line, the reason certain buying and work habits haven’t taken hold yet is that the majority of millennials are 25 and for most of our working career the jobs economy has been shaky while asset prices have been shooting for the moon. Buying habits have been simply delayed – maybe forever as some experts have stated, but not for reason of taste, rather out of a lack of ability.

From Ms. O’Connor, using the example of the U.K., but applicable in general.

The general consensus of millennials in the work place is that they “expect different things from employers than previous generations – rapid promotions, constant positive feedback, flatter corporate structures, a better work-life balance and a sense of purpose beyond profit. The press releases wrap up with a few quotes from experts urging companies to adapt to this new generation.”

“Most millennials – those born between the early 1980s and early 2000s – entered the labor force in the aftermath of a brutal downturn. It is almost a decade since the financial crisis, and global youth unemployment remains about 13%. Far from demanding that employers adjust to their needs, many young people have bent over backwards to persuade anyone to give them a foothold in the labor market.”

“While the income of the median UK household finally regained its pre-recession level last year, the income of the average 22-to-30 year old is still about 8% lower than in 2008.”

“…everyone should be rooting for the unlucky ones who had a tough start, since it will fall to them to pay for the pensions and healthcare of the generations ahead of them. This will be a heavy responsibility: the world has only three “super-aged” societies today (countries where more than one in five of the population is 65 or older) but by 2020 it will have 13. The more long–term the damage to young people’s careers, the less they will earn over their lifetimes and the less tax they will be able to pay.”

In regard to a speech by Minouche Shafik, a deputy governor at the Bank of England, “She was trying to figure out why wage growth is still so weak in Britain even though joblessness has fallen to pre-recession levels. This is a puzzle in the US and Japan too. Perhaps, she said, the crisis was so severe that it had a lasting effect on employees’ psyches and made them reluctant to push for pay rises or switch jobs in pursuit of higher salaries.

If this is true for the average worker, you can see why it might be particularly true for a young person who has never known a time when the economy seemed truly secure.”

Moody’s puts 175 energy and mining companies on downgrade watch. Christopher Adams, James Wilson, and Mark Vandevelde. 22 Jan. 2016.

While this article is from a week ago and oil prices have rebounded somewhat over the last week, the structural challenges remain.

“Several of the world’s biggest oil and gas groups – including Royal Dutch Shell, Total and Chesapeake Energy – are among 175 energy and mining companies at risk of rating downgrades following a collapse in crude and other commodities markets, Moody’s warned on Friday.”

“Moody’s has put on review for downgrades 69 US-based companies – including Schlumberger and Chesapeake.”

“Multi-notch downgrades are particularly likely among issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil prices,” said the rating agency.”

“Moody’s notice for 120 energy companies and 55 miners is its largest single warning of potential corporate downgrades since the financial crisis.”

“China’s outsized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Moody’s.

This graph below is from a separate FT article, but it illustrates the rising stress in emerging market debt.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Saudi Arabia’s Secret Holdings of U.S. Debt Are Suddenly a Big Deal 1/21

Bloomberg – So Yes, the Oil Crash Looks a Lot Like Subprime 1/25

FT – The tiny shifts that can signal huge changes 1/21

FT – A history of betrayal that leads to Donald Trump 1/24

FT – Investors rush online to ditch stakes in China rural lenders 1/24

FT – Emerging markets’ stressed debt reaches record levels 1/24

FT – US junk-rated energy debt hits two-decade low 1/24

FT – Capital controls may be China’s only real option 1/25

FT – Currency risk matters for China’s property sector 1/25

FT – Pay attention to long-term debt cycle (Ray Dalio) 1/25

FT – China mouthpiece warns Soros against shorting renminbi 1/26

FT – South Korea export growth slows to trickle as China demand wanes 1/26

FT – China’s toughest test is within its walls 1/26

FT – Protectionism at play in Sharp takeover drama 1/26

NYT – African Economies, and Hopes for New Ear, Are Shaken by China 1/25

NYT – El Salvador’s Advice on Zika Virus: Don’t Have Babies 1/25

NYT – Inquiry in China Adds to Doubt Over Reliability of Its Economic Data 1/26

Vanity Fair – Hedge Funder John Paulson Puts Up His Own Fortune to Save His Firm 1/26

WSJ – What’s Wrong With The Producer-Price Index? Rent Is Too Damn High 1/14

WSJ – China Cinema Companies Produce Box-Office Hype 1/25

WSJ – Vacant Office Spaces Pile Up in Houston 1/26

WSJ – Tougher Times for Mall Owners 1/26

WSJ – China Sharpens Efforts to Halt Money Outflow 1/27

WSJ – Malaysia Antigraft Agency Asks for Review of Decision to Clear Najib Razak 1/27

WSJ – Heeding Softer Market, Extell Development Furnishes One57 Condo for Sale 1/28

December 11, 2015December 11, 2015

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.

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.
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.
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.
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:

“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.”
Activist investors… they have forced boards into an intellectual sameness, and certainly a fear of reproach.”
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

October 30, 2015November 6, 2015

October 23 – October 29, 2015

China’s Economic Transition. Sovereign Wealth Funds – How can we reduce costs and increase returns? Corporate Profits Peaked?

This week three key themes that stood out were 1) how China’s economic transition from an investment-led economy to a consumption-led economy is by no means going smoothly as highlighted by The Wall Street Journal’s China’s Central Bank Moves to Spur Economic Growth and The Economist’s Debt in China – Deleveraging delayed 2) continuing on the reduction of petro-dollars in the investment markets how sovereign wealth funds are restructuring themselves to reduce costs while seeking out higher return investments (see The Financial Times’ Asset managers suffer as oil funds withdraw cash and Qatar fund backs Brookfield’s $8bn Manhattan West project), and 3) was a well written article (Peak Profits – The age of the torporation) in The Economist illustrating that corporations (or at least those that currently make up the major indices like the S&P 500) may have passed their profit peaks.

*Note: bold emphasis is mine.

China’s Central Bank Moves to Spur Economic Growth. Lingling Wei. Wall Street Journal.

First, before China entered into its Fifth Plenum this week and removed it’s one-child policy (changed to a two-child policy), the People’s Bank of China (PBOC) cut its benchmark one-year lending and deposit rates by 0.25% points (to 4.35% and 1.5% respectively), reduced banks’ reserve requirement ratios by 0.5% points and is removing caps on deposit rates that commercial banks can offer.

With the intention of lowering corporate financing costs and pumping liquidity into the economy, this

…was the sixth time since November that the Chinese Central bank has cut interest rates and the fourth across-the-board reduction of the amount of deposits banks are required to hold in reserve.

Zhu Chaoping, China economist at UOB Kay Hian Holdings Ltd., estimates the reduction in banks’ reserve requirements will pump about 680bn yuan ($108bn) worth of funds into China’s banking system.

“Taking such a rare action again means the real economy is performing poorly,” said a senior official at the PBOC. “A lot of companies have seen their profitability falling sharply and that’s a key reason why we took the action again today.”

Profits at Chinese industrial companies are down 8.8% in August year-over-year (the biggest monthly fall since 2011).

By loosening controls on deposit rates now, the government is attempting to inject market competition into a politically powerful state-run banking sector that has favored big state companies over a more dynamic private sector.

However, removing the deposit-rate ceiling also

“Removes one of the last remaining hurdles to satisfying the technical criteria set by the IMF” for designation of the yuan as a reserve currency. – Eswar Prasad, a Cornell University professor and former IMF China head.

The barrage of easing measures since late last year has had some success in getting more credit flowing in the economy. Chinese banks issued 1.05tn yuan of new loans last month, the highest on record. However, as credit continues to expand while growth slows, China risks a further buildup in debt. An analysis by consultancy McKinsey & Co. shows that China’s debt load increased by 282% of GDP last year from 158% in 2007.

Nice transition into:

Debt in China – Deleveraging delayed. The Economist.

It’s pretty simple, credit continues to grow faster than the economy so debt load to GDP will continue to increase.

China’s economy grew by 6.9% in the 3rd quarter, yet bank loans increased by 15.4% compared with the same period in 2014.

China’s overall debt-to-GDP ratio is continuing its steady upward climb (at 160% in 2007, now more than 240% – 161tn yuan ($25tn)). It has risen nearly 50% points over the past four years alone.

The question remains, what debt-to-GDP ratio becomes too high, and specifically for China (they have a much longer leash than a sovereign that doesn’t control its monetary policy, i.e. Greece, and then there is the whole +/- $3.5tn in reserves)? As Jim Chanos, famed short seller of Enron and founder/president of hedge fund Kynikos Assoc., pointed out in ValueWalk’s Jim Chanos: China Debt Surge Echoes 1990s Japan “we have an economy addicted to credit.” While the country doesn’t appear to be facing an “imminent collapse,” it is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids.”

However, surprisingly the weighted interest rate on existing Chinese liabilities has fallen from roughly 6% to 4.5% this year.

Investors are lending to companies as if they were becoming safer borrowers, even as their liabilities increase.

Yang Chen of Bank of America Merrill Lynch notes that some investors are buying bonds with borrowed cash, believing that the government will wade in to spare them from any big defaults – as it has done in the past.

Wait… this seems vaguely familiar. What’s that term…moral hazard.

Second,

Asset managers suffer as oil funds withdraw cash. Madison Marriage and Chris Newlands. The Financial Times.

Global asset managers are facing a double hit to their fees, as sovereign wealth funds withdraw billions to support their oil-dependent economies – and switch to a cheaper in-house investment approach.

Of the world’s 50 sovereign wealth funds, which collectively oversee about $6.5tn, one-third have reported a reduction in their invested assets. Of those affected, half derive their capital from oil, according to data provider Prequin.

The Saudi Arabian Monetary Agency, the world’s third-largest sovereign fund with $661bn invested – has withdrawn about $70bn from external asset managers.

Azerbaijan’s oil fund, which oversees $37bn of assets, has said in its annual report that it intends to bring the management of all of its assets in-house. It currently has $662m managed by State Street, the US financial service group, and $664m with Swiss bank UBS.

The Abu Dhabi Investment Authority – the second-largest sovereign fund globally with $773bn of assets – has also grown its in-house teams. It reduced its allocations to investment managers from 75% to 65% last year – in effect, a $77bn outflow from external fund houses.

State Street had outflows of $65bn in the second quarter of 2015, which it blamed partly on clients’ need for cash “due to lower commodity prices.”

Now consider this in conjunction with the efforts for transparency and to reduce fees at the likes of giant pension funds ala The California Public Employee’s Retirement System (Calpers) and the “Canadian model” of brining management in-house (the $125.2bn Ontario Teacher’s Pension Plan and the $54.7bn Ontario Municipal Employee’s Retirement System internally manage about 80% and 88% of their assets respectively) and you can see that the investment management field is under assault. However, don’t misunderstand. Investors (individuals, pension funds, sovereign wealth funds, etc.) will continue to invest with hedge funds. Ben Carlson of the blog A Wealth of Common Sense covered this extremely well in his October 11, 2015 post “Why People Invest in Hedge Funds,” so I won’t cover it here, basically investors invest in hedge funds because it’s too hard not to.

Hence,

Qatar fund backs Brookfield’s $8bn Manhattan West project. Henry Sender. The Financial Times.

Qatar Investment Authority is taking down a 44% stake in Brookfield’s $8bn Manhattan West real estate project – a 7m sq ft mixed-use development in NYC, west of Pennsylvania Station (part of the Hudson Yards area).

QIA’s investment comes as many sovereign wealth funds have been putting money into real estate at an earlier stage in than in the past – taking on development risk in pursuit of better returns.

Lastly,

Peak Profits The age of the torporation. The Economist.

For the second quarter in a row the sales and profits of members of the S&P 500 are expected to fall; for the three months to September they are forecast to be 3-5% lower than in the same period last year. Half of big listed American firms now have shrinking profits.

Worldwide earnings per share have stopped growing, measured in dollars. In local-currency terms sales growth has stalled in Asia, slowed in Europe and is expected to collapse in Brazil.

Earnings are high relative to two yardsticks: the S&P 500 earnings per share are 28% above their ten-year average and in America profits are stretched relative to GDP. Further, the three general methods that have worked in the past to generate growing profits are no longer as easily available. Specifically, 1) globalization – emerging markets are sputtering, the U.S. dollar is strengthening, and years of joint ventures in China have built competitors that better understand Chinese consumers and are better able at serving them, 2) finance – no longer the driver of profits it was up until 2007-2008, think of the finance arms of GE and GM, and 3) since 2007-2008 wages have been suppressed – there is definitely political pressure to change this.

If the share of domestic gross earnings paid in wages were to rise back to the average level of the 1990s, the profits of American firms would drop by a fifth.

So the quick fix has been share buy-backs (running at $600bn a year in America).

IBM spent $121bn on buy-backs over the past decade, twice what if forked out on research and development. Walmart spent $60bn on buy-backs.

Or cutting costs.

Even for Brazilian firm 3G which specializes in buying mature firms and cutting the “fat,” sales at its most recent target, Kraft are falling at a rate of 5% a year.

For all their obsession with growth, big listed firms appear paralyzed. They long to expand, yet also want to protect peak profits, restrain wages and investment, buy back shares and hold armfuls of excess cash on their balance-sheets.

Other Interesting Articles

Bloomberg Businessweek

The Economist

CNBC: America’s best malls have this tenant in common 10/23

FT: Investing in oil is a slippery slope 10/23

FT: China funding UK to build white elephants 10/23

FT: ‘Deflationary boom’ in prospect as China slows 10/26

NYT: A Global Chill in Commodity Demand Hits America’s Heartland 10/23

NYT: Greenland Is Melting Away 10/27

ValueWalk: Venezuela Selling Its Gold As It Runs Out of Cash 10/29

WSJ: How Global Easing Makes the Fed’s Job Harder 10/25

WSJ: Why It’s Not So Easy for China to Ease 10/26