Tag: Energy

June 23, 2017

Perspective

WSJ – Wal-Mart to Vendors: Get Off Amazon’s Cloud – Jay Greene and Laura Stevens 6/21

  • “To do business with Wal-Mart, the retailer requires some tech providers to build the services on AWS cloud rivals.”

WSJ – Daily Shot: Brookings – Midlife mortality from “deaths of despair” 6/22

Worthy Insights / Opinion Pieces / Advice

FT – Inevitable Chinese slowdown ‘a myth’ – Steve Johnson 6/21

  • Essentially, there is precedence when looking at China’s Asian neighbors that would provide examples why the country has room to run. However, the credit boom of late is still a major concern.

FT – China has no choice but to walk financial tightrope – Diana Choyleva 6/21

  • “The warning signs of significant financial distress have grown in tandem with a surge in interbank borrowing and lending over the past couple of years. The strains have intensified since Beijing’s leaders made it clear in late 2016 that they were determined to rein in runaway debt and started nudging up money market rates as well as cracking down on nefarious shadow banking activities.”
  • “The risk of contagion is a key reason why China’s regulators are striving to rein in Wealth Management Products (WMPs), which totaled Rmb30tn at the end of April. The complex structure of WMPs typically yokes together any number of banks and NBFIs, which are now the largest borrowers on the interbank market.”
  • “Beijing is especially wary of banks allocating cash raised through WMPs to external asset managers. City commercial banks, which depend heavily on WMPs for funding, are particular enthusiasts of these ‘entrusted investments’, which totaled more than Rmb5tn at the end of 2016.”
  • “Regulators have taken aim at entrusted investments because they hide further layers of leverage and obscure the ultimate borrower. In recent weeks, the China Banking Regulatory Commission, under new chairman Guo Shuqing, has issued a flurry of directives to haul banks back into line. Banks have responded by pulling back their cash from the capital markets, increasing the very strains that the regulators want to avert.”
  • “A looming shake-out in the young, burgeoning interbank market for negotiable certificates of deposit (NCDs) could intensify a cash crunch. Regulators recently required banks to count NCDs as part of their lending and borrowing totals, dimming their attraction. More than 60% of outstanding NCDs will mature over the next four months, a big headache for those banks that rely on this source of funding.”
  • “Banks are not the only weak link. Insurance companies are net interbank lenders, but the breakneck expansion of some insurers is fanning concerns. China’s insurance regulator, worried about the risk of mismatched maturities, has clamped down on so-called universal life insurance policies, which are thinly disguised WMPs.”

Energy

WSJ – Daily Shot: BMI Research – U.S. Shale Output 6/22

WSJ – Daily Shot: GasBuddy – U.S. Average Retail Gas Price Chart 6/22

  • “It’s worth noting that despite these sharp declines in crude futures, US gasoline prices at the pump have barely budged.”

Environment / Science

NYT – 95-Degree Days: How Extreme Heat Could Spread Across the World – Brad Plumer and Nadja Popovich 6/22

China

FT – Alibaba taps user data to drive growth spurt – Louise Lucas 6/21

  • Data, data, data. The more I know about your customers, the more you’re willing to pay me to broker transactions. And the more I know about you (consumer), the better able I am to match you (sell you) with products you’d want.

FT – Big China companies targeted over ‘systemic risk’ – Lucy Hornby, Yuan Yang, Gabriel Wildau 6/22

  • “This is a game changer for Chinese M&A and could pretty much stop all outbound deal making in its tracks.” – Keith Pogson, EY’s senior partner for financial services in Asia.

June 22, 2017

Perspective

Data Is Beautiful – Adult Obesity rates in the United States – zonination 6/20

Worthy Insights / Opinion Pieces / Advice

Project Syndicate – Brexit In Reverse? – George Soros 6/19

  • “Economic reality is beginning to catch up with the false hopes of many Britons. One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.”

A Teachable Moment – How Can We Fix a Broken 403(b) System? – Anthony Isola 6/21

Markets / Economy

Reuters – For thousands of U.S. auto workers, downturn is already here – Nick Carey 6/21

Real Estate

WSJ – Avocado Toast Looks a Better Bet Than Australian Housing – Jacky Wong 6/20

  • “Chinese buyers have been gobbling up houses all over the world in recent years. There could be some nasty surprises when the buying stops.”
  • “There are already signs of imminent pain for the global property market, thanks to China’s efforts to stop money pouring out of the country. Inquiries from China for foreign real estate fell 31% in the first quarter from a year ago, according to Juwai.com, a portal that connects potential Chinese buyers to property listings overseas. For some of the most popular destinations, the drop was even bigger—42% for the U.S. and 39% for Australia.”
  • “The property market Down Under looks particularly vulnerable. China accounts for four in every five foreign buyers in Australia, with their interest a prime reason why home prices have surged to unaffordable levels: Prices in Sydney, for example, are up 72% since 2012.”
  • “Some are waking up to the potential trouble ahead, with Australia’s household debt now nearing 200% of disposable income. Moody’s downgraded 12 Australian banks and their affiliates Monday, citing rising risks associated with the housing market, following a similar move by Standard & Poor’s last month. The country’s four biggest banks alone have a $1.1 trillion exposure to Australian housing loans, making up 55% of their total portfolios, according to Morgan Stanley.”
  • “Worse still, nearly 40% of home loans now are interest-only, meaning borrowers don’t need to repay the principal for a certain period, usually five years. Such loans work fine when house prices keep rising. The worry now is that prices will start falling as Chinese buying interest wanes: Meanwhile, homeowners who have only had to pay interest on mortgages could see a rise in payments as the interest-only period on their loans expires.”

Energy

WSJ – Oil Returns to Bear Market – Stephanie Yang, Alison Sider, and Timothy Puko 6/20

  • “Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.”

Finance

FT – Argentina’s 100-year bond cannot defy EM playbook forever – Jonathan Wheatley 6/20

  • “Really? A dollar-denominated bond that pays back 100 years from now, from a junk-rated country that has barely managed to stay solvent for more than half that time in its entire history as a creditor? While there is certainly an investment case for taking part, several analysts warn that this issue is a classic sign of a market getting ahead of itself.”
  • “The point, though, is not the 100 years. The complexities of bond math mean that, once maturities go beyond 30 years, the investment case barely changes. Barring default, with a yield of nearly 8%, the bond will repay investors in full in about 12 years, all else (such as inflation) being equal — and that’s leaving aside its resale value. Many investors will have much shorter horizons.”
  • “In a world starved of yield, the 7.91% on offer proved to be quite a pull and the bond attracted orders of $9.75bn for the $2.75bn issued. ‘People are looking out over the next 12 to 24 months and see a pretty positive outlook [for Argentina],’ says David Robbins, head of emerging markets at TCW in New York. ‘Duration in high yield is something they are more comfortable with.’ Argentina, he notes, is in effect selling equity in its economic recovery.”
  • “Sérgio Trigo Paz, head of emerging market fixed income portfolio management at BlackRock, says the rationale and the pricing are all good. But, he adds: ‘When you put it into perspective, it gives you a sense of déjà vu.’”
  • “He sees two scenarios. In one, the Fed is right about inflation and rates will continue to rise. This would turn the Argentine bond into ‘a bad experience’. In the other, markets are right, US inflation and payrolls will disappoint and we will be back in a low rate environment, which will be good for the bonds — until deflation rears its head again, hurting the Argentine economy and its ability to pay.”
  • “In the meantime, he says, there is a ‘Goldilocks’ middle ground in which investors can suck up an 8% coupon. Beyond that: ‘It doesn’t look good either way — which is why you get an inflection point.'”

Japan

FT – Toshiba picks government-backed group as chip unit buyer – Kana Inagaki and Leo Lewis 6/20

  • “After a chaotic months-long search for a buyer, Toshiba has picked a consortium led by a Japanese government-backed fund as the preferred bidder for its prized memory chip business.”
  • “The group — which includes the Innovation Network Corporation of Japan fund, private equity group Bain Capital and the Development Bank of Japan — competed against rival offers topping ¥2tn ($18bn) from US chipmaker Broadcom and Apple supplier Foxconn.”
  • “’Toshiba has determined that the consortium has presented the best proposal, not only in terms of valuation, but also in respect to certainty of closing, retention of employees, and maintenance of sensitive technology within Japan,’ the company said in a statement on Wednesday.”

South America

NYT – Venezuela Opens Inquiry Into a Critic: Its Attorney General – Nicholas Casey 6/20

  • Long a Chavista, attorney general Luisa Ortega is being investigated now that she has expressed concern at how far those in power are willing to go to quiet dissent.

June 19, 2017

If you were to read only one thing…

FT – The real risks of the falling oil price – Nick Butler 6/11

  • “In any discussion of the oil market it is all too easy to ignore the real world consequences of the price fall that has occurred over the last three years. We might appreciate a small cut in the price of petrol or gasoline at the pump, even though its effect is dampened by high levels of taxation. But we do not give much thought to the impact of price changes on the supplying countries. That is short-sighted because the structural shift that has taken place is profoundly destabilizing and potentially very dangerous.”
  • “A new note from the Energy Information Administration in the US published last month sets out the impact of the fall in prices in recent years. It is worth summarizing the data, which are expressed in real 2016 dollars.”
  • “These are big numbers for all the countries involved. Very few have diverse economies that can adjust quickly to the fall in the price of a crucial export commodity. Most have large dependent populations, especially of children and young people. Nigeria, for instance, has some 115m people, amounting to 61% of its population, under the age of 25; Angola 13m — 63% of its population.”
  • “But simply looking down on the failings of the oil producers is not an adequate response.”
  • “The price fall has reduced the revenue of the Opec states by some $750bn from the 2012 level — a fall of over 60%. None have fully adapted to that loss of income. Most have assumed that the price change would be temporary and some have even borrowed to cover the shortfall of revenue against current spending — thereby storing up even more problems for the future.”
  • “The real pain of enforced austerity is only just beginning and will deepen as governments realize that the price fall is more structural than cyclical. The latest attempt to manage the market by extending the production quota for another nine months has had no positive effect. Prices for Brent crude on Friday were down to about $48 per barrel.”
  • “The pain will be profoundly destabilizing. At least five Opec states are at risk of very serious political and economic destabilization, including major economies such as Venezuela and Nigeria. Civil unrest is already evident in Libya and latent in Algeria. Across the whole of the cartel there is a substantial and growing group of restless, unemployed youths aged between 15 and 30.”
  • “In reality, the structural fall in the oil price is the most destabilizing economic event to have hit the world since the financial crash of 2008. In this case, the impact is being felt in slow motion but it is building and feeding on existing conflicts and tensions. And just as the collapse of the subprime housing market in the US shook the global economic system, so the problems of the cartel cannot be contained within the countries themselves. When problems are rapidly globalized through migration, terrorism and even health risks if key public services collapse, the deteriorating situation within Opec is all too likely to become our problem too.”

Perspective

Bloomberg – The U.S. Is Where the Rich Are the Richest – Ben Steverman 6/16

cnsnews.com – Census: More Americans 18-to-34 Now Live With Parents Than With Spouse – Terence Jeffrey 4/19

Worthy Insights / Opinion Pieces / Advice

WSJ – How Anbang Could Clog China’s Financial Plumbing – Anjani Trivedi 6/16

  • “China’s decision to detain the chairman of Anbang Insurance Group, one of the country’s most acquisitive companies, is stunning in itself. The knock-on effects on the Chinese financial system could deepen the drama.”
  • “If customers of Anbang—owner of New York’s Waldorf Astoria hotel—start surrendering their policies and stop buying new ones, that could accelerate a continuing cash drain at the company. China’s insurance regulator has already been clamping down on the primary source of Anbang’s cash since late last year—short-term, high-yielding investment products disguised as insurance policies. Its premium income plunged 99% in April while its solvency ratio halved in the first quarter from the previous year.”
  • “The company’s tentacles reach far and deep into China’s financial system, with one key route being its lending of short-term funds into Chinese money markets.”
  • “Take its dealings with Chengdu Rural Commercial Bank, a provincial bank of which Anbang owns more than one-third, and which itself has some 40 subsidiaries across towns and villages in China. Anbang provides around 40% of the deposits for Chengdu Rural, and accounts for 80% of its related-party transactions, most of which are short-term, money-market loans. The bank also pays Anbang a high 5% interest on its deposits and holds some of Anbang’s debt.”
  • “Such tight relationships illustrate how financial stress at Anbang could quickly ripple through China’s banking system. Banks like Chengdu Rural have already become increasingly reliant on short-term wholesale funding and have been resorting to capital raises: The loss of a big cash provider like Anbang could cause real pain. Interbank funding conditions are already tight in China—the country’s central bank made its biggest one-day cash injection into the market in nearly six months on Friday. If the detention of Anbang’s chairman leads to the company stepping back more broadly from Chinese markets, the saga could have a while to run.”

Markets / Economy

Bloomberg – Nissans Crowding Rental-Car Lots Carry Risk as U.S. Sales Slow – Jamie Butters and John Lippert 5/30

Real Estate

Investment News – W.P. Carey exiting the nontraded REIT business – Bruce Kelly 6/16

Energy

Bloomberg – Solar Power Will Kill Coal Faster Than You Think – Jess Shankleman and Hayley Warren 6/15

National Post – This lonely drifting tanker carrying 2 million barrels nobody wants to buy sums up global oil’s struggle – Laura Hurst and Javier Blas 6/14

Asia – excluding China and Japan

FT – US targets $540m in assets bought with 1MDB funds – David Lynch 6/15

  • “The US Department of Justice on Thursday moved to seize an additional $540m in assets purchased with funds stolen from Malaysian sovereign wealth fund 1MDB, including a luxury yacht, a Picasso painting, jewelery and rights to the movie Dumb and Dumber.” 
  • “The US now estimates that a total of $4.5bn was pilfered by Malaysian public officials and their associates including Jho Low, a well-connected Malaysian businessman who held no formal role in the project.” 
  • “Including the new lawsuit and earlier civil forfeiture actions, the US government has moved to recover $1.7bn of that amount, according to Kendall Day, acting deputy assistant attorney-general. This represents the largest such US seizure action under a DoJ initiative aimed at recovering money stolen by corrupt foreign officials.”

China

Bloomberg Businessweek – Try Getting Your Kid Into a Beijing Public School – Dexter Roberts 6/7

FT – A deal too far for China’s Anbang – Tom Mitchell, Henny Sender, Lucy Hornby, and Gabriel Wildau 6/16

  • “The apparent fall from grace of the founder Wu Xiaohui has shone a spotlight on a brand of Chinese capitalism that has taken root in the financial industry.”

South America

FT – Venezuela’s food parcels prove imperfect solution to crisis – Gideon Long 6/16

  • “According to Fedeagro, an agricultural association, Venezuela produces only enough food to cover between 30-40% of domestic consumption, compared with about 70% a decade ago. Chronic food shortages ensure that Venezuelans regularly skip meals and go hungry. A survey from the Universidad Central de Venezuela found that three-quarters of the Opec nation’s population lost weight involuntarily in 2016.”

Other Links

Tax Foundation – How High Are Wine Taxes In Your State? – Jose Trejos 6/15

June 16, 2017

Perspective

MarketingDaily – Despite Retail Slump, Consumers Feel Generous At Checkout – Sarah Mahoney 6/14

  • “With retailers closing thousands of stores and malls growing emptier, it’s easy to think Americans would be less inclined to pony up for good causes at the register. But the latest Charity Checkout Champions report says that people contributed $441 million last year to some of the biggest point-of-sale campaigns, up 4.5% from 2014.”
  • “The biggest fund-raiser is eBay for Charity, which raised $56.6 million by allowing sellers to give a portion of sales to one of 34,000 charities. The Miracle Balloon program at Sam’s Clubs and Walmart stores came in at No. 2, raising $37 million for Children’s Miracle Network Hospitals in just seven weeks. And Petco bumped the McDonald’s Coin Collection program, benefitting Ronald McDonald House, out of third place, generating $28.3 million in gifts for the Petco Foundation, which funds pet welfare and adoption groups.”

The Big Picture – Sharing Economy – Barry Ritholtz 6/15

Our World in Data – Proportion of seats held by women in national parliaments 6/15

WSJ – A Test of Loyalty at Macy’s – Miriam Gottfried 6/15

Worthy Insights / Opinion Pieces / Advice

WSJ – Oil Outlook Now So Bleak It May Be an Opportunity – Spencer Jakab 6/14

  • “Things look bleak, but oil bulls nursing losses should take solace in the fact that the consensus view in this market is usually wrong.”

Markets / Economy

WSJ – Daily Shot: FRED – Used cars and trucks price index 6/15

WSJ – Daily Shot: Capital Economics – Projected Fed Asset Holdings 6/15

Real Estate

Bloomberg – Blackstone Plans to Sell San Francisco’s Ferry Building – David Carey and Hui-yong Yu 6/9

NYT – A $664,000 Parking Spot Symbolizes Hong Kong’s Property Frenzy – Austin Ramzy 6/15

  • The last time this happened I covered in my 10/28/16 – 11/3/16 post. Well now the record is $664,000.
  • “The buyer was listed as Kwan Wai-ming, whom local news outlets identified as executive director of the Huarong Investment Stock Corporation. His company declined to comment. That price, paid for a spot in an apartment complex on Hong Kong Island, was a new local record, breaking the previous $615,000 paid for a slightly smaller spot last year.”
  • “For his money, Mr. Kwan may get convenience. He already owns property in the same apartment complex where the parking spot is situated, called the Upton, in the Sai Ying Pun district. He previously bought two apartments for $9.7 million and two other parking spots in the complex for $995,000, according to the Hong Kong land registry.”
  • “But some wealthy residents revel in the recognition that comes with a Lamborghini or even a coveted license plate. Last year, a plate carrying the number 28, which sounds like a phrase for ‘easy money’ in Cantonese, sold for a record $2.3 million at auction.
  • Seriously?

WSJ – Google Will Buy Modular Homes to Address Housing Crunch – 6/14

  • “The Mountain View, Calif., company is finalizing an order to buy 300 apartment units from Factory OS, a modular-home startup, in a building likely to serve as short-term housing for Google employees, according to executives from both companies.”

Energy

WSJ – OPEC Stumbles in Face of Oil Glut – Summer Said, Georgi Kantchev, and Neanda Salvaterra 6/14

  • “The global oil glut is proving immune to the limits set by the Organization of the Petroleum Exporting Countries and its big-producer allies like Russia, fueling the idea that output caps withholding almost 2% of world crude supply were a miscalculation.”
  • “In the U.S., the Energy Information Administration said Wednesday that crude stockpiles fell last week by 1.7 million barrels, less than the 2.6 million drop forecast by a Wall Street Journal survey. At the same time, gasoline inventories rose by 2.1 million barrels, compared with the survey’s expectation of a 700,000 decline, underlining worries about the oversupply extending to crude oil’s products.”
  • “Oil stockpiles in the Organization for Economic Cooperation and Development—a club of 35 countries with industrialized economies—rose by 18.6 million barrels in April and were higher than they were when OPEC agreed to its cut late last year, said the International Energy Agency, a Paris-based group that advises governments on energy trends.”
  • “Adding to oil traders’ angst: U.S. oil production has come roaring back to life. The IEA said U.S. crude supply will grow almost 5% on average this year, and nearly 8% in 2018, potentially vaulting American producers ahead of Saudi Arabia in daily output.”
  • “’Such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster,’ the IEA said.”
  • “Saudi energy minister Khalid al-Falih said this week that the production cuts would start having an impact this summer, accelerating a drop in stored oil that OPEC said began in January. He has said OPEC and Russia would do ‘whatever it takes’ to bring supply back in line with demand.”
  • “Daniel Yergin, vice chairman of IHS Markit and a long-time oil market watcher, said OPEC wouldn’t abandon its production-cut agreement, which took almost a year to put together through 2016.”
  • “’When OPEC and the other producers agreed to this deal, they hoped that, as the old adage says, time heals all—and time will heal the inventory problem,’ Mr. Yergin said. ‘They should now take a deep breath and realize this will take a lot more time.’”
  • “The cartel set a tough goal last December, when its officials said they wanted to cut oil-storage levels to the five-year average.”
  • “OPEC said OECD storage levels actually have been falling but by only 88 million barrels in the first four months of 2017. At that pace, it would take until March 2018 for stockpiles to fall another 250 million barrels to the five-year average.”

WSJ – Daily Shot: eia – US Wind and Solar Electricity Generation 6/15

WSJ – Beijing Gives Banks the Go-Ahead for Yet Another Lending Binge – Anjani Trivedi 6/14

  • “While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households.”
  • “If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”
  • “But lending standards are set to get even looser. Banks have been told they should tolerate higher nonperforming loan ratios for small companies and agriculture-related lending, meaning they need to worry less about credit quality. The regulator also asked banks to keep interest rates on such loans at an ‘appropriate’ level—effectively allowing banks to ignore the proper pricing of risk.”
  • “This all flies in the face of efforts to cull bad credit from the economy. Chinese banks are already given plenty of leeway to classify loans how they like: The new measures may only encourage them to avoid writing off bad debt. It isn’t clear, either, how allowing small businesses and farmers to borrow even more will help China Inc. cure its addiction to debt-fueled growth.”

WSJ – Chinese Banks Limit Exposure to Anbang – James T. Areddy 6/15

  • “A number of banks have slowed marketing of Anbang-branded investments to their customers in recent days, according to people with knowledge of the situation.”

June 12, 2017

Worthy Insights / Opinion Pieces / Advice

WSJ – The Cushion That Saved Taxpayers From Banco Popular’s Failure – Paul Davies 6/7

  • “Regulators can make a determination that a bank is failing or likely to fail with information that investors don’t have. Regulators shouldn’t act too early, but it is right that they should act when waiting threatens the integrity of the financial system or a drawdown of public money. Any investor who doesn’t understand that should steer clear of bank equity and debt. Period.”

The Big Picture: Bloomberg – Jim Chanos on Tesla, China 6/7

  • Interview

Real Estate

WSJ – Daily Shot: Green Street Commercial Property Index 6/9

FT – Real estate: The global luxury condo glut – Anna Dedhar 6/8

  • Podcast

Energy

WSJ – Daily Shot: EIA – Total US Effective Rig Count 6/9

China

FT – LeEco’s listed arm cancels bond fundraising – Emily Feng 6/8

  • “A bond sale (meant to raise Rmb2bn – $300m) by the Shenzhen-listed arm of embattled company LeEco has been cancelled, after the group was asked to address regulators’ concerns about the health of its financials.”

WSJ – Beijing Lands in Another Debt Mess – Anjani Trivedi 6/9

WSJ – Perpetual Doesn’t Mean Forever in China – Jacky Wong 6/8

  • “Chinese companies growing appetite tapping an unconventional source of financing might not be a source of eternal bliss.”
  • “Perpetual securities, bondlike instruments that pay interest but have no maturity dates, have become popular in China in recent years: Issuance jumped to $55 billion in 2016 from less than $1 billion in 2012, according to Dealogic. This year, Chinese companies have been keener to issue them in offshore markets, raising some $4.4 billion, more than their dollar-denominated issuance in all of 2016.”
  • “A big reason Chinese companies like perpetuals is that they are classified as equity on their balance sheets. The accounting logic is that perpetual issuers don’t ever have to repay the bond’s principal and can choose to defer annual coupon payments—making them similar to dividends.”
  • “Treating perpetuals as equity means companies can report lower gearing ratios, a measure investors commonly use to assess a company’s indebtedness. China Evergrande, the country’s biggest property developer by assets, had a net debt-to-equity ratio of 120% as of December. That ratio would have jumped to 432% if its perpetual bonds had been counted as debt. Investors are happy to play along as the perpetuals usually pay higher yields. Evergrande effectively paid an 11% coupon on its perpetuals last year.”
  • “But whatever the accounting rules say, perpetual securities still work much more like debt than equity in China. To start with, companies can defer coupon payments on perpetuals only if they aren’t paying dividends to their shareholders. Given that Chinese companies often have a majority shareholder, and therefore nearly always pay a dividend, that clause rarely applies.”
  • “Moreover, perpetuals in China often include a clause that automatically steps up the coupon rate, usually after three to five years. Since the step-up is usually quite steep, issuers have a strong incentive to redeem their perpetuals early—making them not so perpetual, after all. The coupon on a recent $500 million perpetual bond issue from state-owned Power Construction Corp. of China will jump by 5 percentage points, more than double its initial yield, after five years.”
  • “Investors hoping to live happily ever after with perpetuals ought to scrutinize why companies are issuing such disguised debt in the first place—and whether it is really in their interests.”

FT – Chinese regulators target staff shareholding plans – Gabriel Wildau and Nan Ma 6/9

  • “The Shenzhen Stock Exchange is querying listed companies about a series of unusual plans to sell shares to employees while insuring them against losses if stock prices fall.”
  • “At least 21 Shenzhen-listed companies announced employee shareholding plans in the first week of June that include guarantees by the chairman or senior executives to protect workers against downside risk, according to exchange filings compiled from Wind Information.” 
  • “While it is not yet clear whether such plans will enable large shareholders to sell directly to employees, market observers still view them as a response to the tighter rules. With stake sales more difficult to execute, large shareholders are looking for ways to boost their share prices, at least until they can find ways to offload their shares.”

NYT – China’s New Bridges: Rising High, but Buried in Debt – Chris Buckley 6/10

Middle East

FT – Crisis in the Gulf: Qatar faces a stress test – Simeon Kerr 6/9

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/9

  • “Venezuela’s stock market has gone ‘vertical’ as it becomes the only legal ‘safe-haven’ to escape the currency collapse.”

FT – Venezuela woes on paying Russia debt raise prospect of default – Jonathan Wheatley and Robin Wigglesworth 6/9

  • “Reports of a failure to pay a debt to Russia and a requested ruling on whether such a failure constitutes a ‘credit event’ that could trigger insurance contracts on billions of dollars of international bonds have brought Venezuela closer than ever to the brink of financial collapse.”
  • “Matters may soon come to a head. On Wednesday, the International Swaps and Derivatives Association, an umbrella organization of the finance industry’s biggest banks and money managers, was asked by an anonymous member whether the reported default to Russia should be classified as a ‘credit event’ and trigger insurance-like contracts on Venezuela’s roughly $36bn in sovereign bonds.”
  • “The ISDA ruling may take some time. And even if it decides a credit event has occurred, there would be no automatic default on Venezuela’s sovereign bonds.”
  • “But it is clear from the terms of those bonds that should the government fail to meet any other debt obligations, bondholders can demand immediate payment.”
  • “Should the sovereign bonds then go into default, the roughly $35bn of outstanding PDVSA bonds would not be affected, and may even be left intact. The government in Caracas almost certainly would not.”

June 9, 2017

If you were to read only one thing…

FT – Amazon to ramp up lending in challenge to big banks – Ben McLannahan 6/7

  • “Amazon is planning to expand its lending to small businesses in the US, the UK and Japan, in a direct challenge to the big banks which have historically dominated.”
  • “The Seattle-based company launched Amazon Lending with little fanfare six years ago, offering select sellers on its platform instant loans for up to 12 months at annual interest rates ranging from about 6 to 17%.”
  • “Now, having done about $3bn of originations in total and $1bn within the past year, Amazon is expanding offers to more of the 2m or so businesses on its ‘marketplace’ platform. Such independent sellers — many of which pay Amazon to store, package and ship merchandise to customers on their behalf — account for about half of Amazon’s total units sold worldwide.”
  • “Amazon supplies funds from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.”
  • “’It’s a ‘can’t lose’ proposition for Amazon,’ said Jordan Malik, a Las Vegas-based publisher, noting that the company has a near-perfect view of any seller’s cash flows. ‘It’s a very clever thing they’ve done.’”

FT – Tech companies invade banks’ territory with customer loans – Ben McLannahan 6/7

Perspective

NYT – Venezuelan Exiles in Miami Turn to Public Shaming of Maduro Supporters – Lizette Alvarez 6/7

FT – Is it finally time for a pay rise for American workers? – Sam Fleming 6/7

Worthy Insights / Opinion Pieces / Advice

Bloomberg View – It’s Not Just Retail That’s Changing. It’s Us. – Barry Ritholtz 6/7

Markets / Economy

FT – Streaming revenue to surpass physical music sales this year – Shannon Bond 6/6

WSJ – Daily Shot: Banco Popular CoCo debt 6/8

FT – Streaming revenue to surpass physical music sales this year – Shannon Bond 6/6

Real Estate

National Real Estate Investor – Are Investors Ready to Return to Non-Listed REITs? – Beth Mattson-Teig 6/7

WSJ – Daily Shot: John Burns Real Estate Consulting – US Home Prices 6/8

  • “With wage growth remaining tepid, this estimate suggests that homes are overvalued (in part due to low mortgage rates).”

WSJ – New Houses Get Smaller as First-Time Buyers Move Into the Market – Jeffrey Sparshott 6/5

  • “The median size of a new single-family home slipped by a scant 2% to 2,422 square feet in 2016, according to Census Bureau data released last week. While that’s a small adjustment, it’s the first time since 2009 and only the third time in the last 20 years it’s fallen.”

Energy

Bloomberg – Iraqi Oil Floods Into U.S. After Saudi Arabia Cuts Back – David Marino 6/7

South America

Bloomberg – No One Has Ever Made a Corruption Machine Like This One – Michael Smith, Sabrina Valle, and Blake Schmidt 6/8

  • “Year after year… 0.5% to 2% of revenue was directed to illicit payoffs, mainly to Brazilian politicians and executives of state companies, particularly the national oil producer, Petrobas. Some years graft expenses neared 2 billion reais ($611 million). It just depended on the demands of Odebrecht’s political contacts.”

Other Links

Ancestry.com – What’s the Most Popular Surname in Your State?

June 8, 2017

Perspective

Pew Research Center – The rise of multiracial and multiethnic babies in the U.S. – Gretchen Livingston 6/6

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Greatest Hits From Michael Mauboussin & Meir Statman 6/6

  • Mauboussin: “Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.”
  • Statman: “Risk is not measured by standard deviation but rather by the probability of not getting to your goal.”

Real Estate

WSJ – Millions of Young People Shut Out of the Housing Market – Laura Kusisto 6/7

  • “Roughly three million potential first-time home buyers have been shut out of the market over the last decade, according to a new study, suggesting the market’s recovery of the past few years could have been stronger.”
  • “Tight lending standards and acute shortages of affordable housing in many markets have reduced the pool of potential buyers, particularly among young people, reducing a key component of housing demand.”
  • “In all, the number of first-time U.S. home buyers averaged 1.5 million a year over the last decade, compared with the historical average of 1.8 million, according to a new study to be released Thursday by Genworth Mortgage Insurance that examines mortgage data from Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Affairs and other sources. The study looked at data going back to 1994 and defined first-time buyers as anyone who hasn’t owned a home in the last three years.”
  • “Lackluster demand for homeownership among younger people has been one of the main factors holding back the housing recovery. Many young people have been delaying buying homes due to tight credit, student loans and rising rents that have made it difficult to save for down payments.”
  • “’What’s been missing is confidence,’ said Sam Khater, deputy chief economist at CoreLogic Inc.”
  • “But that is starting to change. So far this year, first-time buyers represented about 38% of the market, greater than the historical average of 35%, according to Genworth. Some two million first-timers purchased homes last year, or 37% of the market.”
  • “’We’ve had a very strong surge in first-time home buyers,’ said Tian Liu, chief economist at Genworth.”
  • “Credit also appears to be loosening. According to Genworth, about 78% of first-time buyers are using low-down-payment loans, compared with the historical average of 73%.”
  • “Economists said a wave of first-time buyers is likely coming over the next decade, as a large cohort in their mid-20s begin to buy homes.”
  • “’As we’re seeing millennials age into homeownership, there’s a huge tailwind coming,’ said Nela Richardson, chief economist at Redfin.”

Energy

WSJ – An Energy Shock from the High Seas – Spencer Jakab 6/6

  • “Circle January 2020 on your calendar for what could be a major disruption to the energy market and a jolt to the global economy.”
  • “The origin of the problem isn’t some oil cartel’s machinations, a looming war or even a technological shift—it is a bureaucratic body that few people have heard of: the International Maritime Organization. Just 30 months from now the cargo vessels that are the lifeblood of global trade will be required to cut the sulfur content in their fuel from 3.5% to 0.5%.”
  • “Ships move more than 10 billion tons of cargo a year and do it far more efficiently than road or rail, but it comes at a high cost in terms of overall pollution because ships use fuel oil, which is just about the cheapest, dirtiest stuff to come out of refineries. About 9% of all sulfur dioxide emitted globally comes from ships, contributing to acid rain and many premature deaths annually. Even the new cap is 500 times the sulfur content of most road diesel.”
  • “While standards have changed for many fuels, the rapid nature of the switch means that, if shippers fully comply, there could be price spikes. Ships that currently use cheap high sulfur fuel oil will have to switch to some other source higher up in the product slate that comes out of refineries. Even with significant investment, refiners may not be ready and ships may have to burn more expensive marine diesel.”
  • “Is the threat real? While energy traders mainly focus on the next several months, derivative prices indicate it is. For example, crude futures expiring in July 2020 are just 1% more expensive than those expiring in July 2017. By contrast, Rotterdam high sulfur fuel oil is 16% cheaper and New York ultralow sulfur diesel is 10% more expensive.”

Finance

FT – Global investors develop taste for US high-yield corporate bonds – Eric Platt 6/6

China

FT – China’s next ‘city from scratch’ called into question – Jamil Anderlini 6/6

  • “When the Chinese government announced its plan to create a new city from scratch in a rural northern backwater of the country on April 1, the effect was immediate.”
  • “Housing prices in the area tripled almost overnight as property speculators rushed to the area — about 100km south-west of Beijing — in the hopes of cashing in on the new project, described by state media as a ‘grand strategy crucial for a millennium to come’.”
  • “Share prices for listed companies with even tenuous connections to the ‘Xiongan New Area’ soared as analysts estimated that up to $580bn — roughly the annual gross domestic product of Argentina — would be spent in the next few years on building up the new city, which will eventually cover an area twice the size of Hong Kong and nearly three times the size of New York City. The government is aiming for a population of 2.5m people as soon as 2030.”
  • “The Xiongan plan draws on a blueprint that has been tried and tested in China before. As it was unveiled at the start of April, China’s state-controlled media hailed it as President Xi’s answer to the ‘special economic zones’ of Shenzhen and Pudong, both of which were launched under the auspices of China’s former paramount leader, Deng Xiaoping.”
  • “However, critics of Xiongan point out that for every Shenzhen and Pudong there are scores of half-empty or failed ‘special economic zones’ now dotted across China.”
  • “They argue that Xiongan shares none of the natural advantages of those earlier experimental cities, such as proximity to booming financial centers, world-class ports or enormous depots of international capital. They also worry about Beijing’s stated plan to exclude foreign investment, at least at the earliest stages, in favor of state investment and planning.”