Tag: Inequality

April 29 – May 5, 2016

Beware of ‘investments’ being peddled by Chinese banks. China no longer getting the same bang for the buck. Industry concentration tends to result less money going to employees.

Headlines

Briefs

    • “The economy in China’s industrial province of Liaoning contracted in the first quarter, making it the first region to register negative growth in seven years as a severe downturn in energy and heavy industry sectors hits hard in the country’s north-east.”
    • “China’s national growth clocked in at an annual rate of 6.7% in the first quarter, but that headline figure masks sharp discrepancies between provinces reliant on heavy industry, mining or oil, and the southern and eastern regions with more diversified economies.”
    • “Chinese newspaper 21st Century Business Herald reported this week that Liaoning would book a 1.3% contraction in real GDP for the quarter…”
  • Daniel Thomas of the Financial Times covered that Global smartphone sales fell for the first time.  It was bound to happen eventually.
    • “Global smartphone shipments fell for the first time as “iPhone fatigue” dragged down sales for Apple’s once-unstoppable franchise amid a general weakening in the market for new devices.”
    • “After close to a decade of stellar growth, analysts say a tipping point in the smartphone market has been reached as most people already have a phone, phablet or tablet device.”
    • “Apple popularized the smartphone market with the launch of the first iPhone in 2007. The US group said this week that it had suffered a 16% fall in unit sales in the first quarter and warned that the next quarter could be even worse…”
    • “Apple was not totally to blame, however, as global smartphone shipments fell 3% in the first quarter of 2016 to 334.6m, down from 345m units in the same quarter of 2015. The quarter was the ‘first time ever since the modern smartphone market began in 1996 that global shipments have shrunk on an annualized basis.'”
    • “As the China market matures, the appetite for smartphones has slowed dramatically as the explosion of uptake has passed its peak.” – IDC, a research firm.
  • For those of us in Hawaii, we’re quite familiar with the concept of leasehold property, and generally if you can avoid it for your primary residence you do.  Well in China all residential property is leasehold and some of those lease terms are rolling over in short order.  Lucy Hornby of the Financial Times discusses the angst this is causing.
    • “The simmering issue of property rights in China has burst into the open with the upcoming expiry of residential leases in several wealthy cities and a contentious plan to charge homeowners to renew them.”
    • When the Communist party entered into power in 1949 property ownership was abolished only to be renewed via a mixed bag of leasehold rights in the 1980s and 1990s.  Now these rights are “…in the spotlight with the upcoming expiry of 20-year residential land use rights in Wenzhou in eastern China… Leases granted in the 1990s will also soon come due in Shenzhen and other coastal cities, although the more common tenure of 70 years means most of the current generation of urban homeowners will hand the problem on to their heirs.”
    • “Wenzhou has asked homeowners to pay up to a third of their homes’ value to renew their rights, according to a city government document, sparking an outcry across China. The Property Law of 2007 says land-use rights can be renewed but does not specify the criteria for doing so.”
    • “Many Chinese bought their homes under the expectations that the long leases would be transformed into full ownership.”
  • Enough with all this bad news.  No really, as Lingling Wei reports in the Wall Street Journal, China is pressing Economists to brighten their outlooks.
    • “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements, according to government officials and economic commentators with knowledge of the matter.”
    • As Scott Kennedy, a deputy director at the Center for Strategic and International Studies (a Washington think tank), puts it “vigorous debate among economists and public confidence in this conversation is critical if China is to successfully navigate the choppy economic waters. If the party and government only want to hear good news, then they’d be better off hearing nothing because the value of the words would be less than zero.”
    • “While restrictions on foreign media have always been tight, they are becoming tighter, with a growing list of foreign publications having their websites blocked from view within China, including The Wall Street Journal.”

Special Reports

Graphics

FT – Will duration risk rear its head for bond investors? 4/28

FT_Negative yielding bonds by country of origin_4-28-16

FT_Bond Duration_4-28-16

FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2

FT_Rise of the robot economy_5-2-16

FT – US producers Ultra and Midstates fall victim to low oil price 5/3

FT_US high yield energy_5-3-16

Featured

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

Chinese banks disguise risky loans as ‘investments’. Yuan Yang and Gabriel Wildau. Financial Times. 28 Apr. 2016.

“Chinese banks are using complex financial engineering to disguise risky loans as ‘investments,’ rendering traditional risk metrics such as non-performing loan ratios virtually useless.”

“Analyst say most of these assets are in effect loans but are structured to appear as holdings of investment products issued by a third party. Such financial alchemy allows banks to evade regulations designed to limit risk.”

“Banks are required to set aside fewer provisions against ‘investment’ assets than traditional loans.”

“Because the investments are not classified as loans, defaults are not reflected in these banks’ non-performing loan ratio. Many analysts believe China’s official NPL ratio of 1.67% is all but irrelevant in assessing banks’ overall asset quality.”

“Fitch, the rating agency, believes this practice, also known as channel lending is used to provide credit to the likes of ‘cash-strapped property developers and local governments’ that cannot obtain formal loans.”

“Now that overcapacity sectors such as steel and cement are facing restrictions on formal borrowing, channel lending could become even more important to zombie companies.”

“Banks classify the assets they hold in these third parties as ‘investment receivables’ or ‘debt receivables,’ not loans.”

“Shadow lending in debt receivables increased 63% to Rmb14tn ($2.16tn) last year, according to an analysis of 103 Chinese banks by Wigram Capital Advisors, equivalent to 16.5% of the formal loan book.”

“Aggressive balance sheet expansion by midsized lenders has also increased their systemic importance to China’s overall banking system. The big four’s share of total banking assets has fallen from 51% in 2009 to 38% at the end of 2015, according to Wigram’s calculations.”

China’s fizz goes flat, even with far bigger credit stimuli. James Kynge. Financial Times. 4 May 2016.

Bottom line: “money is losing the power to energize important economic muscles. Asset prices in the all-important property market – which drove China’s recovery from the 2008 financial crisis – are now so high relative to household incomes that it is hard to envisage another sustained rally.”

“On average, it would take 25 years, 33 years, 36 years and 19 years of household income in Beijing, Shanghai, Shenzhen and Guangzhou respectively for a family to buy a 90 sq m (969 sq ft) apartment, according to calculations by Mizuho Securities in Hong Kong. By contrast, London house prices are 9.2 times average earnings for first-time buyers, according to Nationwide data.”

“The International Monetary Fund estimates that $1.3tn in corporate debt – or almost one in six of the business loans on Chinese banks’ books – was owed by companies that brought in less in revenues than they owed in interest payments.”

“So unleashing a new tide of credit to ease debt problems is ‘like smoking opium to look healthy,’ said Professor Li Weisen of Fudan University, according to the South China Morning Post.”

“China expanded total domestic credit by Rmb12tn, or 34% of gross domestic product, in the year to November 2009 – significantly less than the Rmb27.9tn, or 40% of GDP, in the year to February this year, according to Bernstein Research.”

“But while the 2009 stimulus reinvigorated growth from 6.1% in the first quarter to a full-year GDP growth rate of 9.2%, the flood of credit seen in the year to February has been accompanied by a gentle decline in GDP headline numbers.”

Rising Profits Don’t Lift Workers’ Boats. Peter Coy. Bloomberg. 5 May 2016.

“Big business is getting bigger, and workers’ slice of the economic pie is getting smaller. Those trends have bred resentment toward large corporations. Now research shows a surprisingly tight link between the two phenomena: The share of the pie that goes to workers has been shrinking most in precisely those industries where ownership is becoming more concentrated.”

“Increasing industry concentration ‘may explain one of the transcendent issues confronting the U.S. economy,” namely labor’s declining share and profits’ rising share of the value a company creates, Michael Feroli, the chief U.S. economist at JPMorgan Chase, wrote in an April 25 research note.”

Bloomberg_Tale of two payrolls_5-5-16

As an explanation of the trend, “Feroli says, is that industries with more concentrated ownership can charge higher prices. They pay out their extra profits to shareholders, or to the government in taxes, but not to workers.”

“One hopeful sign for workers: The share of national income going to wages and salaries has rebounded since 2012, erasing about 30% of its post-1997 decline.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Norway’s sovereign wealth fund hit by global stock turmoil 4/28

FT – Sovereign funds ignore climate risk 4/30

FT – US banks sound caution on commercial property loans 5/1

FT – Hidden loans leave once-promising Mozambique with heavy costs 5/1

FT – The perils facing Japan’s pension funds 5/1

FT – China financial regulator clamps down on shadow banking 5/2

FT – GAAP earnings: persuasion 5/2

FT – Explainer: Puerto Rico’s crippling debt problems 5/2

FT – Dollar’s slide takes it to 15-month nadir 5/3

FT – China crackdown on data sales opens gaps in economic statistics 5/3

FT – Water scarcity threatens growth and stability, study warns 5/3

FT – Malaysia dissolves 1MDB advisory board after payments probe 5/4

FT – Apple loses trademark dispute in China 5/4

FT – Mystery buyers snap up 100-year debt in Europe 5/4

NYT – One Top Taxpayer Moved, and New Jersey Shuddered 4/30

NYT – Spain’s Jobless Numbers Almost Look Like Misprints 5/2

NYT – Putin Took Credit for the Boom. Now There’s a Bust. 5/2

Telegraph – AEP: Japan’s Abenomics ‘dead in the water’ after US currency warnings 4/28

WSJ – A Wrecking Ball Won’t Fix China’s Property Market 5/3

WSJ – Why China’s Big Banks Aren’t Looking So Large 5/3

WSJ – Negative Rates May Cost Property Investors More 5/3

Yahoo Finance – The $571 Billion Debt Wall That Points to More Defaults in China 5/3

 

April 1 – April 7, 2016

The virtuous cycle of Chinese real estate development. Global liquidity trap. What’s driving the China M&A boom?

In an effort to ease readability and to assist with navigation of the weekly posts I have updated the format this week.  I am removing the featured articles/themes from the introductory paragraph – so there may at times not be an introductory paragraph, rather I will get right into Headlines (article links with a headline of what the article is about), followed by Briefs (currently featured as the “other items” section), Special Reports, Graphics, Featured (the featured themes/articles from the week), and will conclude with the Other Interesting Articles.  Happy readings.

Headlines

Briefs

    • “The IMF predicts that inflation will be 720% in Venezuela this year, a figure Zimbabwe hit in 2006. By 2008 Zimbabwe was racked by hyperinflation so crippling that beggars who were offered billion-Zimbabwe-dollar bills would frown and reject them.”
    • “Suppliers, rather than giving goods away at the official price, prefer to sell them on the black market.”
    • In the case of a tanker of subsidized gasoline, “you can sell the cargo legally in Venezuela for $100, or drive across the border to Colombia and sell it for $20,000. The pitifully paid border police will be easy to square.”
    • “By the most overvalued official exchange rate, ten bolivares are worth one American dollar. On the black market, the same dollar fetches 1,150 bolivares. Zimbabwe abandoned its worthless currency not long after monthly inflation hit 80 billion percent in November 2008.”
  • Konrad Putzier of The Real Deal illustrated the growing cash piles of private real estate funds and their lack of placement opportunities.
    • “As of March, private real estate investment funds worldwide had $231 billion in aggregate dry powder – or capital commitments from fund investors ready to be spent – according to research firm Preqin. That’s the highest figure in history and a 10% increase since December.”
    • “Dry powder has grown in part because fund managers are having an increasingly difficult time finding profitable investments – not just because they are raising huge sums from investors.”
    • “In a year-end Preqin survey, 56% of fund managers polled said they see finding attractive investment opportunities as their biggest challenge – far ahead of raising funds (27%).”
    • 2015 was the year of the unicorn, 2016 may be the year of the dead unicorn (private companies with valuations in excess of $1bn).
    • In late 2013 there were 39 unicorns (a phrase introduced by Aileen Lee, founder of Cowboy Ventures – a venture capital firm), now there are 156 globally “with a cumulative valuation of $550bn, according to CB Insights.”
    • Interesting thing is growing investment amounts by non-traditional VC investors, specifically large money managers like Fidelity and BlackRock.  So called “crossover investments in private technology companies rose 51% last year, to more than $40.9bn across 800 deals, CB Insights data show.”
    • While crossover investments still make up a small portion of the VC funds in private companies, the question is whether the investors in these fund managers are equipped for VC investing?  “58 tech start-ups suffered “down rounds” since the start of 2015.” Not to mention the lack of liquidity in these investments.
    • Natural gas goes through two primary seasons, an “injection season” when gas is put into storage during the warmer months of the year and a “withdrawal season” when gas is drawn down for use during the winter months for heating and the like.
    • Well two things have happened, 1) record amounts of gas is being produced, and 2) it’s been a lot warmer than usual during the winter months.
    • “The problem is that there is so little room to put gas between now and November. On Thursday, with one week to go in withdrawal season, the amount in underground storage was at an all-time record of 2.47 trillion cubic feet, some 52% higher than the five-year average. That is a whopping trillion cubic feet more than a year ago.”
    • “Last year, so much excess gas was produced in the following seven months that storage reached its theoretical limit. If this year is like 2015, then storage might be full by the middle of August. Gas would have nowhere to go, and producers would have to “shut in” production or sell it for nearly nothing until heating demand appears.”
    • “The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds – it’s companies buying their own stock, by a 6-to-1 margin.”
    • Companies have “executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012.”
    • “Peer-to-peer lenders, who raise money from investors and then lend it out at higher interest rates, made 924 million yuan ($143 million) in down-payment loans in January, more than three times the amount made in July, according to Shanghai-based consultancy Yingcan.”
    • “Agents say these loans can attract annual interest rates of up to 24%.”
    • “Trying to reduce housing inventory by encouraging individuals to increase borrowing is a dangerous experiment. Enormous risks are lurking behind the surging property prices in first-tier cities.” – Ming Zhang, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
    • “Industrywide, nonperforming loans rose to 1.67% of total loans last year from 1.25% in 2014, according to official data. But analysts estimate the true ratio this year could be 8% or more. In the U.S., 14.6% of subprime loans made in 2005 defaulted, according to the Federal Reserve Bank of Chicago.”
    • “Steven Woods of Moody’s, the credit rating agency, says the entire US oil industry is under financial stress with prices at today’s levels.”
    • “At $40, the industry doesn’t work. Companies can’t earn an adequate return on capital.” – Mr. Woods
    • “The number of rigs drilling for oil and gas in the US has dropped 77% since September 2014, falling a further 14 last week to 450, the lowest level since the data were first collected in 1940.”
    • “To stabilize total US production and stop it falling, oil would need to be about $40 to $50 a barrel, he adds. To go back to the boom years of 2012-2014, when the US was adding about 1m barrels a day of additional supply every year, oil would need to be more than $80.”
    • “The shale revolution will not be reversed; in fact, the technology is continuing to advance. But every revolution needs to be followed by a period of consolidation, and this one is no different. The high-growth period of the industry’s history is over, perhaps for a long time.”
    • “Government subsidies have helped wind and solar get a foothold in global power markets, but economies of scale are the true driver of falling prices: The cost of solar power has fallen to 1/150th of its level in the 1970s, while the total amount of installed solar has soared 115,000-fold.”
    • “Just since 2000, the amount of global electricity produced by solar power has doubled seven times over. Even wind power, which was already established, doubled four times over the same period. For the first time, the two forms of renewable energy are beginning to compete head-to-head on price and annual investment.”
    • “The International Consortium of Investigative Journalists (ICIJ) this weekend went public with its findings that the firm (Mossack Fonseca) had, wittingly or unwittingly, helped clients evade or avoid tax, launder money or mask its origins. More astonishing than their methods, which are well known, was the scale of activity and the people involved. The 2.6 terabytes of data are thought to contain information about 214,500 companies in 21 offshore jurisdictions and name over 14,000 middlemen (such as banks and law firms) with whom the law firm has allegedly worked.”
  • Hannah Kuchler of the Financial Times covered Facebook’s plan to expand its live streaming service.
    • Here is a link from the horse’s mouth.
    • Just imagine how much content Facebook is going to put out in the near future. “Live is like having a TV camera in your pocket. Anyone with a phone now has the power to broadcast to anyone in the world.” – Mark Zuckerberg, founder and chief executive of Facebook.
    • This is a game changer. Think the Kardashian’s get too much play, you ain’t seen nothing yet.

Special Reports

Graphics

The Real Deal – Private real estate funds have a record $231B to spend – but few places to put it.

Real Deal_Real Estate Dry Powder_3-31-16

Wall Street Journal – No Mercy Rule for Glutted Natural-Gas Market.

WSJ_Natural Gas Glut_4-1-16

Financial Times – US oil and gas sector reboots to survive.

FT_US oil and gas guidance_4-4-16

Bloomberg – Wind and Solar Are Crushing Fossil Fuels. Investment in Power Capacity, 2008-2015 (Source: BNEF, UNEP)

Bloomberg_Investment in Power Capacity_4-5-16

Featured

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

Price falls keep China’s property developers grounded. Ben Bland. Financial Times. 4 Apr. 2016.

Seeking an example of the credit boom in China fueling property developments that maybe should not be undertaken?  Look no further than Hong Kong developer Goldin Properties’ Goldin 117 a $10bn project in Tianjin (30 minutes by high-speed train from Beijing).

Founder Pan Sutong (also the individual who had $13bn wiped off his paper fortune in a single day due to stock market girations) and China Cinda Asset Management “one of the state-run ‘bad banks’ with a mission to lend to distressed companies” are putting in Rmb9bn ($1.4bn) each recapitalize the project.

“Anne Stevenson-Yang of China-focused research house J Capital, argues that the use of government-backed funds to support Goldin is symptomatic of the wider misallocation of capital weighing upon China’s economy.”

“It’s a miniature picture of what China is all about, demonstrating scale in order to capture more financing. China’s asset management companies and banking establishment are dedicated to maintaining the value of their collateral because if they allow it to drop and they have to mark their real estate holdings to market, it would be a disaster for banks, depositors and cities.” – Ms. Stevenson-Yang

Because “Chinese banks are reluctant to continue lending to ambitious and overstretched developers,” the “government is pushing asset managers such as Cinda to extend more credit to ailing companies and has proposed allowing Chinese banks to swap debt in struggling enterprises for equity.”

“The government is using its financial arms to provide further guarantees to the real estate sector and other industries that are plagued by overcapacity. It’s setting a bad precedent and there is a very big risk of moral hazard because developers know that, in the end, the government will bail everyone out.” – Zhu Ning, a professor at the Shanghai Advanced Institute of Finance

The global liquidity trap turns more treacherous. Scott Minerd (global chief investment officer at Guggenheim). Financial Times. 5 Apr. 2016.

“…when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.”

“There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money.”

“The empirical data support this view – the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth.”

Recall Kevin Wilson’s article: Japanese Policy Failure Means Disaster For Us All from the March 5 – March 10 post.

Japanese Velocity of Money_Q3 2015

“As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher.“

“The Bank of Japan and the European Central Bank are already executing massive quantitative easing programs, but as their balance sheets expand, assets available to purchase shrink.”

“The BoJ now buys virtually all of the Japanese government bonds that are issued every year, and has resorted to buying exchange traded funds to expand its balance sheet.”

China’s M&A boom – Money bags. Economist. 2 Apr. 2016.

Subheader: China’s global investment spree is fueled by debt

“Chinese firms with little international experience and lots of debt have emerged as the biggest buyers of global assets. They have announced nearly $100 billion in cross-border M&A deals this year, already more than their $61 billion of foreign acquisitions last year.”

What is being missed are the motivations. General theories are concern over the Chinese economy or a pending yuan devaluation; however, what it really comes down to is that foreign acquisitions are a cheap (relative to what’s available in China) source of growth.

“Chinese buyers, by and large, are far more indebted than the firms they are acquiring. Of the deals announced since the start of 2015, the median debt-to-equity ratio of Chinese buyers has been 71%, compared with 44% for the foreign targets, according to The Economist’s analysis of S&P Global Market Intelligence data. Cash cushions are generally also much thinner for Chinese buyers: their liquid assets are roughly a quarter lower than their immediate liabilities. The forbearance of their creditors makes these heavy debts more bearable in China than they would be elsewhere. But the Chinese buyers are financially stretched, all the same.”

“Chinese banks see lending to Chinese firms abroad as a safe way of gaining more international exposure. The government has encouraged them to support foreign deals. As long as the firms to be acquired have strong cash flows…”

“For the buyers, there are two strong financial rationales for the deals…

“First, debt-funded buyouts can actually make their debt burdens more tolerable. Take the case of Zoomlion, a construction-equipment maker with 83 times more debt than it earns before interest, tax, depreciation and amortization. It wants to buy Terex, an American rival with debt just 3.5 times larger than its earnings, for $3.4 billion. Even if the purchase consists entirely of borrowed cash, the combined entity would still have a debt-to-earnings multiple of roughly 18, a marked improvement for Zoomlion.”

“Second, Chinese buyers know that one key financial metric works to their advantage: valuations in the domestic stock market are much higher than abroad. The median price-to-earnings ratio of Chinese buyers is 56, twice that of their targets. In effect, this means they can issue shares domestically and use the proceeds to buy what, from their perspective, are half-price assets abroad.”

“…so long as their banks and shareholders are willing to stump up the cash, Chinese companies see a window of opportunity.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Saudi Arabia Plans $2 Trillion Megafund for Post-Oil Era: Deputy Crown Prince 3/31

Bloomberg – Norway Frees Wealth Fund to Add $17 Billion in Real Estate 4/4

CoStar – REITs Reverse Course on Investment Strategy, Become Big Net Sellers 4/6

FT – China group seals record trove of M&A deals 3/31

FT – Hong Kong’s retail sales drop hardest in 17 years 3/31

FT – What is the Petrobas scandal that is engulfing Brazil? 3/31

FT – Anbang chairman Wu Xiaohui’s ‘wings clipped’ by regulators 4/1

FT – Even oil barons are giving up on fossil fuels 4/2

FT – Whatever you read about alternative investing is true 4/2

FT – Russia learns to live with the fallen rouble 4/2

FT – Business is right to use its superpowers for social change 4/3

FT – Investors should ignore the hype about fintech 4/3

FT – Investment strategy: The new property barons 4/3

FT – Panama Papers: what we know so far 4/3

FT – PE investors face tougher exit environment 4/4

FT – Currency wars backfire for Japan and Europe 4/5

FT – M&A failures: deep breaths 4/6
FT – Japan lashes out against rise of yen 4/7

LinkedIn – Learning to Code Yields Diminishing Returns (Douglas Rushkoff) 3/30

NYT – With ‘Gigs’ Instead of Jobs, Workers Bear New Burdens 3/31

NYT – The Cities on the Sunny Side of the American Economy 3/31

NYT – Insider’s Account of How Graft Fed Brazil’s Political Crisis 4/3

WSJ – NYSE Margin Debt Falls to Lowest Since 2013 3/30

WSJ – Why Oil and Gas Companies Are Bracing for Bad News From Banks 3/31

WSJ – Why Investors Are Crazy to Chase This Bond Yield Lower 4/5

WSJ – How the Reserve Bank of India’s Policy Might Finally Be Paying Off 4/5

WSJ – Chinese Developers Aim to Expand in China 4/5

WSJ – Surge in Land Prices Adds Froth to Vancouver Market 4/5

WSJ – Pfizer Walks Away From Allergan Deal 4/6

WSJ – Another Reason Investors Should Fear a Strong Yen 4/6

WSJ – China’s Currency Victory Hides Scars of War 4/7

 

March 11 – March 17, 2016

Chinese cracking down on P2P lenders. Anbang is off to a bang in U.S. real estate. Tick, tick, tick – CMBS not looking so good.

Happy St. Patrick’s Day!  To add a bit of good news, the Dow Industrials turned positive for the year yesterday and U.S. crude closed above $40 a barrel for the first time this year.  Woohoo.  This week will cover more real estate articles than usual, actually all three have ties to real estate – that’s just how it goes sometimes.  Starting in China  is 1) Don Weinland and Yuan Yang’s  “China to crack down on P2P lenders” in the Financial Times, followed by 2) Arash Massoudi, James Fontanella-Khan, and Lucy Hornby’s “China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone” in the Financial Times, which really goes hand-in-hand with Joshua Jamerson’s “Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal” in the Wall Street Journal, and 3) is Diana Olick’s “Real estate’s ticking bomb: Who gets hurt” in CNBC.

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

  • Following up on the difference between pro forma earnings and GAAP earnings and particularly for Tech companies, “Stock-based compensation isn’t a real expense – or so tech companies would have investors believe.”
    • “The difference between pro forma results and those reported under general accepted accounting principles, or GAAP, has been widening. Facebook’s GAAP net income was only 56.6% of its pro forma net income in 2015 down from 62% in 2014. For S&P 500 tech companies as a whole, there was a 19% gap between the two earnings measures in 2015, nearly double the difference in 2014.”
    • “That may have been why Warren Buffett again felt compelled to address the issue in his annual letter to Berkshire Hathaway shareholders. Excluding stock-based compensation is ‘the most egregious example’ of ‘managers telling their owners to ignore certain expense items that are all too real,’ he wrote. ‘If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?'”
  • It’s getting hot in here. “Last month was the hottest February in 137 years of record keeping, according to data released Thursday by the National Oceanic and Atmospheric Administration (NOAA). It’s the 10th consecutive month to set a new record, and it puts 2016 on course to set a third straight annual record.”
    • “The El Nino that started that started last year produced some of the hottest temperatures ever witnessed across great swaths of the equatorial Pacific. By some measures, this may now be the most extreme El Nino on record.”

Bloomberg_Global Heat Wave_3-17-16

  •  At China’s ‘two sessions,’ the party leadership is pushing more stimulus. It appears that the party leadership wants to keep the good times rolling at least until Xi Jinping has the opportunity to appoint his own nominees to the Standing Committee of the Politburo (the highest committee of the political system – 5 of 7 seats will be open) in 2017.
    • “China is aiming for just 3% growth in government revenue this year, suggesting that more of the deficit will come from tax cuts to private firms.”
    • “Promises to slim industries such as steel and coal sound tough – the government expects nearly 2m workers will be laid off-but the planned reduction would make only a small dent in oversupply. Instead the government seems to be doubling down on its well-worn recipe of debt-and investment-fueled growth.
    • “Credit is growing at twice the rate of nominal GDP, in a country already overburdened by private debt.”
  • $81 million was stolen from Bangladesh this week.  Turns out the money was routed to the Philippines, specifically to some casinos.  Why, because the Philippines, and especially their casinos, have the toughest privacy laws around – ‘don’t ask, don’t tell.’
  • Otto Warmbier, a U.S. college student was sentenced to 15 years of hard labor for attempting to steal a poster from a hotel in North Korea.
  • Brazilian President Rousseff had appointed her predecessor (Lula) to a cabinet position to provide him with a degree of legal immunity – prosecutors are seeking to indict him for involvement with the Petrobas scandal, but just before the appointment took hold, a judge barred the position.  Not so fast…
  • With negative yields taking hold in Japan, Japanese institutional investors are looking to invest funds in overseas real estate.

Interesting graphics:

From Barry Ritholtz’s The Big Picture blog.

Bianco Research_Negative Interest Rates in the World_3-17-16

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

China to crack down on P2P lenders.  Don Weinland and Yuan Yang. Financial Times. 14 Mar. 2016.

“Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

As a result, “Home sales in Beijing, Shanghai, Guangzhou and Shenzhen, China’s “first-tier” cities, grew 14% last year compared with about 7% nationwide. In Shenzhen, the average price per square meter in February increased by about 50% compared with a year earlier, according to Soufun, a real estate consultancy.”

FT_Chinese residential property prices_3-14-16

As Xia Le, chief economist for Asia at BBVA, a bank, puts it “I have been very nervous about this because it reminds me of the US subprime crisis. In the past, people buying houses paid using their own money but now they’re using speculative shadow finance.”

Basically, Peer-to-Peer (P2P) companies have allowed borrowers to circumvent government controls – requirements for buyers to have a 30% down payment for their first home and up to 50% for subsequent properties – meant to slow property price growth.  The challenge is that the P2P sector is loosely regulated and its size is not fully known. Further, P2P loans are not cheap.  “P2P loans typically mature in 90 days and carry hefty interest rates of up to 12%.”

FT_Chinese P2P Market_3-14-16

China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone. Arash Massoudi, James Fontanella-Khan, and Lucy Hornby. Financial Times. 13 Mar. 2016.

There was a lot of press about Chinese insurer Anbang this past week.  It started with Anbang buying Strategic Hotels & Resorts from Blackstone for $6.5bn. Blackstone only just closed on the 16 luxury US hotels (includes the Hotel del Coronado in San Diego and the JW Marriot Essex House Hotel in NYC) three months ago for $6bn.  Not a bad way to make a buck for Blackstone – especially considering the odds are high that a good deal of leverage was used in the initial purchase.

Who is Anbang? Anbang was founded and is led by politically connected (married to the granddaughter of Deng Xiaoping) 40-something Wu Xiaohui has grown from a small car insurer with approximately $60m in assets 12 years ago into a financial services conglomerate with over $123bn in assets (as of February of last year).

But don’t stop there.

Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal. Joshua Jamerson. Wall Street Journal. 14 Mar. 2016.

Before the ink could dry on the Strategic Hotels & Resorts deal, Anbang along with Chinese investment firm Primavera Capital Group, and J.C. Flowers & Co, submitted (March 10) a $12.8bn unsolicited bid for Starwood Hotels & Resorts Worldwide Inc, about $1.8bn more than the currently agreed to (in November 2015) deal that Marriott had made with Starwood.

Per Starwood’s current deal with Marriott, they have until March 17 to talk with rival bidders.  Don’t feel bad for Marriott.  “Marriott noted that if Starwood were to terminate the deal, it would owe Marriott a $400 million termination fee.”  Also not a bad way to make a buck – for Marriott and Starwood.

Shareholders of each company are scheduled to vote on the deal on March 28.

Geez Louise.

“Chinese companies have done more than $84 billion in deals since the start of the year, according to Dealogic, setting them up to top the record $108 billion of Chinese outbound acquisitions reached last year.”

Well that’s one way to get money out of China.

 

Real estate’s ticking bomb: Who gets hurt. Diane Olick. CNBC. 10 Mar. 2016.

Last week I made mention of defaults starting to show up in the commercial property sector.  Well a large part of that has to do with demand for commercial mortgage backed securities (CMBS) which effects property owners and developer’s abilities to refinance and acquire assets.  Bottom line, demand for CMBS bonds is drying up at the current yield offerings, especially considering the yield offered relative to other high-yield debt products.

In reference to ‘cracks’ showing up in CMBS financing, Willy Walker, Chairman and CEO of Walker & Dunlop – one of the largest suppliers of multi-family loans in the country, had this to say, “I think cracks is a little bit of an understatement for where the market has been for January and February, where, for all practical purposes, the market was frozen.”

CMBS “maturities are expected to surpass $400 billion annually this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year. CBRE “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year could have problems refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially troubled loans over these two years.”

Though, “the real refinancing wave doesn’t kick in until June, but starting in June there’s about $10 billion a month that needs to be refinanced, so unless the CMBS market finds its level and starts to price and transact again, we’re going to have more than cracks,” – Walker.

Interestingly and relatedly, “Commercial real estate prices have been strong for a few years now, thanks to high occupancy and strong demand, but in January they fell nationally for the first time in seven years, according to the Moody/RCA Commercial Property Index.”

“This is a significant milestone that signals that a shift in sentiment among commercial-property investors is under way.” – Moody’s

Other Interesting Articles

Bloomberg Businessweek

The Economist

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