Tag: Insurance

December 30, 2016 – January 5, 2017

China insurance crackdown – meaningful implications. Fewer and fewer U.S. public companies.

Headlines

 Special Reports / Opinion Pieces

Briefs

  • Yuan Yang of the Financial Times highlighted recent promises made by Beijing’s mayor that house prices will not rise in 2017.
    • So here’s a new approach, with prices haven risen by more than 25% in 2016 “Beijing’s mayor has promised that house prices in the capital will not rise in 2017 in an attempt to ease concerns over the city’s property bubble.”
    • Good for people wanting to get in on the action, bad for those that own property.
    • “We must be firm in stamping out speculative investment [in property], increase the supply of residential housing, and guarantee that there will be no month-on-month increases in house prices.” – Mayor Cai Qi
    • This message is consistent with national policy that “houses are for living in, not for speculating with.”
    • The trick though will be to apply the break and the gas in a manner that keeps pricing static and not falling.
  • Tom Hancock of the Financial Times covered the new NGO regulation in effect in China.
    • In a previous post I highlighted Edward Wong’s article on China’s new regulations on Non-Government Organizations (NGOs) requiring each NGO within the country to have an official sponsor.  Well the policy is in effect as of January 1, and guess what…
    • “China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China – ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation – will meet the law’s conditions before the January 1 deadline.”
    • Oh and there is no grace period.
    • As a result organizations are dialing down their operations to shuttling out personnel before December 31.
    • At issue is that “the law puts foreign organizations under direct supervision of Chinese police, who in the last two years have detained scores of human rights lawyers and cracked down on local groups advocating for reform via the courts. This month an office of the MPS promoted a video accusing foreign governments of using civil society to promote ‘color revolution’ in China.”
    • Bottom line, “the law says: ‘Foreign NGOS carrying out activities within mainland China shall abide by Chinese laws, must not endanger China’s national unity, security or ethnic unity; and must not harm China’s national interests.'”
    • As it stands “the MPS has said there are 7,000 foreign NGOs in China, suggesting it has a more expansive definition of the term than foreign experts who put the number closer to 1,000.”
  • Jacky Wong of The Wall Street Journal illustrated an interesting ploy by China Evergrande to sell equity that acts a lot like debt.
    • In a word, shenanigans.
    • “China Evergrande Group, the country’s largest developer by assets, said Monday that it has agreed to sell a 13.2% stake in its major subsidiary, Hengda Real Estate, to eight investors for 30 billion yuan ($4.3 billion). This values Hengda, which owns Evergrande’s core property development business, at $33 billion – almost four times the parent’s current market capitalization.”
    • So the rest of the company is worth much less than $0?
    • “The investment is basically a form of bridge financing in preparation for the company to list Hengda in mainland China, something the developer proposed back in October.”
    • Basically, the company is “effectively guaranteeing the investors an average 7.8% yield for the next three years. That is more cash drain for a company that hasn’t had a full year of positive operating cash flow since 2009 and has net debt equal to more than four times its equity, counting perpetuals as debt, among the highest in the sector.”
    • wsj_china-evergrande-operating-cash-flow_1-3-17
  • Dave Gershgorn of Quartz pointed to the automation of Japanese white-collar workers in the insurance industry.
    • “One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with ‘IBM Watson Explorer,’ starting January 2017.”
    • “Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on investment in less than two years.”
    • “Watson AI is expected to improve productivity by 30%, Fukoku Mutual says.”
    • “Artificial intelligence systems like IBM’s are poised to upend knowledge-based professions, like insurance and financial services, according to the Harvard Business Review, due to the fact that many jobs can be ‘composed of work that can be codified into standard steps and of decisions based on cleanly formatted data.’ But whether that means augmenting workers’ ability to be productive, or replacing them entirely remains to be seen.”

 Graphics

WSJ – Daily Shot: Cities Where Rent Swallows Your Salary 12/29

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WSJ – Daily Shot: Selfie-Fatalities 12/29

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FT – China/US real estate: safe as houses – Lex 12/30

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WSJ – China and the Debt-Refinancing Game in 2017 – Nathaniel Taplin 1/3

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WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 – Laura Kusisto 1/2

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Featured

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

How China’s Insurance Crackdown Spawns More Risks. Anjani Trivedi. The Wall Street Journal. 4 Jan. 2017.

“Following a year in which Chinese insurers aggressively built risky and illiquid portfolios, acquired real estate, companies and stakes in companies at home and across the world, under loose regulation, China’s insurance regulator has taken to severe tightening measures in recent weeks. Regulators have effectively barred insurers from making risking investments and banned certain insurers and insurance products with high cash value and low protection.”

“The repercussions could cause trouble far and wide. Almost 60% of China’s wealth-management products are invested in bond and money-market funds and a growing portion of these products are backed by bonds. And, they account for almost 20% of banking-system deposits.”

“China’s unlisted insurers-infamous among them, Anbang-will now see their wealth-management, product-backed financing platforms squeezed under new rules that bar investing cash raised from investment products. With policyholder deposits accounting for more than 70% of written premiums, more asset-selling may be on the cards.”

Chinese insurers under pressure to rein in overseas deals. Henny Sender. Financial Times. 3 Jan. 2017.

Adding to the WSJ article.

“Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod, acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.”

“Until recently, many analysts expected Chinese insurers to increase their offshore activity.”

Further, due to low interest rates worldwide, insurance companies have been seeking higher return investment categories. As Boston-based consultancy Cerulli Associates notes “investments in the ‘others’ category – which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate – rose from 23.7% in 2014 to 34.2% in June 2016.”

“Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that ‘the insurers have shifted to investing in riskier assets to sustain investment yields. This make their credit profiles more vulnerable to unfavorable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.”

Thus considering these insurers will find it quite difficult purchase overseas assets with capital from China, they will have to already have the cash overseas, have a means to raise cash abroad, or they will need to sell overseas assets to pursue continued investments.

“Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US ratings agencies suggested that it was likely to receive a non-investment grade rating.”

In fact, “Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed (to). That in turn would crimp its ability to buy more.”

“In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued (hurting SWF liquidity), and the US focused inward, it is not clear who will take their place.”

America’s Roster of Public Companies Is Shrinking Before Our Eyes. Maureen Farrell. The Wall Street Journal. 4 Jan. 2017.

“With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.”

“The U.S. is becoming ‘de-equitized,’ putting some of the best investing prospects out of the reach of ordinary Americans.”

“The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.”

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“In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.”

“‘There’s no great advantage of being public,’ says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of ‘The Vanishing American Corporation.’ ‘The dangers of being a public company are really evident.'”

“Among them, Mr. Davis and other say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.”

“While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds-pools of capital invested by nations-have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.”

“Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic.”

“Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.”

“With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014… the average public company is more than three times as large as it was in 1997, after adjusting for inflation.”

Unfortunately for investors, it is unlikely that they’re going to be able to invest in a start-up with huge upside potential through the public markets…

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Other Interesting Articles

Bloomberg Businessweek

Bloomberg – Wall Street, America’s New Landlord, Kicks Tenants to the Curb 1/3

Bloomberg – Harvard Academic Sees Debt Rout Worse Than 1994 ‘Bond Massacre’ 1/4

FT – French luxury hotels woo daytime lovers 12/29

FT – Chinese government enters storm over domestic filmmaking 12/30

FT – Stalling Chinese box office raises Hollywood fears 12/30

FT – Uber and Airbnb business models come under scrutiny 12/30

FT – Tesla falls short of vehicle delivery target in 2016 1/3

FT – Apple removes New York Times app from its China store 1/4

FT – Apple-SoftBank: noncore bets 1/4

FT – German push for home ownership drives price bubble fears 1/4

NYT – A Peek Inside the Strange World of Fake Academia 12/29

NYT – Uncertainty Over New Chinese Law Rattles Foreign Nonprofits 12/29

NYT – In a Brutal Year in Venezuela, Even Crime Fighters Are Killers 12/30

Visual Capitalist – Infographic: Vancouver Real Estate Mania 6/2/16

WSJ – The Chinese Theme-Park Honey Trap 1/3

WSJ – Shanghai Tower Fails to Meet High Leasing Hopes 1/3

WSJ – Slippery Logic to Russia’s Oil-Cut Claim 1/4

WSJ – Ignore Tesla’s Latest Slip at Your Peril 1/4

 

 

October 28 – November 3, 2016

Declining global trade. Chinese bank loan loss provisions. Pending auto loan crisis?

Headlines

Special Reports / Opinion Pieces

Briefs

    • “Earlier this year, One Kings Lane, the online home goods retailer once worth almost $1 billion, sold itself to Bed Bath & Beyond, one of the companies it was supposed to displace, for just $12 million. Jawbone, the maker of sleek wearable fitness hardware once seen as a threat to Apple’s, has seen its value fall 50%. Since 2015, researcher CB Insights has counted 80 ‘down rounds,’ instances of a startup accepting a reduced valuation to raise more venture funding. ‘There was this fog hanging over Silicon Valley in 2001,’ says Botha (Roelof Botha, partner at VC firm Sequoia Capital) referring to the last big tech bust. ‘And there’s a fog hanging over it now. There’s no underlying wave of growth.'”
    • Yet at the same time VC funds are flush. “A few years ago, a big VC fund might have had about $500 million to play with. Today, ‘big’ means well over $1 billion. VCs raised $12 billion in the first quarter of 2016, which the industry’s trade group says marked a 10-year high. ‘The world has never seen an investment climate like this one,’ says Bill Gurley, a partner with Benchmark who led the firm’s investment in Uber. ‘It’s hard to express how much money is out there.'”
    • As Benchmark’s Gurley puts it “we’re in a slow correction. You might see a unicorn go down once a quarter.”
    • “Grocers are struggling to lure e-commerce-loving millennials into their aisles amid what experts say is a permanent shift in shopping patterns among consumers.”
    • “I don’t think we’ve seen shopping change so dramatically ever. Those things in the past that have been real drivers for grocery in terms of freshness and quality aren’t the key drivers for millennials.” – Marty Siewart, senior VP for consumer and shopper analytics at Nielsen
    • “Consumers between 25 and 34 years of age last year spent an average of $3,539 on groceries, about $1,000 less in inflation-adjusted dollars than people that age spent in 1990, federal data shows.”
    • Of course it doesn’t help that “the more than 75 million Americans born in the 1980s and 1990s are also delaying marriage and childbearing, milestones that traditionally lead people to start making big trips to the grocery store.”
    • wsj_grocery-slump_10-27-16
    • Austria just sold 70-year bonds at a yield of 1.5%. On the same day the country also sold 7-year bonds at a sub-zero yield.
    • ft_annual-sales-of-long-dated-debt_10-27-16
  • Peter Wells of the Financial Times pointed to the ‘real’ reason why AIA has a fall in insurance policies underwritten.
    • “UnionPay customers from the mainland (China) will only be allowed to use their credit and debit cards to buy accident, illness and tourism-related insurance policies in Hong Kong, the state-backed bank card provider said on Saturday through one of its subsidiaries.”
    • Why the sudden change…
    • “UnionPay said it ‘has observed a significant increase in overseas insurance transactions by cards issued from mainland China’ and is now preventing its mainland customers from buying insurance products that include ‘investment-related contents.'”
    • “The purchase of insurance products overseas, particularly in Hong Kong, had become a popular way to move money offshore, particularly after the devaluation of the renminbi in August 2015.”
  • Danny Hakim of the New York Times covered the new findings about genetically modified crops and how the results haven’t quite lived up to the promises.
    • The skinny: “genetic modification in the United States and Canada has not accelerated increases in crop yields or led to an overall reduction in the use of chemical pesticides.”
    • “An analysis by The Times using United Nations data showed that the United States and Canada have gained no discernible advantage in yields – food per acre – when measured against Western Europe, a region with comparable modernized agricultural producers like France and Germany. Also, a recent National Academy of Sciences report found that ‘there was little evidence’ that the introduction of genetically modified crops in the United States had led to yield gains beyond those seen in conventional crops.”
    • “At the same time, herbicide use has increased in the United States, even as major crops like corn, soybeans and cotton have been converted to modified varieties. And the United States has fallen behind Europe’s biggest producer, France, in reducing the overall use of pesticides, which includes both herbicides and insecticides.”
  • Mary Childs of the Financial Times discussed some of the changes afoot in the private equity business.
    • A new trend is taking place in the private equity world, one that is promising to hold investor money for longer periods in return for less returns.
    • Granted, “private equity has become a victim of its past success: its strong performance relative to other asset classes looks increasingly difficult to replicate as high valuations and stiff competition among private equity groups make new deals more expensive.”
    • Thus new funds are “offering investors vehicles that will run for 14 years or more, rather than the traditional 10 years, and offer 15% returns or less, lower than the 20% in a typical fund.”
    • “Already the industry’s average returns are slipping below the 20% mark: for 2015, buyout funds generated an average internal rate of return of 17.1%, according to data from Preqin.”
    • “Fund managers are deploying less money, sitting on a record $839bn of so-called dry powder at the end of the third quarter, according to Preqin. Many buyout chiefs say they are modelling potential investments with the expectation that they will be selling into a lower stock market.”
    • Speaking to the timelines of these new funds, the intent is to match investment returns to investor’s long-term liabilities and to avoid forced sales due to too-short investment time horizons.
  • Michael Hiltzik of the Los Angeles Times posted about a recent agreement between Dalian Wanda Group and the City of Beverly Hills on a real estate development that sets quite a precedent – good or bad depending on which side you’re on.
    • The benefits of being a city where entitled land is scarce and money flows abundantly… or a further sign that this real estate development cycle has been going on too long such that municipalities can continue to up the ante.
    • The City of Beverly Hills and the Dalian Wanda Group (large Chinese developer) just inked perhaps the most advantageous deal to a municipality – ever.  Granted, Dalian Wanda wouldn’t have done the deal if it didn’t make sense to them – at least on paper.
    • “The terms are still subject to approval by the Beverly Hills City Council, which will launch a three-day round of hearings on the development Monday. The terms include a doubling of the upfront payment from Wanda to the City from $30 million to $60 million; a quadrupling of environmental mitigation and sustainability fees to 1.25% from 0.45% of the sale of any portion of the development, including the condos, and an additional 2% of any subsequent sale; and hotel occupancy surcharge of 5%, on top of the city’s statutory transient occupancy tax of 14%.”
    • “The city says it expects the terms to yield $820 million in revenue over 30 years, an increase of $560 million over the previous terms.”

 Graphics

FT – Spanish unemployment rate below 20% for first time in 6 years – Tobias Buck 10/26

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Visual Capitalist – Prices Are Skyrocketing, But Only For Things You Actually Need – Jeff Desjardins 10/28

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FT – Solar industry rollercoaster offers a bumpy ride – Ed Crooks 10/30

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FT – US mobile advertising surges 89% – Anna Nicolaou 11/1

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Daily Shot – Nigeria’s FX Reserves 11/1

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Economist – Angling for the future of TV 10/29

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Bloomberg – What Rising Bond Yields Are Trying to Tell Us – Mark Gilbert 11/3

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FT – Millennials drive Chinese online consumer boom – James Kynge 11/2

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Featured

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

A Little-Noticed Fact About Trade: It’s No Longer Rising. Binyamin Appelbaum. New York Times. 30 Oct. 2016.

“…Trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8% in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.”

“It is the first time since World War II that trade with other nations has declined during a period of economic growth.”

Further, “the United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion.”

“In better times, prosperity increased trade and trade increased prosperity. Now that wheel is turning in the opposite direction.”

Worse, “there are also signs that the slowdown is becoming structural. Developed nations appear to be backing away from globalization.”

“The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.”

“During the 1990s, global trade grew more than twice as fast as the global economy. Europe united. China became a factory town. Tariffs came down. Transportation costs plummeted.”

“But those changes have played out. Europe is fraying around the edges; low tariffs and transportation costs cannot get much lower. And China’s role in the global economy is changing. The country is making more of what it consumes, and consuming more of what it makes. In addition, China’s maturing industrial sector increasingly makes its own parts. The International Monetary Fund reported last year that the share of imported components in products “Made in China” has fallen to 35% from 60% in the 1990s.”

“The result: The I.M.F. study calculated that a 1% increase in global growth increased trade volumes by 2.5% in the 1990s, while in recent years, the same growth has increased trade by just 0.7%.”

Now, there is excess capacity in the world’s shipping lines. “In 2009, the world’s cargo lines had enough room to carry 12.1 million of the standardized shipping containers that have played a crucial, if quiet, role in the rise of global trade. By last year, they had room for 19.9 million – much of it unneeded.”

Further, automation is making it difficult, if not impossible, for developing nations to follow in China’s footsteps. “Dani Rodrik, a Harvard economist, calculates that manufacturing employment in India and other developing nations has already peaked, a phenomenon he calls premature deindustrialization.”

It doesn’t help that the benefits of globalization were oversold and that now nativists and protectionists are overstating the downsides.

China banks in stand-off with regulators on loan loss provisions. Yuan Yang. Financial Times. 30 Oct. 2016.

“China’s banks are in a deepening stand-off with regulators over the level of provisions they must make to protect against loan defaults as bad debts continue to climb.”

Current provisions call for a loan loss provision ratio target of 150%.  As it stands at least two of China’s largest four banks are below the coverage ratio. As of the third quarter Industrial and Commercial Bank of China has a coverage ratio of 136% (down from 143% in the second quarter). And that’s based on officially recognized non-performing loans.

“Officially, 1.8% of all Chinese loans are non-performing, although the credit rating agency Fitch puts the true figure at more than 15%. Following a huge credit boom, the outstanding amount of non-performing loans doubled in the two years before June 2016, reaching Rmb1.4tn.”

Hence, will the banks have to raise their loan loss reserves or will the regulators reduce the target ratio?

As Zhang Yingchao, a banking analyst at NSBO China – an investment bank, aptly puts it “setting standards is a tussle between the banks and the regulators. Who gets the upper hand depends on the state of the economy. If increasing the credit supply is necessary to meet the growth target of 6.5-7%, then the regulators will need to relax standards.”

Fears rise over auto loan crisis as repo men see sales’ dark side. Joe Rennison. Financial Times. 1 Nov. 2016.

“Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.”

“That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.”

However, one of the key differences between this cycle and last is that whereas many of the repossessions in 2008 and 2009 were from fraudulent schemes “people renting cars under a fake name and not returning them, for example,” this time there has been a boom in subprime auto loans and people just not able to repay their loans.

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The auto market is booming and correspondingly or really as a result of the growth in the auto loan market. “The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.”

According to Peter McNally, a senior analyst at Moody’s – the rating agency, “while we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable.”

“The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7%. Net losses across subprime auto ABS hit 9.29% in September, according to Fitch – 23% higher than a year earlier.”

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“The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.”

ft_top-10-subprime-auto-loan-issuers-2016_11-1-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Apple’s profits in China down by almost a fifth 10/26

FT – China pension reform to send flood of cash into domestic equities 10/26

FT – China property developers feel chill as cooling measures bite 10/27

FT – Credit Suisse plans cost-sharing project with another bank 10/29

FT – Russia prepares for deep budget cuts that may even hit defense 10/30

FT – Japan insurers prepare for age of self-driving vehicles 10/30

FT – China’s strongman rule sets a test for the west 10/30

FT – Venezuela’s crisis comes to a head in the streets 10/30

FT – Shell and BP warn not to expect strong oil rebound in 2017 10/31

FT – Forget the IMF: global chemicals are your guide to future performance 11/1

FT – China’s corporate governance standards fall 11/2

FT – Egypt devalues currency and begins free float to secure IMF funds 11/3

NYT – China’s Communist Party Declares Xi Jinping ‘Core’ Leader 10/27

WSJ – The Worrying Weak Point for Super-Strong Bonds 10/28

WSJ – Why Everything Isn’t All Right With China’s Economy 11/1

WSJ – More Americans Leave Expensive Metro Areas for Affordable Ones 11/1

 

September 23 – September 29, 2016

Venezuela on the brink.

This post is number 52.  A full year down and I hope that you’ve found value in the Janus Observer.  Thank you for everyone that has been following this blog.    More to come.

Sincerely,

J. Duff Janus

Headlines

Briefs

    • BlackBerry is dropping its hardware division and will focus on software and services.
    • “At its zenith in 2008, BlackBerry accounted for one in every five smartphones sold…”
    • FT_BlackBerry share price_9-28-16
    • “As sales soared, the company’s market value hit $80bn, compared with roughly $4bn today.”
    • Going forward the company is striking licensing deals in Indonesia to manufacture and promote its devices in the country – BlackBerry is pursuing a similar strategy in India and China.
    • FT_BlackBerry phone production_9-28-16
    • “At an annual $278.50 a square foot for prime office space, rental rates are on average nearly 80% higher in Hong Kong than in Manhattan, according to an annual ranking by property consultancy Knight Frank.”
    • “Chinese interest has pushed up Hong Kong building prices to the point that they are rarely attractive investment opportunities to other companies, said Denis Ma, head of research at Jones Lang LaSalle in Hong Kong.”
    • “The flurry of buying by mainland investors has pushed the yields, or the amount made on rents divided by the price of a building, down to 2.5% to 3% from 4% just four years ago, said Mr. Ma.”
    • WSJ_Chinese RE acquisitions_9-27-16
    • “Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020 – cutting staff, delaying projects, and squeezing contractors-they’ve continued to green-light new wells from the Norwegian Sea to Brazil, and from Uganda to the Gulf of Mexico. Those initiatives mean oil production will continue to grow, adding to the supply glut and putting downward pressure on prices.”
    • Bottom line: industry standardization and joint efforts in improving efficiency.
    • Bloomberg_Falling oil production costs_9-27-16
    • “At Statoil, the three wells drilled at its Snorre B platform cost an average 170 million kroner ($21 million) compared with about 490 million kroner for previous projects, according to the Stavanger, Norway-based company. That means oil obtained by the platform, which began pumping some 80,000 barrels a day, costs an average of $10 a barrel.”

Special Reports / Opinion Pieces

Graphics

Visual Capitalist – UBS Global Real Estate Bubble Index – Jeff Desjardins 9/27

Visual Capitalist_UBS Global RE Bubble Index_9-27-16

FT – Rhode Island cuts its hedge fund program by two-thirds – Mary Childs 9/28

FT_Hedge fund investor flows_9-28-16

Featured

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

Venezuelan oil major’s debt swap: the beginning of the end? Robin Wigglesworth and Andres Schipani. Financial Times. 25 Sep. 2016.

“The head of Petroleos de Venezuela (PDVSA) last week unveiled plans to swap more than $7bn of bonds maturing next year with longer-dated debts due in 2020. To sweeten the deal for investors, PDVSA offered up its US subsidiary Citgo Petroleum as collateral.”

“S&P (the ratings agency) said it would constitute a default by PDVSA, and many analysts see the move as a curtain-raiser the move as a curtain-raiser for an inevitable restructuring of Venezuela’s national debts.”

“S&P last week lowered its grade on the affected bonds to triple-C, one of the lowest rungs possible, and said that if the swap goes through it would be considered a ‘distressed exchange’ and therefore a formal default. This would not directly affect the country’s creditworthiness, but S&P warned that a ‘sovereign default seems inevitable.'”

“PDVSA’s proposed debt swap is also complicated by the proposal to offer up to 50.1% of Citgo as security of bondholders who agree to the deal. Firstly, it is already the state oil company’s main ‘seizable’ asset in case of default; secondly, if it is fully pledged to underpin the bond swap then it would in practice deprive other bondholders of their main security.”

“Lawyers say this would therefore probably fall foul of the ‘negative pledge’ clause in PDVSA’s existing bonds. Tellingly, the 442 pages of documentation on the debt swap lists no law firms or investment banks involved.”

“If the deal collapses, then it worsens Venezuela’s predicament. Absent a deal, the country and PDVSA will jointly have to come up with some $15bn over the next 14 months for debt repayments. Although the government does not guarantee PDVSA’s debts, some lawyers say that in practice it would be hard to disentangle a full default and restructuring of the oil company from its parent, the state.”

“The country’s reserves are ‘critically low’ at $11.9bn, S&P notes, down from $16bn at the start of the year. And most of the reserves are in gold, which are hard to liquidate in a hurry without crashing prices.”
Other Interesting Articles

The Economist

Bloomberg – Blackstone’s Top Dealmaker Says Now Is The Most Difficult Period He’s Ever Experienced 9/27

Contra Corner – Dangerous Bubbles in Plain Site 9/27

Economist – Italy’s constitutional referendum 9/28

FT – China’s economic fate rests on its housing market 9/22

FT – How to value (worthless) Venezuelan oil bonds 9/23

FT – Wounds from the 2008 financial crisis are still bleeding 9/23

FT – Perry Capital to shut down after 28 years 9/26

FT – InterContinental drops on Airbnb fears 9/26

FT – China cities move to halt housing market frenzy 9/26

FT – Stretching the truth in Chinese literature 9/26
FT – How would a Fed rate hike affect consumers? 9/27

FT – Evergrande: never more 9/27

FT – Deutsche Bank and Twitter are lost in the past 9/28

FT – How the BlackBerry phone era came to an end 9/28

NYT – An Online Education Breakthrough? A Master’s Degree for a Mere $7,000 9/28

WSJ – The Looming Storm in Insurance 9/23

WSJ – Another $10 Billion Hong Kong Stock Market Mystery 9/26

WSJ – Chinese Insurers’ Short-Term Strategy Is Getting Old 9/28

August 5 – August 11, 2016

It’s a low-growth world for us…instead of high returns, we get zilch… Thus it is no surprise that funds are being pushed back to emerging markets in a big way.

Headlines

Briefs

    • Blackstone Group ($356bn in assets) is getting into the nontraded real estate investment trust business. Its first nontraded REIT – The Blackstone Real Estate Income Trust Inc. – was just registered on Wednesday.
    • The REIT is looking to raise $5bn and its manager “will receive a fee of 12.5% of the REIT’s total return after meeting a 5% hurdle.”
    • “Capped at close to 9%, the cost structure of the new Blackstone REIT is clearly different than the traditional full-commission nontraded REIT sold mainly by independent broker-dealers such as LPL Financial and Ameriprise Financial Services Inc. Such REITs typically carry loads of 12%, including a 7% (fee) to brokers at the time of sale. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.”
    • “Look for Blackstone to shun the traditional marketplace of independent broker-dealers and turn to wirehouses such as Merrill Lynch and Morgan Stanley, with whom they already have business relationships…”
    • “Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.”
    • “The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price – but that implies a bigger loss down the road.“
    • “Germany now has more than €160 billion of zero-coupon bonds in issue. All of its two-year notes pay no interest, along with three of its five-year notes; all of them trade above face value.”
    • WSJ_German bonds becoming pricier_8-10-16
    • “The crucial thing to understand is that these instruments are no longer bonds – at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.”
  • Liyan Qi of the Wall Street Journal added context to China’s efforts to reduce the population of Beijing.
    • In an effort to reduce the problems from rapid growth and overpopulation, Beijing is seeking to push out residences to neighboring provinces such as Hebei and Cangzhou (see map).
    • WSJ_Cutting China’s Capital Down to Size_8-10-16
    • “Despite the city’s efforts to keep a lid on population growth, greater Beijing now has almost 22 million people, an increase of some 6 million in a decade, official data show. The central area, comprising of six districts grew at an average rate of 414,200 a year over the same period to about 13 million.”
    • “Municipal leaders’ latest five-year plan aims to keep greater Beijing’s population under 23 million and to shrink the urban center by 15% by 2020, effectively pushing out some 2 million people – roughly equivalent to excising more than the population of Manhattan from New York City and dispersing those people elsewhere.”
    • “The strategy is to move low-end businesses such as wholesale markets, to Hebei-the province surrounding Beijing where growth has flagged-and coax people to follow.”
    • Just think what will happen to real estate prices when you push out that much demand…but then again, the laws of economics are generally suspended in China.

Special Reports

Graphics

WSJ – Companies Routinely Steer Analysts to Deliver Earnings Surprises – Thomas Gryta, Serena Ng and Theo Francis 8/4

WSJ_Managing earnings expectations_8-4-16

FT – Best coast tech is top and looking to the clouds for growth – Richard Waters 8/4

FT_Rise of the tech giants_8-4-16

Bloomberg – Manhattan Luxury-Condo Glut Ends Developer Rush for Land Deals – Sarah Mulholland and David M Levitt 8/3

Bloomberg_Manhattan Land Deals_8-3-16

FT – US economy: Decline of the start-up nation – Sam Fleming 8/4

FT_US Startup density_8-4-16

FT_20 counties generating new business_8-4-16

FT_Fewer young companies_8-4-16

WSJ – American Paradox: It’s Never Been Cheaper for Cities and States to Borrow Money…And They Refuse to Do It – David Harrison and Heather Gillers 8/7

WSJ_US Municipal borrowing_8-7-16

WSJ – Are Negative Rates Backfiring? Here’s Some Early Evidence 8/8

WSJ_Negative rates having unintended effects_8-8-16

WSJ – Productivity Slump Threatens Economy’s Long-Term Growth – Ben Leubsdorf 8/9

WSJ_Declining US Labor Productivity_8-9-16

FT – US bonds: where credit is due – Lex 8/11

FT_Credit Statistics for US debt issuers_8-11-16

Featured

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

We’re in a Low-Growth World. How Did We Get Here? Neil Irwin. New York Times. 6 Aug. 2016.

“Slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2% a year from 1947 through 2000 – but starting 2001 has averaged only 0.9%. The economies of Western Europe and Japan have done worse than that.”

NYT_Growth lower than projected_8-6-16

According to a new analysis by the McKinsey Global Institute, 81% of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97% in Italy, 70% in Britain, and 63% in France.”

NYT_Annual per capita GDP over preceding 10yrs_8-6-16

“An entire way of thinking about the future – that children will inevitably live in a much richer country than their parents – is thrown into question the longer this lasts.”

Bottom line, people are working fewer hours and there is less “economic output being generated for each hour of labor.”

Investing: The great escape. Jonathan Wheatley and James Kynge. Financial Times. 7 Aug. 2016

“The latest growth forecasts from the International Monetary Fund offer some optimism. It expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.”

“But in truth emerging markets are growing from a shrunken base and a big part of the upturn is not due to things getting better but to things no longer getting worse. Big economies such as Russia and Brazil, for example, in deep recession for the past two years, are finally heading back to growth.”

FT_Investors flood into EMs_8-7-16

“Fund flows to EMs have gone through the roof, but this is best described as [the result of] push factors rather than pull factors.” – Peter Kinsella, head of EM research at Commerzbank

“The EM bond rally is really a global fixed income rally.” – David Hauner, head of EM strategy at Bank of America Merrill Lynch

BlackRock’s ($4.6tn money manager) Sergio Trigo Paz, head of emerging markets fixed income, “who changed his view on EM bonds in February, describes what is happening now as a ‘capitulation’ – a realization by big institutions that they can no longer afford to ignore the returns on offer in emerging markets, which have been as high as 13% in the year to date.”

“The impact of such flows on EM sovereign bond prices, which have risen 15% this year, has been amplified by the fact that the asset class is small. An estimated $12tn of developed market government bonds now offer yields of less than zero, while their emerging market equivalents add up to about $800bn, so their ability to offer an alternative is limited.”

“For now, the pressure on prices has all come from buyers and for those who got in early the returns have justified the risks. The trick will be to know when to head for what could quickly become a very crowded exit.”

Other Interesting Articles

The Economist

Bloomberg – Retail Outlets Are on the Outs 8/4

Bloomberg – There Are All Kinds of Signs of a High-End Real Estate Slowdown 8/10

Bloomberg – Blackstone Enters Nontraded REIT Market With $5 Billion Fund 8/10

FT – I’m from the central bank and I’m here to help 8/4

FT – Oil and gas downturn spells trouble for Singapore 8/7

FT – Demand drives $3bn Mexico bond deal at record rate 8/9

FT – Advisors quash Puerto Rico creditor differentiation 8/9

FT – China takes a gamble in scapegoating the west 8/11

InvestmentNews – Inland Real Estate Investment Corporation eliminates transaction fees on its nontraded REITs 8/9

NYT – New Photos Cast Doubt on China’s Vow Not to Militarize Disputed Islands 8/8

NYT – Chinese Tech Firms Forced to Choose Market: Home or Everywhere Else 8/9

WP – Venezuela’s death spiral is getting worse 8/8

WSJ – When Chinese State Support Evaporates on Investors 8/8

WSJ – New Rules and Fresh Headaches for Short-Term Borrowers 8/8

WSJ – WeWork Misses Mark on Some Lofty Targets 8/9

WSJ – The Typical Home in San Jose Now Costs More Than $1 Million 8/10

WSJ – Lopsided Housing Rebound Leaves Millions of People Out in the Cold 8/10

WSJ – Why China’s Bond Market Rally Is Risky Business 8/10

Yahoo Finance – Macy’s plans to close 100 stores, boost online investment 8/11

Zero Hedge – August Corporate Bond Issuance Breaks All Records Thanks to Relentless Demand For Yield 8/8

 

July 29 – August 4, 2016

Insurers having to rethink their business model. India makes a giant leap forward in tax reform.

Headlines

Briefs

    • “Sovereign wealth funds are investing less money directly than at any time in the past five years. This marks the end of a safety net whereby state-backed vehicles mopped up assets in times of market stress, according to research.”
    • “The Bocconi report found that state funds invested €48bn directly last year, down 57% from €112bn in 2008.”
    • “Given the low oil-price environment and lower revenues for oil producers, [state funds] no longer have the cash positions to get into the markets once they correct.” – Sven Behrendt, managing director of GeoEconomica, a consultancy
    • “What if all Londoners, no matter how young or frail, smoked for at least six years? In effect, they already do. The city’s air pollution exacts an equivalent toll on each resident, cutting short the lives of nearly 10,000 people each year and damaging the lungs, hearts and brains of children.”
    • Bottom line, more needs to be done to track and publish long-term air-quality indexes similar to the existing short-term gauges that people and cities can utilize to alter behaviors and make informed life choices.
  • Jonathan Wheatley of the Financial Times called attention to the demand that Emerging Market bonds have seen as the world has become devoid of ‘safe’ income yielding products.
    • “With an estimated 30% of global government debt now offering yields of less than zero, he (Daniel Senecal, head of credit research at Newfleet Asset Management) says traditionally conservative investors are being pushed into new areas.”
    • “If you’re a pensions guy you have to do something. With German 10-years at zero, you need to change your mindset. Your whole view migrates into US high-yield and EMs.” – Daniel Senecal
    • Geez it’s a tough world to invest in right now…

Special Reports

Graphics

WSJ – Why Bank of Japan Dipped Into Bag of Small Tricks 7/29

WSJ_Why Bank of Japan Dipped Into Bag of Small Tricks_7-29-16

Visual Capitalist – The Rise and Fall of Yahoo 7/29

Visual Capitalist_The rise and fall of Yahoo_7-29-16

Economist – Comparing urban air pollution 8/1

Economist_Nitrogen dioxide city comparison_8-1-16

FT – Japan launches $45bn stimulus package – Robin Harding 8/2

FT_Japan stimulus_8-2-16

FT – Emerging market bonds lure investors seeking yield – Jonathan Wheatley 8/2

FT_EM sovereign rally_8-2-16

WSJ – Bank of England Cuts Key Interest Rate to New Low 8/4

WSJ_Bank of England rate reaction_8-4-16

Featured

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

Insurers: Forced to dig deep. Oliver Ralph and Alistair Gray. Financial Times. 1 Aug. 2016.

“Insurers globally are having to come to terms with the idea of ‘lower for longer’ interest rates, making deep changes to business models that had been unaltered for decades. Whereas previously they might have clung to the hope that higher rates were around the corner, there is a realization that the industry has to do things differently – from investing in assets that might once have been seen as too risky, to experimenting with new products.”

As to how much cash are we talking about, PwC estimates that by 2020, insurance companies will manage about $35tn worth of assets.

“Traditionally, much of that has gone to relatively safe homes, such as bonds. At the end of last year, bonds made up about 68% of US property insurers’ total investments and 76% of life insurers’, according to S&P Global Market Intelligence. When those bonds offered decent yields there was no problem. Insurers could fulfill promises to customers and still have plenty left for shareholders.”

But “by last year the net yield on US life insurers’ overall invested assets had fallen to 4.7% – about a quarter lower than 2002 levels.”

Hence, the performance of US life insurance companies has tended to move in tandem with the 10-year Treasury yield…

FT_US life insurance companies and bond yields_8-1-16

In regard to attaining higher returns, insurers can either take on higher risks or tie up cash for longer.  “Many prefer the latter, investing in more illiquid assets such as property. UK insurer Aviva says 80% of the new investments it is making to back its annuity business will be in long-duration assets rather than traditional gilts or corporate bonds.”

“Infrastructure investments are particularly popular as they offer the long-term cash flows life insurers need to back their promises. Germany’s Allianz, for example, is one of the main backers of London’s £4.2bn supersewer.”

Consider the alternative…“Nobody likes to invest at negative yields but life insurers have so much cash that they need to invest, and they need to do something with it.” – James Peagam, head of global insurance solutions at JPMorgan Asset Management

As to the other side of the equation, ‘new products’ or raising premiums, this is already underway.

“Life assurance customers may see the biggest changes. For decades, the industry has offered savings and retirement products that offer guaranteed minimum returns. In the future, these may no longer be on offer.”

“This would be a major shift. In the US, products with guarantees account for 60-80% of the US life insurers’ balance sheets, Moody’s estimates. The average outstanding guarantee is returning between 2% and 4%.”

The replacement product: “unit-linked products. These make no promises: customers’ investments simply rise and fall with the markets. They are similar to traditional asset management products.”

Which of course puts them in direct competition with traditional asset managers that are facing a major business model challenge from low-cost index fund companies like Vanguard and BlackRock.

“As Jon Hocking, an analyst at Morgan Stanley, points out, the unit-linked model distances insurers from their customers. ‘The risk is that you open Pandora’s box and the industry loses its dominant position in the long term savings market. The customer chooses between products and the only distinction is the fund performance” and fees…

So which insurers are under particular pressure, in the US these are the companies specializing in long-term care (“low interest rates have exacerbated the problems caused by rising treatment costs”) and those that have sold ‘universal life’ protection (“policies that combine death benefits with tax-advantaged savings”).

“Transamerica, a large US provider, is being sued by the advocacy group Consumer Watchdog on behalf of policyholders who bought coverage decades ago. It said consumers who had been offered guaranteed interest of at least 5.5% a year had been stung by premium increases of almost 40%.”

India’s economy: One nation, one tax. Economist. 4 Aug. 2016.

India just passed a new goods-and-services tax (GST) that will “unify the country’s 29 states and 1.3 billion people into a common market for the first time.”

“Few countries are fiddlier than India when it comes to paying taxes; the World Bank ranks it 157th out of 189 for simplicity… Because the rates differ between states, making stuff in one and selling it in another is often harder within India than it is in trade blocs such as NAFTA or the European Union.”

“That should change with the GST, essentially an agreement among all states to charge the same (still to be decided) indirect tax rates.”

“Better yet, the GST will be due on the basis of value added. That avoids businesses being thwacked by taxes on the entire value of the products they buy and sell rather than the value they create – a situation that often made it cheaper to import stuff rather than make it locally. Just as importantly, by requiring businesses to document the prices at which they buy inputs and sell products, it will force vast swathes of the economy into the reach of the taxman.”

The tax is supposed to be enacted in April 2017. There is a lot to be buttoned up by then and chances that exceptions will be inserted; however, it is good step forward and has the chance of boosting India’s GDP by 1-2 percentage points.

Other Interesting Articles

The Economist

Bloomberg – Rich Investors Fear Fortunes Will Fade While They’re Playing Golf 7/28

Bloomberg – Fragile U.S. Economy Now Facing a Slowdown in Building Boom 7/31

Bloomberg – Allianz Buys Stake in Manhattan’s 10 Hudson Yards Skyscraper 8/1

Bloomberg – Where First-Time Homebuyers Can Go Big 8/2

Fast Co. Design – An Exclusive Look At Airbnb’s First Foray Into Urban Planning 8/2

FT – The US student debt bubble is a study in financial dysfunction 7/29

FT – Ant’s Alipay challenges China Unionpay’s dominance 7/31

FT – US $18bn credit card debt spree sparks fears 7/31

FT – WTI closes in bear market 8/1

FT – Microsoft sells $20bn of debt to fund LinkedIn Deal 8/2

FT – European bank shares fall in brutal start to August 8/2

FT – Star designers side with Apple in Samsung patent case 8/4

LAT – As new apartments flood downtown L.A., landlords offer sweet deals 8/3

NYT – Harnessing the Immune System to Fight Cancer 7/30

NYT – Zika Cases in Puerto Rico Are Skyrocketing 7/30

NYT – Russia’s Acres, if Not Its Locals, Beckon Chinese Farmers 7/31

NYT – Bank of England Cuts Interest Rate to Historic Low, Citing Economic Pressures 8/4

WSJ – The Divide Between GDP and Jobs 7/29

WSJ – Uber in China: Why Foreigners Never Win in Tech 8/1

WSJ – Chinese Head to the Web to Feed Infants 8/2

WSJ – Why Investors Everywhere Should Watch Japan’s Bond Market 8/2

WSJ – Rio Projects Fail to Reach the Finish Line 8/2

WSJ – Chinese Insurers Need Another Leg to Stand on 8/3

WSJ – What Oil in the $40s Means for Oil Majors 8/4

WSJ – London Falls Behind New York and Hong Kong in Most Expensive City Rankings 8/4

July 1 – July 7, 2016

The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.

Headlines

Briefs

    • As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
    • “Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.“
    • “Almost 87% of Japanese government bond yields are now below zero.”
    • “Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
    • “Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
    • For reference, “the BOJ now holds almost 30% of its government’s bonds.”
  • Rich Miller and Steve Matthews of Bloomberg called attention to the challenge that Janet Yellen faces in regard to setting rates when the US economy is running short of labor.
    • “Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
    • “We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
    • “At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
  • Central Banks are putting a squeeze on the bond market according to Min Zeng and Christopher Whittall of the Wall Street Journal.
    • “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
    • “Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”

Special Reports

Graphics

FT – Government bond yields fall to fresh record lows led by UK Gilts 7/1

FT_UK 10 year gilt yield_7-1-16

FT_US 10 yr treasury yield_7-1-16

WSJ – Debt for Cheap: U.S. Companies Can Profit from Sinking Rates – Justin Lahart 7/1

WSJ_Debt for Cheap, U.S. Companies Can Profit from Sinking Rates_7-1-16

The Big Picture – China spends more on economic infrastructure annually than North America and Western Europe combined 7/4

The Big Picture_China economic infrastructure spending_7-4-16

FT – Bad-debt warnings triggers fresh fears for Italian banks 7/4

FT_Italian banks bad debt fears_7-4-16

Visual Capitalist – This Map Shows the Average Income of the Top 1% by Location 7/6

Visual Capitalist_Avg income of top 1%_7-6-16

WSJ – Central Bank Buying Puts Squeeze on Bond Market – 7/6

WSJ_Central bank holdings of govt bonds_7-6-16

Featured

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

Bad Debt Piled in Italian Banks Looms as Next Crisis. Giovanni Legorano. Wall Street Journal. 4 Jul. 2016.

“In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”

“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”

According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”

“…impaired loans at Italian banks now exceed €360 billion – quadruple the 2008 level – and they continue to rise.”

“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional €40 billion in write-downs.”

“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”

“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry

However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains.  The Italians though are concerned “about the €187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”

IEA warns of ever-growing reliance on Middle Eastern oil supplies. Anjli Raval and David Sheppard. Financial Times. 6 Jul. 2016.

“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”

“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”

“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”

“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”

Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.

“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”

“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol

Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”

“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”

“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol

S&P sounds alarm on hedge fund reinsurers. Alistair Gray and Miles Johnson. Financial Times. 6 Jul. 2016.

“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”

“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”

“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”

“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”

“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”

“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”

“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – SMU, Yale Endowments Unload Real Estate Assets Due to Cooling Markets 7/1

Bloomberg – Blackstone Tenants Get a Shot at Buying Their Rental Houses 7/4

Bloomberg – Treasuries Deliver $700 Billion Windfall to World Safety Seekers 7/6

CNBC – This private equity giant wants to give landlords millions – here’s how 6/30

FT – Mexico raises interest rates to shore up peso 6/30

FT – Zenefits agrees to halve its valuation to $2bn 6/30

FT – Puerto Rico declares moratorium on debt payments 6/30

FT – Cash-starved Zimbabwe closes in on IMF deal to clear debts 7/6

MarketWatch – This economist thinks China is headed for a 1929-style depression 7/1

NYT – Italy’s Plan for Banks Could Roil Europe 7/6

Vanity Fair – Are We At The Start Of  A Tech World War? 7/6

Wharton – The Case for ‘Regrexit’: Why Britain Won’t Really Leave the EU 6/30

WSJ – Manhattan Apartment Sales Sputter 6/29

WSJ – Why Vanke Sank After Its Wake-Up Call 7/4

WSJ – Foreign Interest in U.S. Homes Cools 7/6

 

May 20 – May 26, 2016

Venezuela about to become a formal dictatorship. Container shipping industry going through one of its (if not the worst) downturns. A handful of US tech companies are flush with cash.

Headlines

Briefs

    • “The plunge in yields on corporate and sovereign bonds in Europe and Asia – the value of bonds with a negative yield is nearly $10tn, according to Fitch – has sent investors racing into the US market.”
    • “The hunt for yield is very high.” – Bob Michele, chief investment officer at JPMorgan Asset Management
    • “The inflows have suppressed corporate borrowing costs at a time when new debt issuance is accelerating…”
    • “More than $900bn of corporate bonds have been sold in 2016, including $411bn in the US, according to Dealogic. Seven of the 20 largest bond offerings of the year have been completed this month alone.”
    • “The latest figures for the loans-to-bonds swap, and the debt-to-equity swap initiated last year, show a subtle bailout is already under way.”
    • “Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.”
    • So far this year the number of swaps has hit $220bn at the end of April, up from approximately $120bn at the beginning of March, according to Wind Information.
    • “Up to Rmb1tn ($152bn) has also been approved for a debt-to-equity swap, which forces banks to write off bad debt in exchange for equity in ailing companies, according to Caixin, a respected business news website.”
    • “The Opec member’s gold reserves have dropped almost a third over the past year and it sold over 40 tones in February and March, according to IMF data. Gold now makes up almost 70% of the country’s total reserves, which fell to a low of $12.1bn last week.”
    • “The IMF forecasts the economy will shrink by 8% this year, and 4.5% in 2017, after a 5.7% contraction in 2015. Inflation is forecast to exceed 1,642% next year, fueled by printing money to fund a fiscal deficit estimated at about 17% of GDP.”
    • Remember that Venezuela has larger crude reserves than Saudi Arabia…
  • One of the articles from the print edition of the Economist this week profiled the rapid rise of the insurance industry in China and how the regulators are implementing measures to keep things from getting out of hand.
    • “Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion). Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016. Most remarkable has been the increase in their workforce. Over the past six months alone, they have added 2m to their sales force. They now employ some 7.2m people, up 120% since the start of last year. Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.“
    • “The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products.”
    • In an effort to curb speculative behavior, regulators have “barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.”
    • “The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers. ‘The government saw the danger early enough before it got out of control.’ If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment. That is a safer bet, but a harder sell.”

Special Reports

Graphics

Selfstorage.com – Inside America’s Gig Economy (and how to work it) – Alexander Harris 5/17

Selfstorage.com_The Gig Economy_5-17-16

FT – Triple A quality fades as companies embrace debt 5/24

FT_Near extinction of the US AAA company_5-24-16

FT – US productivity slips for first time in three decades 5/25

FT_US productivity slips_5-25-16

Economist – Insurance in China: Safe or sorry? 5/21

Economist_Insurance in China_5-21-16

Featured

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

Venezuela: Trouble on the streets – The country is poised between chaos and dictatorship. Economist. 21 May 2016.

Over the next month, expect Venezuela to become a dictatorship or the current regime will be overthrown.

Currently the government forces are blocking all routes to the National Electoral Council (CNE) to keep any opposition/protestor group from being able to submit a petition that would initiate a process to recall the embattled president (Nicolas Maduro) through a referendum.

“Almost 70% of Venezuelans want Mr. Maduro to leave office this year, according to a recent poll… Venezuela is suffering the world’s deepest recession.”

“After the May 18th protests he (Maduro) threatened to supersede the current economic state of emergency (announced five days earlier) with a ‘state of internal commotion'” which would give the government the “…ability to impose something closer to military rule across the country.”

“Mr. Maduro has already indicated that he will govern without regard to the National Assembly, which came under the control of the opposition after elections last December. ‘It is a matter of time before it disappears,’ he said blithely at a press conference on May 17th.”

The thing is that while opposition politicians are seeking to appeal to the military’s sense of deference to the constitution, Maduro and his predecessor Chavez make sure and made sure that the military is generously compensated while the rest of the country suffers.

“Venezuela’s neighbors are appalled by the prospect that the country might implode. They may not be able to stop it.”

Container shipping lines mired in crisis. Robert Wright. Financial Times. 19 May 2016.

“The industry (container shipping), a vital link in the world’s supply of manufactured goods, is suffering what could well turn out to be the deepest and longest downturn in its 60-year history.”

FT_Container shipping earnings_5-19-16

“Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerized Freight Index – one of the few public sources of information on what lines are charging to ship a container – last month reached the lowest level since its inception in 1998.”

“Over the next few years, [container shipping is] a sector that’s going to really get slammed,” says Ron Widdows, a shipping consultant and former chief executive of Neptune Orient Lines, the Singapore-based line.”

Consolidation and cooperation (alliances) are common place as container lines are seeking to achieve better efficiencies to cut costs.

FT_Container shipping alliances_5-19-16

“This month, three Japanese lines – Mitsui OSK, K Line and NYK – outlined plans to form a new alliance with Hapag-Lloyd, South Korea’s Hanjin Shipping and Taiwan’s Yang Ming, to be known as The Alliance.”

“CMA CGM announced last month it was forming a new partnership, called the Ocean Alliance, with China Cosco, Taiwan’s Evergreen and Hong Kong’s Orient Overseas Container Line.”

This is all to compete against the P2 Alliance of the two largest container fleets of Maersk Line and Mediterranean Shipping Company.

“In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25% less than one year earlier, and $203 below the average cost of moving each box.”

FT_Container shipping expanding faster than trade_5-19-16

US companies’ cash pile hits $1.7tn. Eric Platt. Financial Times. 20 May 2016.

“Apple, Microsoft, Alphabet, Cisco and Oracle had amassed $504bn of cash by the end of 2015, nearly a third of the total $1.7tn held on the balance sheets of US non-financial companies, according to a new report from rating agency Moody’s.”

FT_US corporate cash_5-20-16

“It is the first time the top five cash hoarders have been made up exclusively of tech groups, an industry that generates more of its sales abroad than any other sector and one that has been embroiled in tax disputes in both the US and Europe.”

“The ever increasing amount of cash also highlights how US boardrooms are reticent to invest in their businesses, choosing instead to increase dividends, in a sign of the continued anxiety that economic activity could still slow at home or in China.”

“Apple accounted for more than a tenth of the total cash reserves, holding $216bn, 93% of which is overseas.”

FT_US Top 20 cash rich cos_5-20-16

“But the rising cash piles mask a rapid increase in debt.”

“Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.”

“While the top 25 cash hoarders hold cash in excess of their obligations, the cash-to-debt ratio fell to 12% for low-rated junk companies. In 2010, that figure stood above 20%.”

“‘Companies aren’t exactly flush with cash,’ S&P analyst Andrew Chung added. ‘As the credit cycle ages, rates rise and macroeconomic growth slows, that’s when companies in the bottom 99% who levered up [could have] funding issues.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Sugar Is So Scarce in Venezuela That Coca-Cola Will Stop Production 5/23

FT – Elizabeth Warren slams Uber and Lyft 5/19

FT – China reopens securitized bad-debt market 5/19

FT – Hanergy founder resigns one year after stock plunge 5/20

FT – Liquid alternative mutual funds leave investors disappointed 5/22

FT – Negative interest rates fuel record Japan share buybacks 5/23

FT – Triple A quality fades as companies embrace debt 5/24

FT – Regulators accuse Swiss bank BSI over 1MDB scandal 5/24

FT – Investing in China debt? Do not forget to factor in the politics 5/24

FT – US fracking bust sparks surge in car debt 5/24

FT – Olivier Blanchard and Adam Posen believe a recovery is on track 5/25

FT – Viacom’s battle is a warning to Silicon Valley 5/25

 

April 15 – April 21, 2016

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

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

Headlines

Briefs

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

Special Reports

Graphics

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

WSJ_China Housing Starts_4-15-16

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

WSJ_Negative yielding debt_4-14-16

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

WSJ_Home value divergence_4-18-16

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

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

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

Bloomberg_Millennials saving for a home_4-20-16

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

WSJ_Mall Valuations_4-20-16

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

FT_Beijing is least affordable city for rentals_4-20-16

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

WSJ_Hong Kong v Mainland China listings_4-20-16

Featured

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

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

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

Bloomberg_Bank Energy Exposure_4-15-16  

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

Bloomberg_Shale Cash Shortage_4-15-16 

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

Bloomberg_Shrinking credit lines_4-15-16

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Interesting Articles

The Economist

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

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

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

FT – Foreign governments up US Treasury holdings 4/15

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

February 19 – February 25, 2016

China’s media censorship. Life insurance companies face a daunting future. S&P earnings not quite so. Commercial real estate values in limbo.

Some weeks I wonder if there will be enough quality material to post and then there are weeks like this one when there is a deluge.  I am going to focus on four themes, three that apply to everyone and one that is specific to commercial real estate.  1) The New York Times provided some great coverage this week highlighting Beijing’s increased censorship of the media, first in Edward Wong’s “Xi Jinping’s News Alert: Chinese Media Must Serve the Party” and second in Edward Wong and Neil Gough’s “As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush”, 2) was an article in The Economist “The fallout from low interest rates (2): The lowdown” that highlights the effect low and negative interest rates are having on life insurance companies, 3) is a must read by Justin Lahart “S&P Earnings: Far Worse Than Advertised” in The Wall Street Journal, and 4) for the commercial real estate professionals is Tracy Alloway’s Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat in Bloomberg.

Other items that are worth a mention (there is quite a bit this week):

  • World trade records biggest reversal since crisis in 2008. “The value of goods that crossed international borders last year fell 13.8% in dollar terms – the first contraction since 2009 – according to the Netherlands Bureau of Economic Policy Analysis’ World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies.”
  • Jamil Anderlini of the Financial Times wrote a great article around the theme of recessions following development of ‘the world’s tallest tower’ in The Chinese chronicle of a crash foretold.
    • “Today, some analysts describe the Chinese real estate market as the single most important sector in the global economy – and the biggest risk factor. This is less fantastic than it sounds when you consider that in two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century.“
    • “The building boom of recent years has led to enormous excess inventory but the true scale is impossible to estimate because developers and local governments are offered incentive to under-report the problem.”
    • “An outright decline in real estate investment, which is surely coming, will also have profound implications for the rickety, debt-laden Chinese financial system. Analysts estimate that more than 60% of Chinese bank loans are directly or indirectly tied to real estate.”
    • “According to officials in several Chinese cities, their solution is to break ground on entirely new districts and to offer land to “better quality” property developers at marked down prices. The hope is that developers will abandon the existing empty blocks, and build higher quality apartments that can be sold to consumers for big discounts because of the lower land costs.”
    • Never mind the write offs and losses that would have to take place on the unused buildings. Question: are they completely uninhabitable or is really a matter of demand?
  • The Buttonwood column in The Economist does a good job of pointing out one of the larger problems of the weak markets.
    • “Since the crisis commercial banks seem to have retreated from their market-making role. The impact of this shift has been disguised by the huge amounts of liquidity injected by central banks. But as central banks scale back their support, the underlying investors (pension funds, insurers, hedge funds and the like) will have to rely on each other to act as willing buyers and sellers. That seems highly likely to result in more volatile markets than in the past, especially when the outlook for the economy is unclear. Buckle up.”
  • A good but somewhat sad read in the NYT, Reporting on Life, Death and Corruption in Southeast Asia.
  • If you want to scare yourself… China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans and Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread
  • Lastly, all commercial real estate professionals, especially those on the retail side of the business should read Weak Holidays Force Retailers to Shrink, Rethink Web

Interesting graphics:

From The Economist, all is not well in Hedge Fund land.

Economist_Hedge funds_2-25-16

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

Xi Jinping’s News Alert: Chinese Media Must Serve the Party. Edward Wong. The New York Times. 22 Feb. 2016.

As China’s economy downshifts to a ‘new normal,’ the party heads in Beijing are finding the media to be a thorn in their side particularly when it relates to information that isn’t positive.  Thus…

“All news media run by the party must work to speak for the party’s will and its propositions, and protect the party’s authority and unity” – Xi Jinping, according to Xinhua, the state news agency.

“Mr. Xi also wants to curb the presence of foreign media companies. Last week, government agencies announced a regulation that would prevent foreign companies from publishing and distributing content online in China. That could affect Microsoft, Apple and Amazon, among others.”

Hardly seems sporting.

“An essay in China Daily, the official English-language newspaper, offered an explanation on Monday about why Mr. Xi was unveiling his policy now.

“It is necessary for the media to restore people’s trust in the party, especially as the economy has entered a new normal and suggestions that it is declining and dragging down the global economy have emerged,” the essay said.

“Some political analysts note that Mr. Xi’s attempts to impose total control over the media say as much about his personal insecurities as they do about any Marxist-Leninist ideological vision that he holds.

“The most important thing is for him to announce his absolute authority,” said Zhang Lifan, a historian. “He doesn’t feel effective and confident in dealing with problems, and he lacks a sense of security.”

Mr. Zhang added, “He worries the Chinese Communist Party will lose political power, and he also worries that his peers will shove him from his position.”

A subsequent and related article:

As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush. Edward Wong and Neil Gough. The New York Times. 25 Feb. 2016.

“‘Data disappears when it becomes negative,’ – Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy”

“In January data released last week, the Chinese central bank omitted or hid one key number and altered the parameters of another that gave insight into what the central and commercial banks were doing to prop up the country’s currency.”

“When you go around and meet state-owned industry people, everybody laughs at the national statistics, so I don’t know why foreigners believe them,” – Ms. Stevenson-Yang.

Unfortunately, political control of the media is not unique to China (think Russia, Venezuela, etc.), the issue is how important to the global economy China has become and yet the country’s data is questionable at best making it difficult for other policy makers to ascertain appropriate steps to help the global economy along.

 

The fallout from low interest rates (2): The lowdown. The Economist. 20 Feb. 2016.

Subtitle: Insurers regret their guarantees

This article articulates the challenges that life insurers are facing (let alone banks, pensions, etc.) in the low-to-negative interest rate environment.

“Insurers tend to be prudent investors who like steady returns, which is why around 80% of their assets are in fixed-income securities. This served them well during the financial crisis, but today – with bond yields at historic lows, and even in negative territory-it hurts their investment income. This is particularly true for life insurers, which own over $21 trillion of the industry’s $28 trillion (of) assets, and rely heavily on this investment income to pay policy holders.”

“European insurers are especially exposed. Over two-thirds of life-insurance policies in force in the EU today offers some sort of guarantee.”

“Moody’s, a rating agency, reckons those most at risk tend to be in Germany, the Netherlands, Norway and Taiwan, where average duration gaps are especially large (14 years in Norway) or guaranteed rates are eye-wateringly high (4-5% in Taiwan).”

“The average returns promised to German policyholders are far higher than the yields on government bonds that insurers can now buy. Corporate bonds offer returns that are barely higher, which leaves two options: invest in riskier assets such as equities (which will require the insurer to put more capital aside), or face the fact that annual payouts to policyholders will outstrip income, a recipe for losses.”

“Faced with this prospect, life businesses are doing what they can to push risk back to the customer. In some countries, such as France, the promises made to existing policyholders have the built-in flexibility to be scaled back. But mostly the burden falls on new policyholders, who are no longer sold products with guarantees.

Ironically this de-risking creates a different danger: that the industry becomes irrelevant. By removing the key selling point of an insurer over a mutual fund – the assurance that a policy will pay out no matter what – the industry risks negating its business proposition to investors looking for security.”

“The classic model thrives on short-term interest rates of between 2-6%, government bonds yielding at least 4% and no worries about defaults.”

 

S&P Earnings: Far Worse Than Advertised. Justin Lahart. The Wall Street Journal. 24 Feb. 2016.

This article is an eye opener.

“With most calendar-year results now in, FactSet estimates companies in the S&P 500 earned 0.4% more per share in 2015 than the year before. That marks the weakest growth since 2009. But this is based on so-called pro forma figures, results provided by companies that exclude certain items such as restructuring charges or stock-based compensation.

Look to results reported under generally accepted accounting principles (GAAP) and S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower that pro forma figures – the widest difference since 2008 when companies took a record amount of charges.

The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think.”

WSJ_The GAAP Gap - 2-25-16

“Companies ostensibly provide pro forma figures to better reflect the underlying tenor of their operations… But companies have had a history of treating the ordinary as extraordinary when business conditions worsen.

Indeed, outside of 2008, the only other times the GAAP gap was as wide as last year was in 2001 and 2002. That was back when companies wrote off billions of dollars worth of dot-com bubble-era investments.”

“Companies sometimes will also look past charges that result from big swings in the value of their assets. Chesapeake Energy, for example, on Wednesday reported a full-year 2015 loss of $14.9 billion under GAAP.

But the company said that after adjusting for items “typically excluded by securities analysts in their earnings estimates,” it lost just $329 million. The major item Chesapeake and many other energy companies left out of their 2015 pro forma results were charges related to the steep decline in energy prices.”

About our oil reserves being worth tens of billions less, hey look at that squirrel over there…

“This is why skeptics tend to call pro forma figures EBBS, or earnings before bad stuff.”

“Energy companies registered some of the biggest differences between GAAP and pro forma earnings. In total, S&P 500 energy companies had an estimated GAAP loss of $48 billion. That stands in stark contrast to the $45 billion of income they reported on a pro forma basis.“

Come again… that’s a $93 billion swing.

“Materials companies reported $13 billion in GAAP earnings compared with $30 billion in pro forma earnings. And health-care companies earned $104 billion under GAAP versus $157 billion pro forma.”

“And then there was tech: Under GAAP, S&P 500 tech companies earned an estimated $176 billion in 2015, $42 billion less than their pro forma earnings of $218 billion”

“Overall S&P 500 earnings under GAAP came to $787 billion last year, S&P Dow Jones Indices estimates. That is $256 billion less than the pro forma estimate of $1.04 trillion.”

 

Morgan Stanley Says U.S. Commercial Real Estate Price Growth Will Be Flat. Tracy Alloway. Bloomberg. 23 Feb. 2016.

“Morgan Stanley analysts last week predicted U.S. commercial real estate prices would grow by a big fat zero percent in 2016, replacing a previous forecast of 5% growth over the course of the year.”

“We recognize the very important role that the lending markets have played in the recovery in CRE prices,” the analysts write. “Indeed, our analysis shows that a 10 percentage point decline in the loan-to-value ratio (from 70% to 60%) requires 2.25 percentage annual net operating income growth to offset the lower leverage.”

“Throw in higher financing costs-U.S. financial conditions have already tightened following the Federal Reserve’s decision to raise interest rates back in December – and required income needs to increase even more.”

Bloomberg_CRE Price Sensitivity_2-23-16

This article ties well into the one above along with Weak Holidays Force Retailers to Shrink, Rethink Web.  If the tenants, users of space, are experiencing margin squeeze, how likely is it that they’ll be able to absorb meaningful rent growth?  At this point commercial real estate appreciation (on the whole) is reliant on the cost of financing equity and debt [described in the chart as Weighted Average Coupon (WAC)].  Fortunately, as a result of low-to-negative interest rates, life insurers and SWFs are looking for yield.  However, only for the best stuff as highlighted by the growing yields in BBB CMBS offerings due to declining demand.

 

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – The U.S. States Where Recession Is Already a Reality 2/21

Bloomberg – China’s Debt Seen Rising Through 2019, Peaking at 283% of GDP 2/21

Bloomberg – Sovereign Wealth Funds May Sell $404 Billion of Equities 2/22

Bloomberg – Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread 2/22

Bloomberg – Can Things Get Any Worse for Russia? You’re About to Find Out 2/23

Contra Corner (Business Insider) – China’s Ticking Time Bomb: A Runaway Banking System Bloated With Hidden Bad Loans 2/19

CoStar – Four Major Property Sectors Showing Weaker CMBS Loan Underwriting 2/22

FT – China central bank moves to strengthen control of money supply 2/18

FT – Uber losing more than $1bn a year in China 2/18

FT – San Francisco: bubble fears fail to curb rush to build new condos 2/19

FT – Smart beta ‘could go horribly wrong’ 2/22

FT – Helicopter drops might not be far away 2/23

FT – South Korea household debt pile mounts 2/23

FT – Venture capital starts to tune out of on-demand services 2/24

FT – The Chinese chronicle of a crash foretold 2/24

FT – Exports from China to Brazil collapse as recession deepens 2/25

FT – World trade records biggest reversal since crisis 2/25

FT – Oil industry tormented by latest price slump 2/25

Investment News – FBI raids offices of Texas REIT (UDF) 2/18

NYT – In Zika Epidemic, a Warning on Climate Change 2/20

NYT – Reporting on Life, Death and Corruption in Southeast Asia 2/21

NYT – Indian Caste Protests in Haryana Choke Delhi’s Roads and Water Supply 2/22

NYT – Seas Are Rising at Fastest Rate in Last 28 Centuries 2/22

NYT – Once a Coup, Energy Transfer Deal Becomes a Nightmare 2/25

WSJ – IPO Market Dries Up as Investors Retreat 2/18

WSJ – U.S. New-Home Sales Fell Sharply in January 2/24

WSJ – Bank-Stock Bloodbath: The Cycle Financials Can’t Escape 2/24

WSJ – Weak Holidays Force Retailers to Shrink, Rethink Web 2/25