“Petrol prices jumped at the fastest pace in 18 years in May, with an average increase of 6p per liter from the previous month, according to roadside assistance and insurance company RAC.”
“Unleaded petrol rose from 123.43p to 129.41p ($6.46 per gallon) over the month, taking the cost of filling up a 55-litre (14.53 gallon) family car to £71.18 ($93.79), an increase of £3.29 in just one month, according to RAC Fuel Watch data.”
“Price rises were driven by a jump in oil prices combined with the weakening of the pound against the dollar, said RAC.”
“Debt collectors in China are harnessing new technologies such as artificial intelligence in a bid to collect on an estimated Rmb1.3tn ($200bn) debt bubble that has formed in the country’s peer-to-peer lending industry.”
“An estimated Rmb1.3tn in outstanding P2P debt as of May, according to online lending intelligence firm Wdzj.com, and a rising number of defaults have opened the door to a wave of start-ups using new technologies to try to recover tardy loans.”
“’People’s usage of P2P debt is very high but the government only monitors the banking system closely,’ said Cherry Sheng, chief executive of Shanghai-based debt collection group Ziyitong and a former manager at Citigroup and ANZ Bank. ‘This has become an opportunity for start-ups with advanced technology to move into this market.’”
“Ziyitong, which has sought to recover Rmb150bn since it was set up in 2016, recently launched an AI platform to help recover delinquent loans for some 600 debt collection agencies, and more than 200 lenders including Alibaba Group and Postal Savings Bank of China, Ms. Sheng said.”
“The system scrapes the internet for information on borrowers and their friends, then contacts the borrower via phone using a dialogue robot. The conversations are recorded and analyzed by an algorithm that then determines the phrasing with the highest likelihood of pressuring the person to pay back the loan. The system also calls friends of the borrower and asks them to relay the urgency of making payments.”
“In May the AI system had a recovery rate of 41% for large clients on loans delinquent for up to one week, according to Ms. Sheng, compared with a rate of as low as 20% via traditional debt collection methods for similar loans. Ziyitong plans to expand the system to loans that have been unpaid for longer periods of time.”
“Yigou, another debt collection start-up, has launched a mobile phone application that allows collection agents to search thousands of individual debt records and choose cases, streamlining connections between lenders and collectors. The company can also provide geo-locational data on some borrowers to help the agents track them down.”
“U.S. shale oil drillers are boosting efficiency with giant pads and walking rigs, lowering prices to a point that could hurt exporters like Saudi Arabia.”
Cryptocurrency / ICOs
WSJ – Daily Shot: Bianco Research – Bitcoin Trading Activity by Currency 6/13
“Oaktree joins a growing list of major investment firms to expand into non-traded REIT fundraising. The Blackstone Group kicked off the trend in September 2016. So far, other big investors that have followed its lead into the non-traded REIT sector include Nuveen’s TH Real Estate, BGC Partners’ Cantor Fitzgerald, Starwood Capital Group, KKR & Co., and TPG Capital.”
“SpaceX will on Saturday officially enter the race to bring internet access to all parts of the earth’s surface with the planned launch of its first test satellites for a globe-encompassing communications network.”
“The latest trial from Elon Musk’s private space company is a world away from last week’s spectacular first launch of Falcon Heavy, the world’s biggest rocket. Undertaken with none of the Tesla chief executive’s usual showman flair — he has not even mentioned it on Twitter — it is an early technical trial for a communications service that could be years from completion.”
“If successful, however, SpaceX has said it plans to start launching its first commercial satellites next year, with a constellation of more than 11,000 circling the earth in low-earth orbit by the time the network is complete in 2024.”
“SpaceX’s application for approval to test a satellite internet service from the Federal Communications Commission (FCC) is one of 12 made to the US regulators, highlighting the extent of the potential competition.”
“SpaceX plans to connect its constellation of satellites to form a so-called mesh network, passing information among them and blanketing the earth.”
“Researchers are discovering remarkable new links between gut bacteria and the brain. Problems from poor sleep to memory loss could be helped by manipulating the microbiome, the trillions of bacteria living inside healthy human bodies, the American Association for the Advancement of Science heard on Thursday.”
The best synopsis of the cryptocurrency I’ve read to date.
A taste: “Anyone who tells you they know where this thing is heading, how to value it, where it ends, etc. is nuts. No one has a clue. This is everything you’ve ever read about the markets all wrapped into one — FOMO, supply & demand, human nature, behavioral biases, volatility, booms, busts, uncertainty about the future, etc.”
“…at a recent financial technology conference at Michigan Law School, regulators and academics estimated that computers are now generating around 50-70% of trading in equity markets, 60% of futures and more than 50% of treasuries. Increasingly, machine learning and artificial intelligence are being added to the mix, to analyze data, trade securities and offer investment advice.”
“What we are seeing, in other words, is the rise of self-driving investment vehicles, matching the auto world. But while the sight of driverless cars on the roads has sparked public debate and scrutiny, that has not occurred with self-driving finance.”
“The Department of Labor’s fiduciary standard, and new securities industry account statement rules for greater clarity in the prices of products, have forced nontraded real estate investment trusts to slice their commissions. Since then, sales of the product have collapsed.”
“No fat commissions on REITs means poor sales by brokers.”
“REIT managers and broker-dealer executives are likely reluctant to make the connection, at least publicly. But there is no denying that brokers’ appetite for the product disappeared almost overnight once upfront commissions were cut from 7% on an A share to 3% for a T share.”
“When REIT sales were booming a few years ago, the product’s pitch was simple: real estate kicks off an income stream of 6% to 7% annually, real estate is an asset class that is not correlated to the stock market, and with interest rates at record lows, investors needed the yield.”
“Those conditions haven’t changed dramatically, but nontraded REIT sales have tanked regardless.”
“InvestmentNews reported last month that Robert A. Stanger & Co. expects nontraded REIT sales this year to reach just $4.4 billion, about $100 million less than last year and the lowest levels since 2002.”
“If the ‘income, diversify and interest rate’ pitch was accurate back in 2012 and 2013, when REIT sales were booming, why isn’t it working today? There is little change in the narrative.”
“Interest rates have risen only marginally, and with the stock market roaring, wouldn’t it make sense for a broker to peel off some clients’ gains and invest in commercial real estate, a hard asset not correlated to stocks?”
“With brokers no longer getting juicy commissions for REIT sales, they simply don’t appear interested in selling the product.”
“Most brokers who still sell nontraded REITs no longer earn the eye-popping 7% commission, the standard rate paid to brokers who sold the product back in 2013, when REIT sales hit their all-time high and brokers sold $19.6 billion of the product.”
“The Financial Industry Regulatory Authority Inc. recently put into place a new rule, known as 15-02, that makes pricing of illiquid securities like nontraded REITs more transparent to investors. In the past, client account statements showed illiquid securities like REITs at the value they were bought by the client and did not subtract commissions, which were high.”
“‘Now that REITs are getting priced on statements, with Finra 15-02, advisers are having to consider these positions from a total return standpoint, not just income,’ Mr. Rooney said. ‘They are re-evaluating the client’s perception of the product.'”
Markets / Economy
WSJ – Daily Shot: FRED – US Treasury Securities Held by the Federal Reserve 12/8
“And so it begins… Quantitative tightening is finally here.”
“Bitcoin mania reached new highs Thursday as the price of the digital currency jumped about 40% in 40 hours, smashing through five separate $1,000-barriers and surging past $16,000.”
“Sales of nontraded real estate investment trusts are headed for their worst year since 2002, with the industry on track to raise just $4.4 billion in equity in 2017, about $100,000 less than a year earlier, according to data from Robert A. Stanger & Co.”
“Making matters worse for the industry is that one newcomer to selling nontraded REITs, The Blackstone Group, has the highest sales for the year to date through September. Blackstone had almost $1.4 billion in sales with its new REIT, the Blackstone Real Estate Income Trust, over the first nine months of the year, according to Stanger.”
“That means traditional nontraded REIT managers – including Griffin Capital Co., Carter/Validus Advisors, Cole Capital and others – will likely raise about $3 billion this year, about one third less than the 2016 total. And independent broker-dealers are struggling without the lucrative commissions formerly generated by product sales.”
“In 2002, $3.8 billion worth of nontraded REITs were sold. Nontraded REIT sales were $11.5 billion in 2007, according to Stanger, just as the real estate crash was beginning. Sales of nontraded REITs hit their peak in 2013, when independent broker-dealers sold $19.6 billion of the products.”
In addition to an accounting scandal at industry behemoth, American Realty Capital (ARC), new securities rules have hurt sales.
“New securities industry rules and regulations, including the Department of Labor’s fiduciary rule, have hurt sales of high commission products like nontraded REITs. The fiduciary rule has flattened the levels of commissions that brokers charge clients for products such as mutual funds.”
“The Financial Industry Regulatory Authority also recently put into place a new rule, known as 15-02, that makes pricing of illiquid securities like nontraded REITs more transparent to investors. In the past, client account statements showed illiquid securities like REITs at the value they were bought by the client and did not subtract commissions, which were high.”
“With the DOL fiduciary rule flattening commissions, many REIT managers began selling T shares, which cut the upfront load by more than half. After initially paying a 3% commission, the broker is then paid up to 7% over several years. An annual commission of 80 basis points is paid from the return generated by the REIT manager.”
“Many economists have long predicted an end to the dollar reign that was established after World War II, especially after President Richard Nixon unpegged the greenback from gold in 1971. The creation of the euro in 1999 and the breakneck growth of the Chinese economy led many analysts to say the dollar would need to share the limelight.”
“But the euro became politically unpopular during the European debt crisis, and Chinese capital controls to peg the yuan are anathema to global investors. Meanwhile, the share of official reserves held in dollars recently stopped its multiyear decline, and in the second quarter of 2017, foreign-country dollar-denominated debt rose to an all-time high of $8.6 trillion, according to the BIS.
“’The dollar’s downward trend of the last 40 years is over,’ said Paresh Upadhyaya, fund manager at Amundi Pioneer, Europe’s largest asset manager.”
“A one-currency dominance challenges economic models that see global financial markets as a flat surface where, on average, investors shouldn’t be better or worse off depending on which currency they trade.”
“The thefts — which occur on average more than once an hour and are often staged by scores of criminals carrying assault rifles — have reportedly forced the national postal service to stop street deliveries in some neighborhoods of Rio, while supermarkets have raised their prices by up to 20 per cent to pay for the losses.”
“Recession-induced budget crises across governments in Latin America’s largest economy have led to the spike in crime, analysts say. One state — Espírito Santo — recorded 128 murders during eight days of uncontrolled street crime in February when police went on strike after budget cuts.”
“Cargo theft in Rio de Janeiro, whose greater metropolitan area has a population of 12m people, has increased sharply from 5,890 incidents in 2014 at the start of the economic downturn to a record 9,862 last year, says the local industry association Firjan. The state is on track to top a similar number this year, with food, beverages, electronic appliances and cigarettes among the preferred targets.”
“According to a 2017 report by the Inter-American Development Bank, crime and the efforts to combat it cost Brazil some $120bn a year, three times the toll on Mexico, which is ravaged by drug-cartel violence.“
Is this what happens when a society becomes too unequal? Politicians play their hand at their ability to regulate with intent to collect personal payoffs – graft becomes endemic – the people go on a corruption hunt – political infrastructure suffers – basic services decline – theft and looting become common place. I would imagine that the walls around the wealthy compounds are getting higher with more armed guards.
“In any discussion of the oil market it is all too easy to ignore the real world consequences of the price fall that has occurred over the last three years. We might appreciate a small cut in the price of petrol or gasoline at the pump, even though its effect is dampened by high levels of taxation. But we do not give much thought to the impact of price changes on the supplying countries. That is short-sighted because the structural shift that has taken place is profoundly destabilizing and potentially very dangerous.”
“A new note from the Energy Information Administration in the US published last month sets out the impact of the fall in prices in recent years. It is worth summarizing the data, which are expressed in real 2016 dollars.”
“These are big numbers for all the countries involved. Very few have diverse economies that can adjust quickly to the fall in the price of a crucial export commodity. Most have large dependent populations, especially of children and young people. Nigeria, for instance, has some 115m people, amounting to 61% of its population, under the age of 25; Angola 13m — 63% of its population.”
“But simply looking down on the failings of the oil producers is not an adequate response.”
“The price fall has reduced the revenue of the Opec states by some $750bn from the 2012 level — a fall of over 60%. None have fully adapted to that loss of income. Most have assumed that the price change would be temporary and some have even borrowed to cover the shortfall of revenue against current spending — thereby storing up even more problems for the future.”
“The real pain of enforced austerity is only just beginning and will deepen as governments realize that the price fall is more structural than cyclical. The latest attempt to manage the market by extending the production quota for another nine months has had no positive effect. Prices for Brent crude on Friday were down to about $48 per barrel.”
“The pain will be profoundly destabilizing. At least five Opec states are at risk of very serious political and economic destabilization, including major economies such as Venezuela and Nigeria. Civil unrest is already evident in Libya and latent in Algeria. Across the whole of the cartel there is a substantial and growing group of restless, unemployed youths aged between 15 and 30.”
“In reality, the structural fall in the oil price is the most destabilizing economic event to have hit the world since the financial crash of 2008. In this case, the impact is being felt in slow motion but it is building and feeding on existing conflicts and tensions. And just as the collapse of the subprime housing market in the US shook the global economic system, so the problems of the cartel cannot be contained within the countries themselves. When problems are rapidly globalized through migration, terrorism and even health risks if key public services collapse, the deteriorating situation within Opec is all too likely to become our problem too.”
“China’s decision to detain the chairman of Anbang Insurance Group, one of the country’s most acquisitive companies, is stunning in itself. The knock-on effects on the Chinese financial system could deepen the drama.”
“If customers of Anbang—owner of New York’s Waldorf Astoria hotel—start surrendering their policies and stop buying new ones, that could accelerate a continuing cash drain at the company. China’s insurance regulator has already been clamping down on the primary source of Anbang’s cash since late last year—short-term, high-yielding investment products disguised as insurance policies. Its premium income plunged 99% in April while its solvency ratio halved in the first quarter from the previous year.”
“The company’s tentacles reach far and deep into China’s financial system, with one key route being its lending of short-term funds into Chinese money markets.”
“Take its dealings with Chengdu Rural Commercial Bank, a provincial bank of which Anbang owns more than one-third, and which itself has some 40 subsidiaries across towns and villages in China. Anbang provides around 40% of the deposits for Chengdu Rural, and accounts for 80% of its related-party transactions, most of which are short-term, money-market loans. The bank also pays Anbang a high 5% interest on its deposits and holds some of Anbang’s debt.”
“Such tight relationships illustrate how financial stress at Anbang could quickly ripple through China’s banking system. Banks like Chengdu Rural have already become increasingly reliant on short-term wholesale funding and have been resorting to capital raises: The loss of a big cash provider like Anbang could cause real pain. Interbank funding conditions are already tight in China—the country’s central bank made its biggest one-day cash injection into the market in nearly six months on Friday. If the detention of Anbang’s chairman leads to the company stepping back more broadly from Chinese markets, the saga could have a while to run.”
“The US Department of Justice on Thursday moved to seize an additional $540m in assets purchased with funds stolen from Malaysian sovereign wealth fund 1MDB, including a luxury yacht, a Picasso painting, jewelery and rights to the movie Dumb and Dumber.”
“The US now estimates that a total of $4.5bn was pilfered by Malaysian public officials and their associates including Jho Low, a well-connected Malaysian businessman who held no formal role in the project.”
“Including the new lawsuit and earlier civil forfeiture actions, the US government has moved to recover $1.7bn of that amount, according to Kendall Day, acting deputy assistant attorney-general. This represents the largest such US seizure action under a DoJ initiative aimed at recovering money stolen by corrupt foreign officials.”
“The apparent fall from grace of the founder Wu Xiaohui has shone a spotlight on a brand of Chinese capitalism that has taken root in the financial industry.”
“According to Fedeagro, an agricultural association, Venezuela produces only enough food to cover between 30-40% of domestic consumption, compared with about 70% a decade ago. Chronic food shortages ensure that Venezuelans regularly skip meals and go hungry. A survey from the Universidad Central de Venezuela found that three-quarters of the Opec nation’s population lost weight involuntarily in 2016.”
“For decades during the late-20th century, suburbs were the place to build, as urban cores suffered from high crime, poor schools and stagnant or shrinking populations.”
“But preferences have changed among young people, many of whom want to live closer to transit, restaurants and their workplaces. The share of young, educated people living in the urban core of Washington, D.C., for example, increased 8.6 percentage points between 2000 and 2014, according to Jed Kolko, chief economist at job-search site Indeed and senior fellow at the Terner Center for Housing Innovation at the University of California, Berkeley. Portland, Ore., and Chicago each saw increases of 6.4 percentage points.”
“As builders have shifted focus toward trendier urban markets and away from cheaper suburbs, they have produced less housing overall than they otherwise might have. While starter-home construction has bounced back in recent months, it remains far from reversing this long-term trend.”
“At the same time, high land costs in central cities have pushed developers to focus on higher-end housing geared toward high earners instead of younger people just starting out.”
“The shift helps explain one of the most vexing aspects of the housing recovery: New homes are getting more expensive and yet there are fewer of them being built than in past cycles.”
“While new home sales within 5 miles of the centers of 10 of the country’s priciest and most densely populated metropolitan areas have surpassed levels from 2000, they remain more than 50% below where they were in 2000 when you go more than 10 miles out. The year 2000 is often used as a benchmark for a normal market, before the boom and bust of the mid-2000s.”
“The takeaway, Mr. Romem (chief economist at BuildZoom) says, is that pricey cities need to loosen land-use restrictions in core areas where there is more demand. Allowing for more high-rise condo buildings would make it economical to produce starter homes in these areas as well.”
“’Do you care about preserving things the way they are, so that only wealthy people can continue buying in, or do you want to [encourage more density], so that housing is more affordable for everyone?’ he asked.”
“Blackstone in January launched its first nontraded real-estate investment trust, a vehicle marketed to small investors as a way to participate in the commercial real-estate industry without the volatility of a traded REIT. Such vehicles have faced mounting criticism in recent years over high fees, poor disclosure and other problems.”
“Yet as of April, Blackstone Real Estate Income Trust Inc. had raised $755.4 million, about 41% of all the funds the entire industry raised in 2017, far more than any competitor, according to Robert A. Stanger & Co., an investment bank that specializes in nontraded REITs.”
“Blackstone also has become a closely watched agent for change in an industry that is trying to move away from a past that is tangled up in scandal and regulatory criticism. Like many of the new breed of nontraded REITs, Blackstone’s vehicle is structured to align the interests of investors and management better than those of the past.”
“The alignment between REIT managers and investors is critical today as the eight-year bull market in the commercial real-estate industry shows signs of slowing, critics say. Mistakes on reading markets could trigger losses, especially if values start to decline.”
“Some traditional nontraded REITs were criticized because managers wouldn’t be penalized for making bad investment decisions. That isn’t the case with the Blackstone REIT.”
“’If things don’t go well, Blackstone won’t make as much,’ said Phil Owens, managing director of Green Street Advisors’ consulting unit. ‘If things go really well, they make more.'”
“Green Street has been a critic of nontraded REITs for their high fees, weak disclosure and lack of alignment. Mr. Owens said the Blackstone structure represents ‘a big shift’.”
“But Mr. Owens stopped short of backing away from Green Street’s longstanding position that investors are better off buying traded REITs, which are listed on public stock exchanges, than nontraded ones. Green Street has calculated the overhead of the Blackstone REIT will be about twice as much as a ‘large, blue-chip publicly traded REIT’ if it performs as expected.”
“Until recently, nontraded REITs were popular because of the high dividends they paid when interest rates were near historic lows. Mostly sold by financial advisers, the vehicles raised $19.6 billion in 2013 and $15.6 billion in 2014, according to Stanger.”
“But the industry drew criticism for upfront fees that could run as high as 15%.”
“In all, the entire nontraded REIT industry has raised only $1.8 billion in 2017 as of the end of April, about the same as the first four months of 2016, the worst fundraising year since 2002, when the industry was in its early stages, according to Stanger.”
“Some other nontraded REIT sponsors say they aren’t worried about the new 800-pound competitor. They acknowledge the fundraising climate is tough these days. But they blame it primarily on their sales forces reacting to Finra rules and the proposed Labor Department regulations.”
“’It’s not Blackstone that’s impacting it,’ said Jeff Hanson, chief executive of American Healthcare Investors, which has raised more than $6 billion in equity for four nontraded REITs. Mr. Hanson predicted that Blackstone entering the business will be ‘a good thing over time’ for the industry.”
“’In our 109-year history, it is unlikely that there has ever been as much change as there is now,’ Carl-Henric Svanberg, chairman of BP, told shareholders at the UK group’s annual meeting last week, acknowledging that over the next 20 years ‘consumption of oil will slow and eventually peak’.”
“For all the looming risks, fossil fuels still dominate the global energy landscape. Oil, gas and coal together account for 86% of energy used for transport, heat and power worldwide. The questions for companies and investors across the sector are how fast will this change and what should they do to prepare?”
“Deep disruption is already being felt in the power sector. The electricity generated from renewables, excluding hydro, doubled globally between 2010 and 2015 as political efforts to tackle climate change intensified and the cost of wind and solar plummeted. Today, renewables account for an average 23% of global power output. Denmark has breezy days when all its power comes from wind and Germany hit a record 85% share from renewables one day last month.”
“If you’re using software to deal with the complexity in your portfolio maybe you should simplify your portfolio first.” – Marc Levine, Chair – Illinois State Board of Investment
Agriculture
WSJ – Daily Shot: Wolf Street – Delinquencies of Agricultural Loans 5/22
“…environmental sustainability is rapidly moving up the agenda for Xi Jinping, the president, as he flexes his political muscles and consolidates his leadership of China.”
“The country’s moves to protect the environment and avoid pollution-related social unrest represent a radical shift in Chinese policy. Just eight years ago, China viewed climate change initiatives as a western conspiracy to limit China’s rapid growth.”
“In the aluminum-producing, coal-consuming provinces around Beijing, Henan, Shanxi and Shandong, around 30 per cent of aluminum smelting capacity could potentially be closed between November and March every year, in an effort to reduce thick smog like that seen in the first weeks of 2017.”
“There is also talk of an envisaged 30% cut to alumina production in the same provinces, reducing supply of the key raw material required to produce aluminum.”
“While tighter regulations governing environmental protection and energy consumption were issued two years ago by the Chinese government, this year many more smelters are being threatened with the off button. The Chinese government’s new Air Pollution Prevention and Control Action Plan is aimed at offsetting the extra pollution created by the use of indoor heating during the winter heating months.”
“It should be acknowledged that China has been successful in cutting the use of coal, which currently provides around 70% of the country’s electricity. Coal consumption has dropped in each of the last three years and fell 4.7% last year alone.”
“…a spate of research shows that it is not trade or rapacious bankers but technology that is the primary economic driver of the most important political trend of our time – populism.”
“What is perhaps most fascinating about this is that Silicon Valley has largely escaped the populist anger that Wall Street or cheap Chinese labor has attracted. As University of Chicago professor Raghuram Rajan has pointed out, this may be because the job-disrupting effects of technology are harder to see than those of trade. Of the nearly 6m manufacturing jobs lost in the US between 1999 and 2011, only about 10% can be directly traced to Chinese imports – yet those losses are concentrated in just a few rust belt communities. The more subtle, dispersed nature of the changes driven by Silicon Valley makes it a less obvious target for voter rage. And of course, we all love our gadgets: remember Democratic Senator Carl Levin mooning over his iPhone even as he led Senate hearings into Apple’s use of offshore tax havens in 2013?”
“The bullish case is that newly optimistic consumers and business owners will soon start spending, boosting economic data. This is generally what happens when the economy is coming out of recession, with the hard data following the soft data higher.”
“But the economy isn’t coming out of a recession-the last one ended nearly eight years ago. Instead, the country has experienced a long period of rising employment and disappointing but steady growth. The pent-up demand that exists in the aftermath of a downturn isn’t there. And the mere possibility of lower taxes and faster growth hasn’t changed the caution that consumers and businesses learned since the financial crisis.”
“The clock is ticking says Bank of the West economist Scott Anderson. Historically, when the hard data doesn’t pick up within a month or two of the move higher in the soft data, the soft data tends to tumble.”
“The departure of AR Global Investments from the nontraded real estate investment trust (REIT) world, coupled with uncertainty surrounding substantial pending regulations, has put a sizable damper on the ability of the nontraded REIT sector to raise capital. According to Summit Investment Research, $4.8 billion of equity was raised by sponsors of 35 entities last year. That was the lowest volume in 14 years, and pales in comparison to the $10.2 billion of equity that was raised in 2015.”
At its height, the sector raised over $20 billion in 2013. “American Realty-by then known as AR Capital-was responsible for more than one-third of that total.”
“A lot of companies view revolving credit lines the way some rock climbers view harnesses and ropes: They would rather not use them, but they’re glad to have them when trouble strikes.”
“So it’s worth paying attention when a corporation starts withdrawing a substantial amount of money under these prearranged agreements with banks. This can signal a significant problem.”
“For example, consider last fall, when more than 20 energy companies had borrowed more than two-thirds of their limit on their credit lines, according to Spencer Cutter, a senior credit analyst with Bloomberg Intelligence. More than four of those have since filed for bankruptcy. The degree of distress last year wasn’t surprising given the sharp plunge in oil prices that started in 2014. A mounting number of energy companies were forced to sell assets, restructure or file for bankruptcy.”
Well things have gotten better since then right? Yes, but… there are “at least 11 oil and gas producers are using 70 percent or more of their borrowing-base credit lines, according to Cutter. That includes smaller companies such as Trinity River Energy, Yuma Energy and Mid-Con Energy, and some larger ones such as Sanchez Production Partners and California Resources.”
“Over the next few weeks, companies will start announcing their new revolving credit agreements. Investors shouldn’t be surprised at some bad news for smaller energy companies that still haven’t fortified their balance sheets. Just because oil prices have stabilized and even marginally increased doesn’t mean that there won’t be additional rounds of energy-related bankruptcies and restructurings in the near future.”
“China’s bubble-prone property sector isn’t known for its stability. Even so, a 42% rise in the Hong Kong-listed shares of the country’s biggest property developer, China Evergrande Group, over the past month, is striking. Sadly for investors, it’s built on very shaky foundations.”
How much spare crude oil is there – hard to tell. Nontraded REIT sales struggling. There are a lot of dangers lurking in the Chinese P2P market, but the yield is just SO GOOD…
NYT – Is China Stealing Jobs? It May Be Losing Them, Instead 7/22. “If anyone is claiming that China is still enjoying a healthy or robust jobs market, they have no idea what they’re talking about.” – Leland Miller, chief executive of China Beige Book International
Star-Advertiser – N. Korea: U.S. has crossed red line, declared war 7/28. By putting Kim Jong Un on the list of sanctioned individuals, N. Korea claims the U.S. has crossed the red line and should the U.S. and S. Korea hold its planned war games next month, it’s on like Donkey Kong – according to N. Korea.
Chinese wealth management products are looking a lot like the junk bonds used for corporate raiding in the late 1980s rather than the traditional insurance policies they are supposed to be.
“China’s insurance regulator has warned against insurers becoming ‘automatic teller machines’ for activist shareholders, in a veiled reference to the battle for control of China Vanke, China’s largest residential developer, by insurance conglomerate Baoneng Group.”
“We will let those that truly want to do insurance come and do insurance and absolutely not allow companies to become financing platforms and ‘ATMs’ for large shareholders.” – Xiang Junbo, chairman of the China Insurance Regulatory Commission
“There are major regulatory gaps that need to be addressed. These ‘universal’ products have absolutely nothing to do with insurance. Some of them are very risky, but commercial banks are distributing them, and people trust the banks.” – senior financial regulator
With Puerto Rico facing approximately a $2bn interest and principal payments due on its general obligation bonds on July 1 and not being able to make the payments, the U.S. Congress recently passed a law that was meant to give Puerto Rico a temporary reprieve from “legal sanctions by creditors so it could restructure its obligations in an orderly way, and to maintain essential services.”
Well, Puerto Rico took this reprieve to pay about half of the amounts due, only they chose to whom went the payments. “Puerto Rico did not pay any interest or principal on the most senior, or general obligation bonds, but did make payments on more junior bonds. The government also paid its employees’ pension funds $170m more than what was required for this year, despite the pensions supposedly being legally subordinated to bondholders.”
The thing is that US Treasury officials advised on some of this reprioritization… you can see the dangerous precedence this sets for municipal bonds…
“The bonds on which interest payments were made on July 1, such as the Puerto Rico convention center district and the Puerto Rico Highways and Transportation Authority, are disproportionately owned by bondholders on the island. Supposedly more-sophisticated mainland US investors had avoided these lower ranked issues on the misinformed premise that financial and legal analysis should outweigh political calculation.”
The Buttonwood column of The Economist highlighted a rather large potential problem the world is facing: the vanishing of working age adults…
“The world is about to experience something not seen since the Black Death in the 14th century-lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.”
“The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future can be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labor-force participation among older workers.”
“A spokesman for Beijing Cyber Administration confirmed that state press reports that said conducting original reporting was a gross violation of the regulations (rule in place since 2005) and brought about ‘extremely nasty effects.’ The reports also said that the companies had been given a fixed period to ‘rectify’ the offending sites.”
“The trigger for the shutdown, according to media analysts, was coverage of flooding in northern China which – according to the official count – has left 130 dead and racked up damages of more than Rmb16bn ($2.4bn) in Hebei province alone.”
“The government does not want these platforms to provide their own news. They are only allowed to forward reports by outlets like Xinhua and the People’s Daily.” – Qiao Mu, a journalism professor in Beijing.
“The historic fall in oil prices has created a pileup of inventories, much of it stashed in tanks in the U.S. and other industrialized countries that are committed to disclosing the latest tally, but millions of barrels of oil are flowing to locations outside the scope of industry trackers.”
“At the beginning of July, 23 supertankers capable of holding 43 million barrels of oil were anchored for a month or more in the Singapore straits, according to Thomson Reuters’s vessel-tracking service, up from 15 ships at the start of the year. If they were full, it would be enough to meet the U.S.’s oil needs for more than two days.”
“‘OPEC has stopped being a swing supplier,” said Antoine Halff, director of the oil market program at Columbia University’s Center on Global Energy Policy. ‘Given the uncertainty about whether shale-oil production in the U.S. can take the role of swing supplier, it falls on stocks’ to replace lost barrels in the case of a supply disruption.”
“Uncertainty around storage was highlighted after attacks on Nigerian oil facilities in May and June. Following the assaults, some analysts forecast that Nigerian output would fall, which helped push oil prices above $50 a barrel. But shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider Windward.”
“Where did the exports come from?”
“In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country has built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.”
“Analysts believe those barrels have gone to commercial tanks or to government-owned strategic reserves.”
“The distinction is critical. If most of the oil has gone to strategic reserves, demand could shrink once the tanks reach capacity, which some analysts say could happen this year.”
“Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”
“Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.”
As a result, independent broker-dealer company commissions are down in tandem. “Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.”
Four key factors have hit the industry. The blowup of Nicholas Schorsch’s REIT empire, recent FBI raids of United Development Funding (after hedge fund manager Kyle Bass called the company a Ponzi scheme), the Financial Industry Regulatory Authority Inc. rule 15-02, and the new DOL fiduciary rule.
The first two basically have brought the public and regulatory spot light to the industry and has shown the light on the less savory parts of the industry and its excessively high fees.
Finra rule 15-02 basically have caused an increase in transparency in the fees that the industry charges, now making them more accurately reflected on account statements.
And the DOL fiduciary rule “which will be phased in starting April, requires advisers to select investments for retirement accounts that are in the client’s best interest. Investments with high commission structures might not pass that test.” However, this rule also has a flip side, nontraded REITs may now be placed in retirement accounts (also as of April thanks to a Dept. of Labor ruling).
On the plus side, the industry is changing. New T shares are meant to reduce upfront commissions while spreading them over time (still high commissions) and larger financial institutions like Blackstone Group and Cantor Fitzgerald & Co. are looking at getting into the industry. Hence references are made to the evolution of the mutual fund industry that also started out with high commission structures.
As Allan Swaringen, CEO of Jones Lang LaSalle Income Property Trust, put it “nontraded REITs have lived almost exclusively across independent broker-dealer channels. I don’t think that’s a model that will be successful going forward. It has to be sold by a variety of advisers.”
Chinese P2Ps plagued by flaky guarantees (fintech blog). Gabriel Wildau. Financial Times. 25 Jul. 2016.
“‘It’s just too easy to attract investment. That’s why it draws so many scammers,’ says Michael Zhang, chairman of Beijing-based Puhui Finance, a large P2P platform with a clean reputation.”
“Beyond the problem of outright fraud is the thornier issue of raising risk awareness in a culture where debt investments are traditionally seen as carrying an implicit guarantee from issuers who are mainly state-owned institutions.”
“Dianrong.com, one of China’s largest P2P platforms, investment products carry a label that says ‘multiple guarantees.’ While the Chinese term used – baozhang – is distinct from the word for legally binding guarantees, it still translates as ‘guarantee’ or ‘safeguard.’ Many platforms now divert a portion of borrower interest payments into a ‘reserve fund’ used to protect investors from defaults, an arrangement that looks a lot like bank capital.”
“Soul Htite, the co-founder of Dianrong.com who previously co-founded US-based Lending Club, says that in an investing culture where defaults are rare, Chinese investors tend to choose products purely based on yield.”
“In the US we have a very good history of investing and people understand risk. (But) one problem we had in the first couple of years with Chinese investors is, we noticed that when you listed all the loans – this one yields 8% and another one yields 14% – people put all their money on the 14%. And we explained, ‘It’s not guaranteed, it might default.’ Still they put their money there. So that’s when we started forcing diversification on them.” – Soul Htite
