Tag: Real Estate

June 22, 2017

Perspective

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

Worthy Insights / Opinion Pieces / Advice

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

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

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

Markets / Economy

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

Real Estate

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

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

Energy

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

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

Finance

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

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

Japan

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

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

South America

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

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

June 16, 2017

Perspective

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

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

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

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

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

Worthy Insights / Opinion Pieces / Advice

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

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

Markets / Economy

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

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

Real Estate

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

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

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

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

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

Energy

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

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

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

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

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

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

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

June 15, 2017

Perspective

WSJ – Daily Shot: Business Insider – U.S. Pretax income growth by income category – 6/14

Economist – Around the world, beer consumption is falling – THE DATA TEAM 6/13

WSJ – Daily Shot: BMI Research – Projected Global Water Availability 6/14

Markets / Economy

Bloomberg – Wheat Soars as U.S. Spring Crop in Worst Shape in 29 Years – Megan Durisin 6/13

  • “A prolonged dry spell has left the U.S. spring wheat crop in its worst shape in almost three decades, sending prices for the grain on a tear.”

WSJ – Daily Shot: Red Spring Wheat Futures – 6/13

  • “According to the USDA, the US wheat crop is now in worse shape than at any time since 1998. Prices spike.”

Real Estate

Bloomberg  – These Cities Have Too Many Stores, and They’re Still Building – Patrick Clark and Dorothy Gambrell 6/12

China

FT – Shanghai loosens housing policy after rare protests – Yuan Yang, Xinning Liu, and Tom Hancock 6/13

  • “The Shanghai city government has made a partial policy concession after a rare housing protest at the weekend, in an effort to placate middle-class anger at measures to pour cold water on a hot property market.”
  • “Some 100 demonstrators gathered in the main shopping street of Nanjing Road on Saturday night — a sight rarely seen in China’s financial capital.”
  • “The crowd said they had bought ‘dual-use’ homes built on land sold for commercial rather than residential development, and criticized the government’s recent decision to enforce an old rule that restricts such land to commercial use.”
  • “’The government has realized its reliance on asset bubbles for growth is not sustainable,’ said Wang Xinling, lead analyst at China Policy, a Beijing think-tank.”
  • “’So it wants to change direction, but the public perceives this as hurting their wealth while the property market stagnates,’ Ms. Wang added.”
  • “Late on Monday the Shanghai government blamed property developers for ‘distorting the policy’ and ‘delaying reforms’, trying to paint the developers — rather than the government — as the target for public anger.”
  • “However, it relented by allowing buyers of ‘dual-use’ homes to move in, although it did not loosen restrictions on selling the houses, which is a big contention for the homebuyers.”
  • “China is worried about property bubbles developing after years of breakneck price rises, and has attempted to cool prices by limiting citizens’ ability to buy houses while simultaneously bringing the residential market under stricter oversight.”
  • “The regulations affect 12m square meters of property, according to Zhang Hongwei, chief analyst of Tospur, a property consultancy.”
  • “About 30 local governments across China have issued measures making it more difficult to buy houses since last autumn.”
  • “As a result, Beijing house prices fell 4% in May, according to a study by the Chinese Academy of Social Sciences. Prices in other big cities are falling or at a standstill and sales have collapsed this year.”
  • “Aspiring homebuyers have been pushed into greyer areas of the market, such as buying dual-use commercial properties.”

June 14, 2017

Perspective

Economist – Climbing without ropes 6/8

  • “A series of remarkable feats increases the appeal of a niche sport.”

FT – Diplomatic victory for China as Panama ditches Taiwan – Ben Bland 6/13

  • “Panama has cut ties with Taiwan and established diplomatic relations with China, as Beijing intensifies efforts to isolate the self-governing island, which it considers Chinese territory.”
  • “Isabel Saint Malo, Panama’s foreign minister, signed a communiqué with her Chinese counterpart Wang Yi on Tuesday in Beijing to formalize the switch, leaving Taiwan with just 20 diplomatic allies.”
  • “Juan Carlos Varela, the president of the central American nation, said that signing up to Beijing’s ‘One China’ principle would generate ‘great potential in all areas’ including investment and job creation.”
  • “Beijing has tightened the squeeze on Taiwan since the election last year of President Tsai Ing-wen and her pro-independence Democratic Progressive party.”
  • “Panama’s defection is the latest diplomatic coup for Beijing, which is capitalizing on the uncertainty surrounding President Donald Trump’s foreign policy by exerting its influence from Southeast Asia to South Korea.”
  • “’China is exercising smart power more often, while the US is retreating from mainstream international politics,’ said Huang Kwei-bo, a professor of diplomacy at National Chengchi University in Taipei.”
  • “Taiwan still has expansive political and economic relations with many countries that do not formally recognize it, including the US, Japan and China itself, which consumes about 40 per cent of Taiwan’s exports.”

Worthy Insights / Opinion Pieces / Advice

Economist – America is no longer a force for stability in the Gulf 6/10

NYT – ‘No Such Thing as Justice’ in Fight Over Chemical Pollution in China – Javier Hernandez 6/12

Real Estate

WSJ – The Mall of the Future Will Have No Stores – Esther Fung 6/12

  • “Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.”
  • “In all, retailers have announced 2,880 store closings from January to April 6 of this year, more than twice as many as in the same period a year earlier, according to Credit Suisse . For the full year, the investment bank anticipates more than 8,600 stores to close. Analysts predict that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.”
  • “Many mall owners are trying to liven up the experience, bringing more dining and entertainment tenants and eschewing the traditional mix of middling food courts, fashion retailers and department stores.”
  • “In GGP’s holdings of more than 130 shopping centers, apparel takes up half of the portfolio by gross leasable area. Food has risen to 13% from 6% and is projected to go to 20% by 2025, said GGP Chief Executive Sandeep Mathrani in a recent earnings call. Apparel will fall by another 10% or so by the fall, and stabilize at around 40%, he said.”

China

Economist – China’s rockiest environmental problem: its soil 6/9

  • “Cleaning filthy soil is much harder than cleaning foul air.”

FT – China drive to relocate millions of rural poor runs into trouble – Tom Hancock 6/12

  • “Villagers return home after struggling with lack of jobs in urban apartments.”

FT – China accuses 2 more provinces of faking data – Lucy Hornby 6/12

  • “Corruption watchdog cites concerns over figures from Jilin and Inner Mongolia.”

FT – Anbang confirms chairman detained by Chinese government – Tom Mitchell and Lucy Hornby 6/13

Japan

FT – Japan Inc’s silence over Toshiba sends chill across Tokyo – Leo Lewis and Kana Inagaki 6/12

  • “For almost 70 years, Japan Inc, a support network of invisible corporate allegiances, binding investments and unwritten understandings, has stood behind the nation’s companies as the ultimate guarantor of stability.”
  • “But for Toshiba, one of its famous industrial names, corporate Japan has gone missing in its darkest hour of need.”
  • “The failure of Japan Inc to bail out Toshiba is not only a shock for the embattled group — it suggests the framework that has previously helped rescue troubled megabanks and distressed electronics makers may be disintegrating.”
  • “’The deal of Japan Inc was: ‘I will help you when times are tough’,’ says Jesper Koll, head of fund manager WisdomTree Japan, pointing to the diminishing grip of the ‘keiretsu’ — the business groupings whose closeness and mutual support underpinned Japan’s postwar economic growth.”
  • “The Japan Inc concept, say economic historians, evolved over decades to remedy precisely the problem thrown up by Toshiba. It is an unwritten code that demands that, even if the result is unsuccessful, an all-Japanese solution will not only be attempted but will receive broad support from big business, banks and government.”
  • “So far, say people involved in the talks, not a single Japanese company has submitted a bid for the chip division even though business leaders have voiced dismay at the prospect of Toshiba’s technology falling into the hands of Asian rivals.”
  • “Thinning financial ties have contributed to the unravelling of the Japan Inc structures. A long-term trend, accelerated under Prime Minister Shinzo Abe’s governance push, has been the unwinding of the cross-held share stakes between friendly companies.” 
  • “According to Nomura Securities, the ratio of holdings of Japanese stocks by listed Japanese banks and non-financial companies was 10.3% at the end of the financial year that ended in 2015. At its height in 1990, the ratio was 34%. Nomura optimistically predicts Japan’s megabanks will reduce their shareholdings in Japanese companies over the next few years by 20-30% from current levels.” 
  • “The question remains, according to Mr Koll, whether it is still meaningful to talk about Japan Inc, as the Toshiba situation has clearly shown that the old safety nets are gone.”
  • “The chief executive of a large Japanese company, who is close to top METI (Ministry of Economy, Trade and Industry) officials, adds that it is not just a lack of willingness to help. ‘I don’t know if you would call this the ‘end of Japan Inc’ but it is certainly true that the task of resolving the Toshiba problem has taken everyone here by surprise because of its difficulty,’ he says.” 
  • “’I think it has been a wake-up call for METI and Japan for what they can really do in a crisis. Less than they thought, is the frank answer.’”

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/12

  • “Venezuela’s stock market was up another 10% on the day.”

WSJ – Daily Shot: Venezuelan Black Market value for one US dollar 6/12

  • “This rally has little to do with the stock market and everything to do with the collapsing Venezuelan bolivar. It takes over 7k bolivares to buy one dollar on the black market.”

Other Links

WSJ – Daily Shot: Tax Foundation – U.S. Beer Taxes by State 6/13

June 13, 2017

Worthy Insights / Opinion Pieces / Advice

A Wealth of Common Sense – Bulls, Bears & Charlatans – Ben Carlson 6/11

  • “A market crash is always a possibility. But using scare tactics to get people out of the markets (or keep them in) isn’t helpful to anyone.”

NYT – Stop Pretending You’re Not Rich – Richard Reeves 6/10

Markets / Economy

WSJ – Daily Shot: Change in U.S. Retail Jobs 6/12

Real Estate

WSJ – Daily Shot: Canadian Real Estate Assoc. – Home resales above $1 million 6/12

WSJ – Does Anyone Remember How to Make a Subprime Mortgage? – Kirsten Grind 6/12

Finance

WSJ – Daily Shot: Capital Economics – 10-Year Gov’t Bond Yields 6/12

  • “Take a look at this Capital Economics forecast for German government bond yields – a 1.75% increase in 2.5 years. Note that a 1% increase in the 10-year German yield will result in nearly a 10% mark-to-market loss. Time to short these bonds?”

 

June 12, 2017

Worthy Insights / Opinion Pieces / Advice

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

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

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

  • Interview

Real Estate

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

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

  • Podcast

Energy

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

China

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

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

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

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

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

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

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

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

Middle East

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

South America

WSJ – Daily Shot: Caracas Stock Exchange 6/9

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

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

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

June 9, 2017

If you were to read only one thing…

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

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

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

Perspective

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

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

Worthy Insights / Opinion Pieces / Advice

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

Markets / Economy

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

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

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

Real Estate

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

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

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

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

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

Energy

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

South America

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

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

Other Links

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