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Puerto Rico’s Pensions: $2 Billion in Assets,
$45 Billion in Liabilities
- (www.wsj.com) Soon-to-be-named members of an oversight
board are tasked with balancing the island’s huge pension deficit with its $70
billion debt load. One of the thorniest tasks awaiting a seven-member board
charged by Washington with cleaning up Puerto Rico’s debt crisis is deciding
how to balance a $70 billion debt load with nearly $43 billion in unfunded
pension liabilities. The issue is coming to a head now because the White House
is set to name as soon as next week the members of that oversight board, drawn
from lists of candidates submitted by congressional leaders in both parties. Puerto
Rico’s constitution calls for the island to pay its general-obligation bonds
ahead of public services or pensions, but a lawsigned by President Barack Obama in June clouds that hierarchy by
directing the new board to ensure pensions are adequately funded.
Oil Slide Lifts Corporate Defaults to Seven
Year High
- (www.wsj.com) Stronger oil prices offer little respite to
debt defaults in the energy sector. Oil, gas and natural resource companies
accounted for 56% of this year’s corporate defaults as 65 companies missed
payments on their debt, according to a report from S&P Global on Thursday.
The oil and gas sector also has the largest share of high yield bonds trading
at distressed levels, at 31%. Trouble in the oil sector is also translating
into higher global corporate defaults. This year’s tally totals 117 companies,
up 60% from the same period of 2015. Global corporate defaults are currently at
the highest level since 2009, when 213 companies defaulted in the same period
amid the global financial crisis, S&P said. Many commodities companies
tapped debt markets to take advantage of the long period of low interest rates, CFO Journal recently reported. Since some of those loans are tied to the
value of commodity reserves, the drop in energy prices cuts the value of those
in-ground reserves and sometimes pushes a company into default.
Did
Moody’s Just Sever Energy Giant’s Last Life Line? – (www.wolfstreet.com) Few companies epitomize the failings, follies
and foibles of today’s age of hyper-financialized, super-crony capitalism quite
like Spain’s teetering green-energy giant Abengoa. The firm came within inches
of becoming Spain’s biggest ever bankruptcy last year after embarking on a
suicidal multi-year international expansion program fueled by exceedingly
generous renewable energy subsidies and massive helpings of bank and corporate
debt. But the subsidies were abruptly taken away when the Spanish
government changed. When it had trouble dealing with its debt, the company
began hiding it through increasingly complex financial vehicles set up, of
course, in the City of London. As Abengoa’s then-CEO Manuel Sánchez Ortega
crowed at the time, when things get serious, you need to have your wits about
you, and “Abengoa has always been at the leading edge of financialization.”
Why
Is FaceBook Funding "Anti-Fed" Activists - (www.zerohedge.com) That's
what St. Louis Fed president James Bullard would like to know. Moments after revealing that the Fed is very close to admitting that
the stock market is in a bubble when he told Steve Liesman that "I
think we are on the high side of fairly valued, I could see the process getting
away from us, maybe tech stocks, maybe others", he shifted to something
totally different: the so-called Fed Up "activist protests" which
have been taking place at Jackson Hole. And, as the WSJ reported earlier, a day
after an unprecedented gathering between left-leaning activists and many
Federal Reserve officials, at least one central banker is questioning the
group's motives. Bullard said funding of the Center for Popular Democracy's Fed
Up campaign, which draws in large part on a charity supported by ex- Facebook
founder Dustin Moskovitz, whose net worth of $8 billion in 2015 made him the
youngest billionaire according to Forbes - has raised questions for him
about what the activists are really up to.
Central bankers eye public spending to plug $1
trillion investment gap
- (www.reuters.com) As central bankers converge on this mountain
resort Thursday for an annual conference on monetary policy, a couple of top
Federal Reserve officials took the chance to renew a push for interest-rate
hikes, citing improvement in employment and inflation. "The case is
strengthening" for a rate hike, Dallas Fed President Robert Kaplan told
CNBC television, whose open-air studio here overlooks the craggy peaks of the
Grand Teton National Park. "And you should conclude from that in the
not-too-distant future ... I think we're moving toward being able to take
another step."
As central bankers gather, some at Fed make interest rate rise
case - (www.reuters.com)
August U.S. auto sales seen down 5.2 percent; 2015 was peak:
forecasters - (www.reuters.com)
Dear
Congress: Have You Received Money From These Pharma Companies - (www.zerohedge.com)
We have been following the latest melodrama
involving a "greedy" Mylan, and numerous "humanistic" US
politicians, all the way up to the Democratic presidential candidate, exchange
blows over the company's dramatic price increases of its EpiPen anti-allergy
medication, with a healthy dose of amusement for one simple reason: if Congress
wants to crack down on someone, it should crack down on itself. After all, the
only reason Mylan has been able to pass the kinds of price increases that
Congress is now blasting it for, is because of US laws and regulations; laws
which incidentally, have been determined in Washington's backroom bribe parlor,
i.e. the corner offices of thousands of local lobby organizations dispensing
with billions of dollars in "client" funds. Clients such as the
companies listed below. Which brings us to this question: dear Congress,
have you received millions in lobby dollars from the US pharmaceutical
industry.
The canary in the coal mine for China’s
currency - (www.ft.com) The People’s Bank of China’s foreign reserves
have stopped falling and the spread between China’s onshore and offshore
exchange rates has almost vanished. The currency’s resilience, however, is unlikely to last. In particular, the amount of offshore
renminbi deposits, having peaked last year when the currency was devalued, has
continued to shrink this year despite the exchange rate becoming more stable
again. The diminishing size of the offshore market is the canary in the mine,
warning that renewed currency turbulence is likely in future. Holding the
currency outside the mainland, however, allows investors to gain exposure to
China’s economy without incurring its capital controls. The persistent decline
in offshore deposits — down by nearly a third to $180bn over the past year —
thus shows confidence in the currency remains fragile.
A Look at Some Companies Struggling With Rising
Debt - (abcnews.go.com) U.S. companies are sitting on hundreds of
billions of cash, so you might think they are in great financial shape. The
reality is different, and worrisome. Most of the cash is held by precious few
companies, a mere 1 percent of 2,000 tracked by S&P Global Ratings. At the
remaining 99 percent, finances have generally gotten worse in recent years.
Many have increased debt dramatically while their cash has barely risen, or
even fallen, among other signs of potential trouble. Here is a look at five
companies whose finances have weakened recently, according to Moody's Investors
Service, a credit-rating firm that assigns grades to companies based on their
likelihood of paying back what they owe. The companies are either one rating
change away from receiving a "junk" grade, which would make them too
risky for many investors, or have already achieved that status.
Money Market Dysfunction Helps Fuel U.S.
Corporate Bond Bonanza - (www.bloomberg.com) U.S.
companies feeling pain in short-term debt markets are seeking relief by
borrowing longer term, pushing already-high levels of corporate bond issuance
toward fresh records. Google parent Alphabet Inc. and food processor
Archer-Daniels-Midland Co. are among the companies that have sold more than $5
billion of corporate bonds in the past two months to pay off at least part of
their short-term debt known as commercial paper. They’re looking to tame their
interest expenses after new regulations have lifted some issuers’ borrowing
costs for near-term debt to seven-year highs. The changes underscore how
money-market rules that take effect in October are distorting debt markets.
Total sales for corporate bonds maturing in more than eighteen months are
around $950 billion this year, above levels for this time in 2015 and on track
to beat the full-year record of about $1.3 trillion, according to data compiled
by Bloomberg. Commercial-paper markets, where debt typically matures in 270
days or less, have shrunk by $108 billion since May, according to Federal
Reserve data.
Toxic
Mix in Asset Bubble Nirvana Hits Hedge Funds - (www.wolfstreet.com) The
toxic mix of crummy performance and high fees are having some impact. And it’s
big money: The hedge fund industry has over $3 trillion under management. And
some of this money is getting antsy. In July, hedge funds experienced net
outflows of an estimated $25.2 billion, the largest monthly net redemption
since February 2009 ($28.2 billion), according to an eVestment report
cited by Bloomberg.
In June, hedge funds got hit with net outflows of $23.5 billion. In March,
redemptions had hit $7 billion, and in January $20 billion. With some inflows
in the remaining three months, total outflows for 2016 so far amount to $55.9
billion. “Unless these pressures recede, 2016 will be the third year on record
with net annual outflows,” according to eVestment’s report. The other two years
were 2008 and 2009.
Derivatives Users Hit as Negative Rates Raise
Collateral Costs - (www.bloomberg.com) Derivatives
users are the latest group to be hurt by negative interest rates as they
get penalized for the cash they park at Europe’s biggest clearinghouses.
Traders can thank European Central Bank President Mario Draghi. Futures and
swaps are used to hedge or speculate on everything from German interest rates
to oil prices. To avoid taking a loss if a counterparty to a trade defaults,
they post collateral, such as government bonds or cash, at a clearinghouse. In
Europe, the biggest ones are in Frankfurt and London. But with German and U.K.
debt yields so low, or even negative, clearinghouse customers are sometimes
losing money on those assets.
McMansions Define Ugly in a New Way: They’re a
Bad Investment - (www.bloomberg.com) In
the late 1990s, Americans started referring to tract-built luxury homes popping
up in the suburbs as McMansions, a biting portmanteau implying that the
structures were mass-produced and ugly. There was also the implied snark
that their denizens, however wealthy, lacked the sophistication to tell
filet mignon from a Big Mac. Lately, these homes have been the subject
of fresh scorn, thanks to an anonymously authored blog that breaks down the genre’s design flaws
in excruciating detail. Posts lambasted builders for erecting garages bigger
than the homes they’re attached to, dropping giant houses on tiny lots,
plus shoddy construction and a mishmash of contrasting styles. (Gothic Tudor, anyone?) It’s fun reading that nevertheless
raised the question: How well have these homes kept their value? Not
well, compared with the rest of the U.S. housing market.
Debt to reach highest level since 1950 this
year - (www.washingtonexaminer.com) The
national debt this year will jump to the highest level since 1950 relative to
the size of the economy, the Congressional Budget Office reported Tuesday. The
agency projected that the debt held by the public will rise 3 percentage points
to 77 percent of U.S. gross domestic product by the end of fiscal year 2016 in
September. Debt has not hit that ratio since 1950, when the government was
still in the middle of paying down the debt it incurred paying for World War
II. Over the next 10 years, the office sees the debt rising from 77 percent of
GDP to 86 percent. Beyond that, it's supposed to keep rising as interest costs
on the debt mount, along with payments for Social Security, Medicare, and other
mandatory programs.
ECB faces bulked-up govt bond buying if QE
extended beyond March - (www.cnbc.com) The European Central Bank will have to bump
up its monthly purchases of government bonds if it decides to continue buying
beyond March 2017, just to ensure maturing paper does not reduce the pace of
its money printing. J.P. Morgan estimates 320 billion euros ($363 billion)
worth of bonds will mature between 2017 and 2019, and will need to be invested
again to honour an ECB pledge to redeploy the money it receives when bonds are
repaid. This additional buying could compound liquidity problems that have
created unpredictable price swings in the bond market, and the ECB might find
it hard to source enough paper and keep within its purchase criteria in some
countries - notably Ireland and Portugal where it has already scaled back
transactions.
Suddenly
Scared of Vancouver’s Commercial Property Bubble? - (www.wolfstreet.com) For
investors, Vancouver real estate has been a heavenly gift. But now, suddenly,
some of the biggest institutional investors, including Canada’s third largest
pension fund, are getting cold feet and want out. Just over the past 12 months,
the “benchmark price” soared 27% for apartments and 38% for detached houses!
The term “housing bubble” doesn’t even do it justice. But in July, British
Columbia implemented a 15% transfer tax on home purchases involving foreign
investors, an effort to put a lid on the price spiral that’s threatening to
price an entire generation out of the housing market. By the end of July, the
first squiggles appeared, as prices still soared but year over year sales
volume plunged nearly 20% [read…Vancouver Housing Bubble, Meet
Pin].
ECB faces bulked-up govt bond buying if QE extended beyond
March - (www.reuters.com)
Africa’s Next Big Currency Devaluation Seen Unfolding in Egypt
- (www.bloomberg.com)
Largest Oil Companies’ Debts Hit Record High - (www.wsj.com)
Political tensions hit South Africa’s rand and Turkey’s lira
- (www.ft.com)
Monetary policy has nationalized the Japan
stock market: CLSA - (www.cnbc.com) Even
a resurgent yen hasn't dampened Japan's stock rally over
the past couple months, but that's not necessarily because investors like the
market. The Nikkei 225 index has surged around 10 percent since late
June, even as the yen has climbed against the dollar, with the pair testing
levels under 100. Normally this would be bad news for stocks as a stronger yen
is a negative for exporters as it reduces their overseas profits when converted
to local currency. So what explains the buoyant stock market? Analysts
attributed the gains to the Bank of Japan (BOJ), not fundamentals. In a report
titled, "BOJ nationalizing the stock market," Nicholas Smith, an
analyst at CLSA, said that the central bank's exchange-traded fund (ETF) buying
program was distorting the market.
This
U.S. Bank Is About to Relive the 2008 Derivatives Nightmare - ( www.moneymorning.com) Citigroup
Apparently Didn't Learn Its Lesson in 2008… Citigroup Inc. (NYSE: C) already nearly
destroyed itself with derivatives during the 2008 crisis, requiring the biggest
taxpayer bailout in history in order to stay afloat. Strangely, it didn't learn
its lesson the first time its stock fell below $1. As rival banks see the
writing on the wall and scramble to get rid of their derivatives, Citi is now
cheerfully snapping up billions of dollars' worth. Several weeks ago, Credit
Suisse prudently sold $380 billion of derivatives to Citi, thereby reducing its
own leverage exposure by $5 billion. Last year, Deutsche Bank palmed off $250
billion of credit default swaps on (guess who?) Citi, and is in talks to get
rid of even more. The result is that Citi now holds the most derivatives of any
of its U.S. rivals. That's a staggering total exposure of nearly $56 trillion,
according to the OCC's latest report, shown here:
Savers
hit by negative rates are starting to store their cash in safes: S&P - (www.cnbc.com) Nearly
500 million people are living in countries with negative interest rates,
according to S&P Global, a factor which could fuel a return to a
"cash-only" society. Negative interest rates are designed to get
money flowing in an economy. In theory, the rate, set by a central bank,
discourages savers from holding on to their money because of the negative
return and encourages banks to lend. Central banks in Japan, euro zone and
several other European countries have introduced negative interest rates,
helping push the global stock of sub-zero-yielding sovereign debt to over $11
trillion. But rather than spend more, negative rates may force consumers to
look to hold their cash outside of the official banking sector.
RPT-Government on hook for China banks'
shrinking capital - (www.reuters.com) Hit
by bad loans, Chinese banks are expected to show a weakening in their capital
strength in first-half earnings, raising the prospect that government might
have to inject more than $100 billion to shore them up, according to some
analysts. There are early signs that government is already taking action to
help some of the smaller banks, which are struggling to maintain their capital
ratios as China's economy slows, interest margins fall, and bad debts climb. "We
believe the recapitalisation and bailout process is already discretely
underway. However, it has gone unnoticed as it has started with the smaller,
unlisted banks," said Jason Bedford, sector analyst with UBS. "We
expect this process to accelerate sharply in 2017, particularly among listed
joint stock banks," Bedford told Reuters, adding closing the capital
shortfall would require an infusion of $172 billion.
Yield Hunt Emboldens Companies to Whittle Away
Loan Safeguards - (www.bloomberg.com) Riskier
companies are increasingly getting credit agreements that allow them to raise
the amount of future cost savings to appear more creditworthy, boosting
potential losses for investors. The tweaks make it easier for borrowers to stay
in compliance with their loan terms and add more debt, according to Charles
Tricomi, a senior analyst at covenant research firm Xtract Research. “There is
too much money chasing too few loans,” Tricomi said. “Lenders are really at a
disadvantage and have to agree to these terms significantly against their own
interest, terms that they should be fighting off.” Whittling away standards
that keep a lid on leverage levels may leave investors with soured assets,
according to Tricomi. This is happening just as the credit cycle is peaking,
prompting warnings from
S&P Global Ratings that companies in the U.S. have taken on so much debt
that they’re at least as vulnerable to defaults and downgrades as they were
leading up to the 2008 financial crisis.
Former China boom town learns hard lessons
about service economy - (www.reuters.com) At
the section of the Great Wall of China that runs through Yulin, tour guide Gao
Jing says she tried to learn English in expectation of the increased number of
overseas visitors the city planned to attract as part of its economic
transformation. But the international tourists haven't come to Yulin, once a
coal, oil and natural gas boom town in the northwestern province of Shaanxi,
and in their absence she has forgotten her English. "Sure, there's lots of
talk about developing our tourism industry but walking the talk is a different
matter," said Gao, who's been a tour guide there for 10 years. "There's
an immediate return on investment if you invest in energy. But you may need to
wait 10, or even 100 years, if you want to see a return on investment in
tourism." The experience of Yulin carries a lesson for other Chinese cities
trying to re-tool their economies – establishing a vibrant services sector
takes time, and in the meantime you cannot afford to abandon your industrial
strengths.
It’s Getting Scarily Quiet in the Stock Market - (www.wsj.com) It’s
quiet. Too quiet. Even by the standards of August, the S&P 500 has been
remarkably tranquil, moving by less than in any other 30-day period in more
than two decades. Multiple measures show the calm. Realized volatility has
collapsed to levels last seen in September 1995, when a painful series of rate
increases had been replaced by a pause between Federal Reserve cuts. With the
S&P 500 down slightly on Monday, the index has had only five daily moves of
more than 0.5% in either direction in the past 30 trading sessions, equaling
the lowest since October 1995. And trading volumes have dropped far more than
is usual for the summer break. This lull in activity looks to many like yet
another symptom of central banks pouring money on troubled markets. Why worry
when you can sit back, collect the dividend and be sure the policy makers have
your back? Yet a lack of worry itself is often a reason for concern.
Revealed:
ECB Secretly Hands Cash to Select Corporations - (www.wolfstreet.com) In
June, the ECB began buying the bonds of some of the most powerful
companies in Europe as well as the European subsidiaries of foreign
multinationals. This pushed the average yield on euro investment-grade
corporate debt to 0.65%. Large quantities of highly rated corporate debt with
shorter maturities are trading at negative yields, where brainwashed investors
engage in the absurdity of paying for the privilege of lending money to
corporations. By August 12, the ECB had handed out over €16 billion
in freshly printed money in exchange for corporate bonds. Throughout, the
public was given to understand that the ECB was buying already-issued bonds
trading in secondary markets. But the public has been fooled. Now it has
been revealed by The Wall Street Journal that the ECB has also secretly been
buying bonds directly from companies, thus handing them directly its freshly
printed money.
Why No One Trusts China's Markets - (www.bloomberg.com) When
China's top securities regulator said recently that it plans to delist Dandong
Xintai Electric Co. for falsifying initial public offering documents, it didn't
grab many headlines. But it suggested some far-reaching changes may be afoot. Xintai
is the first company to be expelled from Shenzhen's ChiNext board for such an
offense, and one of only a handful that have ever been delisted in China. Its
expulsion suggests that regulators are facing up to some unfortunate truths
about China's capital markets. Those markets are, in important ways, only
superficially market-like. In the stock market, the government has intervened
on a huge scale to prop up prices. Investment in the bond market is overwhelmingly
directed to state-owned enterprises. There's no derivatives market to speak of.
Financial disclosures are often implausible, suspicions of insider trading are
rife and doubts about corporate governance are widespread.
New
SEC Money-Market Fund Rules Forcing a Liquidity Squeeze? - (www.wolfstreet.com) On
Oct. 17th new SEC rules will come into play that’ll affect money market funds
and liquidity across the financial sphere. These rules are an attempt to
prevent an 08’ style crisis by controlling money market liquidity, but in
reality, they may actually cause another financial crisis. The regulations say
that prime and municipal money market funds (the funds invested in riskier
assets than T-bills) will have to float their net asset values (NAV). They’ll
also be required to impose liquidity fees and redemption gates. The problem
with these new rules is the massive shift they’re causing in the money markets.
Investors are moving en masse from riskier prime funds that will be forced to
abide by these new rules, to safer government funds which are exempt. So far
$500 billion has already moved from prime to government funds, and it’s
expected another $500 billion will follow suite in the next few months.
In Scramble for Yield, Pension Funds Will Try
Almost Anything - (www.wsj.com) Some
pension funds are seeking to profit from others’ fear. Pension funds in Hawaii
and South Carolina are plying an arcane options strategy called cash-secured
put writing. In a typical trade, the investor sells a contract, known as a put,
to someone who owns stocks and is willing to pay up for protection in case they
decline. If, within a certain time, the shares fall below a given price, the
investor buys the stocks at that price, or covers their lost value. The upside
for the pension funds, which are writing options on the S&P 500 index, is
that they earn regular income. The strategy aims to work like a volatility
dampener. If stocks fall, the income the funds have collected on the options
contracts should help cushion any hit they take on the puts and their own
separate stockholdings. The pension funds set aside some cash-like instruments
such as Treasurys for the payouts, so they aren’t caught without money if the
market goes against them.
Seller’s Paradise: Companies Build Bonds for
European Central Bank to Buy - (www.wsj.com) The
European Central Bank’s corporate-bond-buying program has stirred so much
action in credit markets that some investment banks and companies are creating
new debt especially for the central bank to buy. In two instances, the ECB has
bought bonds directly from European companies through so-called private
placements, in which debt is sold to a tight circle of buyers without the
formality of a wider auction. It is a startling example of how banks and
companies are quickly adapting to the extremes of monetary policy in what is an
already unconventional age. In the past decade, wide-scale purchases of
government bonds—a bid to lower the cost of borrowing in the economy and
persuade investors to take more risk—have become commonplace. Central banks
more recently have moved to negative interest rates, flipping on their head the
ancient customs of money lending. Now, they are all but inviting private actors
to concoct specific things for them to buy so they can continue pumping money
into the financial system.
Business
Loan Delinquencies Rock Past Lehman Moment Level - (www.wolfstreet.com) This
afternoon, somewhat obscured by the Fed’s media-savvy and endless flip-flopping
about rate hikes, the Board of Governors of the Federal Reserve released its
second quarter delinquencies and charge-off data for all commercial banks. It shows that
if the Fed wanted to raise rates before serious signs of trouble emerged, it
might have missed the train. Consumer loans are still doing well, though
delinquencies have ticked up 10% from a year ago to $26.8 billion. Loans are
considered “delinquent” when they’re 30 days or more past due. Credit card
loans are also still doing well, though delinquencies have jumped 11% from a
year ago to $13.8 billion.
