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Lending in China Is So Risky That Cows Are Now
Collateralized - (www.bloomberg.com)
In the creative world of Chinese lending, there’s a new trade in town: the cow
leaseback. China Huishan Dairy Holdings Co., which operates the largest number
of dairy farms in the country, is selling about a quarter of its herd -– some
50,000 animals -- to Guangdong Yuexin Finance Lease Co. for 1 billion yuan
($152 million) and then renting them back. With an estimated $1.3 trillion of risky loans in the country, Chinese banks are
becoming more cautious about lending, forcing some companies to look for new
ways to borrow. Finance leasing has been growing in popularity, especially for
purchases of equipment. But cows? "It’s not very common to use cows as
collateral," said Robin Yuen, an analyst at RHB OSK Securities Hong Kong
Ltd. "The value of a cow would fluctuate depending on milk prices and
other factors, so it’s a risky asset for lenders. It would be hard to do forced
selling -- there’s no liquid market for a large number of cows."
Global conditions echo post-Lehman crisis, Abe
warns G7 – (www.ft.com) The global economic outlook is as grim as it
was after the Lehman Brothers crisis in 2008, Shinzo Abe claimed on Thursday, as the Group of 7
revealed its stark divisions on economic policy. Seeking to rally support for a
global fiscal stimulus at the G7 summit,
the Japanese prime minister showed his fellow world leaders a series of
alarming graphs comparing today’s economic conditions with those of 2008. But,
according to people close to the discussions, Mr Abe struggled to win over
opponents such as Germany’s chancellor Angela Merkel or UK Prime Minister David
Cameron. Given the implausibility of his comparison with 2008 — the world
economy is growing steadily, rather than falling apart — the fact that he used
it suggests Mr Abe plans to delay a scheduled rise in Japan’s consumption tax
from 8 to 10 per cent.
Euro zone hails 'breakthrough' with Greece, IMF
debt deal - (www.reuters.com) SOUND
FAMILIAR?? We have heard this 4-5 times since 2011. Euro zone governments on
Wednesday offered Greece debt relief in 2018, but left key details for later in
a bid to bridge Germany's
view that no immediate action was needed and the International Monetary Fund's
call for decisions now. The late-night compromise spared the battered European
Union the risk of another Greek crisis this year, less than 12 months after
Athens was on the brink of ejection from the currency area by rejecting
austerity measures and defaulting on an IMF loan. After talks that lasted into
early Wednesday, Eurogroup ministers agreed to release 10.3 billion euros (7.8
billion pounds) in new funds for Greece in
recognition of painful fiscal reforms pushed through by Prime Minister Alexis
Tsipras's leftist-led coalition, subject to some final technical tweaks.
Wells Fargo launches 3% down payment mortgage - (www.cnbc.com) First-time
buyers and low- to moderate-income buyers have largely been sidelined by
today's housing recovery. The common cry is too-tight credit. Lenders have kept
the credit box restrictive because they are gun-shy from the billions of
dollars in buy backs and judicial settlements stemming from the mortgage crisis
that they still face today. Now, the nation's largest lender, Wells Fargo, says it is opening that box with a new low
down payment loan — a loan it claims is low-risk to the bank. "We are
fully underwriting the borrowers, we are partnering with Fannie Mae to
originate and sell these loans, we are ensuring the borrowers have an ability
to repay and that they're qualified for home ownership, but we're simplifying
things for the homebuyer," said Brad Blackwell, executive vice president
and portfolio business manager at Wells Fargo.
Saudi Arabia Probes Bank Currency Trades as Peg
to Dollar Strains - (www.bloomberg.com) Banks
in Saudi Arabia are coming under fresh pressure over products that allow
speculators to bet against the kingdom’s currency peg, according to people with
knowledge of the matter. The Saudi Arabia Monetary Agency has asked lenders to
explain why they are offering dollar-riyal forward structured products to
customers less than four months after the regulator banned options contracts
that let speculators place wagers on a currency devaluation, the people said.
The authority, known as SAMA, didn’t reply to requests for comment. Hedge funds
such as PointState Capital and Pershing Square Capital Management have made
bets that the country’s peg to the dollar will be broken as oil revenue
plunges, even as the country maintains it has no plans to devalue and analysts
including Capital Economics say such a move would be a last resort. Riyal
forwards surged to 660 points, the highest since Feb. 15.
Auto, Mortgage Delinquencies Climb in Energy
Regions - (www.wsj.com) The
year-and-a-half-long spell of low oil prices is making it hard for households
to pay the bills in energy-producing regions, an ominous localized trend that
comes as the rest of the country returns to pre-recession levels of health. Delinquencies
on auto loans have spiked in the U.S. counties that had the highest employment
in the oil-and-gas industry, according to the Federal Reserve Bank of New
York’s quarterly report on household debt and credit. Mortgage delinquencies have also climbed,
though not as dramatically. Tuesday’s report underscores that although the
decline in oil prices has saved many Americans money at the pump, it has caused
significant economic fallout for those who were working in the energy industry
during the boom.
Illinois’s Lost Year About to Become Two as
Budget Cliff Nears - (www.bloomberg.com) Illinois
lawmakers have been busy in the last week of the regular legislative session.
They moved to establish a youth-only turkey hunting season, set standards on
where podiatrists can perform amputations and allowed for the adoption of
retired police dogs. Yet, the Land of Lincoln remains the only state in the
nation without a budget, mired in the longest such standoff in its history. After
leaving the government since June without a plan for what to spend and how, the
Democrat-led legislature and Republican Governor Bruce Rauner have until May 31
to approve one by a majority vote. If not, for the rest of the year it will
take three-fifths of the General Assembly to do so, making a compromise
considerably harder to reach.
“NIRP
is Killing Us,” Wheezes Spain’s Second Biggest Bank -(www.wolfstreet.com) In
Europe, banks are beginning to feel the side effects from the ECB’s negative
interest rate policy (NIRP), which (among other things) is meant to weaken the
euro, fuel inflation, force banks into riskier lending, and prevent Eurozone
economies from buckling under the sheer weight of their sovereign debt. But it
doesn’t work. Inflation remains much lower than the ECB’s target headline rate
of 2%, European sovereign debt continues to grow at an alarming rate, and bank
lending remains anemic in most countries. And it could actually end up killing
the patient, Europe’s biggest banks. That’s what Francisco González, Executive
Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership
Meeting of the world’s most powerful financial lobby organization, the
Institute of International Finance (IIF).
Big
Banks Ladle On the Risk - (www.wsj.com) Hungry
for revenue, Wall Street banks are taking on more risk to help companies sell
large chunks of stock. In block-trade deals, a bank typically buys stock from a
company or its private-equity backers at a discount, and then aims to flip the
stock to money managers after the market closes that same day. If they can
fetch a premium, it is a win for them. But if they can’t unload the shares and
prices fall, they bear the loss, minus fees. About half of all share sales by
already-public companies listed in the U.S. have been block trades this year,
according to data provider Dealogic. In the past five years, these deals
typically accounted for about a third of all share sales, and in the past
decade that figure averages about a fifth, according to Dealogic. Energy
companies, in particular, have sought block trades this year to quickly raise
funds and pay down debt.
Former
Patriot Coal CEO Murdered - (www.zerohedge.com) While
the US coal industry has had its share of bad news in the past year, following
extensive plant shutdowns and numerous bankruptcies including that of the
largest US coal producer Peabody Energy, there was some even more tragic news
last night when as AP reported, West Virginia State Police say longtime coal
company executive and recent Patriot Coal CEO Bennett K. Hatfield has been
murdered. Last night, the local press reported that Hatfield, 59, was shot to
death Monday at Mountain View Memory Gardens, a cemetery in southern West
Virginia's Mingo County. Hatfield resigned in 2015 as president and CEO of
Patriot Coal, a month before the company, headquartered in Creve Coeur until
early 2015, filed for Chapter 11 bankruptcy protection for the second
time. He was International Coal Group's CEO when a 2006 explosion at the Sago
Mine in northern West Virginia killed 12 miners.
Bernie
Sanders Slams the US Bailout of Puerto Rico - (www.fortune.com) Ryan,
R-Wis., has said the bill would avoid an eventual taxpayer bailout and Treasury
Secretary Jack Lew has called it a “tough bipartisan compromise.” House
Democratic leader Nancy Pelosi also supports the agreement. Puerto Rico, which
has struggled to overcome a lengthy recession, has missed several payments to
creditors and faces a $2 billion installment, the largest yet, on July 1. The
island has been under a state of emergency and many businesses have closed,
schools have lacked sufficient resources like electricity and some hospitals
are limiting treatment.
‘Massive Bailout’ Needed in Debt-Saddled China,
Analyst Chu Says - (www.bloomberg.com) Charlene Chu, a banking analyst who made her
name warning of the risks from China’s credit binge, said a bailout in the
trillions of dollars is needed to tackle the bad-debt burden dragging down the
nation’s economy. Speaking eight days after a Communist Party newspaper
highlighted dangers from the build-up of debt, Chu, a partner at Autonomous
Research, said she was yet to be convinced the government is serious about
deleveraging and eliminating industry overcapacity. She also argued that
lenders’ off-balance-sheet portfolios of wealth-management products are
the biggest immediate threat to the nation’s financial system, with
similarities to Western bank exposures in 2008 that helped to trigger a global
meltdown.
Brazil’s Budget Minister Takes Leave of Absence
During Probe - (www.bloomberg.com) Brazil’s
newly-appointed Budget Minister Romero Juca said he will take a leave of
absence after allegations surfaced that he wanted to obstruct the sweeping
corruption probe known as Carwash. Juca, the leader of Acting President Michel
Temer’s political party, will return to his former job as senator and make room
for Dyogo Oliveira to take the helm of the Budget Ministry on Tuesday. The
surprise announcement on Monday afternoon capped a day of speculation about
Juca’s future in the cabinet after he initially refused to step down. The
dramatic departure highlights the challenges facing Temer, who with less than
two weeks on the job was forced into damage-control mode as the corruption
scandal encroached on his government. The allegations emboldened Temer’s
critics, who heckled the acting president and allies when they visited
Congress, accusing them of orchestrating a coup against Dilma Rousseff.
Iron Ore’s Pivot From Boom to Gloom Puts $50
Level Back in View - (www.bloomberg.com) Iron
ore has pivoted from boom to gloom in a few short weeks. Benchmark prices
are near $50 a metric ton as spectacular losses this month driven by rising
supplies and a more cautious approach from mills in China have eviscerated
April’s speculation-driven rally. “Seaborne supply is rising while the Chinese
steel mills will reduce purchases,” Ren Jiaojiao, an analyst at Maike Futures
Co., said by phone from Xi’an on Tuesday before the price
data. Inventories at China’s ports -- which topped 100 million tons last
week -- may increase further, according to Ren. The raw material has been on a
tumultuous ride this year after tentative signs of a demand revival in China,
including widening profit margins for steelmakers in the top producer, ignited
a firestorm of speculation. The frenzy led to a clampdown from regulators and
exchanges, weakening prices once more, including iron ore and steel. Brazil’s
Vale SA, the largest iron ore producer, warned last week there was a need to
prepare for tougher times.
ECB Warns Against Rise of Populism – (online.wsj.com) The
European Central Bank warned Tuesday that the rise of populist political forces
in Europe could slow the implementation of needed economic reforms, leading to
market pressure on vulnerable countries. The comments in the ECB’s Financial
Stability Review, which it issues twice a year, come as Europe faces a wave of
populist revolts that threaten to undermine much of the political order
established on the continent since the end of the World War II. In the report,
the ECB said that rising political risks “as well as the increasing support for
populist political parties which are seen to be less reform-oriented, may
potentially lead to the delay of much needed fiscal and structural reforms and
cause renewed pressures on more vulnerable sovereigns.”
Chinese State Fund Taps WMPs in Financing Shift, Merchants Says
- (www.bloomberg.com)
Investment banks suffer worst first quarter since financial
crisis: survey - (www.reuters.com)
Emerging Markets-Brazil currency drops on local political woes
- (www.reuters.com)
Lost Seals And Other Excuses Used By Defaulting
Chinese Firms - (www.bloomberg.com) Missing
corporate stamps, shuffled assets and disappearing executives have become the
hallmarks of debt distress in China. Investors are starting to lose patience. China
Shanshui Cement Group Ltd. said this month it couldn’t distribute interest
without its company seal, only for the underwriter to report payment later
saying the stamp isn’t needed. Shenyang City Utility Group Co. said it couldn’t
publish a repayment statement as the holder of its chop was traveling. China
City Construction Holding Group Co.’s bonds slumped to 79 yuan out of 100
yuan face value on May 6 after its controlling shareholder changed. Fosun
International Ltd. was among issuers to report lost contact with executives. A
lack of transparency and protections in bond documentation are adding to the
angst among investors in China, where a record 10 companies have failed to
make payments this year amid the weakest economic growth in a quarter century.
This has prompted authorities to tighten regulation and scrutinize underwriters’
due diligence work.
Liquid alternative mutual funds leave investors
disappointed - (www.ft.com) The
asset management industry’s hopes of bringing hedge fund strategies to the
American mass market have stalled in the face of miserable returns and
scepticism from investors. Assets in so-called liquid alternative mutual funds in the US, which doubled between 2011 and
2014, have stagnated for two years, and new data show that the average fund
lost money, regardless of whether the sector is measured over one, three, five
or 10 years. The scale of the disappointment has become apparent because
Morningstar, the research group tracking mutual funds, began categorising
liquid alts funds separately from some bond funds this month.
The High Cost of Ultralow Interest Rates - (online.wsj.com) These
policies are toxic for financial stability. They force retired people to
curtail spending and discourage the young from saving for retirement. They
force people into making risky investments and don’t stimulate economic growth.
Worse, they gradually undermine personal responsibility and ensure that future
generations are more dependent on government programs. The Fed has kept
interest rates near zero for more than seven years. Experts generally recommend
that U.S. households accumulate savings sufficient for 25 years of spending at
80% of earnings the year before retirement. Some savings will be in the form of
Social Security benefits. But unconventional monetary policies are making it
nearly impossible for most households to achieve the rest.
Abu Dhabi Stocks in Worst Run Since October as
Gulf Markets Drop - (www.bloomberg.com) Abu
Dhabi stocks posted their longest losing streak since October amid a slump in
trading across Gulf Arab equity markets as investors held out for more than a
$1 billion worth of rights issues. The ADX General Index fell 1.1 percent,
declining for the sixth straight day. Emirates Telecommunications Group Co., or
Etisalat, the largest phone company in the Middle East, led the retreat with a
2.6 percent drop. Traders exchanged shares in about a third of companies on the
gauge. The Bloomberg GCC 200 Index slipped for a third day, with volumes on the
main gauges in the six-nation Gulf Cooperation Council languishing at less than
half the 20-day average.
Hedge
Funds Are Betting Record Amounts on Meltdown of Australian Banks and Housing
Bubble - (www.wolfstreet.com) It has been called the “widow maker trade,”
based on how short sellers have been dealt with over the past few years. The
fundamentals have been inviting: Australia has been in a fully blooming housing
bubble. Households are the most indebted in the world, based
on debt to disposable income. To maintain the housing bubble, the
central bank slashed interest rates to record lows (1.75%). The government
wants to keep the bubble going for as long as possible. So regulators close
their eyes, according to media reports, to questionable or even illegal lending
practices. Home prices, after soaring for years, are clearly unsustainable. But
just because it’s a bubble doesn’t mean it has to implode on schedule. It will
implode, as all bubbles do, but on its own time. If short sellers get the
timing wrong, they’ll get run over by market euphoria. Hence, “widow maker
trade” for betting against the housing bubble by shorting the banks.
Valeant Gets Notice of Default From Bondholders
on Delayed 10-Q - (www.bloomberg.com) Valeant
Pharmaceuticals International Inc. received a notice of default from some of
its bondholders because of a delay in filing its first-quarter financial
results, the company said Thursday. The notice from holders of the company’s $1
billion of 5.5 percent notes that mature in 2023 started the clock on a 60-day
grace period, giving Valeant until July 18 before the bondholders can demand
immediate repayment if the company hasn’t filed the statement, according to a
regulatory filing Friday. The default notice also triggers a provision in its
credit agreement that allows its most senior lenders to demand repayment if the
financials aren’t filed by July 3, bringing forward the July 31 extension previously worked out with lenders. There is no grace
period under the amended agreement, meaning loan investors will be able to
demand accelerated repayment on $12.7 billion of loans if the new deadline
isn’t met.
Shipbuilding
Industry Collapses, Hits China and South Korea - (www.wolfstreet.com) In
the first quarter, South Korean shipbuilders saw their orders collapse by 94.1%
to 170,000 compensated gross tons (CGT), compared to the prior year. In terms
of dollars, orders collapsed 94% from $6.5 billion in Q1 2015 in to just $390
million. Global orders for new vessels in Q1 have collapsed too, but slightly
less, according to the Export-Import Bank of Korea, cited by IHS Fairplay: down 71% year-over-year to 2.32 CGT. “Their
business slump may continue throughout this year, and demand for oil tankers
may improve slightly during the second half of the year,” Korea Eximbank said
in the report. Current order backlog will provide work for about two years. For
all of 2016, orders are expected to plunge by 85%, from $23.7 billion in 2015
to just $3.5 billion. Chinese shipyards are in even deeper trouble.
Chicago
Pension Liabilities Jump 168%, Understated By $11.5 Billion - (www.zerohedge.com) New
accounting rules show Chicago has understated its pension liabilities by $11.5
billion. At the end of 2015 the stated liability was $7.1 billion. Today
it’s $18.6 billion. That’s a jump in net liabilities of 168%. Mayor Rahm
Emanuel has hopes pinned on union concessions and help from the state
legislature. Neither is likely. Let’s stop pretending there is another
solution, because there isn’t.
Balance Due: Credit-Card Debt Nears $1 Trillion
as Banks Push Plastic - (www.online.wsj.com) U.S.
credit-card balances are on track to hit $1 trillion this year, as banks
aggressively push their plastic and consumers grow more comfortable carrying
debt. That sum would come close to the all-time peak of $1.02 trillion set in
July 2008, just before the financial crisis intensified, and could signal an
easing of frugal habits ingrained by the recession. The boom has been driven by
steady economic conditions and an improving job market that have made
creditworthy consumers less reluctant to take on debt. In addition, lenders
have signed up millions of subprime consumers who previously weren’t able to
get credit. Consumers are taking on other forms of debt, too. Auto-loan
balances surpassed $1 trillion in the first quarter, a record for the industry,
according to a report Thursday from credit bureau Experian.
The Iron Mountain on China’s Doorstep Tops 100
Million Tons – (www.bloomberg.com)
There’s a mountain of iron ore sat right on
China’s doorstep. Stockpiles at ports have climbed above 100
million metric tons, offering fresh evidence of increased supplies in the
world’s top user that may hurt prices. The inventories swelled 1.6 percent to
100.45 million tons this week, the highest level since March 2015, according to
data from Shanghai Steelhome Information Technology Co. The holdings, which
feed the world’s largest steel industry, have expanded 7.9 percent this year,
and are now large enough to cover more than five weeks’ of imports.
Republicans,
Democrats Agree On A Bill To Bailout Puerto Rico - (www.zerohedge.com) It
turns out that Puerto Rico's plan to default on its debt and beg congress for
help is working out as planned. After a slight delay, House Republicans have
reached an agreement with the Obama administration to provide a path to
restructure Puerto Rico's $70 billion debt load. The bill would offer the
island a legal out similar to bankruptcy and wouldn't commit any federal money
according to the WSJ.
All of the political talking heads are supportive of the bill, with House
Speaker Paul Ryan saying that "the stability of the territory is in
danger. Today, Republicans and Democrats came together to fulfill Congress's
constitutional and fiscal responsibility to address the crisis", and
Treasury Secretary Jacob Lew called the proposal "a fair, but tough
bipartisan compromise."
Silicon
Valley Housing Market Hit as Chinese Money “Dried up” - (www.wolfstreet.com) Money
from Chinese investors “has dried up,” a residential real-estate broker in San
Francisco told me a few days ago, as he was fretting about the local housing
market. It’s a result of the crackdown by the Chinese government on capital
flight, he said. Chinese investors have been buying about 5% to 7% of
residential properties in San Francisco, possibly more in parts of Silicon
Valley. And other brokers are now publicly chiming in about money from China
drying up. “We’ve recently noticed a slowdown,” Jack Woodson at Alain Pinel
Realtors in Menlo Park in Silicon Valley, told Bloomberg. “Buyers are taking more time to decide about
making offers.” He fingered Chinese investors who’ve suddenly curtailed
their purchases after they had “really been driving the market.” Data coming
out of China appear to support the thesis of a sudden money vacuum in some of
the toniest West Cost Housing markets.
Petrobras Pays Record Yield in $6.75 Billion
Bond Sale - (www.bloomberg.com) The
company’s stocks and bonds have rallied this year on speculation that a new
government in Brazil will be better able to restore growth in Latin America’s largest
economy. They had tumbled since 2014 as an investigation began into kickback
schemes in which Petrobras executives demanded bribes for handing out billions
of dollars of work contracts. The probe has led to more than 150 arrests in
Brazil and thrown the country’s politics into disarray, fueling efforts to
impeach President Dilma Rousseff, who was Petrobras’s chairman when the alleged
graft took place…. Petrobras has $126 billion of debt outstanding, making it
the most heavily indebted company in emerging markets. Yields on its $5.25
billion of existing notes due in 2021 fell 0.4 percentage point to 8.3 percent
Tuesday as of 12:41 p.m. in New York. Bonds due in 2025 from Argentina’s state oil
company YPF SA yield 8.12 percent.
Lauded
Wunderkind Medical Testing Startup Theranos Turns Out To Be One Big Fraud - (www.zerohedge.com) Just
when you thought that the biggest ever "multi-billion" private
company that also happens to be an utter fraud, would quietly disappear before
it risked attracting even more unwarranted attention from regulators,
enforcers, and criminal investigators which could potentially lead to prison
time for "billionaire" Elizabeth Holmes, here she comes again
reminding everyone of her fallen from grace presence, in this case with what
should be the terminal news for this company, namely that as the WSJ reports (and
as the company confirms) Theranos has told federal health regulators that the
company voided and revised two years of results from its Edison blood-testing
devices and has issued tens of thousands of corrected reports to doctors and
patients.
US
heavy equipment maker faces 'steeply depressed' demand - (www.cnbc.com) Even
with crop prices trending higher, the worst of the agricultural downturn may be
far from over for Deere. Continued weakness in the domestic market
along with softness inSouth America are affecting the company's farm
machinery business. The slump is being felt hard, particularly on
high-horsepower tractors and combines. "Global demand for farm equipment
remains steeply depressed," Longbow Research analyst Eli Lustgarten said
in a note Friday. "Our 34 contacts across four different countries
reported sequentially lower demand and steep year-over-year double-digit
declines across all markets. North American and
international markets seem to be worsening as crop prices stay low and farmers
struggle to break even."
