tpl dec 16 13
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ABRAHAM GULKOWITZ
2013 issue 2December 16, 2013
Winter Crosscurrents
Just shy of the new year, financial markets continue to be dominated by the extent of monetary accommodation. Especially in major adva
economies, bonds and stocks have shrugged off the summer sell-off and posted gains on the view that low policy rates and large-scale a
purchases would persist longer. Accordingly, markets took in stride a two-week US government shutdown and uncertainty over a US tech
default. By contrast, a wide range of country-specific strains weighed on several large emerging market economies, preventing a full reco
of local asset valuations and capital flows. Much attention has been given to the hope of a strengthening in the U.S. economy. Key elem
include an very slowly improving labor market and amazing moves in asset markets. Real estate values and equity market valuations
bolstered both business and household wealth -- and the outlook for spending in 2014. The perceived postponement of Fed tapering gave
to significant gains in global bond and equity markets. Indeed, some have questioned whether the recovery in home prices in some areas
moved too quickly. Any move to normalcy, however gradual, will test markets. The dreaded tapering will remain a key focus of markets
the accommodative monetary policy stance persisted in all major currency areas, so did investors desperate search for yield. The unna
easing stance, though necessary, spurred an aberrant demand for assets in the riskier end of the spectrum. By and large, such assets hav
far lived up to their promise. The new year may again challenge that assumption.
The European Central Bank issued a stark warning
over the threat posed by the scaling back of US
monetary stimulus, calling on eurozone policy
makers to do more to prepare for the market shocks
from Federal Reserve tapering.
Chinese tapering may worsen U.S. bond woesLarge dependable buyers of Treasuries may be thin on the
ground in the coming years. The Fed will trim, and
eventually stop, its asset purchases. And now China is
talking about halting its reserve accumulation. U.S. bond
yields could rise faster and further than expected.
Yen at five-year lows as more bet against currency
Retailers:highenddoingwell,lowendcautious
Budget negotiators reach deal could restore order to the nations chaotic budget processavoid another government shutdown on Janua
Judge:
Detroit eligible for Chapter 9 bankruptcy
Brazil reported its third quarter Gcontracted 0.5% from the secquarter. More alarmingly, Brazilsyear yield shot up and its spread othe U.S. Treasury is now at the highlevel since the summer of 2009
Bracing for bumpy ride in emerging markets
EURO currency at growth-crushing levels Return of boom-era debt
deals raise alarm
The year is not ending on a high note in the small business sectorof teconomy. The bifurcation continues, the Fortune 500 are performwell with the stock market hitting record high levels. But the smbusiness sector is showing little growth beyond that driven by populat
growth.
Fedtaperconcernboostsdollar,weighonstocksWillitburstbondbubbleanddampenmortgagefinance?
Europe faces moment of truth on banks, with flawed defenses
US industrial production jumped 1.1% in November, the greatest gain in 12 mont
November reading was up 3.2% year-over-year. Utility output increased 3.9 perce
declining 0.3 percent in October. Falling temperatures prompted Americans to adju
thermostats last month, the Fed said.
U.S. car sales rose 9% in
November from a year
earlier, aided by promotions
So me apparel cha ins are
seeing inventory growth far
outpacing sales growth.
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The PunchLine.
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December 16, 2013
In This Issue
Headlines and data appearing in The Punch Line came from widely available publications including
national and international newspapers, trade journals, economic and industrial bulletins and news websites.
Data Detective (
The Return to Normal (
You Cant Handle the Truth ( The Likelihood of Unlikely Events... (
Dislocation (
Households (p
Some Job Specs (p
Credit (p
Credit (p
Credit Matters (p
The New Geography of Business (p
Deal or No Deal in Europe (p
Pumping iron (p
The DNA of Business (p
Real Estate and Construction (p
More Construct ion (p
Will Life Ever be the Same? (p
Winter CrosscurrentsJust shy of the new year, financial markets continue to be
dominated by the extent of monetary accommodation. .
Especially in major advanced economies, bonds and stocks
have shrugged off the summer sell-off and posted gains on the
view that low policy rates and large-scale asset purchases
would persist longer. Accordingly, markets took in stride a two-
week US government shutdown and uncertainty over a US
technical default. By contrast, a wide range of country-specific
strains weighed on several large emerging market economies,
preventing a full recovery of local asset valuations and capital
flows. Much attention has been given to the hope of a
strengthening in the U.S. economy. Key elements include an
very slowly improving labor market and amazing moves in asset
markets. Real estate values and equity market valuations have
bolstered both business and household wealth -- and the
outlook for spending in 2014. The perceived postponement of
Fed tapering gave rise to significant gains in global bond and
equity markets. Indeed, some have questioned whether the
recovery in home prices in some areas has moved too quickly.
Any move to normalcy, however gradual, will test markets. The
dreaded tapering will remain a key focus of markets As the
accommodative monetary policy stance persisted in all major
currency areas, so did investors desperate search for yield. The
unnatural easing stance, though necessary, spurred an aberrant
demand for assets in the riskier end of the spectrum. By and
large, such assets have so far lived up to their promise. The new
year may again challenge that assumption. (pg 1)
In This Issue (pg 2)
Go Figure (pg 3)
Engines of GrowthEasy money and the timing of the Feds shift continues to dominate across the
globe. Repercussions from various political stalemates and serious geopolitical
concerns are aggravating the problems of clearly insufficient growth in the world
economy. And lets not forget that many of the challenges cannot be resolved
easily (pg 4)
Contact information:
Abraham Gulkowitz
phone: 917-402-9039 email: [email protected]
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December 16, 2013
Go Figure
Select Market Considerations
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December 16, 2013
Engine Drivers
Asia is on the cusp of a full-blown arms race. The escalating clashbetween China and almost all its neighbours in the Pacific has reached a
threshold. All other economic issues at this point are becoming secondary.
Beijing's implicit threat to shoot down any aircraft that fails to adhere to its new
air control zone in the East China Sea is a watershed moment for the world.
The issue cannot easily be finessed. Other countries either comply, or they don't
comply. Somebody has to back down. The gravity of the latest dispute shouldby now be obvious even to those who don't pay attention the Pacific Rim, the
most dangerous geostrategic fault line in the world. Japans foreign minister,
Fumio Kishida, accused China of profoundly dangerous acts that unilaterally
change the status quo.
China's rich starting to flee the countrywith their fortunes
German consumer confidence at 6-year high
Germanys two major parties reached the long-
waited deal to form a grand coalition government.
At its November meeting, Thailands central bank unexpectedlydecided to lower its benchmark interest rate, the policy rate, by 25
basis points to 2.25%, noting that the economy was growing at a
slower pace than previously assessed and that downside risks togrowth were greater than at the October meeting of the Monetary
Policy Committee. The policy rate hadbeen unchanged since July.
US growth for the past four years has been startstop
and subpar. Persistently high global oil prices, a
credit system that was deleveraging, slow global
eco nomi c growt h a nd a m orib und hou sing s ector
undermined growth and caused performance to
dis appo int . H owev er, b udget b attl es, a rec ent
government shutdown and political gridlock may have
div erte d atten tio n a way fro m the fact t hat the
fundamentals of the US economy are quietly
strengthening. Key elements include an improving labor
market that should boost consumer confidence and
steadily higher equity market valuations that could
increase both business and household wealth and
therefore spending.
OPEC Rift Is Emerging Over OutputOPEC members are divided over how to trim the cartel's oil outputamid surging U.S. production, rising Iraqi exports and the possible
return of more Iranian crude.
Was November's Upbeat Jobs ReportEnough to Push the Fed to Taper?
U.S. Economy Grew Faster Than Expected 3.6% in Q3
The US economy grew at an annual rate of 3.6 percent in
third quarter, significantly more than initially estimated,
Commerce Department reported
US and EU demand boosts China tradeExports rise faster than expected in November
New wealth taking art market t o new heights
Agrowingclassofsuperrichcollectors manyfromAsia,LatinAmericaandtheMiddleEast isputtingmoneyintofineartbothtogainstatusandtoinvestinsomethingnew.
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December 16, 2013
Data Detective
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December 16, 2013
The Return to Normal ?
West Coast Volumes Down Year-Over-Year in OctoberContainer traffic at West Coast ports declined 3 percent in October
compared to the same month last year. Imports were down 4 percent
and exports dropped 2 percent.
AirCargoBoomingOctober 2013 reinforced the most recent trends in air cargo
worldwide, according to market data supplied by WorldACD. The
month brought a 5.3% volume increase over October 2012,
accompanied by a 3.5% rise in air cargo yield, expressed in US
dollars, over September 2013.
Feeding the Bubble: Is the Next Crash Brewing
Central banks around the world are pump
trillions into the economy. The goal is
stimulate growth, but their actions are a
driving up prices in the real estate and equi
markets. The question is no longer whether th
will be a crash, but when.
Growing EU Risks:
Government Bond Holdings Could Burden BanEuropean banks hold increasingly large sharesgovernment bonds as a result of the debt crisis
those states default and can no longer service thdebt, it could lead to massive losses. GermanBundesbank is pushing for new rules at the ECB
Large investors turn cold on commoditiesBanks and asset managers concerned over falling prices
McDonald's November sales miss as U.S. weakness continues
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December 16, 2013
You Cant Handle the TruthLet'sTaketheConoutofEconomics
HOUSING BUBBLES frothiness, if not outright
bubbles, are reappearing in housing markets in
Switzerland, Sweden, Norway, Finland, France,
Germany, Canada, Australia, New Zealand, and, back
for an encore, the UK (well, London). In emergingmarkets, bubbles are appearing in Hong Kong,
Singapore, China, and Israel, and in major urban centers
in Turkey, India, Indonesia, and Brazil.
U.K. Mortgage Approvals Near 6-Year High;
House Price Growth Accelerates
U.K. mortgage approvals increased to the highest level
since February 2008 as banks lend more to housing,
siphoning away funds from lending to businesses, given
the strong confidence in the property market on the back
of government scheme. Moreover, house pricesregistered the strongest growth since July 2010, flagging
fears of a housing bubble.
China companies borrowing costs are
rising as money-market interest rates
increase amid the central banks efforts
to rein in credit growth. The seven-day
repurchase rate, a gauge of funding
availability in the banking system
averaged 4.54 percent in November, up
from an average 3.57 percent in May.
Chinese shares fell for a consecutive day on Friday a
growing speculation
government may cut its 2
economic growth target to
from 7.5%. The benchm
Shanghai Composite Index
0.3%, extending its weekly
to 1.8%. Investors are concer
about uncertainties regar
government future direction
the countrys policy makers se
to struggle between growth
reform agendas.
China manufacturing growth eases in December,
prompts job cuts and lower prices
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December 16, 2013
The Likelihood of Unlikely Events
EM shock could push euro zone back into decline: S&PThe euro zone could face its third recession in six years in 2014 if emerging market growth slows
more than forecast, a senior economist from Standard & Poor's rating agency said .
Jean-Michel Six, the Paris-based chief economist for Europe, the Middle East and Africa, said
that developing economies like Turkey and Brazil were highly exposed to the policies of the
world's major central banks and any decline in their growth could hit the euro zone hard. "An
exogenous shocks from, for example, emerging markets slowing more than expected, could see
the euro zone facing a situation of falling growth and then that is its third dip into recession,"
said Six, in a news briefing in London. Any emerging market risk to the euro area would most
likely come from Turkey, Brazil India, South Africa and Indonesia, which Six termed the "fragile
five". Their large current account deficits and vulnerability to international capital flows leaves
them highly exposed to a fall-off in global central bank liquidity, he said.
Aluminium prices slide to four-year lowAluminium prices have slid to a four-year low, in a development that wheap pressure on the struggling smelting industry. Prices for aluminiu
the second most widely used metal after steel, have been under pressu
for years as the market struggles with oversupply and towering stock
The market has been burdened by large inventories since the financial crisis, wh
producers did not cut output as fast as demand fell. Aluminium stocks in LMregistered warehouses stand at 5.4m tonnes, with analysts estimating that at le
that much again is held outside the LME system. The bearishness has be
exacerbated by the recent decision by the LME to increase the flow of metal out
the largest warehouses, where long queues to deliver out metal have caus
controversy. Despite that, however, traders say availability of physical aluminiu
remains tight, as investors lock up the metal in so-called financing deals. To g
metal between now and six months forward is very difficult, said one trader.
Fragile FiveForget the BRICS: what's really concerning investors now arethe "Fragile Five". The spectre of "global contagion" fromBrazil, Indonesia, India,Turkey and SouthAfrica is looming,As thecost ofemployingworkers in these countries hasrisen,there has been less investment from foreign companies,fewer exports and slower economic growth. This has hitthose countries' balance of payments which measures thebalance of a country's transactions with the rest of the world.
If a country's exports, including financial transactions, are lessthan its imports it runs a current account deficit. Coupledwith relatively weak economic growth in the Fragile Five,these current account deficits are causing alarm amonginvestors.
Global QE led to hot money flows into someemerging economies - - with loose financialconditions, higher wages and widening BoPdeficits the result
Fed Eyes Financial System's Weak LinkMove to Rein In Short-Term-Funding Market
Carries Risks of Its OwnYale University professor Gary Gorton recently likened
financial firms' growing reliance on increasingly shorter-term
funding contracts in 2008 to tinder building up in a parched
forest. Lehman's bankruptcy filing that year, he says, was likea lightning strike that sparked the inferno. The Fed nodded to
those risks last month when it forced big banks to include the
failure of their largest counterparty in the "stress test"
scenario they must pass in order to get permission to pay
dividends to shareholders.
Natural Di sasters in AsiaTyphoon Haiyan (called Yolanda in th
Philippines) follows a series of natur
disasters in Asia, especially Japan
2011 earthquake and tsunam
Thailand's 2011 severe flooding an
the 2004 South Asian tsunami. A
these experiences demonstrate thcleaning up after a massive natur
disaster spread over a large geograph
area takes time -- even in w
prepared, wealthy countries such
Japan. The disaster also highligh
risks to supply chains in the region an
heightened concerns over physic
security of both people an
investments.
World Bank Sees Record Demand for Political Risk InsuranceInvestors demand for insurance against political risk is on track to match last years record as
instability persists in the Middle East and disputes in Latin America erode confidence, the World
Bank said. Investment insurance for developing economies by a group of the main public, private
and multilateral providers reached $45 billion by mid-2013, according to the banks Multilateral
Investment Guarantee Agency unit. For all of last year, issuance totaled $88 billion even as foreign
direct investment to the region fell 6 percent, it said.
EU Needs New Russia Policy after Ukraine DebacleThe EU wanted to usher in a more modern policy toward Eastern Europe through the proposed
association agreement with Ukraine. Instead, in the wake of Kiev's change of heart, it faces a
diplomatic shambles. Europe clearly needs a new strategy for Russia.
Cold War in the Pacific:
China Escalates Tensions with NeighborsBeijing's recent establishment of a new air defense zone in the East
China Sea is exacerbating long-running disputes with its neighbors Japan and Taiwan -- and
threatens to draw the US military into a larger regional conflict.
Thailand Resilience Eroding as Protests Sap ConfidenceThailands economy has withstood coups and regime-changing protests for decades, luring
manufacturers including Toyota Motor Corp. even when turmoil dented stocks and the baht. This
time may be tougher.
Thailands crisis deepens as opposition quitsProtesters gear up for final push to remove prime minister
European banking sector will take years to repairBanks' operational capacity across the European continent, irrespective of euro-area membership,
continues to be adversely affected by billions of toxic assets on their balance sheets. What to dowith such troubled loan portfolios -- fire sales at a steep discount or external separation into a
'bad bank' entity -- remains a major operational challenge for banks and supervisory authorities at
the national and European level. In particular, the funding issue linked to bad bank models is at
the heart of regulatory deliberations as a new architecture takes shape.
Pessimism rises over long-term global growth outlookThe persistently disappointing performance of the global economy is depressing confidence in
long-run growth prospects. Deflation continues to loom in the euro-area and may spread to the
United States. Developing economies are being held back by internal problems, and questionsof US monetary policy shifts may be deflecting attention from underlying flaws in regionalgrowth models. Similarly, many potential new drivers of global growth appear based more on
hope than substance and doubts about the 'innovation engine' in both emerging and advanced
economies have grown, adding to the downbeat mood.
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December 16, 2013
Dislocation, Dislocation, Dislocation
With orders for transportation equipment
and computers showing notable decreases,
U.S. durable goods orders declined from
an upwardly revised 4.1% (m/m sa) in
September to fall by 2.0% in October,
matching estimates. Orders for
transportation equipment tumbled by 5.9%
in October, led by a steep drop in orders
for commercial aircraft and parts.
Excluding transportation equipment,
durable goods orders edged down by a
more modest but still disappointing 0.1%
in October, compared to a 0.2 % increase
in September. On a three-monthly
annualized basis, total durable goods
orders fell 7.3% (3m/3m saar) in
October, compared to Septembersdecrease of 9.5%. Similarly, durable
goods excluding transportation
equipment declined by 1.1% (3m/3m
saar) in October after being flat in
September.
Buying a home hasnt gotten any easier for Spaniards
after home prices tumbled as much as 40 percent. R
borrowing costs, currently more than one-and-a-half timcost in Germany, the end of mortgage tax breaks, and shri
disposable incomes are making it increasingly difficu
Spanish families to own their own home. Fewer than 1
mortgages were granted in September compared with
129,000 at the September 2005 peak, according to the Na
Statistics Institute. Spanish homeownership -- at 83 perce
third-highest among countries that share the euro after Sloand Estonia - - is under assault as the nations bank
government threaten to delay a real estate recovery. The co
of a decade-long property boom, when mortgage lending s
almost four-fold, pushed Spains economy into a five-year
and forced banks to take impairment charges of 87 billion
($118 billion) last year to help clean up soured assets link
real estate. The average rate on a new mortgage with a te
more than 10 years was 5.19 percent in October even a
month Euribor, the benchmark used to price most Spanish
loans, has dropped as low as 0.51 percent, according to
compiled by the Bank of Spain. That compares with a morate of 5.84 percent in 2008, when 12-month Euribor was a
as 5.38 percent. The same mortgage in Germany would cospercent, 3.19 percent in France and 4.77 percent in
according to the European Central Bank.
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Households Brave New World
HolidaySalesSagDespiteBlitzofDeals
Health Care Costs become increasing burden for Americans
Massive sign-up for Medicaid... If that trend continues, it could
bankrupt both federal and state governments. Medicaid is already
Americas third-largest government program, trailing only Social
Security and Medicare, as a proportion of the federal budget.
Suggesting that the holiday shopping season began on an upbeat
note, the Commerce Department released a report on Thursday
showing that U.S. retail sales rose by slightly more than expected
in the month of November. The report said retail sales rose by 0.7
percent in November following an upwardly revised increase of 0.6
percent in October.
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Some Industry Job Specs
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Credit Directions
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December 16, 2013
Credit - A Closer Look
EQUITY MARKETS BUBBLE UP While
the recent surge lacked many aspects of a bubble
there is no single industry that has captured
investors' imaginationthe rally smacked of a rush
to buy almost any stock to compensate for the
Federal Reserve keeping interest rates so low. The
27% gain in the S&P 500 in 2013 has come even
though revenue growth is seen at a little under 2%
and earnings growth at 5% for the full year.
Investors are simply willing to pay more for each
dollar of earnings.
There are more-traditional signs of froth, too. The
latest Investors Intelligence poll of newsletter
writers puts the percentage of bears at 14.4%, thelowest since 1987.
CMBS issuance at highest since crisis
Borrowers refinancing loans at ultra-low interest rates
Borrowing money at bargain basement interest rates
may seem now like a nice way to pad profits and share
prices, but it may not be as much fun in a few years
Companies face three consecutive years where more
than $1 trillion each will come due in the form ofmaturing bond issues that have been used during the
free-wheeling, zero-interest days courtesy of the
Federal Reserve. When that happens, corporation
will have to choose between rolling over, o
refinancing, debt at interest levels likely to be higher
than the present day or using cash on their balance
sheets to pay off their creditors.
New-issue HY volume dri fted lower again in November
For just the third time in 17 months, new-issue volume in U.S. high-yield market failed to crack the $20 billion m
though it didnt miss by much. Issuers placed $19.8 billion
new paper in November, marking the second straight mont
decline, from roughly $27 billion last month and a record $4
billion in September. While the lighter volume is partly du
the Thanksgiving holiday, this was also the lowest Novem
total since 2009, and it is well below this years monthly aver
of $27.4 billion. Even so, year-to-date volume crossed the $3
billion threshold last month for just the second time e
following an all-time high of $346 billion in 2012.
US will end too big to fail, says LewTreasury secretary to press other nations to enact tougher standards
AAA:gradedeflationInahuntforyield,ratingsbecomeirrelevant
VolckerRulereceivesallnecessaryapprovals
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Credit Matters-Know RiskMany Excel in Strategy, Few in the Management of Risk
NEW BOOM IN SUBPRIME LENDING, TO SMALL BUSINESSES
A $330 million loan package to a small, little-known company from Missourihighlights how a new credit boom is taking shape, five years after the bubble,
Lynnley Browning reports in DealBook. The company, Learfield
Communications, of Jefferson City, Mo., which owns multimedia rights to
more than four dozen college sports programs and which made just under $40
million last year in a common measure of earnings, borrowed the money from
Deutsche Bank and GE Capital on Oct. 9. Though the loans were rated
subprime, with few of the standard protections seen in ordinary debt, investors
clamored to buy pieces of the loans, one of which pays annual interest of at
least 8.75 percent.
The bus iness development company has changed from
Congress's original vision. Instead of investing in equity, the
companies invest largely in the debt of private companies. Differentcompanies specialize in different kinds of debt, but the mainstay has
been mezzanine debt and collateralized loan obligations (pools of
leveraged loans). This debt is often issued in connection with private
equity buyouts and is of the riskier ilk
Surge in risk assets held by US banks Structured finance investments up 45% in third quarterUS banks accelerated their purchases of structured products in the third
quarter of the year, pushing their holdings of the higher-yielding assets torecord levels as they seek to offset continued profit pressure from ultra-lowinterest rates. Structured finance investments surged to $69bn in the threemonths to September, according to data released this week by the FederalDeposit Insurance Corporation a 45 per cent increase on the same periodlast year and the highest level since the FDIC began breaking the individualfigure out in 2009. The FDICs definition of structured financial productscovers a broad range of securitizations including collateralized loanobligations (CLOs), commercial mortgage-backed securities (CMBS) andcollateralized debt obligations (CDOs). Banks have been snapping up suchhigher-yielding products to offset the effect of low interest rates on theirbread-and-butter lending business, analysts have said.
Five years on, and bankers are beginning to experiment with n
assets that can be bundled up and sold to investors as they rushtake advantage of resurgent demand for higher-yielding products.
recent weeks, the cash flows from US solar panel leases, sing
family rental homes and peer-to-peer loans have all been sliced a
diced into investable bonds. The experimentation with new ass
follows a broader recovery in many areas of traditional structu
finance. Issuance of collateralised loan obligations (CLOs), wh
pool together leveraged loans made to companies, has reached
highest level since 2007. Sales of commercial mortgage-back
securities (CMBS) have multiplied from $4bn in 2008 to $86bn
far this year, according to Dealogic.
Critics point out that many of these new securitisations, while s
minuscule in terms of volume, lack the historical performance d
that would usually be used to analyse and value such deals. So
of the esoteric asset classes have long-term viability but we
concerned that some companies are trying to use securitisation
early in their life cycle, before they establish alternative formsfinancing, notes Kevin Duignan, global head of securitisation
Fitch Ratings.
The rapid re-emergence of more traditional types of securitisatio
has also prompted concerns. CLOs performed well during the cri
however, the latest versions are increasingly composed of loans t
may give higher returns but with less protection for borrowers. Sa
of CLOs total $72.8bn so far this year, the highest since the $88.4
sold in 2007, according to data from S&P Capital IQ LCD. CM
sales have surged as borrowers rush to refinance and lock in l
interest rates, prompting warnings from rating agencies, includ
Moodys and Fitch, that banks are loosening their corporate lend
standards to drum up business.
Riskier covenantlite loans, which offer fe
protections to lenders, are making up record levelsthe debt packages sold to investors amid resurg
lending markets and a thirst for higher returns.
Managers of collateralized loan obligations, wh
pac kage up c orpo rat e loans and sl ic e th em i
different tranches, have increased the proportion
riskier loans that their investment vehicles
allowed to buy to the highest levels on record.
Lenders, Companies Balk at Proposed Loan RulesRegulators Want to See More Skin in the GameAn attempt by regulators to prevent the kind of lax underwriting that exacerbate
financial crisis is running into resistance from corporations, investors and
managers who said new rules will cripple a $300 billion market for loans to
companies. Regulators want those who manage or arrange collateralized
obligations, or CLOs, to retain some of the loans' risk on their books. Policy makersrequiring such skin in the game will ensure loans sliced, packaged and sold to inve
are of high quality and help protect against default. In a collateralized loan obligat
company that generally has a lower credit rating gets a loan from a group of b
known as a syndicated loan. CLO managers buy pieces of these loans, pool
together into a CLO, and then sell slices of debt to investors based on different risk
return profiles. CLOs are the second-biggest source of financing for syndicated l
which provide nearly $2.8 trillion in financing to U.S. companies. Investors are lur
CLOs as they typically offer higher returns than corporate bonds and other loans.
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A New Geography of Business
Brazil raises benchmark rate to double digitsCentral bank extends worlds biggest tightening cycleBrazil fights protests and inflation with rate rises
Brazilian Economy Contracts More Than Expected In Q3Annually, GDP increased 2.2 percent in the third quarter, slower than second quarter's 3.3percent growth.
Chile, Peru and Colombia lead growth in Andes regionPeru still the star of Lat Am but policy makers want more Perus middle class
prospers - - Economy forecast to grow 5% this year, outstripping the region
Japans salaries extended the longest tumble since 2010, increasing
pressure on household finances as inflation begins to take root.
Russia Slashes Growth Forecasts AgainRussias Economy Ministry slashed the growth forecast for this year on weaker outlook for consumer andinvestment demand, Russian news agencies reported Gross domestic product is expected to grow 1.4percent this year, the staterun ITAR Tass news agency quoted Economic Development Minister Alexei
Ulyukayev as saying on Tuesday. Earlier, the ministry had forecast 1.8 percent growth for this year.Russia's narrowing output gap will constrain growthRussias economic growth has decelerated in the first three quarters of 2013, with GDPexpanding well below government and consensus projections. Normally, a slowdown would
be accompanied by a rising output gap, as spare production capacity increases. It would alsoinclude an increase in the unemployment rate and declining inflation. However, Russiasoutput gap is close to zero, indicating that production capacity is fully utilised;unemployment is very low and inflation is somewhat higher than last year. These indicatorsare not usually associated with a rapid deceleration of growth. Until recently, considerablespare production capacity and strong energy prices enabled growth, even with lowproductivity and insufficient investment. Now, since the narrow output gap suggests thatvirtually all existing production capacity has been utilised, new investment is urgentlyneeded to avoid a prolonged economic slump.
Political turmoil in Ukrainehas driven its CDS spread
the widest levels in almost four years as the governm
resisted calls for it to step down. A no-confidence mowas defeated in parliament, meaning that the governm
survives to fight another day. But the protests that beg
week ago prompted by the government walking a
from a deal for closer integration with the EU -- show
sign of dissipating. Ukraines spreads are now tradin
around 1,100bps, well over 500bps wider than where t
quoted in the first quarter of this year Five-year c
default swaps on the countrys dollar debt rose 21 b
points (bps) to 1,119 bps today, the highest levels s
January. The yield on Ukrainian sovereign dollar bonds
in 2014 climbed 75 bps to 10.15%. It has been reported
Ukraine needs at least $10 billion of external fundin
avoid possible default.
China's state sector braces for creative destructionThe detailed policy document published after the Communist Party CentralCommittees Third Plenum (912 November) contains a raft of decisions that lendsubstance to the Xi Jinping leaderships pledge to deepen and accelerate economicand social reform. The Resolution on Certain Major Questions regardingComprehensively Deepening Reform (hereafter Resolution) explicitly states Xiscommitment to marketorientated economic reform and qualified socialliberalisation. It contains an impressive range of policy proposals, which, ifsuccessfully implemented, will transform Chinas social and economic landscape.
Threat of instability remains after Polish reshuffleThe extensive cabinet reshuffle announced by Prime Minister Donald Tusk on November
20, which included the dismissal of veteran Finance Minister Jacek Rostowski, is designed
to boost the flagging popularity of ruling Civic Platform (PO) ahead of European
Parliament (EP) elections in May 2014 and Poland's own parliamentary elections in
September 2015. Tusk has replaced Rostowski with a well-respected bank economist,
Mateusz Szczurek, with a mandate to make use of the increased fiscal space created by the
recent pensions overhaul in order to help stimulate growth. PO faces mounting opposition
from the right-wing Law and Justice (PiS) party, which is leading in the polls and may yet
win the 2015 election.
Mexicos two biggest political parties are movingopen up the oil sector. Voted to to break t
nations 75year oil monopoly by amending tconstitution to allow production sharing contrac
and licenses for outside producers.
Indias industrial production decreased at a fast pace in October, falling 1.8% (y/y), after
increasing in the previous two months. Driving the decline in industrial production, mining
output contracted 3.5% (y/y) and manufacturing production decreased by 2% (y/y); whileelectricity production increased by 1.3% (y/y). In the April-October period, industrial
production was unchanged compared with the same period last year.
The recent deterioration in investor sentiment towards emerging markets (EMs) has highlighted
vulnerabilities associated with foreign capital inflows and financial sector openness. The sell-off in
foreign exchange and bond markets in many Asian and European EMs, and the deleveraging by
foreign parent banks in several countries in Central and Eastern Europe (CEE), have spawned an
intense debate about foreign participation in developing economies' financial systems -- particularlyin those countries with weak economic fundamentals which are more susceptible to capital outflows.
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Deal or No Deal in Europe?
The May 2014 European Parliament (EP) elections will mark a significant
departure. While many in the parliament hope to turn the elections into a contest
for control over the European Commission, German Chancellor Angela Merkel
has indicated that national leaders (who make up the European Council) may
resist allowing the outcome to determine the selection of the Commission
president. Meanwhile, the EU's new euro-area governance wi ll be tested by
nat ional governments, and leaders will face fateful choices about the next
s tage of a banking union against a backdrop of new ECB-conducted bank
stress tests.
The European Central Bank issued a stark warning othe threat posed by the scaling back of US monet
stimulus, calling on eurozone policy makers to do mor
prepare for the market shocks from Federal Rese
tapering.
The ECB added that the recent turbulence meant
policy makers needed to ensure banks, insurers
pension funds could cope with a normalization of yi
from their current historically low levels. Stable
predictable macroeconomic policies by member sta
as well as measures such as the ECBs forward guida
to markets and the public on interest rates, would h
smooth the exit from central banks exceptional mone
easing without an abrupt rise in global bond yields,
central bank said. In the latest edition of its twice-yereport, the ECB said risks of turbulence from within
euro area had receded since its previous report
published in May, despite the turbulence caused by
Fed chair Ben Bernankes comments that the US cen
bank would begin to cut back on its bond buying once
worlds largest economy neared a full recovery.
ECB said weak bank profitability and persistent finan
fragmentation still presented a threat to stability. Bank
union would be an important contribution to resolv
these hurdles.
Non-bank lenders step up UK funding dealsFunding by alternative lenders, whichallows companies to sidestep banks, hasgrown rapidly in the UK this year,according to a survey released on Tuesdaythat showed a rush of lending activity inthe past few months. Since October lastyear, alternative non-bank lenders debtfunds financed by institutional investors took part in 55 deals with mid-market UKcompanies, said the survey by Deloitte, theadvisory group. Of those, 24 were in the
three months to September this year.Ultra-low interest rates have leftinstitutional investors chasing yield and asa result the European leveraged financemid-market is moving towards a USmodel, said Fenton Burgin, head of UKdebt advisory at Deloitte.
The Netherlands dropped out of the
exclusive club of "AAA" rated countries
after Standard and Poor's agency
downgraded it to "AA+", citing
weakening growth prospects. The
surprising downgrade leaves only three
remaining countries in the 17-nation
eurozone with the coveted top rating
from all three of the world's major
agencies. S and P on Friday also upped
Cyprus' long-term rating to a B- and
improved Spain's BBB- negative
outlook to stable.
Several issues are becoming increasingly salient in Russian politics
ahead of parliamentary and presidential votes in 2016 and 2018. They
include presidential succession and the manoeuvring between rival
camps; the strategic electoral choices made by the Kremlin and
opposition forces, which will become evident in regional elections
over the next year; and the Russian economic slowdown, which could
have far-reaching consequences for the leadership.
The combination of relatively favorable market sentiment and gradual economic recoveries
supported by accommodative monetary and fiscal policies, should allow Central Europe (CEto manage fallout from the US Federal Reserve's planned exit from its program o
quantitative easing (QE). While a renewed flareup of the crisis in the euroarea remain
a key risk, countryspecific vulnerabilities, particularly with regard to the cleanup o
Slovenia's banks and the overhaul of Poland's privately managed pension system, are bigge
concerns. Hungary's parliamentary elections in April could also prove to be a focal poinfor market anxiety
Banks' Troubles Echo Across ItalyThe financial woes of smaller Italian banks are leading to cuts in
lending that are hammering businesses, while communities
contend with lost jobs and reduced charitable donations.
Paris Office Market Wilts to 10-Year Low as Taxes Crimp Spending
Swedish Housing Surges to Unsafe Value as Debt Soars
Ireland has endured a torrid few years since the onset of the financialcrisis, but it took a major step toward stability today. The governmentconfirmed that it would exit the EU/IMF bailout on Sunday, making itthe first peripheral country to emerge from an international rescuepackage. Whats more, it is making this important move without thesafety net of a precautionary credit line from the European StabilityMechanism (ESM).
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Pumping Iron - Old Economy
New Challenges
The U.S. oil boomwill vault the country into first
place among crude producers within two years, the
International Energy Agency says, which will pose
a stiff challenge for the Canadian energy industry as
it faces rapidly declining American demand for
imported oil.
Lumber pricesare getting chopped after notching seven-month highs,
as the market hunkers down for a seasonal decline in construction andexpected higher production next year. But demand for U.S. boards and
planks from China, Japan and the Caribbean to structure home interiors
and to build shipping pallets and furniture is expected to keep the
market from a deep slump.
U.S. lumber exports overseas have grown sharply, rising 22% in the
first nine months of this year from the same period a year ago, to 701
million board feet. China, which accounts for 35% of the U.S.'s offshore
exports, increased its purchases in the same period by 67%.
The commodity slump that spurred bearmarkets in everything from gold to corn to
sugar this year may still deepen
Farmers Hoard Corn as Prices DropFaced with the lowestcorn pricesin more than three yeamany U.S. farmers are stashing away their grain in a bet o
rebound. The strategy is sending ripples through the c
beltaffecting everyone from grain buyers to storage-
makersand tempering the price declines in the $27 bill
corn-futures market.
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The DNA of BusinessWorkouts to Define Recovery
Steel Giants to Buy ThyssenKrupp's Alabama Plant
Dow Chemical Co. said it is exploring a possible
sale or spinoff of its commodity chemicals
businesses, in a continuation of the company's push
to refocus its efforts. The assets include about 40
manufacturing facilities at 11 sites and nearly 2,000
employees, accounting for up to $5 billion in
annual revenue.
US coal-fired power sector will decline, not disappearThe change in Senate filibuster rules last month is the latest sign that
President Barack Obama's second-term agenda will flow from executive-
branch regulations, rather than new legislation. One key plank of theWhite House's climate change plans is the Environmental Protection
Agency's (EPA) proposed coal power plant regulations, released in
September. This coincided with major US energy producers preparing
changes to the resource mix of their electricity generation portfolios. For
example, the Tennessee Valley Authority (TVA) announced in November
that it will close eight coal-fired generation units -- representing nearly
20% of its total coal consumption -- and will ultimately drop its resource
mix from 38% coal-based electricity to 20%. The change occurs against
the backdrop of flat or falling electricity demand in regions within the
United States.
Televisions hold on advertisingbudgets is beginn
falter, with forecasts indicating its share of g
advertising is to peak after three decades of gr
Television is expected to capture 40.2 per cent o
$532bn global ad market in 2013 before falling to 39
cent of the total market in 2016, according to Pub
ZenithOptimedia. WPPs GroupM is also predictin
TVs share of the global advertising market will dec
slightly in the coming year.
The transition is the result of digital media chipping
at televisions dominance amid broader upheaval i
industry. ZenithOptimedia forecasts that the interne
boost its share of the ad market from 20.6 per cent in
to 26.6 per cent in 2016. Within that category, m
advertising will grow by an average of 50 per cent a
between 2013 and 2016, contributing 36 per cent of
ad spending. TV will account for 34 per cent of ne
spending, with newspapers and magazines declining
average of 1 per cent and 2 per cent a year.
Companies looking to put cash
to work could boost t he climate
for deal-marking in 2014.
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Real Estate and Construction Outlook
Overseas Money Pours Into Miami Real EstateCondo Development Surges Again as Foreign Buyers Stoke Demand
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More Construction Views
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Will Life Ever Be the Same?
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