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18-Wheeler Alert—-Heavy Truck Sales Down 29% Y/Y

September 30, 2016

By David Ader

Business is slow. Photographer: ERIK ABEL/BLOOMBERG
For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years.
Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.

It’s too soon to be sure that this history is repeating itself. Brian Wesbury, chief economist at First Trust, says August’s plunge could reflect comparatively narrow economic problems like reduced domestic oil production and slackening mining activity. He also said that regulatory issues might have played a role if sales through mid-2015 were boosted by new requirements on trucks’ antilock braking systems. In that case, the August drop-off would just represent a return to normalcy.
Those are reasonable caveats. But there are other worrying signs. Caterpillar has said that used-machinery prices are down 10 percent from a year ago.

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Mind The Dangers Lurking In China’s Red-Hot Property Markets—— Lessons From Japan’s Crash

September 29, 2016

By Bloomberg News
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Experts Warn of China Property Bubble
China is turning Japanese.
That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals.
While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times by a number of economists and investors. Now, those voices are being heard more often — even within China. Huang Yiping, a Peking University professor who advises China’s central bank, warned Saturday about leverage that continues to climb, saying that the top risk is more and more investment generates less growth. “That’s exactly the story that unfolded in Japan.”
The worry is that China repeats Japan’s mistake of not reining in excess credit and shutting down insolvent borrowers quickly enough, exacting longer-term damage to growth in the world’s No. 2 economy. With potential expansion rates coming down across developed nations, the global pain would be magnified.

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Red Capitalism At Work—–China Destroying Global Aluminum Industry

September 29, 2016

By Joe Deaux
The U.S. aluminum industry’s anti-China drumbeat is gaining volume in Washington this week.
A group that represents aluminum companies is calling for a “meaningful dialogue” with Chinese authorities in a bid to end what they say are incentives and subsidies that are fueling a global glut and squeezing U.S. producers out of the market.
The Aluminum Association is pressing for a deeper investigation by the U.S. International Trade Commission into Chinese policies to save what’s left of the domestic industry, the group’s chief executive officer Heidi Brock and chairman Garney Scott said in Washington on Wednesday. They are scheduled to give testimony Thursday at a Commission hearing.
Primary aluminum production in the U.S. faces the possibility of having to shutter if prices fall below $1,528 a metric ton, according to Austin, Texas-based researcher Harbor Intelligence. Aluminum for delivery in three months settled at $1,665 on Wednesday, down about 50 percent from a 2008 high.

Other companies scheduled to give testimony include Alcoa Inc., the largest U.S. aluminum producer, and United Co. Rusal, the largest aluminum producer outside China.
The U.S. association said there’s evidence that some surplus metal enters the U.S. through transshipment and re-labeling of aluminum products in third countries to circumvent anti-dumping and countervailing duties.

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Middle East “Peace” Report: Turkey Risks Kurdish War on Two Fronts as Army Advances in Syria

September 29, 2016

By Selcan Hacaoglu
Mustafa Denktas had twin sons. One of them, a Kurdish militant, was killed fighting the Turkish army in 2012. Denktas was still in mourning when news arrived three weeks later that the other son had met the same fate.
Back then Turkey’s war with separatist Kurds, however bloody and protracted, was essentially a domestic issue. Now it’s an international conflict. When President Recep Tayyip Erdogan sent his army into Syria last month, he wasn’t just striking a blow against Islamic State: a second goal was to stop Kurds from creating a de facto state.
That’s the element of Erdogan’s Syrian gambit that poses the biggest political risks. It threatens to ensnare his soldiers in a civil war that’s already lasted 5 1/2 years, and drive a wedge between Turkey and its NATO allies — especially the U.S., which considers the Syrian Kurds an ally against Islamic extremists. When Moody’s Investors Service cut Turkey’s rating to junk last week, it cited “the persistence of geopolitical threats” among other reasons.
Erdogan is trying to stem a tide that turned more than two decades ago, when war in Iraq left Kurds in charge of that country’s oil-rich north. Since 2011, civil war has given a similar opportunity to Syrian Kurds, who now control of much of the territory along the 900-kilometer border with Turkey.

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China’s Big Ball of Money Isn’t Going Anywhere Near Stocks

September 29, 2016

By Bloomberg News
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Bad Year for China’s Stock Investors
This year is seen going down as the worst since 2011 for China’s stock investors as the memory of last summer’s rout lingers and speculative buying switches to the housing market.
The Shanghai Composite Index will end the year at 3,075, according to the median forecast in a Bloomberg poll of 10 strategists and fund managers. That implies a 13 percent drop over the 12-month period, the steepest in five years, and a gain of 2.9 percent from Wednesday’s close. Fading prospects for monetary easing, a slowing economy and the risk of higher U.S. borrowing costs spurring yuan weakness were among factors weighing on the nation’s shares, the survey showed.
Turnover on the world’s second-largest stock market has collapsed to a two-year low as China’s army of investors, unnerved by 2015’s plunge in equity values, charged into other assets. After a frenzied bet on commodities futures soured, they have set their sights on a bigger target — property. With new home prices now jumping the most in six years, analysts are scaling back projections for interest-rate cuts.
“The property market and the stock market are like a seesaw,” said Li Lifeng, a strategist at Sinolink Securities Co. in Shanghai. “If the ‘fever’ in the property market doesn’t cool down, funds will flow from equities into real estate.

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They Are Not Fixed! U.S. Banks Need Billions of New Capital Under New Fed Tests

September 27, 2016

By Jesse Hamilton
[embedded content]
Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Federal Reserve’s annual stress tests that could also scrap some provisions that lenders have criticized.
As the Fed has signaled for months, it is considering changes that would raise the minimum capital that the biggest banks need for a passing grade, Fed Governor Daniel Tarullo said Monday. But the Fed is also mulling concessions that Wall Street has sought, such as eliminating its assumption that lenders would continue to pay out the same level of dividends and buy back shares during periods of financial duress, he said.
The plan shows that even after a litany of new rules and capital demands imposed on the biggest banks in response to the financial crisis, regulators still aren’t satisfied that Wall Street is safe enough to endure another economic tsunami. Tarullo, the Fed’s point person on regulation, conceded that the proposal “would generally result in a significant increase in capital requirements” for the largest lenders.
The overhaul tries to incorporate all the new capital requirements into the stress tests, which already represent the highest hurdle that U.S. banks must clear to show they can survive a hypothetical crisis.

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Dotcom 2.0—–Where Are All They Eyeballs At Facebook And Google

September 26, 2016

By Leila Abboud

Martin Sorrell told you so.
The WPP boss has railed against the opacity of Facebook and Google for years, calling for independent checks on the effectiveness of advertising on the sites. So when Facebook said on Thursday that it had overestimated the average viewing time for video ads on the social network for the past two years, the veteran ad man was proven right.
This matters because big brands are pouring ad dollars online, with nearly half of spending going to Google and Facebook alone — as the chart below shows. Not only do the likes of Unilever and P&G want to make sure their dollars aren’t going to waste, they want to know they’re reaching the right people.

One solution would be for the two web giants to be more open and allow third-party auditors to check how many people view ad campaigns on the platforms. But data on their users is Facebook and Google’s main asset and they guard it fiercely.
Facebook has, smartly, taken steps to meet some of the advertisers’ demands. A year ago, it gave an outside analytics firm called Moat access to its data so it could verify whether people were actually seeing display and video ads, and how long they interacted with them. In April, it added three more auditors including comScore and Nielsen.
More is needed.

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China’s Housing Gets Scarily Expensive

September 16, 2016

By Christopher Balding
For many years, China’s authorities took a Goldilocks approach to housing prices: They wanted a market that was neither too hot nor too cold, and took measures as needed to control prices. Although an explicit asset-price target was never announced, it was widely assumed that the government wanted home prices to grow in line with the rate of economic growth.
To accomplish this, technocrats in Beijing deployed a combination of monetary stimulus and regulatory measures. When prices overheated, they put the brakes on credit growth, required higher down payments for mortgages and placed administrative restrictions on who could buy in which cities. When prices started to drop, they tried loosening credit and boosting the number of units people could own.
But in the past few years, with economic growth sluggish, the planners became much more tolerant of rising prices, even as signs of a bubble emerged. Official data shows the price-to income-ratio hitting 9.2 at the end of 2015; housing prices have continued to rise significantly since. All this has led to some widespread distortions.
China’s homeowners have come to see near double-digit real-estate returns as a birthright, a bet on par with death and taxes. According to one study, more than 70 percent of Chinese household wealth is in housing.

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Thanks, Janet——-Rock-Bottom Yields Dig Hole for Pensions

September 14, 2016

By Lisa Abramowicz

It’s going to be hard to reverse the damaging effects of ultralow bond yields on the global economy.
A glaring example of the longer-lasting ramifications can be found by looking at big American corporate pensions, which were formed to provide retirees with a reliable income. These plans are now facing their worst deficit in 15 years, with enough money to cover just 76 percent of their estimated $2.1 trillion of liabilities, Wells Fargo analyst Boris Rjavinski wrote in a Sept. 9 note.

“Corporate pensions overall appear to be in worse shape now than at the peak of the crisis,” he wrote. This is especially galling because companies have poured almost $500 billion into their pensions since 2009, which should have put these funds in a better spot right now.

So why are they facing such a dire outlook? Because they’ve been piling into longer-term bonds to avoid the volatile swings of stocks. Their bond allocations climbed to about 42 percent of their holdings last year, compared with 29 percent eight years earlier, the Wells Fargo analysts wrote.
The problem is that longer-term bond yields have dropped to record lows. These pools of bonds are providing a diminishing amount of income at a time when many pensions still rely on 6.5 percent or higher annual returns. The average yield on U.S. 30-year bonds has fallen to 2.

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The Lemmings March On—-Junk-Bond Buyers Persist in Yield Hunt Amid Global Market Spasms

September 14, 2016

By Claire Boston
Credit market jitters have done little to deter yield-hungry investors from buying new junk bonds to get their fix.
Consider PDC Energy Inc., an oil explorer with credit ratings four levels below investment grade. Investors were so enthusiastic about the company’s bond sale on Monday that they put in $1.5 billion of orders for a $400 million offering, according to people with knowledge of the matter.
PDC’s hardly alone. Despite Tuesday’s plunge in crude, Callon Petroleum Co. and Great Western Petroleum are planning to raise a combined $650 million of debt this week, said the people, who asked not to be identified because the deals are private. They’re seeking to take advantage of borrowing costs that are hovering near 15-month lows even after the busiest August for sales since 2012.
Buying Opportunity
Junk-bond buyers are showing few signs of panic because for them not much has changed despite cracks in the three main forces that have kept volatility low for much of this year, said Niklas Nordenfelt, a money manager at Wells Capital Management. “One being this notion that rates are low for a very long time, the second being that oil prices have stabilized and the third is that the market has discounted a Clinton victory,” he said.
“This is way too early to be concerned about any of these things materially changing the outlook.

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Luxury-Home Sales in Vancouver Plunge by 50% on Foreign-Buyer Surcharge

September 14, 2016

By Katia Dmitrieva
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A tax on foreign homebuyers in Vancouver cut luxury purchases in Canada’s priciest housing market by more than half last month, according to a brokerage report. Meanwhile, high-end sales in Toronto surged.
Transactions in Vancouver of at least C$1 million ($759,000) slid 65 percent from a year earlier to 95 units in August, the month that a 15 percent transfer tax on deals by non-Canadian homebuyers took effect, according to Sotheby’s International Realty Canada. At the same time, luxury-home sales in Toronto and its suburbs doubled to 1,459 units, the high-end brokerage said.

The housing markets in Toronto and Vancouver are heading in separate directions after at least a decade of similar growth. Vancouver’s tax, which took effect Aug. 2, was implemented by the British Columbia government to cool prices in the city after they doubled in the past 10 years.
“We are going to see a clear divergence” between the two cities in this year’s final quarter, Brad Henderson, the brokerage’s chief executive officer, said in the report. There are hints that international investors are redirecting capital to Toronto from Vancouver, according to Sotheby’s, which also forecasts that Montreal will see more offshore investment.

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BOJ Bond Buying And Japan’s “Crooked” Yield Curve

September 13, 2016

By Kevin Buckland and Shigeki Nozawa
In Japan, the yield hunters have become the hunted.
Investors who refused to swallow negative yields to hold Japan’s shorter-dated bonds are suffering, as an index of sovereign debt maturing in 20 years or more has lost 9 percent this quarter. The yield on 2036 bonds climbed to the highest since March 16 as BOJ Governor Haruhiko Kuroda noted last week that low long-term yields hurt returns on pension and insurance investments, even as he signaled there would be no reduction in easing with a policy review due Sept. 21. A 20-year debt sale Tuesday drew the lowest demand in six months.
“JGBs are responding unreservedly to the BOJ’s message that it’s not desirable for superlong yields to be too low,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “The problem is we don’t know what the BOJ’s desired level is, and that’s created an atmosphere of paranoia in the market.”

The intensity of Japan’s bond selloff has sparked concern the market will become the epicenter for a global rout, just as it led a record rally in the first half of 2016. Federal Reserve officials are cautioning against waiting too long to tighten policy, while the European Central Bank is playing down the prospect of further stimulus.

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PIK Bond Bubble Getting Pricked, Fast

September 13, 2016

By Luca Casiraghi
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Bonds that allow issuers to defer interest payments are nosediving less than a week after they were sold amid a sell-off of fixed-income assets.
Ardagh Group SA’s 845 million euros ($948 million) payment-in-kind toggle notes due September 2023 are indicated at 95.5 cents on the euro, down 4.5 cents from when the Luxembourg-headquartered packaging company sold them on Wednesday, according to data compiled by Bloomberg. German auto components maker Schaeffler AG’s 750 million euros of notes due September 2026 are quoted 97.2 cents down from a sale price of 100 cents on Thursday, the data show.
Both companies increased the size of their payment-in-kind note sales last week amid surging demand for higher-yielding assets, which pushed borrowing costs for junk-rated companies to a record low. Markets subsequently turned, starting with a tumble in longer-dated government bonds and spreading to other fixed-income assets, amid growing concern about the effectiveness of loose monetary policies from the U.S. to Europe.
“Investors who bought risky bonds such as PIKs in the bull market phase, have woken up to a bear market this week,” said Bill Blain, a strategist at brokerage Mint Partners in London. “The global experimentation with monetary policy is being shown as ineffective.

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Bubble Alert—-Corporate Leverage Soars to New Heights as Bond Deluge Rolls On

September 11, 2016

Here’s a gut check for bond investors: corporate America is now more leveraged than ever.
As this year’s corporate bond sales raced past $1 trillion on Wednesday — marking the fifth consecutive year of trillion-plus issuance — Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets
“The investment-grade ‘safe’ part of the market is becoming the most dangerous,” said Ashish Shah, chief investment officer at AllianceBernstein LP. “There are so little returns out there. People are crowding into whatever they can.”
The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U.S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times.

But what has the analysts uneasy isn’t just the speed at which leverage is climbing, but that it’s happening while the economy continues to grow.

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Hanjin Shipping Co. Collapse Leaves $14 billion Worth of Goods Adrift

September 8, 2016

By Nguyen Dieu Tu Uyen, Kyunghee Park and Mai Ngoc Chau
[embedded content]
Hanjin’s Ghost Ships Seek Haven
Suppliers to companies such as Nike Inc. and Hugo Boss AG are scrambling to ensure their T-shirts and sneakers reach buyers in time for the year-end holiday season after the collapse of Hanjin Shipping Co. left an estimated $14 billion worth of goods adrift.
Esquel Group, a Hong Kong-based manufacturer for fashion brands including Nike, Hugo Boss and Ralph Lauren, is hiring truckers to move four stranded containers of raw materials to its factories near Ho Chi Minh City as soon as they can be retrieved from ports in China. Liaoning Shidai Wanheng Co., a Chinese fabrics importer and a supplier to Marks & Spencer Group Plc, has made alternative arrangements for shipments that were scheduled with Hanjin.

A Hanjin Shipping Co. container ship anchored near Long Beach. Photographer: Tim Rue/Bloomberg
“Our production lines are waiting,” said Kent Teh, who runs Esquel’s Vietnam business. “We potentially have to take airfreight to deliver the garment items to clients in the U.S. and U.K.”
Apparel, handbags, televisions and microwave ovens are among goods stranded at sea after Korea’s largest shipping company filed for bankruptcy protection last week, setting off a series of events that roiled the global supply chain. A U.S.

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Luxury Manhattan Housing Market Plunges 21% YTD

September 2, 2016

By Oshrat Carmiel
Prospective buyers at one Upper East Side condo project are quietly being offered a 5 percent discount. At an almost-completed Midtown building, five-bedroom homes will be divided into smaller units. Brokers whose clients sign deals at a downtown tower before Labor Day are getting $5,000 gift cards.
Such tactics have become more common in Manhattan, where developers are coping with a luxury-condo glut and adjusting to a new reality after years of building to meet seemingly insatiable demand. With the market now sputtering, they’re altering sales plans and making behind-the-scenes deals in an attempt to create momentum at their projects before an onslaught of even more competition.

Guests attend a party at 50 UN Plaza. Photographer: Michael Nagle/Bloomberg
“Right now, time is your enemy,” said Jacky Teplitzky, a luxury broker with Douglas Elliman Real Estate. “The first question that people ask is how long has an apartment been on the market?”
Global economic turmoil, slumping oil prices and the uncertainty of this year’s presidential election are weighing on luxury-home buyers’ decision-making across the U.S. In New York, where more than 3,500 new apartments are hitting the market this year, developers have to work even harder for a sale.

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Bad News From the Clothing World

September 2, 2016

By Julie Verhage and Janet Freund

Shoppers walk along 5th Avenue in New York, U.S., on Tuesday, July 19, 2016. The Bloomberg Consumer Comfort Index, a survey which measures attitudes about the economy, is scheduled to be released on August 11. Photographer: David Williams/Bloomberg
Despite a seemingly strong U.S. consumer, clothing retailers can’t catch a break.
The S&P 1500 Apparel Index is tumbling Thursday after a slew of disappointing data from companies in the industry, led by footwear retailer Genesco Inc., which slashed its forecast for the year ending January 31, 2017, due to issues with one of its main divisions, Journeys. Its stock is leading the declines, with shares down more than 30 percent as of 12:00 p.m. in New York.
Other shoe companies are dragging down the index as well. Shoe Carnival Inc. is down more than 10 percent after it missed analyst estimates in its earnings report, with second quarter net sales at $231.9 million vs the $235.7 million that analysts were expecting. Caleres Inc., owner of brands like Famous Footwear and Dr. Scholl’s Shoes, is down roughly 3 percent, after having their best day since May 27 on the back of the firm’s earnings report.
Others stocks contributing to the decline are fashion retailers Buckle Inc. and Cato Corp. They are lower by 5 percent and 4.5 percent, respectively, after both reported weak sales.

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China’s Runaway M&A Trains

September 1, 2016

By Nisha Gopalan

Prudence dictates that a compulsive shopper who runs up a hazardous amount of debt should think about cutting the credit card in half and staying home for a while. Try telling that to China’s acquisition-hungry companies.
Two prime examples were on show this week when China Evergrande Group, one of the nation’s biggest developers, and Fosun International, an expanding Shanghai-based conglomerate, reported first-half earnings. The results show just how hard it is to kick the buying habit in an environment where compliant lenders stand ready to advance seemingly unlimited sums.

Total borrowings at junk-rated Evergrande jumped by 28 percent from the end of December to 381 billion yuan ($57 billion). That pushed the Guangzhou-based company’s ratio of net debt to shareholders’ equity to 142 percent, above the average 108 percent for China’s overleveraged property developers, according to data compiled by Bloomberg.
Count Evergrande’s perpetual bonds as debt rather than equity and even that ratio starts to look benign. The total debt to common equity ratio rose to 809 percent at the end of June, from 582 percent six months earlier. The developer added about 40 billion yuan more perpetual notes during the period.

So, time to rein things in somewhat? Not a bit of it.

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Mystery of Oil Held on Chinese Islands Puzzles Crude Markets

August 31, 2016

By Bloomberg News
China’s got the world puzzling over its oil hoard.
From underground caverns by the Yellow Sea to a scattering of islands in the Yangtze River delta, the government has been stockpiling crude for emergencies in a network of storage sites dotted around the country. Record purchases this year by the world’s biggest energy consumer have helped oil prices recover from the worst crash in a generation. What the country plans to do next could determine where they go from here.
The difficulty is that nobody outside China really knows for certain. The government won’t say how much it’s holding or when the tanks will be full. Energy Aspects Ltd. says the country will probably keep buying and fill up commercial tanks if it has to, while the likes of JPMorgan Chase & Co. say the purchases may soon stop. The difference in opinion is equivalent to about 1.1 million barrels a day, or more than the Asian country buys from Saudi Arabia.
“China seems to feel no obligation to report on its strategic stocks, and that might confer a genuine advantage in its favor,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore. “The scope of their purchases can dramatically affect fundamentals and prices.

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China’s Credit Party Winds Down in Headwind for GDP Growth

August 30, 2016

By Bloomberg News
Chinese companies’ borrowing costs have never been so low. That’s little consolation to firms cutting debt rather than investing amid a slowing economy.
The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. Net issuance since March 31 has slowed to 496 billion yuan after a record 810 billion yuan in the first quarter of 2016. Yields on AA+ and AA rated five-year securities dropped to record lows this month.
The decline in bond financing and the lowest fixed-asset investment growth since 1999 suggest central bank monetary easing will have trouble reviving growth that’s forecast to slow through next year. China must balance cutting corporate debt, which more than doubled in five years to 111.7 trillion yuan at the end of 2015, with steps to revive the world’s second-biggest economy.

“Firms are adjusting their balance sheets by slowing further investments and hoarding cash because they see more uncertainty with economic growth,” said Xia Le, chief Asia economist in Hong Kong at Banco Bilbao Vizcaya Argentaria SA. “For the aggregate economy, it means slower growth because fewer companies are expanding.”

China’s fixed-asset investment climbed 8.

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Federal Student Loan Mess Is Worse That Government Pretends

August 29, 2016

By Shahien Nasiripour at Bloomberg
Government-backed student debt is big business: About one in six U.S. adults has a student loan owned or guaranteed by taxpayers, and the feds pay their contracted loan servicers and debt collectors close to $2 billion annually to counsel borrowers on their repayment options and collect monthly payments on nearly $1.3 trillion of federal student debt.
The U.S. Department of Education updates the public every three months on how borrowers are faring with their federal student loans. Bloomberg crunched the numbers on where the federal student loan portfolio stood as of June 30. Here’s what we found.
Fewer Borrowers Are Falling Behind
Late payments, when measured by loan balances in arrears, have fallen significantly in recent years. In 2013, a quarter of student loans were at least 31 days late. Delinquency rates have steadily dropped since then, falling to about 19 percent as of June 30.

The figure likely reflects the Obama administration’s expansion of generous repayment plans that let borrowers make monthly payments based on how much they earn, rather than how much they borrowed, and improved service by federal loan contractors.

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Mission Impossible Looms for Renzi’s Italian Growth Target

August 22, 2016

By Lorenzo Totaro
The odds are stacked against Matteo Renzi’s economic ambitions for Italy.
The prime minister needs to see a blistering pace in the second half of this year to meet his goal of a 1.2 percent expansion in 2016. Economists say that’s not happening, spelling trouble for Renzi and the wider euro area.

Matteo Renzi Photographer: Alessia Pierdomenico/Bloomberg
With Renzi facing a referendum in the autumn that could decide his political future, a stagnant economy and banks hobbled by bad debt are adding to his challenges. While cheaper oil, a weaker euro and unprecedented European Central Bank stimulus helped the Italian economy emerge last year from its longest recession since World War II, that can only take the recovery so far.
“Italy’s potential growth rate is, as of today, still zero if not slightly negative,” said Raffaella Tenconi, a London-based economist at Wood & Co. “Companies are still too indebted, profitability in the aggregate is very low and the economy overall is in a particularly challenging position having no fiscal or monetary-policy independence.”
Renzi’s government so far is standing by the 2016 growth projection it made in April, despite an economy that stalled in the three months through June.

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Japanese Corporate Earnings Heading For Worst Decline Since The Earthquake

August 22, 2016

By Min Jeong Lee, Yuko Takeo and Nobuyuki Akama
After first-quarter earnings in Japan wrapped up this month with the steepest plunge since 2011, the prospect for an increase in annual profits is about to get even dimmer.
Expect a round of corporate earnings downgrades in September, said Norihiro Fujito, a strategist at Mitsubishi UFJ Morgan Stanley Securities. Trends that slammed profit in the first quarter — a stronger yen, negative interest rates and slumping China growth — haven’t reversed. At stake is a second straight year of earnings decline that could bury Prime Minister Shinzo Abe’s push for companies to boost capital spending and raise wages to spur economic growth.
“A lot of companies may be lowering their forecasts in September,” said Fujito. A slower recovery in the U.S. economy than some had expected is also weakening the outlook for Japan’s carmakers and other exporters, he said.

As of the end of the first-quarter earnings reporting season in mid-August, Japan’s biggest companies were projecting aggregate net income of about 16.2 trillion yen ($162 billion) for the year ending March, a 7 percent gain from the 15 trillion yen the same firms reported for the previous 12 months. The estimate is based on projections by almost 200 companies on the benchmark Nikkei 225 Stock Average, compiled by Bloomberg. Analyst forecasts also show expectations for a gain.

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Abenomics At Work: Japan’s July Exports Drop 14 Percent in Biggest Fall Since 2009

August 18, 2016

By Connor Cislo 
Japan’s exports declined the most since 2009, with shipments down for a 10th consecutive month. The continued drop highlights the difficulty of kick-starting growth and pulling Japan’s economy out of the doldrums.
Key Points
Overseas shipments fell 14 percent in July from a year earlier, the Ministry of Finance said on Thursday.
The median estimate of economists surveyed by Bloomberg indicated a 13.7 percent decline.
Imports dropped 24.7 percent, leaving a trade surplus of 513.5 billion yen ($5.2 billion).

Big Picture
Weak exports have been a drag on Japan’s growth, with net exports cutting 0.3 percentage point off gross domestic product growth in the second quarter. The yen has surged about 20 percent since the start of the year, making exports less attractive and businesses more hesitant to invest. However, that has failed to deter tourists, who flocked to Japan in record numbers in July, continuing the boom in tourism from China, South Korea and other countries.

Economist Takeaways
“I think the bad economic conditions in the U.S. in the first half of the year are probably still having an effect,” said Masaki Kuwahara, senior economist at Nomura Securities in Tokyo.
“For now, I don’t think the strong yen is having much effect,” he said.

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BOJ Cornered as Japanese Banks Running Out of Bonds to Sell

August 18, 2016

By Gareth Allan and Shigeki Nozawa
Japan’s biggest banks are running out of room to sell their government bond holdings, pushing the central bank closer to the limits of its record monetary easing.
Japan Post Bank Co. and the nation’s three so-called megabanks have almost halved their sovereign bond holdings to 114 trillion yen ($1.1 trillion) since March 2013, the month before the Bank of Japan began buying the securities on an unprecedented scale to end deflation. Government notes held by Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are approaching the level where further reductions would involve securities they need as collateral.
“Banks are the first port of call” as the BOJ seeks to boost its JGB holdings by 80 trillion yen annually, said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. “But they’re losing capacity to cut beyond those that are reaching maturity.”
Finding willing sellers is a headache for Governor Haruhiko Kuroda as the central bank prepares to review policy at next month’s board meeting, amid growing concern among economists that he has few tools left to revive the economy. Record bond buying has already saddled the BOJ with more than a third of outstanding sovereign notes, draining liquidity from the market and making it more volatile.

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Insurer Exits From Obamacare Turn Few Choices Into None

August 17, 2016

By Zachary Tracer and Tatiana Darie
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Later this year, residents of Pinal County, Arizona, who go shopping for health insurance under Obamacare will face a peculiar dilemma — they’ll have to buy a product that may not exist.
The 400,000-population county southeast of Phoenix currently doesn’t have a single health insurer offering coverage next year on the Affordable Care Act’s exchanges, where Americans can shop for the insurance they’re required to have under the law. With the impending pullout of major health insurers — including Aetna Inc., UnitedHealth Group Inc., and Humana Inc. — Pinal County is just one place around the country where Americans will be left with few, if any, choices for coverage.
“The idea was that people who use the exchanges would have a variety of plans by different carriers,” said Robert Blendon, a health-policy professor at Harvard University’s T.H. Chan School of Public Health. “If it isn’t addressed, you will have more companies drop out and you’ll have more pressure on the other companies in terms of their potential losses.”
The dropouts also undermine a key promise of the law: multiple insurers would compete for consumers’ business each year, and the power of the market would control costs and raise quality. Instead, the opposite is happening. Rates may jump 24 percent next year, according to ACASignups.

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The Bank of Japan’s Unstoppable Rise to Shareholder No. 1

August 15, 2016

By: Anna Kitanaka, Yuji Nakamura, and Toshiro Hasegawa
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The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.

While bulls have cheered the tailwind from BOJ purchases, opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient. Traders worry that the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year.

“Only in Japan does the central bank show its face in the stock market this much,” said Masahiro Ichikawa, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co., which oversees about 12 trillion yen ($118 billion). “Investors are asking whether this is really right.

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Warning From Outer Mongolia——-The Hunt For Yield Can Lead to Dangerous Places

August 11, 2016

By Natasha Doff
Investors who piled into some of the world’s riskiest bonds to escape near-zero interest rates got a reality check this week as signs of an economic crisis in Mongolia and a flare up in the conflict in Ukraine sent their bonds tumbling.
Mongolia’s $1 billion of notes due in six years fell the most on record on Wednesday after the finance minister went on television to say his critical goal was to avoid default as growth slows and the debt burden soars, prompting Barclays Plc to remove its overweight recommendation. A slump in Ukrainian Eurobonds sent yields toward their biggest one-day increase since February on Thursday after officials in Kiev warned Russia is seeking to escalate a military conflict over the disputed Crimean peninsula.

“Central bank policy has given investors a license to move down the risk spectrum,” Gregory Saichin, who helps manage $2.4 billion, including Mongolian bonds, as chief investment officer for developing-world fixed-income at Allianz Global Investors. “The risks are there. People shouldn’t come into a story like this and say they didn’t know about it,” he said of Mongolia’s economic woes.
After cash poured into debt funds tracking emerging nations at the fastest pace on record last month, the shock to both countries’ bond markets highlights the dangers of plowing into junk-rated credits.

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Luxury Sellers Issue Gloomy Forecasts as Mall Traffic Wanes

August 11, 2016

By Stephanie Hoi-Nga Wong
Luxury-goods sellers are keeping the champagne on ice.
Dwindling mall traffic and sluggish tourism are taking a toll on U.S. department stores, a key channel for companies like Ralph Lauren Corp. and Michael Kors Holdings Ltd. The two fashion houses and handbag maker Coach Inc. offered gloomy forecasts this week, saying excessive discounting may be hurting their brands.
“The amount of promotional activity from many of the people who carry our line was at its all-time high, and we had to compete to be able to move our inventories during that period of time,” Michael Kors Chief Executive Officer John Idol said Wednesday on a conference call. “That’s the whole cycle we are going to get ourselves out of.”

To counter weaker U.S. sales, Michael Kors is trying to expand its footprint in Asia and e-commerce, as well as extend its line of men’s products, technology-driven watches and fitness trackers.
Discounting helps retailers and fashion houses by moving unsold merchandise, but the strategy runs the risk of cutting margins and weakening a brand’s cachet.
“Brands are realizing something that seems very obvious at first — premium and discounting is probably not a recipe for success,” said Chen Grazutis, an analyst at Bloomberg Intelligence.

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Soaring Debt Has U.S. Companies as Vulnerable to Default as 2008

August 10, 2016

By Christopher Olsen
U.S. companies 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, according to a report by S&P Global Ratings Tuesday.
Corporate leverage in the U.S., excluding financial firms, is at the highest level in 10 years, driven by a combination of low interest rates and slowing profits, S&P analysts Jacob Crooks and David Tesher wrote. This has resulted in record leverage ratios across a universe of 2,200 companies, they wrote.
Junk-rated firms are particularly at risk because the credit cycle may have peaked and future tightening in interest rates could shut the spigot on new borrowings right when the companies would want to refinance their debt.
“With the level of leverage that we’re seeing, some of these more-peripheral stressed sectors are going to experience some challenges to obtain new financing as well as refinancing,” Tesher said in an interview. “It’s not a question of if, it’s a question of when.”
Meanwhile, bondholders who are searching for yield are increasingly willing to accept less compensation and weaker protections than than in the past — leaving them more vulnerable to losses in a potential downturn.
Many companies have taken on debt in order to fund mergers and in effect “purchase revenue streams,” the report noted.

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