Thursday, April 10, 2014

Today's links

1--RLPC: More aggressive covenant-lite loans barrel through market, Reuters

.S. covenant-lite lending is moving into a more aggressive phase as banks make more concessions and loosen loan terms further to offer even greater flexibility to private equity companies and U.S. firms in a borrower's market.
The new deals, dubbed 'covenant-lite 2.0' by investors, allow companies to pile on more debt, encouraged by investors' seemingly insatiable demand for floating-rate loans.
Covenant-lite lending has already attracted the attention of regulators, who are concerned about overheating in the wider U.S. credit market.

A record $238 billion of U.S. covenant-lite loans were issued in 2013 and around $68 billion of covenant-lite loans have been issued so far this year, according to Thomson Reuters data...

Companies are mounting the size of restricted payments baskets, which usually limit the amount of debt that companies can use to pay dividends or other shareholder payouts, or are tweaking them so that they can be bypassed altogether if firms hit certain leverage ratios....

More aggressive covenant lite loans are appearing as leverage ratios are rising and the use of subordinated junior debt instruments is growing, all of which point to red-hot market conditions reminiscent of the peak of the market in 2007....

Looser lending standards could bring bigger losses to investors in the next default cycle. While the effects may not be immediate now, they could become more apparent in a worsening economy or when the Federal Reserve's liquidity spigot is turned off.
The speculative-grade default rate of 1.95 percent on a trailing 12-month basis in February, is the lowest level since December 2011, according to a March report from Standard & Poor's.

2---'Heartbleed' computer bug threat spreads to firewalls and beyond, Reuters

Hackers could crack email systems, security firewalls and possibly mobile phones through the "Heartbleed" computer bug, according to security experts who warned on Thursday that the risks extended beyond just Internet Web servers.

3---Japan's Nikkei falls to 6-month low on U.S. tech rout, yen, Reuters

4---What’s “up” with the labor force participation rate? Fred blog

The current economic recovery in the United States has featured an almost continuous decline in the labor force participation rate. While this decline is much discussed as a sign the economy may not be recovering, there has been a downward trend since the year 2000. So, the question is whether this decline has recently accelerated or not. Or, in other words, is it mostly cyclical or mostly structural? FRED offers plenty of more-detailed series to analyze this question. St. Louis Fed President James Bullard recently wrote a Review article about the labor force participation.

5---Biggest Credit Bubble in History Flashes Warning: ‘Seek Cover’ , Testosterone Pit
Hidden in the IMF’s just released 188-page Global Financial and Stability Report is a doozie of a chart that screams not only “credit bubble” but also flashes a red warning sign: “seek cover, implosion in sight.” It depicts US issuance of covenant-lite loans and second-lien loans since 2001, including their phenomenal bubble that so spectacularly collapsed in 2008, and the even greater bubble currently underway – with an equally spectacular future...

The IMF chart shows the prior bubble as expressed in covenant-lite loans (green line, right scale) and second-lien loans (red line, left scale) and where it all ended so spectacularly – namely in the financial crisis. It also shows the current bubble through 2013. Covenant-lite loans started setting new records last year, but second-lien loans, a particularly nasty contraption for banks, haven’t quite caught up yet. Up to us to figure out where it ends:

This year, it’s even worse.....Covenants are supposed to protect banks from those shenanigans – but aren’t anymore. Leverage ratios have been rising for a couple of years and now exceed those of the white-hot bubble market of 2007

6---U.S. Bank Repossessions Down 5 Percent in March, Lowest Since 2007 - world property channel

According to RealtyTrac's latest U.S. Foreclosure Market Report for March 2014, U.S. foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 117,485 U.S. properties in March, a 4 percent increase from February but still down 23 percent from a March 2013. The monthly increase in foreclosure activity was driven by a 7 percent month-over-month increase in foreclosure starts -- the initial public notice starting the foreclosure process -- and a 6 percent monthly increase in scheduled foreclosure auctions. Lenders repossessed 28,840 U.S. properties in March, down 5 percent from the previous month and down 34 percent from a year ago to the lowest level since July 2007 -- an 80-month low -...

Average time to complete foreclosure up to 572 days nationwide U.S. properties foreclosed in the first quarter of 2014 were in the foreclosure process an average of 572 days, up 1 percent from 564 days in previous quarter and up 20 percent from 477 days in first quarter of 2013.New Jersey overtook New York as the state with the longest average time to foreclose in the first quarter with an average of 1,103 days to complete foreclosure. That was followed by New York (986 days), Florida (935 days), Hawaii (840 days), and Illinois (830 days

7---Russia And China About To Sign "Holy Grail" Gas Deal, zero hedge

Russia is preparing the announcement of the "Holy Grail" energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis."
Reuters added, reflecting on the recent trip of Rosneft executive chairman to Asia, that "the underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.  The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West."

It's time for an update. According to Itar-Tass, "Russia's Gazprom and China are poised to conclude a gas supply contract in coming weeks, the first in a series of energy projects planned between the two countries. "We’re working now to sign a gas contract in May," said Deputy Prime Minister Arkady Dvorkovich. "Consultations are continuing and Gazprom's leaders are holding talks with Chinese partners on the contract terms. We hope to conclude the contract in May and believe it should come into effect by the year end."

8---The Most Important Difference Between 2007 and 2014, the reformed broker
Screen Shot 2014-04-09 at 12.23.41 PM

In the left pane we see that operating earnings are higher than what they were at the last peak – this demolishes claims that the entire stock market recovery is “because of the Fed.” The recovery is because Fed created conditions in which companies could ramp back up to normalized operating conditions, financing, hiring, innovating, etc.

In the top right pane, you’re looking at the upward trend in profit margins that began in the mid-eighties and has persisted to this day. Profit margins have been generally trending higher (with high lows during recessions and a vicious snapback from the ’09 crash) owing to a variety of factors – most importantly the fact that S&P 500 companies are doing more than half of their business overseas where profits can be higher. In addition, technology represents more than a fifth of the index, and it should not require explanation that selling software and monetizing intellectual property under patent protection is a higher margin business than turning wood into paper or iron and steel into railroad cars. The information technology revolution has given us a different, less labor and cost-intensive economy then we used to have, hence the persistence of higher margins.

Finally, in the bottom right pane you’re looking at total leverage of America’s large companies – as expressed by debt to total equity. The credit bubble of the mid-aughts led to all sorts of reckless behavior and the inevitable reckoning when it all came crashing down. Today we see exactly the opposite, the deleveraging cycle is moderating and credit is just now beginning to expand meaningfully. To me, this is the very starkest difference between 2007 and today – corporate cash as a percentage of total assets is now at 30%, in late 2007 it was 20% and everyone was borrowing.

9---Why We’re in a New Gilded Age, Paul Krugman

Tax burdens on high-income Americans have fallen across the board since the 1970s, but the biggest reductions have come on capital income—including a sharp fall in corporate taxes, which indirectly benefits stockholders—and inheritance. Sometimes it seems as if a substantial part of our political class is actively working to restore Piketty’s patrimonial capitalism. And if you look at the sources of political donations, many of which come from wealthy families, this possibility is a lot less outlandish than it might seem.

Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.

10--Larry Summer makes sense: De long
Lawrence Summers: An agenda for the IMF: "In the face of inadequate demand, the world’s primary strategy is easy money....
All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage.... We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes. A proper growth strategy would recognize that an era of low real interest rates presents opportunities as well as risks and would focus on the promotion of high-return investments... infrastructure spending... promote private investment, including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes... moving forward on international trade agreements.... Europe has moved back from the brink... But no strategy for durable growth is yet in place and the slide toward deflation continues.... A global growth strategy framed to resist secular stagnation rather than simply to muddle through with the palliative of easy money should be this week’s agenda."

11--Gazprom china deal, Bloomberg

On Wednesday, Gazprom chief executive Alexei Miller and China National Petroleum Corporation head Zhou Jiping apparently made progress on the price issue. The deal may be signed within weeks.
Both countries should have closed the gap long ago: Russia needs to diversify its markets and China is desperate to make the switch from coal to gas. Russia, however, had different priorities, investing in more pipelines to Europe where it was guaranteed high prices. Now, Russia needs the deal no less than China does as it looks for defensive moves in a Chess game with the U.S.
Energy resources have always been a geopolitical tool for Russia and Putin knows how to use it. Putting a squeeze on Russia by trying to strangle its energy exports will now be difficult: If Europe starts buying less of its natural gas imports from Gazprom, Gazprom can sell more to China.

12--President Vladimir Putin's letter to leaders of European countries. Full text, itar tass

 discounts on the prices for natural gas purchased by Ukraine’s chemical companies. This also concerns the discount granted in December 2013 for the duration of three months due to the critical state of Ukraine’s economy. Beginning with 2009, the total sum of these discounts stands at 17 billion US dollars. To this, we should add another 18.4 billion US dollars incurred by the Ukrainian side as a minimal take-or-pay fine.....

What about the European partners? Instead of offering Ukraine real support, there is talk about a declaration of intent. There are only promises that are not backed by any real actions. The European Union is using Ukraine’s economy as a source of raw foodstuffs, metal and mineral resources, and at the same time, as a market for selling its highly-processed ready-made commodities (machine engineering and chemicals), thereby creating a deficit in Ukraine’s trade balance amounting to more than 10 billion US dollars. This comes to almost two-thirds of Ukraine’s overall deficit for 2013.
To a large extent, the crisis in Ukraine’s economy has been precipitated by the unbalanced trade with the EU member states, and this, in turn has had a sharply negative impact on Ukraine’s fulfillment of its contractual obligations to pay for deliveries of natural gas supplied by Russia.

 Russia has been subsidizing Ukraine’s economy by offering slashed natural gas prices worth 35.4 billion US dollars. In addition, in December 2013, Russia granted Ukraine a loan of 3 billion US dollars. These very significant sums were directed towards maintaining the stability and creditability of the Ukrainian economy and preservation of jobs. No other country provided such support except Russia.

13--Russian media banned in Ukraine, itar tass

Moscow to ask UN Human Rights Council to consider Kiev’s attitude to Russian media

14--NATO maneuvers with Georgia, Ukraine threaten war with Russia, wsws

15--Russia warns Europe of gas supply cuts over Ukraine debt, Reuters

Russia meets 30 percent of Europe's natural gas demand and half of its gas transit to the EU goes through Ukraine.
State-controlled gas producer Gazprom stopped pumping gas to Ukraine during price disputes in the winters of 2005-2006 and 2008-2009, leading to reduced supplies in European countries that receive Russian gas via pipelines that cross Ukraine.
White House spokesman Jay Carney said he had not seen Putin's comments but: "We've made clear in the past that it is wholly inappropriate to use energy exports to achieve diplomatic or geopolitical objectives

16---The Rise of the Secular Stagnationist, parg cap

17--Curve flattening signals weak growth, prag cap
Will Fed-Driven Curve Flattening Impact Risk Multiples?
The final chart is from Martin Enlund at Handelsbanken Capital Markets.  Martin highlights the divergence between the slope of the 10y-5y curve in the bond market relative to P/E ratios on equities.  The bond market is sending a very clear message – growth will be weak.  Equities on the other hand, reflect an increasing reach for risk and higher prices despite the warnings from the bond market.


Will Fed-Driven Curve Flattening Impact Risk Multiples?
The final chart is from Martin Enlund at Handelsbanken Capital Markets.  Martin highlights the divergence between the slope of the 10y-5y curve in the bond market relative to P/E ratios on equities.  The bond market is sending a very clear message – growth will be weak.  Equities on the other hand, reflect an increasing reach for risk and higher prices despite the warnings from the bond market.


18---Investors want more Capex spending, prag cap

19--Japan’s Still-Clogged Economic Plumbing , wsj


As the chart’s first panel shows, the BOJ has succeeded in steering banks to curb their JGB holdings. But rather than use that money for loans or investments, the banks put much of it in an equally unproductive place: back at the BOJ in “excess reserves.” As the second panel shows, banks took the proceeds from JGB sales and parked them in their own deposit accounts, held at the central bank.
In other words, some of Japan’s old deflation-era habits die hard.

20--Two Middle-Class Incomes Don’t Add Up To a Home, redfin

21------Russia Announces Decoupling Trade From Dollar, info clearinghouse       
China will re-open the old Silk Road as a new trading route linking Germany, Russia and China

In addition, the BRICS are preparing to launch a new currency – composed by a basket of their local currencies – to be used for international trading, as well as for a new reserve currency, replacing the rather worthless debt ridden dollar – a welcome feat for the world.

Along with the new BRICS(A) currency will come a new international payment settlement system, replacing the SWIFT and IBAN exchanges, thereby breaking the hegemony of the infamous privately owned currency and gold manipulator, the Bank for International Settlement (BIS) in Basle, Switzerland – also called the central bank of all central banks.

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