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Fosun wants another piece of China’s new wealth
Capital Markets
<p>China’s richest man Wang Jianlin memorably lost $3.6 billion as the share price of his Dalian Wanda Commercial Property flagship sank on “Black Monday” (24 August). But, we shouldn’t forget that China is producing more and more millionaires each year. They want to spend their new wealth on luxuries and also invest it for big, long-term returns.</p> <p>Fosun International, the Shanghai conglomerate, knows its customers. It has already profited from supplying expensive pharmaceuticals and healthcare, offering up vacations at its Club Med resorts and entertainment at Cirque du Soleil.</p> <p>It now plans to buy small European private banks that are being squeezed out by the mighty wealth management operations run by titans such as UBS and Credit Suisse.</p> <p>Fosun is close to inking a deal to buy German private bank Hauck &amp; Aufhauser for $233 million, has made an offer to purchase half of Belgium’s BHF Kleinwort Benson and is pursuing Portugal’s Novo Banco.</p> <p>“We see that a lot of China’s middle class are looking for investments overseas, and if we have private banks we can offer wealthy Chinese families…direct access to [overseas] personalized financial products,” chief executive Liang Xinjun told The Wall Street Journal.</p> <p>It makes sense. The number of millionaires in China soared at a rate of 17% last year and the size of their chest of investible assets by 19%, according to the 2015 World Wealth Report by Capgemini and RBC Wealth Management. </p> <p>Sure, they were helped by 52% rise in Shanghai’s CSI300 stock index – and like Wang, many have recently taken a hit. But, all the more reason to diversify into less volatile assets.<br /> Photo: Dan Kristiansen<br /> &nbsp;</p>
Soothing China’s markets back to recovery
Capital Markets
<p>Unusual times require desperate measures. “War-war” on collapsing stock prices and malevolent investors gave way to “jaw-jaw” over the weekend, as China’s central bank governor tried to calm markets with soothing words.</p> <p>The “correction in the stock market is almost done” and China’s financial markets should become “more stable” after the currency steadies following last month’s devaluation, PBOC head Zhou Xiaochuan told G20 government finance leaders on Saturday (The Wall Street Journal).</p> <p>Here’s a recap of the main attempts by China, usually through the China Securities Finance Corp, to boss the markets during the past couple of months:</p> <p> Sets up stabilization fund to buy shares<br /> Lends cash to 21 local brokerages to prop up equity prices<br /> Announces massive monetary stimulus and state spending to boost the economy<br /> Cuts interest rates<br /> Allows about half of listed companies to halt trading in their shares<br /> Bans major shareholders from selling their stakes for six months<br /> Threatens short sellers with arrest<br /> Suspension of all IPOs<br /> Relaxes rules on collateral for margin trading - that had inflated the stock bubble in the first place<br /> Devalues the renminbi<br /> Finds scapegoats: identifies, parades or punishes malicious traders, journalists and foreign investors apparently responsible for the rout.<br /> Intends to install circuit-breakers on exchanges to prevent panic selling</p> <p>Posturing, waving the stick, intimidating, imposing arbitrary rules – all weapons of the blustering bully. Maybe charm and soft-soap will work instead and help the market gain a bit of confidence.<br /> Photo: 2 dogs</p>
Meet QT; QE's Evil Twin
Capital Markets
<p>There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing." Now that QE is ready to move out...QT is prepared to take over.<br /> For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.<br /> Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.<br /> The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.<br /> But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT...as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies ha</p>
Daily Scan: Summer comes to an end and it's time to face the reality of the markets
Capital Markets
<p>Good evening,</p> <p>In the U.S. we bid adieu to summer and prepare to return to reality. It doesn't seem all that pretty. China lowered its growth outlook to 7.3% from 7.4%, marginal but psychologically weighty. We also learned that Beijing spent nearly $100 billion to support the yuan last month. China still has plenty of currency reserves. But what a burn rate! European markets were mostly quiet on Monday with the U.S. closed but China closed down for the fourth consecutive day. And the outlook isn't pretty.</p> <p>Here's what else you need to know:</p> <p>Markets closed on Labor Day. If you weren't on the beach in the U.S., you may have been watching this video of President Obama singing "I Can't Feel My Face."</p> <p>British unleash drone attack on Syria. The attack followed word that ISIS terrorists, two of them Britons, were planning an attack on theRoyal Family with a bombing on VJ Day. Three terrorists were killed in an attackon Aug 21. New York Post<br /> N.Y. state lawyer to Governor Cuomo shot in head. The attack took place during an annual celebration in Brooklyn of West Indian American Day. The annual event has been marred by violence in the past. Carey Gabay, 43, was "not doing well," Cuomo told reporters. The New York Times (paywall)<br /> Amazon reportedly set to sell tablet for $50. What will they do on Black Friday, when prices go so low shoppers have been known to stampede stores. Quartz<br /> Apple TV getting a serious facelift. At least that's the buzz. Coming to one of the few sleepy products in the Apple lineup: games.  New product announcements are coming Wednesday. Stay tuned. The New York Times (payall)<br /> Mining giant cuts debt by $10b, issues $2.5b stock. Glencore has announced plans to slash its $30 billion debt by shelving dividends, selling assets and raising fresh equity, as the mining and metals behemoth wrestles with a slump in commodities that has battered its share price. The debt plan underscores the huge pain being inflicted on the mining sector by China’s economic slowdown. Financial Times (paywall)</p> <p>Migrant boat tragedy in Indonesia. Echoing the recent troubles in Europe, 61 bodies have been recovered after an overloaded wooden boat sank off coast of Malaysia carrying dozens of Indonesian immigrants. This follows another crisis in May when boats carrying thousands from Myanmar and Bangladesh were left at sea following a Thai crackdown. ABC<br /> Turkey vows to wipe out PKK rebels. Turkish Prime Minister Ahmet Davutoglu has pledged to "wipe out" Kurdish PKK rebels in their strongholds after a deadly bomb attack</p>
Daily Scan: China has last minute surge, Japan sinks
Capital Markets
<p>Disappointing trade data seemed to have less impact than expected as  Shanghai Composite ended the day 3% up, the Shenzhen Composite closed with a 4% gain, and Hong Kong's Hang Seng added 3.6% following a last hour buying spree. If anything this is a sign volatility is going nowhere as investors wonder whether the equity bubble has yet to fully deflate.</p> <p>Markets across Asia ended in positive territory - only South Korea’s Seoul Composite and Japan’s Nikkei 225 ended in the red. The Nikkei took the biggest pummeling, ending 2.43% down after a day of more disappointing figures: its economy shrank an annualized 1.2% in the second quarter despite ongoing government and central bank measures to support growth.</p> <p>Meanwhile, the broader global outlook is still grim with oil prices remained weak today as cooperation between oil producing countries to curb oversupply looking unlikely. Oil prices have fallen almost 60% since June last year. </p> <p>Here is what else to need to know...</p> <p>Chinese stock exchanges to bring in “circuit breakers” Mainland stock exchanges plan to install bourse-wide "circuit breakers" to stop panic selling after botched official efforts to stop plunges in the volatile A-share market. Under the new plan, Shanghai and Shenzhen will halt trading for 30 minutes when the CSI300 index jumps or slumps 5% in intraday trading. They will stop for the day if it soars or dives by 7%. SCMP (paywall)</p> <p>Koreas agree on family reunions.North and South Korea have agreed to hold rare reunions for families separated by the Korean War.The meetings will take place in October at a mountain resort in North Korea.The decision follows an agreement last month that de-escalated tensions sparked by a border mine explosion that injured two South Korean soldiers. BBC</p> <p>MBK-led consortium clinches South Korea Tesco deal. UK supermarket giant Tesco says  it has agreed to sell its South Korea business - Homeplus - for $6.1 billion in cash, the latest in a series of pullbacks by the chain. Tesco will get $5.1 billion after adjusting for tax and other costs. WSJ</p> <p>China foreign exchanges fall by $97b.  The August drop came as the country’s central bank sold down some of its massive stockpile to support the renminbi. It is the sharpest monthly fall in reserves on record, while in percentage terms it represented the biggest decline in more than three years. Reserves fell 2.6%  in August to $3.557 trillion. Financial Times (paywall)</p> <p>Amanda Knox acquitted of Italy murder. American Amanda Knox and her former Italian boyfriend Raffaele Sollecito have been acquitted of 2007 murder of the British student Meredith Kercher, following a botched investigation. Guardian</p> <p>Japan PM Abe secures new term as ruling party chief.  Shinzo Abe has won a second consecutive term as president of the ruling Liberal Democrats' Party (LDP). H</p>
UBS hires Annie Leibovitz for new ad campaign
Lifestyle, 4:01
<p>Though she is better-known for snapping photos of celebrities and musicians for Vanity Fair and Rolling Stone, Annie Leibovitz now works for Europe’s fifth largest bank, UBS, writes Finbuzz.</p> <p>The Swiss bank commissioned the photographer for the new ad campaign “Can I truly make a difference”, where Leibovitz holds photo sessions with budding entrepreneurs who all deliver speeches on their individual impact on the world, making sure to mention UBS’s mantra, “Together, we can find an answer.”</p> <p>In the 1980s, Leibovitz worked on an ad campaign for American Express which featured portraits of celebrities who were clients of the bank.</p> <p>UBS has also enlisted Leibovitz for a separate project called “Women,” a photography collection that is a sequel to the portrait book she created in 2000.</p> <p>The exhibition tour will debut in London in January 2016 before going to Tokyo, San Francisco, Hong Kong, Singapore, Mexico City, Istanbul, Frankfurt, New York, and Zurich. The photos will then become part of the bank’s corporate art collection, which already includes over 35,000 works.<br /> Photo: UBS</p>
Friendly fire helped to blow up ETFs on Black Monday
Asset Management
<p>ETFs traded like drunken sailors on Black Monday, practically throwing themselves overboard.</p> <p>Recall on August 24, some ETFs traded at a 50% discount to the underlying baskets of stocks that they reference.</p> <p>Is that anyway for a $2 trillion-plus market to act, even if the Dow Jones Industrials tumbles 10% at the open?</p> <p>No. It is not. Credit Suisse estimates that 42 cents of every dollar traded on U.S. exchanges is for an ETF.  A lot of industry insiders have said some self-serving stuff. Or retail investors shouldn't set market orders. Thanks for the advice.</p> <p>Barron's takes a deep dive into what happend on August 24 and comes up with some pretty interesting observations. Observation numero uno: New regulations put in place after the June 2010 flash crash made things much worse. Namely: 327 ETFs were forced to halt trading for five minutes; some were halted more than 10 times.</p> <p>What would you do if suddenly you had no idea how much the ETFs you were trading were worth? Or more important, what would a market maker do? Widen the hell out of the spread. And then you get iShares Core S&amp;P 500 tumbling 26%, more than 20 percentage points below the underlying stocks for the $65 billion ETF. This is the stuff of panic.<br /> “Aug. 24 highlighted the fragility of ETFs in a stressed market,” says James Angel, a professor at Georgetown University who specializes in the functioning of the stock market. “The characteristics of the products aren’t going to change, so we need to contain that fragility.”<br /> Later this month, the SEC's equity market structure committee is holding a meeting. Let's hope ETF structure is top of the agenda.</p> <p>Read the entire analysis at Barron's here. It's very good stuff.<br /> Photo: Official U.S. Navy Page</p>
September swoon for ETFs could continue in the week ahead
Asset Management
<p>U.S. stocks ended last week in miserable fashion as all three major U.S. indexes slumped more than 1 percent on Friday. For the week, the S&amp;P 500, Dow Jones Industrial Average and the Nasdaq Composite each lost at least 2.6 percent.</p> <p>With those dismal numbers in mind, perhaps it is a good thing that the week ahead will be shortened by the Labor Day holiday because while the bull market is still in tact, investors' enthusiasm for riskier assets is clearly waning. Emerging markets stocks and exchange traded funds continue to confirm as much.</p> <p>Read more at Benzinga.<br /> Photo: Rich Herrmann</p>
The markets may have a better solution than ‘extend & pretend’ for troubled oil loans
Capital Markets
<p>Some bankers would have you believe that as they contend with souring credits from oil and gas issuers, the regulators are putting them in an unnecessary straightjacket.</p> <p>As some bankers have done before, these bankers are taking aim at the Office of the Comptroller of the Currency, the overseer of many of the biggest banks. The OCC appears to be pushing the banks to classify some oil loans as troubled assets. Perhaps some bankers think the OCC shouldn’t remember ‘extend and pretend’, a practice whereby at times of stress in the past, bankers have extended loans in order to prevent them from appearing to require classification or workout. Classification pretty much puts the kibosh on extension without some kind of significant quid pro quo from the borrower.</p> <p>The OCC is just too rigid, some of these bankers say, and isn’t taking into account the possibility (if not, in their view, probability) that oil prices will rally and borrowers will make good on their promises.</p> <p>As oil prices yee and yaw, every day there is a new reason for optimism or pessimism. All that should, of course, be reflected in the futures market. Any banker that thinks he is smarter than the futures market deserves the question “Why aren’t you rich beyond avarice?”</p> <p>The complaining bankers are not wrong about the OCC. But the OCC is not wrong about bankers in general, either. Lenders resist classifying loans as troubled. And they almost always are more optimistic about the chances of recovery than the market is. In the case of oil loans, just look at what has happened to the prices of publicly issued bonds. Large company bonds are okay, but smaller company bonds are selling at prices that indicate default is a material possibility.</p> <p>What should happen in this situation? In my opinion, the market should work to sort the realistic recovery chances from the fairy tales. These situations are perfect for new debt or equity that the capital markets can create.  The new money can take many forms, of course. It could be subordinated debt of the debtor or convertible debt or preferred stock; it could take out part of the bank’s debt, it could provide breathing room to service the debt. Or in some cases, it could be super-senior debt and in other cases, the bank debt might have to take a haircut to induce the new money to come in. Many structures are possible. In a bankruptcy, the full panoply of structures would be on the table. The same should be true when seeking to restructure downgraded credits.</p> <p>Often it is better to face reality and to restructure something early. The new money may have to come ahead of the bank debt (old money), but if there is value in the debtor, the parties can figure out how to enhance that value rather than allowing it to diminish further.</p> <p>Sometimes, of course, the market will, in effect, tell the bank and the debtor that bankruptcy is the most likely future course—the comeback is too improbable.</p> <p>Neither bankers nor debtors like having to listen to the bottom fishing market. But if investment bankers are earning their money, they will be working hard to create competitive alternatives. And they just might do a lot of good in the process. Please ride to the rescue.</p> <p>In my opinion, the best investment bankers will work to set up competitive bidding situations so that debtors and banks have options to choose from. Different investment bankers and different types of investors often see these situations differently from each other. Bringing together disparate views of the market to create the best transaction for the parties is what should get the kudos.</p> <p>Photo: Tim Evanson</p>
I'm outta here: How institutions spoiled peer-to-peer payments
FinTech
<p>When I first focused on peer-to-peer lending four or five years ago, I had great hopes for the medium. It seemed like a great use of technology to disintermediate lenders that painted with a broad brush and therefore overcharged their best customers.</p> <p>I put a little money with one of the lenders and began to invest in individual loans that I thought were safely relative to their interest rates. It took me a relative few minutes to find loans that I thought creditworthy, and they performed quite well. I felt good about it, too, because I was supplying the means for borrowers to reduce their payments and to get better control of their financial lives.</p> <p>Gradually, however, I noticed it was getting harder to find loans that met my criteria. There were more loans to choose from, but fewer good ones—and even fewer where the borrower had answered the kinds of questions that previously had been common. What was going on, I wondered.</p> <p>Then I learned. Institutions were buying the loans in bulk. They did not look at individual loans to cherry pick as I had done. They were back to their old way of doing business, merely using the peer-to-peer lender as a front end. Therefore the quality of the credits deteriorated. The companies like Lending Club became more profitable because they had greater throughput, but the original idea of disintermediating the institutions by evaluating the credits individually was pretty much gone.</p> <p>Was that progression a product of the low interest rate environment, where institutions were greedy for yield? Or was it a product of the way that value is created for the technologist in a society where going public is the logical (and, for success, perhaps necessary) end point? Or, as some people have suggested, is using the peer-to-peer lender as a front end a way to discriminate against some kinds of borrowers by using algorithms that exclude them?</p> <p>Whatever the causes, I regret the way the process has gone, and I hope competitors will arise that more truly will reflect the goals of the original peer-to-peer lending platforms. But perhaps the institutions, awash with cash and searching for yield, simply would defeat the purpose again. For my part, I am out of that market. Institutions are highly leveraged, and they look for a spread against their cost of funds, and because of their volume, they merely assume a level of defaults and write-offs. I use my own money, and my hurdle rate is higher than theirs seems to be—and I hate defaults. They are a sign that I did not underwrite well enough, and they reduce my yield.</p> <p>Too bad, there went another asset class to invest in. Nothing looks attractive recently. But who knows, maybe the time for oil has come again. Its downside seems modest and patience may be rewarded so long as one stays away from leveraged situations.</p>