China Buys U.S. Businesses at Record Pace – What are the Implications?

Friday, August 3rd, 2012

CNN Money reports Chinese buying of U.S. business at record pace

Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.

Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.

That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.

In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.

Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. — which broke ground this year on a $100 million plant in Thomasville, Ala. — to avoid these tariffs.

What are the Implications?

China buying US businesses is a necessary part of correcting global imbalances.

As a direct function of trade math, China’s reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.

However, don’t be deceived by the words “record pace”.

To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.

Will Alarm Bells Ring?

Some might be alarmed by China buying US businesses.

Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China’s dependence on an unsustainable model of fixed investment.

Unfortunately, “record pace” is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.

Don’t expect alarmists in Congress and union sympathizers to see it that way.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Ala, Bells, Chinese Firms, Cnn, Cnn Money, Copper Tube, Dependence, Foreign Direct Investment, Golden Dragon, Manufacturing Facilities, Record Pace, Research Director, Rhodium, Tariffs, Thomasville, Treasuries, Trillion, Tube Group, Warehouses
Posted in Markets | Comments Off

Is a U.S. Recession Looming?

Wednesday, July 11th, 2012

by Scott Colyer, Advisors Asset Management

In the third quarter of 2011 the Economic Cycle Research Institute (ECRI) called for a 100% chance of a U.S. recession. They have a stellar track record of calling U.S. economic cycles. We noted this in our communication to clients at the end of 2011 and again in the first quarter of 2012. We gave the call credence because of who was making the call. What we also noted is that the ECRI estimated the severity of any slowdown to be shallow and fairly short-lived. Most recessions in the U.S. are over even before they are positively identified. Other very reliable indicators did not flash a U.S. recession and did not support the ECRI assertion which included a very positively sloped U.S. yield curve (still 100-110 basis points between the 30’s and 10’s).

The ECRI is very well thought of as Morgan Stanley reversed their bullish call on the U.S. equity markets back in August of 2011 based on the same data. Months and months have gone by since these calls were made. It now appears that we have a slowing economy based on the trajectory change in job creation and other monitors. Europe woes are the blame of the day. Is this the 2011 recession coming in 2012? I am not sure but I doubt it makes much difference to us.

Normally, a slowing U.S. economy would prompt Central Banks to ease monetary policy. However, right now, not only the U.S. Federal Reserve (Fed) has the monetary policy pedal already to the metal. Likewise, the global economies are easing at record pace. The point here is the Fed, if faced with a recession, will certainly move to implement QE3. We believe this would be supportive of higher U.S. equity prices and lower bond yields. The bottom-line here is that whether we are seeing a recession or just a soft patch in the economy, our investment thesis remains the same. With monetary policy GLOBALLY being the easiest in history, we would expect future returns in the equity markets to be greater than high grade debt. Additional QE measures should goose hard asset prices and tend to weaken the dollar. Income assets will be what investors will seek as traditional assets have little yield. This situation will be supportive of the prices of income producing assets.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.

Copyright © Advisors Asset Management

Tags: Basis Points, Bond Yields, Central Banks, Colyer, Credence, Economic Cycle Research Institute, Economic Cycles, Ecri, Future Returns, Global Economies, Investment Thesis, Job Creation, Monetary Policy, Morgan Stanley, Recession, Recessions, Record Pace, Slowdown, Trajectory Change, Yield Curve
Posted in Markets | Comments Off

Junk Bonds – Getting Risky for a New Reason?

Monday, April 2nd, 2012

The multi year-ish Fed funds yield plan has had many outsize effects, not the least of which is a massive transfer of wealth from savers to debtors.  Those savers, many usually a very conservative bunch, have been desperate to pick up any sort of meaningful yield to keep ahead of inflation – or to reach those promised annual return assumptions of 7%+ if you are a pension fund.  As Treasury bond rates have swooned, so have corporate bond rates – both at the high end and at the low end of quality as economics 101 kicks in.  As demand swamps supply, prices go up – which in the bond market means yield goes down.

Eventually, like all Fed policies that eliminate any form of realistic supply and demand in a market, this will end badly.   Many people in “safe” investments (i.e. Treasuries) are going to be introduced to principal loss, and those in other form of bonds are going to face interest rate risk – even in places where it is atypical, such as the high yield market.  The question as always is “when” – this could continue for years, or the game could be up in a few months/quarters.  The WSJ takes a closer look at the environment in junk bonds, and the new risks brought in by ultra low rates.

• U.S. companies with junk credit ratings are piling into the debt markets at a record pace, seizing on some of the lowest borrowing costs in history and strong demand from investors craving higher returns.   Companies and investors both have benefited. Many corporate borrowers have been able to refinance debt at much lower rates, and others have been able to raise money cheaply for investments.
• Some 130 U.S. junk-rated companies, from commercial lender CIT Group Inc. to car-rental company Hertz Global Holdings Inc., have sold $75 billion in junk bonds this quarter, according to Thomson Reuters, up 12% from the same period last year and a record for any quarter going back to 1980 when Thomson began keeping data. “This is nirvana” for many low-rated companies, said Jim Casey, co-head of global debt capital markets at J.P. Morgan Chase & Co.   The rally in junk bonds extends an advance that began in early 2009 and can be traced largely to the Federal Reserve’s policy of keeping benchmark interest rates near zero.
• Investors of all stripes have been diving into junk. Many of them are searching for investments that yield more than the meager rates offered by Treasurys and investment-grade corporate bonds. They are flooding into high-yield mutual funds and exchange-traded funds, market data show.
• High-yield corporate borrowers paid an average rate of 7.98% on bonds they have sold this year, according to Thomson Reuters. That is the lowest since the junk-bond market was created in the 1980s. That compares with yields of little more than 1% on comparable Treasury notes and an average of about 3.4% on all investment-grade bonds, based on the Barclays Aggregate Bond index.  For the most part, companies are using money from the debt sales simply to refinance existing debt, or they are hoarding the cash, data show.

• This year, investors poured a record $18.6 billion into high-yield mutual funds and exchange-traded funds through March 26, according to Lipper Inc. That exceeded the previous record $12.8 billion set in the fourth quarter last year.
• But investors run the risk of having the tide turn against them should interest rates start rising. Some analysts have begun suggesting that day could come soon.  “This is the talk of the market,” said Matt Conti, who helps manage $50 billion of high-yield investments at Fidelity Investments. “My general view is it’s time to be defensive.”
• Historically, investors in junk debt have focused on the threat that a company might default and have purchased that debt at a yield that properly compensates them for taking on the risk. Typically that yield is in the high single or low double digits, which insulates the price of the junk bond from swings in underlying Treasury rates.  But with more crossover investors — like investment-grade bond managers — coming into junk because of anemic yield in their markets, that cushion is compressing, said Sandy Rufenacht, manager of $1.3 billion in high yield assets at Three Peaks Capital Management LLC.  “While the high yield guy is looking at a 5% coupon and saying ‘are you kidding me?’ a crossover guy is licking his chops and saying ‘Wow, it’s 5%!’” Rufenacht said.
• Over 1/3 of the $75 billion in U.S. junk bonds sold this year paid yields under 6%, making them far more likely to drop in price when Treasury rates start to rise.

Tags: Car Rental Company, Cit Group, Cit Group Inc, Commercial Lender, Corporate Bond Rates, Corporate Borrowers, Debt Markets, Fed Funds, Global Holdings, Hertz Global Holdings Inc, Interest Rate Risk, Junk Bonds, Junk Credit, Massive Transfer, New Reason, Record Pace, Return Assumptions, Reuters, Treasury Bond Rates, Wsj
Posted in Markets | Comments Off

U.S. Corporate Buybacks Making a Comeback, Best Levels in 4 Years

Monday, November 14th, 2011

Back in the earliest days of the website, I noted how impactful stock buybacks have become [Sept 30, 2007: Buybacks are all the Rage] [Oct 13, 2007: Buybacks Continue at Record Pace]  From 2007….

let’s look at the supply of US stock. Do you realize the level of buybacks that have been going on? Not announced buybacks but tried and true “after the fact” reporting of buybacks is >$100 BILLION for 8 quarters in a row. It has accelerated lately…$118 Billion in Q1 2007, and $158 BILLION in Q2 2008.

Even if we drop back to low $100s for Q3 and Q4 2007 that is anannual buyback bing of just under $500 Billion. On top of that is 6 previous quarters (back half of 2005 and 2006) of another $600 Billion+. So this is $1.1 Trillion of stock value that will be taken out of circulation by year end 2007.

So if we retired on average say $110 Billion a quarter, that is essentially saying we are eliminating 10 huge companies the size of 200th largest stock in the US (market cap $11.8 Billion) … or 40 a year. Or if we move down the scale a bit to the 500th largest company size, which is $5.75 Billion, we are eliminating 20 of those companies a quarter; or 100 a year. These are not tiny fish, these are companies at the bottom end of the SP500…

Of course, two years later in the depths of the financial crisis the story was a tad bit different  [Sep 16, 2009: Stock Buybacks Down 72% Year over Year, and at Lowest Levels Since at Least 1998]

But now, four years after the record setting pace we saw in 07, the buyback spree is back at full spigot.  Of course, this is an excellent way to boost earnings PER share, especially for slower growth companies who don’t have many other uses for the excess cash and hence are ‘growing’ via this method rather than operationally.  Also, corporations can use buybacks to offset the large option offerings executed each quarter (and accounted for on Wall Street as one time events – wink wink).  Further, money is so cheap for our largest corporations (thanks Ben!) that some are borrowing simply to retire shares.

Net net, when buybacks start reaching these levels, it does have an impact on the greater market as sizeable chunks of shares are retired.  Bloomberg looks at the most recent data:

• U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15 percent cheaper than when the credit crisis began.
• Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third- highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) bought shares for the first time, and Amgen Inc. (AMGN) sold debt to fund its buyback.
• U.S. companies spent 70 percent more on their stock last quarter than a year ago, according to financial filings as of Nov. 11.
• While the Standard & Poor’s 500 Index peaked the last time buybacks were this high, companies in the gauge are generating three times as much cash, price-earnings ratios are lower and 10-year Treasury yields are around 2 percent, data compiled by Bloomberg show.
• U.S. companies spent $376.5 billion on repurchases in the first three quarters of 2011.
• Investors benefit more when executives spend money on equipment to fuel corporate growth or pay out dividends, according to Gregor Smith, a London-based fund manager at Daiwa Asset Management, which oversees $111.3 billion worldwide.  “I’d rather see cash used for investment,” he said. “At the end of the day, there is a short-term illusory benefit from having fewer shares in issue.”
• Executives are funding purchases with debt after yields on investment-grade corporate bonds reached a record low of 3.45 percent on Aug. 4, according to Bank of America Merrill Lynch indexes. Borrowing costs have since risen to 3.69 percent.
• Walt Disney Co. (DIS) began the biggest U.S. plan this year, announcing a $16 billion buyback in May, or 20 percent of its market capitalization, according to Birinyi data.
• Buyback announcements reached $119.8 billion in the third quarter, up 67 percent from a year earlier, as the S&P 500 slumped 14 percent in the biggest drop since the end of 2008, according to data compiled by Birinyi and Bloomberg. Companies spent at least $150.6 billion on their own stock in the three months ending Sept. 30, more than any quarter since the final period in 2007, the data show.

Tags: All The Rage, Earnings Per Share, Excess Cash, Financial Crisis, Market Cap, Q1, Q2, Q3, Q4 2007, Record Pace, S&P500, Spigot, Spree, Stock Buybacks, Stock Value, Time Events, Tiny Fish, Trillion, Wink Wink, Year End
Posted in Markets | Comments Off

Jing Ulrich: Chinese Equities Completely Disconnected from Economy

Tuesday, June 15th, 2010

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES AT JP MORGAN, TALKS TO BLOOMBERG’S ERIK SCHATZKER ABOUT THE STOCK MARKET.

JUNE 10, 2010

SPEAKERS: ERIK SCHATZKER, BLOOMBERG NEWS

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES, JP MORGAN

06:15

ERIK SCHATZKER, BLOOMBERG NEWS: Overnight in China, economic data showed exports surged almost 50 percent last month and property prices rose at a near record pace. The economy appears to be on fire, yet Chinese stocks ended down on the day, and the Shanghai composite is off more than 22 percent this year.

With us to discuss the outlook for China is Jing Ulrich, JP Morgan’s Chairman of China Equities and Commodities, named one of the 100 most powerful women in the world by “Forbes” magazine. Jing is at JP Morgan’s China conference in Beijing today.

Jing, let me start by asking you this question. Are Chinese stocks behaving as if the global economy is headed for another recession?

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES, JP MORGAN: Well the Chinese stocks are completely disconnected with the underlying economy. So what we are seeing today is that the economy has been growing on a very robust pace. However, Chinese stocks have been among the worst performing stocks in the world in the year to date.

Now today’s data just proves the Chinese economy is actually growing at a healthy pace. Exports actually surprised on the upside, up some 48 percent. The trade surplus also expanded to some $19 billion.

Of course on a monthly basis, the trade data are always quite volatile. But going forward, I think we have several challenges. One is the troubles in Europe. That may affect Chinese exports going forward. And secondly is the slowdown in the Chinese housing sector.

As you know, since April this year, the Chinese government introduced a host of measures to tighten control on the real estate sector, which is now actually affecting transaction volumes and affecting prices as well in the real estate market. So therefore, the stock market is a bit jittery these days.

SCHATZKER: Okay, so, Jing, I take it by what you just said there that you’re giving more credence to the potential slowdown from European exports and the housing situation than you are to concerns that still exist among some Chinese investors, that the central bank and other policymakers are going to tighten access to credit further.

ULRICH: Well credit has already been tightened since the very beginning of this year. Year to date, we’re seeing loan growth slowing from last year’s 33 percent to about 24 percent.

Now the new worries for the market are basically how rapidly will the real estate market slow down? We’re seeing transaction volumes in the key ten cities in China falling by 50 percent in May compared to the month of April.

In terms of Europe, as you know, the European continent accounts for 22 percent of Chinese exports. So that’s the single largest destination for Chinese exports.

So therefore, the combination of external pressures, the slowdown in Europe, and the internal slowdown in the property market may actually put continued damper on the Chinese stocks for the time being anyway.

SCHATZKER: Okay, Jing, we’ve only got about 30 seconds. You’re effectively saying that these concerns aren’t fully reflected in the price? That the Chinese stock market could continue to decline?

ULRICH: Well I think the downside at this point is relatively limited. Earnings are growing. P/E  ratio is low – about 15 times. And by and large, investors, both globally and in China, are already quite cautious.

So very few people at this point are overweight China. So the bad news that we mentioned earlier on is largely baked in. Some time in the fourth quarter this year, we’ll shift again to see the stock market performing better.

SCHATZKER: Jing, thanks so much. Jing Ulrich, Chairman of Equities and Commodities at JP Morgan in China.

06:18

***END OF TRANSCRIPT***

THIS TRANSCRIPT MAY NOT BE 100% ACCURATE AND MAY CONTAIN MISSPELLINGS AND OTHER INACCURACIES. THIS TRANSCRIPT IS PROVIDED “AS IS,” WITHOUT EXPRESS OR IMPLIED WARRANTIES OF ANY KIND. BLOOMBERG RETAINS ALL RIGHTS TO THIS TRANSCRIPT AND PROVIDES IT SOLELY FOR YOUR PERSONAL, NON-COMMERCIAL USE. BLOOMBERG, ITS SUPPLIERS AND THIRD-PARTY AGENTS SHALL HAVE NO LIABILITY FOR ERRORS IN THIS TRANSCRIPT OR FOR LOST PROFITS, LOSSES OR DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THE FURNISHING, PERFORMANCE, OR USE OF SUCH TRANSCRIPT. NEITHER THE INFORMATION NOR ANY OPINION EXPRESSED IN THIS TRANSCRIPT CONSTITUTES A SOLICITATION OF THE PURCHASE OR SALE OF SECURITIES OR COMMODITIES. ANY OPINION EXPRESSED IN THE TRANSCRIPT DOES NOT NECESSARILY REFLECT THE VIEWS OF BLOOMBERG LP.

[Copy: Content and programming copyright 2010 BLOOMBERG, LP. ALL RIGHTS RESERVED. Copyright 2010 Roll Call, Inc. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Roll Call. You may not alter or remove any trademark, copyright or other notice from copies of the content.]

Tags: 100 Most Powerful Women, Bloomberg News, Chairman Of China, China, China Conference, Chinese Economy, Chinese Exports, Chinese Government, Chinese Stocks, Commodities, Economic Data, Forbes Magazine, Global Economy, Jp Morgan, Powerful Women In The World, Record Pace, Shanghai Composite, Slowdown, Trade Surplus, Women In The World, Worst Performing Stocks
Posted in China, Commodities, Markets, Outlook | Comments Off