Today's Reads

Today's Reads
Interesting readings from today

US markets ripped higher in the morning on reports of better than expected China GDP growth, up 8.9% vs 89.7% consensus. The funny thing is that I have not been able to get hold of the expenditure breakdown of the Chinese GDP i.e. C+I+X-M+G. And there is plenty of skepticism about the trustworthiness or the quality of Chinese economic figures. In any case, the market seems to be shrugging off bad news, and the FT tries to make a point that it could just be short covering.

In "Time to stop fearing the Greek CDS bogeyman" Sober Look gives 4 reasons why a trigger of the Greeck CDS is not as big a deal as the ECB is making it to be, (1) they're already marked to market (2) protections are written long time ago (3) worst case scenario priced in because CDS spreads have narrowed vs 1 month ago, and (4) CDS is already pricing in a 70% probability of a default.

CNBC has an interesting explanation of "Credit Event for CDS and Bond Payouts".

An interesting interview with the CEO of Athenahealth (ATHN), a Healthcare Tech Company, by Fortune Magazine. Couple of interesting tidbits (1) 1/3 of healthcare is consumed by 5% of population that dies each year, another 1/3 by 5% with chronic diseases, and the rest by 90%, (2) VC invested $410 million in Healthcare IT in 2011 vs $30 billion in tech including social media, and (3) only ~1% of doctors are using closed loop Healthcare IT system because it is illegal for a pharmacy or a testing lab to pay a doctor for sending information electronically - it's considered a kickback.

An interesting chart of oil price going back to 1861 from page# 15 of BP Statistical Review of World Energy (June 2011)

Today's Reading List

CORPORATE GOVERNANCE
Satyam Chief Admits Huge Fraud
NYT, 7-Jan-09

Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent... In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control.

Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil ...

REAL ESTATE
Commercial Property Loses Shelter
WSJ, 8-Jan-08

New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds nearly doubled during the past three months, to about 1.2%. The delinquency rate will likely hit 3% by the end of 2009... An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years... a $125 million mortgage secured by a shopping center in Corona, Calif. called Promenade Shops had cash flow of $6.3 million when J.P. Morgan underwrote the loan in July 2007 but the loan was based on the assumption that the cash flow would rise to about $10.5 million.

Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter, as the weaker economy hit landlords and threatens to cause losses for investors in the $3.4 trillion market ...

VALUATION IMPAIRMENT
Timely Warning on Cable Values
WSJ, 8-Jan-08

A key determinant of asset impairment, in addition to market prices, is the long-term cash-flow generation potential of a business... By resetting the level of shareholders' equity through write-off they enhance future returns on shareholders equity.

Shareholders in cable-TV companies might have forgotten in recent weeks -- as they have congratulated themselves on their foresight in owning relatively recession-proof stocks -- that the industry isn't without its competitive challenges from phone companies and the Internet ...

TECHNOLOGY
Intel Outlook Pared Again; Rivals Unveil New Products
WSJ, 8-Jan-09

Intel said Wednesday it now expects to report $8.2 billion in revenue for the fourth quarter and the company had projected in mid-October that sales would rise 3% from the third period...The company also said that its gross profit margins will be at the bottom of the lowered estimate it issued in November of 55%, plus or minus a couple of percentage points. In mid-October, the company had said the range would center around 59%.

Intel Corp. issued a second warning about deteriorating business conditions, signaling further weakness in the computer sector ...

OIL
Bahrain Credit Outlook Is Downgraded
WSJ, 7-Jan-09

"Break even" oil prices for Iran ($90), Oman ($77), Bahrain ($75), Saudia Arabia ($49), Kuwait ($33), Qatar ($24), UAE ($23)... Bahrain holds fewer liquid assets -- such as foreign-exchange reserves or investments by government-controlled funds -- than other regional oil exporters... Last month, Saudi Arabia said it expects to run its first budget deficit in years, committing itself to spending heavily despite an expected fall in oil revenue.

Moody's Investors Service downgraded the credit outlook for the Kingdom of Bahrain on Tuesday, marking the first sovereign-rating hit to the oil-rich Persian Gulf amid tumbling crude prices and the global financial crisis ...

COMMODITIES
Steelmakers Move Cautiously To Raise Prices, Reopen Mills
WSJ, 7-Jan-09

Troubled auto makers, contractors, appliance and equipment makers have cut back on their steel purchases. The majority of mills closed over the last few months remain shuttered and many around the world are operating below 50% of their capacity... In China, several steel mills have announced price increases ranging from 5% to 25% for a variety of products.

In an early sign that some steel prices may have bottomed out, steelmakers in the U.S., China and some other countries are attempting limited price increases and reopening a handful of mills that were closed because of weak demand a few months ago ...

CREDIT
Defaults Pose a Reckoning for Stock Rally
WSJ, 7-Jan-09

U.S. investment-grade corporate-bond issuance jumped to $108 billion in December, according to Dealogic, near the record $111 billion set in May, and up from a nadir of $15 billion in September... In the U.S. alone, some $758 billion in corporate debt is coming due in 2009, according to Standard & Poor's.

Credit-worthy companies have recently found a healthy appetite for their new debt. It is the older stuff that could cause trouble, both for corporate borrowers and stock investors ...

Today's Reading List

RISK MANAGEMENT
Risk Mismanagement
NYT, 4-Jan-09
By JOE NOCERA

VaR isn’t one model but rather a group of related models that share a mathematical framework. In its most common form, it measures the boundaries of risk in a portfolio over short durations, assuming a “normal” market. For instance, if you have $50 million of weekly VaR, that means that over the course of the next week, there is a 99 percent chance that your portfolio won’t lose more than $50 million... one of VaR’s flaws, which only became obvious in this crisis, is that it didn’t measure liquidity risk... the big problem was that it turned out that VaR could be gamed... It (the risk of CDS) was outside the 99 percent probability, so it didn’t show up in the VaR number. People didn’t see the size of those hidden positions lurking in that 1 percent that VaR didn’t measure.

THERE AREN’T MANY widely told anecdotes about the current financial crisis, at least not yet, but there’s one that made the rounds in 2007, back when the big investment banks were first starting to write down billions of dollars in mortgage-backed derivatives and other so-called toxic securities ...



REAL ESTATE
U.S. commercial property in a downward spiral
NYT, 5-Jan-09
By Charles V. Bagli

The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression"... Regional banks may be an even bigger concern. Over the past decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. Their weighting in commercial real estate has nearly doubled in the past six years, according to government data... In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities... Effective rents, which have already started to fall, are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts... The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year... Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress.
Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector ...

Today's Reading List

GOVERNMENT SPENDING
A Trap in Obama’s Spending Plan
NYT, 20-Dec-08
By LOUIS UCHITELLE

Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined. A dollar spent by government generates three or four from the private sector... For all the money spent by the Roosevelt administration, public investment was failing to jump-start a key private-sector industry... Like Roosevelt’s dams, Mr. Obama’s expenditures will no doubt generate jobs and wages in the construction phase. But in 1937, Roosevelt, thinking that the private sector could sustain itself, pulled back on public spending. Some historians say this was a big reason the economy sank again.

As the recession deepens, President-elect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past ...

CREDIT
Debt Recovery Prospects Darken
WSJ, 22-Dec-08

Professor Ed Altman of New York University's Stern School of Business expects 11% to 11.5% of U.S. high-yield bonds outstanding at the end of the third quarter to default within a year. His proprietary model suggests average recovery, given that default rate, of about 27 cents on the dollar... Loose covenants and the use of payment-in-kind (PIK) "toggles" exacerbate the problem.... There are two bigger problems for creditors to contend with. One is the higher use recently of senior loans, fueled by demand for collateralized loan obligations. The second problem is scarce debtor-in-possession (DIP) and exit financing: the credit extended to bankrupt firms to help them restructure and emerge from Chapter 11.

Bankrupt debtors used to be thrown in jail. Do that now, and America's prison system would collapse. Rather than seek incarceration, today's creditors are focusing on extracting better recovery rates: the amount they get back on defaulted debt. Unfortunately, excessive leniency during the boom years means not only having to deal with more defaults, but also getting very little back when that happen ...

CREDIT, REAL ESTATE
Developers Ask U.S. for Bailout as Massive Debt Looms
WSJ, 22-Dec-08

530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year... Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.... At the heart of the financing scarcity is the virtual shutdown of the market for CMBS, where Wall Street firms sliced and diced commercial mortgages into bonds.... While commercial real-estate developers restrained themselves during the boom years when it came to speculative development, property investors bid up the prices of office buildings, malls and other projects to record levels assuming rents and occupancies would keep rising. With cash flows now falling, a growing number of developers are having a tough time repaying their debt... Delinquencies on commercial mortgages jumped to 0.96% in November, up from 0.62% in September. Some analysts predict the delinquency rate will leap to 2% by the end of next year. During the real-estate collapse of the early 1990s, the worst-performing commercial mortgages -- those that were made in 1986 -- sustained losses of about 10%.

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance ...

PHARMA
Pharmacies Fight Tough Battle on Generic Prices
WSJ, 22-Dec-08

Retail pharmacy generic discount programs have proliferated since Wal-Mart Stores Inc. introduced $4 generic prescriptions for one-month supplies of hundreds of unbranded drugs in 2006, and mass merchandisers and grocery stores responded with their own versions... Walgreen this summer started strongly marketing its Prescription Savings Club, which provides discounts on generics and 5,000 branded medications and rebates on store-brand products... CVS this fall introduced a discount program aimed at the uninsured, offering a 90-day supply of more than 400 generic drugs for $9.99 and a 10% discount at the company's store-based clinics... Rite Aid in late September rolled out nationally a prescription savings card offering hundreds of generic drugs at $8.99 for a 30-day supply or at $15.99 for a 90-day supply, plus discounts on branded drugs and Rite Aid products.

Retail pharmacies are waging what some consider a generic-drug price war that is threatening margins in a typically high-profit area and reflects the intense competition that drug-store chains face in attracting and keeping customers ...

CURRENCY
Why didn't the dollar collapse
Paul Krugman

Today's Reading List

COMMODITIES
Platinum Falls to Gold's Level
WSJ, 19-Dec-08

On Wednesday, platinum prices settled below gold prices for the first time since the 1990s (Jan. 21, 1994), as prices have been pummeled on weak demand from the auto industry, which accounts for more than half of platinum consumption. That day, platinum settled at $865.20 and gold at $867.50.... Still, gold's edge over platinum probably isn't sustainable. Above-ground stocks of platinum are much smaller than those of gold.

Platinum prices are trading roughly on par with gold, a far cry from the white metal's $1,200 price lead earlier in the year and highlighting the woes of the auto industry, a big platinum consumer ...

OIL
Oil Drops Under $40 on Demand Fears
WSJ, 19-Dec-08

The big price drop over the past two days was exacerbated by the lack of available space at Cushing, Okla., the oil-storage hub where the physical barrels that underpin the Nymex futures contract are delivered. Inventories topped 27.5 million barrels at Cushing last week, just 500,000 barrels below the all-time high in April 2007, when a Texas refinery fire led to a stockpiling of crude... Investors with expiring contracts to buy crude need to sell out this week, or pay a hefty fee to avoid taking delivery. Physical delivery of crude contracted in the futures market is rare, but with tank space at Cushing difficult to come by, physical delivery is especially undesirable due to rising storage costs. The record gap between the first and second-month contracts -- $5.81 at Thursday's settlement -- reflects the scarcity of buyers willing to take crude for January delivery so close to expiration.

Oil's plunge below $40 a barrel is partly an anomaly due to the expiring January crude-futures contract. It also may be a sign of things to come ...

HOUSING
Tax Break May Have Helped Cause Housing Bubble
NYT, 19-Dec-08

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law... The provision — part of a sprawling bill called the Taxpayer Relief Act of 1997 — exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.).

Ryan J. Wampler had never made much money selling his own homes. Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales ...

Today's Readings List

COMMODITIES
Riding the rollercoaster
Economist, 11-Dec-08

For the six leading firms reviewed by The Economist, cash spent on deals in those two years (2006-07) accounts for four-fifths of their total net debt of $136 billion.... From their peak, analysts’ forecasts of operating profits next year have dropped by 30-50% for all six firms, leaving less cashflow than expected to support debt. Share prices have plunged too, so that net debt is comparable to, or well above, the firms’ market capitalisations....That (capex reduction), along with adequate liquidity for at least five of the six, makes survival likely. It also raises an intriguing question. The deals of recent years mean these industries are more concentrated and indebted than ever before. That in turn has forced huge, rapid cuts in actual and planned capacity, which could stabilise prices faster than in past downturns. It is a glimmer of hope during these bleakest of times.

IF A rollercoaster keeps cranking upwards for long enough it can be tempting to relax your grip—just for a moment. The bosses of some of the world’s biggest basic-materials firms did exactly this and are now suffering. Lulled by expectations that industrialisation in China and other developing countries would ensure sustained demand, leading firms in the steel, cement and mining industries have entered the recession with far more debt than is normally viewed as prudent ...


MEDIA
Broadcasting gloom
Economist, 11-Dec-08

Most forecasts for next year say that ad spending in America will decline by 5% or more....carmakers and dealers normally spend around $20 billion a year on advertising... Analysts at BMO Capital Markets predict that total spending on television ads will fall by almost 9% next year. Only newspapers, where a decline of 12% is expected, are forecast to fare worse...ZenithOptimedia, an arm of Publicis Groupe, another big agency, predicted this week that 89% of all growth in advertising spending between 2008 and 2011 will take place in developing countries.

THE Super Bowl is one of the biggest events on the advertising calendar, as companies vie to produce the most memorable and innovative ads. The battle for the National Football League’s ultimate prize attracts more viewers than anything else on American television and provides a “symbolic pulse-taking” for the advertising industry every February, says John Frelinghuysen, an analyst at Bain and Company, a consultancy. But this year the patient is in poor health. All the advertising slots for the 2008 Super Bowl had been sold by the end of November 2007, despite the $2.6m price of each. For 2009 the price has risen to $3m, but at least ten slots (out of 67) are still looking for a buyer ...

RETAILING
Rising Retailer Threat: Liquidations
WSJ, 12-Dec-08

4,632 announced store closings thus far; apparel (26.4%), others (23.4%), jewelry (18.1%), home entertainment (17.6%) and food & beverage (14.5%).

Retailers grappling with the grimmest holiday shopping season in decades face another threat: a boom in liquidation sales by competitors ...

TAXES
Swiss Gain as Tax Plan Dims Bermuda's Allure
WSJ, 12-Dec-08

The move to Switzerland will help the companies preserve the tax benefits they had in Bermuda and the Cayman Islands, while using Switzerland's tax treaty with the U.S. to shield them from possible adverse legislation from the incoming administration and next Congress. Bermuda imposes no corporate income tax. Switzerland has a corporate income tax, but doesn't levy it on profit earned by subsidiaries overseas.... The shifts to Switzerland carry some risk. Standard & Poor's announced Thursday it would remove Transocean from the S&P 500 stock index, as happened to ACE when it moved earlier this year.

Several big U.S. companies are reincorporating from Bermuda to Switzerland, helping them avoid expected legislation aimed at corporations located in tax havens ...