ABRAHAM GULKOWITZ

abe@gulkowitz.com
917-402-9039
2014 issue 17 September 23, 2014
Serrated Edges
Despite the strong consensus view that the U.S. is on a stronger economic footing than a year ago, and clearly working with stronger
momentumthan other major economies, the scary array of possible flashpoints in the U.S. and certainly overseas will continue to haunt
policymakers and the markets. U.S. labor markets have improved over the past year. Yet a range of indicators continue to point to
significant underutilization and slack in U.S. labor conditions, particularly meager wage gains and adverse labor market participation rates.
Europe will not make much positive contributions to global growth in 2014, and forward trends point to numerous downside risks even for
2015. U.S. re-engagement in Iraq, and tensions in Ukraine will also punctuate the outlook with intermittent bouts of uncertainty. Concerns
about waning Chinese growth are suppressing demand for commodities, limiting Latin Americas upside and has come with a surge in the
U.S. dollar. These conflicting developments highlight the awkward challenges the Fed faces in charting a tightening posture, and in steering
market expectations on the future course of interest rates.
After years of being doped up on cheap money stimulus, and
growing comfortable in the belief that the Fed would never
forsakethebull market that it created by dropping thecost of
credit to the lowest levels in human history, investors are in
denial. The percentage of bears in the Investors Intelligence
surveyhasdroppedtolevels(13.3percent) not seensince1987.
MorganStanley is callingfor theS&P 500toclimb50percent
to3,000by2020. Headytimes, tobesure.
A number of the largest activists are raising
billions of dollars, in an effort to take advantage
of their increasing clout in boardrooms
EU Widens Sanctions on Russia
The EU extended sanctions on Russia in
an effort to target those dealing with the
separatists
Oil Glut Ignites Gasoline Price Swoon
MarketsAreSignalingThatMoreReliefatPumpMayBeontheWay
A sustained period of relatively low gasoline prices could help bolster
the consumerdriven U.S. economy, which has posted wobbly growth
this year. Many policy makers remain concerned about the outlook,
with a disappointing August jobs report adding to jitters. By paying less
at the pump, consumers could use the cash to make other purchases.
Some traders said short-term-oriented players have been lightening up on stocks
holdings in recent days, taking profits after the market's recent run and in some
cases positioning for volatility that might result from any change in the Federal
Reserve's messaging on interest rates.
China's economic engine sputtered in August as
industrial production growth slowed to its lowest level
since the 2008 global financial crisis, according to data
released last Saturday, increasing the chance that Beijing
will step up stimulus measures to bolster the world's
second-largest economy. Economists said the sharp
deceleration in industrial output, along with weaker
fixed-asset investment, retail and real estate sales data, is
likely to rattle regional sentiment
Moscow warns against panic as
ruble plunges to historic lows
Fed renews zero rate pledge, but
hints at steeper rate hike path
IMF warns of emerging
markets slowdown
EM growth stalled in the wake of the
financial crisis and has continued to fall
andunlikeinadvancedeconomies theIMF
doesnot forecast arecovery
Bubble Stage of This Bull Market May be Nigh
The PunchLine...
2
September 23, 2014
In This Issue
Headlines and data appearing in The Punch Line came from widely available publications including
national and international newspapers, trade journals, economic and industrial bulletins and news websites.
Engines of Growth
U.S. recovery, the additional easing in the EU, and the timing of the
Feds policy shift continue to dominate across the globe. A more
robust growth trajectory is widely assumed for all regions. But deep-
seated weaknesses have also become more evident. Very obvious
financial vulnerabilities, repercussions from various regional political
stalemates and serious geopolitical concerns are aggravating the
problems of clearly insufficient growth in the world economy. And
lets not forget that many of the challenges cannot be resolved
easily (pg 6)
Households (pg 7)
The Return to Normal (pg 8)
You Cant Handle the Truth (pg 9)
Credit (pg 10)
Credit II (pg 11)
A New Geography of Business (pg 12)
Pumping Iron (pg 13)
Go Figure (pg 14)
The DNA of Business (pg 15)
Tech and the Business Cycle (pg 16)
Real Estate and Construction (pg 17)
Will Life Ever be the Same? (pg 18)
Fractured Times
Despite the strong consensus view that the U.S. is on a stronger economic
footing than a year ago, and clearly working with stronger momentum than
other major economies, the scary array of possible flashpoints in the U.S. and
certainly overseas will continue to haunt policymakers and the markets. U.S.
labor markets have improved over the past year. Yet a range of indicators
continue to point to significant underutilization and slack in U.S. labor
conditions, particularly meager wage gains and adverse labor market
participation rates. Europe will not make much positive contributions to global
growth in 2014, and forward trends point to numerous downside risks even for
2015. U.S. re-engagement in Iraq, and tensions in Ukraine will also punctuate
the outlook with intermittent bouts of uncertainty. Concerns about waning
Chinese growth are suppressing demand for commodities, limiting Latin
Americas upside and has come with a surge in the U.S. dollar. These
conflicting developments highlight the awkward challenges the Fed faces in
charting a tightening posture, and in steering market expectations on the
future course of interest rates. (pg 1)
In This Issue (pg 2)
Dislocation, Dislocation (pg 3)
Which Way is Up? (pg 4)
The Likelihood of Unlikely Events... (pg 5)
Contact information:
Abraham Gulkowitz
phone: 917-402-9039 email:abe@gulkowitz.com
The PunchLine...
3
September 23, 2014
Dislocation, Dislocation, Dislocation
The debate over Germany's insistence on
euro-zone austerity has flared anew as an
ailing France continues to demand
economic stimulus. The European Central
Bank may now be siding with Paris,
leavingMerkel lookingincreasinglyalone
IMF Chief Sees Slower Global Growth
The global economic growth is likely to be slightly above 3
percent this year in the face of geopolitical risks, International
MonetaryFundChief ChristineLagardesaidinaninterviewwith
theFrenchdailyLesEchos. Thegrowthislikelytobebetween3
and 3.5 percent, she said. Growth is uneven as some countries
started growing faster than others. TheIMF is set to releaseits
next World Economic Outlook in October. Earlier the
Washington-basedlender estimated3.4percent global growthfor
this year. Lagarde noted that geopolitical crisis in Ukraine is
likely to impact Germany and other neighboring nations.
LagardesaidFranceshouldstick toitsdeficit reductionmeasures
despitelowinflation. Shealso urged Germany to support public
spendingoninfrastructurewhichwouldalsohelpitsneighboring
nations.
U.K. financial markets tumble on fear of Scotland splitting
The practice of using debt to repurchase shares has
become so widespread and aggressive no wonder,
since executive compensation is often tied to stock
price and earnings per share metrics that benefit from
reducedsharecounts that it isbelievedtobelimiting
actual physical investment inplantsandequipment.
The world is facing a global jobs crisis
that is hurting the chances of reigniting economic
growth and there is no magic bullet to solve the
problem, the World Bank warned In a study
released at a G20 Labour and Employment
Ministerial Meeting in Australia, the Bank said an
extra 600 million jobs needed to be created
worldwide by 2030 just to cope with the
expanding population. "And equally disturbingly,
we're also seeing wage and income inequality
widening within many G20 countries, although
progress has been made in a few emerging
economies, like Brazil and South Africa."
A below-par recovery in the U.S. and the continued fragility of the
euro zone means that risk assets are "mispriced", the Organization
for Economic Cooperation and Development has warned. In its
Interim Economic Assessment last week, the Paris-based research
body became the latest body to suggest markets are at risk of a
sudden correction, stressing that the current bullishness appeared "at
odds" with the "intensification of several significant risks. The
OECD forecast the U.S. would grow by 2.1 percent this year, down
from its May projection of 2.6 percent growth. For 2015, the group
expects the U.S. economy to grow 3.1 percent, down from earlier
estimates of 3.5 percent. The euro area has also been downgraded
from 1.2 percent growth in May to 0.8 percent and 1.1 percent for
next year and the stubbornly slow growth in the region is the most
"worrying feature" of the OECD's projections.
Free-market era in Sweden swept away
as feminists and greens plot new path
Investorspull17bnfromUKasbanksratchetupScottishindependencepressure
Net flows out of Britain hit $27.3bn (16.8bn) in August, the highest seen since the financial crisis
RBS and Lloyds Banking Group warn of possible relocation
to London, if Scottish voters back breakaway from the UK
Fears of higher U.S. interest rates are
prompting fund managers to cut back on
investments in emerging markets. For now,
investors still are moving into developing
markets, though the pace has moderated.
Emerging-market stocks and bonds received $9
billion from investors in August, compared
with an average $38 billion a month between
May and July, according to the latest data from
the Institute of International Finance. But
after months of heavy buying in such places as
Brazil and India, lured by the prospect of
higher returns than in the Western world,
investors are taking a more cautious stance.
The PunchLine...
4
September 23, 2014
Which Way is Up?
The PunchLine...
5
September 23, 2014
The Likelihood of Unlikely Events
A reescalation of the Ukraine crisis could pose risks to the global economy
Direct spillovers fromtheconflict in Ukrainearemainly regional, reflecting thefact that Russia
accounts for morethan 10%of total exports fromBelarus and most countries in theBaltics, the
Caucasus andCentral Asia, and remittances fromRussiaaccount for morethan 10%of GDP for
Armenia, Moldova, Tajikistan, and Kyrgyz Republic. However, wider spillovers could emerge
fromincreased risk aversion in global financial markets or major disruptions in production or
transportationof oil andnatural gas. Althoughexistingsanctionshavehadonlylimitedeffectsina
few sectors, a shutdown of gas supplies especially could disrupt production in Western Europe,
whichdependsonRussiafor nearly30%of itsnatural gassupplies.
Global cyber space
Potentially the most important development in the final
quarter of 2014 will be the International Telecommunication
Union (ITU)'s Plenipotentiary Conference in Busan, South
Korea from October 20 to November 7. The ITU
Conference will see further disagreement about the future
shape of internet governance between mainly Western
governments on one side and most emerging and
developing countries on the other. Meanwhile, the EU and
the United States are making greater efforts to address the
transnational challenge of cyber security.
Wallet Mobile Payments
One of the competitors in the Great Mobile Payments Race is changing its
name. Isis Wallet, a mobile payments joint venture of AT&T, Verizon, and T
Mobile is changing its name to Softcard for fairly obvious reasons. Isis Wallet
operates by having the consumer store his/her payment card information on
a "secure element"tech speak for a tamper resistant chip that safely stores
encrypted information. (The particular secure element for Isis Wallet
depends on the phone model.) That payment information is then
communicated with merchants using NFC (near field communications, i.e.,
contactless). Isis Wallet also integrates various loyalty programs and
merchant offers (including some that are proximity based). As Apple's Apple
Pay platform shows, mobile payments is becoming a crowded field with
some real heavyweights. Yet, as I'll blog shortly, there are some real
challenges ahead for anyone in the field.
BIS: The vulnerabilities are in the bond
markets; the issuance of foreign-currency
debt by emerging market companies continued
to pose a threat to the global financial
system. The BIS statistics showed many
companies were issuing debt through overseas
affiliates, meaning official national statistics
were vastly underestimating the scale of the
trend. The BIS warned that the maturity of
bonds issued in foreign currency had
lengthened, raising the risk of a mass sell-off
by investors. To the extent that investor
reactions amplify market disruptions, longer
maturities may introduce new vulnerabilities
with the potential to affect the availability
and cost of finance, the BIS said.
China Industrial Production
Growth Slumps to Six-Year Low
China's Industrial Production Growth Slowed to
Lowest Level Since 2008 Global Financial Crisis
The Centre for European Economic
Research (ZEW) economic sentiment
index for Germany fell to 6.9 in
September from 8.6 in August amid
concerns that rising geopolitical
tensions are hurting the European
economy.
Germaninvestor confidencedroppedto
the weakest in 21 months amid
increasing political tension in Europe,
even as the European Central Bank
stepsupitsstimulus.
The global economy faces a growing risk from big financial market bets that could
quickly unravel if investors get spooked by geopolitical tensions or a shift in U.S.
interest rate policy, the International Monetary Fund said on Wednesday. The
IMF, an institution based in Washington that is the world's premier watchdog for
financial and economic stability, said in a report it still expects economic growth
will pick up in the second half of 2014 after a rough start to the year. But it also
warned that financial market indicators suggested investor bets funded with
borrowed money looked "excessive" and that markets could quickly deflate if
there were surprises in U.S. monetary policy or the conflicts in Ukraine and the
Middle East.
Underfunding may threaten
global 'superbug' defenses
It has been reported that rapid sequencing of
pathogen genomes could help combat the spread
of 'superbugs'. Superbugs are microbes that
have become resistant to modern treatments.
Their spread could deal a major blow to health
achievements globally, which would seriously
compromise development across all sectors.
Resistant microbes do not respect borders --
rendering regulation in one country, institution
or subpopulation insufficient to curb their
spread. Without effective antimicrobials,
pandemics could be more frequent and
widespread. Even the most developed countries
are vulnerable. The human capital implications
may be dramatic and have notable consequences
for both economic and human development.
The PunchLine...
6
September 23, 2014
Engines of Growth
Eurozone investor confidence deteriorated
to the lowest level since July 2013 despite
the new measures taken by the the
European Central Bank, survey figures from
the thinktank Sentix showed
The HSBC Emerging Markets Index (EMI), a monthly
indicator derived from the PMI surveys, rose to a
17- month high of 52.5 in August, from 51.7 in July.
That signaled stronger growth of output across
global emerging markets The EMI remained below
its long-run average of 53.8 (since late-2005),
however.
Weak output growth continued in India
and Russia, while Brazil contracted.
The U.S. budget deficit narrowed 22 percent in the first 11
months of the fiscal year as accelerating economic growth
boosted tax receipts, Treasury Department figures showed.
Canada Finance minister to announce
new tax credit for small businesses
Thedebateover Germany'sinsistence
on euro-zone austerity has flared
anewasanailingFrancecontinuesto
demand economic stimulus. The
European Central Bank may now be
siding with Paris, leaving Merkel
lookingincreasinglyalone
US healthcare expenditures may rise again
After rising steadily for 50 years, total US expenditures
on healthcare are increasing at historically low rates.
Healthcare expenses are a major component of spending
by households, businesses and government. A sustained
slowdown in healthcare costs could improve the federal
deficit and might boost economic growth by shifting
household spending to more economically beneficial
categories. However, a return to historic growth rates
could create inflation pressure, crowd out other public
and private spending and swell the federal deficit.
US oil production surged last week to 8.84 million
barrels per day, the highest level since March of 1986,
morethan28yearsago. At thecurrent paceof increases,
daily US oil production should top 9 million barrels
within the next few months, a level of crude oil output
theUShasnt experiencedsince1973.
Chinas house prices fell for the fourth-consecutive
month in August, intensifying the concern that the economy
may be slowing further. Average new home prices across China
fell 1.1% (m/m) in August, accelerating from last months 0.9%
fall, according to a Reuters weighted home price index
calculated from official figures. The price fall was spread to a
record number of cities (68 out of 70 cities), including major
cities like Shanghai and Shenzhen (-1.1% each) and Beijing (-
0.9%). The property market accounts for roughly 15% of the
economy.
The PunchLine...
7
September 23, 2014
Households Brave New World
U.S. Consumer Credit Climbs More Than Expected In July
Reflecting increases in both revolving and non-revolving credit, the
Federal Reserve released a report on Monday showing that U.S.
consumer credit increasedby muchmorethanexpectedinthemonthof
J uly. TheFedsaidconsumer credit jumpedby $26.0billioninJ uly after
climbingby anupwardly revised$18.8billioninJ une. Economists had
been expecting consumer credit to riseby about $17.3 billion, matching
theincrease originally reportedfor thepreviousmonth. Thebigger than
expected increase was partly due to continued growth in non-revolving
credit such as student loans and car loans, which increased by $20.6
billion in J uly after rising by $17 billion in J une. Revolving credit,
which largely reflects credit card debt, also rose by $5.3 billion in J uly
after edgingupby$1.8billioninthepreviousmonth.
The U.S. consumer-finance regulator is preparing to launch in-depth reviews of about 40 large
auto lenders to determine whether the firms are following federal consumer-protection laws,
according to people familiar with the matter. The Consumer Financial Protection Bureau is
expected on Thursday to propose supervising the largest nonbank auto lenders, an initial step
that is expected to lead to examinations of such firms as early as next year. The CFPB's effort
comes amid growing concern about car-lending practices, including whether consumers are
being steered into loans they can't afford and sold pricey add-on products whose total costs may
not be clearly disclosed. Last year, auto lenders made roughly $78 billion in loans to subprime
borrowers, those with weak credit, up from nearly $43 billion in 2009. That figure was still well
below levels seen before the 2008 financial crisis, according to the New York Fed.
The PunchLine...
8
September 23, 2014
The Return to Normal ?
Fed Sizes Up Alternate Rate-Hike Paths
Central Bank Debates How Soon, and How Quickly, It Should Start Tightening
Federal Reserve Creates Financial Stability Committee
Committee Will Be Led by Fed Vice Chairman Stanley Fischer
Central banks inflating 'elevated' asset prices: BIS
Financial asset prices are at "elevated" levels and market volatility
remains "exceptionally subdued" thanks to ultra-loose monetary
policies being implemented by central banks around the world, the
Bank for International Settlements said on Sunday. In its
quarterly review, the BIS said financial market volatility spiked
higher in August on the back of geopolitical concerns and worries
over economic growth, but quickly returned to "exceptional lows"
across most asset classes. "By fostering risk-taking and the search
for yield, accommodative monetary policies thus continued to
contribute to an environment of elevated asset price valuations
and exceptionally subdued volatility," the BIS said.
There were several references in the report to the
"extraordinarily" and "exceptionally" low levels of volatility,
suggesting the BIS feels markets may be getting too
complacent and therefore vulnerable and therefore ill
equipped to a shock.
U.S. housing starts / permits weak; prior month's data revised higher
The PunchLine...
9
September 23, 2014
YouCant Handle the Truth
Let'sTaketheConoutofEconomics
Canada's housing party plays
on as world warns of risk
Experts ranging from Fitch Ratings and
Morningstar to the International
Monetary Fund and economist Paul
Krugman have warned about the risks of
the housing boomin Canada, where the
average home price has doubled in 11
years. They point to record high
household debt, cheap mortgages, and
overbuilding as harbingers of thekind of
doomseen in the U.S. housing collapse
five years ago. A housepricecorrection
may be inevitable in the next five years
that could send values tumbling by as
muchas30percent.
Substantial growth in U.S. short-term business debt balances
over the summer months has driven levels to new record
heights, as low interest rates and looser lending standards
encourage borrowers to expand their near-term leverage
tolerances, analysts say.
As a broad proxy for short-termbusiness debt, the latest sum
of U.S. non-financial commercial paper (CP) and commercial
and industrial (C&I) loans reached an all-time high of $1.984
trillion this month, according to seasonally adjusted data
reported by the Federal Reserve. That level represents year-to-
year growth of roughly $250 billion, or more than 14%,
including a nearly 12% rise in C&I amounts outstanding (a
record-high $1.75 trillion as of the start of this month) and an
eye-catching 50% increase in domestic CP balances ($235.4
billion as of Wednesday, or a high dating to February 2001).
For reference, the CP/C&I sum hit a post-crisis low of $1.3
trillion in 2010, after a precipitous drop from$1.77 trillion in the
immediate aftermath of the Lehman Brothers' collapse six
years ago. The latest sum represents growth of nearly 53%
fromthat nadir.
The PunchLine...
10
September 23, 2014
Credit Matters-Know Risk
Many Excel in Strategy, Few in the Management of Risk
Fed to Hit Banks With
Tougher Surcharge
TheFederal Reserveispreparing
tohit thebiggest U.S. bankswith
a tougher version of a capital
surcharge than agreed to by
international regulators.
After default, Argentina economy falling into deeper hole
Argentina's government is ramping up state intervention in the
economy to try to prevent a new debt default fromtriggering a
balance of payments crisis but its policies are also battering
business confidence and may deepen a recession.
Chinese Bank Lending Surges in August
But Money Growth is Slower
Chinese bank lending surged in August after declining
sharply a month ago, while money supply growth slowed
fromlast year, datapublishedbythePeople'sBank of China
showed Friday. Banks lent CNY 702.5 billion in August,
which was much larger than J uly's CNY 385.2 billion
lending. Social aggregate financing, a broad measure of
credit, totaled CNY 957.4 billion in August, versus CNY
273.1 billion a month ago. Nonetheless, it remained above
theexpectedlevel of CNY 1.13trillion. Thebroadmeasure
of money supply, M2, grew 12.8 percent year-on-year in
August, whileeconomistsexpectedtheannual ratetoremain
unchangedat 13.5percent. ThenarrowmeasureM1climbed
5.7percent, slower thanexpectationsof 6.8percent.
BIS: Banks have started to lend more abroad for the first time
in nearly three years, in a sign that confidence in the sector is
recovering after years of uncertainty.
The increase in cross-border lending was spread across countries and sectors, though a
more significant rise occurred in China, the worlds second-largest economy, where
borrowers have borrowed more than $1tn fromforeign banks. In the eurozone, cross-
border interbank lending went up for the first time since early 2012, indicating foreign
peersarebeginningtotrust their counterpartsinthesinglecurrencyareaonceagain.
For all these improvements, the big picture remains one of retrenchment: the latest rise
was not enough to offset the sharp pace of cutbacks in recent years. But the quarterly
increasewasenoughtosliceinhalf theannual rateof contraction.
Regulator Demands Bank to Address
Problems With Leveraged Lending
Credit Suisse Group is under fire from U.S.
regulators over concerns the bank isn't
heeding warnings to stop making loans
regulators see as risky, according to a person
familiar with the matter. The Swiss bank in
recent weeks received a letter from the
Federal Reserve demanding the bank
immediately address problems with its
underwriting and sale of leveraged loans, or
high-interest-rate loans used by private-
equity firms and others to finance purchases
of companies, among other uses.
A year later, most mega
IPOs are mega laggards
Declining Cigarette Shipments Will Continue to
Harm Performance of Tobacco Settlement ABS
The PunchLine...
11
September 23, 2014
Credit II
The PunchLine...
12
September 23, 2014
A New Geography of Business
Brazil: Moodys adds to pressure on Rousseff
Brazils President DilmaRousseff was dealt afreshblowtoher bidfor re-
election in next months election when Moodys downgraded the outlook
on its rating for Brazils government bonds to negativefromstable. The
agency blamedsloweconomic growthfor its decisionwhichcomes as Ms
Rousseff is locked in an increasingly tight presidential race with polls
showing her lagging behind her nearest rival, the charismatic
environmentalist MarinaSilva.
ProspectsforEastAsia
Asiaisunsettledby China'sstrategicpushout intoregional waters, whichrisks
increasing confrontations with powers large and small. Those who feel
threatened by China are slowly aligning and it is far fromclear that Beijing
couldhandleadeteriorationof relations ontoo many fronts. Beijingwill want
to host a successful Asia Pacific Economic Cooperation (APEC) leaders'
summit inNovember. China's economy also remains exposedto developments
abroad. In J apan, acabinet reshufflehas buoyed PrimeMinister Shinzo Abe's
popularitysomewhat, but economic'escapevelocity' hasyet tobeachieved.
Out of paper, Venezuela's oldest newspaper halts
circulation
Lack of U.S. dollars caused by strict currency controls, import
delays and red tape are hitting businesses across the country.
Venezuela annual inflation hits six-year high of 63.4 pct
ProspectsforLatinAmerica
The largest single event during the upcoming quarter is likely the
Brazilian general elections, whose outcome is looking
increasingly uncertain. Poor growth prospects for most of the
region point to the risk of rising social tensions as public
spending possibilities are curtailed.
Scottish vote will transform UK politics
Ahead of Scotland's independence referendum on
September 18, opinion polls have tightened -- and
one poll at the weekend showed the 'yes' vote in
the lead for the first time. In response, the three
main UK political parties have suspended normal
hostilities and rushed out a timetable to transfer
to Scotland new devolved powers (known as
'devolution max' or 'devo max') -- but only if it
votes to remain in the United Kingdom.
Strengthening global demand has not delivered an
anticipated exports dividend for ASEAN producers. This
points to a decoupling from traditional Western markets
as supply chains undergo a transformation. Investment
and private consumption have also weakened in some
Southeast Asian countries due to an undercurrent of
political tensions and policy tightening to correct fiscal
imbalances, with higher growth being sacrificed for
improved financial stability
Australians Face Repayment Shock on
High-Risk Mortgage Lending
Drivingthegrowthis demandfor high-risk mortgages suchas interest-
onlyloansandfinancingtobuyrental properties. That'ssettingthestage
for ajumpinmortgagedelinquencies wheninterest rates increasefrom
record lows, Moody's Investors Service said this month. The easier
terms arefueling housing demand, boostingprices 11 percent in major
citiesinAugust fromayear earlier.
The Australian Prudential Regulation Authority in May warned of
growingevidenceof "lendingwithhigher risk characteristics." It issued
draft guidelines urging lenders to assess whether borrowers were
capable of repaying mortgages at higher interest rates. It also asked
banks to conduct regular stress tests onits loanbooks to determinethe
impact of rising unemployment, interest rates and falling property
prices.
Foreigndirect investment into China, agauge
of external confidence, slumpedtoafour-year
low amid antitrust probes into multinational
companies that have spurred a letter of
complaint fromtheU.S.
CHINA: The FDI drop follows data
released Sept. 13 that showed the
weakest industrial-output expansion
since the global financial crisis and
moderating investment and retail
sales growth.
Spanish home prices rose in the second quarter for the
first time since 2008, adding to signs that the property
market is stabilizing more than six years after triggering
the worst recession in the countrys democratic history.
Chinas new-home prices fell in all but two cities monitored by the
government last month as tight credit damped demand even as local
home-purchase restrictions were eased. Prices dropped in 68 of the 70
cities in August from July, including in Beijing and Shanghai, the
National Bureau of Statistics said in a statement today, the most since
January 2011 when the government changed the way it compiles the
data. Home sales slumped 11 percent in the first eight months of this
year amid an economic slowdown after banks tightened property lending
to curb default risks. While 37 of the 46 cities that imposed limits on
home ownership since 2010 have removed or eased such restrictions as
of Sept. 3 to stem the decline in sales, a wait-and-see attitude is still
prevalent among homebuyers, according to Centaline Group, parent of
the nations biggest property agency.
The PunchLine...
13
September 23, 2014
Pumping Iron
The Old Economy Revisited
Rising exports and falling imports pushed China's trade
surplus to a new record, but the outlook is downbeat.
Global aluminium market's oversupply woes will persist
Demandfor aluminiumremainsstrong, but theexpansionof Chineseoutput has
kept themarket insurplussince2007, pushinginventoriesup. Consequently, the
total profitsof theindustry'sfivelargest producersfell from9.4billiondollarsin
2009 to 2.4 billion in 2013. Attempts to reverse the oversupply problemhave
been largely ineffective, despite capacity cuts by leading producers: Rusal
reduceditsoutput by216,000tonnesin2013, whileAlcoacut 190,000tonnesof
annual capacitybyclosingitsAustralianPoint Henrysmelter andannouncedthe
closure of its Portovesme smelter in Sardinia. The largest non-Chinese
producers have also adopted various diversification strategies, with Rio Tinto
investigating the prospects for mining bauxite and Alcoa venturing into the
manufacturingspacetoproduceautomotiveandaircraft parts.
Car parts makers look to build scale amid
technological shifts in the global auto industry
ZF Friedrichshafen has agreed to acquire US rival TRW
Automotive in a $11.7bn deal, as the German car parts
supplier looks to build global scale and secure access to
technology for self-driving vehicles. Both companies
boards have approved the transaction, which would create
theworldssecondlargest car component maker by revenue,
with about 30bn ($41bn) in annual sales and 138,000
employees. TRW shareholders and regulators must first
approvethedeal, whichwasunveiledonMonday.
Siemens, the German engineering conglomerate, announced late
Sunday a deal for the DresserRand Group, an oil products and
services company. The deal, worth about $7.6 billion, including the
assumption of debt, gives Siemens prominence in the American
energy sector, which is booming as new reserves of oil and
natural gas are tapped through unconventional drilling
techniques.
The PunchLine...
14
September 23, 2014
Go Figure
Select Data Considerations
Microsoft agreed on
Monday to buy the
creator of Minecraft, the
world-building computer
game, for $2.5 billion, in
a move meant to add the
immensely popular title
to its stock of content.
A 7.0% decline last month in automotive products production (+7.4%
y/y) reversed a 7.6% J uly increase. Appliances, furniture & carpeting
production fell 2.5% (+7.0% y/y) following strong increases in the prior
five months. Working the other way was computers & electronics
output. It gained 2.4% (+5.6% y/y) and reversed a 2.3% J uly decline.
Business equipment production was unchanged (5.8% y/y) last month.
A 1.0% increase (1.7% y/y) in information processing equipment was
offset by a 2.3% decline (+7.2% y/y) in transit equipment (+7.2% y/y).
Amongst consumer soft-goods industries, output improved 0.3% (2.0%
y/y) after a 0.4% decline. Chemical production gained 0.7% (4.1% y/y)
after having been unchanged and food & tobacco production gained
0.5% (1.8% y/y) following a 0.6% J uly decline. To the downside,
clothing output fell 2.3% (+0.3% y/y), the largest of four declines in the
last five months.
The PunchLine...
15
September 23, 2014
The DNA of Business
Reconfiguring Industries to Define Growth
For GE, Electrolux Deal Marks Shift From Consumers
GE's deal to sell its appliance business to Electrolux is part
of a shift driven by J eff Immelt to focus the conglomerate
on finance and industrial equipment.
McDonald's Sales Woes Continue in August
Restaurant Chain Posts Steep Decline in Asia-Pacific Sales
Showbiz, Music Industry Jobs Drop 19% in Two Years
The MPAAs statistics for 2012 the most recent period covered
by the industry group asserted that the industry supports a
total of 1.9 million direct and indirect jobs for a total of $111
billion in total wages in 2012, with the direct jobs generating $46
billion in wages, and an average salary 43% higher than the
national average. There were over 293,000 jobs in the core
business of producing, marketing, manufacturing, and distributing
motion pictures and television shows, the MPAA said. These are
high quality jobs, with an average salary of $86,500, 76% higher
than the average salary nationwide.
The MPAA estimates that there were nearly 360,000 jobs in
related businesses that distribute motion pictures and TV shows
to consumers. The indirect jobs include caterers, dry cleaners,
florists, hardware and lumber suppliers, and digital equipment
suppliers. This also includes jobs in other fields that do business
with consumers, such as DVD and Blu-ray retailers and employees
at theme parks and tourist attractions.
Regional airlines not sharing in majors success
Apple Inc's iPod upended the music industry, and its
iPhone knocked Nokia off its smartphone perch, but
Swiss watch makers breezily dismissed warnings that
the technology giant's new wristwatch gadget could
do something similar to them. "They are essentially
transient products rather than items of enduring
value," one Swiss watch industry expert sniffed.
Trump Plaza shuts down;
4th AC casino to close
Las Vegas: Visitor Traffic on pace for record
in 2014, Convention Attendance Returning
Warning on Tech
The tech investing community is taking
on an excessive amount of risk, and
startups are burning through cash at an
unsustainable pace.
ZARA and RFID
Apparel powerhouse Inditex parent of the Zara chain, says it has learned
from competitors' experience and is rolling out RFID technology
throughout the operations of its signature brand.The chips, about twice
the size of a standard mobile-phone SIM card, help the world's largest
fashion retailer keep better track of its stock and replenish its clothing
racks more quickly, said Pablo Isla, chairman and chief executive of
Inditex, which reports first-half results on Wednesday. "It gives us great
visibility, knowing exactly where each garment is located," Mr. Isla said.
"It really changes how we operate our stores."
Apple said that it is making it impossible for the company to turn over data
frommost iPhones or iPads to police evenwhenthey haveasearchwarrant
taking a hard new line as tech companies attempt to blunt allegations that
they have too readily participated in government efforts to collect user
information.
The PunchLine...
16
September 23, 2014
Tech and the Business Cycle
The conventional wisdom in Silicon Valley is that
acquisitions areabout gaininggreat talent. J ust last week,
TimCook told CharlieRosethat oneof themain reasons
Apple bought Beats was for "incredible talent." The
Valley even has its own term for an acquisition based
solelyonhiring: "acquihire.
But that's not why Microsoft is spending$2.5billionfor Mojang.
Thepurveyor of all things Xbox is buyingtheSwedishdeveloper
for the mega-hit video game Minecraft. That's it. While Mojang
saysthe"vast majority" of employeesareexpectedtostick around
until after the deal closes, the three founders are leaving right
away. That includes Markus "Notch" Persson, the face of the
company.
TheheadlineonMicrosoft's press releaseis telling: "Minecraft to
join Microsoft." Not Mojang. Minecraft. That's a pragmatic way
to describethedeal: J ust about every kidandparent has heardof
Minecraft, which has sold more than 54 million copies,
comprising virtually all of the small studio's revenue. But
Microsoft seems to indicate that this isn't about cultivating an
eccentric groupof independent-mindedgamedesigners; it's about
Minecraft.
Orange SA (ORA) offered to acquire Spanish broadband
provider Jazztel Plc (JAZ) for about 3.4 billion euros
($4.4 billion) in cash, marking the French carriers
biggest takeover attempt in almost a decade.
Israel is known for its engineering prowess,
but less so for spawning big, independent tech
companies. That may be changing. Latestage
tech companies in Israel raised $447 million
in the second quarter, twice as much as the
total financing in the previous quarter,
according to Tel Avivbased IVC Research
Center. Mature startups are defined as those
with more than $10 million in annual sales.
These companies received 48 percent of all
capital invested in technology in the last
quarter, the highest in the 14 years IVC has
tracked the industry. At the beginning of
2013, just 13 percent of investments were in
latestage tech companies. Israeli
entrepreneurs "are growing more established
companies, said Koby Simana, the chief
executive officer at IVC. This is a
broadening of startup nation.
Internet governance
Potentially the most important development in the final
quarter of 2014 will be the International
Telecommunication Union (ITU)'s Plenipotentiary
Conference in Busan, South Korea fromOctober 20 to
November 7. The ITU Conference will see further
disagreement about the future shape of internet
governance between mainly Western governments on
one side and most emerging and developing countries
on the other. Meanwhile, the EU and the United
States are making greater efforts to address the
transnational challenge of cyber security.
The FBI's Next Generation Identification (NGI) system
is now fully operational, after more than three years of
development. The bureau announced today that
development on theproject is complete, and it would be
rollingout newfeaturesfor ongoingcriminal notifications
as well as acontroversial facial recognitionfeaturecalled
theInterstatePhoto System, or IPS. IPS will serveas "an
image-searching capability of photographs associated
withcriminal identities," accordingtotherelease.
The PunchLine...
17
September 23, 2014
Real Estate and Construction Outlook
The PunchLine...
18
September 23, 2014
Will Life Ever Be the Same?
This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial
instrument. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its
accuracy cannot by guaranteed. The views reflected herein are subject to change without notice. No one connected to this publication accepts any
liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. This publication may not be
reproduced, distributed to any person for any purpose without express permission from TPL Advisory, LLC. Please cite source when quoting. All
rights are reserved.