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What We Read Today 22 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Vietnam considers taking China to court (Demetri Sevastopulo, Financial Times) The Financial Times reports that Vietnamese Prime Minister Nguyen Tan Dung told Reuters his country was contemplating measures, including legal action by filing a case with the Permanent Court of Arbitration at The Hague. The Philippines has already a case pending against China in that court. The disputes are centered on China's claim for sovereignty over the entire South China Sea which borders on several other countries. See GEI News for details.

  • Oversubscribed JD.com prices its IPO at $19 a share (John Jannarone, CNBC) Hat tip to Marvin Clark. JD.com, which has been called the Amazon.com of China, priced its IPO (initial public offering) at $19 Wednesday night for its Thursday (22 May) IPO on NASDAQ. The company is expected to raise $1.78 billion. CNBC says the IPO is 15x oversubscribed which implies a big pop when trading starts. This stock will be closely watched for clues as to what might happen when the much bigger IPO for Alibaba (China's E-bay - and then some) goes public in August. See GEI Investing outlook for the Alibaba IPO by GEI Associate Aura Gilham.
  • China, Russia sign $400 billion gas deal (William Wan and Abigail Hauslohner, The Washington Post) Russia and China have signed a 30-year deal for the Chinese to purchase natural gas from Gazprom, the Russian government owned energy giant. This deal was reported as off for a while 24 hours ago by the Financial Times. (See next article.) This is viewed as clearly defining a new order in the world with China and Russia allied against the U.S. and Europe.
  • China to delay Russia gas deal in blow to Putin (Lucy Hornby and Jamil Anderlini, Financial Times) Repeated from yesterday's WWRT. Obviously the Financial Times got this one completely wrong. Russian president Vladimir Putin has been trying to show he has alternative markets for Russia's energy exports as the Ukrainian crisis drags on. But China is not jumping for the bait. PetroChina, the listed subsidiary of state-owned China National Petroleum Corp, said Wednesday that a deal to import natural gas from Russia's Gazprom would not be signed "in the near future". It had been reported that Putin hoped to announce such a deal during a state visit to Beijing this week.
  • China bans use of Microsoft's Windows 8 on government computers (Paul Carsten, Reuters) The Central Government Procurement Center of China has issued the ban on installing Windows 8 on Chinese government computers. The reason, according to this article is security concerns and the reports that there are backdoor "hooks" in the OS (operating system) that can be exploited by the NSA (National Security Administration). Reuters says this is a blow to Microsoft's attempts to improve its poor market position in China. The Verge reports that China will continue to buy Windows 7 from Microsoft.
  • Commercial Mortgage-Backed Securities: Hot ... But Very Dangerous (Keith Jurow, Advisor Perspectives dshort.com) Keith Jurow has contributed to GEI. There is a minefield waiting for CMBS (commercial mortgage backed securities) which mature 2015-2018 according to Jurow. These were written 2005-2008 with ten-year maturities at more than 100% LTV (loan to value). Real estate values have dropped from the credit bubble top so many of these properties are now even further underwater than when they were so carelessly underwritten. Just how this will affect the roll-over into new ten-year mortgages is problematic - there may be some defaults and there may be some adjustments (down) in principal in order to keep from suffering larger losses. Jurow cautions investors investing in distressed CRE need to be very thorough in their due diligence. See also Jurow's recent article on CRE at GEI Analysis.

CRE-loan-underwriting-Jurow


Today there are 13 articles discussed 'behind the wall'.

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  • Goldman: Prepare for Chinese property bust (Houses and Holes, Macro Business) A contraction in China's real estate markets will have an outsized impact on GDP. Not only will the direct contribution of property development be subtracted but also supply industries, such as steel. Half of China's steel production has been going into new real estate construction. Goldman's base estimate for GDP growth is a fall to about 6%. A more sever contraction would take GDP growth below 6%. Macro Business observes that such a slowdown in China could produce housing market problems and a recession in Australia.

Click on graphic for larger image.
china-housing-decline-goldman-mb-2014-22-may-22-600px

  • BP in last-ditch effort to limit Deepwater payouts (Ed Crooks, Financial Times) BP announced that it will ask the SCOTUS (Supreme Court of the U.S.) to review split decisions by lower courts which require payment of billions in damage claims resulting from the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. At issue is a 2012 settlement agreement signed in 2012 which BP had originally thought eould involve $7.8 billion in settlement by now appears to require more than $15 billion.
  • Itís Time for Postal Banking (Mebrsa Baradaran, Harvard Law Review) The author says that the heavily subsidized banking industry is operating in a way that "the poor have been excluded from the credit flow...". The reason?
Any efforts at forcing that sector to provide credit to the poor have failed because they are institutionally designed to maximize profits and lending to the poor is not conducive to profit maximization.

The article proposes that the USPS (United States Postal Service) provide banking services to the unserved.

  • Home Truths (John Foley, BreakingViews) When overleveraged markets start to roll over the result can be a decline that might best be called a crash in some cases. Everybody who was thinking they would make 10-20% in the next year and get out of their high-leverage position starts to panic when they realize there is a possibility of a price decline. Leveraged at 20:1 a 5% decline wipes out all equity. Well, it is clear that late last year the residential real estate market in China started to roll over.

china-real-estate-graphics

  • Why Regulation Goes Astray (James Kwak, The Baseline Scenario) Kwak writes briefly about an article by Adam Levitin in the Harvard Law Review (see next article below) and gives two short form answers: (1) Regulators are personally motivated to favor the financial industry (revolving door) rather than the public interest; and (2) regulatory capture is favored by ideology of the regulators. Kwak has a discussion of these two factors at the Harvard Law Review: Incentives and Ideology.

10-year-rate-driven-by-guidance

  • Record rains made Australia a giant green global carbon sink (Pep Canadell and Ben Poulter, The Conversation) Massive rainfalls in 2010-2011 in Australia transformed the continent into a huge carbon sink. This article asks the question of whether earth's natural climate control mechanisms might be more volatile than has been thought.
  • Roth IRAs Growing Twice as Fast as Traditional IRAs: EBRI (Melanie Waddell, ThinkAdvisor) Before you attribute this 2010-2012 surge to rational expectations of higher taxes in the future, there were probably much more immediate considerations that may have been more important. (1) In 2010 the tax law removed income restrictions for ROTH conversions allowing high net worth people (over $100,000 annual income) to convert. They had been prohibited before then. (2) A special rule was in effect in 2010 that allowed deferral of any taxes due from a ROTH conversion, with the taxes due over two years, 2011-2012. (3) With IRA accounts suffering big losses in 2008-2009 a Roth conversion could be made for many with less taxes due than were saved when contributions were made to qualified accounts 2005-2007. If someone saved $18,000 in income taxes on $60,000 contributions to a qualified plan 2005-2007 and the account was valued at $40,000 in 2010, the taxes due on conversion would be $12,000 (if same tax bracket) for a net "accounting" advantage of $6,000.
  • What 60 years of political gerrymandering looks like (Christopher Ingraham, The Washington Post) Gerrymandering is the way that a political party tries to minimize the opportunity of the opposing party to win as many districts within a state as possible. It can happen any time one party gains control of all branches of state government, although it doe not have to happen in those cases. Two states that have manged to avoid gerrymandering extremes are New York and California; New York because of a divided legislature (House always Dem and Senate always GOP); California because of an independent redistricting commission. The worst states for gerrymandering, according to this article are Maryland and North Carolina. Other 'bad boys' mentioned: Texas, Illinois, Ohio and Pennsylvania. For an analysis and opinion of gerrymandering in the U.S. by an Australian contributor, see this article by Paul Hanly.

gerrymander-maryland-wp-2014-may-21


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