By Eldon Mast, on December 2nd, 2009
What a difference a few days have made in the mainstream headlines.
Overblown concerns about Dubai defaults are quickly shifting to the into the shadows. On Tuesday clarity on the extent of the loan restructuring indicated that Dubai World likely would restructure debt worth $26 billion against earlier talk of a possible $59 billion default.
Moving to center stage was a string of economic good news on Monday and Tuesday.
To kick off the week, gains in new orders were the highlight of November’s Chicago purchasers’ report. Chicago’s PMI rose nearly 2 points to 56.1 to indicate another strong month-to-month increase in the pace of overall business activity in that area of the country. New orders rose 1.4 points to a very strong 62.8. The Chicago survey includes both service and manufacturing segments of the economy in its report.
Contrary to a more gloomy consensus forecast, reports Tuesday showed a continued rebound for the auto sales even in the absence of government incentives. Sales of domestic-made vehicles came in at an 8.2 million annual rate in November, considerably above the 7.9 million rate in October.
On the retail front, Redbook reported strong results for the Nov. 28 shopping week. Redbook’s year-on-year measure for the week is up 3.8 percent and week over week up 1 full percentage point! (That’s 52% annualized). No doubt this is the strongest retail rate of the year and Redbook projects an exceptionally strong 5.2 percent rise in November vs. October. (That’s a heady 62% annualized)
Indications in the manufacturing sector continue to point to strength with ISM’s report showing continued momentum. The manufacturing new orders component of the index (the report’s leading indication for future activity) continues higher to 60.3 for a 1.8 point gain. Acceleration in new orders and gains in backlogs show a healthy mix pointing to rising production and rising employment ahead. Employment continues much improved from earlier in the year, holding above 50 in November from October’s very strong level of 53.1. You’ll remember the past relationship between ISM’s PMI and the overall economy. If the correlation to the PMI for November is annualized, it corresponds to a 3.9 percent increase in real GDP annually.
Then home sales reports were released. You may remember that existing home sales got a giant boost in October as speculation increased that the homebuyer’s credit expiration would pull sales forward and then dip in subsequent months. But to the contrary Tuesday’s report points to continued strength ahead. Pending home sales jumped nearly 4% in October adding to September’s 6% gain. Year-on-year pending home sales are now up a robust 32%.
Then early Tuesday afternoon, Philadelphia Federal Reserve Bank President Charles Plosser gave his views on monetary policy. Plosser (like us) sees economic recovery to be a little more modest than many gloomy economists. Said Plosser, “Looking ahead to next year, I expect real GDP growth from the fourth quarter of this year to the fourth quarter of 2010 to be about 3 percent. I expect similar real GDP growth in 2011. These rates of growth are more modest than what some forecasters anticipate.”
This economic recovery continues to build momentum. No surprise here.
By Ajay Shah, on December 2nd, 2009
In India, in the fields of health and education, an impressive rise of a private ecosystem has come about. In these fields, the State has tried hard to get back in the game, particularly after the UPA won power in 2004. But the unwillingness of the State to undertake deeper reforms has meant that ultimately, government facilities generally work badly. CPI(M) ideologues send their children to private schools.
The CMIE Consumer Pyramids data shows the fraction of household expenditure on school/college fees. Households that spend nothing are those that have no children, or those that are fully served by government schools/colleges. The CMIE data separates out expenditures on stationery, books, private tuitions, etc., so what is observed here is just the pure payment to the school/college. It shows:
| Income class |
Fraction of expenditure |
| Rich 1 |
2.88 |
| Rich 2 |
3.25 |
| Higher Middle Income 1 |
3.52 |
| Higher Middle Income 2 |
4.16 |
| Higher Middle Income 3 |
3.81 |
| Middle Income 1 |
3.17 |
| Middle Income 2 |
2.78 |
| Lower Middle Income 1 |
2.43 |
| Lower Middle Income 2 |
1.89 |
| Poor 1 |
1.46 |
| Poor 2 |
1.35 |
| Overall |
2.82 |
The overall average expenditure per household in the survey is Rs.86,228, so 2.82% of this is Rs.2400 a year or Rs.200 a month. This, of course, reflects a split between some households who use government facilities (who spend nothing) and others who use private facilities (who spend more than Rs.200 a month).
An incipient academic literature shows that learning outcomes from the weakest private schools broadly replicate learning outcomes from government schools even though the resource outlay of government schools is 3x to 10x bigger. If this evidence was correct, private schools would not have gained market share. Poor people have been spurning government schools with zero tuition fees and free meals, and choosing private schools where significant payments have to be made. There are two possible explanations: either the parents are not understanding how best to take care of their interests, or the econometricians are not understanding what parents are thinking. I am biased in favour of the latter explanation.
Like all incumbents, public sector producers of educational services resent competition, and particularly competition that is gaining market share. With the Right to Education Act, the government has armed itself with new powers to force `unrecognised schools’ to close down. This is similar to the Department of Posts trying to prevent private firms from carrying letters. This is going to shape up as one of the most important battlegrounds in Indian education. So far, the broad story was that the government floundered and spent ever larger sums of money, but did not prevent `unrecognised’ schools from coming up. Now it is shifting gears from category 3 (”State Production But Do No Harm”) to category 4 (”State Production While Damaging the Private Sector”).
As Lant Pritchett has emphasised, countries like Chile which have a fully competitive framework, where parents choose between public and private schools, have a bigger market share of public schools as compared with India, where the main approach of the State is to pretend that private schools don’t exist, or to try to force them out. This ought to trigger off fundamental rethinking about what we are doing in the government. This rethinking has not begun, and the customers are quietly voting with their feet, switching their children to private schools. Despite the huge increase in funding to public schools, the market share of private schools is rising every year.
In this setting, it is worth attending the School Choice National Conference 2009 which will be held in Delhi on 16 December. And, do read The Beautiful Tree by James Tooley.
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By Claus Vistesen, on December 1st, 2009
Although I certainly would not rank it alongside Macro Man’s dreaded vacation indicator or the incipient increase in the USD if and when the Economist finally decides to slot its decline on the front page, I still have the nagging feeling that whenever yours truly sit down at either a dull and difficult econometrics lecture or, as today, camps at school for a lab session in connection with a paper due next month, some event is bound to wreck havoc on markets while your author is busy estimating regressions. I would assume that some US market participants feel the same today as they give thanks before hauling in the Turkey.
In any case, this time around the skeleton that could be kept in the closet no longer is neither Baltic nor Spanish; it is Middle Eastern. At this point, I am of course simply trying to get an overview like the rest of you and not least deciding whether it will have any far reaching repercussions beyond today’s theatricals. However, in case you did not turn on your Blackberry today, they story is that the Dubai government has requested investors in the debt of the investment company Dubai world whether they wouldn’t be so nice as to accept a wee postponement of the payment of their debt. Especially, a payment due already the 14th of December in the form of $3.52 billion of bonds from property unit Nakheel PJSC looks as if it is near dead in the water.
(quote Bloomberg)
The price of Nakheel’s bonds fell to 70.5 cents on the dollar from 84 yesterday and 110.5 a week ago, according to Citigroup Inc. prices on Bloomberg.“Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject on it in order to see the enterprise survive,” said Luis Costa, emerging-market debt strategist at Commerzbank AG in London.
Obviously, announcements of delay of debt payments smells an awful lot like default and with $59 billion worth of liabilities at Dubai World many a financial institution and investor are exposed here. Naturally, and apart from the internal mess this is likely to cause in the Middle Eastern region, I am looking closely at the notion of European banks being sucked in here too.
(quote Bloomberg)
The biggest creditors are Abu Dhabi Commercial Bank and Emirate NBD PJSC. Other lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation. Barclays slumped as much as 6.9 percent, the biggest intraday loss in a month, while RBS sank as much as 8.3 percent. Lloyds and Credit Suisse dropped more than 3 percent.
As ever, it will be most interesting to see which adventures European (and indeed US) financial institutions have been engaged in with the cranes of Dubai and thus how much more junk they will now have on their balance sheet (question: does the ECB by chance have collateral from Dubai World in the tank?!).
Naturally, this may all get a happy ending for the creditors if a) the Dubai government decides to foot the bill through a massive liquidity injection and b) it does not default in the process. Since the government itself, it appears, took part in suggesting the repay delay/restructuring the stakes were raised already from the get go especially as both Moodys and S&P have indicated, initially through massive cuts of companies and funds in the region, that they might consider the move to ask investors for a delay in repayment as a defacto default; a statement which together with the state of play naturally have seen credit default swaps soar for both sovereigns and companies across the region.
Globally, the reaction was equally strong with stocks across the board taking a hit and yields on developed economy government bonds dropping to reflect the knee-jerk move into “safety” assets by part of global investors. In this respect, I agree with the underlying sentiment expressed by Russel Jones from RBC Capital markets
(qoute Bloomberg)
“Dubai isn’t doing risk appetite any favors at all and the markets remain in a vulnerable state of mind,” said Russell Jones, head of fixed-income and currency research in London at RBC Capital Markets. “We’re still in an environment where we’re vulnerable to financial shocks of any sort and this is one of those.”
The key here is exactly whether this merely reflects the fact that markets and risky assets are naturally nervous and thus how it takes only a small (or large?) disruption for risk aversion to decline or whether there is a stronger and more structural theme at play here with respect to the potential real contagion the events in Dubai might have. At this point I am leaning towards the former simply because I have no reason or knowledge to claim the latter. I suspect that minds more informed than me will let us know soon enough as well as any untold stories will surface sooner rather than later.
More importantly (at least for me), it was interesting to see that old habits still linger in the context of FX markets;
(quote Bloomberg)
The yen climbed as high as 86.30 per dollar, the strongest since July 1995, before trading at 86.60. The U.S. currency strengthened against all but the yen among its 16 most-traded counterparts, appreciating 2.6 percent versus the New Zealand dollar and advancing 2.4 percent against the South African rand.
The Swiss franc weakened as much as 0.3 percent per euro, falling from the highest level since June, on speculation the Swiss National Bank sold the currency to curb its gains. The franc dropped 0.9 percent to 1.0057 against the dollar after yesterday reaching parity for the first time in 19 months. The SNB declined to comment.
Now, whether this is a story of unwinding of carry trades and low yielders reacting to risk aversion as I have tended to interpret it (a position which Cassandra, by the way, recently called disingenuous at best and ludicrous absurd puerile) or simply, as would be Cassandra’s point, systemic deleveraging and thus a retrenchment of funding liquidity (primarily in USD) is an open question which I intend to deal with in more detail in the future. For now, it will suffice to say that the USD acts as a carry trade funder along side the JPY with the Swissie apparently still supported by the bullying of the SNB. In short, if it walks like one and quacks like one … well.
For more background on Thursday’s Dubai Delights we can thank the job rotation schedule at FT Alphaville for having Izabella Kaminska at the rudder (among others) as she has been relentless digging up background and information on the situation in Dubai throughout the day. Over and above the tragicomic allure of the failed conference call scheduled for bond holders of Nakheel (a guy called Murphy springs to mind), I take notics of the “sterling connection” and specifically the idea that the Pound may suffer from the Dubai rout as the sheiks and the rest of their ilk will be forced to sell UK real estate assets (time to buy a Chelsea pent house then?) in order to kick up the funding needed. Here is Izabella;
In other words, if default is really on the cards, chances are Dubai World will have to start a major fire-sale of assets. Unluckily for the UK, the Middle East and the UAE have for a very long time viewed the British real-estate market as a safe-haven investment.
Whether the inflows from the window shopping of super affluent Middle Eastern investors in the UK real estate market have been a marked driver of the exchange rate is debatable, but Izabella digs up some comments by BNP Paribas who certainly seems to think that this is the case. So we better watch that one too then. Finally, Izabella headbuts Barclays Capital by juxtaposing an old note dated back only this month in which BC recommends a long position in everything debt related to Dubai (Sovereign as well as Corporate) with a more a current note in which this argument is, uhm, relaxed. A cheap shot you might argue … perhaps, but fun and interesting nonetheless.
Dubai Delights No More?
I have to say that it was not without a bit of the old Schadenfreude that I loaded up Bloomberg and Reuters this afternoon to learn that Dubai seems to be facing a great unravelling. We still need to get to full story of course at this point, and if the Dubai authorities step up, it may all turn out to be a storm in a tea cup. However, on a personal note the “Cranes of Dubai” always represented one of the clearest example of the excess and froth observed in the context of the economic boom that ended abruptly with the current financial crisis. With this in mind I am not the least surprised about this which of course is easy to state ex post, but then you choose whether to believe me or not.
More generally, it need not, naturally, put an end to financial and economic development in the region, but it is one thing to have and collect commodity windfall and quite another to spend it wisely and to productive means. One would hope that this serves as a timely reminder as we move on from here.
By Eldon Mast, on December 1st, 2009
Some of the gifts you receive this holiday season may seem inexpensive, but that doesn’t mean they will not be incredibly valuable one day. In fact you might just have something valuable kicking around in the back corner of that old childhood closet.
Do you happen to own the first Superman comic book from the 1950s? It sold for 35c back then, but today is worth over $300,000. How about a 1943 penny made of solid copper? Today that one cent piece is worth well over $100,000.
Were you an early rocker? A signed copy of John Lennon and Yoko Ono’s Double Fantasy is now worth $120,000. Or perhaps you are a baseball card collector? Pull out that shoebox from 2006. The minor league card for Alex Gordon that year is trading for over $7,000 currently.
Chip Cutter and Kristen Girard who usually follow the performance of the S&P 500 by industry took time this Thanksgiving season to remind us that “building a collection of stuff may seem like a waste of cash, but if you happen to buy things that appreciate over time, you can actually make money.”
Happy Hunting…
By Ajay Shah, on December 1st, 2009
The problem
The main source of funding for microfinance in India has been through banks, primarily through the forced `priority sector lending’. Over the years, the demand for funds in the microfinance industry has outpaced the growth in investment by banks. In addition, banks are not the ideal place for these assets, given the nature of cashflows and maturity of micro loans. Hence, even though MFI assets are part of priority sector lending, the excessive focus on bank capital has effectively raised the cost of capital for MFIs.
The upstream funding for microfinance needs to be diversified to harness a diverse array of borrowers, so as to avoid the constraints and unique compulsions of any one source. However, at present in India, MFIs are not permitted to mobilise deposits, or borrow from international lenders, or from MIVs (Microfinance Investment Vehicles).
The role for securitisation
The ideal financing channel for them, in this environment, is securitisation. Through securitisation, a pool of loans across many borrowers (and ideally across many MFIs) would be turned into a tradeable securities that are targets of investment by a diverse array of investors, with different beliefs and compulsions.
A recent transaction
One step towards this goal came about last week, when IFMR Capital announced the completion of a micro-loan securitisation through which mutual fund investment into microfinance takes place. The Rs.480 million ($10.4 million) transaction is backed by over 55,000 micro-loans originated by Equitas Micro Finance, a Chennai-based microfinance institution (MFI) with approximately 700,000 low-income clients.
The bulk of the securities issued were purchased by ICICI Prudential AMC, the country’s third largest mutual fund. The entry of a mutual fund investor into the micro-loan backed securities (MLBS) market, as well as the treasury desks of major Indian banks, has given Equitas a new investor base and lower cost of financing. This should enable lower cost borrowing for the households that Equitas lends to.
Deeper implications
Going beyond the direct issue of access to a large volume of funds at a low cost, capital market financing is beneficial to microfinance firms by bringing about new pressures on transparency, accountability and thus oversight of MFIs.
IFMR Capital has previously done a MLBS transaction, but there it was the sole investor in the BBB rated (subordinated) tranche. In the Equitas transaction, there was investor interest in all tranches; a majority of the BBB tranche was purchased by a private bank. This is relatively new for the Indian corporate bond market, which has hitherto been wary of BBB securities. These developments are thus synergistic for both the growth and development of microfinance and for the corporate bond market.
The ultimate goal is an ecosystem where securitisation paper is constructed using loans made by multiple MFIs, sold to a diverse array of domestic and foreign investors, actively traded on the secondary market, with trading that is supported by high quality disclosure of data about the underlying loans on a daily basis. IFMR Capital will work in all aspects of this ecosystem, including facilitating listing and engaging in market making.
Looking beyond the vision of MFIs funding themselves through securitisation, there is also a role for (say) 1000 small banks (as argued in Raghuram Rajan’s report). A key ingredient of making this work is bringing in market discipline, by having regulations which require them to finance (say) a quarter of their assets using subordinated debt, and using this BBB bond market to exercise market discipline on them. The task of bank supervisors would be simplified when the BBB bond market, the CDS market and the stock market jointly serve up a list of the 50 weakest banks on each trading day. The stock market is in place in India; what is now missing is the BBB bond market and the CDS market.
Further reading
At the IFMR website.
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