December 16, 2013

2013 issue 23

Winter Crosscurrents
Just shy of the new year, financial markets continue to be dominated by the extent of monetary accommodation. Especially in major advanced economies, bonds and stocks have shrugged off the summer sell-off and posted gains on the view that low policy rates and large-scale asset purchases would persist longer. Accordingly, markets took in stride a two-week US government shutdown and uncertainty over a US technical default. By contrast, a wide range of country-specific strains weighed on several large emerging market economies, preventing a full recovery of local asset valuations and capital flows. Much attention has been given to the hope of a strengthening in the U.S. economy. Key elements include an very slowly improving labor market and amazing moves in asset markets. Real estate values and equity market valuations have bolstered both business and household wealth -- and the outlook for spending in 2014. The perceived postponement of Fed tapering gave rise to significant gains in global bond and equity markets. Indeed, some have questioned whether the recovery in home prices in some areas has moved too quickly. Any move to normalcy, however gradual, will test markets. The dreaded tapering will remain a key focus of markets As the accommodative monetary policy stance persisted in all major currency areas, so did investors desperate search for yield. The unnatural easing stance, though necessary, spurred an aberrant demand for assets in the riskier end of the spectrum. By and large, such assets have so far lived up to their promise. The new year may again challenge that assumption.

US industrial production jumped 1.1% in November, the greatest gain in 12 months. The November reading was up 3.2% year-over-year. Utility output increased 3.9 percent after declining 0.3 percent in October. Falling temperatures prompted Americans to adjust their thermostats last month, the Fed said.

EURO currency at growth-crushing levels Fedtaperconcernboostsdollar,weighonstocks Willitburstbondbubbleanddampenmortgagefinance? Bracing for bumpy ride in emerging markets Some apparel Retailers:highenddoingwell,lowendcautious
The European Central Bank issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve tapering.
Europe faces moment of truth on banks, with flawed defenses

Return of boom-era debt deals raise alarm

U.S. car sales rose 9% in November from a year earlier, aided by promotions

chains are seeing inventory growth far outpacing sales growth.

The year is not ending on a high note in the small business sector of the economy. The bifurcation continues, the Fortune 500 are performing well with the stock market hitting record high levels. But the small business sector is showing little growth beyond that driven by population growth.

Chinese tapering may worsen U.S. bond woes

Large dependable buyers of Treasuries may be thin on the ground in the coming years. The Fed will trim, and eventually stop, its asset purchases. And now China is talking about halting its reserve accumulation. U.S. bond yields could rise faster and further than expected.

Brazil reported its third quarter GDP contracted 0.5% from the second quarter. More alarmingly, Brazils 10 year yield shot up and its spread over the U.S. Treasury is now at the highest level since the summer of 2009

Yen at five-year lows as more bet against currency ABRAHAM GULKOWITZ

abe@gulkowitz.com
917-402-9039

Judge: Detroit eligible for Chapter 9 bankruptcy

Budget negotiators reach deal could restore some order to the nations chaotic budget process and avoid another government shutdown on January 15

December 16, 2013

The PunchLine...

In This Issue
Winter Crosscurrents
Just shy of the new year, financial markets continue to be dominated by the extent of monetary accommodation. . Especially in major advanced economies, bonds and stocks have shrugged off the summer sell-off and posted gains on the view that low policy rates and large-scale asset purchases would persist longer. Accordingly, markets took in stride a twoweek US government shutdown and uncertainty over a US technical default. By contrast, a wide range of country-specific strains weighed on several large emerging market economies, preventing a full recovery of local asset valuations and capital flows. Much attention has been given to the hope of a strengthening in the U.S. economy. Key elements include an very slowly improving labor market and amazing moves in asset markets. Real estate values and equity market valuations have bolstered both business and household wealth -- and the outlook for spending in 2014. The perceived postponement of Fed tapering gave rise to significant gains in global bond and equity markets. Indeed, some have questioned whether the recovery in home prices in some areas has moved too quickly. Any move to normalcy, however gradual, will test markets. The dreaded tapering will remain a key focus of markets As the accommodative monetary policy stance persisted in all major currency areas, so did investors desperate search for yield. The unnatural easing stance, though necessary, spurred an aberrant demand for assets in the riskier end of the spectrum. By and large, such assets have so far lived up to their promise. The new year may again challenge that assumption. (pg 1)

Data Detective The Return to Normal You Cant Handle the Truth The Likelihood of Unlikely Events... Dislocation Households Some Job Specs Credit Credit Credit Matters The New Geography of Business Deal or No Deal in Europe Pumping iron The DNA of Business Real Estate and Construction More Construction Will Life Ever be the Same?

(pg 5) (pg 6) (pg 7) (pg 8) (pg 9) (pg 10) (pg 11) (pg 12) (pg 13) (pg 14) (pg 15) (pg 16) (pg 17) (pg 18) (pg 19) (pg 20) (pg 21)

In This Issue Go Figure Engines of Growth

(pg 2) (pg 3)

Easy money and the timing of the Feds shift continues to dominate across the globe. Repercussions from various 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 4)

Contact information:

Abraham Gulkowitz
phone: 917-402-9039

email:abe@gulkowitz.com

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.

December 16, 2013

The PunchLine...

Go Figure Select Market Considerations

December 16, 2013

The PunchLine...

Engine Drivers
China's rich starting to flee the countrywith their fortunes
US and EU demand boosts China trade
Exports rise faster than expected in November New wealth taking art market to new heights

Was November's Upbeat Jobs Report Enough to Push the Fed to Taper?
U.S. Economy Grew Faster Than Expected 3.6% in Q3 The US economy grew at an annual rate of 3.6 percent in the third quarter, significantly more than initially estimated, the Commerce Department reported

Agrowingclassofsuperrichcollectors manyfromAsia,LatinAmericaandtheMiddle East isputtingmoneyintofineartbothtogainstatusandtoinvestinsomethingnew.

Asia is on the cusp of a full-blown arms race. The escalating clash

between China and almost all its neighbours in the Pacific has reached a threshold. All other economic issues at this point are becoming secondary. Beijing's implicit threat to shoot down any aircraft that fails to adhere to its new air control zone in the East China Sea is a watershed moment for the world. The issue cannot easily be finessed. Other countries either comply, or they don't comply. Somebody has to back down. The gravity of the latest dispute should by now be obvious even to those who don't pay attention the Pacific Rim, the most dangerous geostrategic fault line in the world. Japans foreign minister, Fumio Kishida, accused China of profoundly dangerous acts that unilaterally change the status quo.

German consumer confidence at 6-year high Germanys two major parties reached the longwaited deal to form a grand coalition government.

At its November meeting, Thailands central bank unexpectedly decided to lower its benchmark interest rate, the policy rate, by 25 basis points to 2.25%, noting that the economy was growing at a slower pace than previously assessed and that downside risks to growth were greater than at the October meeting of the Monetary Policy Committee. The policy rate had been unchanged since July.

OPEC Rift Is Emerging Over Output

OPEC members are divided over how to trim the cartel's oil output amid surging U.S. production, rising Iraqi exports and the possible return of more Iranian crude.

US growth for the past four years has been startstop and subpar. Persistently high global oil prices, a credit system that was deleveraging, slow global economic growth and a moribund housing sector undermined growth and caused performance to disappoint. However, budget battles, a recent government shutdown and political gridlock may have diverted attention away from the fact that the fundamentals of the US economy are quietly strengthening. Key elements include an improving labor market that should boost consumer confidence and steadily higher equity market valuations that could increase both business and household wealth and therefore spending.

December 16, 2013

The PunchLine...

Data Detective

December 16, 2013

The PunchLine...

The Return to Normal ?

Feeding the Bubble: Is the Next Crash Brewing? Central banks around the world are pumping trillions into the economy. The goal is to stimulate growth, but their actions are also driving up prices in the real estate and equities markets. The question is no longer whether there will be a crash, but when.

Growing EU Risks:

Government Bond Holdings Could Burden Banks

European banks hold increasingly large shares of government bonds as a result of the debt crisis. If those states default and can no longer service their debt, it could lead to massive losses. Germanys Bundesbank is pushing for new rules at the ECB.

Large investors turn cold on commodities

Banks and asset managers concerned over falling prices

West Coast Volumes Down Year-Over-Year in October

Container traffic at West Coast ports declined 3 percent in October compared to the same month last year. Imports were down 4 percent and exports dropped 2 percent.

Air Cargo Booming

October 2013 reinforced the most recent trends in air cargo worldwide, according to market data supplied by WorldACD. The month brought a 5.3% volume increase over October 2012, accompanied by a 3.5% rise in air cargo yield, expressed in US dollars, over September 2013.

McDonald's November sales miss as U.S. weakness continues

December 16, 2013

The PunchLine...

YouCant Handle the Truth

Let'sTaketheConoutofEconomics

HOUSING BUBBLES frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil. U.K. Mortgage Approvals Near 6-Year High; House Price Growth Accelerates U.K. mortgage approvals increased to the highest level since February 2008 as banks lend more to housing, siphoning away funds from lending to businesses, given the strong confidence in the property market on the back of government scheme. Moreover, house prices registered the strongest growth since July 2010, flagging fears of a housing bubble.
China companies borrowing costs are rising as money-market interest rates increase amid the central banks efforts to rein in credit growth. The seven-day repurchase rate, a gauge of funding availability in the banking system averaged 4.54 percent in November, up from an average 3.57 percent in May.

Chinese shares fell for a four consecutive day on Friday amid growing speculation the government may cut its 2014 economic growth target to 7% from 7.5%. The benchmark Shanghai Composite Index fell 0.3%, extending its weekly loss to 1.8%. Investors are concerned about uncertainties regarding government future direction as the countrys policy makers seem to struggle between growth and reform agendas.

China manufacturing growth eases in December, prompts job cuts and lower prices

December 16, 2013

The PunchLine...

The Likelihood of Unlikely Events

Pessimism rises over long-term global growth outlook
The persistently disappointing performance of the global economy is depressing confidence in long-run growth prospects. Deflation continues to loom in the euro-area and may spread to the United States. Developing economies are being held back by internal problems, and questions of US monetary policy shifts may be deflecting attention from underlying flaws in regional growth models. Similarly, many potential new drivers of global growth appear based more on hope than substance and doubts about the 'innovation engine' in both emerging and advanced economies have grown, adding to the downbeat mood.

Aluminium prices slide to four-year low

Aluminium prices have slid to a four-year low, in a development that will heap pressure on the struggling smelting industry. Prices for aluminium, the second most widely used metal after steel, have been under pressure for years as the market struggles with oversupply and towering stocks.
The market has been burdened by large inventories since the financial crisis, when producers did not cut output as fast as demand fell. Aluminium stocks in LMEregistered warehouses stand at 5.4m tonnes, with analysts estimating that at least that much again is held outside the LME system. The bearishness has been exacerbated by the recent decision by the LME to increase the flow of metal out of the largest warehouses, where long queues to deliver out metal have caused controversy. Despite that, however, traders say availability of physical aluminium remains tight, as investors lock up the metal in so-called financing deals. To get metal between now and six months forward is very difficult, said one trader.

EM shock could push euro zone back into decline: S&P

The euro zone could face its third recession in six years in 2014 if emerging market growth slows more than forecast, a senior economist from Standard & Poor's rating agency said . Jean-Michel Six, the Paris-based chief economist for Europe, the Middle East and Africa, said that developing economies like Turkey and Brazil were highly exposed to the policies of the world's major central banks and any decline in their growth could hit the euro zone hard. "An exogenous shocks from, for example, emerging markets slowing more than expected, could see the euro zone facing a situation of falling growth and then that is its third dip into recession," said Six, in a news briefing in London. Any emerging market risk to the euro area would most likely come from Turkey, Brazil India, South Africa and Indonesia, which Six termed the "fragile five". Their large current account deficits and vulnerability to international capital flows leaves them highly exposed to a fall-off in global central bank liquidity, he said.

European banking sector will take years to repair

Banks' operational capacity across the European continent, irrespective of euro-area membership, continues to be adversely affected by billions of toxic assets on their balance sheets. What to do with such troubled loan portfolios -- fire sales at a steep discount or external separation into a 'bad bank' entity -- remains a major operational challenge for banks and supervisory authorities at the national and European level. In particular, the funding issue linked to bad bank models is at the heart of regulatory deliberations as a new architecture takes shape.

Global QE led to hot money flows into some emerging economies - - with loose financial conditions, higher wages and widening BoP deficits the result
Natural Disasters in Asia
Typhoon Haiyan (called Yolanda in the Philippines) follows a series of natural disasters in Asia, especially Japan's 2011 earthquake and tsunami, Thailand's 2011 severe flooding and the 2004 South Asian tsunami. All these experiences demonstrate that cleaning up after a massive natural disaster spread over a large geographic area takes time -- even in well prepared, wealthy countries such as Japan. The disaster also highlights risks to supply chains in the region and heightened concerns over physical security of both people and investments.

Fragile Five
Forget the BRICS: what's really concerning investors now are the "Fragile Five". The spectre of "global contagion" from Brazil, Indonesia, India, Turkey and South Africa is looming, As the cost of employing workers in these countries has risen, there has been less investment from foreign companies, fewer exports and slower economic growth. This has hit those countries' balance of payments which measures the balance of a country's transactions with the rest of the world. If a country's exports, including financial transactions, are less than its imports it runs a current account deficit. Coupled with relatively weak economic growth in the Fragile Five, these current account deficits are causing alarm among investors.

Fed Eyes Financial System's Weak Link

Move to Rein In Short-Term-Funding Market Carries Risks of Its Own
Yale University professor Gary Gorton recently likened financial firms' growing reliance on increasingly shorter-term funding contracts in 2008 to tinder building up in a parched forest. Lehman's bankruptcy filing that year, he says, was like a lightning strike that sparked the inferno. The Fed nodded to those risks last month when it forced big banks to include the failure of their largest counterparty in the "stress test" scenario they must pass in order to get permission to pay dividends to shareholders.

World Bank Sees Record Demand for Political Risk Insurance

Investors demand for insurance against political risk is on track to match last years record as instability persists in the Middle East and disputes in Latin America erode confidence, the World Bank said. Investment insurance for developing economies by a group of the main public, private and multilateral providers reached $45 billion by mid-2013, according to the banks Multilateral Investment Guarantee Agency unit. For all of last year, issuance totaled $88 billion even as foreign direct investment to the region fell 6 percent, it said.

EU Needs New Russia Policy after Ukraine Debacle

The EU wanted to usher in a more modern policy toward Eastern Europe through the proposed association agreement with Ukraine. Instead, in the wake of Kiev's change of heart, it faces a diplomatic shambles. Europe clearly needs a new strategy for Russia.

Cold War in the Pacific: China Escalates Tensions with Neighbors

Beijing's recent establishment of a new air defense zone in the East China Sea is exacerbating long-running disputes with its neighbors Japan and Taiwan -- and threatens to draw the US military into a larger regional conflict.

Thailand Resilience Eroding as Protests Sap Confidence

Thailands economy has withstood coups and regime-changing protests for decades, luring manufacturers including Toyota Motor Corp. even when turmoil dented stocks and the baht. This time may be tougher.

Thailands crisis deepens as opposition quits

Protesters gear up for final push to remove prime minister

December 16, 2013

The PunchLine...

Dislocation, Dislocation, Dislocation

With orders for transportation equipment and computers showing notable decreases, U.S. durable goods orders declined from an upwardly revised 4.1% (m/m sa) in September to fall by 2.0% in October, matching estimates. Orders for transportation equipment tumbled by 5.9% in October, led by a steep drop in orders for commercial aircraft and parts. Excluding transportation equipment, durable goods orders edged down by a more modest but still disappointing 0.1% in October, compared to a 0.2 % increase in September. On a three-monthly annualized basis, total durable goods orders fell 7.3% (3m/3m saar) in October, compared to Septembers decrease of 9.5%. Similarly, durable goods excluding transportation equipment declined by 1.1% (3m/3m saar) in October after being flat in September.

Buying a home hasnt gotten any easier for Spaniards, even after home prices tumbled as much as 40 percent. Rising borrowing costs, currently more than one-and-a-half times the cost in Germany, the end of mortgage tax breaks, and shrinking disposable incomes are making it increasingly difficult for Spanish families to own their own home. Fewer than 15,000 mortgages were granted in September compared with about 129,000 at the September 2005 peak, according to the National Statistics Institute. Spanish homeownership -- at 83 percent the third-highest among countries that share the euro after Slovakia and Estonia - - is under assault as the nations banks and government threaten to delay a real estate recovery. The collapse of a decade-long property boom, when mortgage lending surged almost four-fold, pushed Spains economy into a five-year slump and forced banks to take impairment charges of 87 billion euros ($118 billion) last year to help clean up soured assets linked to real estate. The average rate on a new mortgage with a term of more than 10 years was 5.19 percent in October even as 12month Euribor, the benchmark used to price most Spanish home loans, has dropped as low as 0.51 percent, according to data compiled by the Bank of Spain. That compares with a mortgage rate of 5.84 percent in 2008, when 12-month Euribor was as high as 5.38 percent. The same mortgage in Germany would cost 3.14 percent, 3.19 percent in France and 4.77 percent in Italy, according to the European Central Bank.

December 16, 2013

The PunchLine...

Households Brave New World

Health Care Costs become increasing burden for Americans Massive sign-up for Medicaid... If that trend continues, it could bankrupt both federal and state governments. Medicaid is already Americas third-largest government program, trailing only Social Security and Medicare, as a proportion of the federal budget.

Suggesting that the holiday shopping season began on an upbeat note, the Commerce Department released a report on Thursday showing that U.S. retail sales rose by slightly more than expected in the month of November. The report said retail sales rose by 0.7 percent in November following an upwardly revised increase of 0.6 percent in October.

HolidaySalesSagDespiteBlitzofDeals

10

December 16, 2013

The PunchLine...

Some Industry Job Specs

11

December 16, 2013

The PunchLine...

Credit Directions

12

December 16, 2013

The PunchLine...

Credit - A Closer Look

US will end too big to fail, says Lew
Treasury secretary to press other nations to enact tougher standards

New-issue HY volume drifted lower again in November

For just the third time in 17 months, new-issue volume in the U.S. high-yield market failed to crack the $20 billion mark, though it didnt miss by much. Issuers placed $19.8 billion of new paper in November, marking the second straight monthly decline, from roughly $27 billion last month and a record $47.7 billion in September. While the lighter volume is partly due to the Thanksgiving holiday, this was also the lowest November total since 2009, and it is well below this years monthly average of $27.4 billion. Even so, year-to-date volume crossed the $300 billion threshold last month for just the second time ever, following an all-time high of $346 billion in 2012.

VolckerRulereceivesallnecessaryapprovals

CMBS issuance at highest since crisis Borrowers refinancing loans at ultra-low interest rates
AAA:gradedeflation Inahuntforyield,ratingsbecomeirrelevant EQUITY MARKETS BUBBLE UP While the recent surge lacked many aspects of a bubble there is no single industry that has captured investors' imaginationthe rally smacked of a rush to buy almost any stock to compensate for the Federal Reserve keeping interest rates so low. The 27% gain in the S&P 500 in 2013 has come even though revenue growth is seen at a little under 2% and earnings growth at 5% for the full year. Investors are simply willing to pay more for each dollar of earnings. There are more-traditional signs of froth, too. The latest Investors Intelligence poll of newsletter writers puts the percentage of bears at 14.4%, the lowest since 1987.

Borrowing money at bargain basement interest rates may seem now like a nice way to pad profits and share prices, but it may not be as much fun in a few years. Companies face three consecutive years where more than $1 trillion each will come due in the form of maturing bond issues that have been used during the free-wheeling, zero-interest days courtesy of the Federal Reserve. When that happens, corporations will have to choose between rolling over, or refinancing, debt at interest levels likely to be higher than the present day or using cash on their balance sheets to pay off their creditors.

13

December 16, 2013

The PunchLine...

Credit Matters-Know Risk

Many Excel in Strategy, Few in the Management of Risk
NEW BOOM IN SUBPRIME LENDING, TO SMALL BUSINESSES
A $330 million loan package to a small, little-known company from Missouri highlights how a new credit boom is taking shape, five years after the bubble, Lynnley Browning reports in DealBook. The company, Learfield Communications, of Jefferson City, Mo., which owns multimedia rights to more than four dozen college sports programs and which made just under $40 million last year in a common measure of earnings, borrowed the money from Deutsche Bank and GE Capital on Oct. 9. Though the loans were rated subprime, with few of the standard protections seen in ordinary debt, investors clamored to buy pieces of the loans, one of which pays annual interest of at least 8.75 percent.
Five years on, and bankers are beginning to experiment with new assets that can be bundled up and sold to investors as they rush to take advantage of resurgent demand for higher-yielding products. In recent weeks, the cash flows from US solar panel leases, singlefamily rental homes and peer-to-peer loans have all been sliced and diced into investable bonds. The experimentation with new assets follows a broader recovery in many areas of traditional structured finance. Issuance of collateralised loan obligations (CLOs), which pool together leveraged loans made to companies, has reached the highest level since 2007. Sales of commercial mortgage-backed securities (CMBS) have multiplied from $4bn in 2008 to $86bn so far this year, according to Dealogic. Critics point out that many of these new securitisations, while still minuscule in terms of volume, lack the historical performance data that would usually be used to analyse and value such deals. Some of the esoteric asset classes have long-term viability but we are concerned that some companies are trying to use securitisation too early in their life cycle, before they establish alternative forms of financing, notes Kevin Duignan, global head of securitisation for Fitch Ratings. The rapid re-emergence of more traditional types of securitisations has also prompted concerns. CLOs performed well during the crisis, however, the latest versions are increasingly composed of loans that may give higher returns but with less protection for borrowers. Sales of CLOs total $72.8bn so far this year, the highest since the $88.4bn sold in 2007, according to data from S&P Capital IQ LCD. CMBS sales have surged as borrowers rush to refinance and lock in low interest rates, prompting warnings from rating agencies, including Moodys and Fitch, that banks are loosening their corporate lending standards to drum up business. Riskier covenantlite loans, which offer fewer protections to lenders, are making up record levels of the debt packages sold to investors amid resurgent lending markets and a thirst for higher returns. Managers of collateralized loan obligations, which package up corporate loans and slice them into different tranches, have increased the proportion of riskier loans that their investment vehicles are allowed to buy to the highest levels on record.

Surge in risk assets held by US banks Structured finance investments up 45% in third quarter

US banks accelerated their purchases of structured products in the third quarter of the year, pushing their holdings of the higher-yielding assets to record levels as they seek to offset continued profit pressure from ultra-low interest rates. Structured finance investments surged to $69bn in the three months to September, according to data released this week by the Federal Deposit Insurance Corporation a 45 per cent increase on the same period last year and the highest level since the FDIC began breaking the individual figure out in 2009. The FDICs definition of structured financial products covers a broad range of securitizations including collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS) and collateralized debt obligations (CDOs). Banks have been snapping up such higher-yielding products to offset the effect of low interest rates on their bread-and-butter lending business, analysts have said.

The business development company has changed from Congress's original vision. Instead of investing in equity, the companies invest largely in the debt of private companies. Different companies specialize in different kinds of debt, but the mainstay has been mezzanine debt and collateralized loan obligations (pools of leveraged loans). This debt is often issued in connection with private equity buyouts and is of the riskier ilk

Lenders, Companies Balk at Proposed Loan Rules

Regulators Want to See More Skin in the Game
An attempt by regulators to prevent the kind of lax underwriting that exacerbated the financial crisis is running into resistance from corporations, investors and asset managers who said new rules will cripple a $300 billion market for loans to U.S. companies. Regulators want those who manage or arrange collateralized loan obligations, or CLOs, to retain some of the loans' risk on their books. Policy makers said requiring such skin in the game will ensure loans sliced, packaged and sold to investors are of high quality and help protect against default. In a collateralized loan obligation, a company that generally has a lower credit rating gets a loan from a group of banks, known as a syndicated loan. CLO managers buy pieces of these loans, pool them together into a CLO, and then sell slices of debt to investors based on different risk and return profiles. CLOs are the second-biggest source of financing for syndicated loans, which provide nearly $2.8 trillion in financing to U.S. companies. Investors are lured to CLOs as they typically offer higher returns than corporate bonds and other loans.

14

December 16, 2013

The PunchLine...

A New Geography of Business

The recent deterioration in investor sentiment towards emerging markets (EMs) has highlighted vulnerabilities associated with foreign capital inflows and financial sector openness. The sell-off in foreign exchange and bond markets in many Asian and European EMs, and the deleveraging by foreign parent banks in several countries in Central and Eastern Europe (CEE), have spawned an intense debate about foreign participation in developing economies' financial systems -- particularly in those countries with weak economic fundamentals which are more susceptible to capital outflows.

Brazil raises benchmark rate to double digits

Central bank extends worlds biggest tightening cycle Brazil fights protests and inflation with rate rises

Brazilian Economy Contracts More Than Expected In Q3

Annually, GDP increased 2.2 percent in the third quarter, slower than second quarter's 3.3 percent growth.

Chile, Peru and Colombia lead growth in Andes region

Peru still the star of Lat Am but policy makers want more Perus middle class prospers - - Economy forecast to grow 5% this year, outstripping the region
Indias industrial production decreased at a fast pace in October, falling 1.8% (y/y), after increasing in the previous two months. Driving the decline in industrial production, mining output contracted 3.5% (y/y) and manufacturing production decreased by 2% (y/y); while electricity production increased by 1.3% (y/y). In the April-October period, industrial production was unchanged compared with the same period last year.

Political turmoil in Ukraine has driven its CDS spreads to the widest levels in almost four years as the government resisted calls for it to step down. A no-confidence motion was defeated in parliament, meaning that the government survives to fight another day. But the protests that began a week ago prompted by the government walking away from a deal for closer integration with the EU -- show no sign of dissipating. Ukraines spreads are now trading at around 1,100bps, well over 500bps wider than where they quoted in the first quarter of this year Five-year credit default swaps on the countrys dollar debt rose 21 basis points (bps) to 1,119 bps today, the highest levels since January. The yield on Ukrainian sovereign dollar bonds due in 2014 climbed 75 bps to 10.15%. It has been reported that Ukraine needs at least $10 billion of external funding to avoid possible default.

Japans salaries extended the longest tumble since 2010, increasing pressure on household finances as inflation begins to take root.
China's state sector braces for creative destruction
The detailed policy document published after the Communist Party Central Committees Third Plenum (912 November) contains a raft of decisions that lend substance to the Xi Jinping leaderships pledge to deepen and accelerate economic and social reform. The Resolution on Certain Major Questions regarding Comprehensively Deepening Reform (hereafter Resolution) explicitly states Xis commitment to marketorientated economic reform and qualified social liberalisation. It contains an impressive range of policy proposals, which, if successfully implemented, will transform Chinas social and economic landscape.

Mexicos two biggest political parties are moving to open up the oil sector. Voted to to break the nations 75year oil monopoly by amending the constitution to allow production sharing contracts and licenses for outside producers.

Threat of instability remains after Polish reshuffle

The extensive cabinet reshuffle announced by Prime Minister Donald Tusk on November 20, which included the dismissal of veteran Finance Minister Jacek Rostowski, is designed to boost the flagging popularity of ruling Civic Platform (PO) ahead of European Parliament (EP) elections in May 2014 and Poland's own parliamentary elections in September 2015. Tusk has replaced Rostowski with a well-respected bank economist, Mateusz Szczurek, with a mandate to make use of the increased fiscal space created by the recent pensions overhaul in order to help stimulate growth. PO faces mounting opposition from the right-wing Law and Justice (PiS) party, which is leading in the polls and may yet win the 2015 election.

Russia Slashes Growth Forecasts Again

Russias Economy Ministry slashed the growth forecast for this year on weaker outlook for consumer and investment demand, Russian news agencies reported Gross domestic product is expected to grow 1.4 percent this year, the staterun ITAR Tass news agency quoted Economic Development Minister Alexei Ulyukayev as saying on Tuesday. Earlier, the ministry had forecast 1.8 percent growth for this year.

Russia's narrowing output gap will constrain growth

Russias economic growth has decelerated in the first three quarters of 2013, with GDP expanding well below government and consensus projections. Normally, a slowdown would be accompanied by a rising output gap, as spare production capacity increases. It would also include an increase in the unemployment rate and declining inflation. However, Russias output gap is close to zero, indicating that production capacity is fully utilised; unemployment is very low and inflation is somewhat higher than last year. These indicators are not usually associated with a rapid deceleration of growth. Until recently, considerable spare production capacity and strong energy prices enabled growth, even with low productivity and insufficient investment. Now, since the narrow output gap suggests that virtually all existing production capacity has been utilised, new investment is urgently needed to avoid a prolonged economic slump.

15

December 16, 2013

The PunchLine...

Deal or No Deal in Europe?

The May 2014 European Parliament (EP) elections will mark a significant departure. While many in the parliament hope to turn the elections into a contest for control over the European Commission, German Chancellor Angela Merkel has indicated that national leaders (who make up the European Council) may resist allowing the outcome to determine the selection of the Commission president. Meanwhile, the EU's new euro-area governance will be tested by national governments, and leaders will face fateful choices about the next stage of a banking union against a backdrop of new ECB-conducted bank stress tests. The European Central Bank issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve tapering. The ECB added that the recent turbulence meant that policy makers needed to ensure banks, insurers and pension funds could cope with a normalization of yields from their current historically low levels. Stable and predictable macroeconomic policies by member states, as well as measures such as the ECBs forward guidance to markets and the public on interest rates, would help smooth the exit from central banks exceptional monetary easing without an abrupt rise in global bond yields, the central bank said. In the latest edition of its twice-yearly report, the ECB said risks of turbulence from within the euro area had receded since its previous report was published in May, despite the turbulence caused by the Fed chair Ben Bernankes comments that the US central bank would begin to cut back on its bond buying once the worlds largest economy neared a full recovery. The ECB said weak bank profitability and persistent financial fragmentation still presented a threat to stability. Banking union would be an important contribution to resolving these hurdles.

Swedish Housing Surges to Unsafe Value as Debt Soars Paris Office Market Wilts to 10-Year Low as Taxes Crimp Spending
Non-bank lenders step up UK funding deals Funding by alternative lenders, which allows companies to sidestep banks, has grown rapidly in the UK this year, according to a survey released on Tuesday that showed a rush of lending activity in the past few months. Since October last year, alternative non-bank lenders debt funds financed by institutional investors took part in 55 deals with mid-market UK companies, said the survey by Deloitte, the advisory group. Of those, 24 were in the three months to September this year. Ultra-low interest rates have left institutional investors chasing yield and as a result the European leveraged finance mid-market is moving towards a US model, said Fenton Burgin, head of UK debt advisory at Deloitte.
Banks' Troubles Echo Across Italy
The financial woes of smaller Italian banks are leading to cuts in lending that are hammering businesses, while communities contend with lost jobs and reduced charitable donations.
Ireland has endured a torrid few years since the onset of the financial crisis, but it took a major step toward stability today. The government confirmed that it would exit the EU/IMF bailout on Sunday, making it the first peripheral country to emerge from an international rescue package. Whats more, it is making this important move without the safety net of a precautionary credit line from the European Stability Mechanism (ESM).

The Netherlands dropped out of the exclusive club of "AAA" rated countries after Standard and Poor's agency downgraded it to "AA+", citing weakening growth prospects. The surprising downgrade leaves only three remaining countries in the 17-nation eurozone with the coveted top rating from all three of the world's major agencies. S and P on Friday also upped Cyprus' long-term rating to a B- and improved Spain's BBB- negative outlook to stable.

The combination of relatively favorable market sentiment and gradual economic recoveries, supported by accommodative monetary and fiscal policies, should allow Central Europe (CE) to manage fallout from the US Federal Reserve's planned exit from its program of quantitative easing (QE). While a renewed flareup of the crisis in the euroarea remains a key risk, countryspecific vulnerabilities, particularly with regard to the cleanup of Slovenia's banks and the overhaul of Poland's privately managed pension system, are bigger concerns. Hungary's parliamentary elections in April could also prove to be a focal point for market anxiety

Several issues are becoming increasingly salient in Russian politics ahead of parliamentary and presidential votes in 2016 and 2018. They include presidential succession and the manoeuvring between rival camps; the strategic electoral choices made by the Kremlin and opposition forces, which will become evident in regional elections over the next year; and the Russian economic slowdown, which could have far-reaching consequences for the leadership.

16

December 16, 2013

The PunchLine...

Pumping Iron - Old Economy New Challenges

Farmers Hoard Corn as Prices Drop

Faced with the lowest corn prices in more than three years, many U.S. farmers are stashing away their grain in a bet on a rebound. The strategy is sending ripples through the corn beltaffecting everyone from grain buyers to storage-bin makersand tempering the price declines in the $27 billion corn-futures market.

The U.S. oil boom will vault the country into first place among crude producers within two years, the International Energy Agency says, which will pose a stiff challenge for the Canadian energy industry as it faces rapidly declining American demand for imported oil.
Lumber prices are getting chopped after notching seven-month highs, as the market hunkers down for a seasonal decline in construction and expected higher production next year. But demand for U.S. boards and planks from China, Japan and the Caribbean to structure home interiors and to build shipping pallets and furniture is expected to keep the market from a deep slump. U.S. lumber exports overseas have grown sharply, rising 22% in the first nine months of this year from the same period a year ago, to 701 million board feet. China, which accounts for 35% of the U.S.'s offshore exports, increased its purchases in the same period by 67%.

The commodity slump that spurred bear markets in everything from gold to corn to sugar this year may still deepen

17

December 16, 2013

The PunchLine...

The DNA of Business

Workouts to Define Recovery

Companies looking to put cash to work could boost the climate for deal-marking in 2014. Dow Chemical Co. said it is exploring a possible sale or spinoff of its commodity chemicals businesses, in a continuation of the company's push to refocus its efforts. The assets include about 40 manufacturing facilities at 11 sites and nearly 2,000 employees, accounting for up to $5 billion in annual revenue.

Televisions hold on advertising budgets is beginning to falter, with forecasts indicating its share of global advertising is to peak after three decades of growth. Television is expected to capture 40.2 per cent of the $532bn global ad market in 2013 before falling to 39.3 per cent of the total market in 2016, according to Publicis ZenithOptimedia. WPPs GroupM is also predicting that TVs share of the global advertising market will decrease slightly in the coming year. The transition is the result of digital media chipping away at televisions dominance amid broader upheaval in the industry. ZenithOptimedia forecasts that the internet will boost its share of the ad market from 20.6 per cent in 2013 to 26.6 per cent in 2016. Within that category, mobile advertising will grow by an average of 50 per cent a year between 2013 and 2016, contributing 36 per cent of extra ad spending. TV will account for 34 per cent of new ad spending, with newspapers and magazines declining by an average of 1 per cent and 2 per cent a year.

Steel Giants to Buy ThyssenKrupp's Alabama Plant US coal-fired power sector will decline, not disappear
The change in Senate filibuster rules last month is the latest sign that President Barack Obama's second-term agenda will flow from executivebranch regulations, rather than new legislation. One key plank of the White House's climate change plans is the Environmental Protection Agency's (EPA) proposed coal power plant regulations, released in September. This coincided with major US energy producers preparing changes to the resource mix of their electricity generation portfolios. For example, the Tennessee Valley Authority (TVA) announced in November that it will close eight coal-fired generation units -- representing nearly 20% of its total coal consumption -- and will ultimately drop its resource mix from 38% coal-based electricity to 20%. The change occurs against the backdrop of flat or falling electricity demand in regions within the United States.

18

December 16, 2013

The PunchLine...

Real Estate and Construction Outlook

Overseas Money Pours Into Miami Real Estate

Condo Development Surges Again as Foreign Buyers Stoke Demand

19

December 16, 2013

The PunchLine...

More Construction Views

20

December 16, 2013

The PunchLine...

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.

21