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Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.


You don’t hear nearly as much about Dell anymore. Going private has that effect and that is what Michael Dell executed in 2013, along with partner Silver Lake who own approx. 25%.

Shaky debt markets argued for patience from the leads (BAML, BARC, C, CS, GS & JPM), but time was likely getting tight for Dell to raise the debt portion of the funding for their Oct. 2015 purchase of data storage firm EMC. Hybrid cloud, Dell is back baby.

In the end, the bond deal sold like hot cakes. Structured as a secured deal, with a 1st lien on certain company assets, the rating will be Baa3/BBB-, investment grade, just. On loss of investment grade, Dell agreed to spread “kickers” of 25bp per notch up to 200bp to allay investor concerns that the cloud they have hitched themselves to might be too Icarus like, in term of proximity to the sun.

At 20 yards this is a big deal, the 4th largest corporate bond ever (combined debt for Dell now just shy of $50bln) and the 2nd largest for 2015, overtaking Apple’s & Exxon’s $12bln deals to leave only AB InBev’s $46bln in #1 spot. The order booked topped out at $87bln for an upsized $20bln of bonds ($16bln initial size target, included an FRN which was subsequently dropped).

$3.75bln Dell (Baa3/BBB-) 3 year Fixed at US Teasuries (UST) +250bp, $4.5bln 5yr fixed @ UST +312.50, $3.75bln 7yr fixed @ UST +387.5, $4.5bln 10yr @ UST +425, $1.5bln 20yr @ UST +550, $2.0bln 30yr @ UST +575.

With the 30 year UST yielding 2.60% this makes the all-in yield on the longest and hence priciest tranche 8.35%, as long as the Baa3/BBB- rating are maintained.

Unsecured there were thought that Dell would have to pay 10-11% only a couple of short months ago, at the worst of it for credit spread, when BBB spreads were treble what they are today. Timing, check. Financial alchemy, indeed. Far out.

The structuring flexibility of being a private entity is likely to elicit some jealousy from certain gas & oil and pharma/biotech names. M&A for public entities is having a tough year with many pairing left at the altar or annulled . Going private is likely to become a much more popular avenue to creating shareholder value. As the stock of listed equity is reduced there is obviously less of it, all things being equal, causing priced to rise. The natural order of things, positive, normal, upward sloping. Gauge, and position, yourselves accordingly. JCG


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Note: Now that is a selfie; risk aversion in Europe is low, apparently…more Dom Perignon svp, aviation garcon.

The contrarian in me is keeping an even keel and a steady hand on the wheel, longer of equities than I have been for some time. Europe weighted, mind you (unhedged as to currency, at least for now). The same twitchy feeling that prompted me to go  long of gold miners in late November 2015. The key is to let the winners run,which I’ll give myself a B- on (+34% before switching to European equities mid February 2016).

On the bond side, the US remains a global “high yielder” with the 10 year UST at a 1.76% yield. A slowing pace of Treasury Bond issuance, coupled with budget surpluses, should allow rates to remain “contained”. Equity markets do not normally “turn tail” until 18 months after the 1st rate hike by the Fed and unlike former business cycles where the pace of rate hikes was underestimated by Fed Fund futures, most expect a more measured withdrawal from the methadone clinic this time around, with the potential for monetary “throttle steer”, where rates are potentially eased within a longer, flatter tightening cycle. The US 2-10’s curve is clearly flattening, but not by an absurd amount in relation to the modest absolute anchor rate levels in both maturities.


The big boogie men worrying global investors are more ,”in the tails”, than the market is giving them credit for, in my view:

Brexit is far from a coin toss, 70/30 worst case, in favour of  the stay camp. From a statistics perspective on a 1-tailed basis (i.e. measuring on the negative outcome tail only, exit the EU), Brexit has a 0.15% “level of significance”. Not to be ignored, but not to be all consuming, West Ham bus incident negative either.

Ditto outcome and math for Trumpanasia, more feared than Zika across the land. Not a likely event that Trump gets beyond the GOP nomination in my view (non-voter, pure armchair view). Hillary looks largely unbeatable, despite the theatrics playing out on your TV.

China. Large, complex, multi-variate. A US$10 trillion dollar economy (2nd largest globally) is far from a 1 trick pony. The US Dollar’s viagra wore off just long enough for the Yuan to regain it’s footing and for the pace of Chinese fx reserve depletion to be curtailed. Time, and time alone, can cure many ills. A 2016 China hard landing is all but off the table.

I see in my crystal ball 2,250 at 2016 year end, with the S&P underperforming other major global indices, save Japan (ex Japan Mothers Index which will outperform). Soros (85), reducing his fund’s equity beta by 37% via S&P puts (on China fears) makes me even more convinced that we rally from here.

Pharma is a strong candidate lead from here in the high beta category. Financials seem destined to lag, still recovering from both gout and the food poisoning inflicted by their governors. JCG

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It was a very big week for South East Asian politics.

Filipino Rodrigo (aka “Rody”, “Punisher”& “Digong”) Duterte (71) is the presumptive 16th President elect of the Philippines. Washington broke protocol, offering congrats to Duterte for the win on Thursday, even though an official winner has not been declared for the Monday May 9th General Election. The White House is  looking forward to deepening ties with Rody’s incoming administration.


Time magazine reserved considerable space to Duterte this week, calling the Punisher “A wildcard in a pack of World leaders”.

Spanish rule of the Philippines ended in 1898 when it was ceded to the USA as victor of the Spanish-American war (US got the peach pit Puerto Rico as a result of the same conflict). Independence was eventually granted to the Philippines July 4, 1946 by the US, when Rody was a 1 year old. The Japanese briefly took control of the Philippines during World War II (1942-1945).

The Philippines has a population of 102 million (12th largest globally), with 12 million (12%) living in what Duterte calls “Imperial” Manila (he is the 1st President from the southern island of Mindanao). Per capita GDP is $2,800 ($233 per month). Duterte, a self described socialist, plans on changing the form of government from unitary to federal to facilitate more effective wealth distribution across the country. Manilla gets too much at present, in Duterte’s view. Wealth is highly concentrated in the Philippines, with the top 40 families controlling approx. 70% of its US$272bln GDP. Surprisingly, the GINI coefficient, a measure of the divide between the rich and the poor, based on income distribution, is not that much higher than the US (or Russia for than matter). Philippines GINI # is 43 to US’s 41.6 and Russia’s 41.1 (Canada is 32, as an aside).

Some liken Duterte to Donald Trump as well, Asian Trump as it were, but our collective hope is they never get a chance to joust. Duterte got over 3 million “likes” of his Nov. 15′ Facebook announcement that he planned to run for President (Twitter is not as big there where he has only 82,700 followers). It is said diplomacy is about saying “nice doggy” until you can reach a bigger rock. Duterte is no bark, all bite. He wants to reinstate capital punishment in the increasingly lawless Philippines and expects they could send over 100,000 criminals to meet their maker with the death penalty freshly restored. Human rights groups have noted the practices of the vigilante group Davou Death Squad (DDS) which have passed extrajudicial judgement on between 700-1,700 alleged criminals under Duterte’s watchful eye as mayor of Davou City, formerly the murder capital of the Philippines. Open water allows little reprieve as the waters between Mindanao and Papua New Guinea are the 2nd most pirated in the World (Somali #1). Rody is currently Vice Major of Davou City, the Philippines 3rd largest city, with his daughter now in the Mayor role. Unlike Clint Eastwood who served as Mayor of Carmel, CA for only 2 years, Duterte served for 21 years and he is the first lawyer/politician to become President directly from a City Mayor role. Duterte, like the majority of Filipinos, a Catholic (although he recently literally cursed the Pope and had to issue a formal apology for it). He will officially enter the role of President as “single”, the 4th Philippine President to do so, as his common law spouse Honeylet (real knickname)  Avancena (46) can not officially act as First Lady, a role one of his daughters, Inday Sara will likely assume. The books on Duterte can almost write themselves, even before he takes the “Big Boy seat”. Some facts are hard to get confirmed, such as Rody spending 7 years in high school. A Bachelors Degree in Political Science followed by a Law Degree made those raucous teenage years a distant memory, I suppose.

Hillary has put her self in an admiral position, having kicked her “high touch” Asia pivot into high gear as Secretary of State, which included 2 trips to the Philippines (pic below of Cook Islands visit, a good shot of her I thought….hag).



The US recently had plans for a military drone base on Duterte’s home island of Mindanao (at the former Davou City airport), but Rody squashed the idea quickly and decisively. The US have not had a permanent military base in the Philippines since 1982 but they do cooperate with the Philippines on joint patrols in the South China Sea where Rody wants to show support for Palawan fishermen who have apparently been subjected to Chinese bullying (think naval bumper cars) . The Philippines has traditionally been one of the US’s strongest allies in South East Asia.

The President of the Unites States is also Commander in Chief, the role has never been more important. The Department of Defence (DOD) is the world’s largest employer at 3.2 million. There are US military personnel deployed in 150 countries at present (75% of World Nations). It has been reported that no military in the history of mankind has been deployed more widely, including Byzantine, Ottoman, Roman & British empires. China’s PLA employs 2.3 million in comparison, supporting 4x the population.

The recent activity in the South China Sea, with China asserting territorial claims and even going so far as to build new islands, has brought most to upgrade the geopolitical risk for Asia. Duterte’s election has likely resulted in the meter moving just a little bit higher.

Filipinos love the US and have a record high 92% favourable rating (World’s highest rating as per PEW report). Duterte, not so much. Stories attribute his distain to a 2002 incident/explosion in Rody’s home town of Davao City where an American involved was allegedly “sprung” by US Federal agents (extra Bourne Identity). Politically, Duterte is likely feeling the Bern right about now. Rody is tough on both crime and corruption and will likely have a dim view of the >$153 million (729 appearances at $210,000 a crack) the Clinton’s have extorted extracted on their combined speaking tours, through the piece. Duterte reports a net worth of PHP 23 million, US$483,000 (2.3 speeches) and has lived in the same modest house for over 2 decades.


The Philippines is solidly investment grade at BBB/Baa2. Duterte’s 8 point plan is well thought out and has a good chance for success without unduly increasing debt as a % of GDP (an admirable 45% at present). Key points include a plan to spend 5% of GDP on infrastructure. Manila is probably 2nd to only Jakarta, Indonesia in the region in terms of the grid lock evident. Promoting foreign direct investment is another key arrow and the Philippines is a stand out in sectors like Banking where 100% foreign ownership is now allowed (for up to 40% of the overall market, hence 1st mover advantage is important). It is too bad that most banks with former global aspirations have befallen “pockets inside out” syndrome and are shedding non-core assets. The Japanese mega banks are circling, as are the Chinese. The Philippines are mowing India’s grass in the call centre space with a tremendous percentage of new contracts being awarded to the Philippines. The chameleon like ability of Filipinos to take on regional accents with a smooth as silk demeanour is paying dividends.


The tone set by the diplomatic relations between the US (Clinton) and the Philippines (Duterte) has broad implications beyond the noted geopolitical ones. The spend on infrastructure will be massive and US companies should be at the fore (equipment, engineering services, etc.). The Philippines is a highly mineralized nation with largely untapped resources worth $840 bln to $1.4 tln. Global (US) firms will be key to ensuring the mistakes of yesteryear are not repeated and that opportunities are prioritized to the benefit of all parties, while minimizing the impact on Mother Earth.

Pinoys around the globe are watching developments closely. 10’s of billions of dollars are repatriated to the Philippines by foreign workers every year to support their extended families back home. Canada is a favorite destination and 25,000-30,000 Filipinos immigrate to Canada per annum (>700,000 live in Canada, making up > 2% of the Canadian population versus 3.4mm or 1% in the USA). The love fest was marred last month when Canadian tourist John Ridsdel was brutally beheaded after ransom demands from Abu Sayyaf (generation jackass jihadist sect), a small extremist Muslim group trying to finance a muslim foothold in Catholic dominated Philippines via kidnapping, were not met ($60mm per head demanded in this instance). The regional hot spots in terms of muslim extremism within South East Asia remain Indonesia and Malaysia, as both are home to muslim majorities in terms of populace. 14% of the Philippine population is muslim versus 62% for Malaysia and 88% for Indonesia.

Foreign direct investment is perhaps even more important in the early innings, but the comfort foreign investors have with investing in non-Japan Asia public equity markets is also key. The developing markets of South East Asia are growing at 5% +, a full 3% advantage to developed markets. Most are highly oil dependent with oil < $50 barrel giving most an incremental 1-1.5% lift in GDP.

Ferdinand Marcos ruled the Philippines from 1965-1986, under Martial Law as a Dictator for the years 1972-1981. First Lady Imelda Marcos was once quotes as saying, “I do not have three thousand pairs of shoes, I have one thousand and sixty.”

Going forward, much depends on the success Duterte has in elevating the Philippines to a higher, more equitable, plane. Like it or not, he has inserted himself, via a democratic election, as the weathervane for South East Asia investor sentiment. Watch this space. JCG

Follow me on twitter: @firehorsecaper

I’m a TWTR shareholder too, although I sold covered calls as a hedge, hence not fully committed.



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If they ring a bell at the top of the muni bond market, this muni bond issue will be the poster child. Muni investors have long been considered the “C students” of Wall Street, but even for them, this may be too much.

McKinney ISD (Independent School District), Texas just voted yes to a new $220mm tax exempt bond issue which will help finance a $72,800,000 football stadium for their high school, yes their high school. Even though MISD is projected to grow by a scant 71 students (net) per year over the next 5, it has been determined that this all makes abundant sense. Most sane voters (Grassroots McKinney) would squash such financial folly, but the proponents of the deal, labelling themselves “Vote for McKinney’s Future” included the $50.3mm of “new” stadium earmarked money ($10mm was previously spent for the land and $12.5mm of debt was raised a full 16 years ago for the stadium) into a larger debt deal with sensical use of proceeds as a means push through this farcical stadium plan. The only way this could be more emblematic of the funk taking place in US of A is if it carried the name TRUMP stadium. A 10 year stadium naming rights deal could at least have resulted in some savings versus the ridiculous budget  for this open-air teenage concussion petri dish.


Note: artist rendering of the new 12,000 seat McKinney high school football stadium.

This is far from an isolated case. Allen ISD is only a few miles away from the planned McKinney stadium, seats a much larger 18,000 and was built for $60mm (bargain). KATY ISD (near Houston) is in the final throws of approval for their very own $62.5mm cost, 12k capacity high school football stadium. The KATY ISD was established in 1898 and includes 60 school with a total annual budget of $785mm. KATY is ranked 13th place within Texas. One would think a top 10 academic placement might be a pre-requisite for spending $50mm+ on a stadium for a non-pro sport, played by teenagers, that may well be extinct or highly amended a decade out (watch the film Concussion, circa 2015).


The US muni market is immense at $3.6 trillion and as with the Federal debt tally, much has been issued in the last couple of decades. In 1945 there was $20bln of muni debt, in 1960 there was $66bln, in 1981 there was $361bln and now we sit at $3.6 trillion.

Texas is a AAA/Aaa rated state. KATY ISD is rated Aa1/AA stand alone, but as with many muni issuers they often procure credit enhancement to get to AAA/Aaa ratings (saves on interest cost for timid muni bond investors that love the idea of a AAA/Aaa rating). The point here is debt is not free. Even if McKinney can get their debt deal done in the mid 2’s, that is still $5.5mm of interest per annum, enough to pay 150 Texas 10 year tenure teachers ($37,000 per teacher). The right be be able to issue debt on a tax exempt basis is a powerful right, in and of itself. Most of the holders of muni debt are the wealthy, the top 10% of taxpayers, with a big concentration in the top 1% of taxpayers. A seemingly paltry 2.5% tax exempt yield is much more attractive when converted to a taxable equivalent basis (TEB) = 2.5% / (1 – marginal tax rate). The 1% are taxed Federal at 39.6% at the margin. There is a 3.8% tax on investment income to pay for Obamacare, but muni interest is exempt making 2.5% tax exempt equivalent to 4.42% on a taxable equivalent basis.

These silos of affluenza are not sustainable, full stop. The World is watching. Smaller government will be a necessity going forward. It will start with towns, which will share essential services (police, fire, education, health care …. high school football stadiums) skimming 20-25% of the bloated unpaid  bar tab for pension and OPEB (Other post employment benefits). Prudent investors should brush up on their Ch. 9 Title 11, Authorization for municipal bankruptcy knowledge. State amalgamation will follow within a decade. We can have a naming competition on the new name for Maine/New Hampshire/Vermont, followed by Washington/Oregon, North and South Dakota, etc.

Each $500bln of frivolous muni debt represent a huge  opportunity cost for the US government. With a weighted average (current) coupon assumption of 2.5% and a marginal tax rate of 39.6% (+3.8% Obamacare tax levy on investments) the Federal tax leakage is 5.4bln (12,500,000,000 of interest income taxed at 43.4%) per annum. Texas has no State tax, the opportunity cost is even higher in the high State tax states like NY and NJ.

All this is happening at a time of near unparalleled uncertainly (GFC aside, but that is a much longer blog …. AIG bailout, TOB – Tender Option Bond Programs, aka “Tons of Blood”, global arbitrage of the steepness of the US municipal interest rate curve gone awry). Puerto Rico (PR), which I have recently written on, will be restructuring their debt, as soon as legally feasible. PR defaulted last week on a large slug of GDB (Government Development Bank) debt. PR’s benchmark 8% 35′ GO’s (General Obligation bonds, top of the food chain from a “priority of payments” perspective) ,are yielding > 13% tax exempt this week (23% + on a taxable equivalent basis even as a Texas taxpayer).

The Federal stance on the PR pension plans will be precedent setting for the woefully underfunded US States. Illinois has the worst pension in the nation (funded 40 cents to the $1), aside from the non-state bastard PR (sub 10 cents funded on a blended basis). IF we see an insolvency at the state level in the next  decade it will be Illinois.

More than 45,000 students in Detroit missed school for a couple of days this week due to the “sickout” staged by teachers, embroiled in a strike. Detroit was the largest city bankruptcy in US history, July 2013 ($19bln).

Something is rotten in the state of Denmark (Shakespeare). JCG

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Some sectors within Japan are hot, which one would would not know if following only the popular “sky is falling” press. The traditional widow maker trade, short JGB’s, has gone exponential grim reaper on the NIRP holo-deck. The benefits effects of being a creditor nation, where less than 10% of JGB’s are held outside of Japan (i.e. no weak hands) I suppose. The same calculus make NIRP of limited value for a market rabid for a means to increase the resting heart rate of a market comatose for 25 years running.


Arguably the largest ever financial bubble (in relative terms) was pricked in 1990 in Japan. Japan grew GDP at an annual rate of 10%+ every year from the end of World War II until the late 1980’s. It was real estate fuelled at its terminus, and the exponential momentum was awe inspiring in scale. On paper, Tokyo’s Imperial Palace (280 acres, 35% of New York’s Central Park’s size) was worth more than the State of California in 1989. As an expat in Tokyo you had to hold up your fingers to indicate how many times the stated fare you were willing to pay a taxi to have a shot at getting service.

The short JPY trade has been hurtful in 2016, but at 106.93 versus the USD at the time of print, not yet lethal (70?). Japan equities, on any metric except the Mothers Index (TSEMOTHR:IND, up 33.1% ytd) have been scornful as well, especially for those currency hedged exposed via ETFs like DXJ. The JPY is a barometer of risk appetite for certain and tethering the generic Japan equity index to the inverse currency move has served to be the equivalent of a levered ETF product, appropriate (perhaps) for a trade view measured in days, not weeks (ice pick) or months (amputation).

A trade worth revisiting is Japan is real estate. Japan is a very mountainous nation, with only 15% of the land mass habitable. A goodly portion of arable land is sequestered for agriculture, with rice being a key staple for the Japanese to maintain self sufficiency in. An urban myth is that there is no daylight savings time in Japan because the famers successfully made that the case that milk cows do not produce as much milk when the clocks are adjusted.

The standard unit of measure for land in Japan is a tsubo which measures 3.3 square metres (35.5 sq. ft.), about the size of a queen size mattress. A standard building lot in Japan is 50 tsubo or 1/25 of an acre. Less than 20% of the land in Japan has ever changed hands with families having owned their respective plots for 100’s of years. With respect to landed housing (freehold), all of the value is attributed to the land and upon sale it is generally expected to be delivered vacant. The “penalty” for disposal cost, depending on lot size and other variables can run US$200,000+. Most of the real estate in play is prime condo (freehold) stock. Individual room sizes are measured in Tatami mat (33.5 x 70.5 inches) metrics, further complicating the math for the Western brain. 6-jo is a standard sized bedroom and 14-jo is a standard living/dining space.

Quirks aside, many are bulled up on Japan residential real estate and place Japan as the #1 market for your investment dollar within Asia Pacific. I would argue the scope can be expanded to a Global metric on a relative value basis (valuation/yield driven):


Note: PwC / ULI 2016 survey results.

For many, Japan and Tokyo are terms used interchangeably. There is good reason, as Tokyo is the most populated metropolitan area in the world at 36.9 million people. A full 29% of Japan’s entire population lives in Greater Tokyo. Other Japan markets worth a gander include Osaka, Nagoya and Fukuoka, but much of my comment will be on the merit of the Tokyo market. You can buy more real estate in an afternoon than you can sell in an lifetime is a great adage to keep in mind. Bespoke plays should likely be left to specialist players with local market knowledge.


I would be remiss without covering this facet of the argument. By the year 2070 apparently there are only 9 Japanese people left on planet Earth? The actual stats are not as bad, in reality, with all developed markets trending in a similar fashion. That said, the working population is Japan is small and shrinking. 26% of the population are > 65 and 13% are < 18 leaving approx. 61% to “pull the economic plough”. The working population in Japan is estimated at 65,000,000, of which 1.4% are foreigners (910,000). Let that sink in for a moment, Japan is 99.3% Japanese. When I lived in Japan in the late 1990’s there were about 500,000 foreign workers, hence Japan was 99.6% Japanese. The foreign work force has spiked 40% since 2013 with a full 1/3 from China, followed by Vietnamese, Filipino and Brazilian skilled workers. Brazil would likely be the only surprise for most, but Sao Paulo, Brazil is home to the largest Japanese population outside of Japan. Over 250,000 Japanese have emigrated to Brazil since 1908 (migration briefly interrupted by World War I & II) with the population having expanded many fold since.

A more typical percentage of foreign workers in a developed nation such as Japan would be 5% of the workforce which leaves the potential for 2,300,000 incremental foreigners to enter Japan over the coming decade(s). Japan is clearly a good global citizen with respect to global aid (few are more generous), but there is no refugee intake into Japan and only skilled workers make the grade on visa entry.

Japanese labour demand sits at a 25 year high since Abe took office in Dec. 12′, driven by rebuilding from the 11′ tsunami and the construction mini-boom from the upcoming 20′ Olympics.

Japan may be relatively bold and wrangling (top 10% holder of a full 90% of the stocks listed on their main stock exchange) with respect to their quantitative easing program, but on a relative basis they have kept their healthcare costs in check as a nation (7% below the OECD average for an excellent standard of care). Healthcare as a % of GDP is still below 10% in Japan versus 20%+ for the USA where 65% “pull the plough” (versus the stated 61% in Japan).




Even though the Japanese are not replacing themselves from a mortality perspective, subtle changes in the traditional family make-up favour the Tokyo residential real estate market. Occupancy rates are currently > 90%. The family unit used to be more extended, with parents and grandparents under the same roof. These days, the family unit has shrunk to encompass the direct family unit solely, in many cases with that unit closer to the core of Tokyo. As with other developed markets, millennials are getting married later in life, but instead of staying with their parents until married, many young professionals (increasingly women) are moving to more central Tokyo housing on a rented basis (paying full freight). These collective trends have average condo valuations back at 1992 levels (approx. US$474,000), two years after the noted blow off top in 1990.



Fees, on balance, are reasonable in Japan. Closing costs are on the high side at 7-8%. Build quality is top notch (must be earthquake resilient to pass code).

Cap rates, the ratio of net operating income to value, are running in the 4% range for prime residential Tokyo, which on a leveraged basis can net 8-10% for investors. Typical loan to value has dropped to 60-70% versus upwards of 90% pre 07′. Mortgage rates have never been lower. Variable rate mortgages can be procured at 0.6%, 10 year at 1.05%, 20 years at 1.25%, 30 and 35 year terms at 1.8% and even 40 years at sub 2%.

Near term catalysts:

While not as marked as a Russia or Brazil olympics prep, the opening of the 2020 olympic flower has netted much nectar. For the first time, since stats were recorded, there were more visitors to Japan than there was outward travel in 2015. 19.7 million people visited Japan in 2015, up 41% from 2014. Spending from said visitors was JPY 3.5 trillion, up 72% from 2104. Chinese mainland shopping binges, termed “Bakugai” (explosive Chinese shoppers) made up a full 1/4 of the total sales bounty.


In prep for the Olympic games, over 10,000 bilingual signs are being erected to aid foreign travellers. Rules at Inns (Ryocans) are being relaxed to allow guests with tattoos to enjoy the natural hot springs that Japan boasts by the 100’s. Traditionally, only the yakuza (Japanese mobsters) sported ink in Japan and they politely deem tattoos as “unclean”.

International resort legislation. The only legal gambling in Japan at present is horse racing, but many expect broader approval over time.

The Japanese government has become pro-business . As with the stealth immigration stance pivot, such policies can have resources redeployed at the margin.

The negatives are nearly innumerable, which is part of the attraction. Demographics. The failure of Abenomics (12-18 month average tenure at the top, hence Abe is Cocoon like in his longevity). Earthquake risk. Nuclear containment (Fukushima) influence on proximate food supply and general health over decades of exposure. Post Olympics swoon expectations.

While Japan recently rated 56th on a global “happiness scale” for the Japanese, most foreigners I have known that lived there loved it and rank it near #1 within Asia (can’t get the smile off their face with a brick happy). While it appears the ship has sailed with respect to Japan as a regional financial centre (current ranking London, New York, Singapore., Hong Kong followed by Tokyo), there is much to like. Climate (ex August), food, safety, service, and unique experiences like no other available on planet Earth.

Ways to play:

The WisdomTree folks run DXJR a modest sized (sub $200mm)  ETF which hedges Japan real estate exposure back to USD basis. While a stinker ytd, contrarians might want to give it a scrub. Down 6%+ ytd.

RWX – SPDR Dow Jones Intl  Real Estate ETF (2 of top 10 holding Japanese), $4.8bln AUM , MER 0.59%, ytd up 8.7%.

VNQ – Vanguard Ex-US Real Estate ETF (3 of top 10 holdings Japanese), $3bln AUM, MER 0.25%, ytd up 7.1%.

Direct – Bespoke property in Japan. Financed in JPY (i.e. short JPY), down payment hedged (JPY upfront).

Personal carry trade – Finance foreign domiciled property with a JPY denominated mortgage. Common on the Continent pre GFC. Spotty availability expected in the current environment.


Disclosure: Vetting Setagaya( Tokyo suburbs) for potential mid 2017 move. Reported stat are in line in terms of cost and terms.


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I last wrote about Malaysia and 1MDB’s travails in November 2015, in my very first blog post for iBC. The Malaysian Ringgit has rallied from the Q4 2015 extremes, but overall times are, if anything, more uncertain for Malaysia. For a primer, a good recap:

Malaysia – 1MDB

Given that 1MDB has now officially defaulted on a $50mm interest payment this week (Monday was the official deadline) on a 5.75% coupon US$1.75bln bond issue , I thought it might be a good time for an update. In bond investing, sometimes a law degree can prove to have more utility than a CFA charter.

In this instance, bond investors are caught in a serious Malaysian stand off between 1MDB and Abu Dhabi’s sovereign wealth fund’s IPIC (International Petroleum Investment Corporation) who provided guarantees on $3.5bln of 1MDB debt (2 x $1.75bln par amount). Sometimes, willingness to pay can be more important than ability to pay. In this instance, 1MDB felt that co-guarantor IPIC should have made the full interest payment. IPIC, for their part, declined to make the payment, noting that cross-default clauses would apply to 1MDB as a result of their inaction. IPIC have stated they will make the referenced interest payments, if 1MDB defaults, which they now clearly have. Both parties are referencing a May 2015 “Term Sheet” whereby IPIC agreed to service the jointly guaranteed debt in exchange for a payment of $1bln from 1MDB, a payment IPIC states was never duly received.

The next $52mm+ interest payment on an identically sized but higher coupon 5.99% 1MDB Energy Ltd security is  due is May 11, 2016. Note the ratings of the TIAMK 5.99% 05/11/22 are Aa2/AA, by virtue of the joint and several guarantee on the bond by AA rated IPIC and A- rated 1MDB. 1MDB have stated they are keeping their options open with respect to the May 11, 2016 interest payment. Clearly both sides have retained legal counsel. There is no morning after pill for default.

With the grace period having passed for the payment on the interest payment due Monday April 25, 2016  the clock now begins on calls for payment under the guarantee(s) which has a 10-day wick in terms of cure period. Presumably IPIC, based on previous statements, will pony up the cash required to make the overdue interest payment during this 10 day window.

JP Morgan, in the midst of all this frolic , have upgraded 1MDB Energy Ltd. bonds to “overweight” noting the IPIC guaranteed 1MDB bonds are now trading at +152bp (1.52%) wide, deemed an “excessive spread” 6.08% yield (+472 spread to UST 5yr) to IPIC’s other US$ debt with comparable maturity maturity, yielding 4.56% (+320 UST 5yr).

Not terrain for the retail investor, as sourcing bonds in block size has proven difficult, and the bid/offer spread in even family office clips would elicit alligator tears from Chuck Noris. Institutional investors only, who can cajole their tier 1 coverage into providing a sliver of liquidity in this peculiar market dare play. Unless we see a significant move in price (lower), new players will likely stay well clear of the festivities.

Goldman were the lead on US$6.5bln 1MDB bond issues, a relationship that has caused a great deal of scrutiny in and of itself (fees eclipsed $500mm). Goldman’s rainmaker, former SE Asia Chairman Tim Leissner, took personal leave earlier in 2016 (at Goldman’s request) and was soon thereafter subpoenaed by US investigators.

Malaysia’s own investigation recently cleared Prime Minister Najib Razak of wrongdoing. Numerous other global investigations are on-going (US, UK, HK, UAE, Thailand, Australia, Luxembourg and Seychelles).

A good barometer of EM sentiment, if nothing else. The sky is not falling, but lack of a speedy resolution could see the Malaysian sovereign rating downgraded as the full extent of their 1MDB contingent liability is laid bare.

Malaysia, you’re so crazy. JCG



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Lithium vs. Copper – I like Dr. Copper

Lithium is certainly the trade du jour, eclipsed only by precious metals year-to-date in terms of return. I think the lovers of “white oil”, as lithium is affectionately know, are well over their skis. A naked short is likely ill advised given the robust current fundamentals for lithium, but as a basis trade versus long copper, I like the current set up. Hear me out.


Lithium is a chemical element with the symbol Li and atomic number 3. Lithium is a soft metal, used increasingly in lithium-ion or lithium-polymer batteries, with other varied uses:


Tesla has clearly been the “thumb on the scale” in the lithium hydroxide market. At full capacity, Goldman estimates Telsa’s gigafactory could draw a full 17% of global lithium supply. If they ever got to a production level of 500,000 cars per annum they could hog the majority. Current lithium (carbonate and hydroxide) production  is estimated at 175,000 MT (metric tonnes) per annum, with production expected to grow to as much as 300,000 MT 4 years out. Prices spiked in 2015.

Lithium Reserve Base

70% of world lithium production comes from only 3 countries; Bolivia is #1 with lithium mined from the southern region of the country, bordering Chile and Argentina, the #2 & #3 producers. Traditional sourcing of lithium in South America is by extracting lithium-rich brine concentrate from beneath salt lakes. Eventual development of Afghanistan, the “Saudi Arabia of Lithium”, ($1tln + in mineral resources, including purported world leading, copious quantities of lithium) could certainly change the math over time, but commercial exploitation of the resource is a ways off yet (how about never). Others countries producing lithium include Canada, China, Australia, Brazil & Serbia. In Australia, the mining and processing of  spodumene, a hard rock lithium bearing mineral, is typically a more expensive sourcing route than brine extraction.

90% of lithium production globally is from 3 listed producers:

Albermarle Corp (ticker ALB) has a $7.4bln market cap. The largest lithium player you have likely never heard of.

Business description: “Albemarle operates in several global specialty chemical businesses with oligopolistic market structures and premium margins. Historically, Albemarle produced bromine, polymer additives, catalysts and fine chemicals that generated $2.5 billion in 2014 sales. The recent acquisition of Rockwood added two leading businesses: lithium and derivatives as well as Chemetall surface treatment”.

Nevada is the site of the 2017 slated Tesla/Panasonic gigafactory. Sumitomo Metal Mining supplies lithium nickel oxide to Panasonic who in turn makes the batteries for Telsa. Despite the future prospects, lithium is currently in good supply (read oversupply), with Sumi able to supply 60% of the gigafactory’s projected lithium needs from existing capacity.



Tesla has separately entered into a long term lithium supply contract with Bacanora Minerals Ltd. and Rare Earth Mines PLC forming Sonora Lithium Project Partners, with right to tracts of land in northern Mexico where they plan to extract lithium from mineral rich clay. Initial capacity is 35k MT which can be scaled to 50k MT. Market watchers have their doubts that Tesla has tethered themselves to the lithium A-team. Time will tell, but it sounds like the chemical version of the Hyperloop to me.

Lithium is not traded on any commodity or futures exchange. Lithium prices are set in an oligopolistic fashion based on supply and demand factors.  Price estimates are difficult to come but, but it appears that $6,000 MT is a floor for battery grade lithium and some expect annual price increases to be 20% through 2017. Reported prices in China for lithium, typically the highest priced in the world, are over $8,000 MT. Electric vehicles account for less than 10% of lithium demand at present, but this is expected to grow to over 30% by 2020 at current adoption rates. Carbonate-hydroxide conversion capacity will likely need to be expanded, with carbonate demand somewhat static versus bid hydroxide, especially in 2018 and beyond.

EXODUS shows ALB to be currently OB (over bought), both on a technical and hybrid basis with a hybrid reading of 3.85 (versus a 3.74 threshold for OB status).

SQM, Chemical Mining Co. of Chile Inc. has a market cap of 5.9bln in comparison, but is nowhere near as overbought. FMC Corp., ticker FMC has a $5.7bln market cap and has several key business lines, making it less of a lithium pure play.

ETF options are available. LIT is the ticker for Global X Lithium ETF with a market cap of 32mm (small) and daily turnover of 36k shares (illiquid). LIT is up 40% ytd.

Top 10 Holdings (67.16% of Total Assets)
Company Symbol % Assets
FMC Corporation Common Stock FMC 19.46
Sociedad Quimica y Minera S.A. SQM 9.85
Orocobre Ltd OROCF.AX 5.58
Albemarle Corporation Common St ALB 5.48
LG Chem Ltd LGCLF.KS 5.02
Tesla Motors, Inc. TSLA 4.54
Simplo Technology Co Ltd SPLOF.TW 4.44
SAMSUNG SDI CO.,LTD. 006400.KS 4.12

The best short leg of the basis trade seems to be abundantly clear, ALB it is ($7bln + market cap and 1mm + avg. shares trades per day). Overbought and appearing ripe for a pull back.


Copper is the 3rd most widely used industrial metal, used extensively in industries such as construction and industrial machinery manufacturing.  Symbol Cu and atomic number 29. Copper has the 2nd most electrical conductivity of any element after pricey silver.

Upwards of 70% of the material in a lithium-ion battery is copper. That is 260lbs. of copper per Tesla 85 kWh (112 lbs. of lithium) battery alone, and does not include the copper required for the copper-induction engine.


Note: picture is of Chile’s Escondida copper mine, the world’s largest. BHP, the 3rd largest copper producer owns 57.5% of the Escondida mine.

Chile is the largest copper producer in the world and holds a full 20% of global reserves. Codelco (privately held) is the # 1 global producer. A full 50% of Chile’s exports are copper. Codelco lost $2.2bln in calendar 2015 after a profit of $3bln in 2014.

China is in #2 spot as producer and garners 40% of world supply on the demand side (versus their 20% world population weighting). Peru is in #3 spot in terms of supply, followed by the USA in #4 position. Global copper production stand at 18k MT per year  with a growth rate of 575k tonnes (3.2%) per year.

copper demand

John Mendelson first identified copper as the bellwether of global economic activity, Dr. Copper, the metal with a Phd. in economics.

The very much living, modern day Dr. Copper is arguably billionaire Robert Friedland, Ivanhoe Mines Executive Chairman (IVN.TO). Mr. Friedland is the Steph Curry of the mining world, having hit 3 pointers around the globe for thirty-five years in geography as diverse as Canada (Voisey Bay, Newfoundland – Nickel), and China (Oyu Tolgoi, Turquiose Hill, Mongolia – copper/gold/silver) with Africa being the current focus (Platreef, South Africa – nickel, copper, gold; Kamoa, DR Congo – copper; Kipushi, DR Congo – copper & zinc). A mining rock star, and in his mid 60’s Friedland shows no signs of slowing down.


Note: Robert Friedland (pictured) is a USA/Canada dual citizen and currently resides in Singapore, Republic of Singapore.

Mr. Friedland provided some insightful information at a recent mining conference in Santiago, Chile:



Copper is trading at $5025 per metric tonne currently ($2.28/lb.). Unlike lithium, there are very active futures exchanges for “financial” copper. Copper trades on the Shanghai Futures Exchange (SHFE), COMEX and the LSE (owned by the HKE). SHFE volumes are beginning to dominate (larger than other exchanges combined). China’s is the world’s largest consumer of industrial metals and is said to have a $2bln stockpile of copper at present.

Banks have tightened their procedures for lending against metals as collateral on the heels of the Qindao port scandal of 2014. The mess is still be untangled, but losses will clearly top $1bln related to the fraud where metal feedstock was re-hypothecated numerous times (like a home mortgage with 400%+ LTV).


The three biggest listed copper producers after non-listed #1 Codelco are Freeport McMoRan Inc. (FCX), Glencore Plc (GLEN.L) and BHP Billiton Limited (BHP).

For the long side of the proposed basis trade, I would vet FCX,  which while not oversold, stands  at 2.82 hybrid on Exodus (2.44 being the threshold for OS).

Glencore is relatively new to the producer side of the equation and between the other two candidates I would favour FCX for the long side of the basis trade (Better Exodus scores and exposure to precious metals).

As with lithium, ETF copper offerings are thin with JJC, iPath Bloomberg Copper Sub TR ETN offering one alternative. GNR SPDR S&P Global Natural Resources ETF is another.

Short ALB vs. long FCX is my current trade inclination. This will be a tactical trade with appropriate stop losses on each leg. JCG

Note: Recent long in Ivanhoe Mines Ltd., (IVN.TO) from C$0.60 to C$0.91. No current position in other securities mentioned.

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This was a week to forget for institutional fixed income investors in Canada. For a change, gas & oil exposure concerns relinquished centre stage in the circus to extension risk on junior subordinated hybrid debt securities.

Great-West Life (GWO) mid-month declined to exercise their call option on their US$300mm 40NC10 fixed-to-floating hybrid security (GWOCN 7.153% 05/16/46 cusip 39136WAA2) which has sent shock waves through the C$45bln domestic market for comparable fixed/float hybrid securities. GWO, it should be noted, is well within their rights as per the bond indenture for the said security, the call option right was theirs solely. Market practice to date led institutional investors to expect Great-West to call the security at the nearest call date, the 10 year anniversary 05/16/2016 in this case, the point at which the fixed coupon ceases and a floating rate (based on the 3 month US$ Libor rate + a spread of 253.8bp) comes into effect should the securities not be called. Top holders of the bonds include RBC Global Asset Mgmt (18%), Fidelity (15%), USAA (12%) and Sentry Investments (11%).

sg2016041921645 (1)

The call feature is not identical for all debt securities. The call on the subject Great-West Life issue is a “European” style, meaning the issuer has a 1-time option to call the security (at $100, par in this case), on 05/16/16, with the appropriate notice to holders.

At the time of issuance in 2006 (Lehman was the book runner, not yesterday), Moody’s rated the issue Baa2 based on the 40 year (final) term and covenant that Great-West would replace at the maturity date (or call date, if so exercised) with an instrument with equal or better “equity characteristics”. Moody’s places the issue in basket D (75% equity / 25% debt) and it should be noted that the ranking is equivalent to Great-West preferred stock in liquidation, offering a loss absorbtion cushion to securities of higher priority. The bond have held the Baa2 through the non-call period and the underlying bond traded at or above par through October 2015. The latest announcement (call not exercised) saw the bond  break $90 (down 5 5/8ths in price terms).

As an aside, if the call option were “American” style, Great-West Life could exercise any time on or after 05/16/16 (with specified notice). The other variant is “Bermudan” (between the other two),where the call can be exercised at any coupon payment date (semi-annual in this case) on or after 05/16/16.

What are the risk?

To investors: The main risk for investors, especially in the high grade sector, is extension risk. If the securities are not called they may remain outstanding for a considerable time (30 years in this case), affecting returns and causing a downward realignment in pricing due to the much longer maturity profile.

To issuers: Market access and the clearing level for future issues can be affected when large institutional investors feel slighted. If this were about a relatively small US$300mm bond issue there would be little impact, but the underlying market for like securities is very large ($45bln +) and significant downtrade in the secondary market pricing of other securities has been evident. The C$1bln Great-West Life 5.691% 06/21/67 also traded down hard on the week as the delta of the 06/21/17 call fell on this new information. The bonds fell $8+ on the week to settle approx. $95.50.

Value may emerge from the carnage, but significant homework is warranted. Great-West prefs are good as a comp, but are not very liquid compared to other names I have profiled in the pref space.

Black-Scholes does not capture all the pricing idiosyncrasies of options pricing when the needs and wants of PMs (buyers) and Treasurers (issuers) do not fully line up. Hybrid securities are inherently complex instruments. JCG

Note: All publicly available information.

Follow me on twitter @firehorsecaper

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Latin American issuer Argentina (B- rated as of last week) returned to the bond market with great fanfare, raising $16.5bln across four maturities, making it the largest ever EM bond issue. There were over $68bln in orders for the debt issue which allowed the 10 year (largest) tranche to price a full 50bp (0.50%) tighter than initial price talk. The bond rallied in the gray market, with the $6.5bln of 10’s trading up $1.60-$2.10 in price terms in late Tuesday trade.

Argentina was rewarded for being market-friendly (legacy default on $95bln of debt in 2001 aside) and having a pragmatic administration at the helm. 15 years “in the box” was deemed to be enough by the market and the recent uptick in emerging market sentiment was pushed to full advantage.

Over 60% of bond proceeds ($10bln) are earmarked for hedge funds and other investors, led by billionaire Paul Singer’s Elliott Management, who recently won a protracted court case against Argentina with respect to defaulted Argentinian debt. 15 years is a long time to wait for a 10 bagger. Thirty years is also a long time to hold a B3/B- sovereign credit with a 8% coupon. JCG



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Pref shares are not everyone’s bag, especially is an equity centric investment world. Regardless, prefs hold an important place in the capital structure, ahead of equity in terms of ranking, but behind debt. Prefs are typically issued with a par value of $25.

Bank equity has has an awful start in 2016, globally. Instrument selection can be as important as sector selection.


Royal Bank of Scotland (RBS) had issues well ahead of the 2008-2009 Global Financial Crisis (GFC). RBS devoured ABN Amro in 2007 (then the 8th largest bank in Europe), which was the equivalent of a python eating an antelope (hooves and all). In truth, other hyena were recruited in the pursuit, namely Fortis and Santander, but the bulk of the kill fell to RBS to digest. By the end of 2007 the RBS balance sheet was US$3.7tln (at GBP/USD exchange rates at the time). Enter the GFC. Enter the cavalry, enter the Queen. Between Dec. 2008 and Dec. 2009 The United Kingdom infused £45bln (US$64bln) into RBS, more than 40% more than the US Treasury pumped into Citi (US$45bln),to keep financial Earth from spinning off its axis.

I had been partial to the 7.25% RBS T Series prefs since coupons were restarted a couple of years back. I have a 4% allocation. As the T series prefs are trading in line with the issuance price of $25, yielding 7.23%, a call by the issuer is effectively a “wash” aside from re-investment risk.


A learned ex-colleague asked about the relative merit of the RBS 6.08% G Series prefs a few weeks back, first leading me to scoff at the sub-optimal current yield versus the 7.25% coupon  T’s. Further analysis yielded much more information, and a timely Grant’s article in the April 8, 2016 issues titled “Least to Beast” with detailed input from Daniel O’Keefe, PM at Artisan Global Value Fund led me on the path to clarity.

The UK would like to show further progress on repayment of their bail out of RBS. The USA has since extricated itself from Citi ownership and even Lloyd’s has started paying a common dividend again. While some progress has been made, the UK government still owns >72% of RBS (down from 90% +).

The crux of the superiority of the 6.08% G series prefs at $24.03 over the 7.25% T at $25.06 lies deeper in the capital structure of RBS. The G’s were issued by RBS Capital Funding Trust VII. RBS Holdings N.V. (NV) is a wholly owned sub of RBS Group PLC (The issuer of the T’s) and holds the legacy assets of the 2007 ABN acquisition. Asset sales over the last 7 years have taken the NV unit assets to £19bln from £667bln. NV is better capitalized than the parent with tier 1 at 17% (parent tier 1 was 15.5% at 12/31/2015), a total capital ratio at 35% and common equity representing 19%+ of assets. NV carries a very high regulatory cost. Post-crisis protocols call for each regulated entity of RBS to have its own recovery and resolution plan. In summary, too much capital tied up in what is now an insignificant Amsterdam subsidiary. RBS’s total assets as at 12/31/2015 were £815bln, NV 2.3% of the total.

RBS has a total of US$3.3bln in prefs issued by NV, G, E & F (G series US$1.8bln). The play is to buy the G series pref on a potential take out at $25 by 05/18/2017 for a yield to call of 10.29%. The prefs are callable anytime after 05/16/2016. While you wait, the 6.08% coupon (6.33% yield) is a qualified dividend for US tax purposes. RBS could of course tender for the G series for less than $25 (par), but at $24+, it is not likely, given the negative signalling effect. RBS recently (Mar. 22, 2016) returned another £1.2bln owed to Her Majesty’s Treasury (HMT) and retired a class of prefs called the “Dividend Access Share”, paving the way for a common dividend in the not too distant future. JCG

Note: Long RBSPR 7.25% T Series (4% weighting), long RBSPR 6.08% G Series (2% weighting) from last week ($23.68-23.75) and long LYG common on recent resumption of common dividends. No wht (UK) and interest not taxable in Singapore on RBS prefs. Core holding.


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