Saturday, November 18, 2017
On this day in 1966,
SANDY KOUFAX RETIRES
[From This Day in History] On November 18, 1966, Sandy Koufax, the ace pitcher for the Los Angeles Dodgers, retires from baseball. He was just 30 years old, and he was retiring after a great season–he’d led the Dodgers to a National League pennant and won his third Cy Young award. But he had chronic arthritis in his pitching arm, and he was afraid that if he kept playing baseball, eventually he wouldn’t be able to use his left hand at all. “In those days there was no surgery,” he said much later. “The wisdom was if you went in there, it would only make things worse and your career would be over, anyway. Now you go in, fix it, and you’re OK for next spring.”
Koufax entered the majors in 1955, when the Dodgers were still in Brooklyn. He didn’t do much for the Bums at the beginning of his career–his arm was powerful but he didn’t have much control over his pitches–but after the team moved to Los Angeles, Koufax began to settle down and throw much more consistently. In a game against the Giants in 1959, he tied the major league strikeout record (18); the next season, though he only won eight games, he struck out 197 batters in 175 innings.
In 1961, Koufax really hit his stride: He went 18-13 and led the majors in strikeouts, something he would do four times between 1961 and 1966. Meanwhile, during those six seasons he led the league three times in wins and shutouts, and twice he threw more complete games than any other pitcher. He set a new major-league season strikeout record–382–in 1965. (Only Nolan Ryan has since struck out more batters in a single season.) Koufax threw one no-hitter every year from 1962 to 1965, and in 1965 he threw a perfect game. His pitches were notoriously difficult to hit; getting the bat on a Koufax fastball, Pittsburgh’s Willie Stargell once said, was like “trying to drink coffee with a fork.”
But what Sandy Koufax is perhaps most famous for is his refusal, in 1965, to pitch the first game of the World Series because it fell on Yom Kippur. (Don Drysdale pitched instead, and gave up seven runs in the first three innings; “I bet right now you wish I was Jewish, too,” he said when the team’s manager pulled him out of the game.) In 1971, the 36-year-old Koufax became the youngest person ever to be elected to the Baseball Hall of Fame.
Friday, November 17, 2017
Grant's Interest Rate Observer 11/17
To be sure, Veolia has in recent years made visible progress towards improving its financial footing. Net debt of €9.3 billion in 2016 is down from €10.7 billion in 2012, lowering the company’s leverage ratio down to 2.8 times from 4.0 times in 2012. Likewise, 2016 operating income covered interest expense by a bit less than five times, well above the sub-two times of interest coverage garnered in 2012. Credit analysts from S&P praised the Veolia C-suite for its “prudent and proactive liability management” in a June 2 report, while nevertheless noting that: “We assess Veolia’s risk profile as significant, given the group’s material debt.”
As noted above, Veolia’s placement stands out even in this extraordinary market for European corporate bonds. Consider a trio of other recent issues on the Old Continent:
On Tuesday came the announcement that spirits producer Diageo plc, rated single-A-minus at S&P, is selling €775 million bonds due November 2020 with a coupon of 0.00% and €500 million bonds due June 2024 with a coupon of 0.50%.
Italian luxury sports car manufacturer Ferrari N.V. likewise tapped the EU bond market to the tune of an €700 million senior unsecured offering at a 0.25% coupon due in January 2021. Ferrari, which is unrated by the bond agencies (the company didn’t get back to us when we asked why), generated free cash flow of €760 million in 2016, equivalent to almost half of its gross long term debt of just under €1.8 billion (the company holds more than €600 million in cash).
Tuesday also brought pricing for €1 billion in junior subordinated perpetual notes from Spanish utility Iberdrola S.A. at a (positive) 1.875% coupon. Iberdrola, unrated at S&P, sports a Baa3 rating at Moody’s, the bottom rung of investment grade. Iberdrola generated €4.51 billion in 2016 operating income, covering its €896 million in interest expense a bit more than five times over.
Helen Durand of Reuters wrote a Nov. 10 piece taking inventory of the evident distortions that have currently gripped the European corporate credit market. It identified as the culprit an actor well known to Grant's readership:
(hint)
Pricing a new issue is usually straightforward, with a company’s outstanding bonds used as reference points to gauge fair value and a spread is then added to lure investors.
However, corporate spreads have snapped tighter after the ECB [in] late October announced an extension to its asset purchases until at least September 2018 to the tune of €30 billion a month.
“We’ve moved too fast, too quickly on no supply. Some curves are not curves anymore, they’re lines,” said a senior syndicate banker.
This has made assessing fair value much more difficult, especially for credits that have been squeezed by central bank purchases, which began in June 2016 and now total over €122 billion for corporate paper.
For his part, ECB chairman Mario Draghi remains defiant. Responding to criticism from bank executives over his imposition of a negative 0.40% deposit rate (it’s been less than zero since June of 2014), Draghi offered a sanguine risk-reward proposition for his radical policies:
If there are any negative effects of low rates on net interest income [for the banks] in the future, they should be largely offset by the positive effects of monetary stimulus on the other main components of profitability, such as the quality of loans and therefore on loan-loss provisions.
Needless to say, the chairman’s contention that central bank-imposed negative interest rates and an indiscriminate bid under corporate bonds will help “the quality of loans” is a debatable one. For now, potential issuers of all stripes are able to finance themselves for virtually nothing. But a crack has recently appeared in the façade: Amidst the modest selloff in U.S. high yield seen recently, the yield on that Bloomberg Barclays Pan-European High Yield Index jumped to a four month high of 2.88% on Wednesday from 2.19%, a 10 year low, recorded less than two weeks prior.
More low long term corporate bond rates
World's smallest Veolin
It was only a matter of time, but the first triple-B-rated credit (that’s two notches above junk) in Europe has managed to place debt at a negative yield. The lucky winner is France’s Veolia Environnement S.A. (VIE on the Euronext), a Paris-based resource/waste management and utility company, which issued €500 million in three year bonds priced to yield negative 0.026%. Even better: Investor demand for the Veolia issue was such that the offering was oversubscribed by more than 4:1. Said another way, three out of four investors who wished to lose money on a yield-to-maturity basis were left disappointed.To be sure, Veolia has in recent years made visible progress towards improving its financial footing. Net debt of €9.3 billion in 2016 is down from €10.7 billion in 2012, lowering the company’s leverage ratio down to 2.8 times from 4.0 times in 2012. Likewise, 2016 operating income covered interest expense by a bit less than five times, well above the sub-two times of interest coverage garnered in 2012. Credit analysts from S&P praised the Veolia C-suite for its “prudent and proactive liability management” in a June 2 report, while nevertheless noting that: “We assess Veolia’s risk profile as significant, given the group’s material debt.”
As noted above, Veolia’s placement stands out even in this extraordinary market for European corporate bonds. Consider a trio of other recent issues on the Old Continent:
On Tuesday came the announcement that spirits producer Diageo plc, rated single-A-minus at S&P, is selling €775 million bonds due November 2020 with a coupon of 0.00% and €500 million bonds due June 2024 with a coupon of 0.50%.
Italian luxury sports car manufacturer Ferrari N.V. likewise tapped the EU bond market to the tune of an €700 million senior unsecured offering at a 0.25% coupon due in January 2021. Ferrari, which is unrated by the bond agencies (the company didn’t get back to us when we asked why), generated free cash flow of €760 million in 2016, equivalent to almost half of its gross long term debt of just under €1.8 billion (the company holds more than €600 million in cash).
Tuesday also brought pricing for €1 billion in junior subordinated perpetual notes from Spanish utility Iberdrola S.A. at a (positive) 1.875% coupon. Iberdrola, unrated at S&P, sports a Baa3 rating at Moody’s, the bottom rung of investment grade. Iberdrola generated €4.51 billion in 2016 operating income, covering its €896 million in interest expense a bit more than five times over.
Helen Durand of Reuters wrote a Nov. 10 piece taking inventory of the evident distortions that have currently gripped the European corporate credit market. It identified as the culprit an actor well known to Grant's readership:
(hint)
Pricing a new issue is usually straightforward, with a company’s outstanding bonds used as reference points to gauge fair value and a spread is then added to lure investors.
However, corporate spreads have snapped tighter after the ECB [in] late October announced an extension to its asset purchases until at least September 2018 to the tune of €30 billion a month.
“We’ve moved too fast, too quickly on no supply. Some curves are not curves anymore, they’re lines,” said a senior syndicate banker.
This has made assessing fair value much more difficult, especially for credits that have been squeezed by central bank purchases, which began in June 2016 and now total over €122 billion for corporate paper.
For his part, ECB chairman Mario Draghi remains defiant. Responding to criticism from bank executives over his imposition of a negative 0.40% deposit rate (it’s been less than zero since June of 2014), Draghi offered a sanguine risk-reward proposition for his radical policies:
If there are any negative effects of low rates on net interest income [for the banks] in the future, they should be largely offset by the positive effects of monetary stimulus on the other main components of profitability, such as the quality of loans and therefore on loan-loss provisions.
Needless to say, the chairman’s contention that central bank-imposed negative interest rates and an indiscriminate bid under corporate bonds will help “the quality of loans” is a debatable one. For now, potential issuers of all stripes are able to finance themselves for virtually nothing. But a crack has recently appeared in the façade: Amidst the modest selloff in U.S. high yield seen recently, the yield on that Bloomberg Barclays Pan-European High Yield Index jumped to a four month high of 2.88% on Wednesday from 2.19%, a 10 year low, recorded less than two weeks prior.
Thursday, November 16, 2017
Wednesday, November 15, 2017
Tuesday, November 14, 2017
Grant's Interest Rate Observer
Rate Rout: An Inverted Yield Curve on the Way?
Behold, the incredible disappearing yield curve. Around the world, inflationary metrics are suddenly percolating, sending short maturity government borrowing costs upward. At the same time, long yields have generally held steady or even declined.
Consider recent data from Japan, which on Sunday reported a 3.4% year-over-year increase in producer price inflation (PPI) in October, to bring the 2017 average to a gain of 2.1%. That continues a stark upside reversal, vs. a year-over-year reading of negative-2.6% in October of last year, and an average of negative-3.2% for 2016 in aggregate. Consumer prices, while moving at a far less dramatic pace, have also turned clearly upward. Japanese CPI for October gained 0.7% year-over-year, matching the September reading for the highest since early 2015.
In the United Kingdom, this morning’s release of October consumer price inflation showed a 3.0% year-over-year uptick, maintaining September’s level at the hottest pace since early 2012. A reading of 3.1% or above would have compelled Bank of England governor Mark Carney to pen an open letter to the Chancellor of the Exchequer Philip Hammond to explain, according to the BoE website: “The reasons why inflation has increased . . . to such an extent and what the Bank proposes to do to ensure inflation comes back to the [2%] target.”
Stateside, this morning’s release of October PPI showed more of the same: Higher prices. The headline 2.8% year-over-year jump was the highest since February of 2012. While that figure is burnished by a 20% year-over-year rise in gasoline futures, the PPI ex-food and energy firmly maintained that plain upward trajectory with a 2.4% year-over-year advance in October. Strip out food and energy prices, and PPI has risen by an average of just over 1.8% through the first 10 months of the year, compared to average increases of 1.2% and 0.8% in 2016 and 2015, respectively.
With that synchronized uptick in measured prices comes a synchronized compression in government yield curves. While the Bank of Japan-dominated JGB market has sported a pancake-flat yield curve for some time, the U.S. and U.K. had as recently as 2014 both offered an additional 200 basis points of annual income for those willing to lend for 10 years versus two. Spreads are now converging it seems
Meanwhile, a similar surge in Chinese borrowing costs has pushed its five-year yield to 4.01%, above the 10-year yield of 3.99%). For the world’s second largest economy and leveraged lynchpin of many a bullish hope, a flattening yield curve could be a warning sign (Chinese five-and 10 year yields also briefly inverted earlier this year, to little apparent effect).
In the U.S. at least, yields on the two-year note last exceeded the 10-year yield in early 2000 and in late 2006. In each instance, recession and substantial asset price markdowns followed in due course. Writing on Nov. 17, 2006 (“Intercontinental tightening push”) amidst a prolonged tightening cycle in which Fed Chairman Ben Bernanke raised the overnight lending rate to a now-hard to fathom 5.25% in July of that year, Grant’s hazarded a guess over the coming direction in rates:
Where will it all end? With a falling fed funds rate and a rising Japanese overnight rate, we predict. The U.S. auto and housing industries cry out for interest-rate relief, and the Japanese policy rate could hardly go much lower. No interest rate forecast is not reckless. Ours may be the least reckless of the season.
We will grade that prediction at one-out-of-two, which would either get you failed out of school or a fast-track induction into the baseball hall of fame in Cooperstown, N.Y., depending on your preferred metaphor. As for today, that inverted yield curve scenario is still a hypothetical one. It is becoming gradually less so.
Monday, November 13, 2017
Grant's Interest Rate Observer
Trade Boom Already Started?
It's easy to grin
Is the global shipping industry, long mired in a turgid slog amidst overcapacity and a lukewarm economic environment, finally springing to life? Recent sightings abound of an acceleration in activity, with the Port of Long Beach (the second largest in the U.S.) announcing on Thursday that October saw record volumes, with a 15% uptick in twenty-foot equivalent (TEU) cargo units year-over-year. Through the first 10 months of the year, total shipment volumes are up by a sturdy 9.6% from their 2016 levels. For next year, IHS Markit forecasts global container trade growth at 4.9%.
Anecdotal evidence of something resembling a boom was pervasive on shipping companies’ third quarter conference calls. AP Moller – Maersk A/S (MAERSK-B on the Copenhagen Stock Exchange) CEO Soren Skou noted a brisk pace of activity on Nov. 7: “We continue to see strong fundamentals in container shipping. We are positively surprised about demand growth.” Gregory G. Zikos, CFO of Costamare, Inc., (CMRE on the NYSE) told listeners-in on Oct. 25 that: “There are positive signs coming from demand growth, which has been exceptional up to now this year.” Loukas Barmparis, president of Safe Bulkers, Inc., (NYSE: SB) offered this forecast on Nov. 1: “We expect that the strength of [the] charter market in the following months will push asset values substantially higher . . . We believe the prospects for global growth remain overall positive.” Robert Bugbee, president of Scorpio Bulkers, Inc., (NYSE: SALT) reported an acceleration in activity beyond their expectations on Oct. 23: “Since we last spoke in July, we ourselves, despite being bullish and confident then, have underestimated the strength of the market in each of the months that have gone through that time.”
Although some companies, such as Safe Bulkers (up 200% year-to-date) and Scorpio Bulkers (up 45% year-to-date) have handsomely rewarded a well-timed investment, the price action in the group remains generally moribund. The Dow Jones Global Shipping Index, which is little changed for 2017, sits almost 30% below its five year average and almost 50% below its 2014 interim highs, and trades at a spartan 0.79 price-to-book value ratio.
Beyond the prospects of the shippers themselves, the evident upturn in activity may be providing a signal for overall economic vitality. The Jan. 27 edition of Grant’s (“‘DJT’ on the New York Stock Exchange”) presented the pleasant possibility of a new paradigm of economic growth, as globalism (“trade encumbered by politics, complexity, favoritism and rent seeking”) would be replaced by globalization (“unfettered economic cross border exchange”).
Biff Robillard, president and co-founder of Bannerstone Capital Management, explained the distinction with the following analogy:
Robillard says that the world economy reminds him of a gigantic jetliner. How well it flies unburdened with, say, extra antennae jutting out from its fuselage, or with a redundant engine awkwardly bolted on to its wing.
Now, Robillard proceeds – just maybe, under the rising threat of the angry populists in America and Britain – the plane will be stripped of the oddments that have kept it from soaring. ‘Removing unnecessary drag from the airframe is a good thing if you want an efficient aircraft,’ he says. ‘Maybe that’s what capital smells coming – retractable landing gear!’
To hear the cadre of shipping executives tell it, the economic jetliner is cleared for takeoff. In terms of their stock prices at least, the shippers themselves are still taxiing on the runway. Or, as they say in the maritime trades, idling by the jetty.
I am not a Roy Moore fan but could he be telling the truth?
Bombard Body Language Analysis Rips Latest Moore Accuser and Credits Moore's Denials
I am not a Roy Moore fan but I was surprised by these analyses from Bombard Body Language: she credits Moore and absolutely rips the latest accuser. She also credited Moore and ripped Luther Strange during their debate, saying if Moore says something, “I’d take it to the bank.” See links below.
One of my favorite Civil War anecdotes.
On this day in 1861, McClellan Snubs Lincoln
On this day in 1861, President Abraham Lincoln pays a late night visit to General George McClellan, who Lincoln had recently named general in chief of the Union army. The general retired to his chambers before speaking with the president.
This was the most famous example of McClellan’s cavalier disregard for the president’s authority. Lincoln had tapped McClellan to head the Army of the Potomac—the main Union army in the East—in July 1861 after the disastrous Union defeat at the First Battle of Bull Run, Virginia. McClellan immediately began to build an effective army, and was elevated to general in chief after Winfield Scott resignedthat fall. McClellan drew praise for his military initiatives but quickly developed a reputation for his arrogance and contempt toward the political leaders in Washington, D.C. After being named to the top army post, McClellan began openly associating with Democratic leaders in Congress and showing his disregard for the Republican administration. To his wife,McClellan wrote that Lincoln was “nothing more than a well-meaning baboon,” and Secretary of State William Seward was an “incompetent little puppy.”
Lincoln made frequent evening visits to McClellan’s house to discuss strategy. On November 13, Lincoln, Seward, and presidential secretary John Hay stopped by to see the general. McClellan was out, so the trio waited for his return. After an hour, McClellan came in and was told by a porter that the guests were waiting. McClellan headed for his room without a word, and only after Lincoln waited another half-hour was the group informed of McClellan’s retirement to bed. Hay felt that the president should have been greatly offended, but Lincoln replied that it was “better at this time not to be making points of etiquette and personal dignity.” Lincoln made no more visits to the general’s home. In March 1862, the president removed McClellan as general in chief of the army.
This was the most famous example of McClellan’s cavalier disregard for the president’s authority. Lincoln had tapped McClellan to head the Army of the Potomac—the main Union army in the East—in July 1861 after the disastrous Union defeat at the First Battle of Bull Run, Virginia. McClellan immediately began to build an effective army, and was elevated to general in chief after Winfield Scott resignedthat fall. McClellan drew praise for his military initiatives but quickly developed a reputation for his arrogance and contempt toward the political leaders in Washington, D.C. After being named to the top army post, McClellan began openly associating with Democratic leaders in Congress and showing his disregard for the Republican administration. To his wife,McClellan wrote that Lincoln was “nothing more than a well-meaning baboon,” and Secretary of State William Seward was an “incompetent little puppy.”
Lincoln made frequent evening visits to McClellan’s house to discuss strategy. On November 13, Lincoln, Seward, and presidential secretary John Hay stopped by to see the general. McClellan was out, so the trio waited for his return. After an hour, McClellan came in and was told by a porter that the guests were waiting. McClellan headed for his room without a word, and only after Lincoln waited another half-hour was the group informed of McClellan’s retirement to bed. Hay felt that the president should have been greatly offended, but Lincoln replied that it was “better at this time not to be making points of etiquette and personal dignity.” Lincoln made no more visits to the general’s home. In March 1862, the president removed McClellan as general in chief of the army.
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