Supernatural! US Payrolls Smash Expectations With 266K Jobs Added (Average Hourly Earnings Climbed 3.1% YoY)

Supernatural!

Hiring roared back in a big way in November. U.S. employers added 266,000 jobs last month, topping all expectations, according to a Labor Department report Friday. The surge was boosted by General Motors Co. workers returning to work after a 40-day strike.

Meanwhile, average hourly earnings climbed 3.1% from a year earlier, beating forecasts.

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The US jobless rate dipped to 3.5% and the underemployment rate dropped to 6.9%.

On the unexpected bounce in jobs, the 10Y-3M yield curve is no longer screaming recession.

And the US Treasury Actives curve and US dollar swaps curves are pretty similar from 2 years to 10 years.

Supernatural!

Death of the Fintech Unicorn (Fintechs Flounder)

Venture capitalists have poured billions of dollars into fintech unicorns, otherwise known as digital bank startups over the last decade. The biggest question everyone is asking is whether the fintech bubble has already burst.

Taking a look at the fintech mania, Ian Green, principal consultant for data and technology at The Disruption House, has provided the Financial Times with a chart of benchmarking and data analytics of the sector.

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California Pension Fund Goes Green With Muni-Bond Debut (Calstrs Selling $281 Million In Tax-exempt Municipal Green Bonds)

Calstrs, which sounds like a cholesterol-reducing medication, is selling $281 million in green municipal debt to fund expansion of their Sacramento headquarters.

(Bloomberg) — The California State Teachers’ Retirement System may have just missed its investment goal but its debut municipal-bond sale Thursday is right on target.

The public pension, the second-biggest in the nation, is selling $281 million in tax-exempt municipal green bonds at a time when wealthy Californians are snapping up such debt to drive down their tax bills and when buyers are increasingly seeking investments intended to lessen the impact of climate change. The pension, which posted a 6.8% return shy of its 7% expectation for the year that ended in June, is using the bond proceeds for an expansion of its West Sacramento headquarters designed to meet high environmental standards, including the ability to achieve zero net energy consumption.

While investors generally haven’t paid higher prices for assets complying with environmental, social and governance principles, that may change in the future, [famous last words] said Eric Friedland, director of municipal research at Lord Abbett & Co. That makes the Calstrs bonds, which are already linked to a strong state credit because of the financing California provides for the pension system, even more appealing, he said. (or appalling).

“If you believe that there will be more of an ESG focus going forward, and that people will pay a premium for green bonds, then you’re basically getting that for free right now,” Friedland said.

The new building, a 10-story tower, will link to the current headquarters and ultimately encompass 510,000 square feet serving 1,200 employees, according to bond documents. Elements include a child-care center, “irresistible stairwells” to encourage people to take stairs instead of riding an elevator and a cafe offering healthy meals with ingredients from the on-site garden, Calstrs Chief Financial Officer Julie Underwood said during the Environmental Finance conference at the Milken Institute in October.

Vanessa Garcia, a spokeswoman for Calstrs, said in an email that officials wouldn’t make public statements on the bond issuance through the California Infrastructure and Economic Development Bank until after the closing of the sale. The building is expected to open in 2022.

The pension hired Kestrel Verifiers to vouch that the securities meet the standards for green bonds from the Climate Bond Initiative. It makes sense that Calstrs would sell green bonds given how it uses its influence as a shareholder to drive social and environmental change, said Ksenia Koban, a municipal-credit analyst at Payden & Rygel Investment Management in Los Angeles. Calstrs, for example, has pressured Duke Energy to cut carbon emissions and retailers to adopt best practices for firearms sales.

Calstrs officials are “putting money where their mouth is in mainstreaming ESG practices and ideas,” said Koban, who called the bond offering “a great issuance.”

The state, which has booked years of surpluses thanks to its growing economy, plays a large role in the pension’s bottom line: it directly made 36% of all contributions Calstrs received last fiscal year and provides significant aid to school districts, which make their own payments to the pension. California lawmakers in this year’s budget made a supplemental payment to pay down the state’s share of the unfunded liabilities for the organization that represents more than 960,000 educators and their beneficiaries.

The system, which by law has limits on how much it can hike contribution rates, is five years into a plan to reach 100% funded by 2046. It has about 64% of the assets needed to cover its liabilities, according to the latest data.

The new bonds are rated A+ by S&P Global Ratings, which gives the rating a stable outlook because it expects the pension’s funded ratio to improve over the next two years. Moody’s Investors Service ranks the debt A1 and Fitch Ratings grades it AA.

Like many US pension funds, Calstrs is only 67.2% funded

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Note that Calstrs has lowered their private equity investment target to 13% and raised their equity target to 47%.

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Like other pension funds, Calstrs is heavily weighted in the technology sector.

And yes, California munis keep growing (with historic low interest rates and a still growing state economy).

China Trade Rally: Investors Rush Into Equity ETFs Just In Time!

There is a China trade rally going on!

A 2% post-Thanksgiving slump in the U.S. stock market couldn’t have come at a worse time for investors in exchange-traded funds. More than $38 billion flowed into equity-focused ETFs in November, the biggest monthly influx in almost two years, data compiled by Bloomberg show. The inflows accounted for about 77% of cash absorbed by U.S. ETFs in the period through Nov. 30, the highest proportion since April.

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Fortunately for the stock market, the latest good news about US trade with China helped bolster a rally. Until we find out tomorrow that …

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Or is it Fools Rush In?

Recession Around The Corner? Evidence From Treasury Market And S&P 500 Earnings Sentiment

It has been the longest bull market in modern history, enabled by massive Central Bank intervention. But with trade wars raging, Brexit, Presidential impeachment over something, etc., there remains a significant risk of a recession over the next 12 months.

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If we look at the normalized change in the 10Y-3M curve minus normalized change in 10Y yields, we can see a heightened recession risk.

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Lower yields and steeper curves are not a good recipe.

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And then we have the decline in S&P 500 earnings estimates.

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Recession coming?

‘Peak’ Private-Equity Fears Are Spreading Across Pension World (Thanks Fed!)

Another consequence of Central Banks pushing interest rates extremely low … and ever negative.

(Bloomberg) — Investors plowing cash into private assets may recall the words of Wall Street legend Barton Biggs: There’s no asset class that too much money can’t spoil.

One of the most fertile grounds for funds harvesting returns in a world of negative-yielding bonds and expensive public companies — private equity — is being swamped.

Historically high valuations for leveraged buyouts has the likes of Morgan Stanley Wealth Management saying the industry has hit its peak after generating a decade of double-digit returns. That’s put the managers of vast pots of Californian retirement savings in a quandary.

“Returns are coming down,” said Elliot Hentov, head of policy research at State Street Global Advisors. “A lot of money is going into that space and we are seeing excess returns shrinking.”

California Public Employees’ Retirement Systems reported its PE portfolio delivered 7.7% in the fiscal year through June 2019, down from 16.1% in the previous period. The pension giant foresaw a future of shrinking private-equity earnings two years ago, when the board cut targeted margins above the FTSE All World All Cap index to 150 basis points from 300 basis points. The $388 billion asset manager has been examining new PE strategies.

“When you have so much liquidity available, naturally the price for illiquidity will come down,” Calpers Chief Investment Officer Ben Meng said.

Globally, the outperformance of PE over the S&P 500 fell to 1.07 times in 2017 from 1.69 times in 2001, according to data from PitchBook.

With so much money flooding the market, the problem is “how to achieve scale in the asset class in a very competitive, illiquid market environment,” Stephen McCourt, co-CEO of consulting firm Meketa Investment Group, told the Calpers board Nov. 18.

That’s left the biggest asset managers turning away a lot of deals even as they struggle to allocate capital earmarked for PE, according to McCourt, who advises Calpers and the California State Teachers’ Retirement System among others.

“We think we have a reached a peak in the private-equity market,” Morgan Stanley Wealth Chief Investment Officer Lisa Shalett wrote in an Oct. 28 note. “Investors tempted to chase the double-digit returns that many earned in private investment vehicles this past decade need to downgrade their expectations. The environment for private investing has gotten tougher.”

Investors can expect annual returns from private-investment funds of less than 10% in the future, below the 20%-plus that many of them delivered in past years, she predicted.

Calstrs chief investment officer Christopher Ailman is uninspired and under-invested. The second-largest U.S. pension had 9.3% of its $242.1 billion of assets in private equity as of Sept. 30, an allocation it plans to raise to 13% eventually. But Ailman is in no rush.

“Everybody is trying to chase what they perceive as the cream of the crop in private equity,” he said in a Bloomberg TV interview in November. “The median private equity portfolio return or GP return is usually actually equal or less than what you can get in public stocks.”

This is borne out by findings from Nicolas Rabener. The managing director of FactorResearch created an index of the smallest small-cap stocks and discovered in research last year that they performed in line with the U.S. Private Equity Index.

‘Through the Roof’

Interest in buying the equity and debt of unlisted companies, property and infrastructure has surged as the yields of $12 trillion of bonds globally fall below zero.

JPMorgan Asset Management recently touted such alternatives as a way to offset falling returns faced by traditional fund managers with 60% allocations in equity and 40% in bonds. Its strategists in November upgraded their forecast for private equity investments over a 10-15 year horizon to 8.8% from 8.25%.

And in the Nordic region, a growing number of pension funds are reworking their models to ramp up private-equity allocations.

Yet the reward for buying unlisted and hard-to-sell securities is becoming more elusive as fears over late-cycle economic risks spread.

At Hermes GPE, Peter Gale is seeking investments in fast-growing companies unfettered by the kind of large debt burden that often comes from private-equity led leveraged buyouts.

“Credit conditions are not as good as they used to be and there are so many people in the game,” said the head of private-equity investments. “Valuations have gone through the roof. Returns will have to diminish.”

And so will Private Equity fundraising.

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The Way Out for a Global Economy Hooked On Debt? Even More Debt (??)

Apparently, debt control is out of the question in this era of low interest rates. There is seemingly only one way out … and that it is MORE debt.

(Bloomberg) — Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

Much of that legacy stems from policy makers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policy makers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk.

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

Central bankers and policy makers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends.

“Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing,” said Mark Sobel, a former U.S. Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads.”

A constraint for policy makers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa and others have also had scares.

As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So called zombie companies — firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects — have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted.

The debt drag is hanging over the next generation of workers too. In the U.S., students now owe $1.5 trillion and are struggling to pay it off.

Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming.

Well, despite the conventional economic wisdom that public debt growth is fine as long as GDP grows at the same rate, the USA has almost always experienced higher rates of debt growth than GDP growth (YoY).

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Modern Monetary Theory (MMT) makes as much sense as this 1960s/1970s photo. (Is that New York Times opinion columnist Paul Krugman??)

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Does Carter’s “Misery Index” (Inflation + Unemployment) Forecast Recession? (No, Near Lowest Level Since Mid-1950s)

Back during the “days of malaise” under President Jimmy Carter, some clever wags thought of the term “misery index” which is the unemployment rate + inflation rate.

Sure enough, the misery index hit its all-time high in May 1980 of 21.93%. But the fear index subsided rapidly following the end of the July 1981 to November 1982 recession.

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But the misery index today is only 5.37%, near the lowest since the mid-1950s. So, no hint of an impending recession.

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Currently, the misery index is near its lowest level since the mid-1950s. The US Unemployment rate is low and is inflation is pretty low resulting in a misery index of 5.37%.

So, no recession in sight according to this indicator.

Frailty? Hong Kong Stock’s 78% Collapse Adds to Wave of Sudden Crashes

A third Hong Kong stock in less than a week lost most of its value in a sudden one-day plunge, underscoring concern that the $5.2 trillion market has become a breeding ground for wild volatility.

China First Capital Group, an investment company that focuses on financial and education services, plunged as much as 78% on Wednesday before trading was suspended. Virscend Education Co., which is partly owned by First Capital, also lost as much as 78% before paring its decline to close 33% lower. The moves wiped out a combined $1.2 billion in shareholder value.

Virscend’s shares may have been sold by First Capital because of a margin call, but that hasn’t been verified, said Chen Keyu, Virscend’s director of investor relations. Virscend is operating normally, and the board isn’t aware of any reason behind the price moves, the firm said in a stock exchange filing on Wednesday evening. A representative for First Capital said the company couldn’t immediately comment.

While Hong Kong is no stranger to sudden stock slumps, the fresh wave of declines is once again putting the spotlight on corporate governance at the city’s listed companies. One oft-cited catalyst for the outsized swings is forced selling by major shareholders who have borrowed against their positions. That can lead to a domino effect when companies are connected by investors or business lines, and it’s not always clear under Hong Kong’s disclosure rules when a stake has been pledged.

Last week, ArtGo Holdings Ltd. slumped 98% after MSCI Inc. scrapped plans to add the stock to its benchmark indexes, citing concerns about investability. That same day, a Chinese furniture maker fell as much as 91% after a short-seller questioned the company’s accounting. First Capital owned a 1.6% stake in ArtGo as of July, according to an exchange filing.

Three Hong Kong stocks in less than a week have seen sudden one-day plunges

Hong Kong’s Securities and Futures Commission and stock-exchange operator have made cleaning up the city’s equity market a priority in recent years, saying extreme share-price swings and allegations of manipulation — particularly among small-cap stocks — have damaged Hong Kong’s reputation. The collapse in 2017 of a shadowy group of companies, dubbed the “Enigma Network” by local activist investor David Webb, is now part of the biggest investigation of market malfeasance in the city’s history.

Hong Kong exchange rules say a controlling shareholder can borrow against stock and not disclose the transaction as long as it’s for personal finance reasons rather than loans, guarantees or other forms of support for the company. Critics have said complex holding structures stretching across multiple stocks puts unsuspecting investors at risk.

First Capital reported a net annual loss in three of the past four years, according to data compiled by Bloomberg. The company has pledged assets worth about 758 million yuan ($108 million) for unspecified funding purposes, according to its mid-year earnings report. It held a stake of about 12.4% in Virscend, according to an exchange filing in July.

First Capital is a constituent of China-focused indexes compiled by MSCI and FTSE Russell. As a member of the Hang Seng Composite index, it’s also available to mainland investors through stock links with Hong Kong.

Victory! US Home Sales Have Best 2 Months In 12 Years As Hourly Earnings Growth Exceeds Home Price Growth

Victory! A slew of positive housing news two days before Thanksgiving Day.

First, new home sales rose 733K in October, continuing the best two months in 12 years. Second, home price growth rose a bit to 2.10% YoY for the 20 largest metro areas while hourly earnings growth is above 2.10% at 3.49% YoY.

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(Bloomberg) — Buyers snapped up new U.S. homes over the past two months at the fastest pace in more than 12 years, adding to signs of sturdy housing demand amid lower prices and borrowing costs.

Single-family house sales ran at a 733,000 annualized pace in October, topping all estimates in a Bloomberg survey, following an upwardly revised 738,000 in September, government data showed Tuesday. Those were the two strongest readings since July 2007. The median sales price decreased 3.5% from a year earlier to $316,700.

And median price of new home sales continue to decline.

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And on the Case-Shiller home price front, average hourly earnings growth in finally exceeding home price growth!

Happy Thanksgiving! And I wish Fed Chair Jerome Powell and former Fed Chair Janet Yellen a joyous day.

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