On The Next Web we learn that HP could not compete with Apple's iPad hardware: WebOS was over twice as fast on Apple's iPad as it was on HP's own tablet. According to Joshua Topolsky, HP claims to have plans for WebOS, even if it doesn't have plans to compete in tablet hardware.
After shelling out one point two billion greenbacks for Palm, HP has a certain amount of motivation to make something of its IP, and to retain the quality engineers it gained with the purchase. How it'll do these things is a question for which it isn't yet offering answers.
Friday, August 19, 2011
ACAS Launches MTGE IPO
[Note: This post was begun 8/3/11 and, due to distractions, not completed until it was noticed in a draft bin weeks later. Sorry about that.]
As previously discussed, ACAS is launching a REIT to invest in mortgage bundles. Unlike American Capital Agency (AGNC), American Capital Mortgage Investment Corp. (MTGE) will invest mortgage-related investments that aren't necessarily backed by the guarantee of a United States agency. Selling fewer shares than initially planned (8m rather than the planned 17.5m) on the first day of the recent market rout, ACAS maintained pricing at $20. In conjunction with the public offering, ACAS directly purchased a $40m block (2m shares) of MTGE for itself.
Despite a prediction that the investment was doomed to be a loser at issuance prices – based on comparisons with other recent mREITs rather than with ACAS' other mREIT – MTGE shares (which dropped with the whole market over the first two days) have recovered to $19 and above before MTGE even demonstrated any investment performance.
I had hoped to buy under $19, but my plan had been to make the purchase in a new account funded with money I hadn't received yet, and it looks like my window for a steal has closed. I suspect that MTGE will in many ways replay AGNC, with the exception that MTGE will not have access to the derivatives income that aided AGNC during the 2008 panic. This prediction is based on the assumption that non-Agency-backed mortgage securities will be less liquid, and thus will not have a ready derivatives market to use as a hedge.
The investment thesis in MTGE is surely a reflection of ACAS' broader investment thesis: illiquid investments are likely to be underpriced due to the inefficiency of the markets for illiquid hard-to-price investments, so ACAS will buy not to resell but to hold. To counter the risk of being stuck until maturity, I expect ACAS to do things like buy variable-rate mortgages. Without the government guarantee, I expect ACAS to be looking for – and finding – medium-grade mortgage packages at afwul-grade prices, with the intent to hold for the upside of the repayments the sellers are too impatient to bet on. I believe ACAS' experience pricing AGNC's portfolio has given it a good idea where the inefficiency is in the market, and given it a hunger to buy at dirt-cheap prices mortgage bundles that aren't nearly as bad as their pricing would imply.
On the other hand, MTGE isn't barred from investing in the exact same investments as AGNC. MTGE merely has the freedom to invest more flexibly.
Oh, and ACAS is paid by MTGE an advisory fee of 1.5% of MTGE's assets, not the 1.25% it is paid by AGNC. So maybe the MTGE issuance is less exciting than it looks: ACAS gives itself a 0.25% raise while broadening its freedom to invest funds beyond agency-backed securities. The 185m raised in the initial round of funding doesn't all become MTGE assets; the 8m shares actually in the IPO are subject to underwriting fees. Assets were reportedly expected to be something like $199m, meaning that ACAS' monthly advisory fee (1/12 of 1.5% of $199m) is approaching a quarter million dollars a month. By my own math, I expect $242,000 per month to be paid to ACAS, but there may be some assets in MTGE that weren't raised on IPO Day; the expected post-IPO assets are a bit above what I calculated based on the 80¢/sh underwriting fee disclosed here. Based on the greater advisory fee in MTGE, I expect ACAS to try to raise in MTGE funds it previously raised in AGNC. MTGE's performance – and its consequent price relative to NAV – will determine how successful that effort will be.
The other advantage to ACAS? With growing management fee income, ACAS' asset management subsidiary becomes more valuable. As a component of ACAS' NAV, the asset manager is as valuable as any profitable subsidiary.
You heard it here first: MTGE is just like AGNC, but allows ACAS to deploy funds into underpriced mortgage bundles that aren't backed by an agency (which is a factor potentially exacerbating pessimism and thus creating an exciting underpricing opportunity); because ACAS is paid more to hold funds in MTGE than in AGNC, expect ACAS to try to raise future funds in MTGE, where it will also have more investment flexibility.
As previously discussed, ACAS is launching a REIT to invest in mortgage bundles. Unlike American Capital Agency (AGNC), American Capital Mortgage Investment Corp. (MTGE) will invest mortgage-related investments that aren't necessarily backed by the guarantee of a United States agency. Selling fewer shares than initially planned (8m rather than the planned 17.5m) on the first day of the recent market rout, ACAS maintained pricing at $20. In conjunction with the public offering, ACAS directly purchased a $40m block (2m shares) of MTGE for itself.
Despite a prediction that the investment was doomed to be a loser at issuance prices – based on comparisons with other recent mREITs rather than with ACAS' other mREIT – MTGE shares (which dropped with the whole market over the first two days) have recovered to $19 and above before MTGE even demonstrated any investment performance.
I had hoped to buy under $19, but my plan had been to make the purchase in a new account funded with money I hadn't received yet, and it looks like my window for a steal has closed. I suspect that MTGE will in many ways replay AGNC, with the exception that MTGE will not have access to the derivatives income that aided AGNC during the 2008 panic. This prediction is based on the assumption that non-Agency-backed mortgage securities will be less liquid, and thus will not have a ready derivatives market to use as a hedge.
The investment thesis in MTGE is surely a reflection of ACAS' broader investment thesis: illiquid investments are likely to be underpriced due to the inefficiency of the markets for illiquid hard-to-price investments, so ACAS will buy not to resell but to hold. To counter the risk of being stuck until maturity, I expect ACAS to do things like buy variable-rate mortgages. Without the government guarantee, I expect ACAS to be looking for – and finding – medium-grade mortgage packages at afwul-grade prices, with the intent to hold for the upside of the repayments the sellers are too impatient to bet on. I believe ACAS' experience pricing AGNC's portfolio has given it a good idea where the inefficiency is in the market, and given it a hunger to buy at dirt-cheap prices mortgage bundles that aren't nearly as bad as their pricing would imply.
On the other hand, MTGE isn't barred from investing in the exact same investments as AGNC. MTGE merely has the freedom to invest more flexibly.
Oh, and ACAS is paid by MTGE an advisory fee of 1.5% of MTGE's assets, not the 1.25% it is paid by AGNC. So maybe the MTGE issuance is less exciting than it looks: ACAS gives itself a 0.25% raise while broadening its freedom to invest funds beyond agency-backed securities. The 185m raised in the initial round of funding doesn't all become MTGE assets; the 8m shares actually in the IPO are subject to underwriting fees. Assets were reportedly expected to be something like $199m, meaning that ACAS' monthly advisory fee (1/12 of 1.5% of $199m) is approaching a quarter million dollars a month. By my own math, I expect $242,000 per month to be paid to ACAS, but there may be some assets in MTGE that weren't raised on IPO Day; the expected post-IPO assets are a bit above what I calculated based on the 80¢/sh underwriting fee disclosed here. Based on the greater advisory fee in MTGE, I expect ACAS to try to raise in MTGE funds it previously raised in AGNC. MTGE's performance – and its consequent price relative to NAV – will determine how successful that effort will be.
The other advantage to ACAS? With growing management fee income, ACAS' asset management subsidiary becomes more valuable. As a component of ACAS' NAV, the asset manager is as valuable as any profitable subsidiary.
You heard it here first: MTGE is just like AGNC, but allows ACAS to deploy funds into underpriced mortgage bundles that aren't backed by an agency (which is a factor potentially exacerbating pessimism and thus creating an exciting underpricing opportunity); because ACAS is paid more to hold funds in MTGE than in AGNC, expect ACAS to try to raise future funds in MTGE, where it will also have more investment flexibility.
ACAS: What's The Cash For?
At the end of last quarter, ACAS had repaid its debt to $1.642B (for a Debt:Equity ratio of 0.4:1) and held cash of $186m. Of that, ACAS has spent $40m buying 2m shares of its newly-public managed fund, MTGE. This leaves $146m, plus whatever it's generating from businesses.
Since ACAS hasn't been snapping up new companies – it's made a few add-on investments in existing portfolio companies and invested in its own subsidiary's IPO and paid down debt – one wonders what exactly ACAS is doing with its brainpower and assets. Holding pat shows confidence, but what about the thesis that economic chaos brings opportunity and that careful investment should pay huge rewards? One has to invest to get that, right?
The Jaded Consumer has a few ideas.
Share Buyback (Or Not)
First, there's been a bit of excitement over the fact that immediately following ACAS' announcement of a NAV exceeding $13, ACAS took a plunge with the rest of the market. ACAS could retire more than 10% of its shares – buying below NAV, thus driving up the assets per share dramatically – and still not run out of cash on hand. A no-brainer, right?
Look at the history. When ACAS' share price was slammed following the Panic of '08, ACAS didn't buy underpriced shares, it bought (to retire) its own underpriced debt. Buying shares doesn't lead to realized gains (imagine if it could treat issuance as a short, and close the positions it opened north of $40!), and offers no benefit to the bottom line. On a per-share basis, it is helpful; but it does nothing for the enterprise. In effect, paying people to retire their shares shrinks the company. As a BDC with aspirations to become a larger asset manager, one of the last things ACAS wants to do is to shrink the company. And look at the other side of the coin: if ACAS thought it worthwhile to issue shares to Paulson at $5.06 so recently, how could it pay a premium of over 50% to get those same shares back?
ACAS has faced below-NAV share price opportunities before. Years ago, before ACAS took ECAS private, analysts asked why ACAS would not use share buybacks to increase value. ECAS had traded below NAV from its inception, and anyone with a blank envelope-back could tell that buying ECAS shares below NAV would increase ACAS' stake in a valuable company with a steady dividend (both companies had to that point paid uninterrupted dividends). ACAS' reply was clear: ACAS was looking to grow its business, to grow ECAS, and to broaden ownership of ECAS in support of its plan to grow the whole enterprise. ACAS had no intention of reducing the size of its enterprise or of its assets under management.
But, the astute reader is surely pointing at the Jaded Consumer and laughing: that analysis is surely wrong, or outdated, or else ACAS would not have bought every share of ECAS when it took the firm private. Surely, something is missing, no? Alas, the explanation shows that nothing has changed.
ACAS did buy ECAS, but the ECAS shares were bought with ACAS shares, not with cash. The transaction did nothing to reduce the size of the enterprise. Because ECAS' discount was greater than ACAS' discount, the below-NAV issuance of ACAS to ECAS holders was accretive to ACAS. Yet, when the dust settled, no shareholders had been paid to stop being shareholders. They just held ACAS shares instead of ECAS shares.
Management Plans Massive Recapitalization
ACAS never wanted to have secured lenders. ACAS fought giving lenders a security interest in its portfolio like there was no tomorrow, and even as it was discussing the new debt agreement on quarterly calls, was already discussing plans to restructure debt to avoid having debt that doesn't move with the markets and exposing ACAS to leverage scares. ACAS wants out of its secured loans. If one recalls, ACAS built up cash during the aftermath of the Panic of '08 – eventually holding over a billion smackers while cash was king and hugely profitable mispriced-investment opportunities lay about the land like stranded fish after a receding tsunami. ACAS is once more quite possibly working on a strategy to address its capital structure issues – to obtain more flexibility than permitted under its agreements with its secured creditors – that will require money.
I don't think ACAS will be retiring equity.
What I dearly hope is that, if ACAS is foregoing panic-selling opportunities that offer decent companies at awful-company prices, its strategy for its cash is really slick. What is ACAS' distressed-opportunity team (the special situations group, mentioned here) doing, anyway? My principal thesis in ACAS is that illiquid privately-held companies trade in an inefficient market in which ACAS has opportunities to buy deals that just don't exist in efficient markets. If ACAS doesn't buy something with its money, what's it doing?
Since ACAS hasn't been snapping up new companies – it's made a few add-on investments in existing portfolio companies and invested in its own subsidiary's IPO and paid down debt – one wonders what exactly ACAS is doing with its brainpower and assets. Holding pat shows confidence, but what about the thesis that economic chaos brings opportunity and that careful investment should pay huge rewards? One has to invest to get that, right?
The Jaded Consumer has a few ideas.
Share Buyback (Or Not)
First, there's been a bit of excitement over the fact that immediately following ACAS' announcement of a NAV exceeding $13, ACAS took a plunge with the rest of the market. ACAS could retire more than 10% of its shares – buying below NAV, thus driving up the assets per share dramatically – and still not run out of cash on hand. A no-brainer, right?
Look at the history. When ACAS' share price was slammed following the Panic of '08, ACAS didn't buy underpriced shares, it bought (to retire) its own underpriced debt. Buying shares doesn't lead to realized gains (imagine if it could treat issuance as a short, and close the positions it opened north of $40!), and offers no benefit to the bottom line. On a per-share basis, it is helpful; but it does nothing for the enterprise. In effect, paying people to retire their shares shrinks the company. As a BDC with aspirations to become a larger asset manager, one of the last things ACAS wants to do is to shrink the company. And look at the other side of the coin: if ACAS thought it worthwhile to issue shares to Paulson at $5.06 so recently, how could it pay a premium of over 50% to get those same shares back?
ACAS has faced below-NAV share price opportunities before. Years ago, before ACAS took ECAS private, analysts asked why ACAS would not use share buybacks to increase value. ECAS had traded below NAV from its inception, and anyone with a blank envelope-back could tell that buying ECAS shares below NAV would increase ACAS' stake in a valuable company with a steady dividend (both companies had to that point paid uninterrupted dividends). ACAS' reply was clear: ACAS was looking to grow its business, to grow ECAS, and to broaden ownership of ECAS in support of its plan to grow the whole enterprise. ACAS had no intention of reducing the size of its enterprise or of its assets under management.
But, the astute reader is surely pointing at the Jaded Consumer and laughing: that analysis is surely wrong, or outdated, or else ACAS would not have bought every share of ECAS when it took the firm private. Surely, something is missing, no? Alas, the explanation shows that nothing has changed.
ACAS did buy ECAS, but the ECAS shares were bought with ACAS shares, not with cash. The transaction did nothing to reduce the size of the enterprise. Because ECAS' discount was greater than ACAS' discount, the below-NAV issuance of ACAS to ECAS holders was accretive to ACAS. Yet, when the dust settled, no shareholders had been paid to stop being shareholders. They just held ACAS shares instead of ECAS shares.
Management Plans Massive Recapitalization
ACAS never wanted to have secured lenders. ACAS fought giving lenders a security interest in its portfolio like there was no tomorrow, and even as it was discussing the new debt agreement on quarterly calls, was already discussing plans to restructure debt to avoid having debt that doesn't move with the markets and exposing ACAS to leverage scares. ACAS wants out of its secured loans. If one recalls, ACAS built up cash during the aftermath of the Panic of '08 – eventually holding over a billion smackers while cash was king and hugely profitable mispriced-investment opportunities lay about the land like stranded fish after a receding tsunami. ACAS is once more quite possibly working on a strategy to address its capital structure issues – to obtain more flexibility than permitted under its agreements with its secured creditors – that will require money.
I don't think ACAS will be retiring equity.
What I dearly hope is that, if ACAS is foregoing panic-selling opportunities that offer decent companies at awful-company prices, its strategy for its cash is really slick. What is ACAS' distressed-opportunity team (the special situations group, mentioned here) doing, anyway? My principal thesis in ACAS is that illiquid privately-held companies trade in an inefficient market in which ACAS has opportunities to buy deals that just don't exist in efficient markets. If ACAS doesn't buy something with its money, what's it doing?
Thursday, August 18, 2011
HP Kills Its Tablet, Looks to Exit PCs
Despite beating Dell at the commodity PC game, HP has killed its TouchPad product and is looking to exit the PC business altogether to focus on higher-margin business (enterprise hardware, services, etc.). With WebOS gone from the mobile market, Apple's platform has fewer competitors, though Google is left (and Microsoft; but partnering with Microsoft can work out differently than expected, and even proving MSFT wrong won't lead to any contrition).
Who will be left to make a quality product?
In news from the other side of the globe, Apple has passed Lenovo in share of the China market (in sales; but remember, unit share isn't profit share). In mobile computers, DisplaySearch reckons that iPads are notebook computers and on that basis concluded that Apple became the worldwide leader in notebook unit volume during the second quarter of 2011 and in that quarter sold just more than 1 of every 5 notebooks sold worldwide. To the extent that platform market share reflects its "stickiness" and serves as a competitive advantage, Apple may have a real and growing platform advantage not just from hipness, but from the virtuous cycle of customers and developer resources being attracted to one another.
Who will be left to make a quality product?
In news from the other side of the globe, Apple has passed Lenovo in share of the China market (in sales; but remember, unit share isn't profit share). In mobile computers, DisplaySearch reckons that iPads are notebook computers and on that basis concluded that Apple became the worldwide leader in notebook unit volume during the second quarter of 2011 and in that quarter sold just more than 1 of every 5 notebooks sold worldwide. To the extent that platform market share reflects its "stickiness" and serves as a competitive advantage, Apple may have a real and growing platform advantage not just from hipness, but from the virtuous cycle of customers and developer resources being attracted to one another.
Monday, August 15, 2011
MSFT Abandons Another Market Niche (eBooks)
After dumping its Zune music player product and its Kin phone hardware, it shouldn't be a surprise to see Microsoft closing down its e-Book reader. Amazon and Apple seem to have sewn up that market, and Microsoft hasn't bothered to invest in any significant competition.
At least with the Zune, MSFT tried to create both a music marketplace and a sense of buzz. The e-Book platform seems to have been launched in an expectation that because Microsoft did it, everyone would accept it as a standard, and it would naturally succeed due to fear of competition. This sort of reasoning certainly can't have much currency after the fading of wma-encrypted DRM music as a "standard" just because MSFT was selling it.
MSFT seems to be concentrating on a smaller number of core platforms and software where it's still competing: operating systems for desktop, notebook, and phone hardware; and software for its platforms (either to run on the platforms, or to support them on the back-end). Microsoft's server products have significant revenue – Exchange and IIS are major back-end products licensed at great expense by major corporations – but Netcraft's current web server graphs show that Microsoft's competition from free competition may be denying it share in the growing market even as Microsoft's revenue continues to be rich. (MSFT had once a share approaching 40% of the web server market, but MSFT's IIS now appears to have less than 20% of the web server market and is losing share. Among the million busiest sites, Microsoft's share has been less volatile but is on a steady decline.) The effect of free software's increasing capability on Microsoft's licensing outlook will turn on things like Microsoft's ability to make use of third-party tools seem burdensome and hostile to users and administrators. Microsoft's ability to do this with impunity will turn in some part on the availability of alternatives to Outlook, which customers typically use to access mail, calendar, and contact information for which Microsoft offers back-end management through its Exchange product.
If anyone has information on email server share that might offer for mailservers what Netcraft offers for web servers, I'd love to see that data.
At least with the Zune, MSFT tried to create both a music marketplace and a sense of buzz. The e-Book platform seems to have been launched in an expectation that because Microsoft did it, everyone would accept it as a standard, and it would naturally succeed due to fear of competition. This sort of reasoning certainly can't have much currency after the fading of wma-encrypted DRM music as a "standard" just because MSFT was selling it.
MSFT seems to be concentrating on a smaller number of core platforms and software where it's still competing: operating systems for desktop, notebook, and phone hardware; and software for its platforms (either to run on the platforms, or to support them on the back-end). Microsoft's server products have significant revenue – Exchange and IIS are major back-end products licensed at great expense by major corporations – but Netcraft's current web server graphs show that Microsoft's competition from free competition may be denying it share in the growing market even as Microsoft's revenue continues to be rich. (MSFT had once a share approaching 40% of the web server market, but MSFT's IIS now appears to have less than 20% of the web server market and is losing share. Among the million busiest sites, Microsoft's share has been less volatile but is on a steady decline.) The effect of free software's increasing capability on Microsoft's licensing outlook will turn on things like Microsoft's ability to make use of third-party tools seem burdensome and hostile to users and administrators. Microsoft's ability to do this with impunity will turn in some part on the availability of alternatives to Outlook, which customers typically use to access mail, calendar, and contact information for which Microsoft offers back-end management through its Exchange product.
If anyone has information on email server share that might offer for mailservers what Netcraft offers for web servers, I'd love to see that data.
Sunday, August 14, 2011
Only 0.01% Wrong?
As a computer hobbyist, the Jaded Consumer is interested in software projects and thus particularly fond of high-quality open-source software projects. Consequently, I was very interested to read that Daniel Hartmeier reported his automated spam solution had achieved a 99.5% accuracy rate in identifying spam, while only losing 0.01% of legitimate emails to false-positive assignment of "spam" status. As it happens, I am not currently running a mailserver outside my own LAN, so I have little current need for this sort of solution – but I have clients, and I read explanations like his to understand what sorts of solutions can be offered to people who don't want to spend thousands on commercial solutions.
Honestly, though, email is becoming like phone service: you don't run your own cable and tap out your own Morse any more, you pick one of a field of commodity vendors and use the service (including any offered spam control) until you decide you like another better. You usually get email service bundled with an Internet connection; there's really little purpose for many businesses to bother with their own email back-ends unless the business is large enough that in-house handling makes better economic sense for handling the business' particular security concerns. Not that all these big businesses get it right, mind you, but ....
But I didn't try to email Daniel Hartmeier about his spam solution. Instead, I emailed him about pf. The page that leads with the word "History" was last updated in 2006, and there's been a recent development in the availability of pf. As of the launch of MacOS X v.10.7 ("Lion"), the firewall originated by Daniel Hartmeier following the removal of IPFilter from the OpenBSD code repository in May of 2001. I thought I'd point out that – although the fact hadn't been advertised – the world's highest-volume Unix distribution now contained the firewall Daniel originated began some ten years ago.
So I sent Daniel an email showing that pf-specific virtual devices were present in the default installation of MacOS X "Lion". What I got back wasn't what I expected:
But on that firewall -- congratulations, Daniel Hartmeier, on an excellent product. It's rocked for years, and I'm pleased it's come to my own desktop. Thanks for everything.
Honestly, though, email is becoming like phone service: you don't run your own cable and tap out your own Morse any more, you pick one of a field of commodity vendors and use the service (including any offered spam control) until you decide you like another better. You usually get email service bundled with an Internet connection; there's really little purpose for many businesses to bother with their own email back-ends unless the business is large enough that in-house handling makes better economic sense for handling the business' particular security concerns. Not that all these big businesses get it right, mind you, but ....
But I didn't try to email Daniel Hartmeier about his spam solution. Instead, I emailed him about pf. The page that leads with the word "History" was last updated in 2006, and there's been a recent development in the availability of pf. As of the launch of MacOS X v.10.7 ("Lion"), the firewall originated by Daniel Hartmeier following the removal of IPFilter from the OpenBSD code repository in May of 2001. I thought I'd point out that – although the fact hadn't been advertised – the world's highest-volume Unix distribution now contained the firewall Daniel originated began some ten years ago.
So I sent Daniel an email showing that pf-specific virtual devices were present in the default installation of MacOS X "Lion". What I got back wasn't what I expected:
A message that you sent could not be delivered to one or more of its recipients. This is a permanent error. The following address(es) failed:I thought the problem might be that I was using a return email address that didn't come from the domain where the mailserver was located. I sent it again from another email address, using the mailserver of the email address' own domain. I got:
daniel@benzedrine.cx
SMTP error from remote mail server after end of data:
host insomnia.benzedrine.cx [213.3.30.106]: 554 5.7.1 Spam (score 3.5)
Google tried to deliver your message, but it was rejected by the recipient domain. We recommend contacting the other email provider for further information about the cause of this error. The error that the other server returned was: 554 554 5.7.1 Spam (score 3.5) (state 18).One of my other tries got a totally different failure. I even tried re-writing my email so that its text might be less apt to trigger a Bayesian spam filter set to trigger on something in my prior email; but to no avail. I suppose the lesson is this: Daniel's excellent firewall tool may be everything one might dream (correctly coded, fast, feature-rich, elegant to configure, etc.) but this doesn't mean I can easily accept his claim that he's stopping 99.5% of the spam with a 0.01% false-positive rate. For information about stopping spam successfully, I'll be reading further.
But on that firewall -- congratulations, Daniel Hartmeier, on an excellent product. It's rocked for years, and I'm pleased it's come to my own desktop. Thanks for everything.
Saturday, August 13, 2011
China: Another Debt Bubble?
Although the national government of China is famously a net creditor with substantial sovereign investment assets, the national government in China isn't the only government in China. Closer to where the rubber meets the road, municipal governments stand responsible for building numerous infrastructure and even housing projects. Local government units in China are restricted in their fundraising. As a result, the frauds that are commonplace everywhere else in China (from fake Apple Stores to fake infant formula, nothing appears too sacred to defile) are equally common in government funding schemes.
In one example, Loudi raised infrastructure development funds with municipal bonds fully secured by numerous tracts of developed land. The problem? To secure the huge bond issue, the land – located in a place you've never heard, with an annual household income less than $2,500 and severe under-occupancy of existing housing – is given a fictitious value commensurate with fully-occupied Chicago suburbs with an average annual household income exceeding $250,000. And based on this Bloomberg report, payment on the bonds requires the claimed land values to go up.
Chinese rating agencies, unsurprisingly, are as easily motivated by politics and favor-trading as by financial reasoning. Ratings on the Loudi bonds range from junk status to one step above U.S. Treasury obligations. According to Moody's, the aggregate local government debt in China is understated by Chinese state auditors by 3.5 trillion yuan – reflecting the murkily unclear status of local debt issuance and whether some of the off-balance-sheet local government fundraising schemes even constitute enforceable obligations. To the extent that Chinese banks are debt holders, the safety of Chinese banks may be in jeopardy. To the extent that official Chinese debt accounting is off by as much as 25%, the reliability of Chinese financial reports is gravely in doubt.
Local Chinese debt may not look very big from the U.S – a mere couple trillion bucks – but they haven't been working to build it up very long, they have no apparent checks in place to prevent issuance scams, and they're working with the central government to issue more. CNBC's John Carney asks an interesting question: if the entire GDP of China has yet to reach $5 trillion when its debt exceeds $2 trillion, what should we conclude about the strength of the economy that's producing China's current output? (For comparison, the U.S. GDP exceeds $14 trillion, and its debt has been accumulating for decades at the local, state, and federal level until it presently exceeds $17 trillion. But the U.S. economy isn't rumored to have been on fire these last few years as the Chinese economy has been reputed.)
Asian study of American business strategies didn't end with the adoption of mass production facilities, did it?
In one example, Loudi raised infrastructure development funds with municipal bonds fully secured by numerous tracts of developed land. The problem? To secure the huge bond issue, the land – located in a place you've never heard, with an annual household income less than $2,500 and severe under-occupancy of existing housing – is given a fictitious value commensurate with fully-occupied Chicago suburbs with an average annual household income exceeding $250,000. And based on this Bloomberg report, payment on the bonds requires the claimed land values to go up.
Chinese rating agencies, unsurprisingly, are as easily motivated by politics and favor-trading as by financial reasoning. Ratings on the Loudi bonds range from junk status to one step above U.S. Treasury obligations. According to Moody's, the aggregate local government debt in China is understated by Chinese state auditors by 3.5 trillion yuan – reflecting the murkily unclear status of local debt issuance and whether some of the off-balance-sheet local government fundraising schemes even constitute enforceable obligations. To the extent that Chinese banks are debt holders, the safety of Chinese banks may be in jeopardy. To the extent that official Chinese debt accounting is off by as much as 25%, the reliability of Chinese financial reports is gravely in doubt.
Local Chinese debt may not look very big from the U.S – a mere couple trillion bucks – but they haven't been working to build it up very long, they have no apparent checks in place to prevent issuance scams, and they're working with the central government to issue more. CNBC's John Carney asks an interesting question: if the entire GDP of China has yet to reach $5 trillion when its debt exceeds $2 trillion, what should we conclude about the strength of the economy that's producing China's current output? (For comparison, the U.S. GDP exceeds $14 trillion, and its debt has been accumulating for decades at the local, state, and federal level until it presently exceeds $17 trillion. But the U.S. economy isn't rumored to have been on fire these last few years as the Chinese economy has been reputed.)
Asian study of American business strategies didn't end with the adoption of mass production facilities, did it?
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