Wednesday, January 21, 2015

The First Domino Falls

There is an old expression on Wall St. that says, "the market can act irrational longer than you can stay solvent." From where I sit, the market is definitely in the irrational stage. I see a big correction coming, but the powers-to-be will do everything to prove me and others wrong.
First Piece
fell last week in China. For years China has instituted "make work" projects that has a labor force of 136 million people employed. Real estate projects like a complete city, capable of holding one million people, now built and sit completely empty. Tall, new skyscrapers that house only a passing bird nest. In busy locations prices have risen ten-fold and amazingly, no end in sight until now.
Kaisa Group Holdings Ltd.(1638)
is a Chinese real estate developer that missed a loan payment of $23 million on its dollar-denominated bond. Kaisa borrowed $500 million of a 2020 bond. There are many repercussions as the ripple in the water travels far.
Consider that the World Bank estimates that China influences 16% of world economic growth. Not only that, Chinese companies made up 62% of all US dollar bond sales in the Asia-Pacific region. Black Rock Inc. holds 8.875% of the Kaisa debt and JPMorgan Chase, Fidelity and ING also hold some Kaisa debt.
"Debt Must Be Repaid"
stated the IMF chief last week, however she was referring to Greece. Nevertheless, the truth is true for everyone, but that is not the only problem. Building empty cities makes one wonder when the punch bowl will go empty. I guess the local government in Shenzhen feels the same way. They blocked all sales of Kaisa, amounting to $300 million and stopped all their projects for now. This is only 15 miles from Hong Kong, but goes all the way to the capital. President Xi Jinping of China has stated he wants to crack down on rampant corruption and in Shenzhen that means Jiang Zunyu. He was the security chief until he got arrested for corruption and this guy is connected to Kaisa. In addition, China's real estate market showed declining prices in 65 of 70 cities. Not a good trend. The main problem is fixed books where down payments and margins are adjusted to meet requirements. This sounds like our past problem with "ninja" loans(no income, no job or assets).
Creditors are lining up and you know what that means...
Enter Lawyers
Everbright Bank Ltd. and Industrial & Commercial Bank of China have asked courts to freeze assets of Kaisa. Maybe this is just a small rock and the ripple will disappear, but then again, do you remember Ben Bernanke saying the housing crisis is contained in 2007?
is happening. Here in the US, one small oil company whose name escapes me, filed for bankruptcy. Of course you heard of Baker Hughes and Halliburton. They both announced massive layoffs due to the falling price of oil. And then, there was a little announcement by the Swiss National Bank about breaking its peg to the euro. Can you feel the earth moving? All that shaking is disturbing the domino pieces. I'll call it, economic diastrophism and you can blame this too on the Fed which is why I say, End the Fed!