China Auto Sales Fall 5.6% YOY In April Despite Sizeable Bounce Back From March
The auto market in China is a widely watched economic gauge and leading indicator for the rest of the world, not only because the country is the number one seller of vehicles worldwide, but now also as a litmus test as to how the country’s coronavirus re-opening is faring.
For now, despite a questionable miraculous-looking rebound, sales are still falling.
April’s auto sales numbers came in down 5.6% compared to last year, despite rising 37% from March numbers, according to data released Sunday by the China Passenger Car Association and MarketWatch.
The CAAM claims that declines are moderating although we have a tough time believing (pardon our skepticism of China) that such a V-shaped recovery is possible in the country where the outbreak first began.
According to China’s data, the YOY growth rebound is pronounced and April’s drop pales in comparison to a 40% YOY drop in March and a 79% YOY drop in February.
The Chinese government is going to attempt to spur demand with new policies aimed at enticing buyers, according to Bloomberg, citing an unnamed automotive industry group in China.
Recall, we have recently noted that U.S. auto manufacturers are teeing up sizeable incentives to get buyers back into showrooms. Europe is following suit, with Volkswagen starting a sales initiative to revive demand, including improved leasing and financing terms.
Meanwhile, optimism for May in China is already muted.
Not only is the country still struggling with lockdowns, but the first five days in May were a labor holiday that could have a negative impact on sales.
Outlook for the year is also less-than-optimistic. The CAAM predicts that sales will drop 15% to 25% for the year, depending on whether or not the country is able to further slow the spread of the virus.
A video out of India shows police officers using a bizarre metal contraption to grab dissidents who violate coronavirus social distancing rules.
“Hands up!” barks a police officer at a man during a demonstration of the tool, which looks like a kind of cattle prod but presumably isn’t electrified (yet).
The dissenter is then entrapped by the mechanism, which closes around his body like some kind of venus fly trap for humans.
VIP Security wing of Chandigarh Police has devised this unique way of tackling non-cooperating corona suspects and curfew breakers. Great equipment, great drill !!! Way to go @ssptfcchd and Insp Manjit, HCt Gurdeep, HCt Pawan and Ct Usha pic.twitter.com/oTLsGoe6yt
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Futures Slide After Senators Propose Legislation To Sanction China If No “Full Accounting” For Coronavirus Outbreak
Just hours after futures tumbled following a report that Republican Senator Graham and GOP Senators have introduced a bill sanctioning China for human rights abuses and over its treatment of Uighurs, moments ago futures took another leg lower on the back of an AFP report that Republican senators proposed legislation that would empower President Donald Trump to slap sanctions on China if Beijing does not give a “full accounting” for the coronavirus outbreak.
In other words, unless there was something lost in translation, Trump will have a carte blanche to sanction China on two account: the Uighurs and Beijing’s secrecy over the origin of the coronavirus pandemic.
“The Chinese Communist Party must be held accountable for the detrimental role they played in this pandemic,” said Senator Jim Inhofe, one of the sponsors of the “COVID-19 Accountability Act”, adding that China’s “outright deception of the origin and spread of the virus cost the world valuable time and lives as it began to spread.”
The legislation will give Trump 60 days to certify to Congress that China has provided a full accounting on the COVID-19 outbreak to an investigation that could be led by the United States and its allies, or a United Nations body like the World Health Organization. Of course, China has repeatedly refused to allow any such “accounting” to the WHO; one can imagine how it will respond when a US body demands similar “accounting.”
As a reminder, yesterday Beijing banned roughly 35% of Australian beef imports due to the country’s demand a probe into the coronavirus origins be launched.
But wait, it gets better: In an act that China would see as violating its sovereignty, Trump must also certify that China has closed its highest-risk wet markets and released Hong Kong activists arrested in post-COVID-19 crackdowns. Without certification, Trump would be authorized under the legislation to impose sanctions like asset freezes, travel bans and visa revocations, as well as restricting Chinese businesses’ access to US bank financing and capital markets.
“China refuses to allow the international community to go into the Wuhan lab to investigate,” said Senator Lindsey Graham, another sponsor of the bill.
“They refuse to allow investigators to study how this outbreak started. I’m convinced China will never cooperate with a serious investigation unless they are made to do so.”
Following the report, futures whic had already legged sharply lower on Tuesday afternoon, tumbled to session lows, as traders now await China’s less than diginified response and as it becomes all too clear that launching a full on assault on China will be a core aspect of Trump’s re-election campaign.
In Unprecedented Move, Two Fund Giants Liquidate CLO Warehouses
Yesterday we laid out how the magic of modern monetary alchemy (not to be confused with the blunt brain trauma that is the magic money tree of helicopter money) works, by showing how a CLO takes 96% junk rates loans and by repackaging this portfolio, or “warehousing” it into a CLO, the product were tranched bonds of which 87% were rated investment grade.
And while in theory this works by “diversifying” away individual credit risk, in practice the whole exercise is nothing but smoke and mirrors which crumbles the moment an adverse systemic event – such as a global viral pandemic – reveals that the investment grade emperor is really wearing junk-rated clothes.
Of course, it is the very process of warehousing that made all this possible and resulted in record demand for leveraged loans for the past few years, with CLOs becoming the biggest source of demand for the $1 trillion leveraged loan market, because as we concluded in our article, this CLO sleight of hand “worked splendidly as long as nobody questioned the “alchemy” behind the biggest magic trick Wall Street pulled in the past decade. Alas, alchemy does not exist, and just like all those buying “gold” from carnival charlatans eventually realized they were holding on to lead, so all those who naively believed they had purchased investment grade securities are about to learn the hard way that what they really owned was, aptly-named, junk.”
Fast forward to today, when investors finally appear to be asking what good are CLOs, and what is the point of tranching cash flows, if virtually all underlying junk loans will soon end up – true to their name – in default, with no cash flows left to tranche.
Bloomberg reports that two funds that aimed to bundle leveraged loans into bonds decided instead to liquidate the loans they had bought, a rare step reflecting just how the pandemic has cooled the market for securities known as collateralized loan obligations.
At a time of massive downgrades of both underlying loans and resulting CLO bonds, Steele Creek Investment Management and AXA Investment Managers both sold off loans they had planned to package into CLOs, according to Bloomberg citing people familiar with the matter. The funds had paid for the loans using temporary lines of credit known as warehouses.
With leveraged loan prices plunged to their lowest level in more than a decade in March, CLOs have been left scrambling to find buyers for their securities, and as a result Steele Creek and AXA Investment Managers decided to instead liquidate their warehouses, a move that some investors fear may become increasingly common, and could push loan prices even lower.
Steele Creek, a Moelis Asset Management company, put a $177 million warehouse loan portfolio up for sale on May 4, the people said. A spokesperson for Steele Creek declined to comment. AXA’s asset management arm sold a warehouse for a CLO it was arranging with Citigroup, said the people, asking not to be identified discussing a private matter.
As Bloomberg notes, selling loans held in warehouses may make more sense now after prices have recovered somewhat from their March levels amid growing Federal Reserve support for credit markets, making potential losses relatively manageable, investors said.
In keeping with the intricacies of structured credit, a CLO warehouse is often funded in part by outside investors who bear the initial pain if the loans go bad, known as the first loss, similar to the equity tranche of the final CLO itself. They usually choose to roll their investment into the riskiest securities of a CLO when the deal is ready to close, known as the equity portion. AXA Investment Management’s decision was made in conjunction with, and in the best interests of the first loss provider, according to Yannick Le Serviget, the firm’s global head of leveraged loans and private debt. AXA IM declined to comment on specifics of the transaction.
“Given the large repricing of the loan market, specifically good quality portfolios, it did make sense to take advantage of the upward pricing,” Le Serviget said.
While such liquidations are extremely rare, fears of CLO warehouse unwinds emerged in March once pandemic fears started hammering corporate debt markets broadly. The, as we reported last month, ratings firms downgraded a wave of loans as the pandemic weighed on companies’ sales. The average loan price plummeted to around 76 cents on the dollar in late March, before rebounding to around 87 cents.
What makes the liquidation scenario especially concerning is that most CLO warehouses aren’t forced to sell loans if prices fall below particular levels, and since the facilities usually mature in 12 to 18 months, fund managers and investors have breathing room to decide whether to liquidate or go through with the CLO. Unwinding a facility at depressed prices could force some CLO investors to bear losses, making them less inclined to push for an unwind.
But investors in the CLO who are among the first to take losses might become more inclined to liquidate a warehouse if i) the loans become impaired, or if ii) they see little scope for price recovery over the medium term. In some cases it may also make more economic sense not to proceed with a transaction if there is a buyer for the loans in the warehouse, investors say. Banks may also pressure CLO managers to end deals if assets are sitting in a warehouse for too long.
The concern is that if despite the recent rebound in both loan prices and various CLO tranches, as per the Palmer Square index, two fund giants decided to unwind warehouses, then the signal is clear: this is as good as it will get for the leveraged loan market – i.e., this is the apex of the dead cat bounce – and what is coming will be much uglier.
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The stunning move by Axa and Steele Creek may explain why on Tuesday, the Fed revised its Term Asset-Backed Securities Loan Facility to allow CLOs that hold a broader range of leveraged loans to be used as collateral. According to a Fed statement, the central bank will now accept new AAA CLOs with leveraged loans, including refinanced loans, that priced as far back as January 2019, compared to the previous term sheet where eligible CLO could only hold newly-originated loans.
Still, the Fed’s involvement is largely superficial to the CLO market which until now had not benefited much from the central bank’s effort to boost credit liquidity: as Bloomberg notes, the terms still require eligible CLOs be static vehicles wherein managers can’t actively trade the loans underpinning the deals, a structure that makes up only a small portion of the market. “It’s not going to open up the floodgates, but it can have some measured effects,” said Gregg Jubin, a partner at Cadwalader. “This looks certainly better than the first iteration.”
It is hardly a coincidence that the Fed announcement comes just as a warehouse was liquidated. According to Jubin, the changes may benefit existing CLO warehouses that hold qualifying loans. On the other hand, some pointed out to the prohibitive interest rate demanded by the Fed under TALF , which will be 150 bps over 30-day average SOFR, making the facility quite expensive .
It’s “a positive sign for the market that the look back for eligible collateral extends back to the beginning of 2019 and also includes refinancings since that time, as is the fact that the Fed appears to have taken into consideration certain detailed aspects of how the CLO market operates,” said Nick Robinson, a partner at Allen & Overy LLP. And while this may be good news for investors in recent AAA CLOs tranches – mostly Japanese retirees – everyone else, i.e., all those who hold to AA and lower rated tranches, remain in the cold and will have to wait for the next crash in hopes the Fed expands the scope of TALF again, or else have no choice but to sell now that the AXAs of the world have suggested this is as good as it will get.
The Billion-Dollar Buyer Of Cohiba, Romeo y Julieta, And Montecristo Cigar Brands Remains A Smoky Mystery
The consortium of buyers of Imperial Brands’ cigar business, who will be acquiring the world renowned Cohiba brand, have mostly remained under the radar. The deal itself has also been “shrouded in a smoky veil of secrecy”, according to Bloomberg.
However, one group of investors is being led by an Asian Gambling Executive who helps run operations in Macau, it is now being reported. Imperial has continued to decline comment on who is buying the business, simply calling them “the right long-term owners” for the brands.
Imperial decided last month to sell its premium cigar business for $1.1 billion to Allied Cigar Corporation. Imperial’s brand portfolio also includes Romeo y Julieta and Montecristo.
Allied Cigar is a private firm that was incorporated in Hong Kong on March 10, according to registry filings. Chiu King-yan, who is the CFO of Macau’s biggest junket operator, SunCity Group Holdings Ltd., was listed as a board member.
Chiu is also a director of Summit Ascent Holdings Ltd., the Hong Kong-listed firm behind a hotel and casino complex near Vladivostok, Russia.
SunCity owns a majority stake in Summit Ascent and has been expanding outside of Macau in recent years. It has opened a resort project in Vietnam and is currently looking for projects in places like Cambodia and Japan.
Other board members include Chiu Ping-shun and Joyce Lam. There is little information available on them in the public domain and there has been no additional evidence to suggest that SunCity is involved directly in the acquisition.
It’s unusual for an acquisition this large to go off without transparency on who the acquirer is.
This is complicated by the fact that the deal includes Imperial’s 50/50 joint venture in Cuba, which distributes and sells the Cohiba, Romeo y Julieta and Montecristo brands. Cuba has been isolated by U.S. sanctions for decades, making it tough for the two countries to do business, Bloomberg concludes.
We’ll continue to keep a close eye on this story as it develops.
Under fire for his handling of the coronavirus pandemic, President Donald Trump, his campaign and his party are moving to lay blame for the 80,000 U.S. dead at the feet of the Communist Party of China and, by extension, its longtime General Secretary, President Xi Jinping.
“There is a significant amount of evidence” that the virus originated in a Wuhan lab, said Secretary of State Mike Pompeo last week.
Trump himself seemed to subscribe to the charge:
“This is worse than Pearl Harbor. This is worse than the World Trade Center. There’s never been an attack like this… It could have been stopped in China. It should have been stopped right at the source.”
There is talk on Capitol Hill of suspending sovereign immunity so China may be sued for the damages done by the virus that produced a U.S. shutdown and a second Great Depression where unemployment is projected to reach near the 25% of 1933.
The Trump campaign has begun to target the Democratic nominee as “Beijing Biden” for his past collusion with China and his attack on Trump for “hysterical xenophobia” when Trump ended flights from China.
What is the historical truth?
On China, Trump is the first realist we have had in the Oval Office in decades. But both parties colluded in the buildup of China as she vaulted over Italy, France, Britain, Germany and Japan to become the world’s second power in the 21st century.
Both parties also dismissed Chinese trade surpluses with the U.S., which began at a few billion dollars a year in the early 1990s and have grown to almost $500 billion a year. Neither party took notice until lately of our growing dependency on Beijing for products critical to our defense and for drugs and medicines crucial to the health and survival of Americans.
The mighty malevolent China we face today was made in the USA.
But what do we do now? Can we coexist with this rising and expansionist power? Or must we conduct a new decades-long Cold War like the one we waged to defeat the Soviet Empire and Soviet Union?
The U.S. prevailed in that Cold War because of advantages we do not possess with the China of 2020.
From 1949-1989, a NATO alliance backed by 300,000 U.S. troops in Europe “contained” the Soviet Union. No Soviet ruler attempted to cross the dividing line laid down at Yalta in 1945. Nor did we cross it.
East of the Elbe, the Soviet bloc visibly failed to offer the freedoms and prosperity the U.S., Western Europe and Japan had on offer after World War II. America won the battle for hearts and minds.
Moreover, ethnic nationalism, the idea that separate and unique peoples have a right to determine their own political and cultural identity and destiny, never died in the captive nations of Europe and the USSR.
China today does not suffer from these deficiencies to the same degree. Unlike the USSR, China has four times our population. Where the USSR could not compete economically and technologically, China is a capable and dynamic rival of the U.S.
Moreover, if we begin a Cold War II with China, we would not be starting with the advantages Truman’s America, undamaged at home in World War II, had over Stalin’s pillaged and plundered land in 1945.
Where ethnic nationalism tore the USSR apart into 15 nations, today’s China is more of an ethno-nationalist state with Han Chinese constituting 1 billion of China’s 1.4 billion people.
There are millions of Tibetans, Uighurs, Kazakhs in southwest and west China, and tens of millions of Buddhists, Christians, Muslims, Falun Gong and other religious minorities. But China is unlike the multiracial, multiethnic, multicultural, multilingual Moscow-centered and Russian-controlled Soviet Empire and USSR that shattered after 1989.
China’s weaknesses?
She is feared and distrusted by her neighbors. She sits on India’s lands from the war of the early 1960s. She claims the whole South China Sea, whose waters and resources are also claimed by Vietnam, Malaysia, Singapore, Indonesia, the Philippines and Taiwan.
The peoples of Hong Kong and Taiwan fear that Beijing intends to overrun and rule them.
Even Vladimir Putin has reason to be suspicious as Beijing looks at the barren but resource-rich lands of Siberia and the Russian Far East, some of which once belonged to China.
China is thus a greater rival than the USSR of Stalin and Khrushchev and Brezhnev, but the U.S. is not today the nation of Ronald Reagan, with its surging economy and ideological conviction we would one day see the ideology of Marx and Lenin buried.
Three decades of post-Cold War foolish and failed democracy-crusading have left this generation not with the conviction and certitude of Cold War America, but with ashes in their mouths and no stomach to spend blood and treasure converting China to our way of life.
Seattle Cop Prepares To Be Fired After Refusing To Remove Viral Video Reminding Officers Not To Obey ‘Tyrannical Orders’
A Port of Seattle Police Officer has been placed on administrative leave after refusing to delete a viral video reminding police officers that they don’t have unlimited powers.
“I have seen officers around the country enforcing tyrannical orders; I was hoping it was a minority of officers, anymore, I am not so sure,” said Officer Greg Anderson, a Special Forces veteran.
Anderson took to Instagram on Tuesday to explain that he will likely be fired for refusing to remove the video, as it is considered insubordination.
A GoFundMe has been established for Anderson which has already raised over $250,000 as of this writing, exceeding its original goal of $50,000.
As KTTH‘s Todd Herman writes: “As this officer fights for his career, Gov. Jay Inlslee is releasing violent felons who have gone on to commit new crimes.”
YouTube CEO Susan Wojcicki admits that the company knows its users don’t like the video giant rigging its own algorithm to boost “authoritative” mainstream sources, but that they do it anyway.
For several years now, the company has artificially gamed its own search engine to ensure that independent content creators are buried underneath a wall of mainstream media content.
This rigging is so severe that the company basically broke its own search engine, with some videos posted by independent creators almost impossible to find even if the user searches for the exact title.
The change was made to help struggling mainstream networks who were losing the eyeball war to independent content creators despite their massive financial backing.
In an interview with the New York Times’ “Rabbit Hole” podcast, Wojcicki said the decision to push “authoritative” search results was made after the Nice massacre, but that even after the change, these results were performing poorly in terms of engagement.
“The users don’t wanna actually see it,” YouTube engineers told Wojcicki at the time.
But Wojcicki refused to listen and told them, “It doesn’t matter. We have a responsibility. Something happened in the world and it’s important for our users to know.”
“In the years since Wojcicki made this decision, YouTube has rigged the site heavily in favor of authoritative sources to the point that they’re now 10x more likely to top search results for some news events while YouTubers won’t even get recommended for breaking news,” reports Reclaim the Net.
As we previously highlighted, the company’s disdain for its own user base was also underscored by its Chief Product Officer Neil Mohan insulting non-mainstream YouTube creators as basement-dwelling idiots.
This followed a new policy by the company to remove any content that challenged the World Health Organization’s official coronavirus guidelines, despite the fact that those guidelines have changed numerous times.
Perhaps the reason why YouTube’s users don’t like the company boosting mainstream media channels is because the media is widely distrusted and loathed.
The same thing could eventually happen to YouTube if it continues to stab the independent creators who helped build it in the back.
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Real Vision’s Ash Bennington and managing editor Ed Harrison discuss the latest developments in macro, markets, and coronavirus. They dive into the havoc wrecked on the jobs market, the continuously moving plans to reopen the US economy, and Dr. Fauci’s warning today to the US senate. They also review what’s happening in the Eurozone and which European economies may be a model for the US’s own reopening.
WeWork has been severely impacted by virus-related shutdowns, which has resulted in hundreds of layoffs in the last several months.
WeWork CEO Sandeep Mathrani told CNBC on Tuesday that it has paid rent in over 80% of its locations in April and May. The remaining properties are in “discussions with our landlords.”
As the economy stumbles into a recession, unemployment at levels not seen since the Great Depression, the co-working company is headed for turbulent times as it attempts to batten down the hatches and drive new cost-cutting measures.
Sources told Bloomberg on Tuesday afternoon that the company is exploring plans to sublease its Manhattan headquarters. The proposal calls for tenants on specific floors at its West 18th Street location, said one source, who requested anonymity.
The company’s 18th Street location was once the headquarters to WeGrow, the now-shuttered learning center started by co-founder Adam Neumann and his wife, Rebekah Neumann.
Adam Neumann and 18 West 18th Street
Another source said WeWork is continuously reviewing its real estate footprint and potential demand trends for its spaces.
“For instance, its 53 Beach St. location in Tribeca morphed over time toward housing paying customers, rather than employees, while its 85 Broad St. location in the Financial District saw a movement in the opposite direction,” said Bloomberg.
The SoftBank-backed company has yet to decide on subleasing a portion of its Manhattan headquarters, the source added.
For the last several quarters, the company had been going through a restructuring phase since its botched IPO last year resulted in a valuation collapse. The company’s current valuation is sub $8 billion, a far cry from last year’s $47 billion level.
Management has already reduced its workforce by several thousand and plans on another round in May. It has been minimizing its lease liabilities by restructuring leases with landlords, to include revenue-sharing agreements.
The virus pandemic has left WeWork struggling, which is the largest office tenant in Manhattan. Here’s the WeWork disaster through the pricing of its 2025 bond price:
WeWork is not the only unicorn in trouble. Uber and Lyft have all announced layoffs and cost-cutting measures as virus-related shutdowns have crushed the economy into recession, if not depression in the second quarter.
