would stay away from all that seem too good to be true
the natural rate of return is now at 0.25%
all excess above that mean that much more danger
in the mean time, just in in-tray
player 1: Guys
I fear that the world keeps adding helium to all bubbles !
I was pondering the scenario on a ship in our fleet.
Here are the facts
Size : 4250 teu (4250 boxes)
ordered end 1999 (asia financial crisis).
Delivered 2001
Yard : samsung
Delivered cots about usd40mill
Reasons :
Asian financial crisis , collapse of korean won (keep in mid at time main shipbuilding nations are korea and japan )
Lack of orders
Samsung (korea) hungry for usd cashflow
In 2006. Peak market
Ship worth abt 70 mill at 5yrs old
Today we are seeing price of low 40 mill as a 10 year old.
Econ Life is 25-30 years.
Essentially price is npv of cash flows that owner expects to make over life.
Though Vsls life much less meaningful then first blush, ie difference between 25 and 30 year life , immaterial for return on investment, as npv of last 5 years cash flow is minimal.
Anyways my question
What has caused the current price (40mill for 10 year old, 55-60 mill for newbuild), which higher then that paid in 2001). In midst of this current downturn, one would have expected a return to bottoms
1.Result of better supply / demand Ie higher charter rates, etc. ?
Marginal differences today and 2001 , 23k vs 18k. But Financial rate after operating cost (opex up to 6k from 4k/day ), is only up to 17k from 14k (so abt 20%)
Only 12 months ago no work at all
2.better finance environment. Ie better leverage , lower costs of capital ?
Total all in finance costs about the same. Banks doing about same leverage ratio , albeit on higher amount.
If anything market tighter than 2001
3. higher input costs , due to price inflation in these items
Definitely case as steel, energy, labour are all up. Though some efficiency in shipbuilding that have helped maintain margins
4. Strengthening of the currency of shipbuilding nations
Also strong case as won, yen , rmb are stronger over this 10yrs
5. decline in value of usd purchasing power. Different way to say 3 and 4 , but in broader terms is definitely case that usd declined due to inherent built in inflation over these 10 years
So at end of day , as I look forward to 2015 and 2020. What will we see.
1. Supply demand.
- Likely irrelevant except for short term affect.
Assume that marginal unit will always get delivered if there is demand to support deployment of capital.
Shipyards not going away. Will remove peaks caused by supply shortage
2. cost of capital
I don't expect we will see a dramtically changed environment in meduim future. Base long term rates will continue to be low as money pumped into system
Margins on lending rise as banks pass thru new costs
We can see some sharp effects due to short term deleveraging or if we see sharp spike in libor rates and usd funding costs. But ultimately central banks will pump in more liguidity to falsely support asset floors
3. Continued higher input costs
I can see a world where steel, energy and labour continues to rise over 5 and 10 yrs,
4. Continued strengthing of the base currency of shipbuilding nations
Yes. I see won, yen and rmb all strengthening on global basket
Don't see any new entrant (keep in mind china entered shipbuilding in early 2000's in meaningful way.
5. Devaluation of usd purchasing power.
Yes as they print more and more money.
So seems some central themes remain unchanged.
I don't suspect we see the drunken days of 2005-2007, where assets doubled in value . When liguidity of leverage was unlimited and low costs, so drove asset prices to all time highs , as multiples of cash flows
But I do see a world in 2020, where the ship that costs 55 mill today , can still be worth 55 mill as a 10 year old. And a newbuild costs 75-80 mill.
And that 10 year old today, may just get 20-30 mill as a 20 year old then because it can generate lots of cash in its remaining days
But all this goes to hell if there are major technological changes, or if price of fuel goes to 150 (adjusted for future world levels of inflation ) again causing new more fuel efficient ships to make a 20yr old and a 10 year old ship economically obsolete
Sorry to bore you with shipping thoughts. But helps me to right out in context of bigger trends
Now please feel free to shoot holes in this thesis
player tj: Are the market sharing of builder of ship materially changed amongst top 8 players - I.e. Perhaps china competition is skewing cost of new build downward, and china demand skewing price of old ladies and even 10-years young ships upward?
There is symmetry in that event
player 1: The balance has changed with the rise of china.
From say japan 35, korea 35, china 20
To
Japan 20, china 35, korea 40
This partly caused by strengthening yen, aging japanese work force , and japanese shipyards being too small of docks for next gen ships
And on other side china's desire to become number one , and employ thousands of workers.
But ironically chinese have helped deflate ship prices over last 10 years , at same time price have risen. Though a study we did showed that ultimately korea / china cost of production is about same across assets types (marginal difference of a few percent , either way)
If not for rise of china likely we see even higher prices as supply would have been severely curtailed
Demand side is a whole other email. But needless to say , china created all the demand
player tj: yes on your read of the situation.
for regardless of universally recognized old-trick gdp stat convolutions by all states and officially sanctioned usd denomination of same, and
disregarding the misleading schema that emphasizes per capita measurement of just about all as opposed to rapidly evolving total useage tally or all that matters (iron, energy, cement, brains, whatever).
it is, from here on out, all about chindia, reversion to the inevitable mean, and the impact of that horrifying reversion at the personal level for all outside chindia, including those of us trying to eek out a precarious existence at the mouth of the volcano here in hong kong and so we must remain faithful to our second passport that gives emergency access further away from the volcano even as we try to pick out gold from the lava spew, perhaps outstaying our welcome.
at the same time, others from afar must try to maintain engagement with their second or third residence hong kong so as to better partake in aggregation and keep hold of getgold.
so much like treasure-hunting movies ala "mummy", trying to getgold even as the ceiling creaks and floor quakes, and gates to inferno gently descends.
what fun.
attached hereunder be watch&brief read of the galactic situation by one adam crook from god's workshop gs
OK EXTERNAL FOR EUROPE AND US AUM>$50MM. From GS Sales/Trading:
O/N ESU10: 1120.7 (-0.44%) O:1125.2 H:1125.5 L:1120
Tue S&P: 1127.79 (+0.55%) O:1122.8 H:1129.24 L:1120.91
Good morning. FX continued the pattern of Monday’s trading overnight with the USD strengthening pretty much across the board with broad-based interest to cut USD shorts ahead of this evening’s FOMC driving price action – EURUSD traded to an o/n low of 1.3136 vs. NY close 1.3225 (now 1.3150) while GBP is the G10 underperformer, with GBPUSD trading almost a big figure off its NY close – now at 1.5820. In the JPY, local banks are the buyers this morning as the BOJ kept rates unchanged at 0.1% as expected. Fin Min Noda was again on the wires, saying that while he wanted to refrain from commenting on FX intervention, recent FX moves did seem “a little one-sided”.
In Asia, Equities are uniformly in the red with China fairing particularly badly (SHComp -2%) as July’s trade numbers were released (exports +38.1% yoy, imports +22.7% yoy vs. cons 30%) and evidence of still-weak domestic demand hit confidence. More from our economists on this below.
Lastly, it is worth noting just how quiet US markets were yesterday as an indicator of the significance being placed on tonight’s Fed decision (our economists expect an announcement that the proceeds from maturing or prepaid MBS will be reinvested in the bond market, as well as significant downward revisions in economic forecasts): NYSE volumes -29% below 10-day averages and 35% below 30-day averages. E-mini SP futures printed fewer than 1mn contracts, less than 50% of Friday’s volumes.?
PIC: Yesterday David Kostin and his US Equity Strategy team raised their 2010 EPS estimates for the S&P500 to $81 (from $78), lowered their 2011 estimate to $89 (from $93), and reduced their year-end 2010 index forecast to 1200 (from 1250).
China Snap
SHCOMP (A & B Shares): 2619 (-2% / -19.3% 12MTD)
CSI300 (A-shares): 2859 (-2% / -19.2% 12MTD)
HSCEI (H shares): 12027 (-1.62% / 1% 12MTD)
Shanghai Copper: 57390 (-1.21% / 8.4% 12MTD)
Spot Fix Today / Yesterday / 1 Week Ago
6.7745 / 6.7685 / 6.7722
Historical Spot Fixes / Fwd Now / Implied % Move / Implied Y’day
1M: 6.7753 / 6.767 / 0.11% /
3M: 6.8269 / 6.753 / 0.32% /
6M: 6.8269 / 6.728 / 0.69% /
1Y: 6.8346 / 6.671 / 1.55% /
China July Trade: Exports Growth Softened as Expected, Imports Growth Fell Significantly Short of Expectations
- July exports growth came in at 38.1% yoy, down from 43.9% yoy in June (GS forecast: 39.0% yoy, market consensus: 35.0% yoy).
- July imports growth came in at 22.7% yoy, down from 34.1% yoy in June (GS forecast: 31.0% yoy, market consensus: 30.0% yoy).
- Trade surplus rose significantly to US$28.7 billion, from US$20.0 billion in June (GS forecast: US$21.9 billion, market consensus: US$19.6 billion).
This from our China economists: “The slowdown in exports growth is expected as frontloading of commodity exports came to an end in mid-July when the VAT rebate cancellation came into effect. However, imports growth was much weaker than expected. We suspect this is the result of lower imports volume which reflects still-weak domestic demand and still falling import prices. Although the market prices of some upstream commodity prices rebounded in July, import prices probably continued to fall quickly, reflecting earlier falls in market prices. While the trade surplus has a seasonal tendency to rise within the year, the dramatic rise in the July trade surplus
is certainly more a reflection of weak imports growth. However, this pattern may start to change in the coming months as domestic policy has started to loosen which should lend more support to domestic demand and imports growth.”
360.gs.com
Significant Chance of Recession Next 2 Years: SF Fed
There is a "significant" possibility the U.S. economy will fall back into recession in the next two years although a reversal is unlikely in the next few months, researchers at the San Francisco Federal Reserve Bank said yesterday. At two years out, the SF Fed puts the odds of recession at between three times more likely than expansion, to expansion being almost five times more likely than recession. Read the full piece here
frbsf.org
Turning Japanese: The Risk of US Deflation
An interesting article was published overnight by Scott Mather, PM at PIMCO, discussing the risk of the US entering a prolonged period of stagnant growth combined with a risk of outright deflation. Mather believes it is likely that the US, along with much of the developed world, will suffer from a muted rate of growth coupled with rising deflationary risks, leaving the Fed with little choice but to keep rates on hold for an extended period. However more experimental monetary policy, potentially through more purchases of UST by the central bank, may provide some respite. The importance of preparing for the possibility of deflation is stressed, with the example of Japan being stressed as a casestudy for how things may evolve. Read the full article here:
europe.pimco.com
Buffett Shortens Bond-Holding Duration After Inflation Warning
Bloomberg is reporting that Warren Buffett has shortened the duration of bonds held by Berkshire Hathaway after warning that deficit spending could force inflation higher. Buffett urged Congress last year to guard against inflation as the U.S. economy returned to growth warning the government that is must address the "monetary medicine" that was pumped into the financial system after the 2008 crisis.
bloomberg.com
China To Close Factories In Energy Drive
China's heavy industries have been dealt a blow overnight as the government moved to crack down on energy demand, of which the sector accounts for more than half. The government announced plans to close factories owned by over 2000 companies in a renewed bid to promote energy conservation, even at the expense of economic growth..
ft.com
Post-US Downgrade – No Change in China due to Policy Adjustment; Small Changes in Smaller Exporters (GS Research)
Following our US economics team’s revisions to their growth and policy outlook on Friday, our NJA team have fed these adjustments into their views and argue that while there is less room to ease policy in China and the rest of the region than in the aftermath of the global credit crisis, there is also much less of a shock to external demand (the impact on China from a 70bp decline in US growth relative to their previous forecasts can be offset by a fairly modest adjustment in the overall stance of macro policy… to put this into perspective, China tightened by around 440bp in 2Q2010 alone). In India, the growth hit is more muted given the smaller linkages, and the monsoon rains will be more important, while in the smaller and more open economies, the team do expect a slight hit to growth, taking down their forecasts for Korea, Taiwan and Singapore all down about 40bp, with Malaysia, Thailand, Hong Kong all slightly less hit. In Indonesia and the Philippines, the US downgrade removes the upside that had otherwise been accumulated and those forecasts are unchanged.
360.gs.com
China: Policy stance has Changed Subtly Since July, Further Changes are Likely (GS Research)
Yesterday, our China economists published an update on the outlook for Chinese macro policy, arguing that a “stealth easing” is already underway, and despite a temporary spike in the CPI due to flood-impacted food prices, should continue and help nudge growth back up towards trend later in the year. They believe the policy easing will be a “stealth easing” to avoid having to more publically unwind the earlier tightening, and because the necessary amount of recalibration can be obtained just by no longer aggressively restricting bank lending to specific sectors and by not as rigidly enforcing the original loan guidance. They also reiterate their optimistic view on China’s growth potential and expect growth to bounce back to trend growth of 10% vs. the market consensus of 8%-9% by 1Q2011.
360.gs.com
Economic Fears Rise as UK House Prices Dip
July saw UK house prices begin to fall for the first time in a year, amid a scenario of scarce buyers and more cautious sellers – July’s RICS survey showed 25% of surveyors reporting falling house prices over the previous three months, compared with 11% saying prices rose. On a seasonally adjusted basis, the negative balance of -8 was the first time the RICS headline measure had indicated falling prices for a year. More details here from the FT…
ft.com
Freddie Seeks $1.8bn from US Treasury
The FT this morning reports that Freddie Mac has requested an additional $1.8bn in federal aid, bringing the total amount spent to rescue the company and its sibling Fannie Mae to $148.3bn so far. This figure is expected to double before the housing market recovers, making the bail out of Freddie and Fannie the most expensive of the government rescues. Freddie reported losses of $6bn in Q2 and this figure could worsen if the US housing market suffers another reversal. Read the full article here:
ft.com
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