ABRAHAM GULKOWITZabe@gulkowitz.com917-402-9039

2014 issue 21December 1, 2014

Talking Turkey…

The robustness or weakness in holiday shopping will confirm the true cautious state of American households. A batch of surprisingly weak data have fuelledsentiment that there is some slowing in the pace of economic growth. First and foremost is the slippage in energy prices. While possibly a boost for households,the speed of the down sweep in oil may yet become disruptive. Moreover, the fall in energy prices has clouded the concerted push by central banks to boost theinflation rate and stoke consumer and business confidence. An anemic housing market recovery in the U.S. and prolonged economic weakness in Europe andJapan, and a weaker China growth path have provided an uneven and subdued backdrop for US growth. Note that the U.S. which, despite being one of the bestperforming developed economies, has not reached the steady 3% annual growth threshold in nine years. Growth in 2014 likely would have breached this mark,except the severe winter weather that started the year in a deep hole and the blistering weather recently. But perhaps in 2015! Economic prospects are flaggingacross Europe, Japan and big emerging markets such as India, a turn that presents fresh challenges to the relatively forceful U.S. economy at a time when theworld needs a dependable growth engine. Multiple strands just this Friday pointed to slackening economic vitality across the globe. In Europe, consumer pricesrose in November at their slowest annual pace in five years, deepening fears the continent may be tipping toward deflation. In Japan, the core consumer-priceindex in October rose at its slowest pace this year, even after massive stimulus efforts. The low-growth outlook is raising questions over whether weak demandcould wash onto U.S. shores in the coming months, even as American businesses and consumers benefit from falling gasoline prices heading into the holidayshopping season. America’s economy has grown steadily this year after a first-quarter contraction, and employers have added more than 200,000 jobs a monthfor nine straight months through October. But consumer spending and business investment in the U.S. was muted in October, suggesting the U.S. might provideinsufficient demand to help buoy other economies. And preliminary evidence for the Thanksgiving period was very weak relative to last year’s pace of shopping.

Oil-Field Giants Work on MergerHalliburton is in talks to buy Baker Hughes, a deal that would help the big oil-field services companies contend with falling oil prices

Moody’s Joins Fitch Slamming Subprime Auto Bonds Honda Motor Co. vehicles are displayed for sale at the Paragon Hondadealership in the Queens borough of New York. The boom in easy financingis helping fuel the fastest pace of car sales in eight years and has drawnscrutiny from the U.S. government as underwriting standards decline amidincreased competition from lenders. Photographer: CraigWarga/Bloomberg… The booming market for securities backed bysubprime car loans is riskier than their ratings imply, say two of the biggestassessors of bond credit quality.

DEEP FREEZE BLANKETS USA… . 

Will hit economic numbers

The yen looks like it's ready to get crushed

Stocks soar to records on global stimulus moves

Wal-Mart Bulls Betting on Oil to Light Up Christmas Sales

Asian central banks under pressure in wake of easing by Beijing and TokyoEasing measures in China and Japan have raisedexpectations that other Asian central banks willfollow suit with growth-boosting interest rate cuts.

Russia’s overnight interbanklending rate climbed to thehighest level in more than 5 yearsamid ruble liquidity squeeze.

Energy company stocks and thecurrencies of major oil‐producingnations stumbled Friday as OPEC’sdecision to keep pumping crude athigh levels despite a glut rippledacross the globe.

Two-day start to holiday shopping season fails to boost spending

The European Parliament (EP) voted on November 27to 'unbundle' Google's search activities from its otherbusinesses. The vote is the latest stage in a deterioratingrelationship between European governments and major US-based internet companies. The European Commission claimsthat the EP resolution will not affect its handling of the Googlecase, but it will remain under intense pressure to get tough withGoogle -- particularly since Paris and Berlin have involvedthemselves in the issue of unbundling and/or regulation of themajor internet platforms.

PMI measures fall to 17-month low, signaling downturn in German manufacturing

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December 1, 2014

In This Issue

Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.

• The Likelihood of Unlikely Events... (pg 6)

• Engines of GrowthDespite U.S. recovery, most of the global economy faces woefully inadequate growth prospects. Risks of a crash in commodity prices only raises the dangers. Very obvious financial vulnerabilities, and serious geopolitical concerns are aggravating the problems of clearly insufficient growth in the world economy. And let’s not forget that many of the challenges cannot be resolved easily … (pg 7)

• Households… (pg 8)

• You Can’t Handle the Truth… (pg 9)

• Credit… (pg 10)

• More Credit… (pg 11)

• U.S. Jobs… (pg 12)

• A New Geography of Business… (pg 13)

• Pumping Iron … (pg 14)

• The DNA of Business… (pg 15)

• Real Estate and Construction… (pg 16)

• Will Life Ever be the Same? (pg 18)

• Talking Turkey… The robustness or weakness in holiday shopping will confirm the true cautiousstate of American households. A batch of surprisingly weak data have fuelledsentiment that there is some slowing in the pace of economic growth. Firstand foremost is the slippage in energy prices. While possibly a boost forhouseholds, the speed of the down sweep in oil may yet become disruptive.Moreover, the fall in energy prices has clouded the concerted push by centralbanks to boost the inflation rate and stoke consumer and businessconfidence. An anemic housing market recovery in the U.S. and prolongedeconomic weakness in Europe and Japan, and a weaker China growth pathhave provided an uneven and subdued backdrop for US growth. Note that theU.S. which, despite being one of the best performing developed economies,has not reached the steady 3% annual growth threshold in nine years. Growthin 2014 likely would have breached this mark, except the severe winterweather that started the year in a deep hole and the blistering weatherrecently. But perhaps in 2015! Economic prospects are flagging acrossEurope, Japan and big emerging markets such as India, a turn that presentsfresh challenges to the relatively forceful U.S. economy at a time when theworld needs a dependable growth engine. Multiple strands just this Fridaypointed to slackening economic vitality across the globe. In Europe, consumerprices rose in November at their slowest annual pace in five years, deepeningfears the continent may be tipping toward deflation. In Japan, the coreconsumer-price index in October rose at its slowest pace this year, even aftermassive stimulus efforts. The low-growth outlook is raising questions overwhether weak demand could wash onto U.S. shores in the coming months,even as American businesses and consumers benefit from falling gasolineprices heading into the holiday shopping season. America’s economy hasgrown steadily this year after a first-quarter contraction, and employers haveadded more than 200,000 jobs a month for nine straight months throughOctober. But consumer spending and business investment in the U.S. wasmuted in October, suggesting the U.S. might provide insufficient demand tohelp buoy other economies. And preliminary evidence for the Thanksgivingperiod was very weak relative to last year’s pace of shopping. …

(pg 1)

• In This Issue (pg 2)

• The Return to Normal… (pg 3)

• Go Figure… (pg 4)

• Dislocation, Dislocation… (pg 5)

Contact information:

Abraham Gulkowitz

phone: 917-402-9039 email:   abe@gulkowitz.com

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December 1, 2014

The Return to Normal ?

Central banks have pumped trillions into the financialsystem… Asset prices, more than vibrant economic growth,has resulted so far. If QE-inflated asset prices are notvalidated by growth, the repricing and transfer of risk againstthe backdrop of diminished market liquidity could provebrutal and destabilizing. Such a scenario represents a big tailrisk regulators, and investors, should seriously consider…

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December 1, 2014

Go Figure… Where Now?

China’s central bank unexpectedly cut itskey interest rates for the first time in morethan two years. The one-year lending ratewas cut by 40 basis points to 5.6% and theone-year deposit rate was cut by 25 basispoints to 2.75%. The surprise rate cutcame as the world’s second largesteconomy is forecast to register itsweakest growth in nearly 25 years.Lending eased and property pricesdeclined in October, while bad loansincreased sharply in the third quarter.Weaker data had raised calls for morestimulus from many quarters including theState Council.

China central bank data show overallcredit growth through the first 10months of 2014 is running Rmb1.27tn($207bn) behind last year’s pace.

Eurozone bulls in countdown to QE chargeBuyers claim easing could leave stocks with further to rally than the euro has to fall

The weak eurozone economy poses a key threat to global growth, the OECDwarned yesterday, urging more flexibility in fiscal rules for struggling EU memberslike France and Italy to prevent another recession. Forcing the two major Europeaneconomies to meet the EU's tough deficit criteria "would likely depress activity furtherand even risk tipping the euro area into another recession," it said. France and Italy's"slower pace of structural fiscal adjustment ... proposed in their 2015 budget plansseems appropriate," said the Organisation for Economic Co-operation andDevelopment, which provides economic analysis and advice to its 34 industrializedmembers. Its assessment came as an EU source said the commission would give thetwo countries until the spring to implement tough reforms, delaying a final verdict onnational overspending originally set for this week.

France, Italy, Belgium may break budget rules, EU to revisit in March

The Chinese Economy Is Facing A $6.8 Trillion Investment Nightmare That Could Get Worse

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December 1, 2014

Dislocation, Dislocation, Dislocation

The downward spiral in oil prices is poised to shake upliquefied natural gas, a critical source of energy in eastAsia and an alternative to Russian gas supplies inEurope. LNG is gas that has been chilled to a liquid soit can be poured into tankers for shipment abroad. Japan,South Korea and China are the top buyers. The 30 percent plunge in crude since the middle of this year, tobelow $80 a barrel this week, is likely to have a bigeffect on LNG. Many Asian customers are locked intocontracts linked to the Japan Custom-cleared Crudeindex, or JCC (nicknamed the Japanese Crude Cocktail).

Prospects for China's politicsAs he enters the third year of a presumed ten-year term, President Xi Jinping isworking hard to re-legitimise Party rule through an exceptionally vigorousanti-corruption campaign, austerity drive and curtailment of privilege. He isconcentrating power in the central authorities and disempowering localofficials -- while concentrating central government power in his own hands. Inforeign affairs, Beijing has softened its recent confrontational stance on severalfronts, as Xi tightens control over the military, with its privileged role inrestoring what the leadership take to be China's rightful place in the world.However, Beijing continues efforts to build its influence on the world stage,believing the United States to be a declining power with exploitableweaknesses.

Trashing currenciesThe more a region is frustrated in its attempts to come up withnew engines of growth, the more likely it is to try to captureothers' growth.It isn't only tiny economies trying to do so. Japan has weakenedits currency to make its exports more competitive and retake aportion of lost growth… Europe is trying to do this now too. Ifsuch a strategy isn't accompanied by an incremental creation ofgrowth at the global level, the result is a zero-sum game that issure to undermine international policy coordination, risk financialinstability and fuel excessive economic nationalism.

Over all, commodity prices have fallen nearly 15 percent since late June,according to a Bloomberg index. Last week, the price of crude oil dropped to afour-year low, about $74 a barrel, down from about $107 a barrel in June. Theprices of metals like copper, platinum and silver have also fallen sharply sincethe summer. The decline can partly be explained by economic changes takingplace in China. In the last two decades, the country has been gobbling up theworld’s coal, iron ore, copper, oil and other commodities to build new citiesand fuel its booming economy, which grew at an average pace of nearly 10percent a year for three decades. But that growth rate has now slowed, and withit China’s demand for raw materials. This year, the country will grow at 7.4percent, according to the International Monetary Fund. The world hadanticipated China’s economic transition, but it was much less prepared forstagnation in Japan and in much of Europe.

Total new debt (bonds and loans) issued by European corporatesis heading for a post-crisis high in 2014, Fitch Ratings says in a newquarterly report . Lower-for-longer funding costs drive continuedrefinancing and M&A activity is heating up. The full year total newdebt figure is set to exceed the around EUR1trn annual amount in thelast five years and approach the all-time high of EUR1.5trn of 2007.

The looming default for Caesars Entertainment Operating Company, Inc.would push the trailing 12-month (TTM) rate to 3.3%. In addition, thegaming, lodging and restaurants’ TTM default rate would climb to 21.3%from 1.8%. Contrary to a recent Bloomberg article suggesting that aCaesars pre-packaged deal is being contemplated, Fitch Ratingscontinues to believe that a lengthy bankruptcy process is a more likelyroute. Fitch’s view reflects the complexity of Caesars' capital structure,the subjective nature of valuing CEOC and pending litigation.

Oil price fall starts to weigh on banksNo consensus between Opec producers and non-cartel members over capping output Barclays and Wells Fargo facing losses on $850m bridge loan

Crushing oil prices couldparticularly impact the high-yield market, where energynames now account for 15%of the market value of theBofA Merrill Lynch US HighYield Index.

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December 1, 2014

The Likelihood of Unlikely Events

With Dry Taps and Toilets, California Drought Turns Desperate

Geopolitical risks have become more relevant

China home prices dropped again in OctoberAll but one of the mainland’s 70 cities on official radarposted yet another month-on-month drop in new homeprices in October, data from the National Bureau ofStatistics showed on Tuesday. The average pace ofdecline eased, however, raising hope that the market isstabilizing after a slew of policy easing. Octobermarked the sixth straight month of property pricedecline, but prices fell 0.3 percentage points slowerthan in September.

Major central banks' rifts may stall new global easingIn testimony to the European Parliament on November 17, ECBPresident Mario Draghi gave his strongest hint so far that theeuro-area's central bank is considering government bondpurchases. Draghi's language, together with the publication ofweak euro-area third-quarter GDP data on November 14,reinforced the perception among investors that the ECB willundertake a programme of sovereign quantitative easing (QE),possibly including supranational bonds. The yield on benchmarkten-year Bunds fell to a near record-low on November 14,recovering only marginally afterwards, as markets believe thatweak economic data will lead to further stimulus. Yet divisionswithin central banks about the benefits of further action suggestmarkets may be too confident about further easing.

Ukraine continues to face multiple threats.In addition to dire economic troubles,including the protracted recession, 2014wracked the country with severe politicalcrises that led to Russia's annexation ofCrimea, war with separatists in Donbasand a total breakdown of relations withMoscow. Most of these problems,especially in the security and geopoliticalfield, will persist into 2015 -- with graveimplications for the ailing economy.

A disorderly unwinding of debt would dent Chinese growth, with adverse impacts on the global economy… China’s credit-to-GDP ratio reached 251 percent of GDP in mid-2014, up from 156 percent at the end of 2007. Theamount of debt (covering government, household and corporate debt) is not unprecedented and mostly comprisesdomestically held corporate debt. However, the pace of increase over the 2008-13 period is rivaled only by Ireland inrunup to the global financial crisis. In addition, rising debt has been underpinned by credit-led public stimulus programssince 2007, which pushed the rate of investment to an extraordinary 45 percent of GDP in 2013. This has led to excesscapacity and low productivity of investments, particularly in the corporate sector which accounts for about two-thirds ofthe debt. Part of the expansion in debt in recent years has also occurred in the shadow banking sector, reflectingattempts to circumvent fiscal rules (on local governments and state-owned companies) and supervisory restrictions onbank lending. Barely available a decade ago, shadow banking credit now accounts for a third of aggregate financing.

2015 will be a year of considerable defence and securitychallenges, with problems posed by the 'Islamic State' group, theUkraine crisis and global terrorism occupying policymakers. Asthe nature of warfare and security challenges changes amidstressed finances, policymakers will also struggle to decidebetween continuing traditional military procurement (such as tanksand aircraft) or move to 'smart' unmanned systems and cyberdefence.

SONY HACK ROCKS SHOWBIZ; NEW MOVIES LEAKED

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December 1, 2014

Engines of Growth…

The eurozone economy expanded last quarter at asluggish pace, underscoring concerns that the region isstuck in a rut of declining investment and highunemployment at a time when other large economiessuch as the U.S. and U.K. are seeing more vigorous andjobs-rich recoveries. In a reversal of recent trends, it wascountries hit hardest by the bloc’s debt crisis that led thepack.

A measure of the current economic situation in the euroarea declined for the fifth successive month in November, asurvey by the Bank of Italy and the Centre for EconomicPolicy Research showed Friday. The eurocoin indicator fellto 0.06 in November from 0.08 in October. The index hasbeen falling since July. The fall of industrial output from thesummer onwards and the persistent weakness of domesticdemand weighed on the indicator, the report said. A slightlypositive contribution came instead from the performance ofequity markets, it added.

Prospects for Japan Prime Minister Shinzo Abe held a 'breakthrough'meeting with Chinese President Xi Jinping on thesidelines of the Asia-Pacific Economic Cooperation(APEC) leaders' summit in Beijing -- the first China-Japan summit since Abe took office. During his trip toChina, reports emerged at home that Abe, still popularafter nearly two years in office, intended to dissolveparliament and bring about a snap lower-house electionin December. Before year-end, Abe must also decidewhether to raise sales tax in October 2015 -- as currentlegislation requires but public opinion strongly opposes-- or to postpone the rise in the hope that economicgrowth will become more robust.

BUBBLES

Christie’s smashes auction records at New York art eveningEvent’s $853m in sales highlight soaring value of contemporary worksBrett Gorvy, chairman and international head of postwar and contemporaryart, said the result was “a reflection of both growing global enthusiasm anddemand in this category and a virtuous cycle of confidence in the art market”.

Tax rise delay will support Japan's fragile economyPrime Minister Shinzo Abe today announced thedissolution of parliament, triggering a lower-houseelection that will take place on December 14. Heframed the election as a referendum on a decision topostpone a consumption tax increase (from 8% to10%) from October 2015 until April 2017. This comesafter GDP data released yesterday showed that Japan enteredinto recession in the July-September quarter. Real GDP fell1.6% from the second quarter on an annual, seasonallyadjusted basis following a revised decline of 7.3% theprevious period. However, there is considerable noise in thedata. The economy is certainly slowing, but the scale of theslowdown is open to question

The race is on. Retailers have kicked off the holiday shoppingseason earlier than ever this year, moving the battle for MiddleAmerica’s dollars online in the run up to Black Friday, thebiggest US shopping event of the year. Traditionally, queues haveformed in parking lots and checkout aisles before midnight onThanksgiving Day, with bargain-hungry customers squabbling outsidestores for first dibs on promotional deals. That frenzy used to mark thestart of the holiday shopping season.

The European Union is poised this week toannounce a new fund that will use financialengineering in an effort to spark at least €300billion ($372 billion) of additional investment inthe Continent’s moribund economy—orsignificantly more than that if nationalgovernments can be convinced to contributeadditional money. The plan, one of thecampaign promises of Jean-Claude Juncker, thenew president of the European Commission, isan attempt to fix a persistent weakness of theEuropean economy: stagnant investment byprivate companies, which have tightened theirpurse-strings in the face of the eurozone’s debtcrisis and government austerity.

Economic activity in the U.S. unexpectedly increased by more than previouslyestimated in the third quarter, according to a report released by the CommerceDepartment on Tuesday. The report said gross domestic product increased by 3.9percent in the third quarter compared to the previously reported 3.5 percent increase.

Forecasts for the German economysuggest that it is unlikely to growstrongly enough to provide alocomotive for the rest of theeuro-area, let alone the worldeconomy -- indeed, Germany itselfwill need an improvement in worldtrade just to match its mediocre2014 growth performance. Thegovernment could afford to spendmore to stimulate the economy,but is unconvinced that suchaction would be effective,preferring instead to balance thebudget next year -- for the firsttime since 1969

November data signaled a further loss of momentum inChina’s manufacturing economy, with output decliningfor the first time since May,

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December 1, 2014

Households – Brave New WorldU.S. Retail Sales Rise, Helped by Lower Gas PricesConsumers Show Willingness to Spend at Restaurants, Online Stores Heading Into Holiday SeasonSales at U.S. restaurants and bars rose 0.9% last month from September,the category’s largest one-month gain since May, and rose 6.8% from ayear earlier. Sales climbed 1.2% at sporting-goods, hobby, music andbook stores. Auto sales rose 0.5% last month. But other categories sawsluggish business during October. Sales at department stores fell 0.3%after declining 1.1% during September, and were down 3.5% in Octoberfrom a year earlier.

U. S. home sales remain subdued… time forrelaxed lending ?Some of the largest U.S. mortgage lenders are preparing to furtherease standards for borrowers after the release of new guidelines thismonth from mortgage giants Fannie Mae and Freddie Mac . The newguidelines, to take full effect Dec. 1, resulted from an agreement inOctober meant to clarify when lenders would be penalized formaking mistakes on mortgages they sell to Fannie and Freddie.Lenders have blamed the lack of clarity for tight credit conditionsthat have made it difficult for many consumers to qualify for amortgage. Relaxing the lending standards potentially could make itpossible for hundreds of thousands of additional consumers to getmortgages.

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December 1, 2014

YouCan’t Handle the Truth…Let's Take the “Con” out of Economics

The explosion of brokers plowing into the lucrative junk-bond underwriting business maybe fading. The number of firms managing U.S. high-yield bond sales isn’t growing forthe first year since 2008, according to data compiled by Bloomberg. The ranks will likelythin in upcoming years as yields rise, making it more expensive for speculative-gradecompanies to borrow. “Underwriting volumes are probably going to decline from here andyou’re going to see more of a consolidation or exodus.” So far, the decline has been small,with 87 firms managing high-yield bond sales this year, down from the record 92 in thesame period in 2013, Bloomberg data show. The number of underwriters is still abouttwice as many as in 2009, when a slew of bankers founded their own firms to grabbusiness from Wall Street firms that were shrinking as the credit crisis caused trillions ofdollars of losses and writedowns.

Buyers in the riskiest part of the U.S. corporate bond marketare demanding the highest relative yields in almost two years, asign the era of wide-open funding to the neediest borrowersmay be nearing an end. Company bonds rated CCC or lower inthe U.S. now yield 5.6 percentage points more than the highest-rated junk notes, jumping from a seven-year low of 3.9percentage points in June, according to index data compiled byBank of America Corp. Companies most vulnerable to defaulthave sold $10.5 billion of bonds this quarter, less than half thequarterly average in the past two years, data compiled byBloomberg show. After six years of easy-money policies by theFederal Reserve opened the debt markets to the least-creditworthy companies, investors are becoming morediscriminating as the prospect of higher interest rates boosts thelikelihood of defaults. Barclays Plc said last month notes fromthe riskiest borrowers will underperform the rest of the year astheir ability to meet obligations and raise more debt weakens.

Danish Bonds Seen Threatened With Foreign Holders at 20% International investors are overtakingDanish pension funds and insurers as thebiggest buyers of the Nordic country’scovered mortgage bonds, creating newrisks for the $500 billion market.

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December 1, 2014

Credit Matters-Know RiskMany Excel in Strategy, Few in the Management of Risk

Russia’s apparent incursion into Ukraine contributes to higher geopolitical risk

Ukraine’s CDS spreads hit 1,500bps for first time in almost five yearsRussia breaches 300bpsLiquidity is strong in Russia but weak in Ukraine

Geopolitical risk was all the rage earlier this year and played a major part in credit spreads widening in several short, sharp bursts. Monetary policy soon resumed its role as the main driver of sentiment, but there were indications this week that it may have to move aside temporarily. Ukraine CDS spreads widened 175bps this week and are now at their widest level since December2009. Prices in the cash market also collapsed, a reflection of renewed concerns that the conflictwith Russia may be about to flare up again. Reports that Russian troops have entered easternUkraine were reminiscent of the incursion in August. The military presence was subsequentlywithdrawn, but if the reports are true, then we could be seeing further escalation.Ukraine’s CDS spreads breached 1,000bps in August – a significant move at that time. But nowthey are being quoted at 1,500bps, and the curve is steeply inverted – a typical sign of creditdistress. Angela Merkel indicated on November 11th that the EU is not planning further sanctionson Russia, which may lead some in the market to expect additional military incursions into theUkraine.

Auto Loans Defaults ClimbThe default rate has been rising for three years, reaching 13 percentin September, exceeding the pre-crisis range of 10 percent to 12percent, according to Wells Fargo & Co… A loss of confidence atone of the smaller companies could lead to an industrywide fundingcrunch as bondholders flee, according to Dave Goodson, the head ofsecuritized products at Voya Investment Management, whichoversees $213 billion. “As a sector, you’re beholden to your weakestlink,” Goodson said in a phone interview. If one lender bucklesunder the pressure, he said, “people would start to hit the exits.”Many of the new companies are focusing on customers with thelowest credit scores or no history at all. The increase in such loans,characterized as deep subprime, is pushing losses on debt underlyingasset-backed bonds higher, according to Wells Fargo. Investorsstarted differentiating more between issuers in the second half of thisyear, demanding additional compensation to hold bonds fromcompanies deemed riskier, Wells Fargo analysts led by JohnMcElravey said in a report last month.

Petróleo Brasileiro SA could slash the value of its assets by as much as 21 billion reais ($8.1 billion)and cut dividends as a result of an ongoing investigation into alleged graft and money-laundering atBrazil's state-controlled oil producer, analysts at Morgan Stanley & Co said in a client note. AnalystBruno Montanari put the price target for U.S.-traded shares of Petrobras (PBR.N), as the company isknown, under review and was reassessing earnings estimates as a consequence of the scandal. Thenote was obtained by Reuters on Wednesday. An internal investigation, which Chief ExecutiveMaria das Graças Foster kicked off as federal prosecutors found evidence of a criminal schemeoperating within the company for years, should lead to asset writedowns ranging from 5 billion reaisto 21 billion reais, Montanari said.

Corporates Are Wary of an Unbalanced UpturnUS corporate bonds have lagged behind the recentequity rally. The latest widening of corporate bondspreads follows from perceptions of more downsiderisk than upside potential for corporate creditquality. Perhaps, investors fear that the latest surgeby M&A will eventually switch from being neutralto negative for corporate credit quality. Moreover,a recent and prospective upturn by corporate bondissuance now helps to widen spreads by increasingthe supply of corporate debt relative to perceiveddemand. Finally, expectations of slower corporateearnings growth during the next several quartersraise the likelihood of more unpleasant surprises interms of insufficient cash flow.

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December 1, 2014

More Credit…

The large LBOs of 2014 illustrate the state of play in today’s market.On the one hand, deal structures are more aggressive than the early-cycle period of 2010-2012, when the market was recovering from thedevastating financial crisis of 2008/2009. On the other hand, today’sdeals have not reached the frenzied levels of 2006/2007, when heroicleverage and rail-thin coverage were rife. That’s not to say thatregulators are incorrect in citing as weak 31% of the leveragedtransactions inked over the past year. “Weak,” after all, is a judgmentcall. But what the data above make clear is that today’srepresentative deals have a more significant margin of safety in termsof coverage ratios than at any time over the past 12 years, even ifcovenant protections have eroded.

A single name credit storyDramatic movements in Abengoa’s spreads show that single name credit stories are alive and well: Abengoa’s spreads widened to 1600bps amid uncertainty

over debt status They have since recovered but still have a risk premium

attached Dovish comments from Mario Draghi ensure that the week

ends on a highAbengoa SA’s debt plunged as much as 32 percent in November amid investorconfusion about how the Spanish renewable energy company accounted for $632million of green bonds. The Seville-based company’s 8.875 percent notes droppedto 74 cents on the euro from 107 cents in two days and rebounded to 95 cents afterAbengoa held a conference call to reassure bondholders.

Fed asks whether it is too close to banksReview to analyse potential ‘regulatory capture’ by the Wall Street groups the regulator oversees

Investors are rattled because they’re concerned that alack of liquidity in the bond market will make itimpossible for them to sell holdings in response tonegative headlines. Trading dropped about 70 percentsince 2008, with a corporate bond that changed handsalmost five times a day a decade ago now only beingsold once a day on average, according to Royal Bank ofScotland Group Plc.

“Vulture” hedge funds, which typically target distressed sovereign bonds,are set to turn their attention to other forms of public borrowing, in anattempt to keep forcing payouts from indebted governments. Significantchanges to government bond contracts in the wake of Argentina’s defaultthis year are making it harder for hedge funds to buy the bonds of indebtedcountries cheaply, resist their debt restructuring proposals, and then sue forfull repayment. But while these changes should act as a “shark repellent”that deters hedge funds from buying distressed sovereign bonds, LeeBuchheit – the lawyer who was lead adviser to Greece in the biggest debtrestructuring in history – has warned that other types of government debtstill lack protection. This unprotected debt can include loans, trade financepapers and bilateral credits.

Amazon.com’sannouncement that it iseyeing an offering ofsenior unsecured notesbacking general corporatepurposes has prompted anegative revision to thecompany’s credit outlook.

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December 1, 2014

U.S. Job Growth, by Select Regions

In October 2014, nonfarm payroll employment increased in 38 states and decreased in 12 states and theDistrict of Columbia. The largest over-the-month increases in employment occurred in California(+41,500), Texas (+35,200), and Florida (+34,400). The largest over-the-month decrease in employmentoccurred in Nevada (-7,300), followed by New York (-5,600) and New Jersey (-4,500). The largest overthe-month percentage increase in employment occurred in Wyoming (+1.4 percent), followed by Idaho(+0.8 percent) and Utah (+0.7 percent). The largest over-the-month percentage declines in employmentoccurred in Montana and Nevada (-0.6 percent each), followed by Rhode Island (-0.5 percent). Over theyear, nonfarm employment increased in 49 states and the District of Columbia and decreased in Alaska(-0.2 percent). The largest over-the-year percentage increase occurred in North Dakota (+5.0 percent),followed by Utah (+3.8 percent) and Texas (+3.7 percent).

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December 1, 2014

A New Geography of Business

Prospects for Chile in 2015After losing speed this year, the economy will pick up onlygradually in 2015. Besides external factors, principallyslower growth in China, this deceleration reflects theuncertainty that the government's plans for structural reformhave generated in the business sector. The wide-rangingreform plans seek to address the inequality that has persisteddespite the strong growth of previous years.

Stocks in Japan have rallied as theextra stimulus measures encouragedinvestors to buy riskier assets, pushingthe Nikkei to the highest levels in sevenyears. That, in turn, is damping demandfor the yen, traditionally regarded as ahaven in times of stress because of thenation’s current-account surplus.Speculation also that the government isconsidering postponing an increase toJapan’s sales tax is another reason why thenation’s stock market is rallying and the yenis sliding.

If anything, the 0.2 percent growth rate released thismorning by Eurostat confirms that Europe faces asignificant growth deficit ‐‐ past, present and future.This should worry more than just the continent, whichstill faces the threat of a lost decade. It should also warnother countries of the headwinds facing the worldeconomy as a whole. And if individual countries arepushed into following a "beggar thy neighbor" strategy,nothing less than disorderly deglobalization couldthreaten the world economy.

Commodities and Prospects for the Andean regionThe economies of the region will see slower growth rates in2015 as a result of lower commodity prices and mutedenthusiasm among outside investors. Domestic demand isalso likely to be less buoyant than in previous years. In Peruand Colombia, governments may encounter difficulties fromopposition in Congress; in Bolivia and Ecuador, oppositionmay take the form of street protest. All four countries willwitness rising public concern about insecurity.

Prospects for Brazil President Dilma Rousseff will be inaugurated for hersecond term on January 1 facing the most difficultscenario since she took office in 2011. The Octoberelections have laid bare deep political divisions,which have led to a fragmented Congress whereensuring the loyalty of her highly heterogeneouscoalition will be an uphill battle. The sluggisheconomy is unlikely to gain much steam next year.Furthermore, fiscal deterioration has recentlyaccelerated.

Prospects for Central Europe While the risk of an earlier-than-expected rise in US interest rates islikely to keep the currencies and equitymarkets of Central Europe (CE) underpressure, the prospect of furthermonetary stimulus by the ECB shouldcontinue to buoy bond markets. Thecombination of extremely low inflationand relatively modest growth shouldallow the region's main central banksto maintain loose monetary policies.Poland's much-awaited parliamentaryelection in September is likely toproduce a more fragmented parliament,boding ill for political stability.

Prospects for India Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) hasset itself the task of reforming and reviving the economy. As 2015nears, optimism pervades large sections of the domestic andforeign private sector. Underlying that bullishness is the belief thatIndia is on the verge of overcoming the 'stagflation' of the last threeyears, and set to return to higher growth and moderate inflation.This expectation is not altogether unfounded. Yet if 2015 proves ayear of economic recovery and reform, it could also be a year ofconsiderable political turbulence.

Oil price compounds PDVSA woes in VenezuelaAt a November 25 meeting Venezuela failed topersuade Russia, Saudi Arabia and Mexico to cutoil output, with agreement only to monitor oilprices for a year. Despite having the world's largestoil reserves, Venezuela's output is now lower thana decade ago. While high prices had cushioned theimpact for some time, current low prices andslipping production will have considerable revenueimplications for the government.

Private sector growth in Germany ishovering below 1% (year-over-year)over the last four quarters, at least.The five-year average for this growthrate is only 1.3%.

Tiffany cut its sales outlook after third‐quarter profits fell short of estimates, assome of the luxury sector’s biggestcompanies contend with slowing Asianmarkets and the fallout from politicalprotests in Hong Kong

Italy’s unemployment rate unexpectedly rose above 13 percent in October, setting a record as businesses refrain from hiring amid the country’s longest recession since World War II.

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December 1, 2014

Pumping Iron…The Old Economy Revisited

U.S. industrial production edged down 0.1 percentin October after having advanced 0.8 percent inSeptember. In October, manufacturing outputincreased 0.2 percent for the second consecutivemonth. The index for mining declined 0.9 percentand the output of utilities moved down 0.7percent. At 104.9 percent of its 2007 average,total industrial production in October was 4.0percent above its level of a year earlier.Capacity utilization for the industrial sectordecreased 0.3 percentage point in October to 78.9percent, a rate that is 1.2 percentage pointsbelow its long‐run (1972–2013) average.

Start hoarding those Hershey's Kisses and stockpile yourSnickers: The world could soon experience a chocolateshortage. Mars Inc. and Barry Callebaut, two of theworld's largest chocolate makers, say that's the path we'reheaded down. They cite a perfect storm of factors: Lesscocoa is being produced as more and more people aredevouring chocolate. In 2013, consumers ate about70,000 metric tons more cocoa than was produced, TheWashington Post reports, and that deficit could go up to1 million metric tons by 2020. The Ivory Coast andGhana produce more than 70 percent of the world's cacaobeans, and both countries are experiencing dry weatherthat limits growth. To make things worse, a fungaldisease called frosty pod has destroyed 30 to 40 percentof global cocoa production. The world's appetite forchocolate isn't going away, and some countries, likeChina, are starting to consume more and more of thesweet treat. Dark chocolate is also rising in popularity,and that takes much more cocoa to create. Althoughresearchers are trying to create trees that can producemore cacao beans than traditional trees, there's one catch:Chocolate made through this process loses its delicioustaste. The only solution is to buy in bulk now and hideyour stash where no one can find it.

Falling Oil Prices Test OPEC UnityThe Organization of the Petroleum Exporting Countries Knows It Must Cut Production to Lift Prices; Unclear is Whether Its Members Will Agree

The outlook for the Latin America metals and miningsector is stable in 2015, demonstrating resilience during atransitional year of lower metals prices with a renewed focus onoperating cost reductions, according to a new Fitch Ratings report.Fitch expects cost reductions by miners in the region to decreaseaverage net debt-to-EBITDA ratios to 1.4x by the end of 2015,from 1.6x as of the latest 12 months (LTM) ended June 30, 2014.Preparing for the lower price environment expected in 2015, LatinAmerican metals and mining companies have reined-incapex, continued to focus on operating cost reduction and closedunprofitable operations. Companies in the lower part of the costcurve will be able to continue expanding their production,displacing higher cost players.

Outlook: global metal marketsThis has been the third consecutive bearish year for metals, atrend exacerbated by markets' reluctance to support newproduction. The ferrous metals value-chain has suffered, withiron ore prices falling 43% in the first ten months of 2014, whileprecious metals have fared a little better, losing 12% on average.By contrast, some base metals have benefited from supplyconstraints, with aluminium, zinc and nickel registering gains.Across sub-sectors, the broad mining equity index lost 15%. Inthe second half of 2014, the dollar's strength intensified nominallosses, even though the metal markets have sufferedcomparatively less than energy or agricultural commodities.

Chile’s GDP expanded 0.8% (y/y) in Q3, beloweconomists’ expectation of 0.9% and the weakest growth since2009, amid continuing slump in copper prices. Investment wasthe weakest part of the economy, contracting 9.9% (y/y). Coppergenerates 20% of the country’s GDP and 60% of exports. Pricesof copper have dropped more than 18% since the beginning of2013 and more than 30% since their 2011 highs.

Coal and spot liquefied natural gas (LNG) prices in the Asia‐Pacific region have fallenmore than oil prices. Overall policy frameworks favor gas use over coal. Therefore,coal prices should stay weak in 2015, keeping coal producers under pressure torationalize production and reduce costs. Gas markets also look well supplied and maybenefit from rising demand in both developed and developing countries. Morebroadly, gas will benefit from a structural upward movement in demand, while coal isexperiencing the opposite trend.

Despite expectations of improving industrialdemand and falling supply from South Africa,platinum prices fell 19% during the thirdquarter ‐‐ and have slipped further recently ‐‐under pressure from the strong dollar andbroader commodity sell‐off. The preciousmetal is now trading at levels last seen fiveyears ago. Even though exchange traded fund(ETF) investors favoured palladium in the firsthalf of 2014, outflows from these productshave accelerated after the metal breached 900dollars/ounce on August 29, its highest levelsince February 2001. It has fallen 12% sincethen.

Energy costs turn up heat on aluminium sectorPlant closures underline problem for Europe of remaining competitive while acting as leader in climate change battle

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The design of skyscrapers could be transformed by a cable‐freeelevator which is powered by magnets and moves horizontally aswell as vertically. Hailing its design as the “holy grail ofthe elevator industry”, ThyssenKrupp, the German steel andtechnology conglomerate, said its Multi system would allowmultiple lifts to use the same shaft and dispense with safetycables altogether. ThyssenKrupp said Multi enables multiplelifts to be placed in a single column, much like an old‐stylepaternoster elevator, where people would hop on and offcontinuously circling cabins.

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December 1, 2014

The DNA of BusinessReconfiguring Industries to Define Growth

Report Sees a Cloudy Future for Atlantic CityCommission Proposes Tearing Down Empty CasinosGov. Chris Christie’s office released a somber assessment of Atlantic City’sfinancial future Thursday, floating proposals that include tearing down emptycasinos, reallocating at least part of the city’s marketing budget and installingan emergency financial manager. The report, from a bipartisan commissionappointed by the Republican governor, contrasted with a more upbeat five-year “economic recovery plan” in 2010. That plan recommended boostingnongambling revenue, bringing more flights into the shore city and attractingdevelopment.

Twitter Debt Rated as JunkTwitter Inc. ’s debt was rated as junk on Thursday by Standard & Poor’sRatings Services, a sobering grade that comes a day after executives of thesocial media service tried to reassure skeptics on Wall Street of its long-term growth plan. S&P gave Twitter a double-B minus rating, noting thatTwitter is investing aggressively and that, depending on the level ofbusiness reinvestment, the company may not generate positive discretionarycash flow until 2016. S&P said the unsolicited rating came in light ofTwitter’s $1.8 billion debt offering in September.

Why Are So Few Blockbuster Drugs Invented Today?Scannell and Brian Warrington, who worked for 40 years inventing drugs forpharmaceutical companies, published a grim paper in 2012 that showed theplummeting efficiency of the pharmaceutical industry. They found that for everybillion dollars spent on research and development since 1950, the number of newdrugs approved has fallen by half roughly every nine years, meaning a totaldecline by a factor of 80. They called this Eroom’s Law, because it resembled aninversion of Moore’s Law (the observation, first made by the Intel co-founderGorden E. Moore in 1965, that the number of transistors in an integrated circuitdoubles approximately about every two years).

Actavis Agrees to Buy Botox Maker AllerganDeal, Valued at $66 Billion, Seen Thwarting Takeover Bid by Valeant, Ackman

Halliburton Agrees to Buy Baker HughesOil-Field Services Deal, Valued at $34.6 Billion, Follows Talks That Turned Contentious

Huge packaging deal…Onex Corp announced yesterday that it is buying Reynolds Group Holdings’ drinks cartondivision SIG Combibloc, for $4.66 billion (€3.75 billion). Roughly €3.575 billion will bepaid at the close of the acquisition, and up to another €175 million is payable based on theperformance of the firm over the next two years. Onex’s equity investment is roughly $1.25billion and is made by Onex Partners IV, certain limited partners as co-investors, includingOnex, and SIG’s management team.

Little more than a decade after BT spun off its mobile phone business, it isthinking about buying it back from its Spanish owner. The former statemonopoly demerged the O2 business – then called Cellnet – in 2001 as part of arestructuring of the company, which was crippled by debt following an ill-fatedexpansion. But after being approached by Telefónica, which bought O2 in 2005 for£17.7bn, BT is plotting its return to mobile from a position of strength. It boasts amuch more robust balance sheet and a management team determined to build abusiness that can compete in the new world of bundled offerings, in which telecomscompanies are battling to lure customers with a mix of mobile, home broadband andtelevision content packages

Bayer eyes consumer healthcare pushPlastics unit IPO could allow company to lift role as supplier to pharmacies

Vinyl record sales hit an 18-year highSales reach over a million for the first time this millennium thanks to British bands including Arctic Monkeys, Oasis and Pink Floyd

Vodafone Is Said to Be Weighing a Combination With Malone's Liberty Global

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December 1, 2014

Real Estate and Construction Outlook

Headed by the continued strength in the multi-family residential marketand the emerging growth for institutional projects, demand for designservices continues to be healthy as exhibited in the latest ArchitectureBillings Index (ABI). As a leading economic indicator of constructionactivity, the ABI reflects the approximate nine to twelve month leadtime between architecture billings and construction spending. TheAmerican Institute of Architects (AIA) reported the October ABI scorewas 53.7, down from a mark of 55.2 in September. This score reflectsan increase in design activity (any score above 50 indicates an increasein billings). The new projects inquiry index was 62.7, following a markof 64.8 the previous month.

While implementation of the Affordable Care Act(ACA) and favorable demographic trends willundoubtedly boost demand for medical services,quantifying the impact on future medical officespace needs has become increasingly difficult.Multiple trends muddy the forecasts, including agrowing physician shortage, the proliferation of in‐store clinics, telemedicine, evolution of the caredelivery model and overall healthcare‐industryconsolidation. While these variables introduce moreunknowns into the long‐term outlook for themedical office sector, they have begun to factor intoproperty‐level performance and values.

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December 1, 2014

Will Life Ever Be the Same?

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