ABRAHAM GULKOWITZabe@gulkowitz.com917-402-9039

2015 issue 5March 15, 2015

Spring Forward …U.S. job growth has accelerated, one of the most important economic developments in the world economy. With this strengthening of economic performance,comes a switch in monetary posturing. A year ago, the EU was running a tighter monetary policy than the U.S. Now we face a reversal, with the Fed needingto tighten at some point, and the ECB embarking on a massive easing program. Awkward developments in currency markets and in interest rates havefollowed. European bond’s ever-deeper plunge into negative nominal yields will continue to attract attention. What are the implications of such a twistedconfiguration? It is highly unusual to see investors paying issuers for the privilege of holding their debt, rather than being paid for the risks they are incurring.The worlds of business and finance are confronted with a low interest rate environment that looks increasingly unnatural and peculiar. Such a distorted ratecontext has encouraged a desperate search for yield that has now infected high-yield markets, real estate investing, the art world, tech ventures, etc. Themagnitude of this distortion is such that questions of future volatility are not to be dismissed lightly. And strange as this is, it does not constitute the full gamutof uncertainty. The repercussions of the dollar’s recent surge vary sharply across the corporate world, depending on where and whether a business hasinternational operations, how its supply chain is configured, and the extant of currency hedges. Many companies will be confounded by this strength in theU.S. dollar. The other notable development for 2015 and possibly longer, has been the plunge in oil prices. While the drop in oil prices will have negativerepercussions for energy producers their regions, it will likely offer significant benefits if it lasts. Primarily, that boost will arise from U.S. households havingthe wherewithal to increase spending on other goods and services as they spend less on heating and gasoline. We will have to see how all these crosscurrents make for a very complex outlook.

CHINA: Steep deceleration in virtually all economicindicators… export orders shrank and deflationarypressures persist, a private business survey showed,adding to the view that yet more policy actions will beneeded.

Google to expand into telecoms servicesTech group to become a US mobile virtual network operator

U.S. labor market flexing its muscles, at lastU.S. employment accelerated in February and the joblessrate fell to 5.5 percent, signs that could encourage theFederal Reserve to consider hiking interest rates in June.

Analysts trim forecasts as stronger dollar takes toll on earnings

Euro funding costs bargain of the century China Inc flocks to euro debt for fundingCompanies shun renminbi as euro funding coststumble with impending ECB quantitative easing

Brazil’s currency plunges as protests erupt over Rousseff ’s austerity plan

OIL PRICE CRASH: Capital spending budgets are beingcut back, drilling rigs idled and staff laid off. Theremarkable growth of US oil production, which broughtmore than 1m barrels a day of additional supply on toworld markets in each of the past three years, seemslikely to flatten out this year.

US Retail Sales Unexpectedly Fall For Third Straight Month

Weak participation rate haunts US labor markets

Greece-Eurozone game of chicken

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March 15, 2015

In This Issue

• Engines of GrowthDespite a broadening U.S. growth potential, most of the global economy faces woefully inadequate growth prospects and difficult policy options. Risks from the crash in commodity prices only raises the dangers for many sectors, nations and currencies. Very obvious financial vulnerabilities, and serious geopolitical concerns are aggravating the dangers. And let’s not forget that many of the challenges are not fleeting and cannot be resolved easily …

(pg 8)

• The Likelihood of Unlikely Events... (pg 9)

• Households… (pg 10)

• Credit… (pg 11)

• A New Geography of Business… (pg 12)

• Pumping Iron … (pg 13)

• The DNA of Business… (pg 14)

• Real Estate and Construction… (pg 15)

• Will Life Ever be the Same? (pg 16)

• Spring Forward U.S. job growth has accelerated, one of the most important economicdevelopments in the world economy. With this strengthening of economicperformance, comes a switch in monetary posturing. A year ago, the EU wasrunning a tighter monetary policy than the U.S. Now we face a reversal, with theFed needing to tighten at some point, and the ECB embarking on a massiveeasing program. Awkward developments in currency markets and in interest rateshave followed. European bond’s ever-deeper plunge into negative nominal yieldswill continue to attract attention. What are the implications of such a twistedconfiguration? It is highly unusual to see investors paying issuers for the privilegeof holding their debt, rather than being paid for the risks they are incurring. Theworlds of business and finance are confronted with a low interest rateenvironment that looks increasingly unnatural and peculiar. Such a distorted ratecontext has encouraged a desperate search for yield that has now infected high-yield markets, real estate investing, the art world, tech ventures, etc. Themagnitude of this distortion is such that questions of future volatility are not to bedismissed lightly. And strange as this is, it does not constitute the full gamut ofuncertainty. The repercussions of the dollar’s recent surge vary sharply acrossthe corporate world, depending on where and whether a business hasinternational operations, how its supply chain is configured, and the extant ofcurrency hedges. Many companies will be confounded by this strength in theU.S. dollar. The other notable development for 2015 and possibly longer, hasbeen the plunge in oil prices. While the drop in oil prices will have negativerepercussions for energy producers their regions, it will likely offer significantbenefits if it lasts. Primarily, that boost will arise from U.S. households having thewherewithal to increase spending on other goods and services as they spend lesson heating and gasoline. We will have to see how all these cross currents makefor a very complex outlook. (pg 1)

• In This Issue (pg 2)

• Go Figure… (pg 3)

• Reference Points… (pg 4)

• The Return to Normal… (pg 5)

• Dislocation, Dislocation… (pg 6)

• You Can’t Handle the Truth ! (pg 7)

Contact information:

Abraham Gulkowitz

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

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March 15, 2015

Go Figure…Where Now?

Deutsche and Santander fail US stress test

Fed vetoes two banks’ capital plans but clears every US lender for the first time since the crisis

Tough February weather dents auto salesLast month's harsh weather in the Northeast and Midwest caused many auto shoppers to stay home, pushing sales below forecast

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March 15, 2015

Reference Points…

Low borrowing costs spur Yankees’ ride into EU financings With reverse Yankee issuance accounting for

a fifth of all euro-denominated corporate andbank issuance so far in 2015, the surge isestablishing benchmarks and broadeningEuropean capital markets in the types ofcompanies issuing and the maturity spectrum;Coca-Cola, AT&T and Berkshire Hathawayall had tranches of 20-year bonds.

If US companies offer a few extra basispoints of yield to get a deal done, that is goodnews for yield-starved European investors.Reverse Yankee issuance helps offsetshortages of investment-grade bonds causedby the ECB’s asset purchase programme. Itenables portfolio managers restricted toinvesting in euros to buy into US companies.

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March 15, 2015

The Return to Normal ?

The European Central Bank’s new bond-buying plan hasleft $1.9 trillion of the euro region’s government securitieswith negative yields. Germany sold five-year notes at anaverage yield of minus 0.08 percent on Wednesday, a euro-area record, meaning investors buying the securities will getless back than they paid when the debt matures in April 2020.By the next day, German notes with a maturity out to sevenyears had sub-zero yields, while rates on seven other euro-area nations’ debt were also negative. While some bonds hadsuch yields as far back as 2012, the phenomenon has gatheredpace since the ECB’s decision to cut its deposit rate to belowzero last year. Even when investors extend maturities, andmove away from the region’s core markets, returns arebecoming increasingly meager. Ireland’s 10-year yield slidbelow 1 percent for the first time this week, Portugal’sdropped below 2 percent, while Spanish and Italian rates alsotumbled to records.

Spanish, Italian and Portuguese yields fell to record lows as investors looked forward to the start of the European Central Bank's quantitative easing program later this month

China set a lower economic growth target forthis year and promised to open more industries toforeign investors as it tries to make its slowing, state-dominated economy more productive. The growthtarget of about 7 percent, down from last year's 7.5percent, is in line with efforts to create a "moderatelyprosperous society," said Premier Li Keqiang in areport Thursday to China's ceremonial nationallegislature. Last year's actual growth was 7.4 percent,the lowest since 1990. The ruling Communist Party isin the midst of a marathon effort to guide the world'ssecond-largest economy to slower but more self-sustaining growth based on domestic consumptionand services. It is trying to replace a worn-out modeldriven by trade and investment in construction andheavy industry that has left China's air and waterbadly polluted.

Demographic Nightmare… Eastern Europe risks an end tobooming economic growth and increasing strains on the public pursewithout radical reforms to employment, migration and educationpolicies, the World Bank has warned. Dwindling birth rates, massemigration and outdated working practices are curbing workforcestrength in the region, threatening decades of economic expansionand challenging attempts by countries such as Poland, Estonia andRomania to close the gap with richer western nations, according to areport by the bank. Left unchecked, the region’s workforce willfall by almost 14m by 2060 — almost the equivalent of Slovakia andthe Czech Republic’s combined population — it says. This wouldstifle economic expansion in one of Europe’s most important growthareas, the report warns.

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March 15, 2015

Dislocation, Dislocation, Dislocation

Maersk warns of slowdown in global tradeThe chief executive of the world's largest container-shipping group has warned thatglobal trade growth could slow this year in spite of low oil prices as Chinese,Brazilian and Russian economies disappoint. Container demand rose by about 4per cent in both 2013 and 2014 and Maersk Line, the Danish group that ships about15 per cent of the world’s seaborne freight, expects growth in trade to remain stuckin the 3 to 5 per cent range this year.The economies in Europe are still very sluggish. Brazil, Russia and China: thosethree economies used to drive a lot of growth, and right now we are not reallyseeing that to the same extent. The only real bright spot is the US, and even the USis good but not great !

We’ve had this record bond issuance but a real drop off in liquidity. Most bankers and fund managers agree that the ability to buy or sell older corporate debtwithout its price having an impact in the secondary market has deteriorated in the yearssince the crisis, though smaller managers tend to feel this shortage of so-called liquiditymore acutely.

Some pin the decline in liquidity on post-crisis regulations that have limited banks’ability to trade debt; their fixed-income holdings have declined 79 per cent from a peak of$235bn in 2007. Others blame a post-crisis economic environment that has seen centralbanks embark on their own bond-purchasing programmes — encouraging investors to buywhat securities they can find and then hold on to them tightly.

The large asset managers “are the bids in the marketplace”, says Anthony Perrotta, headof fixed income research at Tabb, meaning such funds are effectively setting bond prices.If the credit cycle turns, “inflows will turn to outflows and you’ll get redemptions andthose guys will not be the bid any more. They’ll be the sellers.”

Apple Inc, the nation's largestcompany by market value, willjoin the Dow Jones IndustrialAverage on March 18, replacingAT&T Inc, S&P Dow Jones Indicessaid on Friday. Apple holds amarket capitalization of about $736billion, making it the largestpublicly traded company in theworld. AT&T, by contrast, has amarket value of $176.5 billion.The iPhone and iPad maker hadbeen notable by its absence in the30-stock average, precluded frominclusion because its stock pricewas too high for the price-weightedindex. The move by S&P Dow JonesIndices had been widely anticipatedsince a seven-for-one stock split inJune 2014.

The global economy grew at aslightly faster pace in 2014, as amodest revival in the eurozoneand a pickup in India helpedoffset slowdowns in China andJapan. The Organization forEconomic Cooperation andDevelopment Wednesday saidthe combined gross domesticoutput of the Group of 20 largesteconomies expanded 3.4% lastyear, up slightly from 3.2% in2013. The G-20 accounts for about90% of global economic output.

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March 15, 2015

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

Money for NothingPaying interest to borrow money appears to berapidly becoming an old-fashioned idea, asanticipation of quantitative easing from theEuropean Central Bank steadily pushes fixed-income markets further into uncharted territory.Energy company GDF Suez GSZ.FR +0.05% isset to issue €2.5 billion of debt Wednesday thatwill include the first-ever zero-couponbenchmark corporate bond, said one of the banksmanaging the sale. The two-year €500 millionsecurity will be issued at a small discount to par,and so still carry a positive yield – of about0.12% — but it will pay no interest. There’s stillsomething in it for investors: two-year Germangovernment bonds carry negative yields, so GDFSuez’s deal at least looks relatively attractive inthat light.

Auto Makers Gear Up to Take On the Challenge From Google and AppleIndustry’s old school moves to introduce technology to rival Silicon-Valley competitors

Treasury bond yields have been hitby a powerful surge in corporatebond issuance. The hedging of newinventories of corporate bonds andthe replacement of existing Treasurybonds with new corporate debt has,at least, temporarily lifted Treasuryyields. A clearer view regarding thelikely direction for Treasury bondyields must wait for forthcoming datathat will reveal whether or not theworld economy can shoulder muchhigher US Treasury yields. Thestrength of the dollar exchange rateis but one indication showing howmarkets are not demanding a ratehike from the Fed. Nevertheless, theFed probably wants to begingradually hiking rates later in 2015provided that doing so will notdisrupt financial markets by enoughto materially weaken businessactivity.

The now thinner spreads of euro-denominatedcorporate bonds compared to dollar-denominatedcorporates must be interpreted with caution. Majordifferences in the expected direction of monetarypolicy across countries add to the difficulty ofcomparing the yield spreads across currencies.

The European Central Bank’s imminent bond‐buying plan has left $1.9 trillion of the euroregion’s government securities with negativeyields. Germany sold five‐year notes at anaverage yield of minus 0.08 percent, a euro‐area record, meaning investors buying thesecurities will get less back than they paidwhen the debt matures in April 2020.

Investors in European high-yieldbonds have been warned by Fitchof credit market conditionsreminiscent of 2007, when cross-border investors in eurozone debtfuelled excessive credit growth.The rating agency said divergencebetween the US, UK, and continentalEuropean high-yield bond marketshad become more pronounced.Borrowing costs for junk-ratedEuropean companies remained lowerthan for US counterparts, in spite ofweaker growth in the eurozone.Edward Eyerman, a Fitch analyst,said there was a danger of returningto the pre-2007 scenario of greaterimbalances translating into more andmore cross-border capital flowstempting more marginal borrowers inunproductive sectors until they wereexhausted, or policy mistakes led tostressed balance sheets and creditlosses.

China's social security system is targeted forreform. Premier Li Keqiang's 'work report' tothe National People's Congress (NPC) on March5 pledged to increase the basic pension, lowerpremiums for unemployment insurance andcentralisz the country's fragmented urbanpension system. Several days later, humanresources minister Yin Weimin said, on thesidelines of the NPC, that the governmentintends to introduce a plan in 2017 to raise thecountry's statutory retirement age.

The Bank of Japan’s aggressivepurchasing of stock funds hashelped Japanese shares climb tomultiyear highs in recent months.But some within the central bankare growing uncomfortable aboutthe fast-paced rally and thebank’s own role in fueling it.

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March 15, 2015

Engines of Growth…

According to the latest weekly survey of economists by the centralbank, the Brazilian economy is now expected to contract 0.66% thisyear. It's the 10th consecutive week in which economists have shavedtheir expectations. Meanwhile, the real, having fallen through the 3 perdollar mark last week, dropped another 1.1% on Monday to 3.1 - a fresh10 and a half year low.

Government bond yields across Euro Area fell as the EuropeanCentral Bank (ECB) begun its sovereign debt purchase program.German 10‐year bond yields, the currency bloc’s benchmark,dropped 6 basis points (bps) to 0.34% while comparable yields onItalian and Spanish governments bonds slid by 2 and 3 bpsrespectively to 1.28% and 1.31%. Greek yields, however, rose amidrenewed concern that a provisional accord to extend the country’s bailoutfunds may not hold. Meanwhile, the U.S. benchmark 10‐year Treasury yieldfell 5 bps to 2.19% as the launch of the ECB’s quantitative‐easing programprompted investors to seek the higher yields available in the U.S.government debt.

Danger of Mitteleuropa’s financial sectorAt zero interest rates, it is very difficult for the German insurance industry to remain solvent

OPEC Secretary General Abdalla Salem el-Badritold a conference this past weekend that the cartel'spolicy has hurt the U.S. shale oil industry andtriggered a global reduction in capital spending thatcould ultimately lead to a shortage-and higherprices. The U.S. industry, however, has not slowedits high levels of oil production, despite OPEC'sbest efforts to curb drilling with lower prices. TheU.S. has pumped more than 9 million barrels a daysince early November, and last week it produced amultidecade high of 9.32 million barrels. Industryoutput has not been at such a level on a sustainedbasis since the 1970s. Oil analysts say the strongproduction in the U.S. should ultimately winddown, as the output of some wells in operationdeclines and more wells are shut in. But for now, asseasonal factors like refinery maintenance, affectdemand, U.S. production could be a catalyst foreven lower prices and a new bottom for crude."You could touch a surprisingly low pricesometime in the next month or two," said Citigroupenergy analyst Eric Lee. "As we get into summer,refineries come back from maintenance. Demandcould pickup stronger than it was before the rigcuts and capex cuts, and globally there will becapex cuts starting to have an effect."

U.S. wholesale inventories unexpectedlyrose in January as sales recorded theirbiggest decline since 2009, pushing thenumber of months it would take to clearwarehouses to its highest level in morethan 5-1/2 years.

China’s official producer price index fell 4.8 per cent last monthfrom a year earlier, an accelerating decline from the 4.3 per centdrop in January and the worst result since October 2009. The PPI,often regarded as a leading indicator for consumer prices, hasnow been in deflationary territory for three straight years thanksto sliding domestic demand and chronic overcapacity in manysectors.

Missing estimates: Chinese industrial production growthslowed to 6.8% (y/y) in January-February period from 8.3% inDecember. Economists had forecast a growth of 7.7%. At thesame time, retail sales expanded less than expected only 10.7%during the January – February period, slower than the 11.9% riseseen in December. The Chinese National Bureau of Statistics(NBS) publishes combined data for January and February toavoid the distortions caused by the timing of the Chinese LunarNew Year.

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March 15, 2015

The Likelihood of Unlikely Events

Russian Finance Minister Anton Siluanov said theeconomy could witness as much as $100 billion incapital flight this year, though most of it willresult from companies paying down foreign debts.“This amount includes some $60-70 billion inpayments of external debts,” Siluanov said, addinghe suspects at least $30 billion to fly the coopthis quarter. If his number is correct, that willbe less capital flight than last year. According tothe Central Bank of Russia, capital outflow hit$151.5 billion in 2014, 2.5 times greater than 2013numbers. The Bank forecast in January thatcapital outflow could total $118 billion this year.That’s worse than Siluanov’s prediction, butbetter than 2014. Last year was a bad one forRussia. Oil prices began their freefall from $80 abarrel to in the $40-$50s by year end. And a civilwar in eastern Ukraine has led the Westernpowers to sanction the Russian economy. Both theU.S. and European Union banned long termfinancing of more than 90 days out, andprohibited companies from selling equipment usedin oil and gas drilling, as well as all exploration andproduction joint ventures with Russian oil and gascompanies.

Hryvnia collapse will put Ukraine's stability at riskUkraine's parliament yesterday revised the 2015 budget andintroduced controversial pension cuts for working‐age pensioners. Inorder to receive new IMF lending, the budget also introduces big gasprice rises, and increases defence spending. Meanwhile, the hryvnia'sdisastrous February weakening exceeded all the previous bouts ofdepreciation and is a major concern for Kyiv. For the first time in manyyears, people began stocking up on basic foodstuffs. With domesticdemand for foreign currency driven more by panic and lack of trust inthe hryvnia than anything else, the Ukrainian central bank (NBU) willstruggle to restore any relative currency stability.

Heightened geopolitical risk undermines the potential for any short-term strengthening of world economic activity. In the secondquarter, global growth should be similar to that experienced in early2015. Over the first half of this year, it will remain in the 3.0-3.5%range, similar to the 2014 growth rate of 3.3%. Many countriesremain vulnerable to international tensions: there will be no earlyrecovery in the commodity-producing economies of the Middle East,Africa and Latin America, or in Eastern Europe.

US running out of room to store oil; price collapse next?Oil glut: US running out of room to store crude; prices for oil and gasoline could plunge

EU DEFLATION RISKS… Easing for the third straight month due tofurther declines in energy prices, the consumer price index (CPI) for theOrganization for Economic Cooperation and Development (OECD)economies rose 0.5% (y/y) in January, following the 1.1% increase inDecember. Inflation was the lowest since October 2009, when pricesrose only 0.2%. Excluding food and energy, core inflation easedmarginally to 1.7% in January from 1.8% in December.

Russian financial system will be increasingly fragileThe fall in the ruble and the expectation of year-on-year recession have not yet produced a bankingcrisis in Russia. However, the banking sector hasalready seen what may be warning signs. InFebruary, Tavricheskii Bank and FundServisBankwere put into temporary administration. Last yearVTB said that it had received 100 billion rubles(1.8 billion dollars) in aid while Moscowannounced in December that it would spend 40billion rubles to support Gazprombank. Also in2014, there was a run on private-sector Trust Bank;the bail-out, at 2.4 billion dollars, was the second-largest in post-communist Russia.

Euro Area Pushes Greece to Open Books as Talks Resume

The surging dollar and a global slowdown are likely to restrain the U.S.economy through at least the first half of the year, according to The WallStreet Journal’s March survey of economic forecasters. Harsh winter weatheris already slowing output in the current quarter. But even once that drag meltsaway, a wider trade gap will remain a headwind, the economists said. Thatcould keep overall economic growth just below 3% in 2015

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March 15, 2015

Households – Brave New World

US Retail Sales decreased 0.6% in FebruarySales Unexpectedly Fall For Third Straight Month Retail sales in the U.S. unexpectedly fell for the third straightmonth in February, according to a report released by theCommerce Department, with the decrease partly reflecting asubstantial drop in auto sales and weak spending at gasolinestations. Retail and Food service sales ex-gasoline increasedby 5.1% on a YoY basis (1.7% for all retail sales).The decrease in February was below consensus expectationsof a 0.3% increase. This was a weak report.

Restaurants and bars helped drive US job growth in February

Americans’ wealth rose to its highest level ever in the fourth quarter of last year,thanks to gains in the stock market and home prices that could prop up consumerspending and economic growth this year. The net worth of U.S. households andnonprofit organizations—the value of homes, stocks and other assets minusdebts and other liabilities—climbed about 2%, or $1.5 trillion, between Octoberand December to $82.9 trillion, after dipping in the previous quarter, according toa Federal Reserve report released Thursday. The figures aren’t adjusted forinflation or population growth. The value of stocks and mutual funds ownedby households jumped $742 billion during a quarter, when the S&P 500 stock‐market index gained 4.4%.

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March 15, 2015

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

Billionaires Use Secret Luxury Homes to Hide Assets

The U.S. leveraged-loan market is showing signs of a recovery after regulatory scrutiny and slumping oil prices curbed issuance. The price of the debt rallied to 96.48 cents Monday,the highest in nearly three months, according to theStandard & Poor’s/LSTA U.S. Leveraged Loan 100index, after falling in December to the lowest in morethan two years. The rate for new loans dropped to4.48 percentage points more than lendingbenchmarks as of Feb. 26 from 4.9 percentage pointsin January, according to S&P’s Capital IQ LeveragedCommentary & Data. The market is reboundingamid a slowing investor retreat from U.S. funds thatbuy high-yield, high-risk loans, which have gained1.7 percent this year after losing 1.45 percent in thesecond half of 2014 when oil prices plunged. Therevival is helping borrowers command lower ratesand emboldening private equity-owned companiessuch as Tank, a manufacturer of steel containers, toissue loans to pay for shareholder dividends.

Latin America corporate debt issuance activity is at a nearstandstill due to the dismal economic outlook for growth in2015, which Fitch Ratings has projected at 1.6%, and thefallout from corruption allegations surrounding Petrobras andits contractors. Investors shun small issuers and debtmaturities escalate in 2016.Oil & gas companies look to reduce

borrowing bases of revolversAmid falling commodity prices, a growing list of oiland gas companies are taking steps to preserve liquidityas they look to ride out the cycle until prices stabilize.Borrowing bases that expanded during the oil boomnow need to come down, and this is putting pressure onissuers in an industry where revolver access has longbeen steady source of working capital financing.

ECB QE policy has seen yield curves in Europe flatten across the board, although the ECB’s pledge to limit purchase to assets priced above -0.2% has caused a price floor.

� 1 and 2-yr bund yields have already hit the -0.2% price floor, something the 5-yr notes are approaching� Yields in periphery bonds are already catching up with their German peers� Longer dated periphery bonds are also narrowing relative to the near end of the curve

Greedy demand from investors isallowing companies to issue bonds withvery few restrictions, according to a newreport from Moody’s Investors Service .Low-rated corporate borrowers are gettingmoney with hardly any strings attached. Infact, bond covenants meant to safeguardinvestors against possible defaults were theweakest ever in February, based on anaverage score of such protections measuredby the ratings firm. “There are a number ofcovenants in the bond space that are beingattacked and weakening over time,” saidEvan Friedman, a Moody’s analyst. Theweakness of those provisions in new bondsissued in February reached a record 4.51 inFebruary, with 5 being the weakest and 1 thestrongest. That was up from 4.41 in January,and 3.78 in December.

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March 15, 2015

A New Geography of Business

Brazil Reels, or is it Reals… While the growing scandal at oil major Petrobras hascontributed to the real's weakness, deterioratingeconomic fundamentals are playing an even bigger roleon the currency's decline. Sentiment for the country isnot helped by the latest Brazilian manufacturing data.The headline manufacturing PMI index slipped to 49.6in February, from 50.7 in January. Any reading below50 signals contraction.

India in the second quarterPrime Minister Narendra Modi's Bharatiya JanataParty (BJP) suffered a major defeat in Delhielections in February, denting the party'sperception of electoral invincibility. This has casta shadow over Modi's economic agenda justwhen investor pressure is mounting for 'big bang'reforms. Nonetheless, signs of economicrecovery -- visible in the uptick in GDP growth,moderating inflation and strengthening balance ofpayments -- promise the government room formanoeuvre in the second quarter of 2015 (thefirst quarter of fiscal 2015-16).

China's "one child" policy is still technically in force, yet Zhang Xue and herhusband are expecting in March— and might even get a government bonus for thesecond child. That's because the world's most populous nation, with 1.35 billionpeople, is moving to encourage more offspring, a significant revision to thecommunist government's strict system of birth control to counter a rapidly agingsociety and shrinking labor force. Instead of facing a massive fine or a forcedabortion or sterilization that rule-breakers have risked over the three decades thepolicy has been in effect, Zhang and her husband might qualify for a $1,600subsidy. Even so, the number of applicants for a second child is lower than thegovernment expected in the past year. That suggests further incentives are neededto pump up the birth rate. China saw a rare rise in births in 2014 — up 470,000from 2013 — after allowing couples to have a second child if one of the parentswas an only child. Previously, only couples who were both single children qualifiedto have two children. Rural couples can have a second child if the first one is a girl,because a son is preferred to work the land and to carry on the family name.

Prospects for East Asia Pronouncements made at the NationalPeople's Congress (NPC), whichopened in Beijing yesterday, will givepointers on policy during the comingmonths. Debt has become asignificant issue in the assessment ofChina's economic outlook. In Japan,nationwide local elections in Aprilcould see setbacks for Prime MinisterShinzo Abe's government, hit inrecent days by political fundingscandals. Meanwhile, annual large-scale military exercises have justbegun in South Korea, antagonisingPyongyang.

China's labor market will come under more pressure this year, the country'ssocial security minister said. Employment fell more year-on-year in Januaryand February compared to the same two month period a year earlier, said YinWeimin, minister of human resources and social security. Chinese leaders haverepeatedly said they will tolerate slower economic growth as part of the reformprocess so long as employment levels remain healthy.

EU This quarter will see highly contentious, high-stakes politics thatcould shape the future of the EU for years to come. First, a decision pointis fast approaching that will determine whether Greece will continue toreceive bailouts or be cut off from EU support, default on its debt and --potentially -- exit the euro-area. Second, the United Kingdom could re-elect a Conservative government, which would then follow through onits vow to hold an 'in-out' referendum on EU membership by 2017.Finally, the EU faces a crucial test of unity against its greatest externalthreat -- Russia.

Global cities could power economic growthCities, defined as metropolitan areas with over 500,000inhabitants, are powering global economic growth.However, by 2014 the results were uneven, as the citieswith the highest growth lie in developing countries,mainly in China, while many North American andEuropean cities remain trapped in recession. Currenturbanization models are unsustainable in the longterm, posing threats to future economic prosperity.

Economic 'escape velocity' hinges on Japan's consumersData released yesterday for theOctober-December quarter of 2014revised annualised real GDP growthdown from 2.2% to 1.5%. TheJapanese economy seems unable toget up to cruising speed. Oneimpediment after another hascaused growth to lag expectations.The most recent indicators suggestthat next quarter will witness solidgrowth. However, there have beenfalse starts many times before, withpromising signs followed bydisappointing performance

In a surprise move, the Thai central bank lowered itskey rate to 1.75% from 2.00%. This was the firstreduction since March last year. Economists had beenexpecting them to keep the rate at the same level. Therate cut has been attributed by analysts to the recentbout of deflation and the relative strength of the baht.

Is an Asia Currency War Coming?Central bankers won’t utter the term, but the rising wave of surprise rate cuts in Asia could portend currency wars.

Russia’s budget deficit more than doubled inFebruary, the finance ministry said, amid a dropin oil prices and Western sanctions that aresending its economy toward recession. Thecountry’s budget deficit rose to 10.5% of grossdomestic product in February from 4.2% inJanuary, as revenues contracted even asexpenditures were slightly reduced. Russia’srevenues were hit by lower prices of oil, one ofthe country’s key exports, along with shrinkingrevenues from collection of taxes, such as valueadded tax, according to Vladimir Kolychev, chiefeconomist at VTB Capital. A faster-than-expected spending of military expensesexacerbated the problem, Mr. Kolychev said.This could be a temporary development and thebudget deficit is likely to shrink in the secondhalf of the year, he added.

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March 15, 2015

Pumping Iron…The Old Economy Revisited

Global agriculture outlookIn the last quarter of 2014 and the first quarter of2015, abundant harvests in the northern hemisphereand moderate increases in global demand tended tosuppress agricultural commodity prices. In the threemonths to June, similar conditions are likely topersist, albeit with two main downside risks: poorweather conditions, especially in the southernhemisphere, and the continued negative impact ofRussia's food embargo on major exporters.

Surging supplies and sliding natural gas pricesdeflated an already hard-hit natural gas sector,driving some company stocks to multi-year lows.Stocks fell after the Energy Information Administrationreported that despite rising draw downs due to coldweather, overall supplies for the last week ofFebruary were 40% higher than year-ago levels.

Hyundai Motor Co has decided to build its second U.S. factory to meet demand for sport utilityvehicles, South Korea's Yonhap News Agency reported on Wednesday, citing an industry sourcefamiliar with the matter. The report came as Hyundai's U.S. executives have been clamoring for moreproduction capacity for SUVs, whose demand is rising partly thanks to lower oil prices. The new plantin Alabama would have an annual production capacity of 300,000 vehicles, Yonhap reported, noting itwould break ground this year and start SUV production in 2017.

US retailers confident West Coast woes won'tderail spring rolloutU.S. retailers appear generally upbeat on theirability to deliver spring merchandise to stores, withsome telling investors that U.S. West Coast portcongestion has had minimal impact on their supplychains, according to earnings calls in recent weeks.

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March 15, 2015

The DNA of BusinessReconfiguring Industries to Define Growth

Chip maker NXP Semiconductors NV has agreed to buy smaller peerFreescale Semiconductor Ltd and merge operations in a deal valuingthe combined company at over $40 billion. The deal, announced bythe pair late on Sunday and first reported by Reuters, will make thebusiness the industry leader within the auto and industrialsemiconductor markets. The transaction is the clearest sign yet thatsemiconductor companies are regaining the confidence required topursue big mergers and acquisitions at a time when their majorclients, such as mobile phone manufacturers, seek to consolidatesuppliers. Freescale also has its chips in consumer products such asAmazon's Kindle e-reader. The deal is the fourth semiconductorsector M&A deal this year, and the biggest of these by far.

GM's Indonesia closure highlights automakers' emerging markets woes

New subprime-loan giant created from spare parts of AIG and Citi

McDonald's US sales plunge in February

Movie going drops even for the young crowd

Intel Slashes OutlookIntel cut its revenue outlook for the current quarter by nearly a billion dollars, saying it has seen weaker-than-expected demand for business desktop computers.

Volkswagen Tightens BeltVolkswagen has earmarked about half of theplanned savings it is seeking to improve resultsat its struggling namesake VW brand andexpects to achieve cost cuts of about $1.1billion this year as it reported a 20% jump in2014 net profit.

Prescription‐drug spending rose more than 12% last year inthe U.S., the biggest annual increase in over a decade,according to a report by the nation’s largest pharmacy benefitmanager. The increase was driven in large part by soaringdemand for expensive new hepatitis C treatments and priceincreases for diabetes and cancer drugs. Growth in drugspending had been relatively modest in recent years because ofthe introduction of generic versions of mass‐market drugs likePfizer Inc.’s cholesterol‐lowering drug Lipitor, which lost patentprotection in 2011.

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March 15, 2015

Real Estate and Construction Outlook

Google, Facebook, LinkedIn Want to Make Sure They Have Space to GrowTech firms are buying up land for future expansion; Apple’s new ‘spaceship’

BEIGE BOOK: FED SURVEY

Commercial real estate market conditionswere stable or improving in most Districts.Commercial vacancy rates declined in Boston,Chicago, St. Louis, and Kansas City. In Dallas,contacts reported that commercial real estate hadsteadied or slowed since the previous report. Theapartment market remained strong in mostDistricts. Apartment rental rates rose in NewYork, Chicago, and San Francisco. Contacts inCleveland noted an increased demand formultifamily housing. Contacts in Dallas noted thatapartment demand remains strong. Commercialconstruction increased in most Districts. Contactsin New York, Richmond, Atlanta, St. Louis, andSan Francisco noted stable to strong multifamilyconstruction. Contacts in Chicago reportedmoderate growth in commercial real estate, drivenmainly by industrial buildings. In Boston, contactsnoted that speculative construction remainslimited due to high construction costs.

Interest in former Sears Tower – The Willis Tower - represents a bet on city centres as companies return from suburbs

Commercial real estate hasn't always been an industryquick to embrace new technology. But David Eisenberg,CEO and co-founder of Manhattan-based startup Floored,has found that has changed. Demand has sizzled for hisfirm's product, which turns the two-dimensional floorplans and architectural drawings used in commercial realestate into interactive 3-D models. Floored has grown to40 employees and revenue in the "single-digit millions"since it was founded in April 2013, he said. "There is alot of interest now in replacing old processes with newones," said Mr. Eisenberg. Floored, backed by $6.3million in venture capital, is part of a wave of real estatestartups, especially in the B2B space, that are picking upspeed quickly in a healthy market. "Historically, thecompanies that have gotten attention are on the consumerside, like Zillowand Trulia," said Steve Schlafman,principal at RRE Ventures, an early-stage venture-capitalfirm that has invested in Floored. "The commercial sidewas largely ignored by VCs."

China’s property sales volumes have fallen sharply in the opening months of the year, which has seen the credit market treat bonds issued by property developers with increasing bearishness.

Evergrande, Time Property and China SCE have all seen their bonds widen relative to the wider offshore RMB marketYields in the Hang Seng Markit iBoxx Offshore RMB China Bond Index have widened by 60bps over this periodBut Kaisa bonds have rebounded since it announced a restructuring

China property transactions for the opening two months of the year fell by over 15% from the same period ago in 2014. This marks the largest fall in three years and will be adding to speculation of a deflating Chinese property market.

The market for Commercial Mortgage Backed Securities (CMBS) has rebounded strongly from the financial crisis both in terms of issuances and trading.

CMBS issuance has jumped seven fold in the last five years; forecast to exceed $100bn in 2015The CMBS Current AAA index tranche of the MarkitiBoxx Trepp CMBS index family has performed in line with AAA corporates, but seen lower volatilityCMBS is relatively untapped in the ETF space, but the one fund that tracks the asset class has seen its AUM jump

CMBS are bonds which are backed by mortgages ranging from retail properties, office blocks, apartment blocks and hotels. They are poised to witness another strong year of issuance as investors continue to be drawn to the asset class’ strong track record in the wake of the financial crisis.

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March 15, 2015

Will Life Ever Be the Same?

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