FT : US Fed considers whether to raise record low interest rates


The US Federal Reserve is set to announce its long anticipated decision on interest rates this Thursday, a meeting long thought to mark the point at which the US tightening cycle would begin.
However, stock market wobbles, non-existent inflation and weaker expectations on the outlook for global growth have damped this view. Fed Funds futures prices now put the chance of a rate rise at a little over 20 per cent.

Ranko Berich, head of market analysis at Monex Europe, comments on Thursday’s decision: “Ultimately, the evidence is so closely balanced that members may end up voting on ideological lines. Our expectation is that the hawks will be in the minority: with the evidence so finely balanced, we believe the Fed is likely to follow the Bank of England’s lead and err on the side of caution.”
The Fed also releases longer term economic projections alongside the rate announcement. In June, 10 of the 17 policymakers believed two or more 25 basis point increases would be appropriate this year. Thursday’s projections are expected to show the majority now expect only one rate rise this year, as well as a slower pace of rate increases throughout 2016 and 2017.
Pre-empting Thursday’s rate announcement we get August updates to US inflation on Wednesday and also retail sales and industrial production on Tuesday. Consumer prices are expected to have increased by 0.2 per cent year on year in August, unchanged from July’s growth.
Lower energy costs have boosted retail sales in recent months and further growth is expected over August. Analysts expect a gain of 0.3 per cent from July. Industrial production is expected to have slipped in August after a stronger than expected reading in July, analysts expecting a decline of 0.2 per cent month on month.
The Chinese economy is one of the biggest sources of uncertainty in the current global outlook and over the weekend updates become available for some key activity indicators.
Industrial production, retail sales and investment data for August should all be available for Monday morning. Analysts expect industrial production to show some improvement while retail sales and fixed asset investment remain in line with the previous month’s readings, suggesting that the slowdown seen in recent months may have found a bottom.
UK inflation data for August are released on Tuesday. Consumer price inflation jumped to 0.1 per cent year on year in July, buoyed by increases in clothing and air fare prices. Analysts do not believe this marks the start of a trend and thin CPI will drop back to zero growth year-on-year in the August reading.
Labour market data for the UK are out Wednesday when the unemployment rate is expected to remain unchanged at 5.6 per cent. Wage growth is expected to tick up to 2.9 per cent year on year from 2.8 per cent in July.

FT : Value investors call bottom to Brazilian plunge

Value investors call bottom to Brazilian plunge

Value investors with strong stomachs and deep pockets are calling a bottom to Brazil’s plummeting markets, despite an economic and political crisis which could see the President impeached and last week led to the country’s credit rating being downgraded to junk.
Multinationals such as British American Tobacco and Spanish construction conglomerate Albertis are among those taking advantage of depressed Brazilian asset prices to take locally-listed subsidiaries private. Brazil’s bourse has fallen 36 per cent in dollar terms this year.

“It’s a vote of confidence in the underlying business,” said Romas Viesulas, of Nau Securities in London, of the trend towards buying out minority shareholders and delisting local companies.
Brazilian assets have plummeted from their 2010 peak, when state-controlled energy group Petrobras raised $70bn in the world’s largest equity offering and the country was viewed an emerging market darling. Today, by contrast, Brazil is engulfed in its worst recession since the Great Depression, a corruption probe has reached into the highest levels of government, and most investors are giving the country a wide berth.
“Brazil moves in cycles: smart investors sell at the top, buy at the bottom,” said a São Paulo corporate lawyer. “This time is no different — so long as you can stomach the volatility.”
BAT is buying the 25 per cent of its local subsidiary Souza Cruz that it does not own; Albertis and Brookfield Asset Management are buying out the listed shares of local toll road operator Arteris; while Diagnósticos da América is delisting after the medical group’s share price fell almost 60 per cent from its 2010 peak.
Mr Viesulas said investors are searching for bargains among so-called “fallen angels” such as Natura, the leading beauty products company, which is trading at a third of its stock market peak with a 7 per cent dividend yield.
Other potential targets included companies trading at a discount to asset value, such as GP Investimentos, the private equity firm, and groups with strong balance sheets, such as footwear maker Grendene.

Private equity investors are also stepping up their commitments, said Cate Ambrose, president of the Latin American Private Equity & Venture Capital Association. In the first half of the year, they invested $2.3bn, 20 per cent more than in 2014.
“There’s never been a better time to invest,” said Ms Ambrose.
“You’re going to do really well on the exchange rate and business owners are more incentivised to work with private equity groups and valuations have clearly come down.”
The last time the Brazilian real, down by a third this year, approached current levels of close to 3.9 to the dollar was in 2002, a moment often seen later as a once in a lifetime buying opportunity. But back then China’s economy was growing fast and the commodity price boom was just beginning. Ms Ambrose cautioned it was difficult to pick the bottom of the Brazilian market for anyone with less than a 24-month horizon.
Alejo Czerwonko, emerging markets strategist at UBS Wealth Management, said he also saw opportunities in the dollar corporate bond market with average spreads on some issuers at 700 basis points, the same as in Argentina, whose economy is in far worse shape.
“We don’t recommend broad exposure, we think certain corporates with a relatively stronger balance sheet, relatively lower sensitivity to foreign exchange depreciation, [and] relatively lower dependence on commodities are offering interesting yields,” he said.

>>> Fed Up with the Fed - J. Stigmate

Fed Up with the Fed

NEW YORK – At the end of every August, central bankers and financiers from around the world meet in Jackson Hole, Wyoming, for the US Federal Reserve’s economic symposium. This year, the participants were greeted by a large group of mostly young people, including many African- and Hispanic Americans.
The group was not there so much to protest as to inform. They wanted the assembled policymakers to know that their decisions affect ordinary people, not just the financiers who are worried about what inflation does to the value of their bonds or what interest-rate hikes might do to their stock portfolios. And their green tee shirts were emblazoned with the message that for these Americans, there has been no recovery.

Even now, seven years after the global financial crisis triggered the Great Recession, “official” unemployment among African-Americans is more than 9%. According to a broader (and more appropriate) definition, which includes part-time employees seeking full-time jobs and marginally employed workers, the unemployment rate for the United States as a whole is 10.3%. But, for African-Americans – especially the young – the rate is much higher. For example, for African-Americans aged 17-20 who have graduated high school but not enrolled in college, the unemployment rate is over 50%. The “jobs gap” – the difference between today’s employment and what it should be – is some three million.
With so many people out of work, downward pressure on wages is showing up in official statistics as well. So far this year, real wages for non-supervisory workers fell by nearly 0.5%. This is part of a long-term trend that explains why household incomes in the middle of the distribution are lower than they were a quarter-century ago.
Wage stagnation also helps to explain why statements from Fed officials that the economy has virtually returned to normal are met with derision. Perhaps that is true in the neighborhoods where the officials live. But, with the bulk of the increase in incomes since the US “recovery” began going to the top 1% of earners, it is not true for most communities. The young people at Jackson Hole, representing a national movement called, naturally, “Fed Up,” could attest to that.
There is strong evidence that economies perform better with a tight labor market and, as the International Monetary Fund has shown, lower inequality (and the former typically leads to the latter). Of course, the financiers and corporate executives who pay $1,000 to attend the Jackson Hole meeting see things differently: Low wages mean high profits, and low interest rates mean high stock prices.
The Fed has a dual mandate – to promote full employment and price stability. It has been more than successful at the second, partly because it has been less than successful at the first. So why will policymakers be considering an interest-rate hike at the Fed’s September meeting?
The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high. That is obviously not the case now. Indeed, given wage stagnation and the strong dollar, inflation is well below the Fed’s own 2% target, not to mention the 4% rate for which many economists (including the International Monetary Fund’s former chief economist, Olivier Blanchard) have argued.
Inflation hawks argue that the inflation dragon must be slayed before one sees the whites of its eyes: Fail to act now and it will burn you in a year or two. But, in the current circumstances, higher inflation would be good for the economy. There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation. Whatever the unemployment rate at which inflationary pressures become significant – a key question for policymakers – we know that it is far lower than the rate today.
If the Fed focuses excessively on inflation, it worsens inequality, which in turn worsens overall economic performance. Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth, workers’ share will be ratcheted down – never recovering what was lost in the downturn.
The argument for raising interest rates focuses not on the wellbeing of workers, but that of the financiers. The worry is that in a low-interest-rate environment, investors’ irrational “search for yield” fuels financial-sector distortions. In a well-functioning economy, one would have expected the low cost of capital to be the basis of healthy growth. In the US, workers are being asked to sacrifice their livelihoods and wellbeing to protect well-heeled financiers from the consequences of their own recklessness.
The Fed should simultaneously stimulate the economy and tame the financial markets. Good regulation means more than just preventing the banking sector from harming the rest of us (though the Fed didn’t do a very good job of that before the crisis). It also means adopting and enforcing rules that restrict the flow of funds into speculation and encourage the financial sector to play the constructive role in our economy that it should, by providing capital to establish new firms and enable successful companies to expand.
I often feel a great deal of sympathy for Fed officials, because they must make close calls in an environment of considerable uncertainty. But the call right now is not a close one. On the contrary, it is as close to a no-brainer as such decisions can be: Now is not the time to tighten credit and slow down the economy.

Read more at https://www.project-syndicate.org/commentary/us-fed-interest-rate-hike-low-inflation-by-joseph-e--stiglitz-2015-09#YlId92aA3mtlwDT6.99

WSJ : China Industrial Production Growth Lower Than Expected

China Industrial Production Growth Lower Than Expected

The latest figures add to signs of weakness in the Chinese economy

BEIJING—China’s industrial production grew at a lower-than-expected pace, official data showed on Sunday, adding to signs of weakness in the world’s second-largest economy.

Value-added industrial output in China rose 6.1% in August from a year earlier, accelerating from a 6.0% year-over-year increase in July, according to data from the National Bureau of Statistics, but undershot the median 6.6% gain forecast by 12 economists in a survey by The Wall Street Journal.

Industrial production also increased 0.53% in August from July. In July, it rose 0.32% from the preceding month.

Fixed-asset investment in non-rural areas of China rose 10.9% in the January-August period compared with the same period a year earlier.

The rise was also slower than the 11.2% increase recorded in the January-July period. It also undershot the economists’ median forecast of an 11.2% gain.

Retail sales in China increased 10.8% in August from a year earlier, accelerating from a 10.5% year-over-year increase in July and coming in higher than the 10.7% forecast by economists.

(ZeroHedge) A Recipe For The Mother Of All Short Squeezes?

A Recipe For The Mother Of All Short Squeezes?
 
Positioning across the world's most-levered financial instruments has never been this extreme...
There has never been a bigger net long VIX futures position...

 

The behavior of the COT positioning in VIX futures has completely changed in recent years. This is no doubt due to the proliferation and increasing popularity of volatility ETF’s, which access the futures market, either directly or indirectly. A simple glance at the chart will tell you that the volatile post-2012 period bears very little resemblance to the 2004-2011 regime.

 

The rise in demand for volatility ETF products has necessitated the increased liquidity in the VIX futures. Therefore, we are now seeing extremes in COT positions that are much greater, even multiples, of those seen prior to 2012. Thus, what was once considered extreme is now pedestrian. Now, the current Speculator net long position is still a record, even compared to readings in the post-2012 world. Therefore, we’re not going as far as to say this reading is irrelevant. We think it is relevant and, on the margin, a bearish data point for the VIX and a bullish data point for stocks.

 

What we are saying is that, in this new derivative-based ETF regime, we still don’t know exactly what the related metrics are capable of. While the current COT reading is a record, it could still get record-er…and by a lot.Consider the extreme positions we’ve pointed out over the past year in Crude Oil futures, Dollar futures, etc., that have gone well beyond prior “normal” bounds. Or simply look at the Speculator net short position in this VIX contract starting in 2012. After a pretty reliable floor in the -20,000 range for nearly a decade, the Speculator net short position exploded in 2012, nearly moving 100,000 contracts beyond that level by 2013.

 

We just don’t know how this dynamic is ultimately going to play out – and I don’t think we will for many years.
But piling on, we also see The Put/Call Ratio is at a serious extreme... the highest since 2007...

 

And while the aggregate positioning in US equity futures is extremely short... the chart below suggests that sometimes the crowd is right...

 

So while it would appear the world is positioned bearishly extreme in stocks; bonds appear no better...
Shorter-dated bond net positioning is its shortest since 2007/08 - and we know what happened next!!!

 

And there has never been a larger short position in the Ultra Long Bond Contract...

 

Given the weight of all these extremes (and the implicit leverage from the ETF markets), this week's FOMC decision may be more turmoil-er than normal... by an order of magnitude!
With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

Reuters : Syrian toddler Aylan's father drove capsized boat, other passengers sa

Syrian toddler Aylan's father drove capsized boat, other passengers say

http://www.reuters.com/article/2015/09/11/us-europe-migrants-turkey-iraq-idUSKCN0RB2BE20150911

The father of drowned Syrian toddler Aylan Kurdi was working with smugglers and driving the flimsy boat that capsized trying to reach Greece, other passengers on board said, in an account that disputes the version he gave last week.

Ahmed Hadi Jawwad and his wife, Iraqis who lost their 11-year-old daughter and 9-year-old son in the crossing, told Reuters that Abdullah Kurdi panicked and accelerated when a wave hit the boat, raising questions about his claim that somebody else was driving the boat.

A third passenger confirmed their version of events, which Reuters could not independently verify.

"The story that (Aylan's father) told is untrue. I don't know what made him lie, maybe fear," Jawwad said in Baghdad at his in-laws' house on Friday. "He was the driver from the very beginning until the boat sank."

He said Kurdi swam to them and begged them to cover up his true role in the incident. His wife confirmed the details.

Jawwad said his point of contact with the smugglers was called Abu Hussein. "Abu Hussein told me that he (Kurdi) was the one who organized this trip," he said.

Reuters tried several times to speak to Kurdi by telephone from the Syrian city of Kobane but was unable to reach him. Abu Hussein also could not be reached.

However, Kurdi told Britain's MailOnline that the accusations were untrue.

"I thought about driving the boat but I didn't do it. That is all lies," he said.

"This is not true. If I was a people smuggler, why would I put my family in the same boat as the other people? I paid the same amount to the people smugglers," he told the newspaper.

In comments to Kurdish news outlet Rudaw this week, Kurdi blamed a Turkish smuggler but did not name him.

Amir Haider, 22, another Iraqi who said he was on the same boat, confirmed Jawwad's account and identified Kurdi as the driver. He told Reuters by telephone from Istanbul that he initially thought Kurdi was Turkish because he was not speaking, but later heard him talking to his wife in Syrian Arabic.

A photo of Aylan Kurdi's body in the surf off a popular Turkish holiday resort prompted sympathy and outrage at the perceived inaction of developed nations in helping thousands of refugees using dangerous sea-routes to reach Europe, many of whom have fled Syria's four-year civil war.

(Barron's) Alibaba: Why It Could Fall 50% Further

Alibaba: Why It Could Fall 50% Further
The Chinese Internet giant’s stock has been plunging amid an array of problems. Expect more trouble ahead.

It has been a wild ride for investors in Alibaba Group Holding.

After the largest-ever initial public offering of stock, a year ago this week, shares of the Chinese Internet giant surged 75% in their first two months—only to begin a long spiral downward. They fell all the way to the initial price of $68 and then some, recently trading at about $64. The descent probably isn’t over. Alibaba’s shares could fall much further as China’s economy struggles, competition in e-commerce increases, and the company’s culture and governance draw scrutiny.

Just last week, Alibaba (ticker: BABA) disclosed that its transaction volume will be lower than expected for the quarter ending this month. Growth in volume already had declined markedly—to 34% in the June quarter from 50%-plus in recent years. The company, which runs two huge retail Websites, cited slower consumer spending, and that may only worsen as China’s economic growth drops to its lowest pace in six years.

Alibaba, which trades on the New York Stock Exchange and sports a market value of $160 billion, still has plenty of fans. To them, the company founded and led by the charismatic Jack Ma remains the ultimate China Dream stock, surfing the wave of surging Chinese middle-class growth and the eventual transition from the nation’s export model to one favoring domestic consumption of goods and services. Forty-five of the 52 brokerage analysts covering the company still have Buy recommendations on the stock, according to Bloomberg. Five rate it Neutral, and just two rate it a Sell. The average price target of this crowd: $95.50, up nearly 50% from the current level.

It’s time to get real. A decline of up to 50% looks far more likely. Alibaba shares trade at about 25 times the consensus earnings estimate for the year ahead, and that should be closer to eBay ’s (EBAY) multiple of 15. Both outfits match sellers and buyers on the Web, and eBay has ample emerging-market exposure. We’d also give the earnings estimates a haircut—Wall Street’s optimism looks overdone in the face of the challenges.

History certainly isn’t on Alibaba’s side. Widely hyped Chinese IPOs like Alibaba often flame out like supernovas as growth rates and profit margins suddenly decline. That’s what happened to a business-to-business predecessor to Alibaba Group. On the Hong Kong Stock Exchange in 2007, Ma’s Alibaba.com rocketed from its IPO price of 13.50 Hong Kong dollars to nearly HK$40 several months later before beginning an ugly descent to under HK$10 over the succeeding five years. The company was ultimately taken private in 2012 at HK$13.50.

Fresh selling pressure on the stock could emerge later this month when Alibaba’s final IPO lockup expires. Some 1.6 billion of its 2.5 billion shares will be available for sale for the first time. The company has taken pains to assure shareholders that the owners of 1.45 billion shares have pledged not to sell their holdings. Moreover, the company is planning a $4 billion stock buyback to counter any selling pressure. But it’s still unclear exactly how it will play out.

THERE’S NO QUESTION THE COMPANY faces some big issues. Competition from Chinese e-commerce rivals like JD.com (JD) is heating up quickly, eating into the market shares of Alibaba’s two main Websites—Taobao, which allows small merchants to sell their wares to Chinese consumers, and Tmall, a platform for global brands and retailers to reach the same folks.

Many of Alibaba’s investments beyond online shopping—in areas like media, entertainment, logistics, and cloud computing—seem aimed more at beguiling investors than improving earnings. Youku Tudou (YOKU), a YouTube-like site for videos, lost some $140 million last year. Alibaba’s movie-production arm also runs in the red. As a result of such performances, the two retail Websites are still thought to account for the huge bulk of profits.

Perhaps more troubling is the seeming improbability of the growth numbers reported by the company over the three fiscal years ending in March.

The value of transactions moving across its platforms—$409 billion in the 12 months through June—has compounded at an annual rate of 55% for the past three fiscal years, while Alibaba revenues have surged yearly at an average of 56%. That kind of growth is exceptional, well ahead of the three-year average revenue growth of Google (20%), Amazon.com (23%), and Facebook (49%).

Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.”

Consider this: Alibaba claims to have 367 million users—about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?

Alibaba Vice President of International Media Robert Christie denies that the company’s figures are inflated in any fashion. He attributes the gaudy growth numbers to such factors as the rapid adoption of smartphones for online buying and the company’s fast user expansion into second- and third-tier cities and into China’s hinterlands. Maybe so, but those growth numbers are still awfully large.

SO, TOO, IS Jack Ma’s fortune. Even after the stock’s sharp pullback, Ma has a net worth of almost $30 billion, according to Bloomberg, and the stock’s descent doesn’t seem to have impinged on his lifestyle. Recent published reports say he was the purchaser of a trophy property in Hong Kong overlooking Victoria Harbour for a reported $193 million. This would be in addition to his recent $23 million acquisition of a home and large acreage in upstate New York, replete with a maple-syrup operation.

Wall Street’s faith in Ma is testimony to his undeniable magnetism and salesmanship. His life story, which he has related with gusto in numerous interviews and speeches, is spellbinding. A poor boy from the city of Hangzhou, he hung around tourist hotels in the city in order to learn idiomatic English by taking American tourists on free tours of the city. One of them even prevailed upon him to change his first name from Ma Yun to Jack because the latter was easier for Westerners to pronounce.

By the late-’90s, he relates, he had become entranced by the commercial potential of the Internet, despite, by his own admission, having no programming ability or technical knowledge. It was in his cramped apartment near a Hangzhou lake in 1999 that he met with 17 friends to map out a course whereby Alibaba could become pre-eminent in the then-fledgling Chinese e-commerce industry. The apartment has since become a corporate shrine to which company executives often retire for meditation and brainstorming.

Jack, the name he uses in all SEC filings, is a consummate performer, projecting disarming humility and a beguiling vision of Alibaba’s future. The 51-year-old has a self-deprecatory sense of humor, often comparing himself physically to the Spielberg character E.T. But there’s nothing humble about his ambition for the company—to become the platform for two billion users worldwide, up from the claimed 367 million Chinese who use Alibaba today.

Growth isn’t the company’s only message. In its SEC filings and public statements, Alibaba talks endlessly about integrity, transparency, passion, and always putting the interests of the customer first. But some merchants and government officials have raised questions about the company’s commitment to such values.


Complaints about Alibaba’s alleged failure to crack down on the sale of product knockoffs on its sites have been chronic throughout its history. A lawsuit in May filed by Kering (KER.France), the parent of Gucci and Yves Saint Laurent, in New York Federal District Court is seeking monetary damages and an injunction against Alibaba for alleged violations of trademarks and racketeering laws arising from counterfeit goods selling on Alibaba sites. The company says the suit is without merit and is fighting it. More recently, a hectoring letter was sent to Ma on the same subject by the American Apparel & Footwear Association.

Although the U.S. Trade Representative removed Alibaba from its list of “notorious markets”—markets rife with counterfeit merchandise—in 2012 in light of progress made on that score, Alibaba’s home regulator, the State Administration for Industry and Commerce in China, last January released a “white paper” charging the company with an alleged failure to properly control the sale of counterfeit goods and other alleged illegal activities in Alibaba’s Chinese marketplaces. The company denied the charges in the white paper, and mysteriously, the paper was retracted within days.

When Barron’s asked the company about these accusations, Alibaba’s representative replied, “We are committed to the protection of intellectual property rights to eradicate counterfeit merchandise that may appear on our marketplaces.” The company says it uses sophistical algorithms and random checks, among other things, to identify malefactors and expunge them from its sites.

ALIBABA’S TREATMENT of its shareholders, meanwhile, hardly meets best-in-class corporate governance. The company itself acknowledges in SEC filings that the interests of founder Ma and his confederates may conflict with the interests of Alibaba shareholders.

Just consider how the company is structured. Shareholders of Alibaba Group don’t actually own the businesses that make up the company; Ma and his close associate Simon Xie do. Under a legal agreement with Ma and Xie, the fruits of the businesses, including cash flow and profits, are transferred to the holding company. But the Ma team gets to select a majority of the holding company’s board of directors.

This form of “virtual ownership” for shareholders of Chinese companies like Alibaba is aimed at getting around government prohibitions against foreign ownership of Chinese companies in industries deemed “sensitive,” like the Internet. The fact that Alibaba Group is some 90% owned by Americans and other overseas investors makes it a Wholly-Foreign Owned Enterprise under Chinese law. Yet Alibaba is allowed to operate in China because its businesses are entirely owned by mainland Chinese.

At least in one instance, Ma was widely criticized both in and out of China for, in the words of the respected business magazine Caixin, “failing to abide” by that contract with Alibaba shareholders. This occurred in early 2011, when Ma quietly transferred ownership of fast-growing payment processor Alipay out of a Chinese company that was part of Alibaba Group’s “virtual ownership” structure and into a separate private partnership that Ma controlled, thereby eliminating Alibaba Group’s right to Alipay’s earnings. The reason for the move, according to Ma, was that a change in licensing requirements by Chinese banking regulations required nonbank payment processors to be domestically owned.

That claim seems somewhat flimsy since Alipay was domestically owned both before and after the transfer. What’s more, Ma made the transfer of Alipay without the approval of the Alibaba board and without the knowledge of the company’s two largest shareholders, Yahoo! (YHOO) and Japanese conglomerate SoftBank Group (9984.Japan). Both kicked up a storm.

There have since been several settlement agreements due to changing circumstances. Today, Alibaba Group is entitled to 37.5% of profits from Alipay (which is now part of Ant Financial Services) in perpetuity. And should Alipay or its parent go public, which is widely expected, the holding company would be entitled to the same 37.5% equity value.

Estimates of Alipay’s value run as high as $50 billion. So the difference between Alibaba’s former 100% interest in Alipay and today’s 37.5% piece is huge. In the latest SEC filing, Ma says he will reduce his unspecified ownership share in Ant Financial Services by giving them to employees of Ant and Alibaba. But it would be more sporting of him to give those shares back to Alibaba shareholders whence the stock came rather than to employees of Ant and Alibaba.

A RAFT OF RELATED-PARTY transactions involving Ma and the company are also cause for concern. For example, Ma has 40% control of three investment funds sponsored by an outfit he helped found called Yunfeng Capital; these funds show up as co-investors with Alibaba in a number investments. It is probably confusing for Ma to keep track of his roles as both a general partner of the funds and as Alibaba CEO. Alibaba and the funds may at times have different investment goals. Alibaba’s annual report informs us of Ma’s intention to “donate all distributions he may receive by virtue of his 40% indirect interest” in the Yunfeng funds to the Alibaba Foundation charity.

Nor do Ma and friends seem to be shy about using Alibaba Group’s balance sheet to make private investments. Case in point: an April 2014 investment made by a partnership controlled by Ma and online-gaming magnate Yuzhu Shi. The deal for a 20% interest in the Internet streaming company called Wasu Media Holding (000156.China) seemed fairly straightforward initially. Alibaba Group financed the purchase of the shares by a third party, Simon Xie, a limited partner, by giving him a $1 billion loan.

But a year later, the optics changed. The $1 billion primary loan was assumed by an unnamed Chinese bank, but Alibaba was hardly off the hook. It provided the partnership with a $300 million loan to cover the interest payments that Xie faced on the bank loan. Alibaba also had to deposit $1.1 billion in the same bank as collateral on the loan. So in all, Alibaba shareholders are on the hook for $1.4 billion to finance the private investment made by the Ma partnership.

In its filings with the SEC, Alibaba concedes that this transaction raises the specter of potential conflicts of interests between the company and Ma, Xie, and the other general partner, Shi. Among other things, “there is no assurance that Simon [Xie] will have sufficient resources to repay the loan in a timely manner, or at all,” an Alibaba filing says.

An Alibaba spokesman attributed the complex structure of the Wasu deal to government prohibitions against foreign investments in the nation’s media and entertainment industry. This claim seems stretched. Wasu trades on the Shenzhen Stock Exchange, where foreigners can purchase its shares. And Alibaba itself, though deemed a foreign-owned enterprise, was able to buy a 16.5% interest in Youku Tudou, another Chinese Internet streaming company, which trades on the New York Stock Exchange. Alibaba declined to discuss those issues.

So, much of the China Dream magic surrounding Alibaba rests on the turbocharged growth in transaction volume, or GMV, that the company has reported in recent years. And here, some incongruities are troubling.

Take, for example, Alibaba’s claimed growth in user numbers, which has compounded at an annual rate of 39.1% over the past four years, from a June 2011 total of 98 million to 367 million as of June 2015. Yet over roughly the same period, a biannual national survey conducted by the Chinese Internet Network Information Center, an official agency, shows that China’s online-shopper population has a compound growth rate of 23.5%, rising from 173 million in June 2011 to 361 million this past December. An Alibaba spokesman says the agency’s figures are too low.

The discrepancy in growth rates could perhaps be explained if users were increasingly gravitating to Taobao and Tmall, Alibaba’s two main Websites, at the expense of their competitors. But that doesn’t conform with other surveys. A study by a Financial Times research service showed that, as of this year’s first quarter, 44.9% of respondents most regularly use JD.com, surpassing the 36.3% favoring Tmall and nearly catching up to the 50.6% notched by Taobao. Four years ago, there was a yawning gap in popularity between Taobao and JD.com where the former waxed the latter by about 52% to 28%.

THE OTHER COMPONENT OF Alibaba’s GMV, average annual spend per user, likewise invites a measure of skepticism. For the past seven quarters, that number has stood at about $1,215, well above the $963 annual average for U.S. online shoppers. But the U.S. is significantly more developed and affluent; per capita gross domestic product in the U.S. is about 7.5 times that of China.

That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining.

Alibaba attributes the apparent discrepancy on the less-developed bricks-and-mortar retail sector in China forcing consumers onto the Internet, not only for aspirational purchases, like fashion goods, but also household necessities. Still, you’d have to buy a lot of light bulbs and detergent to close the gaps in those numbers.

PART OF ALIBABA’S ALLURE, particularly to offshore investors, who constitute nearly 90% of its owner base, is that the company casts a wide shadow over so many digital areas beyond e-commerce, such as social media, chat, instant messaging, smart television, and entertainment.

In fact, the company has been on an investment rampage since 2014, spending billions. Yet it has in the main kept its investments stakes under 50%, meaning it doesn’t have to include the results of those businesses in its operating profits. That has insulated its results from the losses coming from businesses like Youku Tudou and Alibaba Pictures Group (1060.Hong Kong).

Things could get tougher for Alibaba and Jack Ma. User growth is no longer matching the extraordinary pace of recent years, and economic times are getting harder. Also, competition from JD.com and others is forcing Alibaba to abandon its “asset light” model of little inventory and few warehouses. It’s building warehouses, fulfillment operations, and delivery networks to match the faster delivery times of rivals.

In the end, gaudy financial reports can only work for so long before reality intrudes. This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won’t be pretty.

(Barron's) Plummeting Commodity Demand Slams Nigerian, Brazilian Debt

Plummeting Commodity Demand Slams Nigerian, Brazilian Debt
Nigeria and Brazil find themselves hit by the same force: plummeting commodity demand.

Emerging Markets

Nigeria and Brazil may be in different continents, but they had something in common last week: There’s no hiding behind bad fiscal and monetary policies when commodity demand dries up.

JPMorgan said it would boot Nigeria from its benchmark local-currency Government Bond Index-Emerging Markets, citing foreign-currency restrictions and a lack of liquidity. But Nigeria defended policies that it argues curb speculative trading and volatility. Its oil-dependent economy is revenue starved, and new President Muhammadu Bhuari has been slow to appoint a new cabinet. The Global X MSCI Nigeria exchange-traded fund (ticker: NGE) has fallen 23% this year.

Standard & Poor’s downgraded Brazil’s foreign-currency sovereign credit rating one notch, to BB+, relegating euro- and dollar-denominated Brazil bonds to junk. If other ratings agencies follow, institutional bondholders could be forced to sell. With the Brazilian real down 30% against the dollar this year, the downgrade could push Brazil’s President Dilma Rousseff, Finance Minister Joaquim Levy, and the National Congress to agree on tax hikes and spending cuts needed to patch the fiscal deficit and get the economy out of recession.

On top of decimated prices for key commodity exports—iron ore and crude oil—Brazil can’t shake the corruption probe that started at state-controlled oil exploration-and-refining giant Petroleo Brasileiro (PBR). Rousseff is at risk of impeachment as investigations spread to her ruling Worker’s Party, and the downgrade undermines her already low ratings. S&P cited political uncertainty in its negative outlook for Brazil. The government now expects a 2016 0.5% primary budget deficit—that’s tax revenues minus government spending, excluding interest payments. There was hope earlier this year for a 2% surplus.

“This could be a wake-up call for Brazil to reverse course,” says Jorge Mariscal, emerging-markets chief investment officer at UBS Wealth Management in New York. “There’s an upside case in which Brazilian authorities panic enough to get their act together, and Congress panics enough to pass a fiscal adjustment. But it isn’t our base case.” He notes that Brazil is far from a debt default, with $365 billion in foreign-exchange reserves. However, S&P’s outlook is rumbling across emerging markets. Brown Brothers Harriman analysts say South Africa and Turkey debt downgrades could be next.

BUT EMERGING-MARKET INVESTORS are diehards. UBS Wealth recommends investors have a 5% weighting in emerging-market equities over the next six months, and 3% in emerging-market bonds. Osamu Yamagata, an emerging-markets portfolio manager with Aberdeen Asset Management, favors names with solid balance sheets and growth stories that have been subject to indiscriminate selling. One example he offers: Brazil clothing retailer Lojas Renner (LREN3.Brazil) can gain market share as consumers trade down to value-priced styles. The stock is off 18% this year in dollar terms, while the iShares MSCI Brazil Capped ETF (EWZ) is down 37%. The stock is trading at 19 times forward earnings, which is a premium to its annual earnings growth of 10% to 15%, but cheaper than historical valuations.

Brazil and Nigeria are among countries that will produce winning stocks in the next decade, he says: “Emerging markets are something you invest in for the longer term, not one or two years, when volatility will hurt you.”