The document provides an overview of recent developments in financial markets and the global economy. It discusses how bond markets have wobbled recently, and how extended periods of low interest rates have caused private sector leverage and asset prices to rise. It also covers topics like weakening conditions in the junk bond market, rising US interest rates, strength in the US economy, volatility in China's bond market, Saudi Arabia's anti-corruption probe, and uncertainty around Brexit negotiations.

1. ABRAHAM GULKOWITZ
abe@gulkowitz.com
917-402-9039
2017 issue 21November 18, 2017
Testy Markets …
Select segments of bond markets have wobbled in recent weeks in a taste of what a more significant reassessment would be like. An extended regime of easy
money across the globe, underpinned by central banks that have kept rates at awkward historic lows, supported buying of riskier assets in exchange for more
enticing yields. The massive central bank purchases have engendered problematic shifts in asset allocations over their respective periods of quantitative
easing, and current euphoric conditions in many asset classes have become “junkies’ for ongoing easy money. The trajectory of market normalization by
policymakers will remain a major challenge well into 2018. One outcome of extended easy money is that spreads are so unnaturally low that setbacks can be
terribly painful. Second, because of unnaturally low rates, private sector leverage crept higher than even before the financial crisis. It has risen so far that many
businesses actually need ebullient markets to continue on and on. Indeed, with such extended periods of easy money, strict credit covenants have been
neglected even as spreads have compressed to record tights over Treasuries. Of course, the good news is that economic growth may finally be lifting to a
higher growth trajectory. The outlook for sustained profitability is becoming more favorable. Legacy constraints to growth are being more fully addressed,
regulatory and tax issues may be overhauled, the global financial system has become more resilient, and business model tinkering continues apace. There’s
much to discuss…
Monster Deal
Broadcom Proposes to Acquire Qualcomm, but…
Volatility across asset classes had
collapsed, and also in crude oil markets
Debt maturity wall is
forcing Venezuela to default
Venezuela’s electric company bonds now
trade below 25 cents on the dollar
US money market rates have risen
sharply on rate hike expectations
1yr Treasury bill yield over 1.50%
ECB buying has driven European junk bond yields
below those of US Treasuries, and, in turn, that has
reverberated and pressured global high yield risk
lower - despite a rise in leverage to record highs
Iran ‘s rising tensions with Saudi Arabia
Euro-area GDP faces risks but takes momentum into 2018
The European Commission outlook upgrades 2017 euro-area growth
substantially and expects a gradual slowdown in 2018-19
Saudi Arabia’s Game of Thrones
Stocks Decouple from Credit as
Investors Ignore the High-Yield Selloff
Strong corporate guidance in the
latest earnings reports rules the day
Chinese Bond Rout
PBoC liquidity boost and cash injection drives
down 10-year benchmark from three-year high
Italy was in a state of shock, dismay and
bitter recrimination after the national
football team failed to qualify for the
World Cup for the first time since 1958
Wal-Mart shares hit a new high as
the company takes on Amazon
MARKET ROAR
Leonardo da Vinci painting sells for world record $450
million despite lingering doubts over its authenticity
2017-10-30 2.08
2017-10-31 2.12
2017-11-01 2.13
2017-11-02 2.11
2017-11-03 2.11
2017-11-06 2.11
2017-11-07 2.10
2017-11-08 2.18
2017-11-09 2.27
2017-11-10 2.39
2017-11-13 2.40
2017-11-14 2.46
2017-11-15 2.57
See Chart Above
ECB’s bond buying lets eurozone politicians off the hook
Higher purchases of French and Italian bonds carries risks
as the QE program is extended
It is the combination of tight spreads and higher duration that is unsettling, as
it has eroded the cushion bondholders have if the tide turns. And it has led to
a vast transfer of credit and interest-rate risk from companies to lenders.

2. The PunchLine...
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November 18, 2017
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.
• Engines of Growth
Despite a run of global statistics offering economic relief, confusing stress
signals are still emanating from around the globe . Uncertainties -- particularly
from overextended markets, terror and geopolitical concerns here and abroad,
Brexit, and now in Spain, dangerous issues regarding N Korea, China, Iran
and others - - continue to confound investors and contribute to intermittent
bouts of haven seeking investment moves. But let’s not forget that the political
agenda in Washington is a significant one and much of the political bickering
may not be resolved easily or quickly… (pg 7)
• The Likelihood of Unlikely Events... (pg 8)
• Dislocation, Dislocation (pg 9)
• Households… (pg 10)
• Credit Perspectives (pg 11)
• SuperVision… (pg 12)
• Credit Matters (pg 13)
• The DNA of Business… (pg 14)
• Tech and The Business Cycle (pg 15)
• Real Estate and Construction… (pg 16)
• Will Life Ever be the Same? (pg 17)
• Testy Markets . . .
Select segments of bond markets have wobbled in recent weeks in a taste of
what a more significant reassessment would be like. An extended regime of
easy money across the globe, underpinned by central banks that have kept
rates at awkward historic lows, supported buying of riskier assets in exchange
for more enticing yields. The massive central bank purchases have
engendered problematic shifts in asset allocations over their respective
periods of quantitative easing, and current euphoric conditions in many asset
classes have become “junkies’ for ongoing easy money. The trajectory of
market normalization by policymakers will remain a major challenge well into
2018. One outcome of extended easy money is that spreads are so
unnaturally low that setbacks can be terribly painful. Second, because of
unnaturally low rates, private sector leverage crept higher than even before
the financial crisis. It has risen so far that many businesses actually need
ebullient markets to continue on and on. Indeed, with such extended periods
of easy money, strict credit covenants have been neglected even as spreads
have compressed to record tights over Treasuries. Of course, the good news
is that economic growth may finally be lifting to a higher growth trajectory. The
outlook for sustained profitability is becoming more favorable. Legacy
constraints to growth are being more fully addressed, regulatory and tax
issues may be overhauled, the global financial system has become more
resilient, and business model tinkering continues apace. There’s much to
discuss… (pg 1)
• In This Issue (pg 2)
• Market Wobbles (pg 3)
• A Fuller View… (pg 4)
• You Can’t Handle the Truth ! (pg 5)
• The Future Ain’t… (pg 6)
Contact information:
Abraham Gulkowitz
phone: 917-402-9039 email: abe@gulkowitz.com

3. The PunchLine...
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November 18, 2017
Market Wobbles- Careful Reading
The recent Merrill Lynch Fund Manager Survey
shows excessive risk-taking at levels not seen before.
Another Valuation Fit in Junk Bonds
Credit markets don't necessarily drag stocks lower
Popular junk-bond exchange-traded funds ended Wednesday at their lowest levels since March
Communications companies are taking the
junk-bond market for a ride. As the price
of debt issued by low-rated telecom
companies tumbled, the yield on their
bonds jumped to 6.6% late last week, the
highest in nearly a year and up from 5.4% a
month earlier, according to Bloomberg
Barclays index data. Telecom companies
make up about 9% of the high-yield
benchmark, so their recent decline has
dragged down the broader market. The
sell-off in junk bonds has stirred broader
concerns that a steady rally across risky
assets like stocks could face more
resistance. Investors have shown a
willingness to shrug off a growing list of
worries, such as gridlock in Washington
and geopolitical tensions between the U.S.
and North KoreaAn autumn pullback in the junk-bond market is centered in the telecommunications sector, raising concerns that
weakness in the group could spread if withdrawals from mutual and exchange-traded funds pick up momentum.
The bond selloff has hit firms ranging from European giant Altice NV to U.S. operator Frontier Communications
Corp. , dragging down broader indexes of high-yield bonds—those deemed speculative by credit-rating firms. The
selling so far has been largely contained, easing fears that the junk-bond retreat could be the first crack in a
furious 2017 market rally that has taken major stock indexes around the globe to records, some investors said.
Given the extraordinarily easy financial conditions around
the world, the Fed could get more aggressive on rate hikes.
The Chicago Fed’s National Financial
Conditions Index (NFCI) provides a
comprehensive weekly update on U.S.
financial conditions in money markets,
debt and equity markets and the
traditional and “shadow” banking
systems. Positive values of the NFCI
indicate financial conditions that are
tighter than average, while negative
values indicate financial conditions

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November 18, 2017
A Fuller View… Data Insights
Record profits, buybacks and the revolution of passive
investing have helped propel markets to new highs
US Small Business Optimism Index "inches up" in October
U.S. Wholesale Pricing Power Strengthens Yet Again
The US PPI , final demand for services jumped 0.5%
(2.4% y/y), a surprisingly strong gain. Trade services
prices surged 1.1% (3.0% y/y) after a 0.8% increase.
Private passenger transportation prices strengthened 3.2%
(4.8% y/y), also the firmest rise in six months.

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November 18, 2017
You Can’t Handle the Truth…
Let'sTake the “Con” out of Economics
Despite the tightness in the labor
markets, wage growth remains sluggish
JUST HOW VULNERABLE?
Overnight market “fireworks” in Japan saw the Nikkei plunge by 860
intraday points and sent vol and volumes soaring (before recovering
most losses); that sudden collapse spooked traders and around the globe
London house prices fell for the first time year-on-year
since the height of the financial crisis eight years ago
✓ 4 in 10 London home sellers are cutting their asking
prices… House price reductions have hit a five-year
high, but estate agents don't think they go far enough
2017 saw a record amount of sub-investment-grade
EM government debt issued. Challenges will arise
as the Fed keeps hiking rates or if growth
disappoints…

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November 18, 2017
The Future Ain’t What It Used To Be

7. The PunchLine...
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November 18, 2017
Engines of Growth…
ECB’s bond buying lets eurozone politicians off the hook
Higher purchases of French and Italian bonds carries risks as the
QE programme is extended
Oil prices hit two-year high
as Saudi graft probe widens
US factory orders remain robust, with capital
goods (equipment, etc.) leading the way
U.S. industrial output accelerated in October,
because manufacturing production bounced back
after hurricane-related disruptions.
China reported its trade balance for October at
$26.62 billion, narrower compared with a $39.50
billion surplus seen and imports jumped 17.2%, above
the 16% increase expected, while exports rose 6.9%,
below the 7.2% gain seen last month
Russia, the world’s largest oil producer, has ramped up its crude
exports this year, potentially undermining a deal with OPEC that
has helped raise oil prices by 5% this year.
OPEC is now forecasting a much higher
North American shale output than previously
U.S. Oil Production Hits a Record High
Many warn that Italy’s economic recovery is weaker than it looks and the
country risks a serious funding shock when the European Central Bank slashes
purchases of Italian debt. Quantitative easing by the ECB has worked wonders
for Italy’s apparent fiscal health. It has mopped up half the gross supply of Italian
debt, shaving at least 100 basis points off Rome’s borrowing costs. But it has not
changed the country's underlying pathologies.
Breakup of Saudi-Russian ‘bromance’
would collapse crude prices
The Saudi- and Russia-led supply limits that have
lifted crude to a 2 1/2-year high must be prolonged
for an extended period or prices will collapse…
Brent oil prices have gained 11 per cent this year and
the benchmark grade touched US$64.65 a barrel in
London on Nov. 7, the highest intraday price since
June 2015. The U.A.E.’s Mazrouei affirmed that
view, saying that coordinated cuts by OPEC and
suppliers outside the group have helped trim crude
inventories from record storage levels.
Prospects for Brazil in 2018
The presidential election is highly unpredictable
and prospects for reform limited, while growth
will pick up only modestly
A Trumpism
The European Parliament approved legislation designed to protect
EU industries against excessively cheap imports from China.
Oil prices steadied as traders looked
ahead to the OPEC meeting at the
end of this month, when producers
are expected to extend output cuts,
sheltering prices from the impact of
rising U.S. crude production and
inventories.

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November 18, 2017
The Likelihood of Unlikely Events
China’s local bond yields were grinding higher
China bond yields have slid from 3-year highs after PBoC cash
injection…New liquidity eases market jitters over deleveraging campaign
A surge of investor demand for the country’s first U.S. dollar-denominated
debt sale in 13 years enabled China to price its five-year bonds to yield
2.196%, or just 0.15 percentage point over comparable U.S. Treasury notes.
Saudi Arabia Arrests 11 Princes, Including Billionaire Alwaleed bin Talal
Saudi Arabia corruption probe arrests rise to more than 200
A sweeping weekend roundup of more than five dozen princes, ministers and prominent
businessmen in Saudi Arabia marks a dramatic escalation in the crown prince’s effort to
consolidate power.
Venezuela’s bonds plummeted on
Maduro’s talk of debt restructuring
Venezuela’s oil rig count collapsing
as investment curtailed
Strains on emerging market currencies begin to build
Concerns around the US Fed’s intentions and EM
political headwinds are biting
China has established a new Financial Stability and Development
Committee to improve supervision coordination, Xinhua news
agency said, in the latest effort to ward off systemic risks in the
world's second-largest economy.
The Turkish 5yr government bond yield hit
another record(over 12.50%)…
The bond market is doing what the central bank is
unable to accomplish
Brexit Turbulence Gives Rise to U.S.-U.K. Aviation Talks
The need for cybersecurity is increasing as
interconnectivity and technology progress
The Fed’s latest meeting started on Halloween,
but the outcome wasn’t scary for markets
ECB Turns Spotlight on ‘Significant' Risks
From A China Slowdown Scenario
✓ Currency bloc’s GDP could shrink 1.2% if China rebalances fast
✓ Impact would be even larger in case of outright crisis
South Africa is Collapsing
Security Agency Targets Zuma Accuser in New South Africa Scandal
African debt servicing costs hit 16-year high
Figures come as IMF warns of potential rise in
public debt to ‘unsustainable levels’

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November 18, 2017
Dislocation, Dislocation, Dislocation
Coffee futures in Europe (Robusta coffee) hit a 14-
month low on new supplies flowing from Vietnam
US lumber futures continue to climb
China growth keeps pushing greenhouse
emissions to global record

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November 18, 2017
Households – Brave New World
US Consumers Choking on Living Costs
After years of tracking each other, rental costs
are diverging from wages
The most widely quoted measure of U.S.
underemployment (U-6) is at the lowest
level in a decade.
Consumer credit as a percentage of US household
disposable income has hit a record high
Capital One Financial will stop issuing mortgage and
home equity loans and cut some 1,100 jobs amid
rising interest rates that have pushed away borrowers
and slowed loan growth at many U.S. regional banks.
Delinquencies Mount in Auto Finance Sector
US Small Businesses Remain Upbeat
The National Federation of Independent Business reported that its Small
Business Optimism Index rose to 103.8 during October following a
September decline to 103.0. The new figure remained below its January
high of 105.9, but has now increased 19.4% over the past year…
Outstanding subprime auto debt now stands at about $300 billion. Although
this amount has increased steadily in absolute terms, as a share of the total
outstanding auto loan balance, it has been fairly steady at around 24 percent
since about 2011. Subprime loans are disproportionately originated by auto
finance companies, and their share has nearly doubled since 2011 and now stands
at over $200 billion. In comparison, the outstanding balances of bank auto loans
remain dominated by loans originated to borrowers with higher credit scores…
US household debt rose by $116 billion, or 0.9%, to
$12.96 trillion in the third quarter, the New York Fed
said Tuesday. That’s the highest level in nominal
terms, though not when compared to the size of the
economy. Credit-card debt rose by 3.1% while home
equity lines of credit, or HELOC, balances fell by
0.9%. There were small gains in mortgage, student and
auto debt. Flows into credit-card and auto loans
delinquencies rose, with 4.6% of credit card debt 90
days or more delinquent, up from 4.4% in the second
quarter, and 2.4% of auto loan debt seriously
delinquent, up from 2.3%. That’s still nowhere near the
9.6% of student loan debt that is delinquent, which
itself is understated because about half of those loans
are currently in deferment, grace periods or in
forbearance.
POST STORMS COMEBACK… Housing starts in the US jumped 13.7% to 1,290K
in October, beating expectations. It follows an upwardly revised 1,135K in
September, which was the lowest in a year, mainly due to disruptions caused
by Hurricanes Harvey and Irma in the South.

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November 18, 2017
Credit Perspectives

12. The PunchLine...
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November 18, 2017
Super Vision - Select Signals
Latest = 8,766

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November 18, 2017
Credit Matters - Know Risk
Many Excel in Strategy, Few in the Management of Risk
The U.S. banking industry is booming—a development
that is bringing windfall gains to a small group of
investors who bought esoteric bank securities when the
outlook for financial firms was far less clear-cut
The STLFSI measures the degree of financial stress in the
markets and is constructed from 18 weekly data series:
seven interest rate series, six yield spreads and five other
indicators. Each of these variables captures some aspect of
financial stress
The average value of the index, which begins in late 1993,
is designed to be zero. Thus, zero is viewed as representing
normal financial market conditions. Values below zero
suggest below-average financial market stress, while values
above zero suggest above-average financial market stress.
Volatility compression has been extraordinary
► VIX ran below 10 for an extraordinary run
► Will the snapback be violent?.
Loan origination has become an issue across sectors
High-yield debt is undergoing a rethink… as poor
performance in telecoms and healthcare infects the
whole market
Tesla Inc. first-ever pure corporate bonds are trading under water, boding ill
for the Silicon Valley car maker’s next attempt to tap capital markets.
The 5.30% notes, which mature in 2025, were trading at 93.81 cents on the
dollar on Friday to yield 6.320%, according to trading platform MarketAxess.
On a spread basis, they were trading at 393 basis points above comparable
Treasurys. The bonds fell under par within a week of issuance, but were
holding above 97 cents for much of October.
The stock is down 9% so far in November, on the heels of a quarterly miss
earlier in the month and news that the company has further pushed out its
Model 3 production targets.
Chinese government bond yields continue
to climb, with the 10yr approaching 4%
Refinancing risk for some weaker companies who need to roll
their debt is also on the rise
The selloff in Greek banks has accelerated,
and credit continues to contract
S&P Rules Venezuela in Default on Interest Payment
Move could have far-reaching consequences for country
and its creditors
Chinese Deputy Minister of Finance Zhu Guangyao announced that China would
allow foreign majority ownership of financial firms. The announcement is credit
positive for Chinese banks and non-bank financial institutions (NBFIs) because it
will increase foreign investors’ involvement in domestic markets and improve
financial firms’ risk management and corporate governance

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November 18, 2017
The DNA of Business
Reconfiguring Industries to Define Growth
US Manufacturing Goldman Sachs and China Investment Corp.
are partnering on a multibillion-dollar fund to help the giant Chinese fund
invest in U.S. manufacturing and other sectors.
Amazon has quietly started lowering prices by as much as
9% on goods offered by independent merchants on its site,
ratcheting up a price war with other retail giants—and
potentially straining its relationship with some sellers.
Sears Holdings Corp said it will close 63 additional stores in the United
States after the holiday season as part of its continued effort to return to
profitability in a difficult retail environment.
U.S. pharmacy operator CVS Health Corp and health insurer
Aetna Inc are working toward finalizing merger terms and
announcing a deal for more than $70 billion as early as
December, according to people familiar with the matter.
Private equity firm Permira Funds said on
Wednesday it would buy corporate finance adviser
Duff & Phelps for $1.75 billion to tap the growing
demand for advisory services as regulators push for
improved corporate practices
The rally in lumber futures continues
GE Slashes Dividend Amid Restructuring
Wal-Mart Stores Inc said it will offer Hudson's Bay Co- owned
department store chain Lord & Taylor dedicated space on its website,
as it looks to make deeper inroads into the fast-growing online fashion
business
Many retail firms remain under pressure
Sears as a retailer is just melting away. It’s hard to see
suppliers sticking by the firm when they see this chart
Coal
China coal glut threatens to create $90bn in ‘stranded assets’
FREIGHT RATES… With lines steadfastly refusing to remove capacity on major East-West box
trades, spot freight rates on the transpacific and Asia-Europe trades slumped further this week
and are now 22%-26% lower than a year earlier. The World Container Index assessed by
Drewry, a composite of container freight rates on eight major routes to and from the US, Europe,
and Asia, plummeted 10.5% this week and is now down to $1,493 per 40ft container − 16.2%
down compared to the same period of 2016 and $113 lower than the five-year average of $1,606
per 40ft container. The rate decline on transpacific trades was most severe for carriers.
According to Drewry’s s assessment, rates on the Shanghai-Los Angeles lane declined, week on
week, by 13% or $205 for a 40ft box to reach $1,352 this week, while rates on Shanghai-New
York plummeted by $189 (9%) to reach $1,925 per feu.

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November 18, 2017
Tech and the Business Cycle
Click on the Revolution
Qualcomm reeling from a series of regulatory and
competitive setbacks that cut its market value by nearly 20%
over the past year, now faces a $100 billion takeover offer
from rival chip maker Broadcom Ltd. Can it get more?
The FAANG basket is now 25% ahead
of the S&P 500 over the past year
Hong Kong’s red-hot market for technology listings has
already surpassed the heady days of the dot-com boom.
Fundraising from tech-related initial public offerings in the city, led
by ZhongAn Online P&C Insurance Co., has hit a record $4.2
billion this year, according to data compiled by Bloomberg. That’s
more than five times the amount raised in Hong Kong during the
global dot-com boom in 2000.
China's supercomputers race past US to world dominance
China doesn't just have the single fastest supercomputer in the world.
It now dominates the list of the 500 fastest
Initial coin offerings
EU watchdog warns over riskiness of ICOs
Emerson to Increase Offer for Rockwell to $29 Billion
Emerson Electric plans to boost its takeover offer for Rockwell
Automation, this time to $29 billion, ratcheting up an effort to
bring its reluctant rival to the negotiating table.

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November 18, 2017
Real Estate and Construction Outlook
Rising homeownership is adding to the jitters in the residential rental
market, which has slumped recently after a long stretch near the top
of the commercial real-estate industry
Drop in Mall Values Weighs Down
Commercial Property Sector
Green Street’s Commercial
Property Price Index, which covers
property owned by real estate
investment trusts, declined 1% to
125.5 in October from September,
the sharpest month-over-month
drop since the financial crisis.
Commercial property prices
generally have been trending
higher since June 2009, when the
Green Street index bottomed at
61.2, as an improving economy
fueled demand and low interest
rates made property yields
attractive.
Is the High Concentration of Retail in the Southwest US a Cause for Concern?
Property
Brookfield Property in $15bn offer for shopping mall owner GGP

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November 18, 2017
Will Life Ever Be the Same?
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