PGM Capital – Blog

Will Puerto Rico become the Greece of the Caribbean?

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss with you the debt situation of our neighbour island Puerto Rico.

Puerto Rico, an American territory, risks a Greek-style bust. With US$72 billion of debt outstanding, which accordance with CIA world Factbook. is 93% of its GDP.

It is more indebted than any of America’s 50 states. (Puerto Rico is not technically a state, but its bonds are treated as if it were.) Yields on its bonds have soared as high as 10%, as investors fret it may be heading for a default.

On June 29th, Puerto Rico's governor, Alejandro García Padilla is warning that the island can't pay its $72 billion public debt, delivering another jolt to the recession-gripped US territory.

Puerto Rico governer Alejandro García Padilla

Governor Alejandro García Padilla is hoping to defer debt payments while negotiating with creditors

On June 30th, 2015, Standard & Poor's Ratings Services lowered its credit rating on Puerto Rico to 'CCC-minus' from 'CCC-plus', hours after Governor Alejandro Garcia Padilla said the U.S. territory needed a period of bankruptcy to restructure its debt.

A default, distressed exchange, or redemption of Puerto Rico's debt within the next six months seems inevitable, S&P said in a statement. It put a negative outlook on the rating.

In a statement S&P said:

"We believe the (Puerto Rico) commonwealth's very weak liquidity and difficulty in obtaining external market access for cash flow financing raises the likelihood of a debt restructuring within the next six months,"

Fitch downgraded Puerto Rico's debt ratings to 'CC' from 'B' with a rating watch negative, saying a default of some kind appeared probable.

Moody's Investor Service said its ratings on Puerto Rico's debt range from 'Caa2-negative' to 'Ca-negative' and are consistent with a high probability of default.

Puerto Rican municipalities and public utilities were for years allowed to issue “triple tax-free” obligations – meaning that lenders’ earnings were exempt from local, state, and federal taxation.

This made Puerto Rican debt an attractive option for investors, whose eagerness to benefit from the tax exemption helped Puerto Rico cover a substantial budget deficit.

But slow economic growth has made it impossible for Puerto Rico to continue servicing its debts while providing basic services to its citizens.

The Island’s governor, Alejandro Garcia Padilla, warned in an interview with The New York Times on June 28.

"The debt is not payable"  

"There is no other option. I would love to have an easier option. This is not politics, this is math."

After months of staggering under its US$72 billion debt load, the island is expected to miss a bond payment due Saturday, August 1st, which - despite what some government officials have claimed - means the island is probably heading for default,  setting the stage for what could be one of the largest U.S. municipal debt restructuring.

Puerto Rico's government said Friday, July 31st, it would not make a US$58 million bond payment due over the weekend.

The Puerto Rican governor's chief of staff,Victor Suarez, said in an interview on Friday:

"We don't have the money"

He added that the government still hopes to renegotiate its debts with creditors.

A payment due over a weekend can be made by the end of business on Monday. A missed payment would be considered a default by investors.

The bonds are issued by Puerto Rico's Public Finance Corp., which has sold $1 billion of debt.

Like Greece, Puerto Rico is a chronically uncompetitive place locked in a currency union with a richer, more productive neighbour.

The island’s economy is also dominated by a vast, inefficient near-Athenian public sector. And, as with Greece, there are fears that a chaotic default could precipitate a far bigger crisis by driving away investors, and pushing up borrowing costs in America’s near US$4 trillion market for state and local bonds.

Below table shows the comparison of Greece and Puerto Rico's debt site by site.

Puerto Rico's governor recently confirmed that he had considered having his government seek permission from the US Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is pushing for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island's government can file for bankruptcy under current US rules.

Puerto Rico's public agencies owe a large portion of the debt, with the power company alone owing some US$9 billion.

García has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5% and creating a 4% tax on professional services.

Lawmakers in Washington appear to be getting increasingly anxious about the situation in Puerto Rico, which is poised to default on some US$72 billion in debt the island territory has acquired over the past several years. A key concern is the impact such a default could have on U.S. bond markets.

In a letter to Treasury Secretary Jack Lew on Friday, Senate Finance Committee Chairman Orrin Hatch (R-UT) asked the administration about its plans for dealing with the island’s finances, including its opinion on a move being pushed in Congress to allow Puerto Rico’s municipalities and public utilities to file for Chapter 9 bankruptcy.

To make a long story short, we can conclude that, Puerto Rico’s debts have become unsustainable.

As Greece has taught us, slashing government spending and services in order to pay off debt has a way of further beating down growth. The worse the economy gets, the more Puerto Ricans will likely leave the island, which will mean fewer tax revenues and even weaker potential for growth. Governor García Padilla has called it a potential "death spiral."

After reading this blog and governor, Alejandro Garcia Padilla, statement that Puerto Rico's debt is not payable, the island got a new nickname:

The Greece of the Caribbean.

Puerto Rico-Greece

Last but not least it is worth mentioning that, Puerto Rico's failure to pay on debt would be the USA's highest profile since Detroit, which defaulted on US$1.45 billion of insured pension bonds before filing for bankruptcy in 2013.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


HighLights of the Week of July 20, 2015

By Eric Panneflek


Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of July 20, 2015:

  • Bad start of earnings season Q2-2015
  • DOW Jones Down YTD
  • Gold falls below US$ 1,100.00 a Troy Ounce

The stock market’s reaction to a heavy week of earnings reports was not encouraging.

Last week’s stock trading featured a few winners but there were more losers as declining stocks swamped the advancing ones by a 4-1 margin. Some of the losers like Caterpillar (NYSE: CAT) are large multinational companies that have been hurt by the stronger dollar and the resulting weakness in their overseas business.

Below a list of stocks and blue chips that were hit hard last week:

  • Apple Inc. (NASDAQ: AAPL) where shares were down 7% at US$121.63 after it reported earnings on Tuesday, July 21st.
    260715-Apple Week July 20
  • Technologies Inc. (NYSE: UTX) reported a 10% drop in elevator orders from China and it’s stock was down 10% for the week.
    260715-UTX Week July 20
  • IBM Inc (NYSE: IBM) shares fell in the week of July 20, from US$ 172.57 to US$ 159.75 a share, -US$ 12.82 or 7.4%, after the company reported its second-quarter earnings fell 17% as the technology giant posted its 13th straight quarter of year-over-year revenue declines.
    260715-IBM Week July 20

U.S. stocks fell for the fourth straight session on Friday, leaving indexes with the biggest weekly losses in months.

Over the past week, investors sold stocks as disappointing earnings results from companies such as Apple Inc., Caterpillar, United Technology and IBM  as well as a dramatic sell-off in commodities, brought back concerns over a slowing growth in global economy.

  • The S&P 500 closed 22.50 points, or 1.1%, lower at 2,079.65, booking a 2.2% weekly loss. The weekly decline for the benchmark was the steepest since March.

    260715-S&P 500 Week July 20
    Among the S&P 500 sectors, materials stocks were hit the hardest, with the sector falling 5.5% over the week, while the energy sector booked a 4.1% loss.
  • The Nasdaq Composite dropped 57.78 points, or 1.1%, to 5,088.63, ending the week with a 2.3% weekly loss.
    260715-S&P 500 Week July 20
  • The Dow Jones Industrial Average, dropped 163.39 points, or 0.9%, to 17,568.53, recording a 2.9% weekly loss.
    260715-DOW week july 20

Investors also grappled with a housing report that showed sales of new single-family homes in the U.S. dropped to the slowest pace in seven months, suggesting the U.S. housing market may not be firing on all cylinders.

Gold fell more than 1 percent to a five-year low on Wednesday as a bounce in the dollar fueled downside momentum, with investors continuing to pull away from the metal after its dramatic slide earlier this week.

A looming increase in U.S. interest rates, the first in nearly a decade, has diminished gold's appeal to investors, encouraging more sellers in the market after Monday's 3 percent rout, the biggest one-day drop since September 2013.

As can be seen from below chart Spot gold hit the lowest since February 2010 at US$1,078.24 an ounce on Friday, July 24 at noon for it to rebound with 0.5 percent, to close at US$1,096.29.

Screen Shot 2015-07-26 at 2.54.41 PM

The above shows that although it closed below the psychological important level of US$ 1,100.00 per Troy ounce, it was only down with approx. 1.00%  last week.

Corporate earnings in the USA are being hurt by the high US-Dollar, while on the other-side the positive impact of lower oil prices has not materialized.

In the meantime oil prices continued to decline as West Texas Intermediate crude closed 0.72% lower to US$48.88 a barrel and down 5.4% for the week as can be seen from below chart.

260715-WTI week July 20

Prices dropped after the total number of active U.S. rigs drilling for oil climbed 21 to 659 over the week, according to Baker Hughes. Crude took a dive last week after six world powers agreed to a nuclear deal with Iran that would lead to Iranian oil on global markets.

USA Stocks by extended losses in the final hour of trading Friday, pushed the Dow Jones Industrial Average into negative territory for the year as can be seen from below chart.

260715-DOW YTD July 24 2015

The USA-media is blaming the Greece woes in the Euro-zone and the slowdown in China the decline of global demand for commodities and USA produced goods, and subsequent the decline in earnings for USA Companies.

How ever below chats of the German DAX-30 and China CSI-300, shows that both index are in the green YTD.


260715-DAX YTD July 24 2015

Germany's DAX Index performance Year-To-Date

260715-China CSI-300 YTD July 24 2015

China's CSI-300 Index, performance Year-To-Date

Beside this it is also worth mentioning that the Euro, was up in the week of July 20, as can be seen from below chart.

260715-Euro - USD week july 20

Last but not least, when analysing market behaviour, always remember below quote of John Maynard Keynes;
"Markets can stay irrational longer than you can stay solvent."
Secondly before taking any investment advise, always take your investment horizon and risk tolerance into consideration.
Thirdly, remember that we currently are living in the age of turbulence which is very volatile and that sharp corrections may happen at a sudden.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


China Reports an Increase in Gold Reserves By 57%

By Eric Panneflek

Dear PGM Capital Blog readers,

On Friday, July 17, China ended years of speculation about its official gold holdings by revealing an almost 60 percent jump in its reserves since 2009.

The People’s Bank of China (PBOC), the country's central bank, announced on Friday, that its gold reserves have grown by 57% to about 1,658 metric tonnes (53.31 million fine troy ounces) as of the end of June. This is the first official update to China’s gold reserves since April 2009, when it reported that its gold reserves were 1,054 tonnes.

The purchases show how China is seeking to diversify its reserves away from the US dollar at a time when the price of gold has fallen to near its lowest price since 2010.

China has been reducing its foreign exchange reserves this year, reporting 3.69 Trillion US-Dollars, at the end of June, down from 3.84 Trillion US-Dollars in January.

The People's Bank of China said on its website:

"Gold has special risk-return characteristic, and at specific times is not a bad investment"

The reason why everyone has been so focused on Chinese official gold holdings is that there has been no official update to the gold inventory of the world's biggest nation, which have been fixed at 33.89 million oz since April 2009, a little over 1000 tonnes.

The long awaited moment, finally arrived on Friday, July 17th, in the morning, when after a 6 year delay, China announced that its gold holdings had increased from 38.89 million to 53.31 million troy ounces, a 57% increase "in one month." as can be seen from below table.

The amounts to a new grand total of 1,658 metric tons, an increase of 604 tons from the 1054 reported last in 2009 and which according to the PBOC was also the May 2015 total.

According to the World Gold Council, China’s gold reserves are now the fifth largest of any country in the world and sixth when you include the holdings of the International Monetary Fund (IMF). Only the United States, Germany, Italy, and France hold more gold than China as can be seen from below table.

The latest total is about half what the market thought it was. The market was generally expecting a total of well over 3,000 metric tons, according to Brien Lundin, editor of Gold Newsletter.

In our April 26, blog article we wrote that "The Mystery Of China's Gold Holdings Is Coming To An End" as a result of China willingness to add the Yuan to the IMF's SDR currency basket which would require the disclosure of China's gold holding ahead of an IMF meeting on Special Drawing Rights (SDR) composition which may be held in October.

The increase in China’s gold holdings highlights the precious metal’s role in the global financial system as a bank reserve asset. Central banks, as a group, have continued to buy gold over the past three years even as prices plunged more than a third from their record, set in 2011.

While we welcome some long overdue transparency by China, the numbers they reported on Friday July 17, are well below official expectations. The market was generally expecting a total of well over 3,000 metric tons.

This is what Bloomberg Intelligence said previously:

"Based on trade data, domestic output and China Gold Association figures, the People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tonnes,"

Ken Ford, president of Warwick Valley Financial Advisors, said:

"China has been pressing to be included in the International Monetary Fund’s Special Drawing Rights, or SDR, currency basket. So they want to show that the have accumulated enough, but do not want to show their whole hand because it may spook the markets"

China has undertaken economic reforms aimed at persuading the IMF to include the Yuan in the basket, which would accelerate its acceptance as a reserve currency.

We believe that lifting the Yuan’s potential as a global reserve currency is what’s behind China’s move to lift the shroud of mystery surrounding its hoard of gold.

That could mean China will be adding a lot more gold to its reserves in the months to come.

China also has ambitions to create a global reserve currency to challenge the hegemony of the U.S. dollar and the Chinese clearly recognize gold’s role in providing credibility and status to what would be a new currency on the international stage.

The IMF will be considering the inclusion of the Yuan under the special drawing rights in October, to become part of the IMF’s SDR basket, China will almost certainly have to unpeg its currency from the US dollar.

The above means that the coming weeks up the IMF meeting regarding the reshuffling of the SDR, in October, we can expect some more fireworks news from China.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek