by ilene - February 8th, 2016 12:33 pm
Courtesy of John Rubino
So far, each financial crisis in the series that began with the junk bond bubble of 1989 has been noticeably different from its predecessors. New instruments, new malefactors, new monetary policy experiments in response.
But the one that’s now emerging feels strikingly similar to what just happened a few years ago: Banks overexposed to assets they thought were safe but turn out to be highly risky see their balance sheets deteriorate, their liquidity dry up and their stocks plunge.
This time it’s starting in Europe, where bank stocks are down by over 20% year-to-date and credit spreads are exploding. For a general look at this process see Is Another European Bank Crisis Starting?
Not surprisingly, the scariest stories are emanating from Italy which, despite inventing the mega-bank concept during the reign of the Medici, seems unable to grasp how money actually works. Check out the following Wall Street Journal chart of non-performing loans. When 16% of an entire country’s borrowers have stopped making their payments, that country is pretty much over.
All eyes are therefore on Italy’s Banca Monte dei Paschi, which has a non-performing loan ratio of 33% and, as a result, a plunging share price. When the Italian economy finally blows up, this will probably be where it starts.
But here the story takes an even more disturbing turn. It seems that the other lender now spooking the markets is none other than Deutsche Bank, pillar of the world’s best-performing economy. Shockingly-bad recent numbers have combined with questions about its mountain of derivatives and exotic debt to put DB in a very uncomfortable spotlight. Excerpts from analysis of the aforementioned debt:
(Wolf Street) – Shares of scandal-plagued, litigation-hammered, loss-ridden Deutsche Bank, one of the largest and least capitalized megabanks in the world, closed at €16.32 today in Frankfurt, down 50% from April last year. Investors are fidgeting in their seats, cursor on the sell-button.
In October, it had announced that it would shed divisions, clients, and employees, and hopefully some risks, and that it would scrap its dividends.
January 20, the bank reported “earnings” – in
by ilene - February 8th, 2016 12:05 pm
Courtesy of Joshua M. Brown, The Reformed Broker
Today’s MLP of the Day – Energy Transfer Partners LP, ticker symbol ETE. In a tersely-worded 8K, the company announced the replacement of their CFO. I don’t know anything about the company, but the investors in the name are clearly shooting first here and getting the hell out of dodge. Shareholders in this and many other MLPS are now learning an abject lesson in portfolio construction and the true nature of risk-reward tradeoffs in fixed income.
For a 4.5% income stream in ETE during the salad days of MLPs, investors endured almost complete wipeout of their principal.
We’re seeing portfolios come in to us lately loaded with securities that carried high yields at the time of purchase, but that also carried extreme risk – a foreign concept during the QE years when anything could be financed and refinanced at will.
The pros knew not to construct income portfolios laden with “bond alternatives” or, at a minimum, to keep these holdings small and compartmentalized. The pretenders replaced the Treasury slots of their fixed income holdings with garbage so they could promise clients (and prospective clients) a current income higher than what the guy down the street was offering.
And now we separate the pros from the pretenders, as the potential risks become actual risks, and, in many cases, permanent losses.
If you’re an advisor who won business over the last few years by out-delivering on current yield in your proposals, your time of reckoning has come. Because all fixed income must be looked at from a total return perspective, not merely quoted in terms of the trailing 12-month’s dividend yield.
Read this if you haven’t yet:
by ilene - February 8th, 2016 11:59 am
Courtesy of Dana Lyons
While the broad stock market has been getting hammered, the utility sector hit a 52-week high this week – and achieved a significant relative breakout.
Our firm’s philosophy when it comes to investment selection, i.e., where to invest, is to concentrate in the strongest performing areas of the market. We refer to this as relative strength. Typically, this means the sectors that are rising more than the rest, especially on a risk-adjusted basis. Occasionally, though – in a market correction or bear market – it can mean the sectors that just aren’t losing ground, or are losing the least.
This is the case currently with the utility sector. For, while most areas of the market are off to a historically weak start, utilities are up 8% for 2016, as measured by the Dow Jones Utility Average (DJU). Furthermore, while the DJU is up a mere 1.7% over the past 52 weeks, it is nevertheless at a 52-week high.
Additionally, as the chart indicates, the utility sector has broken out of a well defined downtrend on a relative basis versus the S&P 500. While there is no guarantee, this does suggest that, over the longer-term, the utility sector could be in the early staged of out-performance versus the market. And based on past occurrences when we have witnessed relative breakouts of some variation (e.g., 2000, 2007), this is not necessarily a positive development for stocks overall.
It remains to be seen whether similarly challenging times will materialize for the broader market versus utilities over the longer-term, but that trend certainly is in effect at the moment.
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More from Dana Lyons, JLFMI and My401kPro.
by ilene - February 8th, 2016 10:33 am
Ever since early 2015, we have repeated that with the world caught in a negative rate "race to the bottom", which even S&P now admits, it is inevitable that the US will join the rest of the DM central banks, especially after the flawed and much delayed attempt to hike rates into what is at least a quasi recession.
Now, with sellside chatter that it is only a matter of time before the Fed will likewise join the fray despite stern warnings by the likes of Deutsche Bank that more easing will only exacerbate conditions for global financial firms, JPM's Michael Feroli has set the "bogey" or the catalyst for what will be needed for the Fed to finally admit defeat and go not only back to zero but below it:
While we earlier mentioned that negative nominal rates should affect the economy no differently than ordinary policy easing, there is some evidence that the exchange rate channel is particularly pronounced in the case of NIRP. The leadership role of the Federal Reserve in the global monetary system may lead to some hesitancy to engage in what may be uncomfortably close to a skirmish in the currency wars. Lastly, there is the political issue. To be sure, political concerns about NIRP are not unique to the Fed; presumably one reason central bankers abroad sought to limit the pass-through to retail depositors was to avoid pushback from the political establishment. Even so, it seems reasonable to judge that the Fed’s current political situation is more parlous than is the case among its overseas counterparts. For all of the above reasons, we believe the hurdle for NIRP in the US is quite high, and we would need to see recession-like conditions before the Fed seriously considered this option.
So the "hurdle is quite high", but all that will be needed for Yellen and co. to surpass this hurdle is for "recession-like" conditions to emerge.
Which means be on the lookout for "recession-like" conditions because a few more days of stocks crashing and wiping out years of the Fed's carefully planned out "wealth effect" and the Fed wil have no choice but to beg the Department of Commerce to come up with quadruple seasonal adjustments that make every data…
by ilene - February 8th, 2016 9:07 am
The saga of the gas giant Aubrey McClendon built, Chesapeake Energy, enters its endgame, when moments ago following a Debtwire report that the company has hired Kirkland and Ellis as its restructuring/bankruptcy attorney – typically a step taken just weeks ahead of a formal Chapter 11 filing – the stock has plunged 22% to $2.40, the lowest price in the 21st century, and for all intents and purposes, ever.
In a few weeks we will see just how many banks were properly "provisioned" for this now imminent bankruptcy that may just unleash the default wave so many have been waiting for.
by ilene - February 7th, 2016 2:15 pm
Courtesy of Lance Roberts of Real Investment Advice
RALLY FAILS, ALERTS RISE
Last week, I discussed the boost the market received as the BOJ made an unexpected move into negative interest rate territory combined with end of the month buying by portfolio managers. I wrote:
“However, the announcement by the Bank of Japan (BOJ) to implement negative interest rates in a desperate last attempt to boost economic growth in Japan was only the catalyst that ignited the bulls. The “fuel” for the buying came from the end of the month portfolio buying by fund managers.”
But more importantly, was the push higher by stocks that I have been discussing with you over the last couple of weeks. I wrote:
“Over the last few weeks, I have suggested the markets would likely provide a reflexive rally to allow investors to reduce equity risk in portfolios. This was due to the oversold condition that previously existed which would provide the “fuel” for a reflexive rally to sell into.
I traced out the potential for such a reflexive rally two weeks ago as shown in the chart below.”
As I stated then, the most important parts of the chart above are the overbought / oversold indicators at the top and bottom. The oversold condition that once existed has been completely exhausted due to the gyrations in the markets over the last couple of weeks. This leaves little ability for a significant rally from this point which makes a push above overhead resistance unlikely.
“Just as an oversold condition provides the necessary “fuel” for an advance, the opposite is also true.”
Here is the problem. I have updated the chart above through Friday’s close.
The rally failed at the previous reflex rally attempt during the late December/January plunge. This failure now cements that high point as resistance. Furthermore, the market continues to fail almost immediately when overbought conditions are met (red circles), which suggests that internals remain extraordinarily weak.
HEAD & SHOULDERS – NOT JUST DANDRUFF
by ilene - February 7th, 2016 1:51 pm
JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to this edition of the Hudson Report. Now joining us is MichaelHudson. He’s an economics professor at the University of Missouri Kansas City, and he has a new book out titled Killing the Host. Thank you so much for joining us, Michael.
MICHAEL HUDSON: It’s good to be here, Jessica. Since we last talked I’ve also been appointed a professor at Peking University in Beijing.
DESVARIEUX: Awesome. Congratulations. So Michael, let’s get right into it and talk about the big stories of 2015, economic stories, I should say. What would you say are thethree most important stories that people should be aware of?
HUDSON: Well, the leading story is that the economy has not recovered. That the 1 percent have recovered, but the 99 percent have not recovered. And there is no sign of recovery, or even any sign that the presidential candidates running in next year’s election are trying to do anything.
The next story is that the 1 percent have recovered. I’m told that the largest sustained gains in any kind of asset have been number one Andy Warhol paintings, and number two, Stradivarius violins. These are trophies for the rich. They’re going way up while wages are not going up and consumer prices are not going up.
And the third story would be international, that the United States has changed the rules of the International Monetary Fund. Essentially, the U.S. has dragged Europe into an economic war against Russia, China, and the BRICS.
DESVARIEUX: Can you be more specific about that last story? How are they doing that?
HUDSON: Well, earlier this month the International Monetary Fund changed its rules that it had had since 1945. The whole international financial system since 1945 was based on the fact that governments when they’re bailed out, or when they borrow from other governments, they have to repay their debts, and that the IMF is going to bring leverage to make sure that the international, intergovernmental finance system remains intact by saying it’s not
by ilene - February 7th, 2016 11:30 am
Courtesy of EconMatters
We are near the low in bond yields for the year, and with the global markets selling off but the employment numbers holding in there, we have a real conundrum for bond investors.
by ilene - February 7th, 2016 10:50 am
Courtesy of Pam Martens
Sanford (Sandy) Weill, the Man Who Put the Serially Charged Citigroup Behemoth Together
Last Wednesday something noteworthy happened on Wall Street. Four of the largest Wall Street banks, each holding trillions of dollars in derivatives, hit new 12-month lows in intraday trading. The banks are Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. The banks recovered a little ground by the end of the week. These banks have two other things in common: they have been spending billions buying back their own stock and they all received bailouts during the 2008 crash.
Over the past six years, publicly traded companies in the Standard and Poor’s 500 Index have bought back $2.7 trillion of their own shares according to Bloomberg data. There are four major problems with this strategy: much of the buybacks are financed with debt; some of the buybacks simply offset insider selling or stock awards to executives; none of the money goes to growing or innovating the company; the timing of the buybacks could lead to stock market manipulation.
In the September 2014 issue of the Harvard Business Review, William Lazonick sized up the share buyback phenomenon like this:
“Given incentives to maximize shareholder value and meet Wall Street’s expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them ‘manage’ stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation.”
The SEC has a very lax rule, known as 10b-18, which provides a multitude of openings for stock price manipulation. As we previously reported, Wall Street banks can even carry out buybacks in their own dark pools as the self-regulators on Wall Street look the other way.
by ilene - February 7th, 2016 10:01 am
Tim Knight explains his bearish call on Apple Inc. stock which is largely based on the loss of Steve Jobs.
Courtesy of Tim Knight at Slope of Hope
Over the past ten months, in steps almost too small to be noticed by the mass media, Apple has shed over two hundred billion dollars in value. That's nearly one quarter of a trillion dollars in wealth which would have fed shareholder dreams of new houses, new boats, new jewelry, and mink coats, but……….it's gone.
The thing is, I think the slide is far, far from over. I wrote a piece earlier this year (which got picked up by some of the mainstream press) predicting that Apple would fall to the mid-70s. We're already heading into the low 90s, so my goofy prediction is seeming a little less insane.
Of course, it wasn't that long ago that buying Apple was a "no brainer" – indeed, a "bargain." God knows it wasn't hungry for media attention. This is the unedited home page of MarketWatch a while back:
So what's behind this fall? Lots of things (not the least of which is a wildly-overvalued market which, ultimately, will pound the Dow back into 4-digit land), but for Apple specifically, I think it's simple: the magic is gone again.
When I say "again", I am referring to something in my own personal experience. I worked at Apple HQ from 1987 to 1990. Steve Jobs had left the company two years earlier, although there was still Jobsian memorabilia scattered about, such as the 1985 planning binder from the Finance department which had an image of a dollar bill with Steve's face instead of George Washington's. On the bottom of the dollar bill were the words In Jobs We Trust.
This was the Sculley era. That is, John Sculley, the Pepsi boy whom Jobs famously lured to Apple in the early 1980s and, by the late 1980s, was sailing along with the winds of Jobs' former product prowess pushing his sailboat…