Back in March 2016, we published an article explaining how the coming default cycle – when it finally hits – would be different: it would be marked by record low recovery rates. While there were many reasons for that, three stood out: i) the disconnect between fundamentals and asset prices thanks to the Fed’s constant manipulation of markets, ii) the record layering of debt upon debt, much of it secured, and iii) the years of covenant-lite deals that stripped most if not all creditor protections over the past decade (something which as we noted recently has resulted in bitter creditor fights and a “civil war” involving some of the most prominent names in investing).

Fast forward to today when Bloomberg picks up on what we said almost five years ago an in “Bond Defaults Deliver 99% Losses in New Era of U.S. Bankruptcies” writes that more and more, bondholders are fighting over recoveries as low as 1 cent.

The story should be familiar as we have discussed in constantly in recent months: in a post-covid world, where bankruptcy filings are surging, many lenders are coming to the realization that their claims are almost completely worthless, just as we warned would happen in 2016.

Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies — if that.

Several stark examples of this epic collapse in recoveries is the current price of a handful of retailers’ bonds. Men’s Wearhouse, which filed in August, traded this month for less than 2 cents on the dollar. When J.C. Penney Co. went bankrupt, an auction held for holders of default protection found the retailer’s lowest-priced debt was worth just 0.125 cents on the dollar. For Neiman Marcus that figure was 3 cents. Indeed, as the following chart of median CDS auctions finds record low recoveries for bondholders (which of course is great news for all those who bought the CDS).

According to Barclays, the median value for companies’ cheapest debt in credit derivatives auctions this year is just 3.5 cents on the dollar, a record low and far below the 23.4 cent median for 2005 through 2019. It also confirms

Today China's top leaders represented by the Chinese Communist Party’s Central Committee started the Fifth Plenum of its 19th Party Congress where they will chart the course for the economy’s development for the next 15 years and set the country’s long-term priorities, with are expected to focus on boosting technological self-sufficiency and domestic demand while Xi cements his influence over the party.

The Plenum will run until Thursday, and will conduct the country’s most important exercise in central-planning: drafting the next Five-Year Plan against the backdrop of a worsening global economy and US sanctions (it's unclear what if any role the recordings China intelligence has of Hunter Biden will play in this exercise). The plenum will also discuss a broad plan for the next 15 years, with goals that are likely to endure for at least the rest of 67-year-old President Xi Jinping’s rule, who as a reminder made himself ruler for life several years ago.

According to the FT, the process to draft a plan typically reveals the biggest worries and priorities for the Chinese leadership, although these are usually for private consumption and rarely officially disclosed to the public. This year’s meeting comes as the deadline for meeting the previous overarching goal of achieving a “moderately prosperous society”, is due to expire in 2021, the centenary of the founding of the Chinese Communist party.

Beijing has recently hinted it would broaden out its focus on economic growth to include targets for environmental protection, innovation and self-sufficient development — such as in food, energy, and in chips. The Planum will also explain how the government will meet Xi’s target of zero net carbon emissions by 2060, which is ironic since China is the world's biggest emitter of CO2.

Xi is also expected to use the exercise to consolidate his influence over the party and the party’s influence over governance, said Holly Snape, a fellow in Chinese politics at the University of Glasgow. "It’s useful to understand these broad goals in the context of an expression Xi seems fond of: the party, government, military, people, education, east, west, south, north, and centre — the party leads everything."

At

Beijing is following up its announcement of impending sanctions to be levied against a trio of American defense contractors by ordering six American media companies to deliver detailed information about their finances, staff and other details.

The urgent demand – which gives the media companies a week to comply – follows another tit-for-tat attempt by Washington to crack down on Chinese media by labeling six entities as “foreign missions”, which could create problems for their employees working from the US.

This isn’t the first attack on American journalists. Back in March, the CCP kicked out all the most critical western journos from the NYT, WSJ and Washington Post, plus others.

However, some of the media orgs being targeted by Beijing have never been targeted before. Overall, the list includes mostly liberal-leaning outlets. ABC, LATimes, Minnesota Public Radio, Bureau of National Affairs, Newsweek and Feature Story News.

Ironically, all of these outlets typically promote a media narrative at odds – sometimes even directly hostile to – President Trump’s agenda.

Readers can find the full statement below.

Beijing responds to US moves on state media: “…demands that the China-based branches of the ABC, LATimes, Minn. Public Radio, Bureau of National Affairs, Newsweek and Feature Story News declare in written form information about their staff, finance, operation and real estate..” pic.twitter.com/xtUZkRT199

— Timothy McLaughlin (@TMclaughlin3) October 26, 2020

Beijing’s Foreign Ministry claimed the decision was “entirely necessary” in retaliation for the Trump Administration’s latest effort.

The measures are entirely necessary and reciprocal countermeasures that China is compelled to take in response to the unreasonable oppression Chinese media experience in the US. They are legitimate & justified self-defense in every sense: Chinese FM https://t.co/b5TCgRtXsI

— Global Times (@globaltimesnews) October 26, 2020

The Foreign Ministry immediately called on Washington to “immediately change course, undo the damage, and stop its political oppression and arbitrary restrictions on Chinese media organizations” or face additional countermeasures.

NASA scientists used a robotic spacecraft and a Boeing 747SP plane modified with a special telescope to detect water on the Moon’s sunlit surface for the first time. This discovery indicates water could be more widespread than previously thought, and it allows for NASA’s return of humans to the lunar surface via the Artemis program by 2024. 

Two studies were published in the journal Nature Astronomy Monday morning, describing how NASA detected “widespread hydration” on the lunar surface. The research is based on data collected by NASA’s Lunar Reconnaissance Orbiter, as well as the agency’s Stratospheric Observatory for Infrared Astronomy airborne telescope, also known as SOFIA, mounted within a heavily modified Boeing 747. 

The first study, titled “Molecular water detected on the sunlit Moon by SOFIA,” detected water molecules on the lunar surface. 

The second study, titled “Micro cold traps on the Moon,” found “water ice is thought to be trapped in large permanently shadowed regions in the Moon’s polar regions, due to their extremely low temperatures.” Using data from the Lunar Reconnaissance Orbiter, lead planetary scientist Paul Hayne of the University of Colorado, Boulder, discovered “small-scale shadows in the polar regions, which we term ‘micro cold traps,’ substantially augment the cold-trapping area of the Moon, and may also influence the transport and sequestration of water.” 

“Our research shows that a multitude of previously unknown regions of the moon could harbor water ice,” Hayne said, who was quoted by Reuters.”Our results suggest that water could be much more widespread in the moon’s polar regions than previously thought, making it easier to access, extract, and analyze.”

The findings were also released during a NASA press conference that began around lunchtime on Monday.  

“For the first time, water has been confirmed to be present on the sunlit surface of the moon,” CNN quoted Hayne at Monday’s press conference. 

Findings Are Discussed At NASA’s Press Conference 

The water found on the Moon might be challenging to extract. We noted, by 4Q22, NASA is planning to send an ice-mining drill rig to the south pole of the moon to extract “water ice.” 

NASA is planning to return humans, or to be politically correct this time, land the first women on the Moon

Authored by Lance Roberts via RealInvestmentAdvice.com,

I recently published an article discussing why “recessions” are a good thing by reverting debt buildups excesses during expansions. The argument against debt reversions is always the same in that “debt-to-income” ratios low. To wit:

“One reason (of many) we don’t need a debt reversion is that household debt service costs (interest etc.) as a % of household incomes are currently at a 40 year low.” – S. Porter

If you look at a chart, it certainly would seem that would be the case.

But, like most data from the Federal Reserve, you have to dig behind the numbers to reveal the real story.

So let’s do that, shall we?

This is exactly why the Fed's "Debt to income ratios" are wrong. (The ratios are heavily skewed by the top 10% of income earners. Bottom 80% in debt up to their eyeballs.) pic.twitter.com/rb4wx3XAXA

— Lance Roberts (@LanceRoberts) January 23, 2020

Living The Dream

Every year, most Americans go further into debt just to “sustain” their standard of living. To wit:

“In 1998, monetary velocity peaked and began to turn lower. Such coincides with the point that consumers were forced into debt to sustain their standard of living. For decades, WallStreet, advertisers, and corporate powerhouses flooded consumers with advertising to induce them into buying bigger houses, televisions, and cars. The age of ‘consumerism’ took hold.“

The idea of “maintaining a certain standard of living” has become a foundation in society currently. The average American believes they are “entitled” to a specific type of house, car, and general lifestyle. Such includes living necessities such as food, running water, electricity, and the latest mobile phone, computer, and high-speed internet connection. (Really, what would be the point of living if you didn’t have access to Facebook every two minutes?)

However, maintaining this “entitled” lifestyle requires money, and as shown above, when income and savings run short, debt fills the gap.

The Illusion Of Debt Reduction

One of the headline stories of late has been the sharp decline in credit balances as individuals were rapidly paying down credit.

Such isn’t the case.

Each quarter, the Federal Reserve Bank of New York releases its quarterly consumer debt composition and balances survey. (Note that consumers are at near-record debt levels and roughly $1.5 Trillion more than

By Nicholas Colas of DataTrek Research

We recently picked up an original copy of then-NYSE president Edward Simmons’ 1930 report on the 1929 stock market crash. In recognition of that event’s upcoming anniversary, we have a summary of Simmons’ key observations. The comparisons to 2020 are remarkable, ranging from uncertainty on how technology might change business, to questions regarding sustainable corporate earnings, and even a sudden rush of retail investors.

We want to introduce you to Edward Henry Harriman Simmons. Born in 1876, he was the nephew and namesake of the famed US railroad magnate. He trained to be a doctor at Columbia University, but switched from the healing arts to finance in 1900. Simmons became a member of the New York Stock Exchange in that year and was named president of the institution in 1924.

The reason for this introduction is that we recently acquired a copy of Simmons’ May 1930 annual report to the NYSE’s Governing Committee, which includes his detailed analysis of the October 1929 stock market crash. Since we are coming up on the 91st anniversary of the event next week, this week’s story is his near-contemporaneous review of that event.

As a starting point, here is a brief description of what sorts of companies were listed on the NYSE at the time of the October 1929 Crash, as listed in the Appendix to Simmons’ report. At the time there were 821 companies on the Big Board, with 1,261 issues (common, preferred, etc.) between them.

Half of all NYSE stocks were in eight capital-intensive industry sectors:

• Railroads: 11.1 percent of all listed companies
• Autos: 7.1 pct
• Machinery and metals: 6.9 pct
• Foods: 6.3 pct
• Chemicals: 6.0 pct
• Petroleum: 5.8 pct
• Mining: 5.0 pct
• Steel and Iron: 4.1 pct

Despite the Roaring 20’s reputation for rampant consumerism, outsized Wall Street profits, and the growth of innovative technologies like telephony and mass market radio, industries related to these trends were not heavily represented on the NYSE:

• Chain stores/department stores: 6.7 percent combined of all listings
• Finance: 2.9 pct
• Cable, Telegraph, Telephone and Radio: 1.1 pct

This brings us to our first observation: unlike the world today, the stock market of 1929 wasn’t just “the economy”; it represented the highest fixed cost, most operationally levered parts

Update 1035ET: WH Economic Advisor Larry Kudlow – normally full of market-buffering optimism – admitted that there "remains a number of areas in Pelosi's cornonavirus plan that Trump cannot accept" – something we all knew for weeks, but this has taken the shine off Nasdaq's renaissance and sent the rest of the market legging lower once again…

The Dow and Small Caps are down around 1.9% from Friday's close and Nasdaq is tumbling back towards the lows of the day…

…well that re-escalated quickly!

*  *  *

Update 1015ET: The COVID-reflation trade is back as value is puked…

And momo is soaring…

Algos have stormed Nasdaq into the green… (but it's not holding)…

And at the same time, large-cap (Dow) and small-cap (Russell 2000) stocks are plunging…

Meanwhile, bonds haven't moved.

*  *  *

The algos are large and in charge this morning, as they ramp Nasdaq back to overnight highs…

Small Caps and The Dow are being dumped as Nasdaq explodes…

Sorry but WTF!!!

Over the past month, Wall Street's strategists have engaged in a comprehensive campaign to "ease" client fears that a Biden administration and/or a "Blue Sweep" would be bad for risk assets, shifting the narrative to where such an outcome would be just as good for stocks if not better than a continuation of the status quo, thus avoiding a selloff should Nov 3 prove to be a rout for Republicans, to wit:

• Higher corporate taxes under Biden? No worries, it will be offset by up to $7 trillion in fiscal stimulus under a joint Democratic congress.
• A doubling of capital gains taxes? No worries, it only will affect the super-rich and while it may hit stocks in late 2021, the dip will be quickly bought as, after all, stocks always go up, with Goldman predicting that  "regardless of the election outcome, we expect roughly 10% upside to the S&P 500 by the middle of next year."
• Higher bond yields under a Democratic sweep? No worries, after all we need higher yields to telegraph that the economy is improving and reflation is returning.

A recent Bank of America analysis laid out the 4 possible election outcomes, which were more dependent on the composition of the Senate than who is president (the worst scenarios for markets were those where "president Biden" faced a Republican Senate and vice versa for Trump):

The bottom line however was clear: the best possible outcome for markets is a Blue Sweep.

However, now that said Blue Sweep scenario has been fully priced in a new risk has emerged: what is polls are wrong – again – and we get either a Trump victory or a mixed Congress? Would that mean that the consensus trade would fall apart, leading to sharp stock market losses as the reflation trade is puked into an illiquid market?

Judging by the latest report from JPMorgan head of global equity strategy, Dubravko Lakos-Bujas – published over the weekend, Wall Street is about to pull a U-turn and begin pre-emptive damage control should Trump win.

Indeed,

Update (12:25 ET): Tropical Storm Zeta is on the verge of becoming a hurricane Monday afternoon as it swirls 140 miles southeast of Cozumel, Mexico, with maximum sustained winds of 70 mph, The National Hurricane Center reports. 

Zeta’s track is taking a familiar one, could make landfall anywhere between southeast Louisiana and the western Florida Panhandle late Wednesday or early Thursday morning. 

This storm, expected to be upgraded to a hurricane today or on Tuesday, could be the eight storm to make landfall along the Gulf Coast this hurricane season, with Louisiana’s coastline taking the brunt of the landfalls. 

Here's a map of the amount of time spent in the 5-day NHC forecast cones so far in 2020.

Louisiana has had a cumulative of THREE WEEKS in the cone this year!

And now we have TD 28 tracking toward the same area. pic.twitter.com/dX4J9w6n2z

— Sam Lillo (@splillo) October 25, 2020

Ahead of the Zeta’s arrival, a handful of energy companies released statements Monday morning about evacuations plans for workers at offshore rigs in the Gulf Of Mexico. 

Royal Dutch Shell said it would begin evacuating non-essential workers from platforms in the northern Gulf of Mexico ahead of Zeta’s arrival.

“We will start reducing non-essential personnel,” Shell spokeswoman Cynthia Bobski said. 

BHP Group Ltd announced evacuations have already begun for non-essential workers from the Shenzi and Neptune offshore production platforms. 

Equinor ASA also announced production shutdowns on the offshore Titan platform and evacuations of non-essential workers. 

“Equinor has decided to shut in production at our Titan facility and we will be evacuating staff from the platform today in advance of hurricane Zeta,” said Equinor ASA spokesman Erik Haaland.

Weather models suggest Zeta’s current track (subjected to change) is headed for a region in the northern Gulf known for an abundance of oil/gas offshore assets. 

*  *  *

Tropical Storm Zeta formed in the Caribbean Sunday morning, with the National Hurricane Center (NHC) forecasting the storm could strengthen into a hurricane Tuesday as a midweek landfall is expected on the US Gulf Coast. Zeta could strike the northern Gulf Coast on Wednesday. More specifically, hurricane models, as of Sunday afternoon, predict storm surge, rainfall, and hurricane wind impacts could be seen from Louisiana to the Florida Panhandle.

To remind readers, on June 1, day one of hurricane season,