Gold: $1062.90 down $1.80 (comex closing time)
Silver $13.74 up 8 cents
In the access market 5:15 pm
Gold $1061.20
Silver: $13.76
At the gold comex today, we had an extremely fair delivery day, registering 186 notices for 18,600 ounces.Silver saw 1 notice for 5,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 196.86 tonnes for a loss of 106 tonnes over that period.
In silver, the open interest rose by 980 contracts even though silver was down in price by a considerable 20 cents with respect to Monday’s trading. We have an extremely low price of silver and a very high OI coupled with backwardation in silver at the LBMA. (negative SIFO rates). The total silver OI now rests at 169,167 contracts. In ounces, the OI is still represented by .846 billion oz or 120% of annual global silver production (ex Russia ex China).
In silver we had 1 notice served upon for 5,000 oz.
In gold, the total comex gold OI fell by 918 contracts to 395,436 contracts as gold was down $12.20 in price with respect to yesterday’s trading.
We had no changes in gold inventory at the GLD, / thus the inventory rests tonight at 634.63 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver, we had no changes,in silver inventory at the SLV/Inventory rests at 323.509 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rise by 980 contracts up to 169,167 despite the fact that silver was down in price to the tune of 20 cents with respect to yesterday’s trading. The total OI for gold fell by 918 contracts to 395,436 contracts as gold was down $12.20 in price
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
3. ASIAN AFFAIRS
ii) Chinese officials finally admit to significantly faking data:
i) What took them so long: European nations now are against the EU plan to seize border sovereignty and to impose a standing border force:
The main power supplier, Aggreko, for the Brazil Olympic games has pulled out leaving unknown bidders left to do the job. Aggreko is well versed in the power supply business of Olympics and this is a blow to Brazil:
( zero hedge)
Chesapeake oil will be out of cash and going into chapter 11 by the summer of 2016:
( zero hedge)
Let us head over to the comex:
The total gold comex open interest fell to 395,436 for a loss of 918 contracts despite the fact that gold was down $12.20 in price with respect to Monday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, the latter did not hold as the boys finally could not convince any remaining OI holders to accept fiat. We are now in the big December contract which saw it’s OI fall by 65 contracts from 1833 down to 1768. We had 65 notices filed yesterday, so we neither lost nor gained any gold contracts standing for delivery in this active delivery month of December. The next contract month of January saw it’s OI fall by 24 contracts down to 623. The next big active delivery month is February and here the OI fell by 1336 contracts down to 282,234. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 127,951 which is poor. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also poor at 127,144 contracts. The comex was in backwardation in gold up to April (see James Turk)
December contract month:
INITIAL standings for DECEMBER
Dec 15/2015
| Gold |
Ounces
|
| Withdrawals from Dealers Inventory in oz | nil |
| Withdrawals from Customer Inventory in oz nil | nil |
| Deposits to the Dealer Inventory in oz | nil |
| Deposits to the Customer Inventory, in oz | nil |
| No of oz served (contracts) today | 186 contracts
18,600 oz |
| No of oz to be served (notices) | 1582 contracts
(158,200 oz) |
| Total monthly oz gold served (contracts) so far this month | 496 contracts(49,600 oz) |
| Total accumulative withdrawals of gold from the Dealers inventory this month | nil |
| Total accumulative withdrawal of gold from the Customer inventory this month | 156,898.5 oz |
Total customer deposits nil oz
DECEMBER INITIAL standings/
Dec 15/2015:
| Silver |
Ounces
|
| Withdrawals from Dealers Inventory | nil |
| Withdrawals from Customer Inventory | 299,371.755 oz
(JPM), |
| Deposits to the Dealer Inventory | nil |
| Deposits to the Customer Inventory | 790,042.06 oz
Scotia,Brinks |
| No of oz served today (contracts) | 1 contract
5,000 oz |
| No of oz to be served (notices) | 330 contracts
(1,650,000 oz) |
| Total monthly oz silver served (contracts) | 3599 contracts (17,995,000 oz) |
| Total accumulative withdrawal of silver from the Dealers inventory this month | nil oz |
| Total accumulative withdrawal of silver from the Customer inventory this month | 4,4720,582.3 oz |
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
we had no dealer withdrawals:
total dealer withdrawals: nil
we had 2 customer deposits:
i) Into Scotia: 302,572.770 oz
ii) Into Brinks: 487,474.29 oz
total customer deposits: 790,042.060 oz
total withdrawals from customer account: 790,042.060 oz
we had 1 adjustments:
Out of CNT:
we had 627,487.860 oz leave the dealer account and this landed into the customer account of CNT
And now the Gold inventory at the GLD:
Dec 15.2105/no changes in gold inventory at the GLD/Inventory rests at 643.63 tonnes
Dec 14.no change in gold inventory at the GLD/Inventory rests at 634.63 tonnes
DEC 11/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 10.2015/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
DEC 9/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 8/ no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 7/another huge withdrawal of 4.23 tonnes of gold/inventory rests at 634.63 tonnes
Dec 4/no change in gold inventory at the GLD/Inventory rests this weekend at 638.80
Dec 3/ a massive withdrawal of 16.oo tonnes of gold heading straight to Shanghai/tonnage rests tonight at 638.80 tonnes
Dec 2.2015: no change in gold inventory at the GLD/inventory rests at 654.80 tonnes
Nov 30/no change in silver inventory at the SLV/Inventory rests at 318.209 million oz
Comex gold backwardated to Apr. $1 premium to Jan. I don’t recall backwardation deeper than this. People want metal
-END-
And now your overnight trading in gold and also physical stories that may interest you:
Investors Beware – Credit Market Collapse Warning
Money Week editor John Stepek has looked at the recent mutual fund collapse in the junk bond market and correctly warns that it is a canary in the coal mine:
If you were around during the financial crisis, you might remember that fund closures became one of the canaries in the coal mine.
Various funds failed in the run-up to the crisis, as bad bets on risky assets went wrong and the economic backdrop became steadily less forgiving.
Why am I reminding you of this? Because we’ve just seen the biggest mutual fund failure in the US since 2008…
The full Money Week article can be read here
DAILY PRICES
Today’s Gold Prices: USD 1069.15, EUR 969.53 and GBP 705.31 per ounce.
Yesterday’s Gold Prices: USD 1071.75, EUR 988.43 and GBP 714.79 per ounce.
(LBMA AM)
Copper’s Dumping As Crude’s Pumping
Dr. Copper and Captain Crude are in significant disagreement over the state of the world… or it is just algos gone wild once again?
Crude jumps back above $37 for no good reason whatsover in the face of a surging dollar.
Copper plunges to one-week lows.
Has GATA taken things out of context? China doesn’t think so
Submitted by cpowell on Tue, 2015-12-15 18:46. Section: Daily Dispatches
1:53p ET Tuesday, December 15, 2015
Dear Friend of GATA and Gold:
In commentary posted at Kitco yesterday, “Confessions of a Gold Analyst: Will You Let The Inmates Run The Asylum?” —
http://www.kitco.com/commentaries/2015-12-14/Confessions-of-a-Gold-Analy…
— ElliotWaveTrader.net writer Avi Gilburt criticizes GATA for being “wrong” for more than four years.
But wrong about what exactly?
Gilburt mistakenly perceives GATA’s work as being to predict imminently higher prices for gold. While higher prices are implicit in the huge short position central banks long have been underwriting in the gold market, GATA’s work is not to give investment advice, nor to predict prices. Rather GATA’s work has been to document, publicize, and oppose the largely surreptitious intervention in the gold market by central banks, and to oppose their market rigging generally.
GATA’s work explains why fundamentals of supply and demand have not been manifesting themselves in the gold market — indeed, why neither fundamental nor technical analysis of the gold market is much use.Gilburt’s criticism is of more interest when he approaches the documentation GATA has compiled over the years. He writes: “If you read all the ‘proof’ presented by the manipulation theorists and really think about what it means, you would recognize that they have either presented statements being taken out of context (which I have shown in some of my prior published articles), or they have shown that there may be small movements in metals that may have been manipulated.”
The only defense against criticism that documents have been taken “out of context” is to review them all one by one, which GATA more than encourages — GATA pleads for this. If Gilburt has “shown” such contextual distortion in previous articles, GATA has not seen them, maybe because they have not been published in the clear. We would welcome a detailed exchange with Gilburt about particular documents.
In any case some central bankers themselves seem to have construed the documents pretty much as GATA does:
http://www.gata.org/node/11304
http://www.gata.org/node/11012
http://www.gata.org/node/12016
http://www.gata.org/node/10839
News organizations controlled by the government of China also have construed the documents as GATA does, as have officials of the gold industry in China:
http://www.gata.org/node/10380
http://www.gata.org/node/10416
http://www.gata.org/node/13446
http://www.gata.org/node/13314
Just a few weeks ago an Austrian central banker, speaking at the London Bullion Market Association conference in Vienna, cheerfully conceded surreptitious intervention in the gold market by central banks and then, when his admission made it outside the conference, locked himself in his office, or was locked up there, to avoid an attempt to question him about it:
http://www.gata.org/node/15897
No analysis of the gold market is worth anything if it fails to address the following questions, which GATA encourages Gilburt and all gold market analysts to address:
— Are central banks in the gold market surreptitiously or not?
— If central banks are in the gold market surreptitiously, is it just for fun — for example, to see which central bank’s trading desk can make the most money by cheating the most investors — or is it for policy purposes?
— If central banks are in the gold market for policy purposes, are these the traditional purposes of defeating a potentially competitive world reserve currency, or have these purposes expanded?
— If central banks, creators of infinite money, are surreptitiously trading a market, how can it be considered a market at all, and how can any country or the world ever enjoy a market economy again?
Documentation responsive to these questions, along with a summary attempting to put the documentation in context, can be found here:
http://www.gata.org/node/14839
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
1 Chinese yuan vs USA dollar/yuan falls in value , this time to 6.4628/ Shanghai bourse: in the red (even after last hr rescue), hang sang: red
2 Nikkei closed down 317.52 down 1.68%
3. Europe stocks all in the green /USA dollar index down to 97.55/Euro up to 1.1002
3b Japan 10 year bond yield: falls to .299% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 121.43
3c Nikkei now just above 18,000
3d USA/Yen rate now well above the important 120 barrier this morning
3e WTI: 36.60 and Brent: 38.46
3f Gold down /Yen up
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises to .58% German bunds in negative yields from 5 years out
Greece sees its 2 year rate rise to 9.32%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield rises to : 8.51% (yield curve deeply inverted)
3k Gold at $1063.25/silver $13.71 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 11/100 in roubles/dollar) 70.56
3m oil into the 36 dollar handle for WTI and 38 handle for Brent/ China purchases huge supplies from Saudi Arabia
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 0.9844 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0830 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England on criminal charges/arrests 10 traders for Euribor manipulation
3r the 5 year German bund now in negative territory with the 10 year rises to + .580%/German 5 year rate negative%!!!
3s The ELA lowers to 82.4 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.25% early this morning. Thirty year rate at 3% at 2.99% /
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Surge, Oil Rebounds As Fed Starts Historic Two-Day “Rate Hike” Meeting
The start of the Fed’s most eagerly awaited two-day policy meeting in years has finally arrived with the market expecting Yellen to announce the first 25 bps rate hike in 9 years tomorrow with nearly 80% probability, and so far US equity futures are enjoying a last minute relief rally, while emerging market stocks rose for the first day in ten after the longest losing run since June. Europe’s Stoxx 600 Index has also rebounded from a five-day losing streak, the worst in over four months.
While yesterday stocks started off weak on the latest commodity carnage only to rebound following some truly ridiculous action, so far today’s session has been a mirror image, with oil rebounding from February 2009 lows and WTI printing above $37 at last check, even as China closed just off its lows, the Nikkei tumbled led by a strong Yen, and the broader commodity complex once again sliding as can be seen in the Bloomberg Commodity Index, which tracks 22 materials, and which just dropped to the lowest since March 1999 despite the modest oil rebound which briefly took WTI above $37 but has failed to sustain the highs.
If yesterday was any indication, it would not be at all surprising to see today’s early strength be wiped out and the S&P closes at its lows as the reality of an $800 reduction in overall liquidity finally hits market participants.
Somewhat surprisingly the dollar has fallen against most of its major 16 peers. Bloomberg believes that investors have had time to adjust to the prospect of higher U.S. interest rates since Oct. 28, when the Fed signaled a December move was likely. We are less sanguine about just what is priced in especially since all other central banks will continue to aggressively easy and devalue their own currencies, most notable case in point of course being China.
And while there is a long way to go before the week ends, including not only the Fed’s first potential tightening in nearly a decade, but also the largest S&P option expiration on Friday in many years (as profiled before), which in this illiquid market means a lot of volatility is imminent, but for now here is where we stand:
- S&P 500 futures up 0.9% to 2027
- Stoxx 600 up 1.9% to 356
- FTSE 100 up 1.7% to 5977
- DAX up 2.3% to 10370
- German 10Yr yield up 6bps to 0.63%
- Italian 10Yr yield up 2bps to 1.66%
- MSCI Asia Pacific down 0.7% to 127
- US 10-yr yield up 2bps to 2.24%
- Dollar Index down 0.16% to 97.45
- WTI Crude futures up 0.6% to $36.51
- Brent Futures up 1.2% to $38.39
- Gold spot up less than 0.1% to $1,060
- Silver spot up 0.3% to $13.72
A closer look at the markets, shows that Asian stocks saw choppy price action following the positive close on Wall St. as energy prices rebounded, while prospects of a looming Fed rate hike kept sentiment cautious. ASX 200 (-0.4%) initially traded with minor gains with the energy sector underpinned by the recovery in crude, while healthcare outperformed after Greencross shares soared 30% on buying interest for a 15% stake in Co. However, the index then shrugged-off gains to print a fresh 2-year low. Elsewhere, Chinese markets traded mixed before both the Hang Seng (-0.2%) and Shanghai Composite (-0.3%) closed in the red, while Nikkei 225 (-1.7%) underperformed despite JPY weakness with investors cautious ahead of the FOMC meeting. Finally 10yr JGBs traded higher as Japanese equities lag.
Top Asian News:
- Apple Said to Open Secret Lab in Taiwan to Develop Displays: Engineers developing LCD, OLED technologies for devices
- RBA Says Recent Data Positive, Repeats Scope to Ease Further: Australia’s central bank said low interest rates are supporting household spending and weaker exchange rate aiding local cos.
- Chinese Backpedal From U.S. IPO Market as Mainland Deals Surge: Total value of U.S offerings declines 98% to $666m
- Japan’s Giant Leveraged ETF Says Won’t Use Swaps as Fund Reopens: Fund starts taking new orders on Dec. 18 after 2- mo. halt
- Shanghai’s Worst Smog in Two Years Spurs Production Limits: City orders schools to keep children indoors and factories to limit production
- Murder-Free Days Underpin Property Boom in Top Pakistan City: Karachi has seen real estate prices rise 22% in past year
- Indonesia Nov. Exports Fall 17.58% Y/y; Est. 11.5% Drop
European equities reside in a sea of green this morning (Euro Stoxx: 1.9%) as risk on sentiment returns after bearish sentiment dictated play yesterday. Equities have been lifted by energy names as sentiment is bolstered after the energy complex held onto yesterday’s gains overnight and with WTI extended above the USD 36/bbl level throughout the morning. One of the notable movers in European hours has been Syngenta (+1.8%), who benefitted after source reports suggesting that ChemChina is set to make new bid for the Co. after talks, while Syngenta also remain in talks with Monsanto (MON).
Bunds edged lower throughout the session, moving below 158.00 level and then the 21 DMA line at 157.85 in the process, with the next major support coming in at the 50DMA line at 157.17.
Top European News:
- ChemChina Chairman Said to Meet With Syngenta as Talks Progress: Syngenta also holding informal discussions with Monsanto
- Rio CEO Says Iron Ore Rivals ‘Hanging On by Their Fingernails’: Iron ore industry on verge of unprecedented shake-out
- VW’s Europe Market Share Declines Most Since Emissions Crisis: VW’s sales rose at less than one-third of market gain
- UBM Agrees to Sell PR Newswire for $841 Million to Cision: Shareholders to get 245m pounds in special dividend
- U.K. Inflation Rate Is Above Zero for First Time in Four Months
- German ZEW Investor Confidence Gains After ECB Steps Up Stimulus
In FX, In terms of FX markets, a fairly busy morning has seen strength in EUR/SEK after the Riksbank elected to keep rates and their QE programme on hold, while UK CPI release saw a relatively muted reaction given that the data was mostly in line with expectation (Y/Y 0.10% vs. Exp. 0.10%), with participants also shrugging off the latest German ZEW survey (Expectations 16.10 vs. Exp. 15).
Separately, source reports suggesting that China stand prepared to act if the CNH were to see sharp falls and is ready to intervene if CNH/CNY spread widens to a destabilising effect has also seen some traction this morning. This comes as the continued softness in CNY against the USD in focus ahead of the FOMC rate decision later this week, with USD/CNY printing fresh multi year highs overnight. Of note, European names are touted as sellers in USD/CNH.
The energy complex has extended on gains seen ahead of yesterday’s close and resides in positive territory heading into the North American crossover, with WTI Jan’16 futures in close proximity to the USD 37.00/bbl level, with the Brent counterpart close to USD 39.00/bbl. This comes ahead of the US API crude oil inventories later today, with last week’s reading showing a drawdown of 1900k.
Elsewhere, gold has benefitted from a softer USD and has seen a mild rebound overnight, while copper prices traded lower amid cautiousness ahead of a possible hike in US rates, with iron ore futures gaining for a 3rd consecutive day as prices continue to bounce from last week’s record lows, alongside a recovery in steel prices
On today’s US calendar, we have the US CPI and Empire manufacturing releases, as well as Fonterra’s GlobalDairyTrade auction.
Bulletin headline summary from RanSquawk and Bloomberg
- European equities reside in a sea of green this morning (Euro Stoxx: 1.9%) as risk on sentiment returns after bearish sentiment dictated play yesterday
- The energy complex has seen a bid today, with Brent and WTI both heading into US hours in positive territory
- Today’s highlights include US CPI and Empire manufacturing releases, API crude oil inventories as well as Fonterra’s GlobalDairyTrade auction
- Treasuries decline before Fed begins two-day meeting amid expectations it will raise rates for first time since 2006.
- Fed policy makers risk making a mistake that will be difficult to correct if they raise interest rates on Wednesday, according to former U.S. Treasury Secretary Lawrence Summers and economist Nouriel Roubini
- U.K. inflation edged back above zero in November for the first time in four months, a move that still leaves the rate a long way from the Bank of England’s target
- Fidelity, Capital Group Cos., Waddell & Reed and Nuveen Investments said their high-income strategies don’t make them distressed credit funds and their holdings of CCC bonds are either selectively positioned or weighted toward better- quality debt within that tier
- While Wall Street is having a 2007 flashback as a high- yield debt rout triggers nightmares of hard-to-trade assets plunging in value and funds halting redemptions, traders and analysts say this isn’t the making of another financial crisis
- The SEC said Monday it was “on site” at Third Avenue and closely evaluating the wind-down process of the credit fund, which saw investors yank $734 million of its assets over the past four months
- German investor confidence rose to 16.1 in December from 10.4 in November
- Sovereign 10Y bond yields higher. Asian stocks mostly lower. European stocks and U.S. equity- index futures gain. Crude oil, gold higher; copper lower
US Event Calendar
- 8:30am: Empire Manufacturing, Dec., est. -7 (prior -10.74)
- 8:30am: CPI m/m, Nov., est. 0% (prior 0.2%)
- CPI Ex Food and Energy m/m, Nov., est. 0.2% (prior 0.2%)
- CPI y/y, Nov., est. 0.4% (prior 0.2%)
- CPI Ex Food and Energy y/y, Nov., est. 2% (prior 1.9%)
- CPI Index NSA, Nov., est. 237.204 (prior 237.838)
- CPI Core Index SA, Nov., est. 244.088 (prior 243.698)
- Real Avg Weekly Earnings y/y, Nov. (prior 2.1%, revised 2.4%)
- 10:00am: NAHB Housing Market Index, Dec., est. 63 (prior 62)
- 4:00pm: Net Long-term TIC Flows, Oct. (prior $33.6b); Total Net TIC Flows, Oct. (prior -$175.1b)
Central Banks
- FOMC starts two-day policy meeting
Top Global News
- Sumitomo Mitsui to Buy GE Japan Leasing Arm for $4.8b: Second deal between companies this year as GE sells assets
- House Democrats Said to Be Open to Lifting U.S. Oil-Export Ban: Negotiations with Republicans center on various tradeoffs
- Sanofi in Asset Swap Talks With Boehringer for $25b Deal: Boehringer’s consumer health assets, Sanofi’s Merial in deal
- Hudson’s Bay Said to Near Deal to Buy Gilt Groupe for $250m: WSJ: Would combine online luxury retailer with Off 5th Business
- Lumber Liquidators Surges After Critic Ends Bet Against Company: Short seller Whitney Tilson said he stopped betting against co.
- Third Avenue Sought Internal Loan Approval Before Fund Collapsed: Fund-to-fund bridge lending helps firms avoid fire sales
- Valeant Said to Cut Prices With Walgreens Distribution Pact: Valeant to lower prices by 10% on skin, eye product
- NetApp May Make $1.2b Bid for SolidFire, CRN Says: Bid could be announced as soon as this week
- Puerto Rico’s Governor Won’t Seek Re-Election in 2016: Won’t seek re-election so administration can focus on cutting debt
- Xerox Rises After Carl Icahn Reports Increased Stake: Icahn reports 8.1% stake, up from 7.1%
- Boeing Raises Qtrly Dividend 20%, Boosts Buyback to $14b: Replaces existing $12b repurchase program of which $5.25b remained
DB’s Jim Reid concludes the overnight wrap
The tone in markets at the moment is certainly being dictated to a large degree by what’s going on in US HY. Sentiment took another knock yesterday on the back of the news of another fund (the third in recent days) announcing that it plans to liquidate its entire $900m portfolio and return money to investors. Nerves are also being tested increasingly by recent comments from some of the more high profile money managers around the asset class, the latest coming from Bill Gross who fired warning signs about US HY liquidity in particular in comments yesterday.
A late risk-on rally into the close yesterday masked what had been another largely weak day of price action for the bulk of risk assets. The S&P 500 finished +0.46% having been nearly 1% lower intraday, while CDX IG rebounded to finish 3.5bps tighter with the gains coming in the last hour of trading. Of particular focus was CDX HY which closed up +0.4pts (or in spread terms finished 9bps tighter) although that was after having dipped well over half a point lower mid way through the US session. The big US HY ETF’s (HYG and JNK) also pared some earlier steeper falls but still finished the session nearly 1% down on the day and have now closed lower on 10 out of the last 11 days. US HY energy spreads finished +43bps wider yesterday which means they are now +99bps wider over the last two days alone and a whopping +217bps wider in the month of December so far. That already far exceeds any month we have data for going back to the start of 2010. Chesapeake in particular is gaining plenty of attention now as it seeks a restructuring of its debt. Seen as something of a benchmark name in the US HY energy market, its 8-year bonds were down another 3.5pts yesterday and are now trading at just 27c. That’s after having traded north of 75c back in September.
The negative tone spiraling out of the US HY market spilled over into European credit yesterday, with Crossover closing +16bps wider and Main out nearly +4bps wider. Financials were hit hard also, with iTraxx sub-financials in particular nearly +9bps wider. In the cash market sentiment was weak but there was little in the way of panic. European stocks felt the full force of an early dip lower for Oil markets with bourses generally down 1.5-2% at the close. Just on Oil, the early afternoon saw both WTI and Brent hit fresh near 7-year lows after tumbling below $35 and $37 respectively (down 3% and 4%). Both turned around with the US session however, seemingly on the back of short-covering. WTI eventually finished up +1.94% and back above $36, while Brent finished more or less unchanged and slightly below $38.
It’s been a bit of a mixed start for markets across Asia this morning. Credit markets have followed the lead from that late rebound in the US with the iTraxx Asia currently 2bps tighter. It’s a bit of a weaker start for equities however where Japan in particular has seen steep declines with the Nikkei currently -1.53%. There are modest losses for bourses in China with the Shanghai Comp currently -0.31%, while the Hang Seng is flat. Both the Kospi and ASX are posting small losses, while the same can be said for Oil markets this morning too. The latest in the FX space has seen the PBoC set the Yuan fix lower for seventh consecutive session, this time by 0.1%.
Overnight the HouseView team have published their latest Infographic taking a look at the upcoming highly likely Fed rate hike tomorrow. In it they dig deeper into the mechanics of a 25bp hike and note that while the upper and lower limits will be moved to 50bps and 25bps respectively, the likely rise in the effective fed funds rate will closer to 20bps rather than 25bps, reflective of the premium to what will be the new reverse repo rate set equal to the lower limit.
Aside from the moves and headlines emerging from US HY yesterday it was relatively quiet elsewhere. Treasury yields reversed much of the sharp leg lower that we saw on Friday with 2y and 10y yields up +6.9bps and +9.5bps respectively and pretty much back to where we finished Thursday. With no data out in the US, Euro area industrial production was the only release of note with the October monthly increase of +0.6% mom coming in ahead of market expectations for +0.3%. Curiously ECB President Draghi was speaking yesterday at a speech in Italy, although his comments seemingly got overshadowed by price action in markets. The ECB President talked up his expectations of Euro area inflation hitting its target, saying specifically that ‘after the re-calibration of our instruments put in place this month by the Governing Council, we expect inflation will reach our objective without undue delay’. Draghi went on to reiterate that ‘within our mandate, there are no restrictions to our choice of which tools we use or how’.
Looking ahead now to what’s set to be a busier day for economic releases today. Kicking off the European session this morning we’ll have the November inflation numbers out of the UK with the CPI, RPI and PPI prints all expected. This will be followed by the Q3 employment numbers for the Euro area before we get the German ZEW survey. The BoE is also set to publish its Quarterly Bulleting around midday. Over in the US this afternoon the main focus will be on the November CPI numbers with current market expectations at 0.0% mom for the headline and +0.2% for the core which are in line with the view of our US economists. Also due out will be the December Empire manufacturing print, real average weekly earnings and finally the NAHB housing market index for December. Of course the two-day FOMC meeting begins today with the main event coming with its conclusion tomorrow.
ASIAN AFFAIRS
“Stealth” Currency War Continues – China Weakens Yuan Fix For 7th Consecutive Day
The Yuan fix has now weakened for 7 consecutive days. Aside from the August devaluation, this is the biggest devaluation in the Yuan since records began in 2004. At the current level of 6.4559 per dollar, the Yuan has retraced to the level it was at when QE ended in July 2011. Chinese stocks are fading a smidge after yesterday’s afternoon session “rescue” ramp.
(note – CNY chart inverted to make comparisons easier – lower is weaker CNY compared to USD)
It’s good to have friends in The IMF where not a peep will be heard as the quietest currency war in the world is under way. We presume as long as US equities don’t get hurt, then The Fed, Treasury, and Chuck Schumer will just ignore it (unless and until HY’s collapse becomes just too painful to ignore for all those collateral chains as The Fed withdraws up to $800bn in liquidity this week).
Charts: Bloomberg
end
(courtesy zero hedge)
European Nations Throw Up On EU Plan To Seize Border Sovereignty, Impose Standng Border Force
Last week we reported that in a move which the FT dubbed would “arguably represent the biggest transfer of sovereignty since the creation of the single currency” Brussels was about to propose the creation of a standing European border force that could take control of the bloc’s external frontiers — even if a government objected.
Not unexpectedly, the plan went far beyond a Franco-German request to give Frontex more powers and staff. The request was made a few weeks after the Paris attacks, when frustration surfaced over Greece’s inability to better manage the flow of migrants as it emerged that at least two of the Paris attackers were registered as Syrian refugees on a Greek island. Why? Because Europe saw a real crisis opportunity and decided to jump on it.
As a result of this dramatic takeover of the most sacrosanct aspect of state sovereignty, a few unelected EU bureaucrats would effectively have veto rights over decisions how individuals states would police their borders: “Although member states would be consulted, they would not have the power to veto a deployment unilaterally.”
Furthermore, the new agency would be able to deport people who do not have the right to remain in Europe, essentially voiding the protections that come with nationality at least among EU member states, as well as several that are currently outside of it.
The take home was simple: “goodbye sovereignty… all in the name of halting the endless onslaught of Syrian refugees, which ironically was unleashed in the first place just so Europe could get its supplies of natural gas from Qatar instead of Russia.”
We wondered if Europe would quietly go along with this unprecedented sovereignty land grab by Brussels and Berlin, in the process admitting that the political structure of Europe has been forever changed and that Germany is effectively the new hegemon of the formerly independent states. And while the final outcome is almost preordained, because what Germany wants Germany will eventually get, the process will be noisier than expected.
According to the WSJ, the proposal to police the bloc’s external borders “is facing growing opposition ahead of an EU leaders’ summit this week on the continent’s migration crisis.”
The first objecting state was, not surprisingly considering its history vis-a-vis German territorial and sovereign ambitions, Poland:
Polish Foreign Minister Witold Waszczykowski said Monday that while his country welcomed the strengthening of EU’s existing border agency, Frontex, the commission’s plan went too far.
“Strengthening Frontex, creating a kind of border guard would by all means be needed, beneficial,” he said on his way into a meeting of EU foreign ministers in Brussels. “But the way the commission proposed it—for it to be a structure independent from nation states—is astounding.”
He added: “There’d be an undemocratic structure reporting to no one knows who.”
Well, that’s the point!
The WSJ adds that Mr. Waszczykowski’s remarks were echoed by Hungary’s foreign minister Peter Szijjarto, who said that border controls were part and parcel of national sovereignty. “I would not support a diktat-based takeover of border controls,” Mr. Szijjarto said.
He also pointed out that the entire proposed pool of border guards wouldn’t suffice to guard just Hungary’s southern border. Indicatively, the commission’s proposal calls for at least 1,500 border guards that EU governments would have to put at the disposal of the new agency, to deploy within days should a crisis situation arise.
Greek Prime Minister Alexis Tsipras welcomed the proposal on Friday “but said that it would work only if his country retained the ultimate authority to police the borders. He also repeated the government’s opposition to joint sea patrols with Turkey—a long-standing request by his European peers.”
Considering Greek banks still exist only at the mercy of the ECB, which means de facto, Europe, it is unclear just what leverage he has to demand conditions.
Others, however, did not have too much problems with ceding sovereignty to Brussels:
Slovak Foreign Minister Miroslav Laj?ák, whose prime minister has gone so far as to ask that Greece to be kicked out of the Schengen accord, voiced cautious support for the plan Monday. “If one member state is unable to cope with its responsibilities, others should be able to come and assist,” he said. “We need a mechanism for that, the protection of the Schengen border is a shared responsibility.”
The defenders of the plan were ready: “diplomats from countries favorable to the project – including France, Germany and the Netherlands—said the commission’s plan was so ambitious for tactical reasons. “They put the bar so high because they know it will get watered down anyway,” one diplomat said.”
So watered down from a demand for full abdication of sovereignty? Perhaps the compromise plan will reflect that. But what happens when the “Syrian refugee crisis” is not contained as a result of a “watered down” plan, or – as many expect will happen – there is another deadly terrorist act in Europe pushing the crisis level to new highs and emboldening Brussels to demand even more aggressive measures and even more steps that see individual state sovereignty disappear at the expense of a collective controlled by a handful of political (and financial ) oligarchs and plutocrats.
Once again we urge readers to keep a very close eye on this unprecedented attempt to dissolve Europe’s borders because if it succeeds the implications would be far greater for the European project than a mere temporary or permanent Grexit.
Finally, we conclude as we always do when describing Brussels’ unprecedented political power grab, with a simple forecast made by AIG in 2008, explaining “What Europe Wants.”
To use global issues as excuses to extend its power:
- environmental issues: increase control over member countries; advance idea of global governance
- terrorism: use excuse for greater control over police and judicial issues; increase extent of surveillance
- global financial crisis: kill two birds (free market; Anglo-Saxon economies) with one stone (Europe-wide regulator; attempts at global financial governance)
- EMU: create a crisis to force introduction of “European economic government”
Unless the people of “Europe” finally stand up and reject the monster that has been spawned in Brussels, Europe will get all that it demands.
GLEN GLENCORE PLC ORD USD0.01
| Price (GBX) | 82.37 | Var % (+/-) | +2.96% ( +2.37) |
| High | 85.19 | Low | 81.61 |
| Volume | 83,204,162 | Last close | 82.37 on 15-Dec-2015 |
| Bid | 82.50 | Offer | 82.56 |
| Trading status | End of Post Close | Special conditions | NONE |
Did Saudi Arabia Just Clear The Way For An Invasion Of Syria And Iraq?
And now, a further turn for the absurd…
While it’s still far from common knowledge among the Western public that Washington’s closest allies in the Mid-East are funding, arming, and otherwise enabling the Sunni extremists (including ISIS) battling for control of Syria and working to destabilize Iraq, the massacre that unfolded earlier this month in San Bernardino has managed to focus some much needed attention on the role Saudi Arabia plays in promoting extremism.
As we noted in the immediate aftermath of the California mass shooting, the fact that Tashfeen Malik spent 25 years in Saudi Arabia living with a father who, according to family members who spoke to Reuters, adopted an increasingly hardline ideology as time went on, underscores the fact that the puritanical, ultra orthodox belief system promoted by the Saudis is poisonous. That’s not a critique of Islam. It’s a critique of Wahhabism and the effect it has on the minds of those who are inculcated by Saudi culture.
Here’s an excerpt from “Saudi Arabia Is Underwriting Terrorism. Let’s Start Making It Pay,” by Charles Kenny:
For years since 9/11, U.S. and Western officials have mostly looked the other way at all this ideological support for extremism: Saudi oil was just too important to the global economy,even though many of these Saudi petro-dollars were underwriting repression at home and the growth of Salafist fundamentalism abroad.
This support for radicalism abroad should come as little surprise given that Islamic State is an ideological cousin of Saudi Arabia’s own state-sponsored extremist Wahhabi sect—which the country has spent more than $10 billion to promote worldwide through charitable organizations like the World Assembly of Muslim Youth. The country will continue to export extremism as long as it practices the same policies at home.
More, from “Saudi Arabia: An ISIS That Has Made It,” by Kamel Daoud:
Black Daesh, white Daesh. The former slits throats, kills, stones, cuts off hands, destroys humanity’s common heritage and despises archaeology, women and non-Muslims. The latter is better dressed and neater but does the same things. The Islamic State; Saudi Arabia. In its struggle against terrorism, the West wages war on one, but shakes hands with the other. This is a mechanism of denial, and denial has a price: preserving the famous strategic alliance with Saudi Arabia at the risk of forgetting that the kingdom also relies on an alliance with a religious clergy that produces, legitimizes, spreads, preaches and defends Wahhabism, the ultra-puritanical form of Islam that Daesh feeds on.
Consider that, and consider the following headline from Reuters which surely qualifies as the most tragically ironic thing you’ll read all day: “Saudi Arabia announces 34-state Islamic military alliance against terrorism”
That’s right ladies and gentlemen, you no longer have anything to fear from Sunni extremists because the undisputed king of promoting Sunni extremism is on the case. “The countries here mentioned have decided on the formation of a military alliance led by Saudi Arabia to fight terrorism, with a joint operations center based in Riyadh to coordinate and support military operations,” a statement from state-ruun SPA said.
But it gets better. Much better.
“The countries here mentioned” of course include Turkey and Qatar. Qatar is a well known sponsor of extremist groups battling in Syria. Recall the following from The New York Times (ca. 2014):
Standing at the front of a conference hall in Doha, the visiting sheikh told his audience of wealthy Qataris that to help the battered residents of Syria, they should not bother with donations to humanitarian programs or the Western-backed Free Syrian Army.
“Give your money to the ones who will spend it on jihad, not aid,” implored the sheikh, Hajaj al-Ajmi, recently identified by the United States government as a fund-raiser for Al Qaeda’s Syrian affiliate.
Sheikh Ajmi and at least a half-dozen others identified by the United States as private fund-raisers for Al Qaeda’s Syrian franchise operate freely in Doha, often speaking at state-owned mosques and even occasionally appearing on Al Jazeera. The state itself has provided at least some form of assistance — whether sanctuary, media, money or weapons — to the Taliban of Afghanistan, Hamas of Gaza, rebels from Syria, militias in Libya and allies of the Muslim Brotherhood across the region.
Now, however, Qatar is finding itself under withering attack by an unlikely alignment of interests, including Saudi Arabia, the United Arab Emirates, Egypt and Israel, which have all sought to portray it as a godfather to terrorists everywhere. Some in Washington have accused it of directly supporting the Islamic State in Iraq and Syria — an extremist group so bloodthirsty that Al Qaeda has condemned it — a charge that Western officials, independent analysts and Arab diplomats critical of Qatar all call implausible and unsubstantiated.
As for Turkey, well, we’ve covered Ankara’s connections to ISIS exhaustively, but suffice to say you don’t pull in $500 million or more per year in oil sales without a state sponsor and for Bakr al-Baghdadi, that state sponsor looks to be Turkey. And the oil story only scratches the surface of Erdogan’s complicity when it comes to aiding and abetting extremism in Syria.
Of course Iran is excluded from the new “coalition.” Here’s Reuters again:
Shi’ite Muslim Iran, Sunni Saudi Arabia’s arch rival for influence in the Arab world, was absent from the states named as participants, as proxy conflicts between the two regional powers rage from Syria to Yemen.
This would be infuriating if it weren’t so comically absurd. Obviously Tehran has some blood on its hands when it comes to promoting international terrorism via the Quds and via Hezbollah. However, that pales in comparison to the Saudis role in creating a world view that indocrinates the masses with an ideology that aligns almost perfectly with that espoused by ISIS, al-Qaeda, and their offshoots.
Further, the IRGC and Hezbollah are actually on the ground fighting the same terrorists the Saudis are talking about. So while Riyadh issues press releases, Iran risks its soldiers, while the Saudi-led coalition in Yemen is busy fighting to restore a a puppet government.
The obvious question here is this: is this the precursor to Saudi, Qatari, UAE, and (more) Turkish boots on the ground in Syria and Iraq, just as Iraqi Shiite politician Hanan Fatlawi predicted last week? It certainly appears so. Here’s a headline that crossed the wires earlier today (from Reuters):
- SAUDI FOREIGN MINISTER JUBEIR SAYS TALKS ONGOING WITH REGARD TO SAUDI ARABIA, OTHER GULF STATES SENDING SPECIAL FORCES TO SYRIA
With that in mind, we close with one last quote, this one from 30-year-old deputy crown prince and Defense Minister Mohammed bin Salman: “There will be international coordination with major powers and international organizations … in terms of operations in Syria and Iraq.”
The main power supplier, Aggreko, for the Brazil Olympic games has pulled out leaving unknown bidders left to do the job. Aggreko is well versed in the power supply business of Olympics and this is a blow to Brazil:
(courtesy zero hedge)
“Dark” Days Ahead: Main Power Supplier For Brazil Olympic Games Pulls Out
Back in July, we asked if Olympians at the upcoming summer games in Rio would be swimming in feces. “Extreme water pollution is common in Brazil, where the majority of sewage is not treated. Raw waste runs through open-air ditches to streams and rivers that feed the Olympic water sites,” AP explained. “As a result, Olympic athletes are almost certain to come into contact with disease-causing viruses that in some tests measured up to 1.7 million times the level of what would be considered hazardous on a Southern California beach.”
Obviously, spending billions on modernizing the country’s basic sanitation infrastructure isn’t in the cards now that the government is mired in a fiscal crisis and desperately needs to cut spending in order to hit what certainly look like unrealistic primary surplus targets.
We’ve long predicted that the country’s economic and political strife would end up having an adverse impact on the games and sure enough, we found out earlier this month that athletes in Olympic village will be asked to pay for their own air conditioning and will not have televisions in their rooms. In short, organizers can no longer depend on the government (and who knows what the government will look like by the time the games commence) to fund cost overruns. That means spending only as much as Brazil expects to take in from sponsorships, ticket sales, and a grant from the International Olympic Committee.
Apparently, the games were already some $520 million over budget. The government was supposed to cover that (and more) but obviously that’s out of the question given Brazil’s worsening fiscal crisis. “By the time the Games begin, the committee plans to have 500 fewer paid staff than the 5,000 it originally expected,” Bloomberg said, adding that “the deepest cuts will probably come from operational areas like catering, transportation and cleaning services.”
Well, if you thought all of the above was bad, consider that now, a major supplier of power has reportedly backed out of the event, suggesting that in addition to unsanitary conditions and no air conditioning, athletes could well run out of energy – literally.
As Reuters reports, “longtime Olympic power provider Aggreko has pulled out of a tender to supply generators for the games in Rio de Janeiro next year, dealing a major blow to organizers rushing to secure an energy source for the world’s largest sporting event.”
With Glasgow-based Aggreko, it’s the experience that counts. The company has helped power nine Olympics and six World Cups and although Rio 2016 spokesman Mario Andrada told Reuters he was comfortable with the companies still competing for the tender, some say he probably shouldn’t be.
“There is increased risk of it going to someone who doesn’t have the experience. Are there people out there with enough equipment? Probably. But in terms of the operational side of things, Aggreko are pretty good at this,” said Will Kirkness, an analyst at Jefferies.
While Aggreko didn’t give a reason for pulling out, Reuters suggests they may have become exhausted with the planning process which, if you go by the 2012 London games, is behind by about 12 months.
Of course it’s also likely that Aggreko worried it wouldn’t get paid. As noted above, and as we discussed two weeks ago, the government can’t fund cost overruns, which means that if the planning committee exceeds the budget, it’s not clear who would cover the bill.
More worrisome is that “the temporary power contract guarantees a stable and secure energy supply for international broadcasters.” Interruptions in coverage mean lost ad impressions and if advertisers and sponsors become concerned that Brazil will ultimately be unable to deliver, they could begin to rethink their commitment.
Additionally, one has to wonder how long it will be before fans begin to rethink their plans to attend.
After all, no one wants to go to an opening ceremony where the only light is the Olympic torch.
Your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/TUESDAY morning 7:00 am
Euro/USA 1.1002 up .0011
USA/JAPAN YEN 121.08 down .033
GBP/USA 1.5157 down .0002
USA/CAN 1.3699 down .0029
Early this morning in Europe, the Euro rose by 11 basis points, trading now just above the 1.09 level rising to 1.0986; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore, Nysmark and the Ukraine, along with rising peripheral bond yield, further stimulation as the EU is moving more into NIRP and moving in the opposite direction that they were suppose to with the USA tightening on Dec 16. Last night the Chinese yuan was down in value (onshore). The USA/CNY up in rate at closing last night: 6.4628 / (yuan down)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31/2014. The yen now trades in a northbound trajectory as settled up again in Japan by 3 basis points and trading now closer to that all important 120 level to 121.08 yen to the dollar. However the yen carry trade is ceasing!
The pound was down this morning by 2 basis points as it now trades just above the 1.51 level at 1.5157.
The Canadian dollar is now trading up 29 in basis points to 1.3699 to the dollar.
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
AND NOW WE AWAIT THE DECISION OF THE USA TO RAISE RATES AND THE DILEMMA THEY FACE. SOMEONE ELSE MUST DO QE TO REPLACE LOST LIQUIDITY (800 billion of liquidity will be withdrawn on a 1/4% rise in rates)
The NIKKEI: this TUESDAY morning:closed down 317.52 or 1.68%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses mostly in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the red with even after a gov’t intervention in last hour/ / (massive bubble ready to burst), Australia in the red: /Nikkei (Japan) red/India’s Sensex in the green /
Gold very early morning trading: $1063.00
silver:$13.71
Early TUESDAY morning USA 10 year bond yield: 2.25% !!! up 3 in basis points from MONDAY night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.99 up 3 in basis points.
USA dollar index early TUESDAY morning: 97.69 down 1 cent from MONDAY’s close. ( Now below resistance at a DXY of 100)
This ends early morning numbers TUESDAY MORNING
end
OIL RELATED STORIES
These guys will be out of cash and going into chapter 11 by the summer of 2016:
(courtesy zero hedge)
Chesapeake Bonds Plummet To 27 Cents Of Par After Company Hires Restructuring Advisor
After numerous false starts and months of hollow hopes for the stakeholders of beleaguered gas producer Chesapeake Energy, including an activist stake built up by none other than Carl Icahn which was the source of much transitory joy, various notional reducing debt exchanges, and speculation of asset sales, the time is coming when the inevitable debt-for-equity restructuring, one which could wipe away most or all of the existing $2.6 billion equity tranche (down from $11 billion a year ago) is on the table.
According to the WSJ, Chesapeake has hired restructuring advisor Evercore “to shore up its balance sheet as commodity prices extend their decline.” This means that Evercore will seek to further slash its debt, almost certainly be equitizing a substantial portion of it, and handing it over as equity in the new company to CHK’s bondholders.
And while many saw the restructuring, and potential prepackaged bankruptcy, coming from a mile away, what precipitated it was the plunge in the company’s liquidity as a result of the ongoing collapse in commodity prices. Just earlier today, nat gas hit the lowest price in 13 years, which meant that after ending 2014 with $4.1 billion in cash, the company is down to just $1.8 billion in cash, or about 1-2 quarter of liquidity at the current cash burn rate.
But while CHK’s stock has imploded, falling 79% this year to around $4.09 per share or a $2.7 billion market cap, the real story is in the company’s bonds.
Chesapeake’s $1.3 billion in bonds due in 2020 bearing 6.625% interest recently traded at 29 cents on the dollar, down from 47 cents late last month, according to MarketAxess.
Worse, the company’s 2023 bonds which were trading at par as recently as late May, just rumbled to a record low 27 cents on the dollar.
What is troubling is that Chesapeake has already taken steps to reduce its debt load, and is offering to exchange bonds at a discount for up to $1.5 billion of new debt, while offering a partial priming and a stronger claim on the company’s assets. As the WSJ adds, the proposed swap follows a deal Chesapeake cut with its banks earlier this year that allowed it to issue the new high-ranking debt. In return, Chesapeake agreed to secure its $4 billion credit line with a top-ranking claim on its assets.
In other words, what Chesapeake is doing is using and abusing the goodwill of its creditors, both secured and unsecured, to extract every last penny from them while promising the sun and the moon to both groups.
This is hardly new: “Dozens of money-losing oil-and-gas companies have issued new debt this year, sometimes swapping it for discounted bonds, in an effort to ride out the slump in prices. SandRidge Energy Inc., Midstates Petroleum Co. and Halcon Resources Corp. all have done such deals this year.”
However, in the aftermath of the most recent implosion in the high yield space, of which Chesapeake is a proud member, we expect that the banks, realizing at this point they are only throwing good money after bad will slam the issuance (and voluntary refi) window shut, forcing the company to burn the last of its cash which at current commodity prices should be gone by the summer of 2016, at which point it will have no choice but to file for bankruptcy. The only question is whether it will be a prepackaged consensual affair or a free-fall Chapter 11.
Our only question is whether Carl Icahn will be as generous with lending Chesapeake the Debtoi In Possession loan it will need, as he was in building up his 11% “BTFD” equity stake.
end
The two vehicles used by the powers to be to levitate stocks are
- USA/Yen
- crude
today both were in force to drive up the NYSE
(courtesy zero hedge)
WTI Crude Nears $38, Up Over 10% In 28 Hours
Presented with little comment.. aside to note that every rip from a dip is greeted by the mainstream stock enthusiasts as a balls-deep buying opportunity in every oil & gas stock… only to be grossly disappointed a day or two later…
Stocks flip-flopped from USDJPY to crude as correlation-algo-in-chief…
But did stops just get run?
end
The Nasdaq up 43.13 or 0.87%
Pre-Fed Pandemonium – “Confident” Traders Buy Stocks, Dollars, Crude; Dump Bonds & Protection
Artist’s impression of The Fed statement and press conference tomorrow…
Stocks, Crude, and USDJPY were loving it…
Cash stock indices gapped open then went nowhere…
Equities ran on the back of the algos to the stops at Thursday’s pre-3rd Avenue collapse… then faded…
Breadth was not buying it…
FANGs ended the day very weak…
Smith & Wesson was whacked… Revenge?
Equity protection was puked like a bad Chipotle Burrito… (who needs hedges?) Notice the lack of beta in stocks even as VXX was slammed lower in the last hour…
IG credit continues to underperform this week…
The US high-yield market was on a firmer footing Tuesday with buying from both Exchange Traded Funds and institutional buyers – but market participants said it was far too early to say with any confidence that the recent rout in the asset class was over. The HY CDX 25 was 1.25bp higher at 100.6bp, according to Tradeweb, and cash bonds up to three points higher, a day after the Bank of America Merrill Lynch high-yield index breached 9% yields for the first time in four years. To be sure, the market is still wincing from the slap given by the Third Avenue junk fund redemption freeze and liquidation announced last week.
Treasuries continued to get dumped…note again that the selling was dominated by the European session (smells of China dumping through Belgium?)
The USDollar was heavily bid from the early morning…
Commodities were mixed once again. Depsite a surging USDollar, PMs flatlined, copper crashed and crude soared…
Crude algos ran the stops again…
Nattie collapsed to near record lows…
Charts: Bloomberg
Bonus Chart: A Gentle Reminder of The Last Pre-FOMC Statement Ramp…
And Another: Junk Bond Fund Run By Clintons’ Close Personal Friend Slammed With Heavy Redemptions
It may not be a mutual fund like Third Avenue, but Marc Lasry’s Avenue Capital Group hedge fund is far more prominent in the investing community, and as such news that it too has been slammed with redemptions from its high yields fund in recent weeks will hardly ease fears about a capital outflow from the junk bond which has sent junk ETFs down 12% for the year and has become the main topic of discussion over the past week following a flurry of reports about panic among holders of below-investment grade bonds.
What is just as surprising is that among its investments, Lasry does have a mutual fund, in fact two of them – the Avenue Credit Strategies Funds, an open- and close-ended fund, which as we first showed last Friday, are not only among the worst performers year to date, but have tumbled by a whopping 9% in the past three months.
Fast forward to last night when according to Reuters, Avenue’s founder, billionaire Marc Lasry, was forced on Monday to back the junk bond mutual fund hemorrhaging assets at his Avenue Capital Group “as jittery investors exit high-yield bonds amid a market rout.”As a result, the size of the fund has been cut by more than half, sliding from $2 billion to just $884 million according to Lipper, roughly the same size where Third Avenue’s own high yield fund was when it announced it would liquidate and gate investors.
Despite his defensive posture, Lasry hardly sounded too enthusiastic about the pace of outflows: “I think overall redemptions at some point are going to slow down across the market,” Lasry said. “I’m not sure if that will be tomorrow or next week, but people are going to start putting money back into the market at some point.”
The reason for the sudden redemption wave is not only the overall weakness among junk bonds, but as Reuters notes, investors have taken note that Lasry’s $884 million Avenue Credit Strategies Fund is run by the same portfolio manager who in 2009 helped launch the Third Avenue Focused Credit Fund, which abruptly shut down last week and blocked investor redemptions, fund disclosures show.
In January 2012, Jeff Gary joined Lasry from Third Avenue, where he once ran the now defunct fund. Gary left Third Avenue in December 2010.
Cornered, Lasry had to show the “distinctions” between the two junk bonds in a telephone interview with Reuters, saying that Third Avenue’s fund had an estimated 20 percent of its assets in illiquid, hard-to-trade securities.
“We have a diversified and well-positioned portfolio and our illiquid assets are in the single digits,” Lasry said about his fund. Lasry’s Avenue Capital, has about $12 billion in assets, compared with less than $10 billion at Third Avenue Capital.
The Avenue Credit Strategies Fund’s total return is minus 10 percent this year, underperforming the 3.83 percent average decline in the junk bond category, according to Morningstar Inc. And investor withdrawals have accelerated since March, cutting the size of the fund from $2 billion to $884 million, according to Lipper Inc.
By contrast, Third Avenue’s junk fund was down nearly 30 percent before it closed with about $800 million in assets. Both funds bet on debt issued by companies in stressed situations. Third Avenue, though, focused some of its investing on bankruptcy-related claims, which are considered extremely hard to trade even during good times.
Despite his spirited defense, Lasry’s work may be cut out for him: Brad Alford, chief investment officer of Alpha Capital Management in Atlanta, who had invested in both the Avenue Capital and Third Avenue funds, said Third Avenue’s liquidation shocked the mutual fund industry. Alford sold out of both the Third Avenue and the Avenue Capital funds earlier this year.
“It has shaken to me to the core. Who else can do this?” he said.
We may soon find out, because even with his attempt to sound optimistic, when redemption waves come, they rarely stops on a dime if at all, and there is only so much capital outflows a fund, mutual or hedge, can take before it is forced to take a time out, either temporary or permanent. Avenue will be no different.
The only question is whether Lasry, who is a close personal friend of the Clintons – recall Chelsea Clintonlaunched her “career’ by working as an “analyst” at the very same Avenue Capital in the mid-2000s – and who was slated to become US ambassador to France until his ties to a shady poker ring were exposed in 2013, will use his executive privilege and request special treatment by the former, and soon future, first family.
If so, that will be the first case of a hedge fund bailout by the presidential family in history, and will make the political farce that are US capital markets even more comical.
Empire Manufacturing Contracts For 5th Month As Workweek Crashes Near Record Lows
While Empire Fed Manufacturing survey modestly beat expectations (-4.6 vs -7 exp), it has been in contraction for 5 straght months. The biggest driver of the ‘beat’ was a massive surge in ‘hope’ (six month outlook surged from 20 to 38.5 – its biggest percentage gain since Nov 2011). At the same time as hope soars, employment tumbles to 6 year lows and average workweek collapses to its lowest since the peak of the crisis in 2009.
5th straight month of contraction…
As Hope surges and Average workweek collapses…
And Employment hits 6 year lows…
Time to raise rates!!
Charts: Bloomberg
end
Core CPI Rises 2.0% Driven By Surging Rents, Giving Fed Green Light To Hike Rate
Just hours before the FOMC sits down in the Marriner Eccles to discuss just how it will announce the first rate hike in 9 years, 7 years to the day after it cut rates to zero, it got the best gift from the BLS it could have asked for: core inflation rose precisely the amount the Fed wanted from a year ago, ot 2.0% on the dot, the highest annual core CPI increase in the past year. Why the jump? “About two-thirds of this increase is accounted for by the shelter index, which rose 3.2 percent over the span.“
This took place even as the CPI for energy Fell 14.7% Y/y; while fuel oil plunged 31.4% from a year ago, which meant that the headline CPI increase from a year ago was a far more modest 0.5%, which still was the largest 12 month increase since the 12-month period ending December 2014.
On a monthly basis, headline CPI came in unchanged, declining from the 0.2% increase a month ago, as the indexes for energy and food declined in November, offsetting an increase in the index for all items less food and energy. The energy index fell 1.3 percent, with all of the major component indexes declining except electricity. The food index fell 0.1 percent, as the index for food at home fell 0.3 percent, with five of the six major grocery store food group indexes declining.
The full breakdown by components is shown below:
But, as noted above, the one key index that mattered was the core annual change, which was driven almost entirely by rents. Here are the details:
The index for all items less food and energy increased 2.0 percent over the past 12 months.About two-thirds of this increase is accounted for by the shelter index, which rose 3.2 percent over the span. The medical care index increased 2.9 percent over the past 12 months, and the indexes for education, motor vehicle insurance, tobacco, alcoholic beverages, personal care, recreation, and new vehicles also increased. The indexes for apparel, airline fares, communication, household furnishings and operations, and used cars and trucks are among the indexes that declined over the past 12 months.
Here is the one chart, which according to the BLS, mattered most for determining rising prices:
One can only hope that the Fed, in its attempt to stabilize core inflation, manages to tame surging rents with its 25 bps rate hike, otherwise it may find itself in a very unpleasant situation of chasing record asking rents across the nation and pushing rate hikes far more often than those hoping for a dovish rate hike would like.
The Fixed Income Bloodbath Continues: Wall Street Harbinger Jefferies Reports Another Terrible Bond Trading Quarter
On numerous prior occasions (here, here and here) we have explained why Jefferies, as the last “pure-play” investment bank left standing and thus with a legacy one-month offset year-end calendar (Nov 30 fiscal year-end) is the best harbinger of Wall Street’s reporting season: “it provides an invaluable glimpse into the fortunes of its Wall Street peers with a 4 week advance notice.”
Then one quarter ago, things for Jefferies imploded when the firm which is now a part of Leucadia confirmed the bond trading bloodbath that its bigger peers would soon confirm when it for the first time in its merged history reported negative fixed income revenue. Back then CEO Dick Handler tried to put a favorable spin on the terrible result, as follows:
“We believe most of the issues we faced this past quarter in Fixed Income were due to distinct factors that began about a year ago and the largest portion of which relates to the turmoil in the oil and gas industry. For the first nine months of 2015, we have provided liquidity and traded approximately $5 billion in distressed energy securities for our clients. Our exposures in our distressed energy trading business decreased approximately 50% during the quarter and are currently down to $70 million in total net market value. We believe that, with our exposures in distressed securities reduced to current levels, there should be no similar impact on our future results.”
Alas, Handler was completely wrong, and the very next quarter there was a very “similar impact” on results, when earlier this morning Jefferies reported another quarter in which its Fixed Income revenue could best be described as dismal. Instead of rebounding solidly from the negative $18 million in revenue, Fixed Income posted a nominal $8.4 million in revenue: a whopping 83% collapse from the already subdued $48.6 million a year ago.
Follow’s today’s mea culpa:
“Fixed Income, which has been a solid to excellent business for Jefferies in prior years, did not perform well in 2015. Almost all our Fixed Income credit businesses were impacted by the prolonged anticipation of the lift-off in Federal Reserve rate-setting, the collapse in the global energy markets (where we have long been an active adviser, capital raiser and trader), reduced originations in leveraged finance and meaningfully reduced liquidity. There were a number of periods of extreme volatility, which were followed by periods of low trading volume.”
In other words, everything that could have gone wrong did go wrong.
However, as we suggested last quarter, the real reason for the fixed income implosion had mostly to do with Jefferies prop trading decisions, and the fact that it kept so many bonds mismarked on its books. As a result, the bank had no choice but to finally engage in a long-overdue deleveraging of its balance sheet, read remarking to market.
This is how the WSJ summarized today’s latest stunner from Jefferies: “Much of the trading shortfall was attributed to decisions to reduce Jefferies’s balance sheet “due to the challenge of liquidating positions in a volatile and less liquid environment,” Mr. Handler said in the release. Adjusted leverage at the end of November stood at its lowest level in about seven years, and securities inventory fell to $16.5 billion, down 13% from the third quarter.”
And back to the press release:
“Our balance sheet at November 30, 2015 was $38.5 billion, down $4.2 billion from three months prior and $6.0 billion from the end of fiscal 2014. Leverage (excluding the impact of the Leucadia transaction, which added significant goodwill and a corresponding increase in equity from the transaction’s consideration) was less than nine times, its lowest level in about seven years. In addition to the absolute reduction in our balance sheet, our long securities inventory was $16.5 billion at November 30, 2015, down $2.4 billion from August 31, 2015, and down $2.1 billion from November 30, 2014. These reductions were substantially effected during our fourth quarter and, while the impact was to reduce our quarterly Fixed Income Net Revenues and profitability due to the challenge of liquidating positions in a volatile and less liquid environment, we believe this will best position Jefferies to succeed in 2016 and beyond. In this connection, we note that our net distressed trading energy exposure was $39 million at year-end.”
As the WSJ further adds, “Jefferies has counted riskier debt trading as a core business since well before the financial crisis, putting it in the cross hairs during a tumultuous period in the market for junk bonds. What’s more, a focus on both the energy industry and midsize companies has compounded Jefferies’s issues.”
It wasn’t just bond trading however, with equity trading also posting a substantial 28% drop year over year, with the declines offset by a 18% pick up in the company’s investment banking business.
“A perfect storm” is how Sandler O’Neill analyst Jeff Harte summarized the results.
“They do more high-yield, and more distressed debt, and more to the middle market, and they have a big energy banking franchise,” Sandler O’Neill + Partners analyst Jeff Harte said. “I hate to say it’s been the perfect storm, but from a credit perspective it’s been the perfect storm—in a bad way.”
So after slashing its balance sheet exposure, will Jefferies also take the axe to payrolls? “Mr. Harte said he would expect Jefferies to slash expenses though job cuts, as other larger firms announced in the wake of another downturn in debt trading on Wall Street. “You’ve had Morgan Stanley make some cuts, and three of the big European competitors talking about making cuts,” he said. “The environment has gotten tough enough in” fixed income.”
However, the biggest question for a company that at its core is a legacy fixed income trading house is whether it can survive in a world in which it has now dramatically restructured its business model from one meant to facilitate prop trading into a “flow-focused” one. For now, what Jefferies has to deal with is a more than 50% collapse in fixed income revenues in 2015 compared to the prior year.
The biggest irony is that while other banks are clamoring to be allowed to “prop trade” again, Jefferies which has had the green light to do just that as it never got an FDIC bailout and remains the only sizable pure-play investment bank, just got crushed precisely due to its junk bond prop trading.
And with a one month head start on all the other banks the next question is just what prop trading skeletons are hiding in everyone else’s closets and will Jefferies again be a harbinger of the mauling Fixed Income trading will suffer across all of Wall Street when banks report their Q4 earnings some time in mid-January.
Is The Fed Trying To Arrange A Bailout Of Junk Bond Funds?
Warning #3: If you are hesitant to sell your bond funds, use any bounce in the junk bond market to get out of all fixed income funds. Someone asked me the other day about Treasury funds. Go read the fine print in the prospectus. You can find it online. If the fund permits the use of derivatives, get out of it. 100’s of thousands of investment advisors and retail investors loaded up on Pimco’s Total Rate of Return fund having no idea that it is riddled with derivatives. If you own Black Rock funds, don’t wait for a bounce. Just get out. Black Rock is the financial market version of Fukushima.
I heard a rumor today that the Fed is trying to solicit “fire sale” liquidity bids from private equity funds for big chunks of the bonds held by high yield mutual funds and ETFs. I want to emphasize that this is an unsubstantiated rumor but it comes from a good source.
At this stage in the game, I believe the Fed will do anything possible to keep the system from collapsing. On the assumption that the rumor is valid – which I would suggest has a 95% level of probability – I would also expect to see the Fed, in conjunction with the Treasury, offer private equity firms zero-percent credit lines in order incentivize and facilitate an attempted bailout of the junk market by private equity funds. After all, this would be a no-risk opportunity for the managers of these funds to throw their growing cash piles at something besides Silicon Valley unicorns in order to put the cash to work and skim fees off the invested capital.
Of course at the end of the day, if this scenario plays out, it will be just another attempt to kick the proverbial can down the road and forestall the inevitable collapse of the financial system. Unfortunately the fundamentals which support the idea that there’s any intrinsic value in the majority of the junk paper that has been issued over the past five years continue to deteriorate.
The primary reason for the Fed to prop up the junk bond market is to prevent the stock market from
collapsing. The graph on the right shows what’s at stake (click to enlarge). At some point the performance of the S&P 500 and the high yield bond market will be forced by the market to re-correlate. I highly doubt that high yield bonds will converge up to the stock market.
The graph below on the left shows that leveraged loans, which sit on top of junk bonds in the capital structure, are chasing junk bonds in a race to the bottom now. Theoretically, to the extent the the top of the
capital structure – leveraged loans – are valued at less than 100 cents on the dollar, everything below them is worth zero. In a strict application of bankruptcy law, liquidation payouts go from top to bottom. However, for practical purposes, bankruptcy workouts typically sprinkle some of the agreed restructuring value to the debt tranches below the senior secured level. If for nothing else than to prevent lawyers from cannibalizing any remaining value with fees.
As you can probably guess, if senior secured debt and junk bonds are worth substantially below par, the equity is worth zero. THAT is why the stock market eventually follows the junk bond market lower. THAT is the dynamic that the Fed will attempt to prevent using any possible means at its disposal – legal and illegal.
History tells us this will eventually fail. The degree to which the end result is catastrophic is always directly proportional to the amount of effort that went in to the attempt to prevent the inevitable.
You can make money off of this inevitability by shorting the stock market. As this unfolds, there is a lot of money to be made shorting all of the hideously overvalued stocks. Mynew subscription service will be rolling out two ideas per week that will help you find ways to exploit the gross price distortions and sector bubbles that have developed after 6 years of extremely reckless monetary policy by the Federal Reserve and U.S. Treasury. You can subscribe by clicking here: SHORT SELLER’S JOURNAL.
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