Thursday, December 11, 2014

Today's Links

1--Worse than the Great Depression, W blog

2--US govt uses CIA torture report to heighten security and reinforce idea of war on terror’, RT

3--Russell Napier: This Has Never Happened Before Without A Drop In Stock Prices, zero hedge
Over the next five years investors now expect inflation to average just below 1.3%. This level of expected inflation has always previously been associated with a decline in US equity prices. There have been no exceptions until today....

In 1919-1921, 1929-1932, 2000-2003, 2007-2009 it was not a resurgence in wages, Fed-controlled interest rates or corporate taxes which produced a collapse in corporate profits and a bear market in equities. On those four occasions equity investors suffered losses of 32%, 85%, 41% and 51% respectively despite the continued dormancy of labour, creditors and the state. It was deflation, or the fear of deflation, which cost equity investors so much. There is a simple reason why deflation has always been so damaging to corporate profits and equity valuations: it brings a credit crisis.

Investors forget at their peril what can happen to the credit system in a highly leveraged world when cash-flows, whether of the corporate, the household or the state variety, decline. In a deflationary world credit is much more difficult to access, economic activity slows and often one very large institution or country fails and creates a systemic risk to the whole system. The collapse in commodity prices and EM currencies in conjunction with the general rise of the US$ suggests another credit crisis cannot be far away. With nominal interest rates already so low, monetary remedies to a credit seizure today would be much less effective. Such a shock, after five and a half years of QE, might suggest that the patient does not respond to this type of medicine. Investors would doubt whether monetary policy in general has the power to sustain corporate profits and with them near record-high equity valuations.

4--EU Demands Russia Bail Out EU and Ukraine, smirking chimp

IMF says Ukraine will be bankrupt ‘within weeks’ and needs $15 billion more for war against eastern Ukraine; EU threatens Russia with more sanctions if Russia lets Ukraine go bankrupt; EU will lose billions on Ukraine if Russia won’t bail them out.

5---Kerry demands open-ended Mideast war resolution, wsws

Kerry argued for an open-ended resolution that would set no binding time limit on the war, nor any limit on the geographical area in which US operations could be conducted. He stressed as well that the resolution should not bar President Obama from ordering the use of US combat troops...

But when he turned to the details of the proposed Authorization for the Use of Military Force, the limitations evaporated. “We do not think an AUMF should include a geographical limitation,” he said.....Such language would make the entire world a potential target of the war resolution, a fact on which several senators commented later in the hearing.

6--UN officials call for criminal prosecution of US torturers, wsws

7---CIA torture: American democracy in shambles, wsws
Two irrefutable conclusions flow from the release of the Senate Intelligence Committee report on CIA torture: 1) The United States, during the Bush administration, committed criminal acts of the most serious character, in violation of international and domestic law; and 2) None of those responsible for these crimes will be arrested, indicted or prosecuted for their actions....

The Obama administration has already ruled out any action in response to the Senate report. On Tuesday, Obama released a prepared written statement repeating the position of his administration that there will be no accountability for these crimes. “Rather than another reason to refight old arguments,” he wrote, “I hope that today’s report can help us leave these techniques where they belong—in the past.”

8---Pensions, health care, education, scholl lunches: Everything gets cut in Ukraine to serve the IMF and foreign owners,

The new Minister of Social Policy Paul Rozenko (COB) has confirmed, that the plan for the slow strangulation of Ukraine and the impoverishment of the Ukrainians is already discussed in governmental meetings and will soon be probably the new reality of Ukraine. It is therefore not surprising that the new vice-speaker of the Rada, Oksana Syroyed, has proposed to hold these meetings excluding of press and public.

9--Wall Street Moves In for the Kill, smirking chimp

The amendment in question, which would have repealed a measure known as the "swaps push-out rule," was largely written by lobbyists for Citigroup. It was backed by Republican Rep. Jeb Hensarling, Chair of the House Financial Services Committee. Hensarling's Democratic counterpart, Rep. Maxine Waters, released a statement that said in part:
"I am disgusted that in a back room deal, some members and lobbyists for the largest banks are trying to undo a seminal component of the Wall Street Reform Act ... I'm disheartened that, by trying to pass this repeal, this Congress is risking our homes, jobs and retirement savings once again

10--Have Democrats Failed the White Working Class?, NYT

11---What is Congress Trying to Secretly Deregulate in Dodd-Frank?, by Mike Konczal

Why would you want a regulation like this? The first is that it acts as a complement to the Volcker Rule. ...
A second reason is 716 will also prevent exotic derivatives from being subsidized by the government’s safety net. ...
The third reason is for the sake of financial stability. ...
Stiglitz reiterated this point today, saying “Section 716 facilitates the ability of markets to provide the kind of discipline without which a market economy cannot effectively function. I was concerned in 2010 that Congress would weaken 716, but what is proposed now is worse than anything contemplated back then.”

12---Cash Sales Made Up 35 Percent of Total Home Sales in September 2014, core logic

13--Lowering Down Payments Increase Risk of Mortgage Default, Dean Baker

A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was nearly 9 percent. This is more than 80 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.

It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default. Furthermore, since the median period of homeownership among low income homebuyers is less than five years, a relatively small portion of households who are able to buy homes through this policy will accumulate any substantial amount of wealth. By contrast, the policy is likely to help the banking and real estate industries accumulate wealth.

14--BOJ probably finished with ETF buying this year, Amundi says, JT

15--Lance Roberts

The problem for the "economic growth is coming" crowd is that corporations are indeed spending their cash, but not in ways that directly impact economic growth like capex and R&D does

The rout in junk bonds driven by tumbling oil prices is getting worse as one of the high-yield market’s largest sector weighs on other industries.
The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps index tied to the debt of 100 speculative-grade companies, jumped by the most in two months. BlackRock Inc.’s $13.8 billion exchange-traded fund that buys high-yield debt slid to the lowest level in more than two years.
Investors have been shunning speculative-grade debt as crude oil plunged to a five-year low, dragging down securities sold by energy companies, which make up one of the biggest components of the corporate-bond market. The extra yield investors demand to hold debentures sold by companies in that sector has doubled in the past three months.

19--Junk Bond Carnage

Bonds Turn Sour

Much of the expansion in the domestic shale energy industry was funded by high-yielding bonds issued by companies such as SandRidge Energy (SD), Energy XXI (EXXI), and Halcón Resources (HK).
So many of those bonds have been issued that the junk bond market in the energy sector has doubled in size since 2008. According to Dealogic, that expansion continued early this year, leading to energy-related junk bonds accounting for 18% of the total high-yield issuance in 2014.
Today, these bonds make up 17% of the benchmark Bank of America Merrill Lynch High-Yield Bond Index.
But there’s a problem. Lower oil prices – which are down 37% year to date – are squeezing many of the smaller U.S. exploration and production companies in the shale gas and oil industry. The squeeze is being felt by players in the most expensive regions to operate in, where companies need at least $60 a barrel to break even.
The pressure is occurring because the amount of money an energy company can borrow is tied directly to the value of its reserves. The lower oil goes, the less the reserves are worth.
Thus, some are questioning the state of funding at certain companies and whether they’ll be able to pay back the money they borrowed through the issuance of these junk bonds.
This concern is reflected in the spread between these bonds and similarly mature U.S. Treasury securities.

20--High-Yield ETFs Near 2-Year Lows As Oil Decline Continues, Barrons

I’ve written repeatedly over the past couple of months that the energy sector now constitutes about 17% of the broader high-yield market, and the drop in oil prices continues to weigh on high-yield bonds. In June, the high-yield market’s average yield hit an all-time low 4.86%, per a benchmark Bank of America index, and at that time the energy sector yielded a nearly identical 4.88%. Today, the market’s average yield has risen to 6.48%, as the energy sector’s average yield has soared to 8.90%, a spread of 7.1 percentage points over comparable Treasury bonds. The average high-yield bond now trades at 99.58 cents on the dollar, dropping below par value for the first time all year on Friday, while the average bond in the energy sector now trades below 90 cents on the dollar at 89.83 cents.

“Plunging oil prices have driven nearly one out of four high-yield Energy issues into distressed territory,” writes Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors today. “The implied default rate for the next 12 months fits the trajectory we would likely see leading up to an industry-specific oil patch recession in 2016.”

21---The Fed Helped Cause $550 Billion Energy Debt Boom, And Now It Could End In Tears, yahoo

A report from Moody's Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis. ....

Stimulus Effect
The Fed's three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Quantitative easing "has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital," Lafakis said...

Bubble Risk
"We think the sell-off has been a little over done," said Greg Smith, a vice president in Energy XXI's investor relations department. "People are trading us as though we're distressed."
The company has "plenty of liquidity," Smith said. "Come January we'll be free cash flow positive," which is "a rarity in this business," he said.
The debt rout is one of the latest examples of a boom and bust in U.S. markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far, yet the longer the Fed holds its benchmark lending rate near zero, the greater the risk of more consequential bubbles, according to former Fed governor Jeremy Stein.
"To the extent that highly accommodative monetary policy courts risks to the economy further down the road, there is more of a live trade-off than there was at 8 percent unemployment" said Stein, now a Harvard University professor. ...

Some borrowers are under pressure just a few months after selling new debt. Sanchez Energy Corp.'s $1.15 billion of 6.125 percent notes maturing in January 2023, issued this year, have tumbled to 77 cents from 101 cents in September, according to Trace. Proceeds from the bonds were partly used to fund a purchase of Eagle Ford shale assets from Royal Dutch Shell Plc. (RDSA) ...

Default Risk
"We've insulated ourselves," Evans said. For other energy borrowers at risk, "the liquidity squeeze" will probably occur in March or April when banks re-calculate have much they may borrow under their credit lines based on the value of their oil reserves.
Deutsche Bank analysts predicted in a Dec. 8 report that about a third of companies rated B or CCC may be unable to meet their obligations should oil prices drop to $55 a barrel.

"If you keep oil prices low enough for long enough, there is a pretty good case that some of the weakest issuers in the high-yield space will run into cash-flow issues," Oleg Melentyev, a New York-based credit strategist at Deutsche Bank, said in a telephone interview.
For Related News and Information: Junk Fervor Cools as Oil Rout Upends Energy Debt: Credit Markets Junk Backing Shale Boom Faces $11.6 Billion Loss: Credit Markets Shale Boom's Allure to Wall Street Tested by Drop in Oil Prices Oil Slump Heaps Bond Losses in $50 Billion Glut: Credit Markets Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale

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