“Well-contained.”
Market Roundup
That’s the phrase government and Federal Reserve officials used to describe the subprime mortgage problems in 2006 and 2007. They said the stress wouldn’t spread to the rest of the mortgage and housing industry, much less the broader economy.
I said the exact opposite at the time. Sure enough, the entire credit and stock market collapsed, while the economy fell into its deepest recession in decades.
Now, many bullish pundits are saying today’s credit-market problems are largely bottled up in the energy sector. A handful of them are willing to admit the problems are also evident in the broader commodities industry. But that’s about it.
There’s just one problem. It’s not true.
Take a look at this chart that was published in a credit market analysis by Deutsche Bank (DB). It shows the percentage of high-yield bonds trading with yields more than 1,000 basis points (10 percentage points) above comparable Treasury bonds — broken out by sector …
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| High levels of stress |
You can see that the energy and materials sectors are clearly in the worst shape, as noted by the large blue bars at the bottom of the chart. The percentage of distressed bonds in those sectors has also more than doubled since this time last year (shown by the pink bars).
But check out the notable deterioration in several other sectors. More than 20% of commercial services junk bonds are now trading in distressed territory, as are more than one-fifth of high-yield retail bonds.
Credit stress is rising fast in transportation and consumer products, too.
And it’s pushing into double-digit territory for gaming/lodging, media, technology, capital goods, telecommunications, and utilities.
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| Credit stress is also surfacing in the health-care sector. |
In other words, this isn’t just an energy story … or even a commodities story. It’s a broader, underlying rot that is spreading throughout the credit markets.
Wall Street pundits can try to lie, obfuscate, and sugarcoat things all they want — but make sure you don’t fall for it!
What’s your take here? Is Deutsche Bank onto something? Is this increasing credit turmoil a troubling sign for the broad market? Or should investors ignore it as long as “FANG” stocks are rising and the major averages aren’t breaking down? Do you believe we’re going to rally into the end of 2015 and beyond … or is a day of reckoning approaching for stocks? Share your thoughts online here.
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Yesterday’s column on the lack of vision and sensible transactions in Corporate America prompted several of you to weigh in.
Reader M.P. said: “You are 100-percent correct that CEOs are flailing around trying to impress Wall Street. It may have to do with 24/7 media coverage of financial markets and the resulting hyper-importance of Wall Street’s valuations as the raison d’être for corporate decisions. One can tell that this phenomenon is reaching ridiculous heights when the Yahoo (YHOO) ticker may soon be a proxy for Alibaba (BABA) and nothing more.”
Reader Henry A. added: “The merger of Dow Chemical (DOW) and DuPont (DD) may produce an increase in asset price (probably temporary), but it’s unlikely to increase real wealth. You need gains in real net investment, entrepreneurial activity and gains in labor hours to create wealth. Most likely the result will be just the opposite.
“It makes me think of the Studebaker and Packard merger in the 1950s. You just get a bigger dinosaur.”
Reader Billy also took a jaded view, saying: “The Fortune 100 is running out of ideas and capabilities to grow their businesses after squeezing all they can out of workers as part of a financial engineering ploy to become fabulously wealthy over the last several decades.
“This is unfortunately the price you pay for concentrated global elitism. Now that the middle class (a.k.a. the golden goose) has been killed, is there any reason to wonder why there are no more golden eggs?”
But Reader Jim suggested the jury is still out on the latest transaction, saying: “As for the current spate of seemingly pointless maneuvers in the corporate world, it may be like playing Solitaire. Sometimes when you’re playing Solitaire, you run into a hole. Moving cards around suddenly can unlock a stack and boom, the game is won. So these moves may seem uninspired, but they could unlock lots of unseen opportunities.”
Thanks for sharing your perspectives. As I said in my column, rational, well-planned and visionary transactions can benefit both companies and shareholders. But this latest spate of deals seems haphazard, desperate, and anything but focused on long-term wealth building. Time will tell either way.
If you have additional thoughts on this topic, don’t be afraid to share them below.
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Regardless of whether you take a fond or skeptical view of the Dow-DuPont merger proposal, government officials are likely to go over it with a fine-toothed comb. They could block it outright on antitrust concerns, or force several divestitures to ensure the combined firm wouldn’t have too much market power, according to the Wall Street Journal.
The troubled commodities giant Glencore (GLNCY) is at it again, trying to assuage market concerns about its future by promising to cut even more debt and sell more assets. It has already slashed its 2016 dividend and raised $2.5 billion by selling more shares to investors. But that didn’t keep the stock from plunging 80% this year.
The Pentagon and American intelligence agencies are looking to build more bases on foreign territory in order to fight ISIS and other regional terrorist groups. The idea would be to base more special operations forces and spies in small installations in Africa, Asia, and the Middle East, who would conduct surveillance and raids as needed.
Have New York City rents finally hit a point where no one can afford them anymore? Maybe. Apartment vacancies in Manhattan just hit a nine-and-a-half-year high of 2.87%, according to Bloomberg. Median monthly rents had surged 18% in the past few years to $3,361, but now landlords are responding to rising vacancies by offering the most concessions since 2011.
Will Glencore’s fire sale succeed in keeping the company afloat? What do you think about the plan to base more troops and operatives in far-flung corners of the world? And can anyone really afford to live in New York anymore … or has it become a playground for foreign oligarchs and the uber-rich? Add your comments to the mix here at the website.
Until next time,
Mike Larson
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Theres no doubt capital has been chasing yield anywhere it can for 6 years now. The Fed’s statement is critical. If they don’t empasize this is a “one and done” rate hike, then all hell will break loose. If they use the right words, i think the bubble will continue to inflate for at least another year.
The Fed wants to keep inflating the bubble. I think they will telegraph a one and done statement to keep the stock market climbing on the exhaust fumes of promises. It is a proven fact that Draghi was telegraphing all his moves in advance to big business so they could game the market but last time the business financial junkies got a smaller fix than expected. Soon these junkies must go “Cold Turkey”
The descriptive word is deflation and our retribution is waiting in the wings. How in the hell could the feds aid and abet too big to fail corrupt banks and wall street and mr Obama’s trillion dollar deficits? All the years of robbing savers and retirees of honest rents for their money invested. It is a cruel tax on these folks who can no longer work and did all the right things to keep from becoming a public charge. We shall all suffer for these excesses and mr Obama’s lawlessness of open borders with a welfare state.
So, do we believe Janet Yellin will boost the Fed rates by .25% on Dec 17th. Many do. I do not believe this, although I would like to see it. The economy of many countries just STINK! Ours is even rotting from the bottom, while a rate increase could push some of these “walking Zombies” into default, it will not be the worst thing in the world to finally let the cleansing that would have happened after the 2008 Bank mess, had the Fed not interfered to save the “too big to fail.” That was an error in my judgement, but hey, I never liked house prices zooming upward on the backs of crappy underwriting, and cheap rates. The experiment with “cheap rates” has been a failure in allowing the system to cleanse itself. We shall see what the ‘pros’ will do.
I can not say if the Fed will or will not raise rates; but if they do raise rates, the next question is how long can they sustain higher rates before having to whipsaw back down. This is where the Fed has painted themselves into a corner. In the long run it no longer matters what they do, except to shift events by a few months and paint the clown’s face another color.
this is what consolidations are all about. for example, i expect just a handful of large oil companies to survive. but in the mid- to long-term, everyone will be better off. it’s why warren buffet likes large caps. so do i.
you pay a price for buying junk. this is it.
there’s a reason cars are selling like crazy. people with new jobs need to get to work. next they’re going to want new homes. it’s coming. this is what we need to plan for. it’s what the fed is planning for, hopefully.
rates are going up, by golly. get ready for it.
Last time the Fed raise the fed funds rate in 2006, the TNX (treasury yield) to which mortgage interest rates are tied fell for the next six months. Don’t be so sure that all rates will rise. It’s quite possible we will see a flattening of the yield curve where short term rates rise and long term rates fall.
You can check online where the 10 yr yield is on the German 10 yr Bund and the JGB 10 yr (Japan), Last I looked, both were about 1.75% or more below ours. And the standard 35-yr fixed rate mortgage in Japan is at 1.85%. In a world fixed income market, lower rates abroad will tend to pull our rates down as foreign investors put their money in US government securities, driving prices up and rates down.
The fed doesn’t rule the world. The world’s bond futures traders do.
that’s exactly a possibility i would expect to happen. even the dollar could fool us and go down after a rate hike. but the fed needs to raise the funds rate to keep the curve flat as long rate are bound to rise because of an increase in demand for money. raising the short rate reins in the long rate and keeps the spread in line.
New cars and mega mansions are not cheap in todays world. You should delve into what these “new jobs” are paying. Are they “contract” jobs or jobs with 20 to 30 years security you know enough income to completely pay a mortgage. A car loan is just a revolving loan. Its a race to see if you can pay for the car before it gives up the ghost and then must reborrow to buy another one.
it is no accident jeb bush has been displaced by trump and cruz. keynes’s policies are deflating under obama. and the monetarist are unable to compensate. a small increase in rates may collapse the economy and no increase may bring back inflation.
t.parker
At the peak of the real estate market between 2004-2007, one of the most popular loan programs was the 10/1 Interest only ARM, which fixed the rate for ten years, after which it adjusts and recasts to a 20 yr fully amortized loan, with dramatically increasing payments due to the addition of principle payments. This was especially prevalent in the jumbo market, and loans were often taken at at maximum LTV and DTI. Since then, LTV and DTI limits have been reduced, many of these people can’t refinance out of them and can’t afford the increase in payments. The same scenario is playing out with the many Home Equity Line of Credit loans taken out in the same time frame. That tsumami is just beginning to come ashore.
The trend of the last couple of years has been for the markets to rally to the end of the year and then to decline thru January. Then in February they would start advancing again. I think that this pattern will pretty much remain the same, except that after January stocks will continue in a decline throughout 2016.
but eventually the stock market always returns. the scenario you describe would be perfect for a weekly purchase of the s&p.
Jim, read what I say about Third Street, and Focused Credit Fund, below, and think it through. By February, the markets could be closed, unless the Fed and the government act quickly. Banks also. Withdrawal limits, like Greece, at least.
I think your right Jim. Earnings are dropping like flies. Mega mergers stock buy backs are the only things keeping the market afloat. They do not even use earnings (if they have any) to make these moves they go to your bank the one that charges you to park your money there and they borrow your capital for next to nothing. Its a win situation for them and sadly a loose situation for you. The banks get to lend out your almost free money and they also get a cut on each merger and buyout. Your cut out of the equation.
I think the major indexes will rise starting this Mon or Tues (14th or 15th) and continue to do
so until the 24th. It looks like they’ll tumble later, around Feb or Mar.
Investors of all stripes are begging for yield lifeboats because the Fed has pushed rates to zero for too long now. Now issues like JNK are totally overcrowded. The Fed and runaway government spending of the last decade will soon send those chickens home to roost.
I just read that Morningstar’s Director of Mutual Fund Research, Russ Kinnel, reported this morning, that Fund company Third Street, has halted redemptions in its Focused Credit Fund, and plans to liquidate it. Thirty percent of fund holders have redeemed their holdings, and the recent market rise in interest rates meant the fund had to sell 70% of its holdings to meet that demand, leaving it with inadequate holdings to meet further demand. Remaining holders will have to wait for the situation to be resolved, and will doubtless take large losses.in the end. If I had interest in a bond fund of any sort, I would be redeeming it immediately, before the rush forces all bond funds to halt redemptions. This could be the beginning of the end for credit of many kinds, which would be catastrophic for the world economy. Mike should have reported this.
If he knew it, anyway. Maybe Mike didn’t know. I apologize.
we’ve turned a corner. we have to start thinking in terms of rising rates. if i were a bond guy i would rethink my strategy.
high-yield looks like a massacre waiting to happen.
I think you catch on, $1000. It will start slowly, I guess, but could become a stampede out of bond funds very quickly. Maybe bonds themselves.
The bond market is twice the size of the stock markets
To further fortify the Corporate Financial Engineering scheme, has anyone also noticed the Huge increase in “Insider Selling”? So they Buy back with “Other Peoples Money (OPM) which drives up the share price, then they sell theirs leaving only the suckers to suffer!!!
I’ve commented a couple of times on using debt (OPM) to buyback stock and raise earnings per share (with fewer shares) and other performance numbers so management gets bigger bonuses and stock options. Thanks for pointing out insider selling, Danny, though that often happens after insiders retire or resign. They may pay lower taxes, then.
Sooner or later somebody has to produce wealth. Not enough of that happening. Performing services and shuffling money around is not it.
I’m with you, Prof, but services can be important, also. Do you understand tax law? Can you install a new electric circuit according to code? Do you take your garbage to the dump?
Please expand your explanation of this article with more direct information and advice for those of us that aren’t the sharpest pencils in the box. Thanks.
I’m with you. I’m OK at picking stocks but I know next to nothing about the credit markets. Some kind of basic tutorial would be very helpful. The Other Jim
understanding bonds is a must, jim. you can’t really understand stocks or the market without understanding bonds.
Go to Wikipedia and look up Bond Markets. A good basic introduction. As Gordon said, bonds are at least twice as big a market as stocks, but they normally are a much quieter market. When velocity picks up, things can get REAL hairy.
As Porter Stansberry has pointed out, bonds are binary: they either pay interest and principal, or they don’t. When people get worried and start to sell their holdings, bonds tend to bring less than the principal amount. This raises effective interest, which will still be paid, and so will the principal, at maturity, as long as the issuer remains solvent. A repurchaser could potentially make a large profit – maybe 30 to 50% or more. If a bond defaults, the holder will still likely get SOMETHING, but may have to wait for the courts to decide how much. ‘May take years.
Hello, again another red flag or better to say a clear signal of the real mkt. things are getting worst.
Is there any chance that you can load up a much clearer image of the chart is a Little to blurry.
thx