Archive - Dec 2014

In Top-Gun-esque imagery, NATO has released video of a Dutch Air-Force F-16 fighter engaging with numerous Russian planes (more than 30!) including fighter and transport aircraft, over the Baltic Sea. This was filmed this last weekend as activity, according to NATO, continues to increase.

While the question of supply vs demand in global oil markets is merely different sides of the same coin, we hope the following "name that chart" image provides some clarifying perspective on what is really dragging oil prices lower...

In reality, bureaucrats and politicians who produce nothing of value parasitically choke off the productive class through onerous taxation and regulation. This cannot last forever, because at some point they will have no hosts left to feed off of. Ukraine is the perfect example of this right now. In a leaked version of a new budget proposal (in Ukrainian), we are seeing the drastic extent to which bankrupt governments feed on their hosts.

Having grown used to images and clips of "Russian" tanks rolling through Ukraine, crossing borders, and generally creating havoc, we thought the following clip was of note. With NATO and Russia rattling sabres ever louder, the site of a trainful of American tanks passing through Latvia will, we are sure, do nothing to calm both sides.

With OPEC slashing demand expectations to 12 year lows, oil prices have re-cratered today putting further pressure on socialist-utopia Venezuala which needs $121/bbl to break-even. Credit risk for the South American nation has exploded today to record highs - implying a 93% probability of default and President Maduro has taken to the airwaves to calm a benefit-needy nation... tensions are mounting...

On the (high) heels of sanctions and oil-price-collapses, the plunge in the Russian Ruble is even impacting the oldest profession in the world as brothels begin pegging transaction fees to the dollar. As LiveLeak so eloquently reports, the cost of getting laid in Russia just became more expensive - thanks Obama!! An escort agency in the northern port of Murmansk has raised rates 30-40% (a friend told us) from the $130-per-two-hours "spending time with an employee" but it is workers in The Urals that are really suffering where sex workers have raised rates between 50 and 100%. It appears someone has crossed a red line...

All of yesterday's v-shaped recovery gains off the lows are gone as the S&P tests new lows and the Dow is down over 200 points. Treasury yields are back at the mid-October Bullard lows - due for lowest close of the year. Oil has collapsed to a $60 handle (now down opver 8% on the week), as Energy stocks have crashed, giving up all of yesterday's bounce agains. HY credit is blowing wider as HY Energy breaks above 930bps!! USDJPY is tumbling. VIX is up at 17.5. S&P 500 is at one-month lows.

Instead of beating an already dead horse so it looks like the Japanese (and soon, European) economy, and commenting even more on what the oil price collapse will mean for America's energy producers (and Investment as a component of GDP) we decided to bypass the foreplay and proceed straight to showing the 70 or so most levered publicly traded US companies, with exposure to not just crude but all aspects of energy, that have a leverage (Debt/EBITDA) over 4x, as well as LTM EBITDA and CapEx both more than $20 million.

The American miracle idea of energy independence is fully reliant on a shale patch that went over $100 billion deeper into debt every year for years running just to produce that not-so-miracle. Take away 40%+ of what revenue it did take in, and there is no independence left. All that’s left is fracking fluids in your drinking water, and a few trillion in debt that the Big Kahuna lenders will seek to unload upon the real economy.

Another 10 Year auction (or technically 9 Year, 11 Month reopening), and another round of blistering demand by the Indirects. With the When Issued trading at the lowest since the June 2013 high yield, today's 10 Year issuance did not disappoint, and at a 2.214% High Yield, the 10Y priced just through the when issued which was at 2.215% at 1 pm, making this third consecutive month of declining 10 Year yields (and the lowest in 18 months). The Bid To Cover sizzled, surging from last month's 2.52 to 2.97, the highest since March of 2013. The internals saw Indirect demand surge to 53.8%, the highest since December of 2011, however offset by Directs of just 6.9%. Dealers took the remaining 39.3%.

In a stunning rebuke of Preet Bharara's insider-trading prosecutions record, Businessweek reports a federal appeals court overturned and threw out the guilty verdicts of two hedge fund managers, Todd Newman and Anthony Chiasson, ruling jury instructions tainted their verdicts and imperiling other cases brought in his multiyear probe. In a 28-page decision that could rewrite the course of insider trading law, sharply curtailing its boundaries, the United States Court of Appeals for the Second Circuit in Manhattan tossed out the case on technicalities which could also lead to the release of SAC's Michael Steinberg - Bharara's signature prosecution - as Steinberg's lawyer remarked, "it sends a loud and clear message that the government will be rebuked when it tries to turn innocent conduct into a crime." So insider-trading is legal now... with the right lawyer and judge. We wonder how many shipments of Picassos to the three appeals court judges did the verdict cost Steve Cohen?

"...What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another. These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries break out of the stimulus trap, including Fed officials themselves."

The Shale Revolution may not really end up being a revolution after all. A new study in Nature finds that the estimates for shale gas production could be vastly overblown, and production could peak within the next decade.

"... If the unemployment rate were to edge up after reaching a trough in two years and the gap between U-6 and unemployment remains as wide as it is today – in excess of historical norms – the size of the program would be expected to reach roughly $3.3 trillion in 2024, $1.7 trillion more than in the base case." - TBAC