The #1 question we get after we review correlations every month is “Why are they so high relative to long term historical norms?” Our answer is that Federal Reserve policy has been an unusually important factor in asset prices since 2009. The unusually easy monetary policy since that time (and its planning, implementation, and effect on the economy) has been a powerful unifying story in capital markets. Now, as the Federal Reserve moves to return the economy to a more “Normal” policy stance, correlations should drop. That they have not yet moved convincingly lower is a sign that equity markets may want to see the Fed actually pull the trigger.
"Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash."
"There’s another redetermination cycle in the fall, And I’m not going to say likely but it’s possible we’ll be selectively downgrading some clients."
Earlier today one of Icahn's favorite energy names (you won't find him tweeting about this one much thought) Chesapeake Energy, the second-largest US natural gas producer, announced it too is now scrambling to conserve cash (in this case $240 million per year) by suspending its dividend payment.
Financial engineering is one of the worst ills perpetuated by the Fed’s regime of cheap debt and money market subsidies for speculation. And these deformations are turbo-charged by the tax code which creates a powerful bias toward loading capital structures with tax deductible debt, and to delivering returns as lightly taxed capital gains rather than ordinary income. In fact, stock buybacks and LBOs are the bastard offspring of the IRS and Federal Reserve.
Are oil prices heading for a double dip? The surge in shale production has produced a temporary glut in supplies causing oil prices to experience a massive bust. After tanking to a low of $44 per barrel in January, falling rig counts and enormous reductions in exploration budgets have fueled speculation that the market will correct sometime later this year. However, there is a possibility that the recent rise to $51 for WTI and $60 for Brent may only be temporary. In fact, several trends are conspiring to force prices down for a second time.
and other things to keep an eye on today
- Greece to submit loan request to euro zone, Germany resists (Reuters)
- Ukrainian forces start to quit besieged town (Reuters)
- Bank of Japan maintains policy, no surprises (FT)
- China Considering Mergers Among Its Big State Oil Companies (WSJ)
- Soros Shifts to Europe, Asia as Investors Cut U.S. Equities (BBG)
- Putin tells Kiev to let troops surrender as Ukraine ceasefire unravels (Reuters)
- Venezuela Squanders Its Oil Wealth (BBG)
- Swiss prosecutor raids HSBC office, opens criminal inquiry (Reuters)
Over a month ago we presented a ranking of "America's most levered energy companies." Since then they have all, without exception gotten clobbered, not only in their publicly traded stock but also their debt. Today, long after the liquidation whirlwind has left junk bond owners dazed and confused, Goldman catches up, and lays out a matrix of shale companies sorted not only by leveraged (they see 2.5x as the cutoff; we used 4.0x) but also by shale asset quality. From there, it also lays out the various opportunities, if any, available to the management teams in the resultant 4 quadrants. Readers will be most interested in the "restructuring/bankruptcy" option, most applicable for Group 4, because these are the names which, all else equal, will file for bankruptcy first.
With crude oil prices in a strong corrective mode, energy depletion is understandably not on people’s minds these days. However, this is a scenario that many of us might have to deal with at some point in our lifetimes. We might be swimming in oil for now, but this should be no reason to become complacent. Our children and grandchildren will thank us for it.
- Ferguson in Flames (Reuters)
- Ferguson Cop Told Grand Jury He Feared for His Life (BBG)
- Sharpton: Grand Jury Announcement ‘An Absolute Blow’ (Daily Caller)
- Gunshots echo as violence returns to Ferguson, protests across U.S. (Reuters)
- BoJ members warned on costs of more easing (FT)
- Hagel Exit Shows Obama Has Taken Power Away From Pentagon (BBG)
- Ukraine leader, under pressure from West, pledges new government soon (Reuters)
- Eurozone Stagnation Poses Major Risk to Global Growth, OECD Warns (WSJ)
- ECB’s Coeure Says Officials Won’t Rush as They Debate All Assets (BBG)
Seven of the 30 largest U.S. corporations paid more money to their chief executive officers last year than they paid in U.S. federal income taxes, according to a new study by Center for Effective Government and Institute for Policy Studies. As Reuters reports, the study said the seven companies, which in 2013 reported more than $74 billion in combined U.S. pre-tax profits, came out ahead on their taxes, gaining $1.9 billion more than they owed... and at the same time their CEOs were paid - on average - over $17 million each. While some of the firms dispute the findings, the study concludes its findings reflected "deep flaws in our corporate tax system."
"The audience in the ballroom of the Hotel Derek included engineers for shale drillers such as Marathon, Continental and Rice. Pamela Allen, a senior reserves coordinator for Marathon, raised her hand and told Lee that she was worried that using outsized forecasts in public presentations would run afoul of the SEC and “come back to haunt us.” Singhania, the Marathon spokeswoman, said she was unable to comment on Allen’s remarks without seeing a transcript. “If a lot of people get burned -- and I think a lot of people can and will be burned -- by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it,” Lee said during the workshop."
- Fighting erupts in Ukraine as crash investigators arrive (Reuters)
- Russian Billionaires in ‘Horror’ as Putin Risks Isolation (BBG)
- Israel kills militants entering from Gaza, death toll tops 500 (Reuters)
- The other Gaza: In violent weekend, at least 40 people shot in Chicago (Reuters)
- Barclays Dark Pool Drew Early Alarms (WSJ)
- Finance Industry Bonus Hit in Poll as Revenue Disappoints (BBG)
- Severstal to Sell North American Units (WSJ)
- Yum, McDonald's apologize as new China food scandal brews (Reuters)
- Yellen Wage Gauges Blurred by Boomer-Millennial Workforce Shift (BBG)
- Ukraine Offers to Hand Over Malaysia Airlines Probe to Dutch (WSJ)
While the bulk of the just announced Icahn activist foray into yet another company, this time Family Dollar, is cut and dry, we can't help but wonder: was Phil Mickelson the person buying all those FDO calls just after noon today?
The New Normal In One Sentence: "In The US Equity Market, The Worse A Company’s Finances, The Better It’s Doing"Submitted by Tyler Durden on 05/27/2014 11:00 -0400
It was just last Friday when we updated our list of the most hated, i.e., most shorted, stocks which are so critical in the New Normal because as we have reported constantly since 2012, going long the most shorted names remains the best alpha-generating strategy, outperforming the broader market by orders of magnitude. Today, it is Bloomberg's turn to recap just how broken the market is with an article that highlights the "balance sheet bombs" rallying by 94%. The lede: "In the U.S. equity market, the worse a company’s finances, the better it’s doing." Because there is nothing like rewarding failure and capital misallocation to promote economic growth and employment recovery.