How the intersection of Fed policy, the post-crisis regulatory regime, and illiquid markets turned ETFs into the new financial weapons of mass destruction.
On Wednesday, Carl Icahn and Larry Fink engaged in an epic debate about the role ETFs play in perpetuating systemic risk. Icahn, taking a page from the Tyler Durden playbook, talks phantom liquidity before calling BlackRock "a dangerous company", and opining that Fink and Janet Yellen are "pushing the damn thing off a cliff."
"Diva Of Distress" Dissed: Court Tosses Lynn Tilton's Lawsuit Against SEC, Which Is Suing Her For FraudSubmitted by Tyler Durden on 06/30/2015 14:24 -0400
Just hours after the SEC sued Lynn Tilton for CLO fraud, the "Diva of Distress" countersued the SEC to stop it from pursuing its civil charge, alleging the SEC violated her constitutional rights or something. As she said then, "I hold hope that our nation will allow a fair fight for truth, to defend integrity and intent against allegations and provides fair forums," Tilton posted on Twitter. Our nation did not.
"As this critical domino chain of local governments in China’s credit risk situation begins to wobble, there could be significant ramifications for broad financial market stability. Such a chain reaction seems to have begun."
Some people talk about peak energy (or oil) supply. They expect high prices and more demand than supply. Other people talk about energy demand hitting a peak many years from now, perhaps when most of us have electric cars. Neither of these views is correct. The real situation is that we right now seem to be reaching peak energy demand through low commodity prices.
If I'm a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There's a term for that kind of business. It's called a ponzi scheme.
They’ve become sitting ducks, in a market that is "in extreme overvaluation."
If the credit market was "overheating" when only one-third of all loans had no covenants, we wonder what Stein would say now, two years later, when just one-third of all loans have covenants... if anything?
With the Fed supposedly steeling itself at last to remove a little of its emergency ‘accommodation’, it has suddenly become fashionable to warn of the awful parallels with 1937 as an excuse The Fed must not act today. We strongly refute the analogy. Instead, the real Ghost of ’37 takes the form of mean-spirited and, counter-productive 'pitchfork populism' politics and the spectre should not be conjured up to excuse the central bank from further delaying its overdue embarkation on the long road back to normality and policy minimalism.
Back in September 2013 we wrote "Coming Soon To A Theater Near You: MBIA's $1 Billion World War Z" in which we explained why MBIA will soon have a substantial problem (amounting to just about around $600 million) with several CLOs which we dubbed "Zombie CLOs" or as they were actually known, Zohar, on which it had written insurance, and which would become evident sooner or later once someone took a long, hard look at the collateral manager of the CLOs, namely Lynn Tilton's Patriarch Partners. Well, finally someone did take a long, hard look and today, our warning comes full circle following a shocker out of the SEC accusing Lynn Tilton of fraud and of "hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage."
Fortescue chairman suggests price collusion as a decent idea for driving up iron ore prices, drawing the attention of Australian regulators. Meanwhile, Morgan Stanley turns bearish citing a number of issues including cash flow and inability to refinance debt.
Spending cuts for oil-directed drilling have dominated first quarter 2015 energy news but rig counts for shale gas drilling are too high. Investors should pay attention to this growing problem. Bank of America fears sub-$2 gas prices now that winter heating worries are over. Low natural gas prices affect the economics for gas-rich oil production in the Eagle Ford Shale and Permian basin plays as well as for the shale gas plays. Meanwhile, an orgy of over-production is taking place in the Marcellus Shale... Investors should carefully examine why shale gas players have not reduced rig counts more. Continued drilling in the Marcellus will crush natural gas prices further.
"Central banks are not all singing and all dancing," and cannot avoid the consequences of what they are doing, concluding, "you and I have got grandstand seats here [to an imminent market shock]," and investors are about to "find out just how illiquid it really is out there."
"For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is hap-pening and believe that each event is an individual, isolated event. Whether it’s the oil price fall or the Swiss franc move, they’re seen as exceptions. ... we used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to try to counter the effects of a slowing China, falling commodities and EM incomes, and the ultimate First World effects. This down cycle is likely to be remembered in a hundred years . Sadly this down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of the central banks to thwart it."
The End Of Guitar Center (And An Irrational Addiction To Growth & The Scourge Of Unregulated Structured Finance)Submitted by Tyler Durden on 02/05/2015 21:15 -0400
The fact is, the die is cast. In a couple of weeks, Guitar Center will need to report its Christmas performance to its bondholders. If things do not look good, its bonds will be ripped apart like RadioShack’s. Here’s what this really means: it’s the end of big box retail, an irrational addiction to growth, and the scourge of unregulated structured finance. For a few years, unwise urban planning and unregulated banks created a new bubble in the American suburbs. The objective truth is that the growth of the last decade was financed by banking fraud, and that financial trickery of this sort only fools people in the short-term. Eventually, you must have a product people demand, sold by competent people who care about the business, financed in a way that makes sense.