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Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015

Tyler Durden's picture




 

Submitted by Michael Snyder of The Economic Collapse blog,

Do you want to know if the stock market is going to crash next year?  Just keep an eye on junk bonds.  Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first.  And as you will see below, high yield debt is starting to crash again.  The primary reason for this is the price of oil.  The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now.  This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace.  And as I have written about previously, almost every single time junk bonds decline substantially, stocks end up following suit.  So don’t be fooled by the fact that some comforting words from Janet Yellen caused stock prices to jump over the past couple of days.  If you really want to know where the stock market is heading in 2015, keep a close eye on the market for high yield debt.

If you are not familiar with junk bonds, the concept is actually very simple.  Corporations that do not have high credit ratings typically have to pay higher interest rates to borrow money.  The following is how USA Today describes these bonds…

High-yield bonds are long-term IOUs issued by companies with shaky credit ratings. Just like credit card users, companies with poor credit must pay higher interest rates on loans than those with gold-plated credit histories.

But in recent years, interest rates on junk bonds have gone down to ridiculously low levels.  This is another bubble that was created by Federal Reserve policies, and it is a colossal disaster waiting to happen.  And unfortunately, there are already signs that this bubble is now beginning to burst

Back in June, the average junk bond yield was 3.90 percentage points higher than Treasury securities. The average energy junk bond yielded 3.91 percentage points higher than Treasuries, Lonski says.

 

That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds — an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business.

The reason why so many analysts are becoming extremely concerned about this shift in junk bonds is because we also saw this happen just before the great stock market crash of 2008.  In the chart below, you can see how yields on junk bonds started to absolutely skyrocket in September of that year…

High Yield Debt 2008

Of course we have not seen a move of that magnitude quite yet this year, but without a doubt yields have been spiking.  The next chart that I want to share is of this year.  As you can see, the movement over the past month or so has been quite substantial…

High Yield Debt 2014

And of course I am far from the only one that is watching this.  In fact, there are some sharks on Wall Street that plan to make an absolute boatload of cash as high yield bonds crash.

One of them is Josh Birnbaum.  He correctly made a giant bet against subprime mortgages in 2007, and now he is making a giant bet against junk bonds

When Josh Birnbaum was at Goldman Sachs in 2007, he made a huge bet against subprime mortgages.

 

Now he’s betting against something else: high-yield bonds.

 

From The Wall Street Journal:

 

Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.

Could you imagine betting 2 billion dollars on anything?

If he is right, he is going to make an incredible amount of money.

And I have a feeling that he will be.  As a recent New American article detailed, there is already panic in the air…

It’s a mania, said Tim Gramatovich of Peritus Asset Management who oversees a bond portfolio of $800 million: “Anything that becomes a mania — ends badly. And this is a mania.”

 

Bill Gross, who used to run PIMCO’s gigantic bond portfolio and now advises the Janus Capital Group, explained that “there’s very little liquidity” in junk bonds. This is the language a bond fund manager uses to tell people that no one is buying, everyone is selling. Gross added: “Everyone is trying to squeeze through a very small door.”

 

Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.

So is there anything that could stop junk bonds from crashing?

Yes, if the price of oil goes back up to 80 dollars or more a barrel that would go a long way to settling things back down.

Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead…

“We’re continuing to search for a bottom, and might even see another significant drop before the year-end,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.

If the price of oil stays this low, junk bonds are going to keep crashing.

If junk bonds keep crashing, the stock market is almost certainly going to follow.

For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.

But just like in the years leading up to the crash of 2008, there are all kinds of naysayers proclaiming that a collapse will never happen.

Even though our financial problems and our underlying economic fundamentals have gotten much worse since the last crisis, they are absolutely convinced that things are somehow going to be different this time.

In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.

*  *  *

Simply put - ignore this...

 

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Fri, 12/19/2014 - 21:15 | 5574524 Yen Cross
Yen Cross's picture

 Ying & Yang trying to disconnect.

 http://en.wikipedia.org/wiki/Yin_and_yang

Sat, 12/20/2014 - 12:15 | 5575399 sun tzu
sun tzu's picture

Time for the Fed to QE4 and buy up all the junk bonds until the yield is 1%

Sat, 12/20/2014 - 12:34 | 5575448 Nick Jihad
Nick Jihad's picture

Yes, the article clearly describes price-discovery happening in high-yield bond markets. This must be prevented at all costs.

Fri, 12/19/2014 - 21:15 | 5574527 NotGrokkingIt
NotGrokkingIt's picture

"Crashing" is not possible until 2016.

Fri, 12/19/2014 - 21:18 | 5574533 Yen Cross
Yen Cross's picture

 The crash has already happened.  It's all about picking up the pieces/

 ;-D

Fri, 12/19/2014 - 21:27 | 5574548 disabledvet
disabledvet's picture

Actually i agree with this but would call it "a soaring dollar."

In effect the dollar moonshotting is the equivalent of a collateral call on all fiat money...certainly a great time to be buying silver and gold...but more importantly to be very aggressive in buying "producers."

Those are folks who can drive down costs while delivering superior product.

Number One on that list is Elon Musk in my view....although Jeff Bezos is right up there as well.  Interesting story on Washington State's big deficit.  Nothing from Mish on this....which is far from unsurprising.  The only thing worse than a price cutter is a price collapser as in the end the folks who say they believe in gold really don't.

Vladamir Putin is a textbook example actually.

And the Russian "citizens" know it.

Fri, 12/19/2014 - 21:34 | 5574567 Yen Cross
Yen Cross's picture

 You agree that your lower energy cost import idea was questionable?

Fri, 12/19/2014 - 22:03 | 5574615 disabledvet
disabledvet's picture

Well I think the actual price of oil is heading to a buck a barrel...but that has nothing to do with "imports" per se but what the French President in the seventies called the USA's "exorbitant privilege" of being able to basically "print dollars" (petro dollars) and not get the inflation.

Back then (the 70's) Saudi Arabia became the "swing producer" for oil able to command (the lowest) price thus driving the bulk of the non dollar world and a lot of the USA bankrupt.

"Not very nice" needless to say.

I think that role has passed to the USA right now...for how long who knows..but sure...who wouldn't start producing goods for dollars right now when the alternative is a massive inflation?

This is not to say I agree with the outcome morally....just saying "the whole world has had to put up with this bullshit for over a year.". Past performance no guarantee of the future but so far those short the dollar have been utterly annihilated.

The USA can drop costs internally both qualitatively and quantitavely as well.  " That was called the 90's." (Better, faster, cheaper.)

So no...imports while necessary (better quality) need not be "needed" (brand loyalty for example.). 

Very interesting story on 4 Perry Class "Frigates" being sent to Taiwan.  I recommend it.

Sat, 12/20/2014 - 09:29 | 5575178 hero HNL
hero HNL's picture

About the Perry class, I think Taiwan makes them under license.

Very well designed frigates though they are old.

 

 

hero

Sat, 12/20/2014 - 12:39 | 5575467 Nick Jihad
Nick Jihad's picture

If I were to make a list of enterprises that have thrived in the ZIRP economy, and whose viability would be doubtful without ZIRP, Tesla and Amazon would make that list.

Fri, 12/19/2014 - 21:24 | 5574540 Pheonyte
Pheonyte's picture

Yep, crashes have this strange habit of only happening around presidential elections.

Fri, 12/19/2014 - 21:33 | 5574564 seek
seek's picture

I think it's more like "crash recognition" not possible until 2016.

It's a slow, ongoing process, but TPTB can't acknowledge any of it until their own skins are saved and/or they're in position to benefit from the collapse. Neither will be complete in 2015.

I wonder who the crisis candidate will be? If history is any guide a dark horse appears and wins, then leads the whole country into complete ruin. Genocide optional.

Sat, 12/20/2014 - 05:40 | 5575004 Seer
Seer's picture

"If history is any guide a dark horse appears and wins, then leads the whole country into complete ruin."

It's the System.  The path is already established:

http://www.newworldeconomics.com/archives/2014/092814.html

If we focus on "candidates" (and "leaders") we will only be distracting ourselves from understanding that "ruin" is the ONLY outcome possible.

Fri, 12/19/2014 - 21:18 | 5574532 sunny
sunny's picture

<yawn>  Oh look another warning about the impending market crash.  Oil junk bonds this time.  Haven't we been here before?  Didn't it all start with Greece and the collapse of the EU?  OK, another warning.  Grab a bag of Cheetos and turn up the telly, maybe the economic revolution will be televised.

Fri, 12/19/2014 - 21:21 | 5574535 Yen Cross
Yen Cross's picture

      Do you want to live past 50?

Fri, 12/19/2014 - 21:22 | 5574539 sunny
sunny's picture

Actually I'm 71.

Fri, 12/19/2014 - 21:30 | 5574554 Yen Cross
Yen Cross's picture

    Why are you acting 1/2 your age?

 

Fri, 12/19/2014 - 22:56 | 5574675 sunny
sunny's picture

Ask yourself that when you get to 71, you'll understand the answer you will give yourself.  :-)

Sat, 12/20/2014 - 15:22 | 5575801 voltrader66
voltrader66's picture

Well said @Sunny.

Fri, 12/19/2014 - 22:33 | 5574537 KnuckleDragger-X
KnuckleDragger-X's picture

They are called junk bonds for a reason. If your in at the right time you can make a nice pile, but if your caught holding when things take a shit, too bad. When they started pushing them hard I was just getting out of the market but they were a temptation.

Fri, 12/19/2014 - 21:27 | 5574549 jm
jm's picture

Nothing like a bogie on your back to make you the next London Whale.

Fri, 12/19/2014 - 21:36 | 5574559 Yen Cross
Yen Cross's picture

        Long, Carrier Pigeons

Fri, 12/19/2014 - 21:44 | 5574581 Atomizer
Atomizer's picture

Naked short selling under new algorithms complex program developments. Sad world we live in.

Fri, 12/19/2014 - 21:57 | 5574592 ebworthen
ebworthen's picture

Now...if only I had money left over from the last crash to short this fucking ponzi...

Fri, 12/19/2014 - 21:56 | 5574606 blindman
blindman's picture

IT’S OUR MONEY WITH ELLEN BROWN – GREASING A COLLAPSE: OIL PRICES AND OUR CRONY CONGRESS – 12.17.14
Posted on: December 17th, 2014 by Archivist
http://prn.fm/money-ellen-brown-greasing-collapse-oil-prices-crony-congr...
.
"The recent drop in oil prices may make you feel good at the gas pump, but your dollars at the bank may soon slide right out of your hands to help pay off Global Bankster bets. Current conditions, circumstances and collusions suggest possible collapse in the not too distant future. Ellen speaks with author Michael Snyder, who blogs at “The Coming Economic Collapse,” about what the chances are, what the outcomes may be, and what you should consider in the days ahead. On the Public Banking Report, co-host Walt McRee talks with Seattle City Councilman Nick Licata about that city’s recently completed forum on creating a pubic bank for that great city." e.b.

Fri, 12/19/2014 - 22:38 | 5574659 NubianSundance
NubianSundance's picture

Am amazed that despite how similar the circumstances are today to how they were.in the lead up to the great crash six years past there are still those burying their heads in the sand pretending it will be different this time...see what Einstein said etc

Fri, 12/19/2014 - 22:42 | 5574662 Rock and Hard Space
Rock and Hard Space's picture

And just think, if the market crashes next year and reality is allowed to peek from under its cover, it will be the GOP that will take the blame and usher in the new Democrats in '16.

This is EXACTLY what TPTB want, and Obama is all to happy to provide.

We literally have no where to go except down and down and down.

The House of Saud signed agreements with China, I continue to have the feeling everyone else in the world knows what is coming next, except us.

USA! USA!

Sat, 12/20/2014 - 00:08 | 5574788 Wild E Coyote
Wild E Coyote's picture

I got to agree. Nobody openly antagonize US, but everywhere in diplomatic circle, everyone is calling US crazy. They still want US dollars. But they are not willing to accept future profits in US dollars. The distrust in US Government has spread to US Corporations. Which means, even good bonds from such corporations are going to become junk. 

Some examples are Oil service companies, whose technologies are spurned by some ASEAN countries. Or example of McDonalds, which has stopped getting good deals on location for its stores in many countries.   

ANd by the way, If some predictions are correct, US will not have democrats or GOP within a few years. Some even predict US will be broken into 5 or more independant regions. 

I would say, US Government in its current form is not sustainable. 

Sat, 12/20/2014 - 05:18 | 5574997 Seer
Seer's picture

"I would say, US Government in its current form is not sustainable."

For a more accurate measure/statement it should be: Nothing based on growth is sustainable.

Fri, 12/19/2014 - 23:00 | 5574678 Chad_the_short_...
Chad_the_short_seller's picture

I'm Jewish

Sat, 12/20/2014 - 05:08 | 5574992 Seer
Seer's picture

Did anyone pay attention to the "Percent" scale on the left-hand side of the graphs?  For 2008 the percent value rocketed over 12 1/2%.  For this year it's been about 1.5%.  Yeah, there's a trend here, but this is hardly close to 2008.

Of fucking course the stock market is going to tank.  Anyone playing in this game is just encouraging the entire facade.  I find nothing honorable in tossing money on this wheel.  Rather, take your wealth and apply it to something meaningful...

Sat, 12/20/2014 - 07:24 | 5575057 Wahooo
Wahooo's picture

The oil "glut" will disappear as quickly as it appeared. Voila, and WTF just happened. This is so fucking rigged.

Sat, 12/20/2014 - 08:49 | 5575132 Seer
Seer's picture

The System is rigged.  The word "rigged" is neutral: if you think it's negative then try going out sailing and de-rigging and see how things would be better.

I suffer no headache because I KNOW how the System really works and I KNOW that it cannot work any other way.  It's ALWAYS been a casino.  People are confusing their awakening to this as though it's somehow a change when the fact is that the only change is that of PACE (not of style, which is the underlying premise of the System itself, which is based on the poor premise of perpetual growth on a finite planet).

Nature is deceptive.  Humans are OF nature.  Human systems are really only means for hiding our claws and fangs.  When those systems start to fail, as they invariably do, then, well, I think that the picture should be clear here...

Sat, 12/20/2014 - 09:07 | 5575159 AdvancingTime
AdvancingTime's picture

Anyway you look at it I have a problem lending my hard earned money out for a long period of time based on predictions of future government deficits. These forecast are often formed and made on assumptions based on rosy scenarios or politically skewed to benefit those in power. Like many investors I think the bond market is a bubble ready to pop and won't touch bonds with a ten foot pole. Knowing what we know about the effect that interest rates have on the value of bonds one might deduce that the 30 year bull run on bonds will have to come to an end the moment rates are expected to go up.

To give you a sense of what this may mean to U.S. Treasury Bond investors a 10 year treasury bond issued at a 2.82% interest rate could see a 42% loss in value from a mere 3% rise in interest rates. This means if you’d held $100,000 in these bonds prior to the rise in rates, you would only be able to sell those bonds for $58,000 in the secondary market after the 3% rise. Not only would bond holders be stripped of wealth if rates rise or even worse soar, but it would magnify the nations debt service and rapidly impact our deficit in a negative way. The article below delves into just how big a problem it could cause.

http://brucewilds.blogspot.com/2014/12/bond-market-bubble-has-ugly.html

Sat, 12/20/2014 - 09:45 | 5575204 jcaz
jcaz's picture

LOL- then just hold your 10 yr bond to maturity, collect 100% instead of taking the 42% hit,  which is a hypothetical hit at best (your example assumes interest rates move 3% one DAY after you buy a when-issued and you're forced to sell that day)

Now, if you want to make an interesting point,  talk about bond FUNDS instead.....

Sat, 12/20/2014 - 10:45 | 5575280 Winston Churchill
Winston Churchill's picture

I remember losing a lot of money on bonds in the 1970's.

Experience is still the best teacher,and I wouldn't touch bonds now with a 100ft barge pole,

let alone a 10ft one.

Safe as houses my financial advisor said,jjust like they say now.

Sat, 12/20/2014 - 15:17 | 5575792 voltrader66
voltrader66's picture

The first chart goes from 10% to 23% whereas the second chart goes from 6% to 7.5%....you ZeroProfit sheep see nothing wrong with this? Your dear leader is pulling wool over your eyes and you don't even know it. In 2008 there was a lot of leverage in the system from Subprime based Mortgage Bonds and CDO/CDS a etc....This time that isn't the case, we have 18% of the HY bonds issued by shale oil companies which are obviouly under pressure due to the lower oil prices. Very few are going to default, some will, most will restructure them. This is reflected in the current spreads. They are HY for a reason after all.

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