Investment Grade

"While we are taking what we believe to be the appropriate reserves for that, I'm just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business."

<Q - Mike L. Mayo>: What percent of the $17 billion is not investment grade?
<A - John R. Shrewsberry>: I would say most of it. Most of it.
<Q - Mike L. Mayo>: So most of the $17 billion is non-investment grade.
<A - John R. Shrewsberry>: Correct.

As a potential worst case scenario, we use the simple sum of probabilities from 2001- 2002 and the current debt stock as an example of what could happen during a protracted downturn. If this comes to fruition, we estimate fallen angel volumes over 2 years could spike to $413bn, with $117bn of 10+ fallen angel paper (again crashing into a 10+ HY market that is only $48bn in size). This is an ugly spectre that the high-grade markets would need to face in future years.

Credit Schmedit...

While the market for corporate bond issuance has been relatively quiet among the recent broader market turbulence, in a few hours a historic new bond is about to price and be sold to investors. Earlier today, Anheuser-Busch InBev NV, the acquiror in the second largest M&A deal of 2015 valued at $117 billion and just shy of Pfizer's massive $160 billion merger with Allergan, started offering bonds that will back its takeover of SABMiller Plc in a sale that according to Bloomberg will stretch into Europe and is set to become the biggest corporate-debt offering on record.

Following Noble Group's downgrade to junk and "Enron moment," we thought it worth considering who is next to be junked?

The risk of a fracture in risk markets when lower liquidity meets forced selling, is high in our view. Should this weakening of spread sectors in fixed income continue, we will see a further rally in Treasuries – back in Aug/ Sep, 10y USTs broke below 2%, and there is no reason we can’t get there later this month.

Our balance sheet - the strongest in recent history - represents a significant advantage as we continue to identify high value growth opportunities across the products and geographies we operate in. Maintaining out investment grade rating with the international rating agencies is a vital part of this strategy.

- Noble Group 2014 Annual Report, p. 27

"As more companies cross the Rubicon out of the buyback zone, the bid for their equity shrivels.  For the 2013 financial year, 60% of stocks in my sample were in good shape to gear-up for buybacks. By the end of 2015, just 35% of the sample were in good shape to do buybacks."

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

As we start the new year, there is a debate raging within the market.  No the debate isn’t whether there is weakness in the manufacturing economy, that is taken as a given, especially after Friday’s awful Chicago Purchasing Manager number of 42.9. Instead, the debate boils down to this: 'bears' believe the manufacturing economy and the service economy act in conjunction with each other – that one cannot turn, without the other; 'bulls' view each segment of the economy as relatively independent and they highlight the size of the service economy relative to the manufacturing. The answer lies in the missing cog - the 'wealth' economy.

For now Noble refuses to throw in the towel, and overnight released the following statement on the Singapore Exchange where its massively beaten down stock trades.

"Moody's downgrades Noble Group to Ba1; outlook negative.... "The downgrade of Noble's ratings reflects Moody's concerns over the company's liquidity," says Joe Morrison, a Moody's Vice President and Senior Credit Officer. The Ba1 ratings also reflect low levels of profitability and consistent negative free cash flow from core operating activities, which exclude proceeds from asset sales."

The winners from a $5 trillion M&A bubble: Wall Street bankers will make hundreds of millions in M&A fees. The losers: hundreds of thousands of workers who are about to be laid off, pardon, "synergized."

The S&P 500 closed at 2052 on November 18,2014. That was 405 days ago, and despite the rips and dips in the interim the broad market average has gone nowhere.