Merrill Lynch

The shale patch can exist in its present form only if it has access to nigh limitless credit, and only if prices are in the $100 or up range. Wells in the patch deplete faster than you can say POOF, and drilling new wells costs $10 million or more a piece. Without access to credit, that’s simply not going to happen. That’s about all we need to know. Shale was never a viable industry, it was all about gambling on land prices from the start. And now that wager is over, even if the players don’t get it yet. So strictly speaking my title is a tad off: we’re not drilling our way into oblivion, the drilling is about to grind to a halt. But it will still end in oblivion.

If prices fall any further (and what’s going to stop them?), it would seem that most of the entire shale edifice must of necessity crumble to the ground. And that will cause an absolute earthquake in the financial world, because someone supplied the loans the whole thing leans on. An enormous amount of investors have been chasing high yield, including many institutional investors, and they’re about to get burned something bad. We might well be looking at the development of a story much bigger than just oil.

The central banks are now out of dry powder - impaled on the zero-bound. That means any resort to a massive new round of money printing can not be disguised as an effort to “stimulate” the macro-economy by temporarily driving interest rates to “extraordinarily” low levels. They are already there. Instead, a Bernanke style balance sheet explosion like that which stopped the financial meltdown in the fall and winter of 2008-2009 will be seen for exactly what it is—-an exercise in pure monetary desperation and quackery. So duck and cover. This storm could be a monster.

The precipitous decline in the price of oil is perhaps one of the most bearish macro developments this year. We believe we are entering a “new oil normal,” where oil prices stay lower for longer. While we highlighted the risk of a near-term decline in the oil price in our July newsletter, we failed to adjust our portfolio sufficiently to reflect such a scenario. This month we identify the major implications of our revised energy thesis.  The reason oil prices started sliding in June can be explained by record growth in US production, sputtering demand from Europe and China, and an unwind of the Middle East geopolitical risk premium. The world oil market, which consumes 92 million barrels a day, currently has one million barrels more than it needs.... Large energy companies are sitting on a great deal of cash which cushions the blow from a weak pricing environment in the short-term. It is still important to keep in mind, however, that most big oil projects have been planned around the notion that oil would stay above $100, which no longer seems likely.

"... Shortly after returning from a trip in late 2009, Farmer erased electronic notes, in Microsoft Word format, that were stored on thumb drives, Zip drives and a shared drive at Citadel, agents wrote in a summary of one of the interviews with him. Farmer also threw away his handwritten notes because that was his normal practice and because they were incriminating, agents wrote. Farmer got rid of e-mails as well, according to their summary. “This,” they wrote, “wiped the slate clean."

This may not quite be the blow-off top in the merger bubble as companies rush to frontrun the ECB and buy whatever still isn't nailed, but it is getting close. Because while earlier today Baker Hughes announced it would accept the Halliburton offer to buy it unchallenged in a $35 billion transaction leading many to wonder just how much lower the price of oil is still set to drop, moments ago the Allergan "White Knight" swooped from up on high, and as had also been leaked in recent weeks, Actavis agreed to buy the botox- maker which Ackman and Valeant had been so eagerly chasing for months in order to let the roll-up pharma pad its non-GAAP books with another 2-3 years of pro forma "synergies" add backs.  This means that between Halliburton and Actavis, today we have had the first $100 billion "Merger Monday" in over a decade.

"Solutions to the world's problems are not produced in a meeting between Bill Gates and George Soros... Renewal has to come from below... Limiting the influence [of the richest] is of the utmost importance... so that today's upper-class, high-finance capitalism can once again revert to being a capitalism of the real economy and the societal center."

The excesses of 1980s New York investment banking as captured best (and with just a dose of hyperbole) by Bret Easton Ellis's American Psycho may be long gone in the US, but they certainly are alive and well in other banking meccas, such as the one place where every financier wants to work these days (thanks to the Chinese government making it rain credit): Hong Kong. It is here that yesterday a 29-year-old British banker, Rurik Jutting, a Cambridge University grad and current Bank of America Merrill Lynch, former Barclays employee, was arrested in connection with the grisly murder of two prostitutes. One of the two victims had been hidden in a suitcase on a balcony, while the other, a foreign woman of between 25 and 30, was found lying inside the apartment with wounds to her neck and buttocks, the police said in a statement.

Central banks are printing rules almost as fast as they’re printing money. The consequences of these fast-multiplying directives — complicated, long-winded, and sometimes self-contradictory — is one topic at hand. Manipulated interest rates is a second. Distortion and mispricing of stocks, bonds, and currencies is a third. Skipping to the conclusion of this essay, Jim Grant is worried: "The more they tried, the less they succeeded. The less they succeeded, the more they tried. There is no 'exit.'"

The market environment is turning sour...

Over the last few weeks, the markets have seen wild vacillations as stocks plunged and then surged on a massive short-squeeze in the most beaten up sectors of energy and small-mid capitalization companies. While "Ebola" fears filled mainstream headlines the other driver behind the sell-off, and then marked recovery, was a variety of rhetoric surrounding the last vestiges of the current quantitative easing program by the Fed. “You will know that the financial markets have reached peak instability and volatility when Britney Spears rings the opening bell.”

Junk bond investors suffered their biggest quarterly loss since 2011, losing 1.7% in Q3 pushing yields up to one-year highs (despite Treasury yield compression). Managers, knowing full well the underlying liquidity to handle any further selling is not there are out en masse explaining that "high-yield should bounce back in the fourth quarter," relying on the fact that 'historical' defaults are still low and the economy is recovering (as if that's not priced in already). The worst hit segment of the junk market is CCCs and below - at 22-month lows - as Bernanke and Yellen forced investors ever further along the risk spectrum for yield. Of course, equity markets (Russell 2000 aside) have ignored much of this decline until recently, but the plunge in leveraged loan issuance suggests all that cheap-buy-back-funding is rapidly disappearing (even for the best credits and biggest names).

* Where is Venezuela's 366 tonnes of gold?
* Does Venezuela still control and own unencumbered it’s own gold reserves?
* Is any of the country's gold encumbered, loaned or leased to Goldman Sachs or other banks?
 

“... Just Before It Melted Down”

The word “gloomier” inconveniently shows up to describe CEOs’ outlook.