Tag Archives: credit market collapse

The Credit Market Collapse Intensifies – Redemption Gates Up Next

In the summer of 2014 I warned that liquidity was beginning to leave the credit markets and that mutual funds and hedge funds eventually would be instructed by the Fed to implement redemption “gates.”  We are getting closer to this reality.  As the credit market collapse advances, what has happened to the fund described below will spread to the majority of non-Treasury based fixed income funds.

If you own any bond mutual funds of any “flavor,” I am strongly suggesting that you stop reading this and pick up the phone and call your investment advisor or brokerage firm or mutual fund custodian and sell all of your bond fund holdings.  You will eventually regret ignoring this advice.

These “gates” are a mechanism to prevent you from taking your money out of a mutual fund at the fund’s discretion.  They are used when the value of redemption requests is higher than the fund’s ability to sell its holdings in order to meet the requests.  It generally means that a fund is marked too high on its assets and the market for the fund’s holdings is highly illiquid (i.e. no one wants to buy the bonds held by the fund).

The junk bond market is collapsing and it’s not just the triple-C tranche of assets.  it’s everything.  The problem is manifesting openly in the triple-C segment but it’s the tip of the iceberg.

As Zerohedge first reported, Third Avenue Fund’s “Focused Credit” junk bond fund has blown up.   This is the direct way of saying that it has announced that it is liquidating.   it has suspended the ability of fundholders to request a redemption.   While it attempts to sell its garbage, it has announced that it will make a cash distribution to fund holders with what little cash it has on hand.  It will place the remaining fund holdings in a “liquidating trust” which will try to sell off the bonds that it can’t sell now.

A colleague of mine showed me some proprietary information that his firm had compiled on this ThirdUntitled Avenue Fund. Before I describe what was in the fund, let me just say that I am confident that none of the investment advisors, financial planners or securities brokers who put their clients into this fund had any clue how risky this fund was.

Up until early 2015, this fund had up to a negative 50% cash weighting.  This means that it had 50% “effective leverage” – it was more than 100% in the junkiest of the junk bond market.  Of that leverage, 97% was invested in C-rated bonds.  In other words, this bond fund was the equivalent of Fukushima nuclear waste.   As of July 2015, the fund had managed to raise about 10% cash and remove the leverage.    I assume that is around amount that will distributed.  Investors will thus receive about 10% of the quoted NAV in cash.

That’s not to say investors will get 10% of their original investment.  Depending on where the fund was valued when they invested, they will be getting back substantially less than 10% of their original investment.  There will be little to no hope of getting much beyond that, as most of the bonds in the fund are utter toxic sewage:  LINK.

Before you bristle at the thought of taking a loss on your current bond fund holdings and sweat over the thought of not earning any interest on that capital, you better contemplate the possibility of not being able to get most if not all of that money back at all at some point. Think about the people who watched in horror as their beloved Kinder Morgan stock dropped $44 in April to $16 now.  The whole way down they refused to sell because “it was too cheap.”  Really?

Those who wait are going to suffer through the eventual reality of having their money trapped in the bond market.  I’m not making this up.  There have been multiple warnings issued over the last year by several sources, including this website, that the credit markets were becoming very illiquid.  The Third Avenue Fund above is evidence of this and it’s not an “outlier.”   Most fixed income funds have hidden leverage and derivatives. Get out now while you can.

As this unfolds, there is a lot of money to be made shorting all of the hideously overvalued stocks.   My new subscription service will be rolling out at least one idea per week that will help you find ways to exploit the gross price distortions and sector bubbles that have developed after 6 years of extremely reckless monetary policy by the Federal Reserve and U.S. Treasury.    You can subscribe by clicking here:   SHORT SELLER’S JOURNAL.

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The Greece-ification Of Puerto Rico: Get Your Money Out Of Oppenheimer Funds

(Please note:  the term “Greece-ification” was coined by John Titus  of Best Evidence, who will be a guest on the Shadow of Truth podcast show tomorrow).

A big fight is brewing between Oppenheimer Funds and the Governor of Puerto Rico.  The battle is a smaller scale version of the battle between the EU and Greece.  Currently hedge funds own $15 billion in Puerto Rican debt, mutual funds hold $11 billion, and comatose high net worth investors have been stuffed with the rest – $46 billion – by their brain-dead, trusty financial advisors.

Too be sure, there is no doubt many $10’s of billions in credit default swaps connected to the bond insurance on Puerto Rico’s debt underwritten by MBIA, Ambac and Assured Guaranty.  I would not be surprised if Oppenheimer has exposure in this derivative form as well.

Puerto Rico announced on June 28 that it was unable to handle the debt service requirements of $72 billion in debt it has issued over the years.  The debt issued by Puerto Rico is structured as “super” municipal bonds.  This is because it is triple-tax free for everyone in the United States.  Typically muni-bonds are only triple-tax free for residents of the issuing municipality.

Because of this “super” tax-exempt status, the yield hog investors groped for Puerto Rican debt like groping pedophiles running a daycare center.  Despite the junk bond rating status of this debt, investors continue to beg for it like Oliver Twist groveling for gruel.

Puerto Rico’s economy has been sliding for nearly 10 years.   Nearly 50% of the island’s residents are living in poverty.  Yet the buyers of Puerto Rico’s debt continued to have insatiable appetite so Wall Street was more than willing to oblige, naturally.

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt.  including $4.4 billion of uninsured bonds.  Not including tobacco bonds, insured debt and pre-funded bonds,as much as 13%  of some of Oppenheimer’s bond funds’ total holdings are in Puerto Rico’s bonds.

This explains why Oppenheimer has assumed the role of Germany in the ongoing battle between creditors and Puerto Rico’s Government.  Puerto Rico’s Governor is seeking to restructure the $72 billion in debt down to a level that will enable Puerto Rico to continue servicing it.  The alternative is to force Puerto Rico to implement draconian budget cuts and tax hikes which would crush the economy and throw even more of its residents in brutal poverty.

Without getting into the details, Puerto Rico can not file bankruptcy in order to force a restructuring of the debt, although Congress is considering legislation which would enable the island to take this route.  If this occurs, 13.8% of Oppenheimer’s asset base will get hammered.  In my experience as junk bond market trader, in this particular asset sector yield hogs almost always lose their shirt.

The message here is clear:  If you own any Oppenheimer mutual funds, you are a complete moron if you do not call up your mutual fund custodian and sell them all tomorrow.  

Source links for this analysis:  Investment News and Vox.com

Black Swans?

You never know what will trigger an bull market and what will trigger a bear market .   – Marc Faber on CNBC

Faber goes on to say in his comment on CNBC that you can only know what triggered a bull/bear market after the fact.  That is the definition of a “black swan.”   There hasbeen a lot of speculation in the last year about what the black swan would be that would trigger the next market collapse.  Of course, once a candidate for the Cigno Nero is identified, that takes it out of contention, right?

The collapse of Banco Espirito Santo, Portugal’s 2nd largest bank, could well prove out to be that black swan, as it is an event that no one saw coming (except maybe the bank’s auditors).  Too be sure, I read a lot of everything and I have not seen any Oracle of Blogosphere previously mention this situation:  Espirito Santo Creditors Doubt Containment on Missed Payment (Bloomberg News).

But this is the reason the U.S. stock market is tanking hard today AND why gold, silver and mining shares are spiking higher.

The Bloomberg story above references the fact that there are credit default swaps – aka OTC derivatives – on Banco Espirito Santo.  But what’s missing from the analysis is, “what happens if one of the counterparties who has made the bet that this bank will never go bankrupt can not pay off the bet it has made?”

What happens?  A defaulted bank will now be bailed out creditors –  depositors and debt holders, in that order.  But what about the entities that have to make the payments associated with the credit default swaps?

We don’t know who the counterparties are and we don’t know who will be on the hook – until after the fact, which by then it’s too late.   We don’t know this because the Too Big To Fail Banks made sure they paid your elected Congressmen to pass laws that enabled the TBTF’s to keep this information hidden away.  I bet even Jamie Dimon, pre-chemo, has no clue whatsoever if JP Morgan is on the hook or if JP Morgan is exposed to someone who is on the hook.

THIS is what could potentially trigger a bigger run on the bond market and THIS is exactly the dynamic of which regulators in the U.S. are terrified.   And THIS dynamic is why the Fed was discussing putting capital controls on bond mutual funds.  And THIS is why the Vice Chairman of Black Rock, Barbara Novick, is going around like the Sicilian Mob Boss promoting the concept of the need to have a bailout mechanism for the derivatives clearing mechanism.  Clearly Black Rock is highly exposed to credit default swaps.

It’s coming.  It’s just a matter of time.  You have been warned:  Get money OUT of bond mutual funds.   Get your money out of your IRA and 401k plans TO THE EXTENT YOU CAN. Pay the penalty and taxes.  Do you want to pay 30% of something or get 0% of zero, because there will come a time when your retirement fund is reset to zero.

On another note, three of the four junior miners I have published research on are up well over 10% in the short time since I’ve published my reports:  Junior Mining Stock Research Reports.   “Huge Upside Idea” is up 22% since June 25th.   It’s just getting started.  Almaden (AAU), spiked higher yesterday on great drilling results and is pulling back today for no reason.  This is an entry opportunity, in my opinion.  The other two ideas have plenty of room to run and good reasons why they should run.