Tag Archives: distressed debt

Energy Debt Is Imploding – Housing Market To Follow

“The banks are still clinging to their reserve reports and praying.  The bonds are all toast. Most are in the single digits or teens.”

I asked a former colleague of mine from my Bankers Trust junk bond days who is now a distressed debt trader what was going on in the secondary market for energy sector bank debt and junk bonds.  The quote above was his response.

Zerohedge posted a report last night with a Bloomberg article linked that describes what is going on – “Assets selling for far less than what companies owe lenders – Creditors are left holding prospects no one wants to buy.”   the article further cites the ridiculously small reserves that four biggest banks in the energy sector have set aside:  “Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low”  – (Bloomberg).

Considering that those four banks combined probably have at least $100 billion of exposure to sector – not counting the unknowable amount of credit default swaps and other funky OTC derivative configurations the financalized Thomas Edisons at these banks dreamed up – the $2.5 billion in loss reserves is a complete joke.  It’s an insult to our collective intelligence.  Of course, Congress and the SEC took care of the problem of forcing banks to do a bona fide mark to market after the 2008 financial crash.

This is the 2008 “The Big Short” scenario Part 2.  The banks underwrote over $500 billion in debt they knew was backed by largely fraudulent reserve estimates.  I bet most of the “professional” investors at pension funds and mutual fund companies were not even aware that oil extracted from shale formations trades at a big discount to WTI.  When creditors go to grab assets in liquidation, they’ll get a few handfuls of dirt to resell.  And when the bondholders go to grab assets, they’ll get an armful of air.

The same dynamic is about to invade and infect the housing market.  Notwithstanding the incredulous existing home sales report released on Friday – (how can the NAR expect us to believe that December experienced the largest one month percentage increase in existing home sales in history when the economy is sliding into recession and retail sales were a disaster?) – the housing market is on the cusp of imploding.  I was expecting to see a unusually high number of new listings hit the Denver market right after Jan 1st and so far my expectations have been met. The acceleration of new listings is being accompanied by a flood of “new price” notices.   I believe a rapid deterioration in home sales activity will take a lot of the housing bulls by surprise.

The stock market’s reflection of my assertions about the housing market is exemplified by the homebuilder stock I feature in this week’s issue of the Short Seller’s Journal.  This stock is down 16% from when I first published a stock report on this Company in 2014. This is a remarkable fact considering that the S&P 500 is down only 4% in the same time period AND the Dow Jones Home Construction Index UP 8% in that time period.  This company happens to originate a high percentage of the mortgages used to finance the sale of its homes.

The company relies on an ability to dump these mortgages into the CDO and Bespoke Tranche Opportunity configures conjured up by Wall Street in order to seduce dumb pension and mutual fund money into higher yielding “safe” assets.   As the energy debt market implodes, it will cause the entire Wall Street supported asset-backed credit market to seize up.  The next biggest losers after the energy sector will autos and housing.

This week’s Short Seller’s Journal features the above housing stock plus a copy of the report I originally published (the data is old but the ideas behind why the stock is a short are intact, if not more pronounced) plus I have presented two “Quick Hit” energy sector stock short ideas. All three ideas are accompanied with my suggestions for using puts and calls to replicate shorting the stock  You can access this report here:Untitled



The Junk Bond Market Is Collapsing

It’s not just distressed debt or the energy sector.  I was chatting with a friend/colleague in NYC who is connected with the high yield market.  To begin with, the economic devastation to Texas from the collapsing price of oil is just beginning.  Word to him from a big Texas bank is that the massive asset write-downs – i.e. energy and real estate loans – are just starting.  Up until now the banks and financial firms have been able to hold off marking to market in hopes of a recovery in the price of oil.  But distressed offerings in oil, gas and real estate assets are starting to hit the market and it’s going to force the issue. This is going to get ugly.

This is economic fall-out that will spread to the entire country.

Next we turned to the high yield market and he remarked that the junk market is collapsing.  And it’s not just oil bonds – it’s gas, technology, healthcare, industrial, retail – everything. The few recent deals that got done soaked up all the cash available and now big outflows are starting again.  There’s no liquidity and bids that show up within a reasonable context of the quoted bid/ask market get tattoo’d.  It’s impossible to move any kind of stuff – i.e. big investors, mutual funds, pension funds are stuck.

Here’s two graphs that illustrate just how far off the rails the stock market has gone:

UntitledThis graph from The King Report illustrates the current differential between junk bonds and the SPX vs. the differential in August. Recall that in August the S&P 500 plunged 11.2% in six trading sessions

The second graph compares the returns to the HYG I-shares high yield ETF and the S&P 500. As you can see the, divergence between the S&P 500 and the high yield bond market has reached an absurd level. The high yield market, in the absence of extreme intervention, typically will lead the stock marketUntitled1 directionally. This is especially true on the downside because high yield investors typically are “privy” to bank credit information – trust me, this is true, as our high yield desk was next to the bank debt trading desk and we were very friendly with each other – and can see when corporate numbers are deteriorating well in advance of equity analysts and investors.  As you can see from this graph the divergence between high yield debt and the S&P 500 has never been greater.

We can draw two conclusions from the information conveyed in the two graphs above:  1) the Fed is terrified of letting the stock market move lower and, for now at least, has a solid iron floor beneath the stock market;  2)  the credit condition of corporate America has been deteriorating since early 2013, punctuated by 3 quarters in a row of declining earnings for the S&P 500.  Revenues have been flat to down on average for a couple years.


This is not going to end well for anyone.  I would suggest that this is one of the specific reasons that the U.S. Government is ramping up its military aggression, rampant domestic fear-mongering and extreme propaganda.  We can’t even enjoy a college or NFL football game anymore without the shameless promotion of the military constantly thrown in our face.

History tells us – and it is very clear on this matter – when all else fails, collapsing empires start a war.  This war started slowly burning when Bush II attacked Iraq and now it’s escalating into a global conflict.  This will not end well…Happy Thanksgiving.

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.  – HL Menken