Tag Archives: Glencore

Glencore Mirrors The Entire Global Financial And Economic System

  • Collapsing fundamental economics
  • Plunging end-user demand for its products
  • Overloaded with debt
  • Hidden land-mines in the form of OTC derivatives

Who said “black swans” have to be hidden?   Glencore is in full view.  After a dead-cat bounce from a quick descent that took Glencore stock from 310 (pounds) to 68 in 5 1/2 months, the stock is rolling over again and headed lower:

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This isn’t just about the plunging price of copper, which is now back to its pre-financial system collapse price in 2008 and headed lower. Copper is responsible for generating only 36% of Glencore’s operating income.  This is about the plunging prices and demand for oil and all base metals.

It’s about a company (global financial system) that hides a lot of risk, debt, derivatives, corruption and fraud.  Point of example:  Glencore’s funded debt level is $50 billion and it has the capability to draw on credit lines that would take it up to $100 billion.  But the sleazebag snakeoil promoters cite Glencore as having $19 billion in “liquid” inventories so the debt number that gets quoted and widely accepted is $31 billion.   But it’s not.  It’s $50 billion.  And Glencore’s “liquid” inventory is the same base metals that are plunging in price from oversupply and lack of demand.

Furthermore, over 30% of Glencore’s EBIT is derived from what the Company lables as its “marketing” business.  But this is the legacy business that was originally Marc Rich’s commodities trading company.   It’s a corrupted commodities trading and brokerage business. That means it’s riddled with hidden counter-party risks and derivatives.  We don’t know the full extent of Glencore’s risk-exposure in this area because this an area that global financial regulators give financial firms a lot of breathing room with which to cover up the truth using insidious accounting schemes.  But what I do know for sure is that you can rip and toss out any of the research reports indicating the Glencore’s derivatives exposure is limited to $5.2 billion.   The real number is multiples of that.

With 50 billion (pounds) in funded debt and not including hidden off-balance sheet skeletons – Glencore’s debt to market capitalization (13 billion pounds) is nearly 4:1.  That is an extreme degree of leverage for a volatile, commodities-based business which is headed into an economic depression.

Glencore is a microcosm for the entire global economic and financial system.  Including and especially the United States.  And here’s the kicker.  Deutsche Bank is Glencore’s largest creditor.  We can also very safely assume that Deutsche and Glencore are counterparties to a vast web of derivatives contracts.   I’m sure Deutsche has also tried to off-load credit exposure thru the use of credit default swaps with hedge funds and other shadow banking participants.  But who are those counterparties and how is the risk of default on this “insurance” Deutsche has likely “purchased.?”  Glencore has the possibility of taking down Deutsche Bank, which in turn would take down the entire German system.

The rest will flow from there and there will be a lot of blood, including and especially in the United States.

Just like with Glencore, the true degree of ongoing economic collapse and financial risk exposure has been papered over with both QE and more debt issuance.  It won’t take much trigger a financial nuclear explosion.

I would suggest that this is why the Central Banks and the relateve propaganda machine have shifted into full-gear in their effort to prevent the price of gold from engaging in unfettered price discovery.  I would also suggest that this is why the U.S. conducted a highly visible Trident nuclear missile test along the west coast, in full view of Russia and China.

Glencore Stock Is Down 16% In Three Days

Glencore stock popped up last week after it announced a $900 million dollar streaming deal with Silver Wheaton. It involves Glencore’s share of the silver that is produced from the Antimina mine in Peru. But Glencore leveraged up to buy Xstrata in 2012, when silver was $32/oz. The amount of debt that Glencore was able to access for this transaction without doubt assumed a $32/oz valuation on Glencore’s silver assets. It only took 3 days for reality to reassert control over Glencore’s stock:

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The stock has plunged 16% since hitting 130 (British pounds) last Wednesday after the streaming deal was announced.

Glencore’s business is a general reflection of the entire global economy: A massive cesspool of too much debt supported by economic fundamentals which are quickly collapsing. Glencore’s stock has been repriced downward by 65% since May, when it hit 318 pounds.

This one is going to be a wild ride because the big banks with derivatives and debt exposure to Glencore will do their best to proliferate disinformation designed to cause upward spikes in the stock. But ultimately they can’t support of a collapsing economy and base metals commodities market.

Glencore derives 37% of operating income from copper. When the price of copper dives below $2, whichUntitled appears to be inevitable, it will be a disaster for Glencore. Citibank and Blackrock are among Glencore’s largest shareholders.

At some point in time the Fed is going to lose control of its ability to keep the U.S. stock market propped up.  That reality is inevitable but placing a bet on the timing of that reality is not easy.   However when the event occurs which triggers a complete re-pricing of the U.S. stock market, I suspect that the graph of the S&P 500 will look quite similar to graph of Glencore above.    The best advice I can give is that you should prepare accordingly, especially if you have the ability to get out of your retirement asset vehicles.

Glencore Stock Got Smoked Again Today

All we need now to pound the final death-nail into Glenron’s stock is for Cramer to issue an “all’s clear, time to load up on Glencore stock” call on Mad Money.

Down 4% on no meaningful fundamental news:

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Glencore has announced that it plans on “liquidating” some of its inventory in order to pay down its debt. Again, this article referenced Glencore’s debt load as $30 billion. But as I demonstrated with a graphic from Glencore’s financials, the Company has $50 billion in debt outstanding:

GlenronCF Debt

The $30 billion debt number is the number that Wall Street pimps and the financial media want market to believe, even though this number assumes that Glencore can sell its inventory at current market prices. Well, I’m hearing a lot of “noise” about this, let’s see it happen. If I were running a commodities hedge fund I would be shorting copper, zinc and iron ore futures ahead of this alleged inventory liquidation.

I think this report out of China is likely what spooked the markets and triggered the sell-off in Glencore stock – Steel demand evaporating at unprecedented speed:

On Wednesday, the deputy head of the China Iron and Steel Association warned that demand for the ferrous metal was waning fast. “China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed. As demand quickly contracted, steel mills are lowering prices in competition to get contracts,” Zhu Jimin, deputy head of the China Iron & Steel Association, said on Wednesday at a briefing in Beijing.

Glencore is a commodities-based debt and derivatives roach motel.  I would not be surprised if a lot of funds/banks with long-side exposure to Glencore credit default swaps – as in, Deutsche Bank – start shorting the crap out of Glencore stock to try and hedge their leveraged exposure to Glencore.

And with the global economy – including the United States – quickly sliding into a nasty recession, I can’t wait to see what kind of nonsense spews out from December’s FOMC zoo gathering to justify another rate-hike deferral.

Extreme Gold/Silver Manipulation And Potential Financial Collapse

Doc from Silver Doctors invited me back on to his weekly market wrap to discuss the extreme manipulation in the precious metals market.  In addition to the massive imbalance between paper gold/silver and the above ground available for supply for delivery should a lot more  paper longs demand delivery, the potential exists for the mother of all short squeezes in gold  and silver.

We also discuss India’s current  demand, which is misunderstood and subjected to highly misleading media reporting by the likes of Reuters, Bloomberg and the World Gold Council.  I explain why this is the case and why India gold demand is significantly higher than is currently reported.

Other topics include the why Glencore could potential an OTC derivatives catastrophe and potential black swan events that could appear before the end of 2015:

Glencore Stock Is Tanking Again

After a hearty dead-cat short-cover bounce, Glencore – aka “Glenron” – stock appears to be headed quickly south again:

Glenron

After a flurry of rumors about debt buybacks, asset sales and possible buyouts, it looks like the reality of gravity has gripped Glencore’s stock again, as Glencore’s stock bounced up to its plunging 50-day moving average and quickly headed south again.

A lot of unfounded assertions and articles written without factual references have surfaced, so I did a quick “drive-by” view of Glencore’s financials and recent presentations to get some truth. To begin with, 36% of Glencore’s operating income (EBIT) is derived from copper. Here’s what a long term copper chart looks like:

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I don’t know about anyone else, but it appears to me that the global economic conditions are headed back down to where they were in 2008/2009 and probably even lower. That implies that the price of copper has a lot further to fall.  Another 17% of Glencore’s EBIT is derived from zinc, nickel and coal. All three commodities are close to or at very long term lows, with no bottom in sight.

I think it’s fair to say that the downside risk to Glencore’s cash flow is greater than the likelihood of upside potential at this point.

As for Glencore’s debt load.  In the latest management presentation, management stated the one of its goals is to maintain a “strong investment grade rating.”  This made me laugh. Why?  Because Glencore’s debt rating is triple-B flat (BBB/Baa).  This is two downgrades away from being considered “junk.”

Original reports were that Glencore had “net debt” of $29 billion at the end of June.  But let’s examine the truth before we become poisoned with propaganda.   As it turns out, Glencore was carrying $50 billion of funded debt at the end of June (bonds + funded credit lines):

GlenronCF Debt

The graphic above is from Glencore’s 1st Half financial report.   As you can see, the “$29 billion” is derived by netting out Glencore’s “readily marketable inventories.”   It’s a number used by Wall Street’s snakeoil salesmen and their financial media propaganda vassals (Steve Liesman, Joe Lavorgna, Jim Cramer, Mark Zandi, etc).    If these inventories are “readily marketable,” then how come Glencore does not readily sell them and pay down its debt?

Because the answer is  that the inventory consists of copper, zinc, nickel and coal, all of which are in abundant supply with falling prices.  The “net debt” number is therefore highly misleading and the real debt level is $50 billion, which means that Glencore is de facto a junk bond credit.

As an aside, the other day some dweeb from BlackRock, Evy Hambro, announced publicly that he backs Glencore’s big debt reduction “plan.”   Of course he backs it – BlackRock is the fourth biggest holder of Glencore’s stock and undoubtedly one of its largest non-bank creditors.   Tell me Evy, if Glencore’s plans are executable, why don’t they start by raising $17 billion from the “readily marketable inventory?”  “Readily” means you can sell it all into a deep market bid now.

$50 billion in debt on top of what will likely be about $8.5 billion of EBITDA and likely about $2.5 billion after CAPEX for all of 2015.  Glencore’s debt level, in other words, is   In other words, is 20x cash flow after capex.  This is a staggering ratio.  It is likely that Glencore’s cash flow will continue to decline along with commodities prices and the economic contraction in China.   Glencore has thus entered the realm of the Irreversible Debt Spiral.

I remember the Enron saga vividly because I was short the stock from about $42 down to where itUntitled2 bounced.  At which point I covered and after the bounce was over  I re-shorted Enron until it went below $10. I’m not suggesting that Glencore is going to be completely incinerated the way Enron was, but there’s certainly a lot of questionable events behind the “curtain” that covers Glencore, going all the way back to the time when Glencore existed as Marc Rich’s commodity trading company.    I would suggest that anyone who might be exposed to the stock or the debt of Glencore should get out of the way, because Glencore certainly does not pass the “smell test.”

Deutsche Bank’s Balance Sheet Is Toxic Waste

Deutsche Bank has $1.5 trillion of declared asset value on top of $67 billion of net worth.   But a large portion of its assets are loans and related financing vehicles and trading positions connected to Glencore, VW, the energy sector, emerging market companies, high yield and a highly unreliably valued net derivatives position.  It Deutsche Bank has “mismarked” the value of all these assets by just 5% its net worth is wiped out.

It’s more likely that the bulk of its assets are overvalued by at least 20-30%.   And that’s in the context of the current financial and economic environment – both of which seem to be quickly deteriorating.  In other words, DB is technically insolvent.   I performed a similar analysis on some big bank balance sheets in late 2007/early 2008 and my model predicted the collapse of Countrywide, Wash Mutual and Wachovia. All of the big Wall Street banks should have collapsed but we know how that ended.

The present situation doesn’t remind me of 2008 right before Lehman blew up.  It is more like 2008 x 10.  The hidden ticking time bombs in the global financial system are significantly greater than what was ticking 2008.  And the fraud and criminality used to cover it up, along with the propaganda devised to promote the idea that the economy is recovering, is many times more worse than it was in 2008.

Craig Hemke of TFMetalsReport.com me invited onto this podcast show to discuss Deutsche Bank’s latest “fluffed up” $7 billion “intangibles” write-down, which didn’t even scratch the tip of Deutsche Banks real “iceberg” of financial toxicity.

You can listen to this discussion at here:   Deutsche Bank And The Coming Global Financial Catastrophe

A friend of mine with connections at DB told me yesterday that his sources describe Deutsche Bank as a toxic junkyard of chaos and complete unaccountability.  In my opinion the German Government/EU will eventually either have to print money and monetize DB or its demise will trigger Lehman x 10.

Something Blew Up In The Global Financial System

Earlier this week I suggested, based on the sudden big spike up in Fed reverse repos in mid-September that there was some kind of derivatives accident that required the Fed to flood the global financial system with Treasury collateral, which is used to satisfy derivatives margin calls.

This was likely connected to everything that has cratered in value since June 2014, when the price of oil crashed:    high yield bonds, industrial commodities, emerging market currencies, biotech stocks, Glencore, Volkswagen and now Deutsche Bank.

Glencore was originally said to have $30 billion of debt.  However, that number did not include the $50 billion in bank credit lines outstanding plus an undetermined amount of unsecured trade finance deals.  The total exposure to Glencore debt by banks and investors is now estimated to be as high as $100 billion – LINK.

To put this in perspective, Enron had $13 billion in debt at the time of its collapse.  Moody’s continued to assign a triple-A debt rating to Enron until shortly before it filed for bankruptcy.  I mention this to illustrate the unreliability of “expert” hear-say analysis.

With Glencore the hidden OTC derivatives skeletons are likely much more lethal to the financial system than has been estimated.   Just ask AIG and Goldman Sachs about that.

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I would suggest that the record spike up in reverse repos and the plunge in Glencore stock, after it had previously lost 56% of its value since the beginning of May, was not coincidental.

On that list of asset sectors that have imploded in price, Glencore has exposure to industrial commodities, oil and EM currencies.  It also is exposed to the price of silver and gold.  Ironically, its precious metals assets seem to be getting by far the most attention from potential buyers (royalty stream investors) as a source of cash.

But Glencore is only part of the story.  Today Deutsche Bank announced a $7 billion quarterly loss from impaired asset write-downs litigation reserves.  Some reporters have suggested this was “kitchen sink” event in which Deutsche Bank piles all of its potential losses from bad investments and business lines into one quarter in order to make its results going forward look better.

But there’s no way a “kitchen sink” maneuver will come even remotely close to covering DB’s exposure to toxic assets.   For starters, the bank has heavy exposure to Glencore.  It also is the largest lender to Volkswagon and Volkswagons suppliers. It also has rather  large exposure to emerging market currencies and related derivatives.

Deutsche Bank, at $75 trillion in holdings, is the largest derivatives player in the world now.  This amount of derivatives is 20x greater than the GDP of Germany.   And that’s DB’s “net” exposure.   As counterparties default, that $75 trillion blossoms at a geometric rate. Deutsche Bank is too big for the German Government to bail-out without implementing Weimar-era money printing.  It’s balance sheet is a nuclear cesspool of toxic assets.

The $7 billion charge to earnings this quarter is unequivocally not  “kitchen sink” accounting gamesmanship.  It was either wishful thinking by upper management – not likely – or it was the result of a concerted effort by the bank to put out a shock-value number that reflected the expectation by analysts and investors that DB would have to admit to a large loss this quarter given the nature of its assets. I would suggest that it a mere fraction of the true mark to market losses sitting on and off DB’s balance sheet.  For me it’s a number so unrealistic that it’s silly.

As of its June 30 “interim” financial report, DB had $1.51 trillion in assets supported by a razor thin $67 billion of book value.  That’s 22x leverage.   This number does not reflect a realistic assessment of the value of its derivatives.  At 22x leverage, DB’s balance sheet in and of itself is massive OTC derivative.  

DB is not only now the lethal sovereign risk of Germany, it is the sovereign risk of the entire EU. Whereas Bear Stearns the Lehman triggered the Great Financial Collapse in the U.S., Deutsche Bank could potentially trigger the collapse of the global financial system.

The graph above is evidence that a massive monetization operation was implemented by the Fed in mid-September in an effort to contain the damage from something big that has blown  up behind the facade of fraud that has been erected over several years by western Central Banks and their Too Big To Fail appendages.

All Ponzi schemes eventually fail.  The global financial Ponzi scheme, of which the U.S. financial system is the largest contributor, will end in some sort of financial Apocalypse…

Short/Sell This Bounce In Glencore Stock AND Short The Bonds

Glencore stock has bounced at 16% today on a rumor that some investment group could take Glencore private.  Too be sure, there’s plenty of idiots out there with enough cash to pay 9x revenues for The Onion’s business section (Business Insider), but it’s another matter to find enough banks and institutional investors investors willing to finance a massive $40-50 billion buyout of an overleveraged commodity company.  This is especially true given that the outlook for Glencore’s base metal products is very grim given that the world is on the cusp on the worst economic depression in history.

The bonds have not moved in response to that rumor, with the Glencore 5.95’s of 2020 trading in the 70’s.  That’s 70 cents on the dollar.  That’s roughly a YTM of 6.44%, or about 500 basis points off the 5-yr Treasury.  That’s the equivalent of a low-B or triple-C rated bond, which reflects a fairly high probability of eventual insolvency.   Furthermore, the cost of credit default risk insurance got more expensive today.   Both of these markets are telling us that, not only was the rumor absurd but that the credit markets are expecting a turn for the worse.

Glencore is now going to conduct a fire sale of assets in order to start addressing its $30 billion in debt.   This is the absolute worst time to sell assets which derive their intrinsic value from base metals, energy and agricultural products.   This is the classic sign of a “fire sale” being conducted by a company that is walking the plank.   It also tells us that the willingness of the credit market – which have behaved like moronic drunken sailors for the last 5 years – is unwilling to chase bad money with more printed money.   

Glencore is entering the irreversible death spiral.   We used call the bonds issued by companies in Glencore’s predicament, “IDS bonds” – irreversible debt spiral bonds.  The only event that will save Glencore is a massive helicopter drop of more printed money and I doubt even that will move the needle on commodity prices (except gold and silver, of course) other than a brief knee-jerk bounce.  QE does not stimulate real economic growth.

Perhaps the best indicator that Glencore is poisonous is the fact that Carl Icahn is not trying to get involved.  In my opinion he sniffs out opportunities to capitalize on bubbling Ponzi schemes better than any investor I’ve observed.  The difference between Carl and the crooks who bought Glencore is that Icahn doesn’t get involved unless he has a “greater fool” in his back pocket.

The Glencore equity holders do not have a greater fool.   I take that back:  the bondholders who financed the original buyout are the greater fools.  And the greatest fools are participants in the pension plans managed by the greater fool institutional investors.

Not only is Carl Icahn not sniffing around Glencore’s back-side, he’s issued a statement today which indicates he’s going to take his chips off the table and find a different game to play.  The greater fools who will pay more than the previous fools are likely gone altogether from this market. But there will plenty of greatest fools who will try to catch falling knives…