Tag Archives: Wall Street

The $100 Trillion Reason the Fed is Terrified of Deflation

by Phoenix Capital Research

Falling Prices Ahead

Over the last few months, Janet Yellen, head of the Federal Reserve Bank repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy.

And yet, repeatedly, the head of the Fed admitted, in public, that deflation can in fact be positive.

How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?

The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.

Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.

However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%… and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.

This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping.

https://i0.wp.com/www.silverbearcafe.com/private/images/inflation2.jpg

This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.

This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.

If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET.

However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.

Advertisements

Something Rotten Is Piling Up In This Economy

Total US business inventories balloon to Lehman-Moment levels

https://farm4.staticflickr.com/3912/15252459662_c459d49944_h.jpgby Wolf Richter

“We do have more work to do in the US,” admitted John Bryant, CEO of Kellogg’s which makes Pringles, Pop Tarts, Kashi Cereal, and a million other things that consumers are increasingly reluctant or unable to buy. He was trying to explain the crummy quarterly results and the big-fat operating loss of $422 million, along with a lousy outlook that sent its stock careening down 4.5% during the rest of the day.

Then in the evening, ConAgra, with brands like Healthy Choice for consumers and something yummy they call “commercial food” for restaurants, cut its fiscal 2015 earnings guidance, citing a laundry list of problems, including the “strengthening dollar” and “a higher-than-planned mark-to-market loss from certain commodity index hedges.” But it blamed two operating issues “for the majority of the EPS cut: “a highly competitive bidding environment” and “execution shortfalls.”

After which confession time still wasn’t over: it would be “evaluating the need” for additional write-offs. What had gone well? Cost cutting – “strong SG&A efficiencies,” the statement called it. But the pandemic cost-cutting by corporate America represents wages and other companies’ sales.

It’s tough out there for companies that have to deal with the over-indebted, under-employed, strung-out American consumers with fickle loyalties and finicky tastes, who have been subjected to this corporate cost-cutting for years.

And so retail sales, according to the Commerce Department, dropped a seasonally adjusted 0.8% in January. That’s on top of a 0.9% decline in December. The hitherto inconceivable is happening: folks are saving money on gas, but not everyone is immediately spending all that money! It’s so inconceivable that I warned about it and other effects of the oil price crash two months ago: “Wall Street promises a big boost to US GDP,” I wrote. “What have these folks been smoking?”

But even excluding gasoline sales, retail sales were flat last month after edging down 0.2% in December. And sure, some of the savings from gasoline will be spent eventually, but there are plenty of Americans with enough money left over every month to where their spending patterns aren’t influenced by the price of gas.

But this report, an advance estimate that is subject to potentially large revisions, covers only spending at retailers and restaurants, a portion of total consumer spending, which includes healthcare and anything else that consumers pay out of their noses for. And year-over-year, retail sales actually rose 3.3%, with food services sales up 11.3%, auto sales up 10.7% thanks to prodigious subprime financing, while sales at gas stations sagged 23.5%.

So from just the retail sales report, the consumer situation remains murky.

But there is another gauge that is moving deeper and deeper into the red. It has been deteriorating consistently since last summer. A couple of days ago, I reported that wholesale inventories were ballooning in relationship to sales, a red flag in our era when just-in-time delivery and lean inventories have been honed into an art to minimize how much working capital and physical space gets tied up. The crucial inventories-to-sales ratio for wholesalers had reached the highest level since the financial crisis.

Now the Commerce Department released total business sales and inventories for December, which include sales and inventories at retailers, wholesalers, and manufactures – the entire channel. And it’s even worse.

Combined sales by retailers, wholesalers, and manufacturers, adjusted seasonally but not for price changes, dropped 0.9% from November, and was up only 0.9% from December 2013 – not even beating inflation.

Retailers were able to keep their inventories stable in relationship to sales, which inched up 2.6% year-over-year. So the inventories-to-sales ratio remained at 1.43.

Further up the channel, wholesalers saw sales rise only 1.43%, but their inventories stacked up, and the inventories-to-sales ratio hit 1.22, up from 1.16 a year earlier.

And manufactures? That great “manufacturing renaissance” in the US? Year over year, sales declined 0.9%, but inventories rose 2.7%, and their inventories-to-sales ratio jumped to 1.34 from 1.29 a year earlier.

For all three combined, the inventories-to-sales ratio rose to 1.33 in December, after climbing methodically since summer. The last time it was rising to this level was in September 2008 – the Lehman Moment – when sales up the entire channel were beginning to grind to a near halt, a terrible condition that morphed into the Great Recession. That propitious September, the inventories-to-sales reached 1.32, still a smidgen below where it is today:

US-Business-inventories-sales-ratio-2005_2014-Dec

Optimistic merchants and manufacturers expect sales to rise. They plan for it and order accordingly. If sales boom and draw down inventories, the inventories-to-sales ratio remains lean. That’s the rosy scenario. But that hasn’t been happening recently.

In our less rosy reality, sales are not keeping up with expectations, and inventories are piling up. The increase in inventories adds to GDP, and so from that point of view, they beautify the numbers. But from the business point of view, growing inventories caused by lagging sales can turn into a nightmare. And unless sales can somehow be cranked up for all businesses across the entire country to bring down these inventories, orders to suppliers will be trimmed – and that ricochets nastily around the economy with all kinds of unpleasant secondary fireworks.

World War III Has Started

by Greg Hunter

Analyst and trader Gregory Mannarino says, “We are deeply engaged in an economic war against Russia. This is a collective collusion that is very scary.

“We are watching epic events occur. People have been saying for years, where is the collapse, where is it? It’s now.

“The strength of the U.S. dollar is a fear trade. When you see the dollar going parabolic with a flattening yield curve, this is a huge tell.”

“People need to understand here that economic warfare is war. World War III, beyond any shadow of a doubt, is already here.”

The Baltic Dry Index is another tell that says the economy is not good because the shipping of goods has come to a crawl.

Money Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start

https://i2.wp.com/www.petrorigs.com/files/cache/45a05a294860772d6ff23262800daa1f_f171.JPG
by
Wolf Richter

When money was growing on trees even for junk-rated companies, and when Wall Street still performed miracles for a fee, thanks to the greatest credit bubble in US history, oil and gas drillers grabbed this money channeled to them from investors and refilled the ever deeper holes fracking was drilling into their balance sheets.

But the prices for crude oil, US natural gas, and natural gas liquids have all plunged. Revenues from unhedged production are down 40% or 50%, or more from just seven months ago. And when the hedges expire, the problem will get worse. The industry has been through this before. It knows what to do.

Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.

It had had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.

To prop up its shares, it announced that it would increase its dividend by 25%. And yes, it blew $1.1 billion in the quarter and $4.7 billion in the year, on share buybacks, a program that would continue, it said. Financial engineering works. On Thursday, its shares were down 35% since June. But on Friday, after the announcement, they jumped 6%.

All these companies had gone on hiring binges over the last few years. Those binges are now being unwound. “We want to live within our means,” is how Suncor CFO Alister Cowan explained the phenomenon.

Because now, they have to.

Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited.

Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.

California Resources, for example. This oil-and-gas production company operating exclusively in oil-state California, was spun off from Occidental Petroleum November 2014 to inflate Oxy’s share price. As part of the financial engineering that went into the spinoff, California Resources was loaded up with debt to pay Oxy $6 billion. Shares started trading on December 1. Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks.

Its junk bonds – 6% notes due 2024 – were trading at 79 cents on the dollar today, down another 3 points from last week, according to S&P Capital IQ LCD.

Others weren’t so lucky.

Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR. They loaded it up with $3.6 billion in new debt and saddled it with “management fees.” Since its acquisition, it lost over $3 billion, the Wall Street Journal reported. This is the inevitable result of fracking for natural gas whose price has been below the cost of production for years – though the industry has vigorously denied this at every twist and turn to attract the new money it needed to fill the holes fracking for gas was leaving behind.

Having burned through most of its available credit, Samson is getting rid of workers and selling off a big part of its oil-and-gas fields. According to S&P Capital IQ LCD, its junk bonds – 9.75% notes due 2020 – traded at 26.5 cents on the dollar today, down about 10 points this week alone.

Halcón Resources, which cut its 2015 budget by 55% to 60% just to survive somehow, saw its shares plunge 10% today to $1.20, down 85% since June, and down 25% since January 12 when I wrote about it last. Its junk bonds slid six points this week to 72 cents on the dollar.

Hercules Offshore, when I last wrote about it on October 15, was trading for $1.47 a share, down 81% since July. This rock-bottom price might have induced some folks to jump in and follow the Wall-Street hype-advice to “buy the most hated stocks.” Today, it’s trading for $0.82 a share, down another 44%. In mid-October, its 8.75% notes due 2022 traded at 66 cent on the dollar. Yesterday they traded at 45.

Despite what Wall-Street hype mongers want us to believe: bottom-fishing in the early stages of an oil bust can be one of the most expensive things to do.

Paragon Offshore is another perfect example of Wall Street engineering in the oil and gas sector. The offshore driller was spun off from Noble in early August 2014 with the goal of goosing Noble’s stock price. They loaded up the new company with debt. As part of the spinoff, it sold $580 million in junk bonds at 100 cents on the dollar. When its shares started trading, they immediately plunged. By the time I wrote about the company on October 15, they’d dropped 68% to $5.60. And the 6.75% notes due 2022 were trading at 77 cents on the dollar. Then in November, Paragon had the temerity to take on more debt to acquire Prospector Drilling Offshore.

Two days ago, Moody’s downgraded the outfit to Ba3, with negative outlook, citing the “rapid and significant deterioration in offshore rig-market fundamentals,” “the high likelihood” its older rigs might “not find new contracts,” and the “mostly debt-funded acquisition” of Prospector Drilling. The downgrade affects about $1.64 billion in debt.

Today, Paragon’s shares trade for $2.18, down another 61% since October 15. Its junk bonds are down to 58 cents on the dollar.

Swift Energy – whose stock, now at $2.37, has been declining for years and is down 84% from a year ago – saw its junk bonds shrivel another eight points over the week to 36 cents on the dollar.

“Such movement demonstrates the challenging market conditions for oil-spill credits, with spotty trades and often large price gaps lower,” S&P Capital IQ LCD reported.

It boils down to this: these companies are locked out of the capital markets for all practical purposes: at these share prices, they can’t raise equity capital without wiping out existing stockholders; and they can’t issue new debt at affordable rates. For them, the junk-bond music has stopped. And their banks are getting nervous too.

Their hope rests on cutting operating costs and capital expenditures, and coddling every dollar they get, while pushing production to maximize cash flow, which ironically will contribute to the oil glut and pressure prices further. They’re hoping to hang on until the next miracle arrives.


These Two Charts Show the True Fiasco of US Oil & Gas

https://i0.wp.com/static.panoramio.com/photos/large/78033170.jpgby Wolf Richter

Rig count for oil and for gas: two separate fiascoes

Oil-and-gas exploration and production companies in the US have announced cutbacks of 30%, 40%, or 50% and beyond in operating budgets and capital expenditures. They want to survive in an environment of plunging oil and gas prices, and hence plunging revenues. They loaded up on debt, and that debt is now exacting its pound of flesh.

These companies lease drilling rigs from oil-field services companies, such as Halliburton. When the going gets tough and they run out of borrowed money, they stop leasing rigs, and they try to get out from under the rigs that they have already contracted for. It’s a slow process. But it has begun.

The number of rigs drilling for oil in the US dropped another 55 in the latest week to 1,366, the lowest since October 2013, down 15.1% from the peak in the second week of October last year, when 1,609 rigs were drilling for oil.

The rig count had already dropped by 61 in the prior week, the largest week-to-week drop in Baker Hughes’ data series going back to 1987. In percentage terms (-4.12%), it had been the largest drop since the Financial Crisis.

In both weeks combined, the rig count plunged by 116, or 7.8%. The last time it started plunging like this for two weeks was in December 2007 (also down 7.8%, ironically), at the cusp of the stock market crash.

The standouts:

California lost 4 active oil and gas rigs in the latest week, bringing the rig count to 18 (including 1 offshore), from 45 rigs (including 2 offshore) reported on November 21. In those eight weeks, the rig count plunged 60%! Drilling is coming to a halt in California.

North Dakota, second largest oil-producing state, lost another 6 rigs in the latest week, to 156 active rigs. Down 13.3% in five weeks.

Texas, the largest oil-producing state, got hit the hardest, not in percentage terms – that honor belongs to California – but in number of rigs that have been evaporating: 44 in the latest week. The oil and gas rig count is now at 766, the lowest since March 2011. That’s down 15.4% from the peak of 905 rigs reported on November 21.

This is what drilling activity looks like across the US:

US-rig-count_1988_2015-01-16=oil

As I wrote a few days ago in This Is Just the Beginning of the Great American Oil Bust:

Estimates vary widely as to how far the rig cutting will go. Barclays’ analyst Anderson estimated that at least 500 rigs could be idled in the American oil patch by the end of the year. Raymond James analyst Praveen Narra said that his firm estimated that up to 850 rigs could be idled this year. If 60% are idled, as was the case during the Financial Crisis, it would mean that 965 rigs would be taken out of service.

Over the last 10 years, the oil and gas business in the US has become huge, and the unwind will be huge as well.

Rigs drilling for natural gas follow a different pattern. The rig count collapsed years ago as the price of natural gas fell below the cost of production, after a phenomenal no-holds-barred fracking boom in the years before the financial crisis, which culminated in August 2008 when over 1,600 gas rigs were active. This resulted in a “gas glut” that killed prices, pushing them below the cost of production.

The rig count collapsed in two phases, first during the financial crisis, and then after a sucker rally, during the “gas glut.” It has turned into a true fiasco for the industry and increasingly for its investors:

US-rig-count_1988_2015-01-16=gas

But why is production still rising after this kind of plunge in drilling activity?

There are a number of reasons, but one stands out: Numerous of these newly drilled and completed or partially completed wells couldn’t be hooked up to pipelines because the growth of the pipeline infrastructure hadn’t kept up with the drilling boom. These wells – by some estimates, 1,300 in the Marcellus alone – just sat there, waiting for the pipeline. Over the last two years, pipeline infrastructure has reached these wells, and despite the plunge in drilling activity, “production” – which is counted when natural gas reaches a trading hub, not when the well is drilled – has soared in 2014.

So the rig count for natural gas dropped 19 in the latest reporting week, to 310, matching the low of June 2014, levels not seen since May 1993! Yet, in the overall fiasco that natural gas drillers are facing, this is just another minor downtick, and barely visible on the chart.

This Chart Makes It Look Like It’s All Over In Venezuela

Supporter of Venezuela’s late President Hugo Chavez holds a doll of him as she stands outside a military academy where the funeral ceremony for Chavez is held, in Caracas March 8, 2013.  Article source: Business Insider

Collapsing oil prices have a turned a difficult economic situation into a dire one. Oil exports brought in 60% of the country’s revenue.

And now, according the UBS, Venezuela has an 82% chance of collapsing within a year. The country will no longer be able to make payments to foreign investors without oil revenue as it was.

Economist Rafael del Fuente wrote in a recent note:

By the government’s own recognition, the economy contracted by 4% in the first three quarters of 2014;
inflation is running at close to 65%; the fiscal deficit has shot up above 15% of GDP by most estimates; and the black market exchange rate is trading at VEF180 to the dollar, almost 30 times higher than the official Cencoex rate.

Wall Street is watching and waiting, which is why the spread on Venezuela’s 5 year credit default swap — basically debt insurance — has spiked. You just don’t see charts like this everyday people.

Meanwhile, as foreign investors wait for the day Venezuela calls them and says, ‘sorry, we don’t have the cash’, ordinary Venezuelans suffer. The government cut them loose a while ago, doing nothing to curb rampant inflation (at 60%) and shortages of goods and food. People wait in line for days to enter grocery stores with empty shelves.

venezuelan cds skitch

On hearing this, the Venezuelan Minister of Food said — “I’ve been in tons of lines. I went to my favorite sports team’s game this weekend, and…I went to go buy an arepa [Venezuelan sandwich] … and I had to wait in line there, too.”

The Spike Series By Cold Steel

Spike Series

Cold Steel Bowie Spike Neck Knife, 53NBS. Entirely re-engineered in 2013, this Spike series continue to raise the bar for neck knives! Thin, light and super-tough, their razor sharp, zero ground blades, are complemented by heavily scalloped, textured handle scales that offer a comfortable, secure grip.
Integral quillons provide a safe stop for index finger and thumb, while the textured Faux G-10 provides excellent positive traction even when your hands are cold, wet and slippery.

Available in four distinctive blade shapes (Bowie, Drop Point, Tokyo and Tanto point) they offer all the strength of a solid steel one-piece construction (much stronger than any tactical folder and even rivaling the strength of some boot knives) while still being light enough to carry all day without fatigue.

The brand new Spike series come complete with all-new Secure-Ex sheaths that provide even greater retention and safety. Super lightweight (weighing in at 3oz. in the sheath!) the Spikes can be comfortably worn around the neck 24/7 by using the black bead lanyard provided, or carried on a waistband or belt by taking advantage of their new Tek-Lok™ compatible design.

Easily concealed, razor sharp and light as a feather — the Spike series by Cold Steel!

Good Alternative

Furious 7 – Trailer