What Does The Turmoil in Greece Mean for Your Money : Update

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UPDATE No Vote Pulls Ahead

Cash within the Greek banking system will run out in just a few short days, a senior banking source has told me, amid fears that the financial crisis will force Greek companies to start laying off workers on Monday.

“This is a fully fledged banking and economic crisis,” said the despairing source. “The rate of cash withdrawals has trebled in recent days, even with the limits.”

Since I arrived in Athens, I have witnessed Greeks queuing at those cash machines that are working, to withdraw the maximum amount of cash they’re allowed under the restrictions implemented last Monday.

“People are taking out money around the clock, out of ATMs, on the internet transferring to HSBC – you name it, they’re finding ingenious ways to get their savings.”

He added: “We desperately need a solution. It will not be long before our country is on its knees, with the damage so great that it will be permanent.”

After the referendum polls close tonight, Greek Finance Minister Yanis Varoufakis will meet bank bosses, grouped together under the auspices of the Hellenic Bank Association, and the governor of the Bank of Greece, Yannis Stournaras, I have learned.

All options currently remain open. Greece could do what Cyprus did: default on some of its debts while staying in the euro. Tsipras could decide to accept the tax increases and the pension cuts demanded by the creditors while receiving only minor and vague concessions on debt relief. Greece could have run out of money and be out of the euro within 24 hours.

Some things though are clear.

Firstly, the Greeks have said no to austerity rather than to membership of the euro. Tsipras does not have a mandate to bring back the drachma, even if that is where this all ends.

Secondly, the referendum result means both economic and political chaos. As Joan Hoey of the Economist Intelligence Unit put it even before the vote: “Greece is angry and fearful; divided and conflicted.”

Inevitably, Greece faces a fresh period of acute economic pain. It will take months, if not years, to recover from the events of the past week, even if there is a speedy resolution to the crisis. The Greek economy has already shrunk by a quarter in the past five years.

Thirdly, it is no longer possible to kick the can down the road. Any solution to the Greek crisis that involves more austerity without measures designed to get the economy growing again and to make the country’s debt sustainable will be a pyrrhic victory. The upshot would be a period of feeble growth and mounting indebtedness that would bring the possibility of Grexit back on the agenda. Sooner rather than later, in all likelihood.

Fourthly, this is the most serious crisis in the euro’s relatively short history. There have been confident pronouncements that Greece has been quarantined so that there will be no knock-on effects on the rest of the eurozone. Such sentiments will be tested to the full if there is a Grexit. Share prices will inevitably take a tumble when the financial markets open for business, but more attention should be paid to the bond yields – or interest rates – on the sovereign debt of other eurozone members seen as vulnerable.

The short-term problem for Merkel and Hollande is obvious. If they take a tough line in talks with Athens, they will get the blame for Greece’s departure from the single currency.

The longer-term problem is perhaps even more serious. Greece has highlighted the structural weaknesses of the euro, a one-size-fits-all approach that doesn’t suit such a diverse set of countries. One solution would be to create a fiscal union to run alongside monetary union, with one eurozone finance minister deciding tax and spending decisions for all 19 nations. This, though, requires the sort of solidarity notable by its absence in recent weeks. The European project has stalled.

So, this story is not over. In Homer’s epic tale, it took Odysseus 10 years to return to his Ithaca home from the Trojan war, losing all his men along the way. Greece’s modern odyssey, similarly, is only half over. The next chapter begins on Monday).

Expect lower stock prices.

Faced with an apocalyptic unemployment rate of 28%, voters in Greece have drawn the line on austerity measures that have mired the country in a crisis rivaling that of the Great Depression. In the worst case, the move could lead to Greece’s exit from the European monetary union. In the best case, it will produce much-needed debt relief for the country’s ailing economy. But either way, it’s prudent to assume the turmoil will roil equity markets both here and abroad.

The issue came to a head earlier this week when Greece’s “radical left” Syriza party won a plurality of votes in the latest election. Led by 40-year-old Alexis Tsipras, Syriza campaigned on a platform to ease the “humiliation and suffering” caused by austerity. This includes debt relief and rolling back steep spending cuts enacted by Greece’s former government in exchange for financing from the International Monetary Union and other members of the European Union.

To say Greece has paid dearly for these cuts would be an understatement. The consensus among mainstream economists is that austerity during a time of crisis exacerbates the underlying issues. We saw this in Germany after World War I when France and Great Britain demanded it pay colossal war reparations. We saw it throughout Latin America following the IMF’s structural adjustments of the 1980s and 1990s. And we’re seeing it now in Greece and Spain, where unemployment has reached levels not seen in the developed world since the Great Depression.

The problem for Greece is that Germany and other fiscally conservative European countries aren’t sympathetic to its predicament. They see Greece’s travails as its just deserts. They see a fiscally irresponsible country that exploited its membership in the continent’s monetary union in order to borrow cheaply and spend extravagantly. And they see an electorate that isn’t willing to accept the consequences of its government’s actions.

To a certain extent, Greece’s critics are right. Over the last decade, its debt has ballooned. In 2004, the country’s debt-to-GDP ratio was 97%. Today, it is 175%. This is the heaviest debt load of any European country relative to output.

It accordingly follows that the European Union stands once again at the precipice of fracturing. If the Syriza party sticks to its demands and Greece’s neighbors won’t agree to relief, then one of the few options left on the table will be for Greece to exit the monetary union and abandon the euro. Doing so would free the country to pursue its own fiscal and monetary policies. It would also almost inevitably trigger a period of sharp inflation in a reinstituted drachma.

This isn’t to say global investors should be petrified at the prospect of even the most extreme scenario — that of Greece abandoning the euro. In essence, the euro is nothing more than a currency peg that fossilized the exchange rates between the continent’s currencies in 2001. By going off it, Greece would essentially be following in the footsteps of the Swiss National Bank, which recently unpegged the Swiss franc from the euro after a drop in the latter’s value made maintaining the peg prohibitively expensive.

A more complicated question revolves around the fate of Greece’s sovereign debt. Seceding from the monetary union won’t eliminate its obligations to creditors. It likely also won’t change the fact that the country’s debt is denominated in euros. Thus, if Greece were to exit the euro and experience rapid inflation, the burden of its interest payments would get worse, not better. This would make the prospect of default increasingly attractive if not necessary in order to reignite economic growth.

But investors have shouldered sovereign debt repeatedly since the birth of international bond markets. Just last year, Standard & Poor’s declared that Argentina had defaulted after missing a $539 million payment on $13 billion in restructured bonds — restructured, that is, following the nation’s 2002 default. Yet stocks ended the year up by 11.5%. The same thing happened when Russia defaulted in 1998. Despite triggering the failure of Long Term Capital Management, a highly leveraged hedge fund that was ultimately rescued by a consortium of Wall Street banks, stocks soared by 26.7% that year.

Given all this, the biggest impact on investors, particularly in the United States, is likely to make its way through the currency markets. When fear envelopes the globe, investors flee to safety. And in the currency markets, safety is synonymous with the U.S. dollar. Over the last year, for instance, speculation about quantitative easing by the European Central Bank, coupled with the scourge of low oil prices on energy-dependent economies such as Russia and Mexico, has increased the strength of the dollar. This will only grow more pronounced if the U.S. Federal Reserve raises short-term interest rates later this year.

The net result is that American companies with significant international operations will struggle to grow their top and bottom lines. This is because a strong dollar makes American goods more expensive relative to competitors elsewhere. Consumer products giant Procter & Gamble PG 0.26% serves as a case in point. In the final three months of last year, P&G’s sales suffered a negative five percentage point impact from foreign exchange. As Chairman and CEO A.G. Lafley noted in Tuesday’s earnings release:

The October [to] December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way. While we continue to make steady progress on the strategic transformation of the company — which focuses P&G on about a dozen core categories and 70 to 80 brands, on leading brand growth, on accelerating meaningful product innovation and increasing productivity savings — the considerable business portfolio, product innovation, and productivity progress was not enough to overcome foreign exchange.

With this in mind, it seems best to assume revenue and earnings at American companies will take a hit while Europe works toward a solution to Greece’s problems. In addition, as we’ve already started to see, the hit to earnings will be reflected in lower stock prices. There’s no way around this. But keep in mind that we’ve been through countless crises like this is in the past, and the stock market continues to reward long-term investors for their patience and perseverance.

More Limbo

“Irrespective of the referendum outcome, it is unlikely that there is an immediate resolution to the crisis the next day,” Marco Stringa, an economist at Deutsche Bank AG in London, wrote in a research note before the polls closed. “A ‘yes’ vote would be significantly more likely to lead to a quicker agreement with the creditors, but not without risks. Ultimately, the economic emergency will remain a key catalyst.”

A “yes” could force the end of the Tsipras government and fresh elections, a possibility to which Finance Minister Yanis Varoufakis alluded on Thursday. A result so close that it’s inconclusive may only extend the current stalemate, which began when Tsipras called the surprise plebiscite on June 27.

Some Greeks are despairing of their country’s situation.

“This vote is a test of our collective IQ,” said Hara Nikolou, a retired biochemist who lives on the island of Serifos, before casting her “yes” vote. “If our society opts to turn this country into Balkan wasteland, I don’t want to continue living here.”

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Money Managers Brace for Bond-Market Collapse

TheNewBondMarket

 

 

TCW Group Inc. is taking the possibility of a bond-market selloff seriously.

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

“We never realize what the tipping point is until after it happens,” said Jack A. Bass,  head of trading for Jack A. Bass and Associates. “We’re as defensive as we’ve been since pre-crisis.”

Bass isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

Cudzil’s reasoning is that the Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.

The shift in policy comes amid a global backdrop that’s not exactly rosy. The Chinese economy is slowing, the outlook for developing nations has grown cloudy, and the tone of Greece’s bailout talks changes daily.

Distorted Markets

Of course, U.S. central bankers are aiming to gently wean markets and companies off zero interest-rate policies. In their ideal scenario, borrowing costs would rise slowly and steadily, debt investors would calmly absorb losses and corporate America would easily adjust to debt that’s a little less cheap amid an improving economy.

That outcome seems less and less likely to Cudzil, as volatility in the bond market climbs.

“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” said Cudzil, who traded high-yield bonds at Morgan Stanley and Deutsche Bank AG . He declined to specify the exact amount of cash he’s holding in the funds he runs.

Price swings will also likely be magnified by investors’ inability to quickly trade bonds, he said. New regulations have made it less profitable for banks to grease the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.

To boot, record-low yields have prompted investors to pile into the same types of risky investors — so it may be even more painful to get out with few potential buyers able to absorb mass selling.

“We think the market’s telling you to upgrade your portfolio,” Bass said. “Whether it happens tomorrow or in six months, do you want look silly before the market sells off or after?”

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Stock Market Top ? : The Q Ratio Indicator Says Watch Out Below

 

If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.

The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets — higher than any time other than the Internet bubble and the 1929 peak.

Valuation tools are being dusted off around Wall Street as investors assess the staying power of the bull market that is now the second longest in 60 years. To Andrew Smithers, the 77-year-old former head of SG Warburg’s investment arm, the Q ratio is an indicator whose time has come because it illuminates distortions caused by quantitative easing.

“QE is a very dangerous policy, in my view, because it has pushed asset prices up and high asset prices, we know from history, are very dangerous,” Smithers, founder of Smithers & Co. in London, said in a phone interview. “It is very strongly indicated by reliable measures that we’re looking at a stock market which is something like 80 percent over-priced.”

Dissenting Views

Acceptance of Tobin’s theory is at best uneven, with investors such as Laszlo Birinyi saying the ratio is useless as a signal because it would have kept you out of a bull market that has added $17 trillion to share values. Others see its meaning debased in an economy whose reliance on manufacturing is nothing like it used to be.

Futures on the S&P 500 expiring next month slipped 0.1 percent at 9:36 a.m. in London.

To Smithers, the ratio’s doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth, he said.

Standard & Poor’s 500 Index members last year spent about 95 percent of their profits on buybacks and dividends, with stock repurchases exceeding $2 trillion since 2009, data compiled by S&P Dow Jones Indices show.

In the first four months of this year, almost $400 billion of buybacks were announced, with February, March and April ranking as three of the four busiest months ever, according to data compiled by Birinyi Associates Inc.

Slow Spending

Spending by companies on plants and equipment is lagging behind. While capital investment also rose to a record in 2014, its growth was 11 percent over the last two years, versus 45 percent in buybacks, data compiled by Barclays Plc show.

With equity prices surging and investment growth failing to keep pace, the Q ratio has risen to 58 percent above its average of 0.70 since 1900, according to data compiled by Birinyi and the Federal Reserve on market and asset values for non-financial companies. Readings above 1 are considered by some to be too high and the ratio has exceeded that threshold only 12 percent of the time, mostly between 1995 to 2001.

That’s nothing to be alarmed about because the American economy has become more oriented around services than manufacturing, according to George Pearkes, an analyst at Harrison, New York-based Bespoke Investment Group LLC. Nowadays, companies like Apple Inc. and Facebook Inc. dominate growth, while decades ago, it was railroads and steelmakers, which rely heavily on capital.

Mean Reversion

“Does that necessarily mean that the Q ratio should be as high as it is right now? I don’t know,” Pearkes said by phone. “With those sorts of long-term indicators, they can sometimes mean that the market is overvalued. But the reversion to the mean on them is usually going to take a lot longer than most people’s time frame.”

Any investors who based their investment decisions on the Q ratio would have missed most of the rally since 2009, according to Jeffrey Yale Rubin, director of research at Birinyi’s firm. The measure rose above its historic mean three months into this bull market and since then, the S&P 500 has climbed 131 percent.

“The issue we have with Tobin Q is that it does a very poor job at timing the market,” Rubin said from Westport, Connecticut. “The followers of Tobin Q never told us to buy in 2009, yet now we are warned that we should sell. Our response is sell what? We were never told to buy.”

Bond Yields

Everyone from Janet Yellen to Warren Buffett has spoken cautiously on stock valuations in the past month. Both the Fed chair and chief executive officer of Berkshire Hathaway Inc. said prices are at risk of getting stretched should bond yields increase. The rate on 10-year Treasuries slipped last week to 2.14 percent while the S&P 500 gained 0.3 percent.

“It’s probably a sensible configuration for the stock market to be overvalued because competing investments are so poor,” Robert Brusca, president of Fact & Opinion Economics in New York, said by phone. “As an investor, you’re not just looking at the value of the firm, but the value of the firm relative to other things you can do with your money.”

At 2,260 days, the bull market that began in March 2009 this month exceeded the 1974-1980 rally as the second longest since 1956. While measures such as price-to-earnings ratios are holding just above historical averages, the bull market’s duration is sowing anxiety among professionals who watched the previous two end in catastrophe.

“We’re still close enough to that prior experience and that hold-over effect is still there,” Chris Bouffard, chief investment officer who oversees more than $10 billion at Mutual Fund Store in Overland Park, Kansas, said by phone. “When you start to see prior cycle peaks on the chart like Tobin Q and any other valuation metrics that people are putting up there, it looks dramatic, stark and scary.”

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Penn West Petroleum Ltd. : Long Time of Hardship Continues

Image result for oil price cartoons

Dividend: Q1 2015

CDN: $0.01

TSX : PWT

$1.81

Change : $ -0.10 (-5.236%)
Vol : 4701451

NYSE : PWE

$1.42

Change : $ -0.10 (-6.579%)
Vol : 7229947

Tremendous potential – but they used to say the same thing about me.The rout in crude oil is turning out to be more than just a blip, and producers that are feeling the pinch may have to start selling.

The struggle to outlast sub-economic oil prices took another ugly turn Thursday as Penn West Petroleum Ltd. all but eliminated its once-hefty dividend and started discussions to ease the terms of its debt.

The restructured company has gotten so lean, CEO David Roberts said it now offers great “torque” on an oil price recovery.

“The management of this company and the board are strongly aligned with shareholders, with significant amount of personal capital at risk, and focused on redefining oil and gas excellence in Canada,” Mr. Roberts said on a conference call to discuss fourth-quarter results.

But the latest measures continue a long time of hardship at Penn West, which over the past year has undergone a major restructuring to cut costs and re-invent itself as a low-cost producer focused on three conventional light oil plays in Alberta, then had to address an accounting scandal involving previous management that led to a re-examination of financial results for 2014 and four previous years.

By December, just after Mr. Roberts thought the company had finally “turned the corner,” oil price collapsed and “served to overpower our 2014 results,” he said in the call.

Though “we think our path to success is firm,” the company ended the year with a loss of $1.77-billion in the fourth quarter, compared to a loss of $675-million in the same year-ago period, largely due to impairments of goodwill and property, plant and equipment tied to the decline in commodity prices.

Cash flow shrunk to $137-million from $203-million in the same period a year ago.

“Looking ahead, clearly we as an industry are facing a dramatically different commodity price environment today relative to this time last year,” Mr. Roberts said in a statement.

“Operations aside, with crude oil prices ranging between approximately US$43 per barrel and US$55 per barrel since the beginning of 2015, there is now a clear focus on leverage and the balance sheet. At year-end 2014, Penn West was well within its debt covenants, with a senior debt to EBITDA ratio of 2.1 times against a limit of 3.0 times and we were undrawn on our $1.7 billion credit facility.

However, if crude oil prices persist below US$50 per barrel in to the second half of 2015, we do foresee potential challenges complying with our covenants.”

That’s why the highly leveraged company started discussions with lenders and note holders, said CFO David Dyck.

It now has an agreement in principle to ease its financial covenants that involves reducing its $1.7-billion bank facility to $1.2-billion and using up to $650-million of proceeds from asset sales to pay down debt.

In a research report, RBC Dominion Securities Inc. analyst Greg Pardy said the “relaxation of the covenants is positive and will provide the company with additional time to proceed with asset dispositions.” Penn West shares closed at $1.91 in Toronto, down 2¢. The stock has lost 80% of its value in the past year.

To save cash, Penn West, which had a large retail investor base from its past as an income trust, is cutting its dividend to 1¢ a share, from 3¢ expected for the first quarter, down from 14¢ in the fourth quarter of 2014. The company said the reduction is temporary.

Companies across the Canadian sector have cut spending, laid off staff and raised equity and debt to cope with sub-US$50 a barrel oil prices, the result of a price war instigated by Saudi Arabia to take back market share from North American producers. With the latest measures, Penn West is taking the belt-tightening to a new level.

Mr. Roberts said lenders’ decision to “stand with us” through tough times is a result of the company’s successful restructuring.

Penn West sold $1 billion in non-core assets as part of its restructuring and would like to sell more. It plans to invest $650 million this year, primarily directed at its Cardium and Viking core areas, and deliver production of about 100,000 barrels per day.

The adjustments may not even be over. With oil price volatility continuing, spending will be reviewed again in the spring, Mr. Roberts said.

Shipping Sector Continues Decline ( as we forecast) – Index Hits Thirty Year Low

NOTE : This Is A Global Economic Indicator At A 30-Year Low

 

  • The Baltic Dry Index falls another 3.8% and is now trading at its lowest levels since the 1980s, even as traded volumes of many commodities are reaching record levels.
  • The dry-bulk market has been sunk by a perfect storm as new ships ordered after the financial crisis have hit the seas just as Chinese economic growth has slowed and commodity prices have turned lower.
  • Earnings for a capesize vessel typically used to transport coal and iron ore have fallen to $6,707/day today, down ~50% Y/Y and hardly enough to cover daily operating expenses of $6K-$10K.
  • As one analyst says, some of the share prices are starting to reflect almost a state of bankruptcy: Shares of Scorpio Bulkers (NYSE:SALT), for one, have plunged 85% in the past year, and Star Bulk Carriers (NASDAQ:SBLK) has shed 67% in the same period.
  • Related tickers: FREE, EGLE, SB, DRYS, NM, SHIP, ESEA, PRGN, DCIX, GSL,NMM, DSX, DAC, KEX, ULTR, BALT, SINO.
image

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

Managed Accounts Year End Review and Forecast

Our post and Chart Of The Day on Tuesday focused on the 5-Year Breakeven Inflation Rate. The impetus for mentioning it was due to the rate hitting its lowest levels since its inception in 2003, other than during the financial crisis. The point is that the indicator is signaling the lowest inflation, and greatest threat of deflation during that time. We also mentioned that we would try to avoid further rare (and unwelcomed) forays into the economic realm, as opposed to our usual financial market turf. Well, that attempt lasted a whole 3 days.

While the subject of today’s Chart Of The Day is not an explicit economic indicator, the message behind its behavior is inexorably tied to the global economic outlook. And the message it is sending is similar to that of the 5-Year Breakeven Inflation Rate currently. The Baltic Dry Index is a composite of various global shipping rates tied to the movement of raw materials. Thus, the price of the BDI is an indicator of the level of global demand for shipping raw materials, specifically. It is also considered by many to be an indicator of the level of global economic growth, in general. If that is indeed the case, it is not good news for the global economy since the BDI dropped yesterday to $632 the lowest level in almost 30 years. And but for a few months in 1986, it would be a record low in its history.

image

Given the recent decline in the price of many commodities, the fact that the Baltic Dry Index would be at depressed levels is not a surprise. Like any other market measure, the BDI is a function of supply and demand. In this case, there are basically two factors involved: ships and cargo. With the supply of ships typically at a fairly constant level, it comes down to the cargo, in this case, raw materials. And with materials prices dropping, so too should the BDI. Conversely, the BDI hit an all-time high around $11,800 in 2008, concurrent with the Chinese-led bubble top in many commodity prices.

The curious thing is the fact that the BDI has dropped below the floor around 650 that it held in 2008 and a few times in 2012. At those periods, prices here actually marked a low-point of sorts and upside opportunity across many assets. We don’t know for sure but we expect the breakeven level for shipping operators must be somewhere in the vicinity of that 650 level, given the fact that it held there so precisely. The fact that it dropped below now is that much more telling. This is especially so given the fact that even with the sell off, most commodities are still comfortably above their 2008-2009 lows. That would suggest that there is also a weak demand dynamic in play here as well as merely low prices for materials.

So what should folks make of this development in the Baltic Dry Index, assuming they are not directly involved in international shipping of raw materials? The BDI is one of those things that became fashionable to talk about in financial circles, even if nobody really knew what it was or what its implications were. Its sudden popularity arose during the materials boom in 2008. And to be honest, despite its intriguing concept, we had no idea what to do with it either. So we actually took a further cursory look at its correlation traits to see what, if any, benefit it has as an indicator.

Running a scan of the BDI correlation versus our universe of global indexes over the past decade or so, we found that, surprise, it is most correlated with companies dealing in raw materials and industrial metals and the like. Just what you’d expect. Therefore, it is a decent gauge of the performance and potential of those industries. And if the well-being of these companies is an accurate gauge of the broader economic outlook, then perhaps the BDI is indeed a fair global economic barometer.

Interestingly, the batch with the next highest correlation with the BDI was a collection of European stock markets. Given that these markets have fluctuated with the global economy, as the BDI has, much more so than, say, the U.S. market over the past 5 years or so, this is another head’s up that the BDI may be a decent indicator of economic growth. For example, in 2012, many of the European  markets hit major lows along with the BDI while the U.S. market was able to come away relatively unscathed.

Lastly, the other highly correlated market over the last 10 years is China with a roughly +0.6 correlation coefficient. Given the aforementioned Chinese-driven commodity bubble in 2008 which spiked the BDI, this is not surprising. The surprising thing is what has happened over the past 6 months. As commodities and the BDI have collapsed, the Shanghai Composite has soared. In fact, the two have a negative 0.6 correlation coefficient over that time. We don’t know what’s behind this…but something is different.

So what’s the point? If you’ve always ignored the Baltic Dry Index, feel free to continue to do so. We are not going to ingest it into our investment risk models either, since we pay very little attention to economic indicators anyway. However, the message behind the BDI plumbing new 30-year lows is straightforward. Like with the 5-Year Breakeven Inflation Rate, the BDI is sending deflation warnings. And whether or not the BDI is a sound global economic indicator, the deflationary signal is reason enough for some concern.

 

“SHIPWRECK” photo by Marckles55from Dana Lyons

and now you have to decide for 2015.

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Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

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Oil Extends Drop : Worsening Glut – With Oil Companies and Investors In Denial

Oil extended losses to trade below $45 a barrel amid speculation that U.S. crude stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years.

Futures fell as much as 2.6 percent in New York, declining for a third day. Crude inventories probably gained by 1.75 million barrels last week, a Bloomberg News survey shows before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will stand by its plan to expand output capacity even with “unstable oil prices,” according to Energy Minister Suhail Al Mazrouei.

Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.

“There’s adequate supply,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “It’s really going to take someone from the supply side to step up and cut, and the only organization capable of doing something substantial is OPEC. I can’t see the U.S. reducing output.”

West Texas Intermediate for February delivery decreased as much as $1.19 to $44.88 a barrel in electronic trading on the New York Mercantile Exchange and was at $44.94 at 2:26 p.m. Singapore time. The contract lost $2.29 to $46.07 yesterday, the lowest close since April 2009. The volume of all futures traded was about 51 percent above the 100-day average.

U.S. Supplies

Brent for February settlement slid as much as $1.31, or 2.8 percent, to $46.12 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $1.24 to WTI. The spread was $1.36 yesterday, the narrowest based on closing prices since July 2013.

U.S. crude stockpiles probably rose to 384.1 million barrels in the week ended Jan. 9, according to the median estimate in the Bloomberg survey of six analysts before the Energy Information Administration’s report. Supplies have climbed to almost 8 percent above the five-year average level for this time of year, data from the Energy Department’s statistical arm show.

Production accelerated to 9.14 million barrels a day through Dec. 12, the most in weekly EIA records that started in January 1983. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.

OPEC Output

The U.A.E. will continue plans to boost its production capacity to 3.5 million barrels a day in 2017, Al Mazrouei said in a presentation in Abu Dhabi yesterday. The country currently has a capacity of 3 million and pumped 2.7 million a day last month, according to data compiled by Bloomberg.

OPEC, whose 12 members supply about 40 percent of the world’s oil, agreed to maintain their collective output target at 30 million barrels a day at a Nov. 27 meeting in Vienna. Qatar estimates the global surplus at 2 million a day.

In China, the world’s biggest oil consumer after the U.S., crude imports surged to a new high in December, capping a record for last year. Overseas purchases rose 19.5 percent from the previous month to 30.4 million metric tons, according to preliminary data from the General Administration of Customs in Beijing today. For 2014, imports climbed 9.5 percent to 310 million tons, or about 6.2 million barrels a day.

Oil Companies and Investors In Denial : Portfolio Profits At Risk

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

Managed Accounts Year End Review and Forecast

Miners Sector 2015 Forecast :Dumping Assets At Fire-sale Prices

Senior mining companies are still holding many unnecessary and troubled assets on their books. So it would not be a surprise to see a few more dirt-cheap deals in 2015.

Scott Douglas/Riversdale Mining Ltd.Senior mining companies are still holding many unnecessary and troubled assets .

The junior mining sector is in such brutal shape right now that most companies are unwilling to even pay for booths at conferences that are geared to them.

 

Mr. Dethlefsen’s firm, Corsa Coal Corp., was approached this year about buying coal assets in Pennsylvania from Russian steel giant OAO Severstal, which was bailing out of the United States.

Severstal had bought these operations for $900 million in 2008, when steelmaking coal prices were hitting all-time highs. Mr. Dethlefsen would not pay anything close to that in today’s awful coal market, but he didn’t have to. Corsa bought the operations for a grand total of US$60 million, or less than 8% of what Severstal paid.

“It’s a tough market. We have our work cut out for us with this business and it’s not going to be easy,” said Mr. Dethlefsen, Corsa’s chief executive.

“But we’d rather start by paying US$60 million than US$500 million.”

Indeed. It used to be that when mining companies put assets up for auction, they wouldn’t actually sell them unless they got a very full price. That could be because their commodity price assumptions were too optimistic, or they were just too attached to them and convinced they could extract more value. Dozens of interesting projects were put up for auction in recent years and never changed hands because sellers demanded too much money.

We have our work cut out for us with this business and it’s not going to be easy

That changed in 2014, especially at the low end. This will go down as the year when miners were happy to dump their troubled assets. They just wanted to get them off the books and make them someone else’s problem.

The Corsa-Severstal deal was one such example. Rio Tinto Ltd., another, sold coal assets in Mozambique for US$50 million, just three years after paying US$3.7 billion for them. Kinross Gold Corp. dumped Fruta del Norte, possibly the world’s richest undeveloped gold project, for US$240 million, or less than a quarter of what it paid six years ago.

A Billion Dollar Loss – and more of these stories to be written in 2015

And then there was the unfortunate tale of Alberta coal miner Grande Cache Coal Corp. A pair of Asian commodity traders (Marubeni Corp. and Winsway Enterprises Holdings) paid $1 billion for the company in 2011. But coal prices turned dramatically against them. So in October, they agreed to sell their Grand Cache stakes for a buck. Each.

These fire-sale prices generated some laughs across the industry. Yet the deals have an undeniable logic in the current volatile market conditions.

Handout/Grande Cache Coal

Handout/Grande Cache CoalA pair of Asian commodity traders (Marubeni Corp. and Winsway Enterprises Holdings) paid $1 billion for Grande Cache Coal in 2011. But coal prices turned dramatically against them. So in October, they agreed to sell their Grand Cache stakes for a buck. Each.

During the mining bull market (roughly 2002 to 2011), the industry was undergoing massive consolidation as miners rode the wave of rising metal prices. Senior mining companies like Rio Tinto and Vale SA snapped up almost everything in sight, piling up a lot of debt and unnecessary assets in the process. As long as commodity prices were high, who cared? They were just happy to get bigger.

It took a steep drop in prices — and an embarrassing wave of writedowns — to force them to reconsider their strategy. They realized too much management time was being wasted on non-core assets that deliver minimal or no return. They also recognized that low commodity prices may last for a while and that they needed to shed these assets to get as lean as possible.

It has helped that almost every major mining company replaced its CEO over the last couple of years. These guys have no emotional attachment to the assets their predecessors overpaid for, and are happy to do whatever it takes to get value out of them.

“Everyone is looking at rationalizing their portfolios to their best core assets,” said Melanie Shishler, a partner and mining specialist at Davies Ward Phillips & Vineberg LLP. “In furtherance of that, I think people are being quite unrelenting in what they’re prepared to do to reach that goal.”

And there was nothing CEOs wanted to divest more than their problem assets. These assets were unloaded for bargain-basement prices after they backfired in spectacular ways.

For Severstal, it was a combination of a deteriorating coal market and Vladimir Putin. When Severstal bought the U.S. assets in 2008, coking coal prices were soaring above US$300 a tonne. Supply was so tight that steelmakers were terrified they would not be able to source product, so they started snapping up coal mining operations.

Today, that strategy seems absurd. Benchmark prices have plunged to US$117 a tonne, due to soaring supply and uncertain Chinese demand. Steelmakers no longer see any need to be vertically integrated.

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Kinross – Poster Child For Mining Sector Errors

For Toronto-based Kinross, the central issue was also politics. The problem with the Fruta del Norte (FDN) project is that it is in Ecuador, a country with no history of large-scale gold mining. Kinross paid $1.2 billion for FDN in 2008 even though Ecuador did not have a firm mining law at the time. It was a reckless gamble, and it backfired after the government demanded outrageous windfall profits taxes. (Kinross owns equity in FDN’s new owner, so it could still benefit if the mine is built.)

Rio Tinto fell victim to a lack of good due diligence. It paid billions for the Mozambique coal assets without having a firm transportation plan in place. The transportation constraints were far bigger than anticipated, making the coal assets almost worthless in Rio’s eyes.

Handout/Kinross

Handout/KinrossKinross paid $1.2 billion for the Fruta del Norte mine in 2008 even though Ecuador did not have a firm mining law at the time. It was a reckless gamble, and it backfired after the government demanded outrageous windfall profits taxes.

 

In the two-dollar Grande Cache deal, the Asian sellers decided the assets definitely worthless to them at these prices. Experts said the sellers were facing potential cash outflows in the short term, something they clearly wanted to avoid.

Senior mining companies are still holding many unnecessary and troubled assets on their books. So it would not be a surprise to see a few more dirt-cheap deals in 2015.

One notable thing about these transactions is they usually involved a large company selling to a very small one. Sometimes it takes a small company to give a problem asset the attention it needs to create value. If they can’t get the assets turned around, then these deals are not such a great bargain.

“I’ve always said one company’s non-core asset is the cornerstone asset of another one,” said Jack A. Bass, managing partner at Jack A. Bass and Associates.

That is certainly the case with Corsa, which transformed into a serious player overnight with the Severstal deal. But now that the excitement has worn off, the company has to prove it can generate actual value out of these operations in a miserable coal market. If Corsa pulls that off and prices rebound, it could turn out to be one of the best mining deals in decades.

“We took the opportunity to come in and buy at what we think is the trough,” Mr. Dethlefsen said.

“To do that, you’ve got to have a pretty strong stomach. Over the next 12 months, it’s going to be a knife fight.”

You Have Options:

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

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