Crude Crashes As Saudi Abandons OPEC Production Curbs

For the first time since the Vienna OPEC deal in 2016, Saudi Arabia is no longer complying with the quota as Bloomberg calculates that in October, The Kingdom boosted crude production above its starting point for oil cuts.

Saudi output in October was 10.63m b/d, according to data published in OPEC’s monthly market report; compares with 10.502m b/d in September.

As a reminder, as part of OPEC+ supply cuts, Saudi Arabia agreed to curb production by 486k b/d below the starting point of 10.544m b/d, which was its October 2016 output.

WTI Crude is crashing over 5% on the news as supply glut fears are resurgent (amid global growth fears stoke demand anxiety)…

Saudi Arabia has fully complied with OPEC+ agreement in every month through May. Since then it has cut supply, but by less than it pledged to curb. October is 1st time it has increased output above the starting point.

WTI has now retraced 60% of the two-year uptrend…

WTI Crude is now down over 6% YTD to its lowest since Dec 2017.

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California “Camp Fire” Deadliest, Most Destructive In State History As Death Toll Hits 42

Northern California’s Camp Fire burning near Chico is not only the state’s most destructive, it is also California’s deadliest in state history. A total of 42 people have died in the blaze – one of two major wildfires burning throughout California with a combined death toll of 44. 

The Camp Fire’s death toll has grown in staggering leaps. The first notice came on Thursday, when investigators found the remains of five people in Paradise who were apparently trapped in their cars by the blaze. Four more were found on Friday, and 20 more over the weekend. –NPR

The Camp Fire in Butte County about 80 miles north of Sacramento grew to 125,000 acres overnight, up from 117,000, and has destroyed over 6,500 structures. It is just 30% contained

Source: Sentinel-2 satellite

“This is an unprecedented event,” said Butte County Sheriff Kory Honea on Monday night. “If you’ve been up there, you also know the magnitude of the scene we’re dealing with. I want to recover as many remains as we possibly can, as soon as we can. Because I know the toll it takes on loved ones.” 

President Trump has approved an expedited disaster declaration request for the California fires, stating in a tweet that he wanted “to respond quickly in order to alleviate some of the incredible suffering going on,” adding “I am with you all the way. God Bless all of the victims and families affected.”

The Camp Fire started last Thursday morning, storming through Paradise CA and leaving utter devastation in its wake.  

“Last night firefighters continued to hold established containment lines,” CalFire said in a Tuesday update, adding that firefighters had “worked aggressively” to safeguard structures in harms way. That said, dry conditions and steep terrain are expected to continue to pose a challenge. 

More than 50,000 people have fled the Camp blaze, according to member station KQED. And even at a distance, the fire is posing health concerns: “Air quality throughout the Bay Area remains in the ‘unhealthy’ zone, according to federal measurements,” KQED reports, adding that the conditions should persist through Friday. –NPR

Meanwhile, the Woolsey Fire in the Southern California Malibu region has destroyed over 95,000 acres, destroyed 435 structures and claimed 2 lives. It is 35% contained. 

An air tanker drops water on a fire along the Ronald Reagan Freeway in Simi Valley, Calif.
Ringo H.W. Chiu/AP

“We’ve got 60 to 70 mph offshore Santa Ana winds blowing for the next several days and those are just deadly,” said CalFire Chief Ken Pimlott to NPR

Molten aluminum flowed from a car that burned in front of one of at least 20 homes destroyed just on Windermere Drive in the Point Dume area of Malibu, California, Saturday, Nov. 10, 2018.Reed Saxon / AP

The cause of the fires remain unknown, however two electric utility companies reported service issues just minutes before the two blazes began. 

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Major Markets Are All Flashing Warning Signs

Authored by Lance Roberts via,

In this past weekend’s newsletter, I touched on the outcome of the mid-term elections and why it would likely not be as optimistic as the mainstream media was portraying it to be. To wit:

“It is likely little will get done as the desire to engage in conflict and positioning between parties will obliterate any chance for potential bipartisan agenda items such as infrastructure spending.

So, really, despite all of the excitement over the outcome of the mid-terms, it will likely mean little going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.”

I also wrote:

“With portfolios reduced to 50% equity, we have a bit of breathing room currently to watch for what the market does next. It is EXTREMELY important the market rally next week above Wednesday’s highs or we will likely see another decline to potentially test the recent lows.”

Unfortunately, on Monday, nothing good happened. While the week is not over yet, the failure of the S&P 500 at the 50-dma now turns that previous support to important resistance. Furthermore, the failure of the market to hold the 200-dma also increases the downside risk of the market currently.

There is an important point here to be made about “bull markets” and “bear markets.”

While there is no “official” definition of what constitutes a “bull” or “bear” market, the generally accepted definition is a decline of 20% in the market.

However, since I really don’t want to subject my clients to a loss of 20% in their portfolios, I would suggest a different definition based on the “trend” of the market as a whole. As shown in the chart below:

  • If prices are generally “trending higher” then such is considered a “bull market.”

  • “bear market” is when the “trend” changes from positive to negative.

The vertical red and green lines denote the confirmation of the change in trend when all three indicators simultaneously align.

  • The price of the market moves below the long-term moving average. 

  • The long-term overbought condition is reversed (top indicator) 

  • The long-term MACD signal changes from “buy” to “sell” X

Importantly, note that just a violation of the long-term moving average is not confirmation of a change to the ongoing bull trend. Over the last decade, there were several violations of the long-term moving average which were quickly reversed by Central Bank interventions (QE2 and Operation Twist).

In late 2015, all indications of the start of a “bear market” coincided as the Federal Reserve had launched into their rate hiking campaign. However, that bear market was cut short through the injections of liquidity from the ECB’s own QE program.

Currently, with Central Banks globally beginning to reduce or extract liquidity from the financial markets, and the Federal Reserve committed to hiking rates, there seems to be no ready “backstop” for the markets currently.

However, since this is a monthly chart, we will have to wait until December 1st to update these indicators. However, if the market doesn’t begin to exhibit a more positive tone by then, all three indicators of a “bear market” will align for only the 4th time in 25-years. 

But it isn’t just the S&P 500 exhibiting these characteristics.

The S&P 400 has not only failed at a retest of the longer-term moving average but mid-caps are close to registering a “change in the trend”  as the 50-dma crosses below the 200-dma.

(Note: we have previously closed all mid-cap positions in our portfolios)

While the S&P 600 is not a close as the S&P 400 to registering a “change in trend,” it likely won’t be long before it does. The failure of small-caps at the 200-dma is confirming additional downward pressure on those companies as concerns over ongoing “tariffs” and “trade wars” are most impactful to small and mid-sized company profitability.

(Note: we have previously closed all small-cap positions in our portfolios)

The Russell 2000 is also confirming the same. The index is extremely close to registering a “change in trend” as the 50-dma approaches a cross of the 200-dma. Also, with the index failing at the 200-dma and turning lower, just as with small and mid-cap indices above, a break of recent lows will confirm a “bear market” has started in these markets.

But what is happening domestically should not be a surprise. The rest of the world markets have already confirmed bear market trends and continue to trade below their long-term moving averages. (The very definition of a bear market.) While it has been believed the U.S. can “decouple” from the rest of the world, such is not likely the case. The pressure on global markets is a reflection of a slowing global economy which will ultimately find its way back to the U.S.

(Note: we closed all international and emerging market positions in our portfolios at the beginning of this year.)

Just as a side note, China has been in a massive bear market trend since 2015 and is down nearly 50% from its previous highs.

While much of the mainstream media continues to suggest the “bull market” is alive and well, there are a tremendous number of warning signs which are suggesting that something has indeed “changed.” 

“The tailwinds that existed for the market over the last couple of years from tax cuts, to natural disasters, to support from Central Banks have now all run their course.

The backdrop of the market currently is vastly different than it was during the “taper tantrum” in 2015-2016, or during the corrections following the end of QE1 and QE2.  In those previous cases, the Federal Reserve was directly injecting liquidity and managing expectations of long-term accommodative support. Valuations had been through a fairly significant reversion, and expectations had been extinguished.

None of that support exists currently.”

The ongoing deterioration in the markets continues to confirm, as I wrote back in April, the bull market that started in 2009 has ended. However, we will likely not know for certain until we get into 2019, but therein lies the biggest problem. Waiting for verification requires a greater destruction of capital than we are willing to endure.

(Note: Just because the bull market has ended doesn’t mean it will never resume again. It is simply a transition to remove excesses from the market. Bear markets are a good thing as it creates long-term opportunities.)

We have already taken steps to reduce equity risk and will do more on rallies that fail to re-establish the previous bullish trends in the market. If I am right, the more conservative stance will protect capital in the short-term. The reduced volatility allows for a logical approach to further adjustments as the correction becomes more apparent. (The goal is not to be forced into a “panic selling” situation.)

If I am wrong, and the bull market resumes, we simply remove hedges and reallocate equity exposure.

“There is little risk, in managing risk.” 

If you have taken NO actions in your portfolio as of yet, use rallies which fail at resistance to “do something.” I have reprinted our portfolio management rules as a guide.

RIA Portfolio Management Rules

  1. Cut losers short(Reduce the risk of fundamentally poor companies.)

  2. Set goals and be actionable. (Without specific goals, trades become arbitrary and increase overall risk.)

  3. Emotionally driven decisions void the investment process.  (Buy high/sell low)

  4. Follow the trend. (80% of portfolio performance is determined by the long-term, monthly, trend. While a “rising tide lifts all boats,” the opposite is also true.)

  5. Never let a “trading opportunity” turn into a long-term investment. (Refer to rule #1. All initial purchases are “trades,” until your investment thesis is proved correct.)

  6. An investment discipline does not work if it is not followed.

  7. “Losing money” is part of the investment process. (If you are not prepared to take losses when they occur, you should not be investing.)

  8. The odds of success improve greatly when the fundamental analysis is confirmed by the technical price action. (This applies to both bull and bear markets)

  9. Never, under any circumstances, add to a losing position. (As Paul Tudor Jones once quipped: “Only losers add to losers.”)

  10. Markets are either “bullish” or “bearish.” During a “bull market” be only long or neutral. During a “bear market”be only neutral or short. (Bull and Bear markets are determined by their long-term trend as shown in the chart below.)

  11. When markets are trading at, or near, extremes do the opposite of the “herd.”

  12. Do more of what works and less of what doesn’t. (Traditional rebalancing takes money from winners and adds it to losers. Rebalance by reducing losers and adding to winners.)

  13. “Buy” and “Sell” signals are only useful if they are implemented. (Managing a portfolio without a “buy/sell” discipline is designed to fail.)

  14. Strive to be a .700 “at bat” player. (No strategy works 100% of the time. However, being consistent, controlling errors, and capitalizing on opportunity is what wins games.)

  15. Manage risk and volatility. (Controlling the variables that lead to investment mistakes is what generates returns as a byproduct.)

It should be remembered that all good things do come to an end. Sometimes, those endings can be very disastrous to long-term investing objectives. This is why focusing on “risk controls” in the short-term, and avoiding subsequent major draw-downs, the long-term returns tend to take care of themselves.

Everyone approaches money management differently.

This is just our approach and we are simply sharing it with you.

We hope you find something useful in it.

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Bezos Backlash Begins: Socialist Democrats Decry Amazon HQ2 “Burden” On NYC

Amazon has only just officially confirmed its plans to split its second headquarters between Queens (specifically the Long Island City neighborhood) and Crystal City, Virginia (a suburb situated just three miles from Washington DC). But already, one newly elected millennial Congresswoman is leading the local backlash against the e-commerce giant, which secured a staggering $1.525 billion in performance based tax incentives from the Democrat-ruled New York State.

Alexandria Ocasio-Cortez, the youngest woman ever elected to Congress, who won her seat following an upset primary victory in the spring over former House leadership member Joe Crowley, is taking a break from her desperate quest to find an affordable Washington DC apartment to stoke public anger against Amazon on behalf of the voters in her district, which includes parts of north-central Queens that are adjacent to LIC.

In a series of tweets published Wednesday, Cortez claimed that residents in her district are “outraged” by Amazon’s decision to move to NYC.

The notion that Amazon will receive hundreds of millions of dollars in tax breaks while NYC’s public infrastructure is literally crumbling before commuters’ eyes is an outrage, Ocasio said, adding that “our communities need MORE investment, not less.”

Amazon has promised to hire 25,000 people to fill well-paid positions with salaries north of $150,000. But has the company promised to hire within the community? And has it guaranteed that workers can collectively bargain? The answers to both of these rhetorical questions is, of course, no.

Displacing working-class people, a phenomenon that has already afflicted much of NYC’s outer boroughs and will almost certainly intensify with Amazon’s arrival, isn’t community development, Ocasio Cortez complained. And investing in luxury condos doesn’t equate with community development.

Corporations that don’t focus on good health care and providing affordable housing “should be met with skepticism,” Ocasio Cortez said.

Before signing off, Ocasio Cortez specified that she isn’t “picking a fight” with Amazon, but raising important questions about corporations’ responsibility to “pay their fair share.”

Shortly after her tweetstorm, several other NYC politicians jumped on the bandwagon.

To compensate New York City for the generous (or, as Ocasio would argue, overly generous) property tax incentives, Amazon has agreed to “payment in lieu of tax” plan through which it will finance “community infrastructure improvements”, including a new public school (because we all know how much Jeff Bezos cares about public school funding), workspace for artists and a tech incubator.


The company also promised to “invest in infrastructure improvements and green spaces”, though, unless Amazon is planning to chip in for a massive upgrade of the subway, we imagine that, whatever it proposes, New Yorkers will remain deeply unimpressed.

We imagine Ocasio-Cortez’s concerns are only the beginning. Expect waves of protests and demonstrations as NYC’s vibrant community of mommy-and-daddy-supported SJWs converge on LIC to protest the company responsible for supplying most of their possessions.

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One Third Of Central Americans Want To Live In A Different Country

Authored by Julie Ray and Neli Esipova via Gallup,

The several thousand Central American asylum seekers and migrants who are slowly making their way toward the U.S. border may be unusual because of the size of their group, but their desire to come to the U.S. is not. They actually represent a relatively small fragment of a much larger group of people in their own region — and around the world — who say they would like to move to the U.S. if they could.

In Gallup’s most recent global estimate, between 2015 and 2017, 15% of the world’s adults – more than 750 million people – said they would like to move to another country permanently if they could. In Central America, this percentage is one in three (33%), or about 10 million adults.

Three percent of the world’s adults — or nearly 160 million people — say they would like to move to the U.S. This includes 16% of adults from Honduras, Nicaragua, Guatemala, El Salvador, Panama and Costa Rica, which translates into nearly 5 million people.

But unlike the caravan of Central American migrants who are currently on the move, most people who desire to migrate will never try to make their way to the U.S. Desire remains only that. Gallup typically finds that the percentage of those who have plans to move is substantially lower than the percentage who would like to move, and even fewer are actively making preparations to do so.

Central America is no different in this regard. For example, in Honduras, whose residents make up a large percentage of the migrant caravan, about half of adults (47%) say they would like to move to another country permanently if they could, but about 9% are planning to move in the next year — and 2% are actively preparing to do so.


The caravan of asylum seekers and migrants is currently weighing whether it will remain in Mexico or push on to the U.S. Those who decide to push on speaks to the risks migrants are willing to take – and also the strong draw that the U.S. continues to be for millions.

For the past decade, Gallup’s global studies have shown that the U.S., more so than any other country, has been the top desired destination for people who say they would like to move. Central Americans are no exception. People in this region who would like to move – if they could – say they would like to move to the U.S. more than any other place in the world.

However, this desire to move to the U.S. started to show signs of waning in Central America in 2017, and it seems to have persisted in a number of countries so far in 2018. This could possibly reflect changes in the climate toward migrants in the U.S. under the Trump administration — but it is still too early to tell, and Gallup will continue to monitor it.

For complete methodology and specific survey dates, please review Gallup’s Country Data Set details.

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Nomura Warns “Only The G-20 Can ‘Kick-Save’ Global Risk Sentiment Now”

While Chinese, European, and US stocks bounced this morning on renewed optimism on positive trade-talk developments between China and US, Nomura’s Charlie McElligott warns that global growth proxies continue to exhibit poor optics and fits with Chinese financing / ‘credit impulse’ data which is far worse than expected

Global growth ‘tea leaves’ still not painting a pretty picture:

  • Crude bleeds further, with both Brent and WTI -2.0% currently

  • Japanese stocks -2.1% (Nikkei was -3.5% at one point) and led lower by cyclicals—Industrials -2.7% / Energy -2.9% / Financials -3.0% / Tech -3.0% / Materials -3.2%, showing especially negative sensitivity to the Apple iPhone concerns

  • Asia EM Eq still weaker too across Taiwan, S Korea, Singapore, Malaysia and Vietnam despite EMFX marginally better

  • Chinese Industrial Metals futures continuing their horrid trajectory (negative implications for “inflation expectations”), with Nickel -12.9% over the past month; Zinc -9.3%, Deformed Bar -8.6% and Hot-Roiled Coil -10.7% over the same 1m span

The Chinese Aggregate Financing data, while expected significantly “weaker” in light of the recent push from Chinese officials to force higher lending quotas …was still a negative-shock despite the lowered-expectations, with massive “misses” across all metrics (remember too that authorities boosted the Sep headline numbers with some accounting-fun, adding ‘local bond sales’ to the overall financing tally and creating a false-optic):

  • Aggregate Financing was 728.8B Yuan in Oct vs 1.3T Yuan survey and vs 2.17T Yuan the prior month

  • New Yuan Loans were 697B Yuan vs est 904.5B survey and 1.38T the prior month

  • Broad M2 money supply increased 8.0%, down from 8.3% in Sep

Further, some headlines from China just out which may in-act disappoint Chinese Equities further upon their reopen tomorrow:



As Nomura’s Managing Director of Cross-Asset Strategy, McElligott suggests the key to risk-asset stabilization remains “movement” at the G20, where a best-case “detente” scenario would be a delay on the third tranche of tariffs planned to launch at the start of the new year – we would play for this with ‘wingy’ SPX Call Spreads.

“Here’s the deal,” McElligott explains: ‘tighter financial conditions’, ‘Dollar Shortage’ thesis, ‘max QT’ (between The Fed, ECB, and BoJ) and trade tariffs are all ‘biting’ at the same time

…as fundamental data is getting downgraded…

..and removal of extraordinary liquidity are overriding these occasional bursts of optimism regarding the status of U.S. / China trade relations:

  • U.S. Dollar (BBDXY) is at 18 month highs

  • U.S. real yields (5Y TIPS) at 9 year highs

  • “Max Quantitative Tightening,” with G3 Central Bank balance-sheets seeing their YoY rate-of-change contracting to outright NEGATIVE in 4Q18

  • Fading U.S. economic momentum, with the diminishing returns of the tax-cut fiscal stimulus seeing QoQ expectations for US GDP growth consecutively lower from 4Q18 through 4Q19

  • Similarly weaker global GDP growth change expectations, with Japan, Europe and China all weaker in 2018 and EU / China expected lower again in 2019, with Japan expected just ‘flat’

  • Clear reversal and breakdown LOWER in global manufacturing PMIs, with the JPM’s aggregated Global Manu PMI index now down 9 of the last 10 months

Add-in the unwind-y behavior in the very exposed Tech sector (the Apple supply-chain beat-down saw additional victims overnight, with Japan Display -9.5% and Hon Hai Precision Industry slipping to the lowest level in five years, with Dialog Semi and AMS again lower in Europe this morning), further punishing long books that are crowded into the multi-year hiding place of “Growth” and you have the makings for atrocious sentiment.

The “kick save” required right now to turn this global risk-sentiment “bleed” is something at the G20 between Trump and Xi (and as previously noted, I plan on being “out” of my current tactical SPX long by then on “disappointment risk”) – which realistically at best is a smiling handshake photo opportunity and a lower-probability delay of the third $267B wave of tariffs (per the DC consultants, a reversal on the existing first two tranches / the $253B and $113B of tariffs is highly unlikely at this juncture)

This theoretical “tariff delay” scenario at the G20 is the obvious potential catalyst for “upside” SPX trades; however, vol remains expensive and call skew unattractive

This “Equities upside” play is further challenged too as investors have pivoted bearishly in light of the negative performance-driven “de-gross,” and NOBODY wants to sell puts to buy calls—thus the only trade which makes sense is “wingy” call spreads

I plan on being OUT of my tactical SPX “outright long” which I have pushed due to the resumption of “mechanical” demand sources in the market over the past two weeks into G20, as I believe there is a greater likelihood of disappointment at the event; HOWEVER, the most attractive UPSIDE hedge / TACTICAL play then becomes the Dec7 SPX 2815 / 2855 CS for 7.40, getting you 4.4 : 1 leverage (20d 10d call spread)

* * *

Looking further out, McElligott continues to believe that in-line with his “financial conditions tightening tantrum” phase 2 end-game, risk-markets will again fade as we push into the March 2019 Fed hike, which will push policy “restrictive” alongside higher Dollar and higher real yields as economic “slowdown” forces (tighter USD-liquidity).

Sometime in 2Q19, the Nomura strategist would then expect the UST curve to STEEPEN as the market then prices-in the end of Fed normalization, where then we should expect the more “risk-off” trading environment and acceleration of “low vol / defensive / value” trades within the Equities-space at this point in the cycle.

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Cable Jumps On Report EU, UK Agree On ‘Hard Border’ Brexit Terms

Another day, another Brexit negotiation story.

According to RTE reporter Tony Connelly, “EU and UK negotiators have agreed a text on how to avoid a hard border on the island of Ireland, which will form part of the Withdrawal Agreement.”

And of course, the algos read the headline and bid cable back above 1.30…

The bottom line – as with so many stories surrounding this negotiation, don’t hold your breath for this headline to be confirmed.

Bloomberg reports that a senior official said it would be wrong to say negotiations were “concluded”, and that there was still some “shuttling” between London and Brussels.

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“The Collapse Has Begun” – GE Is Now Trading Like Junk

Two weeks after we reported that GE had found itself locked out of the commercial paper market following downgrades that made it ineligible for most money market investors, the pain has continued, and yesterday General Electric lost just over $5bn in market capitalization – while far less than the $49bn wiped out from AAPL the same day, it was arguably the bigger headline grabber.

The shares slumped -6.88% – after dropping as much as -10% at the lows – after the company’s CEO, in an interview with CNBC yesterday, failed to reassure market fears about a weakening financial position. The CEO suggested that the company will now urgently sell assets to address leverage and its precarious liquidity situation whereby it will have to rely on revolvers now that it is locked out of the commercial paper market.

Indeed, shares hit levels first seen in 1995 yesterday and have only been lower since, very briefly, during the financial crisis when they hit $6.66 in March 2009. For a bit of perspective, Deutsche Bank notes that the market cap of GE now is $69.5bn and it’s the 80th largest company in the S&P 500. Yet in August 2003, GE was the largest company in the index (and regularly the world between 1993-2005) at a market cap of $296bn, $12bn more than Microsoft in second place. Since then, the tech giant has grown to be a $826bn company well over 10 times the size, while GE’s market cap peaked (ironically) during the dot com bubble in August 2000 at $594BN before tumbling first in the tech crash and then the GFC.

But while most investors have been focusing on GE’s sliding equity, the bigger concern is what happens to the company’s giant debt load, especially if it is downgraded to junk.

First, some background: GE had about $115 billion of debt outstanding as of the end of September, down from $136 billion a year earlier. And while GE is targeting a net EBITDA leverage ratio of 2.5x, this hasn’t been enough to appease credit raters, which have expressed concern recently that GE’s beleaguered power business and deteriorating cash flows will continue to weaken the company’s financial position. As a result, Moody’s downgraded GE two levels last month to Baa1, three steps above speculative grade. S&P Global Ratings and Fitch Ratings assign the company an equivalent BBB+, all with stable outlooks.

The problem is that while the rating agencies still hold GE as an investment grade company, the market disagrees.

GE – a top 15 issuer in both the US and EU indices – was recently downgraded into the BBB bucket, and as recently as September it was trading 20bps inside BBB- bonds. However they crossed over at the end of that month and now trade up to 50bps wide to the average of the weakest notch of IG.

In other words, GE is already trading like junk, and has become the proverbial canary in the coalmine for what many have said could be the biggest risk facing the bond market: over $1 trillion in potential “fallen angel” debt, or investment grade names that end up being downgraded to high yield.

As Deutsche Bank’s Jim Reid notes, GE’s recent collapse has come at time when much discussion in recent months has been about BBBs as a percentage of the size of the HY market. Since 2005, BBBs have been steadily rising as a percentage of HY climbing back above the previous peak in 2014 (175%) before extending that growth to a current level of 274%. Meanwhile, the total notional of BBB investment grade debt has grown to $2.5 trillion in par value today, a 227% increase since 2009, and while it represents just over 50% of the entire IG index. 

Next, to get a sense of just how large the risk of fallen angels in the US is, consider that the BBB part of the IG index is now ~2.5x as large as the entire HY index.

So large BBB companies – and none are larger than GE – with a deteriorating credit story are prone to additional widening pressure as investors fear the risks of an eventual downgrade to HY and a swamping of paper into that market. This, as Deutsche Bank writes, isn’t helping GE at the moment and may be a dress rehearsal for what happens for weaker and large BBB issuers in the next recession.

Which brings us back to GE, which while not trading as a pure play junk bond just yet, is well on its way as the following chart of GE’s spread in the context of both IG and HY shows.

Which is both sad, and ironic: as Bloomberg’s Sebastian Boyd writes this morning, “the company’s CEOs boasted of its AAA rating as a key strategic asset, but it was more than that. The rating, which it maintained for more than half a century, was symbolic of the company’s status as a champion of American commerce. Now, Microsoft and Johnson & Johnson are the only U.S. corporates with the top rating from S&P.”

And while rating agencies have yet to indicate they are contemplating further cuts to the company’s investment grade rating, the bond market has clearly awoken, and nowhere more so than in the swap space, where GE’s Credit Default Swaps have exploded in recent weeks.

What kind of an impact would GE’s downgrade have? With $48 billion of bonds in the Bloomberg Barclays US Corporate index. GE would become almost 9% of the BB universe. And one look at Boyd’s chart below shows that the market is increasingly pricing GE’s index-eligible bonds as junk, especially in the context of the move over the past month.

An additional risk to the company’s credit profile: GE has more debt coming due in the next 18 months than any other BBB rated borrower: that fact alone makes it the most exposed to higher rates according to Boyd.

Meanwhile, GE’s ongoing spread blow out, and junk-equivalent price, has not escaped unnoticed, and as we have been warning for a while, could portend a broader repricing in the credit sector. As Guggenheim CIO commented this morning, “the selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.”

Then again, Minerd’s concern pales in comparison to what some other credit strategists. In an interview with Bloomberg TV on November 8, Bruce Richards, chairman and chief executive officer of the multi-billion Marathon Asset Management warned that overleveraged companies “are going to get crushed” in the next recession.  Richards also warned that when the cycle does turn, “with no liquidity in the high-yield market to speak of, when these tens of billions or potentially hundreds of billions falls into junk land, it’s “Watch out below!” because there’s going to be enormous price adjustments.”

Echoing what we said above, Richards noted that about $1 trillion of bonds are rated as BBB, as investment- grade, when they has leverage ratios worthy of junk, adding that “the magnifying glass is now shifting” toward ratings companies.

For now the “magnifying glass” appears to have focused on GE, and judging by the blow out in spreads for this “investment grade” credit, what it has found has been unexpected. Which brings us to the question we asked at the top: will GE be the canary in the credit crisis coalmine and, when the next crisis finally does strike, the biggest fallen angel of them all?

via RSS Tyler Durden

The Biggest Threat To Dollar Dominance

Authored by Irina Slav via,

Russian oil exporters are pressuring Western commodity traders to pay for Russian crude in euros and not dollars as Washington prepares more sanctions for the 2014 annexation of Crimea by Moscow, Reuters reported last week, citing as many as seven industry sources.

While it may have come as a surprise to the traders, who, Reuters said, were not too happy about it, the Russian companies’ move was to be expected as the Trump administration pursues a foreign policy where sanctions feature prominently. This approach, however, could undermine the dominance of the U.S. dollar as the global oil trade currency.

Early indications of this undermining became evident this spring, when Russia and Iran launched an oil-for-goods exchange program seeking to eliminate bilateral payments in U.S. dollars and plan to keep it going for five years. The sanction buddies discussed this sort of agreement earlier, back in 2014, when Iran was still under Western sanctions. Even after the notorious nuclear deal was reached, the two countries decided to go ahead with their barter deal, and the preliminary agreement was reached last year. According to it, Russia would receive 100,000 bpd of Iranian crude in exchange for US$45 billion worth of Russian goods.

In March, Iran banned purchase orders denominated in U.S. dollars and said that any merchant using dollars in their orders will not be allowed to conduct the import trade. A month later, Tehran announced that it will publish all its official financial reports in euros instead of dollars in a bid to encourage a switch to euros from dollars among state agencies and businesses.

Now, Russia’s biggest oil producers are renegotiating oil delivery contracts with commodity traders, and three of them, Rosneft, Gazprom Neft and Surgutneftegaz, have raised traders’ hackles by insisting they, the traders, commit to paying penalties beginning next year if U.S. sanctions disrupt sales and as a result the buyers fail to make payments. Also, there are discussions about using euros and other currencies instead of dollars to ensure payments are not disrupted.

It would make perfect sense for the seller of any commodity to ensure that they receive payment for their commodity. In an environment of sanctions, looking for ways around them is the only logical behavior. And Russia and Iran are not alone in this drive to distance themselves from the dollar.

Venezuela, for one, has bet on digital currency as a way of skirting Washington sanctions that have added to the pressure created by the 2014 oil price crash and years of PDVSA mismanagement—both factors which have plunged the Venezuelan economy into a possibly irrecoverable crisis. Just today, crypto media reported that Caracas would present its cryptocurrency, the Petro, to OPEC as a unit of account for oil trading next year. “We will use Petro in OPEC as a solid and reliable currency to market our crude in the world,” Finance Minister Manuel Quevedo said.

China is also openly promoting its currency for oil trade and all trade. The internationalization of the yuan is part of the New Silk Road initiative of President Xi and given China’s level of oil consumption, oil trade is a big part of this internationalization. Earlier this year, China launched its long-awaited yuan-denominated oil futures contract. While the general trading public remains cautious about buying into it, some have forecast that the yuan will eventually replace the greenback as the global oil currency. And it could be joined by the euro as long as the European Union survives in the long term. After all, Russia and Iran are among the biggest oil exporters globally. That’s a lot of barrels that might be soon traded in euro and not dollars.

via RSS Tyler Durden

CNN Sues Trump Administration, Demands Return Of Acosta’s Press Pass

Two days after former ABC News reporter Sam Donaldson revealed that CNN was gearing up to sue the Trump Administration over its decision to suspend the press credentials of Chief White House Correspondent Jim Acosta, President Trump’s favorite news organization has confirmed the speculation in a Tuesday morning tweet.

In a bizarre example of a news organization reporting on itself, CNN revealed that it was suing the White House on First Amendment and Fifth Amendment grounds. The lawsuit was filed in US District Court in Washington DC on Tuesday morning.

Both Acosta and CNN are named as plaintiffs, while defendants include two secret service members, three White House senior staff and – of course – President Trump himself.

Both CNN and Acosta are plaintiffs in the lawsuit. There are six defendants: Trump, chief of staff John Kelly, press secretary Sarah Sanders, deputy chief of staff for communications Bill Shine, Secret Service director Joseph Clancy, and the Secret Service officer who took Acosta’s hard pass away last Wednesday. The officer is identified as John Doe in the suit, pending his identification. The six defendants are all named because of their roles in enforcing and announcing Acosta’s suspension.

The lawsuit comes after CNN sent a letter to the White House formally requesting the immediate reinstatement of Acosta’s pass and threatening a lawsuit. The news organization is demanding a preliminary injunction to allow Acosta to return to the White House press room as soon as possible.

While the First Amendment case – that Trump is directly impinging on CNN‘s press-related freedoms – is self-evident, CNN is relying on a little-known precedent for its claims that the administration violated Acosta’s due-process rights.

As the prospect of a lawsuit loomed on Sunday, attorney Floyd Abrams, one of the country’s most respected First Amendment lawyers, said the relevant precedent is a 1977 ruling in favor of Robert Sherrill, a muckraking journalist who was denied access to the White House in 1966.

Eleven years later, a D.C. Court of Appeals judge ruled that the Secret Service had to establish “narrow and specific” standards for judging applicants. In practice, the key question is whether the applicant would pose a threat to the president.

The code of federal regulations states that “in granting or denying a request for a security clearance made in response to an application for a White House press pass, officials of the Secret Service will be guided solely by the principle of whether the applicant presents a potential source of physical danger to the President and/or the family of the President so serious as to justify his or her exclusion from White House press privileges.”

There are other guidelines as well. Abrams said the case law specifies that before a press pass is denied, “you have to have notice, you have to have a chance to respond, and you have to have a written opinion by the White House as to what it’s doing and why, so the courts can examine it.”

“We’ve had none of those things here,” Abrams said.

That’s why the lawsuit is alleging a violation of the Fifth Amendment right to due process.

Here’s CNN’s statement on the lawsuit:

“CNN filed a lawsuit against the Trump Administration this morning in DC District Court,” the statement read. “It demands the return of the White House credentials of CNN’s Chief White House correspondent, Jim Acosta. The wrongful revocation of these credentials violates CNN and Acosta’s First Amendment rights of freedom of the press, and their Fifth Amendment rights to due process. We have asked this court for an immediate restraining order requiring the pass be returned to Jim, and will seek permanent relief as part of this process.”

Acosta’s press pass was revoked after he refused to sit down during a press conference and got into a physical standoff with a young, female White House intern when she tried to take his microphone.


Acosta’s petulant questions incensed Trump, who called Acosta a “rude, terrible person” in a press room standoff that has become the stuff of legend.

Of course, the real reason for CNN’s lawsuit should be obvious to all who are familiar with the discovery process. As its lawyers gather evidence to build their case, they will look for anything indicating that President Trump himself gave the order to revoke Acosta’s pass. Information that, we imagine, will promptly be leaked to CNN’s impartial journalists before it is used as ammunition by Congressional Democrats in one of their many planned investigations.

via RSS Tyler Durden