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Last Friday we warned that the massive ramp in PIK Toggle new issues so far in 2016 was eerily similar to a spike witnessed in 2007 which, in hindsight, was a solid indicator of the “beginning of the end” for the high-yield market.  In 2007, the massive ramp in PIK Toggle new issues was driven by private equity firms rushing to take money off the table via massive, debt-funded dividend recaps.  And now, 9 years later we see a similar spike in PIK Toggle issuance driven by a voracious “search for yield” by the world’s largest pension funds and insurance companies.

But while the underlying cause of the two high-yield bubbles are different we fear the ultimate outcome will be the same.  In fact, we’re seeing the first signs that the 2016 edition of the high-yield, PIK Toggle bubble might be bursting with two new issues collapsing just 1 day after breaking for trading. 

Luxembourg-based packaging company, Ardagh Group, issued €845mm of 6 5/8 PIK Toggle Notes of 2023 last week that crashed to below 96 in early trading today…

 

Meanwhile, German auto parts supplier, Schaeffler, issued €750mm of 3 3/4 PIK Toggle Notes of 2026 that dipped below 97 in early trading.

 

According to Bloomberg, both of these PIK Toggle issuances were oversubscribed last week prompting the companies to increase deal sizing.  And now, 1 day after yelling at bond salesmen for their poor new issue allocations, angry portfolio managers around the globe are rushing for the exits.  Sound familiar to anyone?

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Authored by Mark St.Cyr,

Back in July I wrote the following article titled “Just Keep On Dancing?” And In it I stated the following. To wit:

“If there was ever any doubt that the “markets” are nothing more than a HFT (high frequency trading) cesspool of central bank funded front-running; today is that day when all doubt has been erased.

 

Whether or not one accepts that fact is a choice they have to make for themselves. Only you can decide how long you want to “dance,” as there seems to still be music playing in the casino ballroom.”

Since then the “markets” have (reminiscent of 2015) made headlines of “new lifetime highs” screamed by financial pundits everywhere extolling the virtue of today’s stock markets. Yes, every tick or move higher was praised as coming directly from the “earnings beats” produced by today’s balance sheet engineers.

Who needs fundamentals (you know, like more sales and such) when you can state before the earnings season you’re going to sell a gazillion dollars worth of product. Then, by the time you need to show those numbers, you have reduced it from “a gazillion” to about a dozen, where you’ll now proclaim you sold 13 “beating” your now stated, although lowered, target. Yet, it still offers up the headline “beat” for the next in rotation fund managers to proclaim across their willingly and reflexively repeating media outlets.

For that’s all that matters. Rinse, repeat.

 

So now as we sit here today the markets are waking up to not only a 2%+ downdraft across most of the major indexes. The “markets” are suddenly not behaving as they have since the beginning of the year. It seems someone, somebody, or something (i.e., your friendly HFT’s) have decided BTFD is now risky business. Funny how that happens, no?

It would appear based on “fundamentals” owning stocks, bonds, and a whole lot more isn’t as wonderful of an opportunity to buy, buy, buy if the number one fundamental facilitator of all price action (e.g., The Fed.) just might close the “open bar.”

No one knows for sure, but when the crying “doves” appear to be wiping away their tears as the jukebox begins to play “We’re not gonna take it!?” The prudent begin to move toward the exits and call for rides.

In that July article I posted a chart as to show where we were then. Below is where we are as of Monday before the market opens. To wit:

As you can see, we really went nowhere. However, if one remembers all the headlines and proclamations touting “New lifetime Highs, Again!” over the last few months. It would be easily explainable why, when one looked at the above chart, you felt a little puzzled. After all, not only has the “market” basically gone nowhere since then. It now sports a selloff of over 2% – and the month has just begun. (The above is a monthly chart)

So the question is: Did the music stop on Friday?

If it did, then that red line I placed showing the rise based on nothing more than “Central Bank Liquidity” as the fundamental reason of that rise shows just how precariously high, and subsequently, just how precipitous of a potential decline is once again being placed “on the table.”

As I stated in another article “Wall St. Laughs As The Doves Cry” It appeared the HFT cabal was more than emboldened that the “liquidity bar” was going to remain open, regardless of any further rhetoric coming from the all too predictable Fed. members.

However, once a perceived dyed-in-the-wool Keynesian dove (The Fed’s Eric Rosengren) starts touting the idea that he too believes it may be time to raise rates, all while he does the equivalent of strutting across the bar-room, hitting the jukebox, and it begins to belt out a Twisted Sister song? As I said earlier – the prudent are going to begin heading for the exits.

That’s a fundamental you can bank on.

Now the only question is: How much further does this decline travel before the owner of this “bar” (Chair Yellen) proclaims once again…

“I declare September is off the table! Drinks are on me!”

Welcome to your fundamentally flawed “markets,” where the only thing that matters fundamentally – is the open spigot of liquidity.

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Too soon?

 

Source: GrrrGraphics.com

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One week after Philippines president Rodrigo Duterte caused the biggest diplomatic scandal yet for his relatively new administration, when he called president Obama “son of a bitch” (or “son of a whore” according to an alternative translation), only to backtrack and offer tacit apologies when the US president decided to cancel a previously scheduled meeting between the two leaders, Duterte once again made waves on Monday when he called for the withdrawal of U.S. military from a restive southern island, fearing an American troop presence could complicate offensives against Islamist militants notorious for beheading Westerners.

According to Reuters, Duterte said special forces now training Filipino troops were high-value targets for the Islamic State-linked Abu Sayyaf as counter-insurgency operations intensify.

“These special forces, they have to go,” Duterte said in a speech during an oath-taking ceremony for new officials.

“I do not want a rift with America. But they have to go.” He added: “Americans, they will really kill them, they will try to kidnap them to get ransom.”

The statement from Duterte adds to uncertainty about what impact his rise to the presidency will have on one of Washington’s best alliances in Asia. Duterte wants an independent foreign policy and says close ties with the United States are crucial, but he has frequently accused the former colonial power of hypocrisy when criticized for his deadly drugs war. He denied on Friday calling Obama a “son of a bitch”.

Some U.S. special forces have been killed in the southern Philippines since 2002, when Washington deployed soldiers to train and advise local units fighting Abu Sayyaf in Operation Enduring Freedom, part of its global anti-terror strategy. At the height of that, some 1,200 Americans were in Zamboanga City and on Jolo and Basilan islands, both strongholds of Abu Sayyaf, which is known for its brutality and for earning huge sums of money from hostage-taking.

The U.S. program was discontinued in the Philippines in 2015 but a small troop presence has remained for logistics and technical support. Washington has shifted much of its security focus in the Philippines towards the South China Sea.

In his speech to officials on Monday, Duterte repeated comments from last week when he accused the United States of committing atrocities against Muslims over a century ago on Jolo island. Last week, when speaking in Loas, Duterte spoke for more than five minutes about human rights and his campaign against drugs during the East Asian Summit in the Laotian capital of Vientiane, according to one Indonesian diplomat at the meeting.

“Let me tell you about human rights,” Duterte said while displaying a picture of Filipinos killed by American soldiers about a century ago. “This is my ancestors being killed, so why now we are talking about human rights? We have to talk of the full spectrum of human rights.” Duterte spoke after Obama had delivered a speech that referred to human rights.

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Following Trump’s remark that Clinton’s “deplorables” comment was “perhaps the most explicit attack” of the American voter, Hillary campaign aides have tried to change the narrative by backtracking on the “half” of voters accusation. As aide Brian Fallon explained, “it’s a mistake to try to quantify ‘deplorable Trump backers,” adding that “doesn’t know the ‘deplorables’ percentage, but it is non-zero,” and offers “no apology for criticizing Trump backers.”

Following these remarks from Trump…

.@realDonaldTrump calls Clinton’s “deplorables” remark “perhaps the most explicit attack” on the American voter http://pic.twitter.com/z0SPRCRMEq

— Fox News (@FoxNews) September 12, 2016

Clinton aide Brian Fallon appeared on CNN with Wolf Blitzer to try and change the narrative… Annotated statement:

On the “Deplorables” ‘mistake’…

• *CLINTON AIDE: NO APOLOGY FOR CRITICIZING SOME TRUMP BACKERS
• *FALLON: MISTAKE TO TRY TO QUANTIFY DEPLORABLE TRUMP BACKERS
• *FALLON: DON’T KNOW ‘DEPLORABLES’ PERCENTAGE, IS NON-ZERO

On her conspiracy theorist health concerns…

• *FALLON: CLINTON ON FRIDAY INTENDED TO PRESS ON DESPITE ILLNESS
• *FALLON: WAS CLINTON’S DECISION TO LEAVE SEPT. 11 CEREMONY
• *FALLON: CLINTON BEGAN FEELING DIZZY ON WALK TO VEHICLE
• *FALLON: WOULD HAVE DISCLOSED PNEUMONIA EVEN WITHOUT VIDEO
• *FALLON: SENIOR STAFF KNEW OF CLINTON’S PNEUMONIA FRIDAY

Coming clean…

• *FALLON: MORE HEALTH INFO OUT IF NOT TODAY THEN NEXT COUPLE DAYS
• *FALLON: SUNDAY INCIDENT WASN’T RELATED TO 2012 INCIDENT
• *CLINTON SUSTAINED CONCUSSION IN 2012

On and that little girl, and her grand-daughter, and all her staff are safe…

• *FALLON: CLINTON ISN’T CONTAGIOUS, DOCTOR SAID

He also appeared on “softball” MSNBC earlier…

 

“I can attest, Andrea, that it really is the case that there’s no other undisclosed condition. The pneumonia is the extent of it. And I can also attest that her doctor has stated that there was nothing here in terms of anything that was caused by what happened in 2012.”

 

“[W]e’ve been in touch with her this morning, and it is our intention that, in the next couple days, we’re going to be releasing additional medical information about Hillary Clinton. A year ago — over a year ago now, we released a — an extensive letter with a comprehensive medical history, family medical history, and state, picture of her health that completely adheres to the norm for presidential candidates, and far exceeds what Donald Trump has released, but we’re going to go beyond that. And in the next few days, we’ve been in touch with her physician this morning to get those materials together. We’re going to be releasing that to further put to rest any lingering concerns about what you saw yesterday. I can attest, Andrea, that it really is the case that there’s no other undisclosed condition. The pneumonia is the extent of it. And I can also attest that her doctor has stated that there was nothing here in terms of anything that was caused by what happened in 2012. So, all of that, I think, will be indicated in the further material that we are going to release later this week.”

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Submitted by Howard Kunstler via Kunstler.com,

Idiocy and mendacity are a bad combo in the affairs of nations, especially in elections. The present case in the USA displays both qualities to near-perfection: on one side, a boorish pseudo-savior in zero command of ideas; on the other side, a wannabe racketeer-in-chief in full command of her instinctive deceit. Trump offers incoherent rhetoric in opposition to the current dismal order of things; Clinton offers empty, pandering rhetoric in defense of that order. Both represent an epic national drive toward political suicide.

The idiocy and mendacity extend to the broad voting public and the discredited elites pretending to run the life of the nation. The American public has never been this badly educated and more distracted by manufactured trivia. They know next to nothing. Even college seniors can’t name the Secretary of State or find Switzerland on a map. They don’t know in what century the Civil War took place. They couldn’t tell you whether a hypotenuse is an animal, a vegetable, or a mineral. Their right to vote is a danger to themselves.

The elites operate in their own twilight zone of ignorance, only at a loftier level, flying on wings of sheepskin. Submitted for your approval: Harvard wizard Kenneth Rogoff’s new book, The Curse of Cash. This is the latest salvo in the international campaign to herd all money into the control of central banks and central governments, supposedly to make central planning of the economy more effective — but really for the purpose of extending the fallacy that the mis-pricing of credit and collateral (that is, of everything) can save the current incarnation of crony capitalism, and more to the point, save the fortunes of the racketeers running it, along with the reputations of their intellectual errand boys. Henceforth, all “money” transactions would be traceable, allowing unprecedented power for authorities to regulate the lives of citizens.

It remains to seen whether the American public might be snookered into this scheme, which already has some traction in Europe. Of course, Europe is headed into some interesting political heavy weather of its own in the months ahead, and there is plenty of reason to think that even the docile people of Denmark and Sweden might eventually revolt against the central bank regime if they see the Germans do it.

Aggravating matters is the hyper-complexity of our current financial arrangements, much of it in the service of deliberately mystifying the masses. Does the public understand the rationale behind zero interest rate policy (ZIRP)? Not any more than they understand the interaction of gluons and quarks or the doctrine of the Holy Trinity. It is one of the abiding mysteries of our time, for instance, that a group like AARP, purporting to represent the interests of retired persons, has offered not a peep of pushback to ZIRP, which has pounded retired people dependent on savings into penury. Of course, this might be explained by the pervasive racketeering feature of our current national life: AARP is an insurance racket masquerading as a citizen interest group. Or, stretching credulity to suppose that AARP is honest, perhaps the org’s executives don’t understand that zero interest on savings equals zero income to savers.

Kenneth Rogoff tries to justify his war on cash by invoking two of the era’s favorite bogymen: terrorists and drug dealers. Cash, he says, allows this axis of evil to do its thing(s). This is a ruse, of course. If currency is eliminated, these outfits will turn to gold and silver, it’s that simple. And so will everybody else, by the way. The real reason to abolish cash and herd all money into central banks is to permit the authorities to confiscate it one way or another, either by unavoidable taxation or by “bail-ins” — declaring deposits to be “unsecured loans” that can be repudiated in the event of a financial “accident.”

The results are already in for this experiment: “money” becomes more and more dishonest, that is, it cannot be trusted to represent what it pretends to stand for: an index of account and a store of value. Its role as the basis of capital formation is so impaired that real capital (i.e. wealth) cannot be generated, meaning that none of the credit issued as “money” will ever be paid back. Zero interest rate policy eventually equals zero interest paid. “Money” based on loans that won’t be paid back loses its legitimacy. Herding all the “money” onto central bank computers only allows for more three-card-monte maneuvers to conceal the bezzle. It would be much harder to hide the destruction of value in circulating paper currency. Eliminating currency as a medium of exchange can only lead to the repudiation of “money” — which will beat a quick path to the repudiation of all authority. And there is your recipe for really suicidal political disorder.

One more thing this week: why exactly are America’s Clinton-invested political elites inveighing so strenuously against Russia and its president, Mr. Putin? The US has gone out of its way to provoke Russia militarily the past several years. We foolishly sponsored the revolution in Ukraine that has left it a failed state — and which prompted Russia to reclaim the Crimea, historically its own territory and the site of its strategically crucial warm water ports. We continue to run NATO war game exercises along Russia’s borders. We fly surveillance planes in their airspace and then act surprised when Russia sends up fighters to remind us where we are. We hold naval exercises in the Black Sea and wonder why the Russians buzz us. Are we out of our minds? How would we act if the Russians flew their planes over Catalina Island or held naval war games off Hampton Roads? Who does the US policy elite think they’re kidding?

These memes in financial and foreign policy are dangerously crazy and dishonest. They are doing a good job of making the US political establishment look like a claque of fools and outlaws, and laying a red carpet for the election of Trump, the fake savior… the apotheosis of the fabled Greater Fool.

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