Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
The late 1990s' technology sector and the pre-2007 U.S. housing bubble are good examples of how financial excesses tend to hide in plain sight. It's not that they're unseeable, but that investors rationalize paying higher and higher prices as the trend reaches its zenith and then painfully rolls over.
Two reports this morning suggest that U.S. corporate bonds is another market land mine just sitting there before our eyes,
"Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies -- one third globally -- are failing to generate high enough returns on investments to cover their cost of funding. …'We've never been in a cycle quite like this,' said Bonnie Baha, a money manager at DoubleLine Capital in Los Angeles, which oversees $80-billion. 'It's setting up for an unhappy turn.'"
An interview with Jeff Bahl, Goldman Sachs' former head of high yield bond trading describes a similarly unhappy immediate future for the sector,
"The concept of "efficient frontier" has percolated into the executive suite as CEO's have been searching for the most efficient capital structure. Aided not so subtly by activists, the answer has universally been "more leverage" with a focused sweet spot on [BBB/BB – rated bonds]… the majority of the new money can be classified as "tourists" aka renters, not owners. As a class, these tourists are unfamiliar with the risks and illiquidity and only familiar with a recent history of strong returns. Similar to the cracks that emerged in late 2007 in the mortgage market, cracks emerged over the past six months in levered credit "
"The $29 Trillion Corporate Debt Hangover That Could Spark a Recession" – Bloomberg
"Goldman's Former Head of Junk Bond Trading Has Some Choice Words About the Credit Market" – Bloomberg
"Why the Fed Has the Stock Market Spooked" – Wall Street Journal
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CIBC economist Avery Shenfeld published an uncomfortable warning for Canadians, writing, "While the country's GDP is less heavily weighted to resource sector spending than it was a year ago, we're only in the early stages of the negative spillover effects on other sectors. "
Full research excerpt: "@SBarlow_ROB Wherein Canadian sell-side economists play catch-up on the whole bearishness thing. From CIBC --> pic.twitter.com/8rn4AH7RiF " – Twitter
"'Worst may not be over': Canada's injured economy in 6 charts" – Babad, Report on Business
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The Financial Times attempts to explain the 'new world order' for the oil industry,
"[U.S. production] makes an enormous difference, especially when considering the nature of marginal production in the US, which comes from shale resources. These rocks are not only superabundant, but they can be exploited at a relatively low cost. Just compare an offshore well at $170m with a vertical shale well that costs under $5m, with a five-year payout for a successful deepwater well versus a mere five-month payout for a shale play. And multiply a single, individual shale well by hundreds of wells and hundreds of decisions and you get a new world order.
"With productivity gains in the US rising and costs of exploitation falling in a deflationary environment, if the traditional producers succeed in reining in production, prices will rise and US drilling will resume and US production will again surge."
The story can be summarized as ' there is probably a price ceiling on oil in the $50-$60 per barrel range for a long, long time.
"Welcome to the new oil order" – Financial Times
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Web traffic statistics here at the Report on Business suggest that readers would rather shove needles in their eyes than read about European markets. With most of the Italian bank stocks halted on a steep sell-off overnight, this may change. Italy's banks are much, much bigger than any Greek institution.
"Italian Banks on Losing Streak After Bad-Loan Deal Disappoints" – Bloomberg
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Tweet of the Day: "@PipCzar Crude is in a dangerous spot if you are short ----> pic.twitter.com/bGWQ69uePS " – Twitter
Diversion: "Why counting calories doesn't work for dieters" - Gizmodo
Scott Barlow