12/11/16 UPDATE

Today, oil prices have collapsed to $35.79 a barrel and the junk bond market is collapsing.

Oil prices are breaking into new low ground. Energy and mining companies and countries whose bonds are dependent upon commodity prices, are in trouble. This means that the banks that  hold the securities are also in trouble. In addition, The Third Avenue management mutual fund has stopped investors from withdrawing funds while it liquidates its high-yield bond portfolio. Third Avenue has said that poor bond market trading conditions makes it impossible to raise sufficient funds to meet redemption demands. This is an indication of how much the market for high yield corporate debt is deteriorating. High-yield bond assets in the US mutual funds are at about $300 billion. Third Avenue is the first mutual fund to halt redemption’s without obtaining an authorized SEC order. The SEC has been warning mutual fund managers that it may be difficult to buy or sell at stated prices because of lack of liquidity. In my opinion, this is the tip of the iceberg that will eventually sink the banks. The key to watching the banks is the German bank, Deutsche Bank, since April the stock has fallen from $36 to 23.30 today. The other thing to watch is the Chinese stock market which has fallen from 28,443 to 21,464. If the HS I  index breaks below 20,557, look for panic selling worldwide.

One more thing. The Fed has picked this time to increase interest rates!

12/10/15 Lower commodity prices once again affecting the markets.

Oil prices have fallen from $110 a barrel in the summer of 2014 to its present low price of $37.16 a barrel today. Iron ore prices are off 43% since the start of the year and copper prices are down 29% this year. The S&P commodity price index has fallen since the 2008 recovery from 702 to 318 today. Energy and mining companies and countries whose bonds and dependent upon higher commodity prices are in trouble. This means banks that hold the securities are also in trouble. A number of commodity related businesses have already declared bankruptcy or have fallen behind in their debt payment. There have already been about 40 chapter 11 bankruptcy filings by North American oil and gas producers this year, accounting for roughly $15 billion in losses in secured and unsecured debt. Almost 1200 or so oil rigs or two thirds of the American total, have been decommissioned since last year. On Monday Energy and Exploration Partners declared chapter 11 bankruptcy listing debt of more than $1 billion owed to companies like Baker Hughes and Stumberger. Anglo-American is reducing the company size by 60% with layoffs, cutting its business units and closing mines and its London office. We continue to believe that the commodity price declines are just the tip of the iceberg of a deflationary scenario that will have devastating effects on the markets worldwide in the years to come. That is why European countries bonds are selling below 0%.

The full extent of this commodity deflationary commodities market shakeout will depend on whether prices continue to fall. China has pulled back sharply in its purchases of commodities because of its economic slowdown. China now has four of the world’s largest world banks. It has expanded its lending to 150% of its GDP. Worldwide bank lending to emerging markets has ballooned in recent years from about 70% of GDP in 2007, to  about 140% this year. Dollar denominated loans make up 25% of corporate lending in Russia, 30% in Turkey and probably 40% in Nigeria. Commodity producers would normally be immune to this problem. However, since their income is in dollars, the plunge in commodity prices has ensnared them. There is little worry now in Wall Street, that bad debts will reach a catastrophic level. However, I might remind you that Catastrophes are rarely predicted and always come as a surprise. The credit worthiness of China’s big corporations is worsening. China’s big state firms are largely bloated, insufficient and noncompetitive and account for approximately 1/3 of the country’s economic output. The debt of these large state firms appear shaky. In a November 30 Standard and Poor’s report stated that because of lower commodity prices, a troubled property market and a slowing of economic growth, China could be in more trouble than most investment advisers believe. In China bond issuance this year has boomed to $1.9 trillion. China’s bond market appears to be  a bubble. In my opinion,China’s financial announcements from its centrally controlled dictatorial government cannot be trusted.

China is not alone in having potential problems with its bond market, for instance Italy’s burden of nonperforming loans now amounts to $370 billion, the equivalent of 21% of GDP. The founder of a Brazilian investment bank has recently been arrested as part of a vast bribery investigation centered on resilience state oil and gas giant. Too much corporate growth has been fueled by debt. We continue to believe that a deflationary scenario will continue causing problems with holders of debt, especially banks worldwide. The last economic debacle occurred because of a bubble in mortgage debt securities. This bubble is almost ready to burst because of bad debt of companies and countries depending upon higher and stable commodity prices. If you want to look for the canary in the mine, look at Deutsche Bank whose stock price has fallen from $52 a share to his present $24.38 a share. It keeps on making new loans. One can only wonder why?

In spite of the markets dodging a bullet in 2015, I continue to see corporate earnings as weakening, the bond market as dangerous, banks as a house of cards, and international emerging market growth as negative and my Bear Market deflation scenario is delayed, but on track.

 Current Dow NASDAQ S&P 500
17,312 4,958 2,019
Short Term UP UP UP
Int. Term UP UP UP
Long Term SIDEWAYS? SIDEWAYS? SIDEWAYS?
Foretasted Trend DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term Down Down Down
Long Term Bear Market? Bear Market? Bear Market?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 17,919 5,156 2,110
Short Term Down (Support) 15,881/ 15,651 4487//4506 1879/1867
Int. Term Up (Resistance) 18,352 5,231 2,134
Int. Term Down (Support)       15,651/

/15,370 /14,688/ 13,377

4,506//4,116/ 3,986/3294 1,867/ /1,560
Long Term Up (Resistance) 18,352 5,231 2,134
Long Term Down Fibonacci Support 50%12,000  62% 10,750     50%2,958  62% 2,555 50%1,390 62% 1,177
 10 Treasury 2.16% Gold 1,075 Oil 35.70  

 

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