Thursday, December 11, 2014

Next Crisis: Oil and Subprime=Derivatives

JP Morgan, Morgan Stanley, heck, all of Wall Street have a new game to get their newest yacht. They are targeting high-end net worth individuals. They are offering them paperless loans and then, they are bundling these loans into security swaps. Sound familiar? That's right! They are substituting housing for securities, bonds or both in this new scheme. This easy loan is made because Wall St. already has the security, bonds or other assets in house. No paperwork. Take the money! Let's both go down to the boat dealer and buy a yacht. The market? Don't worry, it always goes up.
Don't Cry For Me, Rich Man!
Yeah, the Argentine revival show will end up crying on the ears of lobbyists and then, Congress. The spin will go something like this, "Something must be done for our rich folks who provide for so many with low paying jobs like cleaning, driving and baby sitting."
What about
It never was in reality. Just like the "deal" yesterday in Congress, it gets weaker and weaker to the point that it never was more than an abstract thought to placate the masses. So, subprime is back in business behind the scenes until it isn't. At that moment it will be a problem. As for you wealthy out there, get it while you can. You know the Fed has your back. So, step up to
Private Client Banking
a separate section in banks just for you. In a hurry? Then, apply for Morgan Stanley's,
Express Credit Line.
If the above was all the bad news you could take, close the site, come back to it after a break. The other problem has already showed itself and it is a doozy.
The price of the commodity as you all know whether you drive or just sit in the car, has been coming down. How low is it? It is so low that the Bird of Paradise was seen in a jacket because it was that cold. It is down by 40% this year! Before I get into the ramifications of low oil to the economy, it is important to realize that other commodities like iron ore, materials, gold and silver are all down too. Iron ore is at a five year low and JP Morgan now says, it could fall to $67. a tonne in 2015. You and me don't follow things like this, but we can understand the implications. In January JP Morgan said
the price would be $87. a tonne. Dr. Copper is below $3. a tonne and this is a dollar below forecast. These deflationary prices reflect a slowing global economy and keep this in mind. In late 2007 oil began to fall and it predicted the crisis of 2008. There are other signs too.
is in recession and it is deeper than previously thought. Half the members of the EU are in recession and the other half is gaining on the losers. China's demand for materials is falling. Russia's ruble is down 40% which will cause pain to its citizens and its central bank indicated a recession in 2015. Brazil and other emerging nations have internal problems with strikes and national protests, not to mention our own Ferguson, "Don't shoot!" story. Finally, the Baltic Shipping Index is down 500 points since last month. Global transactions are falling off the cliff.
Back To Oil
Do you know what "capital expenditure" means? It is money that companies plan to spend in an up coming year to increase quantity, get new equipment or put on a new roof. Since I'm referring to oil, all my example center on oil.
The oil giant, Conoco-Phillips started the process with low oil prices by cutting back its capital expenditure program for 2015. They cut 20%. Others will follow and it is already showing in oil drill permits which were down 40% in November. Keep this in perspective: The oil industry supports 9.3 million people with high paying jobs. It adds $1.9T to the GDP each year. Since 2007, 1.36 million jobs were gained in oil states, whereas 420,000 jobs were lost in non-oil states. In addition, oil accounts for 20% of junk bonds to fund their business. At present junk bonds are falling rapidly as investors are selling. They see this problem on the horizon. Too much supply not enough demand.
Corporate Debt
Now, all these junk bonds for smaller fracking companies like Continental Resources are putting these loans in jeopardy. Continental only had a debt balance of $140 million in 2005, however they expanded quickly. They now owe $6T in debt with lower prices for their product which is 43x the debt level of 2005. The oil industry has $200B in high yield debt and another $300B in loans. If one fails, it will effect a lender who should have the loan tied to an insurance derivative to which will effect more than one insurer and more than one loan. We've all seen a domino falling commercial except this will be real life. Why, you ask? Because Morgan Stanley now sees oil at $43. a barrel for 2015. This is less than half its previous estimate. At that price level more than half of the energy companies will lose money on every barrel sold. The "Don't Cry For Me..." song will be played many times in 2015. I have warned you, dear reader before about the dangers of derivatives. This could trigger the event.
P.S.: Argentina is in serious trouble with its currency too, but the lobbyists will sing to Congress while the Fed's, Yellin will perform for the media. Hopefully, a new song with the meme of "End the Fed" will resound throughout the land.

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