Saturday, February 27, 2016

FINANCIAL STRESS IN THE US?

This is a summary of a report by Wolf Street.

According to S&P Capital IQ, distressed debt ballooned by 15% in the month of February alone, totaling a whopping US$327B, up 265% from a year ago.

The number of S&P rated US companies with distressed debt rose 9% in February, up 128% from a year ago. 

This is an indication that risks are spreading across the broad spectrum of the US economy. Here is a list of the most distressed sectors:

 US-SP-Distressed-sectors-dollar-debt-2016-02

As the oil and gas sector is the more distressed industry, I expect there will be more provision for credit losses once the banks report the Q1 2016 financials. Just last week, JP Morgan increased its provision for credit losses by another 60% (US$500M).

Once the oil and gas sector starts to unravel, it will implode the credit and financial derivative markets, and we could have a major financial crisis at hand.

Besides the oil and gas sector, the subprime students loans (US$1.3T) and car loans (US$1.0T) are raising the prospect of a major default by borrowers, students who cannot find a job, and car owners who over leveraged their personal finances.

Ignoring the U3 and U6 data, if we take into account of every citizen who is of employable age, the unemployment rate in the US could be more than 20%.

The coming months could be telling on the stock market. 

Monday, February 22, 2016

NCM, SBM AND ABX UPDATE

On October 6, 2015, I recommended 3 BUYs for their gold mining exposure. Where do they stand now?

NCM (ASX Newcrest Mining) October 6, 2015 A$14.05  February 22, 2016 A$15.86 for 12.9% gain.

SBM (ASX St Barbara Mining) October 6, 2015 A$1.075  February 22, 2016 A$1.74 for 61.9% gain.

ABX (NYSE Barrick Gold) October 6, 2015 US$7.30  February 22, 2016 US$12.82 for 75.6% gain.

Looks like SBM and ABX outperformed NCM. NCM could be affected by its iron ore production, which saw some lowest prices in recent years.

I would SELL NCM on the back of any increase in gold, HOLD SBM and BUY ABX.

The above are just my opinion. You are encouraged to do your own research.

My disclosure: I own SBM and ABX.



UKOG UPDATE

After waiting for months, UKOG finally conducted a flow test on its Horse Hill site in early February. The results, while not spectacular, was better than expected, as the Lower Kimmeridge zone delivered 456 bopd after choking back with a 24/68 inch choke. Initial flow was 700 bopd.

UKOG is now preparing to conduct similar flow test in the Upper Kimmeridge zone and the Portland Sandstone.

A BUY recommendation on UKOG was initiated in September 2014 at 1.19 pence. With yesterday's closing price at 2.38 pence, this is equivalent to a gain of 100% since.  

My disclosure: O own UKOG.

LEGENDARY INVESTMENT UPDATE

Legendary Investment (LEG) has surged in recent days to close at 0.165 pence, 65% increase from my BUY recommendation (0.10 pence) in September 2014.

This is on the back of its investee company, Virtual Stock (VS) signing two major retailers to use its Edge software in February 2016.

LEG is still undervalued at the moment. Based on the latest valuation of all its investments, LEG should be valued above 0.20 pence.

I am inclined to believe LEG could deliver tremendous result in the next 2 -3 years.

My disclosure: I own LEG.

HSBC Q4 LOSS, THE LATEST ENTRY IN THE BILLION DOLLARS LOSS CLUB

HSBC reported that it posted a US$858M loss in its Q4 2015. Interestingly, impairments on bad loans and credit risk provisions increased by 32% to US$1.64B in Q4, pushing the full year charges to US$3.7B (Source: Bloomberg).

Almost US$1.0B  of the loan impairment charges were from the oil and gas sector.

So I would expect US banks to report further increase their credit risk provisions in the coming months as oil was much lower in Q1 2016 vs Q4 2015. Things could get ugly when the banks report their earnings in Q1 2016.

HSBC is the latest entry to "The Billion Dollar Loss Club." Including in the club are Credit Suisse, Deutsche Bank and Standard Charted.

As a result, HSBC will cut 25,000, just as Standard Charted cuts 25,000 jobs, Credit Suisse, 4,000 jobs, and Deutsche Bank, 30,000 jobs.

When the banks are cutting jobs, you know that their margins are squeezed and is a sure sign that all in the economy is not well.  

Stay away from investing in any banks.


Thursday, February 18, 2016

GOLDMAN OFF ON THE WRONG FOOT....AGAIN

Just days after flip flopping from being bullish to bearish on gold, gold today rose more than US$20 to US$1,230 per oz.

Just two days ago, Goldman issued a letter to its investors to short gold, stating that systematic risks on banks are off and China's slowdown was due to fear more than actual weakness. Just as they did last year when they recommended its investors to short the Euro and what happened next was a major letdown as Draghi's much touted all gun's blazing revamp of policy became a water pistol party (as quoted from zerohedge).

Not to forget, wasn't it Goldman who predicted that the Fed will raise interest rates for four quarters to 1.50% by end of 2016. Well the Fed recent minutes seemed to sate otherwise.

That's 3 Oops! on your scorecard Goldman! And at what costs to the ivnestor who buy your recommendations.

Therefore it is prudent that investors do your own research rather than rely on "prestigious" research houses for research materials.

Always focus on the fundamentals instead. You will be on relative safe grounds.




Tuesday, February 16, 2016

GOLD HAS NOT LOST ITS SHINE

After reaching a high in the US$2160s gold started falling this week to a low of US$1190s before rebounding in late afternoon.

Has gold lost its shine? I think NOT. In fact, the case for gold has not been stronger. The world remains mired in sustainable debt levels (In January, China increased its debt by a whopping US$0.5 trillion!), global trade is in the doldrums (the Baltic Index has fallen more than 97% from its peak and lowest in recorded history), weak GDP growth (Japan's GDP just shrunk 1.4%), and poor PMI data (US and China PMI data is  less than 50 indicating a contraction).

Even more amusing is that just last week, Goldman made a case that gold could move higher but in the latest newsletter called for investors to short gold with a price target at US$1,100 per oz. Really? In a matter of days!?

My suggestion to investors of gold to adhere to the fundamentals which are clearly showing distress in global debt levels, and potential banking crisis in US (due to  a string of bankruptcies among shale oil producers) Europe (debt crisis and negative interest rates), Japan (negative interest rates with the highest debt level in the world at more than 500%) and China (ballooning debt levels and a weak economy).

Just as banks say that gold never earns a dividend and interest rate, and the Fed will continue to raise interest rates going forward. Here are some questions which you shoudl ask yourself:

1) Do Amazon and Facebook pay a dividend?
2) Gold does not pay any interest. So what happens when even bonds are showing negative interest rates and keeping your money in the bank?
3) The EU and Japan are moving into negative interest rates. Will the Fed raise interest rates in such a scenario, because it means a stronger US$ and making US made goods less competitive, harming the US economy further. How many more rate increases before the Fed go back into easing mode? Already all bets are indicating that the Fed will not increase interest rates at all in 2016.

I remain bullish on gold and silver, and related ETFs.

The above are just my opinion. Please do your won research as well.
 




OPEC AND RUSSIA AGREE TO FREEZE PRODUCTION AT JANUARY LEVELS

While the headline sounds positive, it remains be seen if production levels will be frozen at Janaury levels, if at all.

This is because the "freeze" is subject to compliance by other OPEC members, which immediately put this to doubt as Iran has vehemently stated that it will not halt its plans to increase production.

And for wall Street to adopt an optimistic view that production cuts could happen is unrealistic given the following facts:

1) Iran's stance that it will not cut production nor halt its plans to increase production

2) OPEC's price war with US shale producers has resulted in many member countries liquidating their sovereign wealth funds to finance the shortfall in their nations' budget. To have cut production is akin to handling the any potential price increase to the US shale oil producers on a platter. Now, who would do such a thing after such unbearable costs to the nation, especially since non of the US shale oil producers have indicated that they too will cut production?

When all else look so gloomy, it is not surprising that investors often hold hopes for promising outcomes. These outcomes sometime do not make much sense given the fundamentals, geo-political climate and demand. As such they often find themselves on the wrong end of the stick.

I remain bearish on US oil shale oil companies. Many are already in distress and bankruptcies could erupt in the coming months. Ultimately, US financials will also bear the brunt. We are not far from another unraveling in the financial markets.

  

Wednesday, February 10, 2016

WHY SOCGEN'S ALBERT EDWARDS MAY STILL BE RIGHT

Quite sometime ago, SocGen's Albert Edwards projected that the S&P 500 could crash 75% from its high and immediately drew the ire from many economists, analysts and "investment gurus", some comments of which were bordering from pure sarcasm to accusing him of sheer lunacy.

Seeing the many distress in EU banks, the impact of the fed's policy of error (by increasing the interest rate in the midst of a global slowdown), the ECB and BOJ's NIRP, China's looming debt crisis, Edwards could be nearer to the truth than many who thought otherwise.

Edwards only mistake was singling out China as the cause of a global collapse. China is not the cause. The cause is the huge monetary base and ZIRP unleashed by the US, followed by the ECB and BOJ's QE. China responded in the only way it could by reducing the interest rates and the reserve ratio, which push the Yuan lower against the US$. These actions by the central bankers have enabled credit growth to increase to dangerous levels, unseen since 2008. 

I have mentioned time and again that the best barometer of global trade is none other than the Baltic Index which has just plunged 97% from its highest point and is now loss than 300 points. 

And today Maersk reported that its 2015 profit fell a whopping 84% vs 2014! It the economy is on a steady growth path as projected by the Fed and major banks, there should be a vibrant container shipment of goods. Truth is, both imports and exports are falling in the major economies of the world.

To surmise a structural failure in the world's financial system doe snot require rocket science. One only ha sto look at the global debt to GDP level and all will be revealed. How can a global economy of US$70T support a global debt that is more than US$230T. As the global slowdown becomes more prevalent the ratio of global debt to global GDP will increase, putting the world financial system into greater risks.

The EU domino has fallen. Japan is following suit. The next one will be China. With a total debt to GDP of 346% it is a nightmare waiting to happen.

Saturday, February 6, 2016

US JOBS: WHY IT IS WORRYING

US jobs in January came in at 151,000 vs 195,000, estimated. This is a far cry from December's 292,000. jobs.

However a worrying trend seems to have emerged. 69.5% of the jobs reported were minimum wage waiters and retail workers (According to the BLS 58,000 jobs were retail and 47,000 jobs were waiters and bartenders).

This is indicative that majority of the jobs created are low paying jobs.

In a report by Zerohedge, the wage growth shown in the January jobs report has more to do with the states demand for minimum wage hikes which went into effect on January 1. So it is likely that the wage growth seen in January will not be seen in February.

Another worrying trend which emerged is a report by Challenger than number of layoffs in January surged to more than 75,000.

So the spike in the US$ in the early hours of trade on Friday could be a bit premature. I strongly believe that the US economy will continue to weaken with more jobs losses in the coming months, and as a result a further weakening of the US$.

I continue to believe that gold and silver, physical, miners and related ETFs will continue their upward momentum. This is just my opinion, you are encouraged to do your own research.

Wednesday, February 3, 2016

HAS THE UNWINDING OF THE PETRODOLLAR BEGUN?

Russia is now accepting the Chinese Yuan for settlement of oil trades between the two countries. According to Bloomberg, Russia acceptance of the Yuan, will push Russia ahead of Saudi Arabia as China's primary source for oil.

Interestingly, both Iran and India has agreed to settle oil trades between both countries in Rupees, again pushing aside the petrodollar US$).

Source: russia-insider.com.

Both China and India are expected to grow their economies despite a slowing global economy, and thus their demand for oil will continue. As the settlement of oil trades move into the Yuan and Rupees, the demand for the petrodollar will diminish significantly. This could further exacerbate the weakening of the US$ going forward.

Starved of a major client in China, Saudi Arabia, may contemplate following Russia's footsteps. Iran having agreed with India to trade in Rupees, will mostly likely trade with China in Yuan.

Against this threat, one wonders how the US might react. Another war to maintain the US$ dominance? The geopolitical theatre is already in turmoil, and the world is better off  without a war that could have far reaching consequences.  


AN IRRESPONSIBLE CONSEQUENCE?

Japan recently cancelled the sale of March 10 Year Bonds due to the negative interest rates. Prior to that, the sale of  the 2 and 5 year Bonds too have been suspended.

The BIG QUESTION now is how Japan intends to fund itself, being saddled with a government debt that is 250% of its GDP.

 It is not surprising that the Nikkei is crashing lately. I would expect mroe of the same scenarios worldwide as governments fall under the weight of their debts.

A 2014 report by McKinsey showed that Japan had a total debt of 517%, so this puts Japan as at the top spot as being the world most indebted nation.

China which had a total debt of 282% of GDP as at end of 2014, now has a total debt amounting to 346% of GDP. News came out that at least 25% of the debts are risky debts. So in the coming months,  would expect a wave of default among Chinese companies.

The US government's debt just passed the US$19T mark. That's almost US$1T increase in 2015 alone! Total US debts today stand at US$64.7T which is  355% of its GDP. Earnings season in this quarter could reveal that the recession in earnings which started in Q2 2015 has not abated and will likely fall further going into Q1 2016 earnings.

The shale oil companies will be among the first casualties. CNBC reported that almost half would likely declare bankruptcy int he coming months. This suggestion is based on the low oil price environment and and the wide spread among HY energy junk bonds. The continue distress could spread to IG bonds and unravel the financial derivatives which are valued between US$700T to US$1.5Q.

Talking about financial derivatives, the bank with the highest derivatives risk is none other that Deutsche Bank. The value of its derivatives is to the tune of US$64T  or more than 15x the Germany's GDP of US$3.9T (Source: zerohedge.com). Coupled with a US$7B loss in Q4 2015, Deutsche Bank could be at risk. The negative interest rates environment in EU is also not helping the bank. The question is many people's minds right now is, "Could it get worse?" The unraveling of a mammoth bank like Deutsche Bank could have far and wide implications on other banks across the globe.

Going forward, I think some of Japan's major banks could face similar challenges in a negative interest rates environment.

With all these negative yields in bonds, isn't it better to own gold and silver which although do not pay any interest, but at least the 0% yield is by far better than the negative yields in bonds?