IT"S YOUR JOB

There is a simple, straight forward disclaimer at the conclusion of this article.

All of the numbers tell us the same thing. Big trouble is ahead. My job is to inform you of these things. What you choose to do with this information is up to you.

Nearly everyone likes good news. Hardly anyone welcomes bad. For some that's what life is about. Call it ups and downs. For others their contempt for reality goes so far that they try to legislate or edit it away. These are people who love to shoot the messenger. Yet most of us don't own the bus.We're simply driving it.

These are the same people who seek to legislate away or edit legitimate differences of opinion by calling those who express them mean spirited or hateful. But facts are stubborn things, as they say. You might not like it, but there's deep, deep trouble in commodity paradise. Those are the facts.

So why are commodity prices falling so rapidly?

Many analysts are pointing to the economic slowdown in China as the primary reason.  For years, the Chinese economy voraciously gobbled up commodities from sources all over the planet, but now things are changing.  The Chinese economy is really, really slowing down, and some recently released numbers give us some clues as to the true extent of that slowdown…

-Chinese exports fell 6.8 percent in November on a year over year basis after being down 6.9 percent on a year over year basis in October.

-Chinese imports were down 8.7 percent in November on a year over year basis.

-Chinese manufacturing activity has been contracting for nine months in a row.

-Last week, the China Containerized Freight Index plummeted to 718.58 – the lowest level ever recorded.

And of course it isn’t just China.  Goldman Sachs says that the seventh largest economy on the entire planet, Brazil, has plunged into a “depression“.  And as I pointed out the other day, of the 93 largest stock market indexes in the entire world, an astonishing 47 of them (more than half) are down at least 10 percent year to date.

Even though stocks slid in the U.S. this week, the major indexes still seem somewhat stable.  But this is a bit of an illusion.  Yes, the biggest names on Wall Street are still flying high for the moment, but shares of a multitude of smaller and mid-size firms have been plummeting.  At this point, nearly 70 percent of all U.S. stocks are already below their 200 day moving averages.  This is yet another thing that we would expect to see just before the bottom falls out for stocks.

Everything that I have been writing about this week (see here and here) is perfectly consistent with all of my warnings from earlier this year.

We are plunging into a deflationary financial crisis in textbook fashion.  And if the Federal Reserve actually does decide to go ahead with an interest rate hike next week that is just going to make things even worse.

But most people are not patient enough to watch a process play out.  Most people that write about “the coming economic collapse” hype it up like it is going to be some sort of big Hollywood blockbuster that is going to happen over a week or a month and then be over.  That is definitely not the way that I see things.

To me, “the economic collapse” is something that has been happening for decades, that is still in the process of happening right now, and that will continue to happen as we move forward into the future.  The long-term trends that are ripping our economy to shreds continue to intensify, and our leaders are not doing anything to fix our underlying fundamental problems.

As the man said: We're not here to tell you whether this is a good opportunity for more failure or one for back-up-the-money truck for outright success.That's your job.

theeconomiccollapseblog.com/archives/the-global-commodity-crash-tells-us-that-a-major-deflationary-financial-crisis-is-imminent

OVERNIGHT

Reuters reports EU concern about fate of Chinese yuan and it's global impact added to the gloom in the oil patch and next week's Fed action seem to be taking their toll on investor sentiment.
 

LONDON/MILAN, Dec 11 European shares fell on Friday on concerns that weakness in the Chinese yuan could weigh on the global economy, while the slump in oil prices added to the gloomy mood before a widely expected rise in U.S. interest rates next week.

The pan-European FTSEurofirst 300 index fell 2 percent to its lowest level in around two months, and was on course for its weakest weekly perfomance since August. The euro zone's blue-chip Euro STOXX 50 index declined by a similar amount.

"We have the yuan at 4-1/2 year lows and that is causing unease in China and abroad. Last time the yuan fell like this, it caused a jolt for markets, and anyone exporting out to China, like the auto makers and luxury brands, will feel the pain from a weaker yuan," Jasper Lawler, market analyst at CMC, said.

That could hurt export-oriented companies in sectors such as automotive, luxury goods and commodities, which were among the top decliners in Europe.

Shares of French carmaker Renault, watchmaker Swatch, fashion house Hugo Boss and BHP Billiton were all down 3.3 to 5.8 percent.

The FTSEurofirst is down by 4 percent so far this week and also down 7.8 percent since the start of December, after the European Central Bank disappointed some investors with only limited new economic stimulus measures this month.

"Markets continue to discount disappointment over the ECB. You add oil prices making new lows, worries over U.S. high yield, China deflation and a mini credit crisis in Italy, then you have the cocktail that is weighing on markets," said Giuseppe Sersale, fund manager at Anthilia in Milan.

SNIFFING AROUND

 
Much has been written in the past few days since the fate of Third avenue's junk bond fun hit the news. No doubt there will be some ripples. But it obviously begs to be or not to be question for many  investors: stay or be gone?

Here's an excerpt from the recent issue of Barron's on the matter you might find interesting. Our view is best answered with a question: How good is your sniffer?

These are scary times for junk-bond investors. Not only are the bonds falling in price as commodities slump and the Federal Reserve prepares for liftoff, but tax-loss selling and large redemptions in junk-bond funds are dragging down prices further.

Investors saw one of their worst fears realized Thursday when an especially risky, money-losing, high-yield fund facing a wave of redemptions announced it is liquidating. Only by blocking the exits and setting up an orderly process for selling highly illiquid holdings does the Third Avenue Focused Credit Fund stand a chance of returning reasonable amounts of cash to investors.

Friday junk-bond exchange-traded funds, like iShares iBoxx $ High Yield Corporate Bond (ticker: HYG) fell (along with crude oil and equities) an extra-steep 2%, the worst day in more than four years. Year-to-date, the high-yield sector is down some 6%, with 3% of the loss coming in December alone.

Investors who didn’t know what they were getting into when they bought pleasant-sounding high-yield funds, may want to scale back as selling pressures intensify.

Those with long time horizons and risk appetites may find opportunity in select issues. Yields, 

especially in low, triple-C bonds, are in the high teens. “The opportunity is in the lower-quality paper where there is not a lot of liquidity,” says high-yield analyst Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors. In contrast, prices of bonds just below investment grade have improved in recent months, but they aren’t that cheap, he says.

“I wouldn’t be rushing in,” says Fridson, who expects more mutual fund outflows to pressure the sector following Third Avenue’s “unprecedented” fund liquidation. “You’d have to be awful nimble and maybe lucky to take advantage of these short-term moves.” His model shows the sector will average 3.4% annual returns for the next five years—well below coupon rates. There will be some big price swings within that long-term forecast.

Art DeGaetano, chief investment officer at Bramshill Investments, is among those sniffing for opportunity, but he’s avoiding energy-related names. “We would need to see a fairly decent repricing for us to get involved in some of the sectors that have really started to break down,” he says.
  
barrons.com/articles/high-yield-hang-in-or-bail-out

VOICES

There are lots of voices out there and-- though, as we always warn, you need to do your homework-- we try to bring ones we find interesting. Dire warnings are a staple of markets and the perennial war between the bulls and the bears.

Still, huge corrections happen and given the now way out-of-control global monetary policy we're witnessing, safe trumps sorry. So, again, do your homework.

Several noted economists and distinguished investors are warning of a 50% stock market crash.

Billionaire Carl Icahn, for example, recently threw up a red flag on national broadcast when he declared, “The public is walking into a trap again as they did in 2007.”

Unfortunately, Icahn’s warning is tame compared to his peers.

“U.S. stocks are now about 80% overvalued,” says Andrew Smithers, the chairman of Smithers & Co. He backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.

This simple sandcastle analogy proves an economic collapse is imminent. Click here to see how…

Former congressman Ron Paul didn’t mince words either. He warns that the stock market’s “day of reckoning” is fast-approaching. When that day comes, he doesn’t think it’s just going to be a correction, it will be “stock market chaos.”

But there is one distinct warning that should send chills down your spine … that of James Dale Davidson.

As a renowned economist, best-selling author, and founder of Strategic Investment, Davidson makes the strongest case for a looming crisis — “Right  now, there are three key economic indicators screaming 

SELL. They don’t imply that a 50% collapse is looming, it’s already at our doorstep.” More:

thesovereigninvestor.com/exclusives/stocks-economy-on-verge-of-collapse

TROUBLE IN HIGH YIELD LAND

If your paradise was once the garden of high yield bonds, there's trouble in paradise.

Though those responsible naturally won't want to claim it, much of that trouble can be placed at the Fed's ZIRP doorstep. And if one can believe billionaire investor Carl Icahn it's just the first act. Here is a list of things the noted investment octogenarian says went wrong.

• Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts) we might fairly say that the Fed has become the bubble blower extraordinaire. See the price tag attached to Picasso’s Women of Algiers (Version O) for proof of this.
• Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost. 
• Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there’s something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn’t exactly been quiet about his opinion with regard to Apple’s buyback program (he does add that healthy companies with lots of cash should repurchases shares). 
• Fake earnings: Companies are being deceptive about their bottom lines.
• Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates. 
• Corporate taxes are too high: Inversions are costing the US jobs.

There is something labeled the spillover effect. Bill Gross, another serious investor, alluded to it recently when he twitted: "Who will get n if you can't get out? " That's more than just an oblique reference to the Third Avenue fund where they reportedly locked up funds for one year.

Where not baseball card collectors but just today it was reported a 1952 Mickey Mantle card went for $525,000. Sure it was a rare rookie card. As Icahn says, the Fed has become the "bubble lower extraordinaire."

And how many today really know who Mickey Mantle was?

http://www.zerohedge.com/news/2015-12-11/carl-icahn-warns-meltdown-high-yield-just-beginning

OPEN LETTER TO RON PAUL

Mr. Ron Paul:

You say that a Trump victory would be horrible for the Republican Party and you cite the following. Knowing that this appeared on CNBC, I am assuming you were quoted correctly.

"It would be very bad if he was to get the nomination," Paul said in a Thursday interview with CNBC's "Futures Now." "The party would be severed in two pieces."

Further, said the libertarian former congressman from Texas said, "he wouldn't win, and it would be devastating to the markets, because then you'd have Hillary [Clinton]," whose tax policies would hurt the economy.

cnbc.com/2015/12/10/ron-paul-a-trump-win-would-sever-the-gop. 

First off, let me say I appreciate many of your views and applaud your long defense of liberty and the libertarian philosophy. Having noted that, however, I am somewhat surprised at your failure to see the Republican Party is already --and has long been--"severed" into several pieces not just two. In fact, one could argue that if this so-called political party that claims it offers a difference actually did so, a candidate like Trump would never enjoy the current traction he's obviously getting, a traction it is  just as obvious that is quite painful to many.

I say this never having been a member of either party. In fact, it's my fervent wish when I finally exit this dimension to enjoy the pride that comes with never having been a member. In our semi-free society we all still get some choice in how we choose to go bankrupt. Joining either these two shams isn't in our bankruptcy lexicon.

Now you and I know MSM is trying its best--par for their course--to write this off as a fringe thing. It isn't. Trump, like it or not, is rattling many establishment cages, one of which is big time MSM. We could name you numerous others, but we will spare you the boredom.. And you don't seriously think anyone other than a Clinton is going to be the next president. If you do I will respectfully lower my respect a notch for you and your political savvy.

Now if you're talking about the Democrat-Republican effect on the stock market, we all know those numbers. Trump is a breath of fresh air; he is the healthiest thing on the political horizon in years. He's saying things millions of Americans across all lines would like to voice publicly, but nearly all of them savvy quite well the definition of two words--ostracism and punishment.

This is a repressive administration in a growing repressive society, something one would think given your political history you would see the value of a character like Trump. So as we like to say around here: That's our opinion. We hope you still know yours.

JUNK BOND DISTRESS

The recent announcement by Third Avenue fund to close client redemptions on their high yield bond fund ruffled investor feathers and started necks craning  to look around for who might be next.

Here is an article on the matter from zerohedge citing a Morningstar list of best and worst junk bond funds. Keep in mind, however, what longtime distressed bond investor billionaire Howard Marks recently noted.

Marks, speaking Tuesday at Goldman Sachs Group Inc.’s U.S. financial services conference in New York, said he’s seen many bonds across industries slide to 60 cents on the dollar from 90 cents since September. Los Angeles-based Oaktree is spending a lot of time studying oil and gas companies, he said.

High-yield bonds tied to energy companies have slumped 25 percent since June of last year. Brent crude on Tuesday briefly fell below $40 a barrel for the first time in almost seven years after the Organization of Petroleum Exporting Countries effectively abandoned any limits on output.

“Hedges were in place that have worn off; companies will lose their credit lines,” Marks said of oil producers. “Some of the price declines and some of the weakness makes the prospective buyer very happy.”

zerohedge.com/news/2015-12-11/which-high-yield-fund-gates-next-after-third-avenue-here-are-unusual-suspects

THE OIL WOODSHED

The market took oil for another visit to the woodshed as the International Energy agency released it's latest report. World demand for next year, according the the report, will decline from 1.8 billion barrels a day to 1.2 billion.

Overnight in New York, West Texas Intermediate crude oil futures fell to a new low seven-year low of about $36.13 per barrel.

The International Energy Agency said in its monthly report that the decision of the Organization of the Petroleum Exporting Countries last week t o continue to pump crudeat record levels into an already oversupplied market is hurting producers outside the oil cartel, especially the shale industry in the U.S.

"As companies make further spending cuts in reaction to sub-$50/bbl oil, the impact on supplies…will be even more pronounced in the longer term," the Paris-based agency said. However, it added that "as inventories continue to swell into 2016, there will still be a lot of oil weighing on the market."

Brent crude, the global oil benchmark, fell 0.7% to $39.86 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 0.5% at $36.56 a barrel.

On Thursday, both benchmarks reached their lowest settlement value since Feb. 18, 2009.

The IEA, which advises the world's biggest economies on energy policies, also projected that world oil demand growth will slow to 1.2 million barrels a day in 2016 after surging to 1.8 million barrels a day this year, as support from sharply falling oil prices begins to fade.

.nasdaq.com/article/oil-falls-on-iea-report-20151211-00173

OVERNIGHT

Reuters reported that this is the first time time in four sessions Japanese equities saw some upward  light at the end of the tunnel. But the move ran counter to other Asian markets pretty much insuring stocks will end the week lower.

Part of the drawback hings on big events next week with the Fed set to bump up interest rates finally in what has become the most anticipated Wall Sreet theme in a long time. Many investors remain jittery ahead of the event.

Meanwhile, Business Insider reports:

Futures were sharply lower and crude oil fell to new lows on Friday morning. 

Near 7:40 a.m. ET in New York, Dow futures were down 196 points, S&P 500 futures were down 19 points, and Nasdaq futures were down 49 points — all about 1% lower, pointing to a lower open on Wall Street.

Overnight in New York, West Texas Intermediate crude oil futures fell to a new low seven-year low of about $36.13 per barrel.

On Thursday, crude slumped after OPEC's monthly report showed that the oil cartel pumped the most oil in three years in November. And then, the International Energy Agency's own report on Friday warned again that the global supply glut will worsen in 2016 as inventories continue to build.

On Thursday, the indexes closed slightly higher to break a three-day losing streak. 

Friday was a weak day for many global markets. Across Europe, indexes including Germany's DAX, the FTSE 10o in London, and Euro Stoxx 50 were all down by more than 1%. 

ECONOMIC SLOWDOWN IN OIL PATCH CONTINUES

 
Earlier it was the Chicago PMI raining on the economic recovery parade. Now it's Houston.

The pain of weak energy prices continues to take its toll. With the Fed set to hike interest rates next week in what many believe is a done deal, Yellen and her crew may be positioning themselves at exactly the right place and time to do exactly the wrong thing.

A current story making the rounds is Fed concern about what effect higher rates might have on auto sales.

Houston’s economy continued to struggle with oil industry layoffs and cutbacks in November, as well as losses in manufacturing and trade that have reversed recent gains in the energy capital of the world.

The Houston Purchasing Mangers Index, a closely watched predictor of the city’s economic health, slipped to 45 points in November, signaling a contraction in economic activity for the 11th straight month. Readings below 50 indicate contraction.

The oil and gas sector and related industries showed significant signs of weakness, with exploration and production firms and oil field service providers curtailing spending plans and paring back budgets to brace for a prolonged period of anemic crude prices.

“Our businesses continue to right-size in order to align with the prices of oil and gas, which are now expected to be these levels for longer term,” one respondent from the oil and gas sector said in the survey conducted by the Institute for Supply Management.

“Employment reductions are continuing,” another said.  

fuelfix.com/blog/2015/12/10/houstons-economy-stumbled-again-in-november-index-shows