Category

Credit

Wall Street

This Credit Market Barometer Shows Heavy Storms Ahead

Private equity firms serve as a startlingly accurate credit barometer. The less productive their behavior, the more likely the cycle is reaching its late stages.

When credit is mispriced, the credit cycle is far advanced, and debt investors should be running in the other direction from bond and loan offerings involving private equity‐owned borrowers… because private equity firms are doing two destructive things.

And that's what we saw up until the end of 2014 when the music in the credit markets stopped. Here's what to watch for...

China

Kyle Bass: Beware China's $34 Trillion Meltdown

Yesterday, Kyle Bass – the hedge fund manager who predicted the 2008 mortgage crisis – released a letter cautioning investors about China's impending implosion.

He revealed how his warnings are largely being ignored by China market experts and Wall Street aficionados alike.

But he's got proof - a very specific wealth product, in fact - he claims is the "ticking time bomb" about to go off in China...

Stocks

The "Ghost Ship" Leading the Markets Now

China finally hit the fan last week, resulting in the worst opening week of trading in history. The Dow Jones Industrial Average dumped 1,079 points (6.2%) to close at 16,346.45. The S&P 500 collapsed by 122 points (6%) to end the week down at 1922.03, and the Nasdaq Composite Index plummeted by 363.78 points (7.3%) to 4643.63.

The MSCI World Index lost 6% as markets around the world joined in the disaster – led by China, where stocks fell so quickly that regulators shut them down on Thursday after a mere 29 minutes of trading. Then they realized that doing so only made matters worse.

While the major U.S. market averages are flirting with a 10% correction, the reality is that most of the market is already trading in bear market territory. The average S&P 500 stock is down 22.6% according to Bespoke Investment Group.

Here it is...

Market Crash

The Only Chart You Need to Profit on the High-Yield Credit Crash

The unprecedented $2 billion collapse of popular high-yield funds that we're experiencing right now is just the start.

Those billions are a drop in the bucket compared to the $200 trillion meltdown ahead.

We're not there yet, so there's time to prepare, but this will be big...

Stocks

Warning: Business Development Companies Just Got Doubly Risky

At this point of the credit cycle, a lot of securities look cheap.

Business Development Companies (BDCs) are looking exceptionally cheap right now – trading at 82.7% of their net asset value and kicking off very high income of 10% to 17% at the same time.

Due to their structure as closed-end funds that pay high dividends, BDCs are designed to appeal to retail investors.

The problem is that investors often forget that high dividends come with a price – and that price is usually that the loans made by these companies are illiquid and high risk.

And Congress just made the risk much worse...

Subprime crash

New Evidence Shows Ratings Agencies' Corruption Played Key Role in Subprime Crash

Mounds upon mounds of corruption were at the root of the subprime financial crisis.

Our hatred of the fat cat bankers who made millions off of predatory loans, and the lazy regulators, who did nothing about it and even enabled it, knows no bounds. Even more infuriating is the lack of consequences for what they did.

But somehow, a key player has managed squeak by – until now. As a result of 2 major lawsuits, incriminating documents have been piling up that prove – without a doubt – that ratings agencies like Moody's and S&P played a *huge* part in the scam.

Turns out that for years, Moody's and S&P have been "shameless tools for the banks, willing to give just about anything a high rating in exchange for cash."

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China

How to Digest China's Credit Crunch Cereal

So, you've been consuming large servings of China's "credit crunch" in your morning news lately…but do you know the ingredients hiding inside your breakfast?

Here is a simple breakdown on what China's credit crunch is, and why it's important to your wallet:

Let's begin with some shocking numbers.

China is the world's 2nd largest economy.

The Chinese stock market fell as much as 1.7% on Wednesday, and it had already reached lows unseen since the 2009 global financial crisis.

Short-term inter-bank interest rates last week reached as high as 25%.

It is an understatement to say that investors around the globe are extremely nervous as to what this all means for China's growth.

These dismal numbers all stem from the Chinese credit crunch.

China's government-controlled central bank, the People's Bank of China (PBOC), has been pulling back on feeding the banks yuan to meet the demand for money in order to combat excessive lending that was causing concerns it might overheat the economy and lead to bad investments.

Issues like creating a real estate bubble.

Sound intimately familiar? It definitely should.

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Spain Bailout Package of $77 Billion Will Not be Enough

The Spain bailout package has a steep price, but still might not be enough to save the country's banking sector.

Spanish economy minister Luis de Guindos formally asked Eurozone partners for up to 62 billion euros ($77.4 billion) to recapitalize his country's ailing domestic banks. The financial institutions are weighed down by bad loans to property and construction companies, and by an ongoing Eurozone debt crisis.

In a letter to the Luxembourg Prime Minister Jean Claude Juncker, who serves as head of the 17-nation Eurozone finance ministers, Guindos explained he wanted to settle on details and conditions of the loan before the next euro group meeting on July 9.

Juncker acknowledged receipt of the letter and said that the ministers expect to give a go-ahead to the European Commission, the European Central Bank and the European Banking Authority to negotiate terms of the bailout.

The request was anticipated after the results of two independent audits were released last week. Financial consultants Oliver Wyman and Roland Berger made the first step in a two-part audit of the Spanish banking system.

Wyman found that worst-case scenario, Spain's banking sector would need a bailout package of between 51 billion euros ($63.6 billion) and 62 billion euros ($77.4 billion). Berger estimated on the lower end with 51.8 billion euros ($64.6 billion).

The formal request for a Spain bailout has made investors more nervous, and is driving the bond yields higher, making it increasingly likely Spain will need more money to try and resolve its debt crisis.

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Options 101: Credit Put Spreads Can Boost Your Gains and Lower Your Risk

Last month, Money Morning showed you how to use a technique called selling "cash-secured puts" to generate a steady flow of cash from a stock – even if you no longer own the shares.

It is a highly effective income strategy that can also be used to buy stocks at bargain prices.

But selling cash-secured puts does have a couple of drawbacks:

  • First, it's fairly expensive since you have to post a large cash margin deposit to ensure that you'll be able to follow through on the transaction if the shares are "exercised." ­Thus the name, "cash-secured" puts.
  • Second, if the market – or the specific stock on which you sell the puts – falls sharply in price, you could have to buy the shares at a price well above their current value, taking a substantial paper loss.

Fortunately, there is a way to offset both these disadvantages while continuing to generate a steady income stream.

It's called a "credit put spread" and it strictly limits both the initial cost and the potential risk of a major price decline.

I'll show exactly how it works in just a second, but first I have to set the stage…

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Why the U.S. Credit Rating Downgrade Could Cause a Full-Fledged Market Crash

That Standard & Poor's finally downgraded its U.S. credit rating surprised no one – the agency said weeks ago that it would require a deficit-reduction agreement of around $4 trillion to affirm its AAA rating on the United States.

But what the ratings agency doesn't realize is that it's playing with fire. Because what we've seen over the past few weeks has been a massive sell-off in the stock market that suggests Wall Street's biggest players are scrambling to bolster their net capital positions.

And it's entirely possible that this already-stiff correction will snowball into a full-blown market crash.

For months, years even, many of these firms have leveraged their Treasury securities to borrow more money to buy more government bonds and other – more speculative – investments. But since Treasury bills, notes, and bonds can no longer be considered "risk free," institutions are being forced to recalculate their net capital positions to accommodate the added risk.

In industry parlance, this is called a "haircut," and it's exactly what Money Morning Contributing Editor Shah Gilani warned about back in July.

"After studying everything that could happen due to a downgrade of the United States' top-tier AAA credit rating, and the potential default on its debt, we found a scenario that would result in forced asset sales that are so widespread that global stock-and-bond markets would plunge — and economies around the world would crash," said Gilani.

Gilani now says that we could be seeing the beginning of a "global margin call" that will continue to ravish global markets.

The Dow Jones Industrial Average plunged more than 631 points, or 5.52%, yesterday (Monday), after falling 6% last week.

"The sell-off itself got uglier later in the day as margin calls likely triggered more liquidations when there was no bounce after the opening downdraft," Gilani said in an interview. "This is very worrisome. If we don't get a bounce Tuesday morning, but instead see a bad opening, margin calls will ramp up and the effect of rolling collateral and margin calls could turn this correction into a full-fledged crash."

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