Editor's Note: We're sharing this Sure Money Investor alert with you because Glencore's imminent collapse is going to have massive, market-shifting repercussions the likes of which we haven't seen since 2008. Michael wants everyone to be ready to avoid the volatility this will cause and, even better, profit from this historic failure. You can get regular updates on this situation from Michael by clicking here, but here's what you need to know right now…
On Monday, European commodities and mining powerhouse Glencore Plc. (LON: GLEN) had a very bad day, and its shares dropped 29%.
Maybe you hadn't heard of Glencore before Monday. But I'd wager that, by the end of this year, everyone will know the name. Just like they know the names AIG, Lehman Brothers, and Bear Stearns.
You see, what's happening with Glencore is an eerie, picture-perfect replay of what happened in the AIG meltdown of 2008.
And what happens next is going to rock the entire market.
I don't tell you this to scare you, though it is scary. This is a major "market event." I think it will get a Wikipedia page or two of its own when the dust settles.
But we know from history that it always pays to be on the leading edge of a crisis and get your money "sure." I'm here to show you how to do that and be in a good position to harness the upside from this event, too.
Right now the Glencore event is still playing out, as I'll show you (though the direction is clear to those of us who run in the credit markets). But one thing's certain. It is going to have a near-immediate, hard-hitting effect on all the risk assets out there – just like AIG's collapse did in 2008.
We all have to move quickly on this one…
Glencore's London-listed shares have collapsed by more than 80% from a 52-week high of £3.46 ($5.25) to open at £0.979 ($1.47) on Monday, as investors have lost confidence in the company.
But during Monday's trading, shares fell another 29% to £0.60 ($1.03). Even more ominously, the credit markets are now questioning whether the company will be able to survive the carnage in major commodities markets, which is battering the company's earnings and threatening its investment-grade credit rating.
Investors are fleeing Glencore's bonds as well. Its €1.25 billion ($1.4 billion) of notes due March 2021 fell to 78 on Monday, while its €750 million ($842.44 million) of bonds due March 2025 have dropped to 67, both record lows.
It was rebounding yesterday, but that won't last. Investors can't flee Glencore exposure fast enough.
Here's What's Wrong with Glencore
Glencore is facing a number of big problems.
First, its earnings are plunging on the back of lower commodity prices. Sales have plunged from $240 billion in 2013 to an estimated $162 billion this year. Net income has fallen from $4.3 billion in 2013 to an estimated $1.47 billion this year. That might still sound like a lot of money, but not when you are carrying over $45 billion of debt ($30 billion net of cash) like Glencore is. The company's interest bill will be about $1.25 billion this year. It simply has no further margin of error if commodity prices fall any further, which they are likely to do.
The company is fatally vulnerable to a weakening global economy and what that means for commodity prices – every 10% drop in copper lowers EBITDA (cash flow) by $1.2 billion. Glencore is facing a toxic mix of too much debt and plunging commodity prices, and there is no way out unless commodities stage a miracle rally – which isn't going to happen.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.