Bankruptcy

Disrespecting the dead then preaching one’s subjective value to society

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Should we be surprised at yet another unhinged lefty taking pot shots at the dead and gloating about it? It was hard to top Canadian freelance journalist Nora Loreto who tweeted at the whiteness of Humbolt hockey players who died in a bus crash but Randa Jarrar has managed to one up her.

Fresno State University Professor Randa Jarrar tweeted that former First Lady Mrs. Barbara Bush was a

generous and smart and amazing racist who, along with her husband, raised a war criminal… “F**k outta here with your nice words….all the hate I’m getting ALMOST made me forget how happy I am that George W Bush…I’m happy the witch is dead…”

She then defended her rant to someone that clearly found her words unnecessary by saying,

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Her college President Joseph Castro had a slightly more balanced view of her behaviour,

On behalf of Fresno State, I extend my deepest condolences to the Bush family on the loss of our former First Lady, Barbara Bush. We share the deep concerns by others over the personal comments made today by Professor Randa Jarrar, a professor in the English Department at Fresno State. Her statements were made as a private citizen, not as a representative of Fresno State. Professor Jarrar’s expressed personal views and commentary are obviously contrary to the core values of our University, which include respect and empathy for individuals with divergent points of view, and a sincere commitment to mutual understanding and progress.

Provost (Vice Chancellor) Lynnette Zelezny of Fresno State spoke afterwards at a news conference confirming a question to her that the disrespectful professor could be fired.

One doubts there will be many that shed a tear at this self inflicted stupidity. Makes one wonder what standards she holds her class to. If history is any guide she will no doubt drag up her lack of white privilege as justification enough to mock a woman who served her country with dignity.

Wizard of Lies

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Another film that shoots the lights out. HBO casts DeNiro as Bernie Madoff who plays the role brilliantly. It is a tragic tale. Not just to those that lost $65bn (although one would think if those that made $100s of millions one might expect they’d be a bit better at risk management) to a fraudster but more importantly the suicide of his eldest son and the death from cancer of his younger son before he passed. While one doesn’t feel any sympathy for Madoff it is a well portrayed rendition of how he created his Ponzi scheme and duped the regulators for so long. Madoff turns 80 on April 29.

Shipping industry needs to save ITSELF before it has any chance of saving the PLANET

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Yet more eco-mentalism being celebrated by the UN International Maritime Organisation (IMO) with little thought to the very economics that has crippled shipping companies for so long. Shipping companies need to save themselves before bothering to save the planet.  Although the back slapping for the supposed “watershed agreement” (their words) will be achieved by 2050. The most pressing global issue of our times and these metal hulks which burn the ugliest, dirtiest and cheapest fuel (bunker) available have 32 years to get there. Perhaps the irony is that bankruptcy might take half the ships out of service meaning the emissions target could be hit decades earlier. A brief look at history.

It wasn’t so long ago that Korea’s largest container transporter Hanjin Shipping declared bankruptcy.  The above chart shows the daily shipping rates for the industry which remain tepid for the past decade. The problem with the shipping industry is the fleet. Ships are not built overnight. Surging order books and limited capacity meant that as the pre GFC global trade boom was taking place, many shipping companies were paying over the odds without cost ceilings on major raw material inputs (like steel). This meant that ships were arriving at customer docks well after the cycle had peaked at prices that were 3x market prices because of the inflated materials.

The pricing market was looking grim in 2016. CM wrote, “These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.”

Ship Prixces

According to Weber’s Week 4 report, VLCC rates for the route from the Arabian Gulf to China dropped to $10,925 per day on January 26 from $18,389 per day on January 19, which represents a 40% fall week-over-week. The average rate for all VLCC routes dropped to $13,179 per day from $19,974 per day on January 19. The current rates are 67% lower year-over-year.

Clarkson’s note 2010 build Capesize rates have fallen from $20,000/day 6 months ago to less than $3,900/day as of April 2018. 84K CBM LPG carriers have fallen from over $800,000/mth in April 2016 to $542,000/mth today.

Take a look at the financials of global leader Maersk. It recorded $US27.1bn of revenue in 2012 but only $24bn in 2017. Yet profitability slumped from $2.1bn to a paltry $25mn. Maersk carries around $34 billion in deferred tax loss carry forwards. That is the extent of the ‘financial baggage’ it still carries. The three major Japanese shipping companies have had a hell of a hit to profitability in recent years. See below.

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If the volume of goods transported by sea increases 3% every year, the volume in 40 years will be 3.3 times today’s volume. To cut total CO2 emissions in half by 2050, CO2 emissions per ton-mile need to fall by 85%. NYK is looking at the following ship that will cut emissions by 69% in 2030.

If the shipping industry is not fixed through market forces it will be difficult to repair the profitability and balance sheets that would allow the companies to invest in more eco friendly vessels. Bankruptcies are mergers are needed to streamline the sector.

According to Clarksons, the global fleet of all types of commercial shipping is 50% larger than it was before the GFC despite the World Trade Organization saying growth in global trade has crept up from $14.3 trillion in 2007 to $15.46tn in 2016 (+8%). Scrapping rates have fallen 40% since 2012 but since 2017 have risen moderately, appealing to owners with too much tonnage on their hands.

The International Chamber for Shipping’s secretary general Peter Hinchliffe said, “This is a ground-breaking agreement — a Paris agreement for shipping — that sets a very high level of ambition for the future reduction of carbon dioxide emissions…We are confident this will give the shipping industry the clear signal it needs to get on with the job of developing zero carbon dioxide fuels so that the entire sector will be in a position to decarbonise completely.”

What a wonderfully naive plan. At least the IMO can feel warm and fuzzy despite so many headwinds ahead of an industry still in structural distress.

Chapter 11 bankruptcy filing trends in the US surging

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The Chapter 11 bankruptcy trends in the US have been picking up in the last 4 years. While well off the highs of the months and years of the GFC and years following it, the absolute numbers of filings has exceeded the levels leading up to the crisis in 2007/8.

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Here we put 2006/7/8 alongside 2016/17/18. The average monthly bankruptcy filings were around 355 in 2006 moving to 429 in 2007 and then 718 in 2008. If we looked at the data in the 12 months prior to the quarter leading into Lehman’s collapse, bankruptcies averaged 463/month. The ultimate carnage peaked out at 1,049 in 2009 (1,377 in Apr 2009). For 2016, 2017 and 2018 (annualized) we get 454, 480 and 521 respectively.

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Bankruptcy filings tend to be seasonal and often show peaks in April when tax season coincides with businesses.

However the %-age spike in bankruptcies in 2008 ahead of Lehman’s downfall was 46%. In the latest recorded month from the American Bankruptcy Institute (ABI) was 81%. This March 2018 spike is the second highest since the GFC hit. April figures will be interesting if we get another lift on that figure. Not even seasonality can explain away the differences. The trends seem clear.

Thinking logically, we are at the end of the generous credit cycle. Interest rates are heading north thanks to a less accommodating Fed. Naturally ‘weaker’ companies will have more trouble in refinancing under such environments. The lowering of corporate taxes would seem to be a boon, but with loss making businesses it becomes harder to exercise tax loss carry forwards.

We’ve already started to see GFC levels of credit card delinquency at the sub-prime end of town. Sub-prime auto loan makers seeking bankruptcy protection have surged too.

Fitch, which rates auto-loan ABS said the 60+ day delinquency rate of subprime auto loans has now risen to 5.8%, up from 5.2% a year ago, and up from 3.8% in February 2014 to the highest rate since Oct 1996, exceeding even GFC levels.

growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

The irony here is that sub-prime auto loan makers expanded lending because new technology allowed these companies to to remotely shut down and repossess vehicles of owners who were late on payments. That game only lasts so long before it forms its own Ponzi scheme.

Throw skittish financial markets, geopolitical instability and the mother of all refinancings coming the US Treasury’s way it is not to hard to see bankruptcies pick up from here.

Remington’s (de)faulty trigger

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As many are aware, Remington filed for Chapter 11 bankruptcy protection earlier this year. It would seem odd given that gun sales had trended sharply higher since Obama took office. However Trump’s victory led to lowered risk of tighter gun controls meaning many dealers were stuffed with excess inventory leading up to the election which hit sales for Remington. Added to that, Remington’s high debt load caused it to seek remedial action through the courts to sort the mess. The $620m in debt will be forgiven in place of a $145m injection and shares in the new company. However tied up in the mess are victims filing a class action lawsuit against Remington’s Model 700 which had a design fault that led to unintentional discharge injuring and in some cases killing the owners. Despite the reorganization plan there are calls for the plaintiffs to get 100 percent of their $163 million in claims against Remington.

Waking up to a horror of our own creation

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Some will say I am a pessimist. I’d prefer to be called an optimist with experience. At only age 16 (in 1987) I realized the destructive power financial markets had on the family home. Those memories were etched permanently. We weren’t homeless or singing for our supper but things sure weren’t like they use to be. It taught me much about risk and thinking all points of view rather than blindly following the crowd. That just because you were told something by authority it didn’t mean it was necessarily true. It was to critically assess everthing without question.

In 1999, as an industrials analyst in Europe during the raging tech bubble, we were as popular as a kick in the teeth. We were ignored for being old economy. That our stocks deserved to trade at deep discounts to the ‘new economy’ tech companies, no thanks to our relatively poor asset turnover and tepid growth rates. The truest sign of the impending collapse of the tech bubble actually came from sell-side tech analysts quitting their grossly overpaid investment bank salaries for optically eye-watering stock options at the very tech corporations they rated. So engrossed in the untold riches that awaited them they abandoned their judgement and ended up holding worthless scrip. Just like the people who bought a house at the peak of the bubble telling others at a dinner party how they got in ‘early’ and the boom was ahead of them, not behind.

It was so blindingly obvious that the tech bubble would collapse. Every five seconds a 21 year old with a computer had somehow found some internet miracle for a service we never knew we needed. The IPO gravy train was insane. One of my biggest clients said that he was seeing 5 new IPO opportunities every single day for months on end. Mobile phone retailers like Hikari Tsushin in Japan were trading at such ridiculous valuations that the CEO at the time lost himself in the euphoria and printed gold coin chocolates with ‘Target market cap: Y100 trillion.’ The train wreck was inevitable. Greed was a forgone conclusion.

So the tech bubble collapsed under the weight of reality which started the most reckless central bank policy prescriptions ever. Supposedly learning from the mistakes of the post bubble collapse in Japan, then Fed Chairman Alan Greenspan turned on the free money spigots. Instead of allowing the free market to adjust and cauterize the systemic imbalances, he threw caution to the wind and poured gasoline on a raging fire. Programs like ‘Keep America Rolling’ which tried to reboot the auto industry meant cheaper and longer lease loans kept sucking consumption forward. That has been the problem. We’ve been living at the expense of the future for nigh on two decades.

Back in 2001, many laughed me out of court for arguing Greenspan would go down in history as one of the most hated central bankers. At the time prevailing sentiment indeed made me look completely stupid. How could I, a stockbroker, know more than Alan Greenspan? It was not a matter of relative educations between me and the Fed Chairman, rather seeing clearly he was playing god with financial markets.  The Congressional Banking Committee hung off his every word like giddy teenagers with a crush on a pop idol. Ron Paul once set on Greenspan during one of the testimonies only to have the rest of the committee turn on him for embarrassing the newly knighted ‘Maestro.’ It was nauseating to watch. Times seemed too good so how dare Paul question a central bank chief who openly said, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”

We all remember the horrors of the collapse of Lehman Brothers and the ensuing Global Financial Crisis (GFC) in September 2008. The nuclear implosions in credit markets had already begun well before this as mortgage defaults screamed. The 7 years of binge investment since the tech bubble collapse meant we never cleansed the wounds. We would undoubtedly be in far better shape had we taken the pain. Yet confusing products like CDOs and CDSs wound their way into the investment portfolios of local country towns in Australia. The punch bowl had duped even local hicks to think they were with the times as any other savvy investor. To turn that on its head, such was the snow job that people who had no business being involved in such investment products were dealing in it.

So Wall St was bailed out by Main St. Yet instead of learning the lessons of the tech bubble collapse and GFC our authorities doubled down on the madness that led to these problems in the first place. Central banks launched QE programs to buy toxic garbage and lower interest rates to get us dragging forward even more consumption. The printing presses were on full speed. Yet what have we bought?

Now we have exchange traded funds (ETFs). Super simple to understand products. While one needed a Field’s Medal in Mathematics to understand the calculations of a CDO or CDS, the ETF is child’s play. Sadly that will only create complacency. We have not really had a chance to see how robots trade in a proper downturn. ETFs follow markets, not lead them. So if the market sells off, the ETF is rapidly trying to keep up. Studies done on ETFs (especially leveraged products) in bear markets shows how they amplify market reactions not mitigate them. So expect to see robots add to the calamity.

Since GFC we’ve had the worst post recession recovery in history. We have asset bubbles in bonds, stocks and property. The Obama Administration doubled the debt pile of the previous 43 presidents in 8 years. Much of it was raised on a short term basis. This year alone, $1.5 trillion must be refinanced.  A total of $8.4 trillion must be refinanced inside the next 4 years. That excludes the funding required for current budget deficits which are growing despite a ‘growing economy’. That excludes the corporate refinancing schedule. Many companies went out of their way to laden the balance sheet in cheap debt. In the process the average corporate credit rating is at its worst levels in a decade. Which means in a market where credit markets are starting to price risk accordingly we also face a Fed openly saying it is tapering its balance sheet and the Chinese and Japanese looking to cut back on US Treasury purchases. Bond spreads like Libor-OIS are already reflecting that pain.

Then there is the tapped out consumer. Unemployment maybe at record lows, yet real wage growth does not appear to be keeping up. The number of people holding down more than one job continues to rebound. The quality of employment is terrible. Poverty continues to remain stubbornly high. There are still three times as many people on food stamps in the US than a decade ago – 41 million people. Public pension unfunded liabilities total $9 trillion. Credit card delinquencies at the sub prime end of town are  back at pre-crisis levels. We could go on and on. Things are terrible out there. Should we be in the least bit surprised that Trump won? Such is the plight of the silent majority, still delinquent after a decade. No wonder Roseanne appeals to so many.

A funny comment was sent by a dyed-in-the-wool Democrat, lambasting Trump on his trade policies. He criticized the fact that America had sold its soul for offshoring for decades. Indeed it had but queried that maybe he should be praising Trump for trying to reverse that tide, despite being so late to the party. Where were the other administrations trying to defend America all this time? Stunned silence.

Yet the trends are ominous. If we go back to the tech bubble IPO-a-thon example. We now have crowd funding and crypto currencies. To date we had 190 odd currencies to trade. Of that maybe a handful were liquid – $US, GBP, JPY, $A, Euro etc – yet we are presented with 1,000s of crypto currency choices. Apart from the numerous breaches, blow ups and cyber thefts to date, more and more of these ‘coins’ are awaiting the next fool to gamble away more in the hope of making a quick buck. Cryptos are backed by nothing other than greed. Yet it sort of proves that more believe that they are falling behind enough such they’re prepared to gamble on the biggest lottery in town. One crypto used Wikipedia as a source for its prospectus.

Yet the media remains engrossed on trying to prove whether the president had sex with a porn star a decade ago, genderless bathrooms, bashing the NRA, pushing for laws to curtail free speech, promoting climate change and covering up crime rather than look at reporting on what truly matters – the biggest financial collapse facing us in 90 years.

There is no ‘told you so’ in any of this. The same feelings in the bones of some 30 years ago are back as they were at the time of Greenspan and Lehman. This time can’t be avoided. We have borrowed too much, saved too little and all the while blissfully ignored the warning signs. The faith and confidence in authorities is evaporating. The failed experiment started by Greenspan is coming home to roost. This will be far worse than 1929. Take that to the bank, if it is still in operation because you won’t be concerned about the return on your money but the return of it!

Worst Q2 start for S&P 500 since 1929

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ZeroHedge reported today that the S&P had its worst percentage 2nd quarter start since 1929 overnight. Both the Dow Jones Industrial Average broke below the 200 day moving average before an at the death rally to close above. Plunge Protection Team (PPT)? The broader S&P 500 failed to hold the 200 dma. All feels ominous. Awaiting the dead cat bounce. Short dated out of the money index put options continue to look ridiculously cheap relative to other asset classes. Gold also having a good day. Bitcoin showing its true value sliding below $7.000. Best to remember in a bear market the winner is the one who loses the least.