Article / 09 December 2014 at 10:00 GMT

Daily Shot: Energy is the new sub-prime Team / Saxo Bank
  • Energy funds becoming "toxic assets"
  • Australian dollar in free-fall
  • Equity investors turning to retail shares

By Walter Kurtz

Energy exposure has become the new sub-prime. In 2006, we saw numerous leveraged mortgage funds marketed (I remember getting pitched a home-grown one by a team from Bear Stearns). Remember those mortgage-dedicated teams and a spike in mortgage securities issuance?

How about credit issuance in the energy sector more recently?

Energy credit
Similarly, some large asset managers have been pitching energy funds recently. Here is one from this summer. The manager’s name has been redacted.
Energy funds
And now we have an “adjustment” such as the one shown below. Ouch…

Avg. energy loan price

All of the sudden, energy credits are viewed as "toxic" assets and everyone is combing through their portfolios in an attempt to assess their total exposure. Meanwhile oil prices keep falling — with WTI crude futures dropping below $63 in after-hours trading tonight... 

Crude oil
 …as the equity markets punish oil and gas exploration and production names, which took another leg down (7% drop today).

We are going to see some good buying opportunities on this capitulation — as we did in mortgages.


The situation in Russia continues to deteriorate, as government bond yields go vertical.

Russia 10-year

The pressure on governments of other oil-producing nations worsens as well. 

Oil break even


As discussed yesterday, this is not a demand issue. China continues to import crude at a steadily growing pace. 

China oil imports
Source: Bloomberg


Speaking of China, the Shanghai composite continues to rally (as I suggested back in November). It busted through the 3000 level on the link-up with Hong Kong. The volume is rising as well with foreign money coming in.

Shanghai Composite
What’s particularly interesting is the spike in new brokerage accounts, as China’s retail investors get back into the equity game.

New accounts
Source: Bloomberg

In another China-related story, the yuan had a relatively sharp drop today (chart shows the dollar moving higher against CNY). With the dollar rallying, China’s peg to the USD is proving painful. I am watching for signs of China attempting to decouple somewhat from the dollar and join the “currency war”. This will infuriate US politicians pushing to label China a “currency manipulator”.

We’ve entered another risk-off period — similar to what we saw in October (except without the Ebola fear). Risk assets are revisiting or breaking through the October lows. In currency-land we have the Australian dollar getting hammered…

… as Australian business sentiment worsens.

Business sentiment

While everyone keeps talking about falling rates in the US, the two-year treasury note snuck up on us. 

Two-year yield
With the two-year yield higher, it’s no wonder that the dollar has been bid up and emerging markets currencies remain under pressure (on the whole at the lowest level in over a decade).
EMG Currencies

Source: Financial Times


In credit-land, Business Development Companies may be revisiting the October lows, as risk-off sentiment returns.
And high-yield bonds already fell below the October lows due to high energy concentration. More pain is likely.

HY Bonds


With gasoline prices sharply lower…

 …equity investors are turning to retail shares, as many expect better spending patterns going forward.


Now some food for thought — three items today:

1. US middle class net worth has really taken a beating (some of it is housing related).
Middle-class wealth

2. One way or another, those running higher education institutions will take their pound of flesh.

3. Sign of the times: there is a Rembrandt on the wall? 


-- Edited by Michael McKenna

* Walter Kurtz is an alias

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Lubo Lubo
Hi guys, Ole has been writting the oil issue it is demand issue as well, so what is truth? Could you little bit elaborate on that? thanks


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