Tuesday, January 13, 2015


It was a wild ride today with equities swinging over 400 points during the course of the session.  It started off great but soon the word was bonds are the place to be (again) after a rather lackluster auction in which successful bidders were probably wishing they were somewhere else at the end of the session.

There is an old adage that you don't but the dips in the bond market.  Bonds go up and bonds go down; and when they go down they go DOWN.  Given the state of the world discussed last week I don't think bonds are going down anytime soon.  But I did spend a good deal of time the past few days speaking with folks about the credit issues surrounding the energy sector which have contributed to this overall flight to safety and for once the answers I received were actually what I expected.

There's a good deal of blood in the water but the biggest area of concern, the banks, are not the ones doing the bleeding at least not yet although the feeling is that they got this one right.  A good deal of private equity has been lost; certain hedge funds have taken a terrific beating and the high yield guys have gotten slaughtered.  But the banks--the Citis and J.P.Morgans of the world have remained on the fringes of the shale boom and stuck with their traditional clients whose P & Ls aren't going to look great at year end but who are basically stable.  Now comes the interesting part and let me emphasize that I'm merely relating tales-told because the only thing I know about the energy business is how to lose money because of it.

My guys tell me that the shale phenomena is real but not to the extent it has been hyped.  The reserves, once estimated at astronomical numbers are not there and as one member of a mid major put it, "if you're in the Bakken you had better be in the right place otherwise you have a problem...at 50 bucks you have a BIG problem,"  whilst a Texas bud of mine called to ask if I was interested in a brand new Mac-Mansion in Midland...cheap.   I told him these days cheap means free but thanks for the thought.

So it would appear that those good ol' boys that levered up and got in late might just suffer the same sort of fate that so many of heir predecessors suffered, but a systemic problem?  I doubt it, except...

Nobody is real sure how these plays were financed but in general there was a lot of high yield debtunderwritten  and whether all or substantially all of that got distributed is anybody's guess. There is a pretty strong suspicion that it did not and there may be some houses that are wearing it.  If it turns out there's a big house or even an middle sized one, it's going to be very important that the regulators make sure this doesn't turn into a 2008 situation where people suddenly decide that one bad all bad and head for the exits.  One would think that at this stage that should not be a major concern but with this mob one can never be sure. If it's more than one...well then it becomes very important as to who they are and again, the manner in which the regulator deal with it.  In short, I don't think we are facing a melt-down scenario but there's a reason the bond market is all bid and is going to stay that way for a while--aside from the well known problems among international producers...bless their pointed heads.

More about that tomorrow because I've gone as far as I can today.  Saw the doc yesterday and I required more laser surgery in my "good" eye.  Bummer.  He's says not to worry but it really plays with your head.  I keep telling him I'm seeing double and he keeps telling me "seeing" is the operative word.  When a guy's right he's right.

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