Home » Posts tagged 'wolfstreet'

Tag Archives: wolfstreet

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

What’s to Be Done Now with All These Zombie Companies?

What’s to Be Done Now with All These Zombie Companies?

Saving the Zombies in Europe.

Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland.

Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period.

The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors:

  • Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years.
  • The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy.

A Bank of America report from July posits that the UK accounts for a staggering one third of all zombie companies in Europe. They represent 20% of all companies in the U.K, up four percentage points since March, according to a new paper by the conservative think tank Onward. In the two hardest-hit sectors — accommodation and food services, and arts, entertainment and recreation — the proportion of zombie firms has soared by 9 and 11 percentage points respectively, to 23% and 26%.

…click on the above link to read the rest of the article…

Have You Noticed How Push-Back Against Powell-Fed’s Actions Is Getting Louder in the Mainstream Media, from NPR to CNBC?

Have You Noticed How Push-Back Against Powell-Fed’s Actions Is Getting Louder in the Mainstream Media, from NPR to CNBC?

Still a lot of fawning coverage, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Powell into telling obvious nonsense.

This is an interesting turn of events, in a world of Fed-fawning mainstream media. In one version, the push-back takes the form of loaded questions about asset bubbles and wealth inequality caused by the Fed’s asset purchases.

Fed Chair Jerome Powell then answers, following what looks like a script because these loaded questions are now being thrown at him regularly. He admits that the Fed’s policies have increased asset prices, then says the Fed as a matter of policy doesn’t comment on asset prices, and hence cannot comment on asset bubbles, but then assiduously denies that this increased wealth of the asset holders, which he admits the Fed has engineered, widened the wealth inequality to the majority of Americans who hold no or nearly no assets, and who got shafted by the Fed. It’s like getting pushed on live TV into saying that, yes, indeed, two plus two equals three!

This happened many times, most notably during the July 29 FOMC press conference when a Bloomberg reporter pushed Powell on that (transcript of my podcast on the Fed’s role in wealth inequality); and during the interview with NPR which aired on September 4, when he was pushed on both, asset bubbles and wealth inequality.

In another version, the push-back in the mainstream media takes more accusatory forms expressed with exasperation and dotted with exclamation marks.

In early August, notable push-backers were former president of the New York Fed William Dudley and Bloomberg News which carried and promoted his editorial.

…click on the above link to read the rest of the article…

“Prolonged Period of Risk to Institutional and Retail Investors of Further – Possibly Significant – Market Corrections”

“Prolonged Period of Risk to Institutional and Retail Investors of Further – Possibly Significant – Market Corrections”

European Market Regulator flags big issues, including the “decoupling of financial market performance and underlying economic activity.”

The European Securities and Markets Authority (ESMA) warned of a “prolonged period of risk to institutional and retail investors of further – possibly significant – market corrections and very high risks” across its jurisdiction.

“Of particular concern” is the sustainability of the recent market rebound and the potential impact of another broad market sell-off on EU corporates and their credit quality, as well as on credit institutions.

The “decoupling of financial market performance and underlying economic activity” — the worst economic crisis in a lifetime — is raising serious questions about “the sustainability of the market rebound,” ESMA says in its Trends, Risks and Vulnerabilities Report of 2020.

Beyond the immediate risks posed by a second wave of infections, other external events, such as Brexit or trade tensions between the US and China, could further destabilize fragile market conditions in the near term.

From a long-term perspective, the crisis is likely to affect economic activity permanently, “owing to lasting unemployment or structural changes, which might have an impact on future earnings.” The increase in private and public sector debt could also give rise to solvency and sustainability issues.

In corporate bond markets, spreads have narrowed but they remain well above pre-crisis levels, owing to heightened credit risk and underlying vulnerabilities related to high corporate leverage. There was also a wide divergence across sectors and asset classes in April and May. Across non-financials, the automotive sector suffered the largest decline, followed by the energy sector.

…click on the above link to read the rest of the article…

The Zombie Companies Are Coming

The Zombie Companies Are Coming

Easy money is a curse for capitalism.

Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.

The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.

The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.

But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.

The junk-bond ETFs the Fed dabbled in hold junk-bonds issued by companies that have been taken over by Private Equity firms in leveraged buyouts, where the acquired company itself borrows the money to pay for its own acquisition. Leveraged buyouts produced the first big wave of bankruptcies among retailers that started years before the Pandemic, and included Toys R Us, now liquidated.

The junk bond ETFs that the Fed has bought hold these types of bonds, including bonds by PetSmart, which was taken over in a leveraged buyout by private-equity firm, BC Partners.

…click on the above link to read the rest of the article…

THE WOLF STREET REPORT: The Zombie Companies Are Coming

THE WOLF STREET REPORT: The Zombie Companies Are Coming

“Easy money is a curse for capitalism.” You can also find the podcast on Apple Podcasts, Spotify, Stitcher, Google Podcasts, iHeart Radio, and others.

Shell’s Colossal Miscalculation in 2011 of Today’s LNG Price: Largest-Ever $12-$17-Billion “Floating Facility” Shut Down, Months After Shipping First LNG. Done in by Long Price Collapse

Shell’s Colossal Miscalculation in 2011 of Today’s LNG Price: Largest-Ever $12-$17-Billion “Floating Facility” Shut Down, Months After Shipping First LNG. Done in by Long Price Collapse

Built to profit from sky-high LNG Prices in Japan. Sunk by surging US LNG Exports, multi-year collapse in LNG prices, global LNG glut.

The Great East Japan Earthquake and subsequent tsunami in March 2011 triggered a series of events at the Fukushima power plant that led to catastrophic meltdowns in three of its six reactors, which led Japan to take the remaining of its 54 operating reactors offline, as a new regulatory and safety regime was established for reactors to come back on line. This caused a mad scramble to switch to other forms of power generation, including power plants fired by natural gas, which Japan has to import as liquefied natural gas (LNG), which triggered a blistering spike in LNG prices that caused all kinds of enormous long-term investments to be commenced around the world, including in the US and in Australia, in order to export super-lucrative LNG into booming Asian demand.

But in 2014, the price of LNG started sinking, and in 2015, it plunged, and those investments became huge money pits – including perhaps the largest of them all, Shell’s floating LNG-factory, the Prelude FLNG, at a length of 1,600 feet, the largest floating facility ever built, and at an undisclosed cost estimated to have been in the range between $12 billion and $17 billion, now languishing off the coast of Australia (the red hull is the Prelude, the smaller ship in front of it is a huge LNG tanker; image by Shell):

In April 2014, the average spot price of LNG at arrival in Japan was $18.30 per million Btu, according to Japan’s Ministry of Economy, Trade, and Industry (METI). This is as far as its data series goes back.

…click on the above link to read the rest of the article…

Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Big Gamble that was hot for years has gone sour after Turkish lira’s plunge and surge of defaults on bank debts denominated in foreign currency.

As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar, attention is turning once again to the potential risks facing lenders. They include a handful of very big Eurozone banks that are heavily exposed to Turkey’s economy via large amounts in loans — much of it in euros — through banks they acquired in Turkey. And the strains are beginning to replay those of the last currency/financial crisis in 2018.

When the Money Runs Out…

Subordinate bonds of Turkiye Garanti Bankasi AS, which is majority owned by Spanish lender BBVA, together with two other local banks — Turkiye Is Bankasi AS and Akbank TAS — are trading at distressed levels (yields of over 10 percentage points above U.S. Treasuries), even though the banks are still profitable and said to be highly capitalized. This is an indication of the amount of confidence investors have in the ability of these companies to repay their obligations.

Three weeks ago, when the lira was trading within a tight band against the dollar — the result of the Central Bank of the Republic of Turkey (CBRT) pegging the lira to the dollar by burning through billions of dollars of already depleted foreign-exchange reserves and dollars borrowed from Turkish banks — no corporate bonds in Turkey were trading at these levels. Now that the CBRT has stopped propping up the lira, which has since fallen 7% against the dollar, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses has soared.

…click on the above link to read the rest of the article…

Dollar’s Purchasing Power Drops to Lowest Ever. Inflation Heats Up, as Fed Wants, After Simultaneous Supply & Demand Shocks

Dollar’s Purchasing Power Drops to Lowest Ever. Inflation Heats Up, as Fed Wants, After Simultaneous Supply & Demand Shocks

“We’re not even thinking about thinking about” slowing the decline of the dollar’s purchasing power — and thereby labor’s purchasing power.

A supply shock and a demand shock came together during the Pandemic, and it produced chaos in the pricing environment. There was a sudden collapse in demand in some segments of the economy – restaurants, gasoline, jet fuel, for example – and a surge in demand in other segments, such as eating at home, and anything to do with ecommerce, including transportation services focused on it.

These shifts came together with supply-chain interruptions and supply chains that were unprepared for the big shifts, leading to shortages in some parts of the economy – the supply shock. There were empty shelves in stores, while product was piling up with no buyers in other parts of the economy.

The sectors surrounding gasoline, jet fuel, and diesel fuel – oil and gas drilling, equipment manufacturers, transportation services, refineries, etc. – were thrown into turmoil as demand vanished, leading to a total collapse in energy prices. In April, in a bizarre moment in the history of the oil business, the price of the US benchmark crude WTI collapsed to negative -$37 a barrel.

Since then, the price of crude oil has risen sharply (now at positive +$41 a barrel), as demand for gasoline has returned to near-normal while demand for jet fuel remains in collapse-mode, as people are driving to go on vacations, instead of flying, and as business travel is essentially shut down.

As a result, for a few months, all of the inflation data was going haywire, with some prices plunging and others spiking. This is now being worked out of the system.

…click on the above link to read the rest of the article…

No Payment, No Problem: Bizarre New World of Consumer Debt

No Payment, No Problem: Bizarre New World of Consumer Debt

All kinds of weird records are being broken. But it’s scheduled to expire, and then what?

The New York Fed released a doozie of a household credit report. It summarized what individual lenders have been reporting about their own practices: If you can’t make the payments on your mortgage, auto loan, credit card debt, or student loan, just ask for a deferral or forbearance, and you won’t have to make the payments, and the loan won’t count as delinquent if it wasn’t delinquent before. And even if it was delinquent before, you can “cure” a delinquency by getting the loan deferred and modified. No payment, no problem.

Nearly all student loans go into forbearance, delinquencies plunge.

Student loan borrowers were automatically rolled into forbearance under the CARES Act, and even though many students had stopped making payments, delinquency rates plunged because the Department of Education had decided to report as “current” all those loans that are in forbearance, even if they were delinquent. Yup, according to New York Fed data, the delinquency rate of student loan borrowers, though many had stopped making payments, plunged from 10.75% in Q1, to 6.97% in Q2, the lowest since 2007:

Student loan forbearance is available until September 30, and interest is waived until then, instead of being added to the loan. In a blog post, the New York Fed said that 88% of the student-loan borrowers, including private-loan borrowers and  Federal Family Education Loan borrowers, had a “scheduled payment of $0,” meaning that at least 88% of the student loans were in some form of forbearance. Until September 30. And then what?

Delinquent loans are “cured” without catch-up payments.

…click on the above link to read the rest of the article…

US Crude Oil Production Plunged Most Ever, Natural Gas Followed: The Great American Oil & Gas Bust, Phase 2

US Crude Oil Production Plunged Most Ever, Natural Gas Followed: The Great American Oil & Gas Bust, Phase 2  

Precisely what’s needed to end the price collapse. But last time, it wasn’t long before Wall Street liquidity surged back into shale, starting the cycle all over again.

US crude oil production in May plunged by 1.99 million barrels per day, from 12 million b/d in April to 10 million b/d, the largest monthly drop since at least 1980, and the sixth monthly drop in a row, according to the EIA.

This comes after the collapse in demand for transportation fuels – especially gasoline and jet fuel – that started in March and exacerbated the oil glut and a downward spiral of the already depressed prices for crude oil. Amid a torrent of bankruptcy filings by oil-and-gas companies, drillers cut drilling activity and production. This trend restarted last year, after having subsided somewhat following phase 1 of the Great American Oil Bust in 2015-2016, but took on record proportions during the Pandemic. From the peak in November 2019 of 12.86 million b/d, production has now plunged by 22.2%:

In the chart above, note how production doubled between mid-2012 and November 2019, despite the drop in production in 2015-2016.

The chart below shows the the price of benchmark crude oil grade West Texas Intermediate. Note how the price recovery from late 2016 ended in the fall of 2018 and then reversed, as production surged. The price decline bottomed out on April 20, when for a brief period the price of WTI plunged below zero, a bizarre moment in the history of crude oil:

Texas, the state with by far the largest production in the US and the epicenter of the oil-and-gas bankruptcy filings, was also the state with the largest production cuts, in terms of million b/d. Peak production occurred in March 2020 at 5.44 million b/d. By May production had plunged 19% to 4.39 million b/d.

…click on the above link to read the rest of the article…

Confession Time for Big Banks in Europe: Banco Santander Reports $12.7 Billion Loss

Confession Time for Big Banks in Europe: Banco Santander Reports $12.7 Billion Loss

Too-Big-To-Fail Santander is also one of the Eurozone’s worst capitalized banks.

Banco Santander, Spain’s largest lender and one of the Eurozone’s eight global systemically important banks (G-SIBs), has posted its first ever loss in 163 years of operations. And it was gargantuan. During the first half of the year, the bank racked up a loss of €10.8 billion ($12.7 billion).

The loss was caused by heavy provisions for expected loan losses. This quarter wiped out the equivalent of one-and-a-half years of the bank’s global profits — in 2019, it posted total global profits of €6.5 billion, and in 2018 of €7.8 billion.

The losses were the result of a €2.5 billion charge related to the recoverability of tax deferred assets as well a €10.1 billion write-down on assets across a number of key overseas markets:

  • In the UK: €6.1 billion write-down of “goodwill” — amount overpaid for prior acquisitions, which included Abbey National and Alliance and Leicester. Santander already took a €1.5 billion write-down on the value of its UK business last year, blaming new regulations and the expected economic fallout from Brexit.
  • In the US: €2.3 billion write-down for Santander Consumer USA, which specializes in consumer lending, particularly subprime lending, and these consumer loans are now particularly at risk.
  • In Poland, its largest market in Eastern Europe: €1.2 billion goodwill impairments charge.
  • In its consumer finance division, which is present in 15 markets: €477 million hit.

Santander’s shares initially reacted to the news by slumping 5.8%. They then staged a partial recovery, only to slump again, ending the day down nearly 5%. Shares are down an eye-watering 45% this year, making it one of the continent’s worst-performing large financial institutions.

“The past six months have been among the most challenging in our history,” Santander’s Chairwoman Ana Botin said in a statement. “The impact of the pandemic has tested us all.”

…click on the above link to read the rest of the article…

Coal Consumption Plunged to Lowest Since at Least 1973. Why There’s No Hope for Coal

Coal Consumption Plunged to Lowest Since at Least 1973. Why There’s No Hope for Coal

It comes down to costs and being bypassed by technological innovation, amid stagnating demand for electricity:

  • Arrival of “combined cycle” natural gas power plants in the 1990s.
  • Collapse in price of natural gas since 2008 due to fracking.
  • Surging wind power production in TX, OK, KS, IA.
  • Decades-long decline of industrial use of coal.   

Consumption of coal by US power plants in April plunged 30% from April last year, to the lowest level in the monthly data going back to 1973, the EIA reported today. This was down 19% from April 1973.

A process of many years: Peak monthly consumption of coal by US power plants occurred from 2003 through 2008 when during the hot summer months (air conditioning) caused coal consumption to rise to 95-99 million short tons. In 2019, the peak month was July, when coal consumption by power plants was down to 56 million short tons. And this year, given the relentless trend over the past 12 years, July consumption will be lower still:

“King coal,” as it was called in the 1990s when it was still the dominant fuel for power plants, was heavily wounded by a technological innovation, the Combined Cycle Gas Turbine power plant, commercialized in the 1990s.

A CCGT power plant uses natural gas to fuel a combustion turbine, similar to a turbine in a jet aircraft. It then uses the hot exhaust gases to heat water into high-pressure steam that drives a steam turbine. Both turbines drive generators to generate electricity. The thermal efficiency of a CCGT plant has reached about 65%.

Coal power plants just create high pressure steam that drives a steam turbine. At the time, their thermal efficiency was below 40%. The rest was waste heat.

…click on the above link to read the rest of the article…

Media Continues to Misreport Unemployment: 31.8 Million People on State & Federal Unemployment Insurance. Week 18 of U.S. Labor Market Collapse

Media Continues to Misreport Unemployment: 31.8 Million People on State & Federal Unemployment Insurance. Week 18 of U.S. Labor Market Collapse

I get tired of reporters or bots who don’t read beyond the 2nd paragraph of Labor Department press releases. 2.35 million initial state and federal unemployment claims. PUA claims (gig workers) now 41% of total unemployment. 20% of labor force on unemployment insurance.

It just doesn’t let up. An astounding number of newly laid-off workers keeps filing for unemployment benefits week after week and pile on top of the people already unemployed. And the number of people who started working again isn’t big enough to make a visible dent in the curve.

In the week ended July 18, the total number of people who continued to claim unemployment compensation  under all state and federal unemployment insurance programs, including gig workers and contract workers, edged down to 31.8 million (not seasonally adjusted), as reported by the Department of Labor this morning. It was the third highest level ever and just a tad off the peak:

Unabated lazy misreporting in the media.

If you read this morning or heard on the radio that 16.2 million people were claiming unemployment insurance – the “continued claims” – and you thought that there were only 16.2 million people who claimed unemployment benefits, you fell victim to lazy misreporting in the media, by reporters or bots that didn’t read the Labor Department’s press release beyond the second paragraph.

Those 16.2 million were only the claims under state programs, and do not include the claims under federal programs. All combined, there were 31.8 million people on the unemployment rolls. That’s what the Labor Department reported further down in the press release.

There is a huge difference between 16.2 million and 31.8 million unemployed people!

…click on the above link to read the rest of the article…

Update on the WTF-Collapse of Consumption of Gasoline, Jet Fuel & Diesel

Update on the WTF-Collapse of Consumption of Gasoline, Jet Fuel & Diesel

Folks started driving again – including those who used to take mass-transit. But jet fuel demand is still in collapse-mode. And overall consumption remains way down.

Ridership on San Francisco’s Bay Area Rapid Transit (BART) trains was still down 89% in June, compared to June last year, according to BART. Not because the Bay Area economy has collapsed by 89% — it has not — but because many people are working from home, and those people who do go to work are driving to avoid the infection risks associated with riding on a commuter train. Driving-instead-of-taking-mass-transit is playing out across the US. And we’re seeing some of that in gasoline demand. But jet fuel consumption is still in collapse mode. And diesel consumption has been down sharply for over a year.

Starting in mid-March, demand for gasoline collapsed in a historic manner. By now 32 million people are claiming unemployment compensation under state and federal programs, and many others switched to work from home, and both groups quit driving to work. Gasoline consumption at the low point in the week ended April 3 plunged by -48% year-over-year, to just 6.7 million barrels per day, the lowest in the EIA’s data going back to 1991.

Folks started driving again, bit by bit, to go to work, and because it’s summer driving season. In the week ended July 17, gasoline consumption, at 8.55 million barrels per day, was down 11.6% year-over-year, according to EIA data. Consumption of gasoline has been in the minus-6% to minus-12% range now for the fifth week in a row, with the latest week being the steepest decline:

The EIA tracks consumption in terms of product supplied by refineries, blenders, etc., and not by retail sales at gas stations.

…click on the above link to read the rest of the article…

“Demand to Remain Suppressed” till Vaccine/Treatment Widely Available: United Airlines. May Not Happen till Late 2021 “or Even Later”: Health Care Leaders

“Demand to Remain Suppressed” till Vaccine/Treatment Widely Available: United Airlines. May Not Happen till Late 2021 “or Even Later”: Health Care Leaders

Flattened-out fish-hook-shaped recovery of demand?

Passenger revenues collapsed by 94% to just $681 million, United Airlines disclosed in its Q2 earnings report today. Other operating revenues plunged by 37% to $392 million, but cargo was hot, rising 36% to $402 million “by serving strategic international cargo-only missions and optimizing aircraft capacity with low passenger demand.” All combined, revenues collapsed by 87%.

This has now become the serenade by airlines to investors. United follows Delta in it: Revenues have totally collapsed, and we’re in an existential crisis, and we’re cutting costs and capacity like maniacs, and we need to shed tens of thousands of employees, to reduce our cash burn, but we’ve raised many billions of dollars from you all (thank you) and from taxpayers, and we will duly burn this cash during this crisis.

United burned $40 million a day in Q2. It expects to reduce this cash burn to $25 million a day in Q3 – about $2.3 billion in the quarter – and reduce it further in Q4.

United said today it has slashed operating costs by 54%” compared to Q2 last year; this includes expenses for fuel, which were down 90%, aircraft maintenance down 74%, landing fees down 35%, and its largest line item, salaries down 29%.

Those are huge cuts. Earlier in July, in a dreary assessment of the airline industry and traffic, including a renewed decline in ticket sales starting in late June, United announced 36,000 “involuntary furloughs” on or after October 1 if it can’t entice those employees to leave voluntarily beforehand.

Despite the cost cuts, United lost $2 billion in the quarter.

And it said that it expects its system capacity in Q3 to still be down by 65% compared to Q3 last year. And it will cancel flights and adjust capacity “until it sees signs of a recovery in demand.”

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase