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Energy Junk Bonds: The Next Subprime?

Summary

The high yield credit markets continue to be under accelerating distress as the collapse in energy and commodity price continues.

Credit spreads in high yield are widening and defaults are rising quickly.

Could this little followed area of the market be the next subprime?

"He who learns but does not think, is lost! He who thinks but does not learn is in great danger." - Confucius

I have been saying since summer that my biggest worry for the economy and the markets going into 2016 is the total collapse in commodities and energy prices. Bond guru Jeffrey Gundlach noted on CNBC the heavy effects this collapse is having on the high yield credit markets again this morning. The stress in high yield became increasingly noticeable in November and has increased this month.

The implosion of commodity and energy prices has and is going to have even deeper impacts on economic and job growth. Companies are slashing capital budgets and reducing their workforces. Through November, approximately 125,000 high paying jobs have been lost in the domestic mining and energy production sectors. This will be another big headwind in 2016 and might even get worse. Anglo American (OTCPK:AAUKF) (OTCPK:AAUKY), a huge global miner, just announced it would lay off the majority (over 80,000 jobs) of its employees and is selling assets. The company previously announced it is slashing its dividend as its stock sells at all-time lows.

This would have less impact if more of the so-called gasoline "tax cut" was being spent by consumers. However, outside of a bump up in restaurant sales and more trucks and SUVs being sold vis-a-vis cars, most of that additional discretionary income is being saved. The personal savings rate recently was at multi-year highs. Given slow wage growth and rent increases and health premium hikes that are much higher than the level of "core" inflation, one can hardly blame consumers for their...


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