Market's desperate to rally despite China's decline

The fly in the ointment this week for debt and commodities markets first and then stocks is Glencore.

This mining and commodities conglomerate is on the verge of having its debt labeled as junk, which will cause many debt holders into panic selling mode since they are not able to hold junk debt in their funds.

The cratering oil and metals market have almost taken this European company out in September and now most of its debt is trading at less than $0.60 on the dollar with a bond rating that’s one step from junk.

The stock is down 65% over the last 6 months, despite a 13% run up on Tuesday.


China came in with its slowest economic growth in 25 years. Coming in at 6.9%, which was just below expectations, but that was enough to get markets moving higher.

Equities and crude prices jumped on the not so bad news. It’s called a relief rally and the snap back is needed to flesh out some short sellers and bring markets to a short-term equilibrium.

There’s been — since the first of the year — a tremendous amount of cash on the sidelines that needed to be put to work. Retirement and annuity funds have been looking for a window to put cash into stocks and bonds.

So despite China coming in weaker on GDP and three other measures of growth, the markets will seize the opportunity to charge higher on anticipation that China may need to ease further to spur growth.

That’s for today, and that means we may get back to last Friday’s market opening levels, if. Lastly, Dow and S&P 500 futures are up 1.6% at 7am EST. I’m thinking that might be the high today, let’s see where they finish.


One quick note. Very sorry to hear Glenn Fry is Already Gone. Loved the Eagles, big part of my music growing up. RIP partner.

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China staging a coup against king dollar

So the US dollar has weakened by 1% this week and the Dow Jones index is up 3.5% through Thurs.

Crude is up $5 a barrel over the week, which is roughly a 10% move and other commodities have moved in tandem including gold.

Now of course a weaker dollar helps everyone in the world except us. The amount of pain in the BRICs and OPEC over the strong dollar is quite evident, so a pullback was needed, but for how long is the question.

Will we see $60 – $70 oil by the holidays? I don’t think it will get that high since the US is the cleanest dirty shirt in the pile.

Time will tell who the sellers of dollars are, but China in defense of the renminbi would seem to be the largest agent in the market.


 

It appears that central banks are being proactive this time and not waiting for the first shoe to drop.

Since the 29th of September, Glencore, Europe’s commodity giant that I wrote about as being this year’s candidate for Lehman Bros., its stock is up 94% at 135, still well off its 52-week high of 339.

While a capital injection and/or going private were rumored it seems that buoying copper prices off their lowest prices in decades seem to have done the trick for the short term.

Ironically, like 2008 after Lehman ex-Morgan Stanley CEO John Mack is out everywhere blaming short sellers for the attack on Glencore. Mack is on the board of the commodity giant.

You’ll recall Mack vigorously defended Morgan Stanley in 2008 with his short sellers are killing the investment bank. It worked then, perhaps it will work now.

 

This quarter turned stocks into pints

More than $11 trillion was lost in global equities prices in the quarter ending Wednesday.

Naturally all markets rally today on the window dressing that occurs on the last day of a month, quarter or year.

That $11 trillion is not lost on all market players. As traders go in and out of stocks to eke out profits in a down market. No the everyday people, who are advised to stay in the market for the long haul are the big losers. Retirement accounts have taken a beating this quarter since most are not actively managed to cut losses.

So we enter the cruelest month for the markets — October — with an US monthly payroll report on Friday.

BTW, I still have Glencore on my radar, despite stories floating around that the firm may go private as the stock rallied briefly. Again who or what will backstop the huge losses on the company’s books? The Fed? The ECB?

Interesting times.


Europe’s economy slipped into negative inflation, which by any measure means deflation. Central banks across the globe fear a deflationary spiral, since they have no ability besides further easing to combat it.

Bit what does that mean for the consumer? Less debasement of currency as prices fall. Pricing power moves to the consumer. Why buy a washer and dryer today, when it could be cheaper next week.

It’s not a draconian event for consumers — in the short term — but can lead to layoffs if it persists from a longer period of time.

So enjoy it while it lasts.

Here's a primer on the latest firm that crushed your portfolio: Glencore

So there’s a company you may never have heard about, that in the next week or so could bring much pain to your portfolio and derivatives markets around the world.

Here’s how the company — Glencore — describes itself:

We are one of the world’s largest diversified natural resource companies, producing and marketing more than 90 commodities, with a network that spans over 50 countries
and around 181,000 people.

Anthony Hayward is the Non-Executive Chairman of Glencore. You may remember Hayward as the CEO of BP during the Gulf oil spill — the worst environmental disaster in history.

Well Hayward is now involved in what could be the worst derivative market meltdown in history.

So here is another What we do at Glencore:

Glencore is a leading integrated commodity producer and marketer, operating worldwide. Our business covers over 90 commodities encompassing
metals & minerals, energy products and agricultural products as well as related marketing and logistics activities.

So Glencore is a huge global player in commodities, which in this deflationary environment have seen their prices crater. Crude oil, coal, copper, iron ore and gold. All these materials have seen prices falling for the last six months, at least.

Over the last year Glencore’s stock price is down 79%, since its 2011 IPO the stock is down 87%. But if it was just an equity wipe out, all would be well except for the investors. A Sept. 16 secondary  offering on the equity side is already down almost 50% in two weeks.

Like AIG and Lehman before it,  Glencore uses overnight lending as liquidity for its commodity trading desks. Well, with a stock performance like this and credit default swaps soaring to Lehman-like levels, Glencore’s going to come crashing down like a house of cards within days as liquidity dries up.

Now of course no one — including Glencore or the Swiss government, where it is based — knows exactly how horrific a take down would be. The second or third derivative to fall on the bankruptcy is anybody’s guess. Think Lehman Bros taking out AIG. And an unwinding of its book is unthinkable due to size and scope.

So that’s the back story on a smallish commodity player going belly up and the shock waves rippling across the globe.

This post should be far more relevant come Wed. or Thurs. of this week. But I thought you would want to know now.