Why a credit crisis in the energy sector may be coming at the worst time

Treasuries are always right. They are saying something is coming. This monthly 30YR chart shows they are going much higher, at least for 2015.

30yr-monthly

 

But high-yield on the other hand..

The lack of liquidity in the high-yield credit market has become something of a joke recently as soaring equities have nurtured an environment in which nothing really matters under the hood. Why spoil the party?

 

A new debt crisis starts in energy sector and spreads to general market?

Energy companies are the 2nd largest issuer of HY debt.

Here’s some charts by Schwab illustrating this

With the ongoing massacre in crude oil my thought has been that the highly leveraged players would have debt issues which would just facilitate industry consolidation. But with the state of the credit market excluding sovereigns, we could have something else entirely. The energy sector makes up a large segment of the HY bond market and it’s about to take a big hit.. Sooner or later it’s coming. If the high-yield market in it’s fragile state is given a push we could see a real route in the markets. It’s starting to look like energy debt could go bidless for a time and take HY with it if action isn’t taken soon. And that action, in part should be for the orgy of debt issuance that is being used for buy-backs to stop asap.

But wait.. The stock buy-backs have been a major enabler of higher equity prices. 

Yep.

Why is no one talking about potential consequences from this ocean of unproductive debt issuance that’s not used for expansion/capex but merely multiple expansion?

 

Charts

Top of trend on ES going back to 2011 as i posted earlier this week.

YT558472-029

 

Russell2000 with a PE of 62 now in down trend on weekly, and daily. Here’s weekly.

RUT1W

 

Something has got to give here. Treasury yields vs S&P.

bves

 

CL Futures weekly.

Judging from the higher highs (within context of the slope) the next support of around $64 should be a floor for a time. Failing that $57. But probably not before we see Russia and the others have domestic problems which could become not-so-domestic problems when their leaders attempt to deflect public unrest and attention onto external enemies. Which would be more upward pressure on Treasuries, downward on equities.

crude-WWW

 

Just as sub-prime was to the financial crisis of 2008, HY credit could play the same role as the trigger for something greater..that “no one saw coming”. The subsequent reduction in debt issuance that would come as the market worsens would put a stop to the buy-back bubble and that would not be good for equities.

 

 

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The best charting teacher I know:
The Morning Analysis Service by Paul Coghlan
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2 comments

  1. Pingback: Signalinea – Called 64 as crude oil bottom last week – And Who’s collateralized what?

  2. Pingback: Signalinea – Crude oil instigated collateral and credit crisis

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