Let’s Be Clear About High Yield Debt

I run an active screen thaat alerts me when a basic resource equity passes the 5x debt/eq threshold. It’s sort of an arbitrary number, but I like it. I view 5x debt/eq as a level where the debt load begins to get serious, the other side of the mountain if you will. Once it gets to 10x, rest assured, reorg is right around the corner.

As of tonight, the distressed debt that I follow in Exodus is at a new high of $291 billion. Everyone is yapping about Third Avenue and now questioning the high yield ETF space.

What do you think they’re buying?

They’re buying the debt, more or less, of the companies that I am alerting you to, CHK being the poster child.

In 2007, the sub prime debt was supposed to be a very small piece of the overall picture, something to dismiss and not worry over. Then, all of the investment grade debt turned to shit and we had ourselves an apocalypse not seen since 1929.

So, we’re all concerned over this small number of $291 billion. But it’s growing daily, with each downtick in crude and equity prices. Behind that 291 is another $1.8 trillion.

How much of that $1.8 trillion in oil and gas debt becomes high yield depends upon the underlying commodity: crude oil. Just like the value of homes dictated the condition of the debt that ravaged the world in 2008, the price of crude is going to do the same to us now.

ZIRP provided the world with excess liquidity. Over the past 10 years, oil and gas projects were financed without question and now the chickens have come home to roost.

This is 2007. The oil and gas burden is the housing debacle. We will enter a period of flux, during 2016, as the price of crude defies reason–down to $30, then $25, then $20, then $15.

Pray tell me, how much of that $1.8t will be considered “high yield” when crude is sucking dicks at $15?

That’s what we’re up against.

Good evening (extra Count Dracula).

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