Goldman: This is Nothing Like the Subprime Crisis

Goldman’s head of global credit, Charles Himmelberg, thinks you’re all idiots for making such a fuss about the oil collapse and the comparison to the 2008 sub prime meltdown.

His main points are the lack of size of the debt problem, when compared to the housing collapse. For example, the subprime debt was $800 billion. The bad oil debt, although $1.5 trillion globally, is merely just $300 billion in the high yield sector.

Is this man out of his fucking mind?

“For one, the magnitude of the subprime mortgage problem in 2007 was much larger with total mortgage debt outstanding rising $5 trillion from 2002 to 2007, while the growth of debt in the oil and gas sector (globally) increased by just $1.5 trillion from 2006 to 2014,” the team says. “At the risky end of the market, subprime mortgages totaled $800 billion in 2007, whereas [high-yield] debt exposed to the energy sector in the US, including both bonds and loans, is estimated to be about $300 billion today.”

“In the run-up to the subprime crisis, the market tolerated extremely high levels of leverage embedded in mortgage-backed securities because house prices and hence mortgage losses were viewed as highly predictable,” the team points out. “In the energy sector, by contrast, the historical volatility of oil prices was well known (even if bond markets failed to foresee the collapse), and thus prevented issuers from pursuing anywhere near the same level of leverage or complexity that was encouraged by the faulty, ‘AAA’ assessments of credit risk in mortgages.”

“Bank balance sheets have far less exposure to energy risk today than they had to mortgage risk in 2007,” Goldman says. “In 2007, for example, mortgages and mortgage securities comprised 33 percent of all bank loans in the U.S. Today, by contrast, commercial loans to the energy sector are relatively modest at just 2.5 percent of total bank loans.”

The level of naivety exhibited in this report runs very deep. Although the debt is less than the housing collapse, does it make the current scope and depth of this debt crisis benign?

In other words, western finance as we knew it was ending in 2009. Comparing this to that is childish and absurd. The world may not be ending; but that doesn’t mean everything is good.

Plus, there are ancillary effects to this story that he doesn’t mention, such as housing debt gone bad due to oil centric job loss and the many industries that rely upon big oil to sustain their bottom line.

Contrary to what the Fed and many others will tell you about the economy and the containment of the oil collapse to specific industries, the housing market is being crushed in oil rich towns like Houston.

Just browsing through the for sale notices on realtor.com, it’s easy to see the pain.

Prices for homes valued over 500k, just in the month of January, plunged by 9%.

Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world’s oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives’ compensation.

In River Oaks, a neighborhood of palatial mansions and lush gardens, the average sales price of a home has tumbled to $1.3 million from $2 million in the middle of 2014 when oil began its more than 70 percent slide, according to data from the Houston Association of Realtors and Keller Williams. Median property prices in the area have already fallen further in this downturn, which is not yet over, than the 16 percent drop in the previous oil slump in 2008 and 2009.

“When oil does well, River Oaks does well. When oil does bad River Oaks does bad,” said Paige Martin, a Keller Williams broker who specializes in the neighborhood. “Not everybody can afford a $10 million house.”

City-wide data also show that while overall sales of single family homes fell 2 percent in January, sales of those priced over $500,000 tumbled 9 percent. The overall median house price was $200,000, up 5 percent on the year, according to the realtors’ association.

In a nod to the downturn, Ouisie’s Table, a River Oaks institution, is now offering its “Oil Barrel Bargain,” a three course dinner for the price of a barrel of oil, now around $30.

This is called contagion. The wealth created in the Houston oil economy is being destroyed. As time passes, homes will be foreclosed and banks will be forced to take write downs.

I seriously doubt the Texas economy is as diversified as so many bank execs from Texas like to say. I suppose we’ll see about that shortly.

Happy tidings to you, gentlemen, on this fine northeastern evening of rain and wind. I interrupt your internet surfing to inform you that the Chinese stock exchange has plunged by 6%. The tech heavy Shenzen, however, was less delicate in its demeanor towards the rural dwelling shareholders of China. It has traded down by 7%.

The samuari in Japan are ignoring the low-level dealings of the Chinese, trading higher by 1.4%–almost spitting in the face of their fiercest competitor in the far east.

Domestically, U.S. futures are lower by just 0.2% and euro-trash futs are ignoring the ignoble Chinese, trading up by 1%.

Portugese-German bonds spreads have widened to 323bps. Once it hits 400bps, the world will end.

Expect to see a great deal of these over the coming months. A vast ocean of moronic start ups have been funded by equally moronic venture capitalists, in their never ending quest for stardom and riches, thrusting their ponzi schemes upon the drug addled investment banks, who then sell them to an inept retail and institutional client base. This, of course, is how many of the famous VCs got rich over the past decade.

Dare I say, the party is over. The pain has yet to begin.

The e-commerce startup, valued at $2.7 billion just a few months ago, went bankrupt on Friday. On Tuesday, it laid off 74 people from its 311 person staff.

The London-based Powa had been hailed as the crown jewel of British tech scene. Its CEO Dan Wagner boasted that Powa would become “the biggest tech firm in living memory.” It was one of only two “unicorns” — the term for private companies valued at more than $1 billion — in the UK, according to data from PrivCo.
Powa created a mobile payment app and point of sale terminals for retailers. Wagner’s goal was to create a payment system that would provide a “seamless experience across all purchase channels.”

The company was also working on “point and click” technology that would allow users to buy a product after scanning its special “PowaTag” that would be printed in advertisements.

In 2013, Powa secured what was then one of the biggest investments ever for a British startup. It raised $175 million in just a year and half, with Boston-based Wellington Management among the leading investors.

The company expanded quickly, setting up offices in exclusive locations in London, New York, and several other cities around the world. But it failed to win customers, and never became profitable.

Reports about Powa missing payments to its staff and contractors started emerging late last year. On Friday, Powa officially went into administration.

It’s just the latest unicorn to hit the skids. Late last year, Jawbone, Evernote and Tango all saw layoffs, and the valuation of high-profile companies like Snapchat and Dropbox have been publicly questioned. Investors have warned that the tech bubble could burst.

Deloitte, which was appointed as the administrator of Powa on Friday, said Tuesday’s layoffs were necessary. “It has not been possible to continue running the company at its current capacity,” it said in a statement.

Deloitte said it is looking for buyers for the company.

How could such a thing happen, you ponder? Leverage. This company, like many others, were built to scale quickly and to be sold to the highest bidder. In the time it took a traditionally run company to scale and amount to billions of dollars in valuation, these companies did in a fortnight–succored by an outrageously corrupt cadre of mountebanks, whose sole purpose in life was to market unprofitable tech start ups to an unsuspecting public for self-aggrandizement. These unicorns were never conceived or operated to be profitable/real businesses, but vehicles to trick and deceive others into increasing the size of their holdings.

The game has ended. The weak shall be washed away.

In the land of the rising sun, a dark gloom overcasts the NIKKEI 225, following a technical pattern last seen in 2008.

BEHOLD.

Who’s ready for a 60% draw down?

Sandridge rejected payment on their bonds last week, putting into question the viability of that organization who is saddled with $7.5 billion in debt.

S&P estimates bond holders are likely to be almost completely wiped out in the next wave of defaults to the tune of 90%. These are harsh drawdowns, even for highly distressed companies, indicative of the fact that the collateral by which these loans were secured are all but worthless.

Banks are setting aside more money to cover potential losses on souring energy loans. S&P estimates that credit lines to these companies could be cut by 30 percent by April, when banks conduct one of their twice-yearly evaluations of their loans.

“We are at the very beginning of the next wave of energy defaults,” said Paul Halpern, chief investment officer at Versa Capital Management, which manages about $1.5 billion of distressed debt.

Of the $197 billion in shale oil debt, $101 billion is considered to be junk, a number that is sure to climb. Moreover, a number of likely defaults in the United States haven’t been this perverse since the wonder years of 2008-2009, whereby we all enjoyed the indefinite suspension of western finance.

According to data provided by Exodus, the following companies are very likely to default on their obligations.

SDRL: $12 billion
CHK: $11.6 billion
PAGP: $11 billion
LINE: $10 billion
CRC: $6.4 billion
BTU: $6.2 billion
WLL: $5.2 billion

In all, the amount of debt likely to be reorganized over the next 5 years could top a trillion dollars.

Markets were rescued today thanks to the rally in crude oil. However, the minor adjustment upwards in the price of crude will do nothing to stabilize the balance sheets of the countless companies currently under duress.

During tonight’s Mad Money episode, Jim Cramer delved into the topic that I’ve been so keen to elaborate on: Big mouthed Fed officials yammering on and on about the virtues of this ridiculous economy, suggesting that normalization (aka rake hikes) were not only the right thing to do, but vital– in our imaginary battle against the pangs of inflation.

Cramer not only denounces these action by the Fed, but also suggests their implicit actions might be at the vanguard of ambushing investor sentiment, which may very well cause the recession they’re so intent on avoiding.

Plainly, fuck the Yellen Fed.

Congrats to Junglegirl for being a very early hater of RH. She’s been deriding it in Exodus for a long time.

This is a deplorable company, whose fashionable approach to conference calls makes me sick. The high end furniture market is, seemingly, in flux.

Via Briefing.com

Restoration Hardware guides Q4 well below consensus
Sees Q4 adj. EPS $0.99 vs $1.39 Capital IQ Consensus Estimate; revs +11% to $647 mln vs $710.85 mln Capital IQ Consensus; comp brand rev +9% vs. ests near +19%.

There are three key factors that had a negative effect on our fourth quarter results, along with several positive developments that give us tremendous confidence in our long-term growth strategy.

“First, our demand sales/written orders were up a strong 21% in the fourth quarter on top of up 26% last year. Our delivered revenue, however, was up only 11% in the quarter on top of up 24% last year, representing a shortfall to our plan. While the initial response to RH Modern has been outstanding, we are experiencing shipping delays as certain vendors are struggling to ramp up production of this new product line. We expect the majority of the demand/written orders to turn into revenues in the first and second quarter, and anticipate our vendors will be substantially caught up by the end of the first half.

Additionally, we believe the poor in-stocks also suppressed orders, and we expect demand to build as our in-stocks improve.
Second, we continue to see underperformance in markets affected by energy, oil, or currency fluctuations. The Canada, Texas and Miami markets were a drag of 2 points to total Company revenues in the first half, then accelerated to a 4 point drag in the third quarter, and continued as a 4 point drag in the fourth quarter despite increased promotional efforts, including reduced shipping charges to incentivize our Canadian customers. These results tell us the conditions remain weak in these markets and in aggregate they are trending 20 points below the rest of the Company. Looking forward, we will begin to cycle the underperformance, and the negative drag should be mitigated.

Third, our attempt to drive incremental revenue through increased promotional activity in the fourth quarter was less successful than in prior periods, signaling a further pullback by the high-end consumer. Our sense is the increased volatility in the US stock markets, especially the extreme conditions in January, which is historically our biggest month of the quarter for furniture sales, contributed to our performance. Historically, our business has a correlation to large movements in stock prices as we believe asset valuations influence our customers’ buying patterns.”

This is a crushing earning miss. It will, and has already, begun to affect peers, like WSM and BBBY. It’s important to note that the stock was already down 40% over the past 12 months, entering this call.

Lights out for RH. Reset and try again.

In the old days I’d call a rally like this a ‘key reversal.’ Now, it’s just another day at the office.

Stocks, genuinely, wanted to die this morning. But, apparently, markets weren’t done going higher. Oil surged ahead; and then a few hours later, stocks decided to join the party.

If you’re a bull, this is precisely what you wanted. Investors added bricks to the wall of worry in the early hours. The media, myself included, threw gasoline on an already hot fire, suggesting the market was finished.

It was not.

Impressively, stocks ignored everything and surged higher, purging all of the marginal believers from its ranks. If you made a lot of money today, congratulations. You deserve all of the ambrosia the Gods have to offer, dealing with this treacherous, sordid, game of smoke and mirrors.

One thing to bear in mind and is worth repeating to your colleagues at to dinner table this evening: breadth stood at a very paltry and pedestrian 65% today. This measure means the gains were narrow, petulant, and fleeting.

This has little to do with stock prices, as both stocks have performed equally dreadful, giving birth to 30% losses over the past nine months.

However, assets have increased enough at RBC, likely due to onerous US regulatory conditions, to become the 5th largest bank in N. America, moving past the heralded Goldman.