Monday January 4 2016 Housing and Economic stories

TOP STORIES:

Where the Heck is the “Dumb Bid” in the Junk-Bond Rout? - (www.wolfstreet.com)  There is a reason why the Focused Credit Fund, a mutual fund that specialized in junk bonds, imploded on December 11 – the first fund to do so since the Financial Crisis. It experienced a run by its beaten-up investors and had to dump assets to cover the redemptions. This “forced selling” drove down prices even further. Finally, the fund blocked withdrawals. Instead, it would liquidate its assets gradually and pay the remaining investors the leftover subway tokens at some later time. It was a classic liquidity mismatch, where a mutual fund held “illiquid” junk bonds, while investors were entitled to daily redemptions. This was exacerbated by the “first-mover” advantage in these kinds of open-end funds: the first investors out the door where made whole; those left behind ended up holding the bag [read…  The culprit? “Liquidity,” or rather the lack thereof, in junk bonds. The only way to sell junk bonds if you have to sell them is at a much lower prices – at which there suddenly is liquidity. And why was there no liquidity at the higher prices? Because there was no “dumb bid.”

Shale's Running Out of Survival Tricks as OPEC Ramps Up Pressure - (www.bloomberg.com) In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50 percent price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well. Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4 percent of a 43-year high. The problem? Oil’s no longer at $50. It now trades near $35. For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes, a senior upstream analyst for Wood Mackenzie Ltd. in Houston.

Oil drop threatens to push energy groups into liquidation - (www.ft.com) A growing number of energy companies that have filed or will soon file for bankruptcy court protection are likely to be liquidated, with their prospects diminished by the latest falls in natural gas and oil prices, according to distressed investors and restructuring advisers. Companies that restructure crippling debt loads can often emerge from bankruptcy and start life anew, but with the latest fall in energy prices, even a freshly capitalised balance sheet may not be enough to save the company. “Even if you take away all the debt, it is not clear some energy firms can operate,” said one restructuring specialist. “Their basic economics requires oil to be considerably north of where it is. They can’t reorganise.” In the case of Walter Energy, which filed for Chapter 11 a few months ago, the group said it would run out of money by early 2016 and has opted for a sale of substantially all of its assets, the LCD unit of Standard & Poor’s said.

It Starts: Junk-Bond Fund Implodes, Investors Stuck - (www.wolfstreet.com)   We have warned about “open-end” bond mutual funds, particularly those with a lot of high-yield bonds. We know some folks who got burned when Charles Schwab’s $13-billion bond fund SWYSX blew up during the financial crisis and lost 60% or so of its value before its data went offline. Schwab settled all kinds of class-action and individual lawsuits for cents on the dollar. It got in trouble over other bond funds. And other purveyors of bond funds got in trouble too. It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper. As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell.

Dallas Fed Survey Crashes To June 2009 Lows, Warns "It Is Getting Ugly" - (www.zerohedge.com)  After a Q1 collapse, the Dallas Fed Manufacturing Outlook managed a bounce for a few months (though never got back above zero). It appears, Dallas Fed's aptly-named 'Dick' Fischer was entirely wrong when he progonosticated that "on net, low oil prices are good for Texas." December's Dallas Fed print crashed to -20.1 (from -4.9) massively missing expectations of -7.0 and back at the lows not seen since June 2009.

OTHER STORIES:

Asian Stocks Trading Near Three-Week High as Industrials Gain - (www.bloomberg.com)
Oil Halts Gains Near 3-Week High as Iran Says Exports `Priority' - (www.bloomberg.com)
Asia M&A hits record, deals top $1 trillion in 2015 - (www.cnbc.com)

Japan output, retail sales slump, dampen recovery prospects - (www.reuters.com)
Japan's Industrial Output Drops For the First Time in Three Months - (www.bloomberg.com)
Central Banks’ Shock Therapy Has Investors on Edge - (online.wsj.com)