Your Money Is Trapped Until Further Notice (Justin Spittler)

Originally Published by Casey Research

Friday was another devastating trading session for resource stocks.

The “bluest” of blue chip resource companies, BHP Billiton (BHP), dropped 5.3% to reach a new multiyear low. Shares are down 74% from their 2011 high.

Coal mining giant Peabody Energy (BTU) also hit a new multiyear low. Leading agricultural chemical firm CF Industries (CF) hit a new 52-week low. Other well-known resource names hitting new lows include Anadarko Petroleum (APC, oil and gas), Southwestern Energy (SWN, oil and gas), Royal Dutch Shell (RDS-A, oil and gas), National Oilwell Varco (NOV, oil drilling rigs), Mosaic (MOS, agriculture), Eagle Materials (EXP, construction aggregates), and Cloud Peak Energy (CLD, coal).

The story here is simple: The global economy is barely growing. And the easy money policies of global central banks allowed resource firms to borrow enormous amounts of money, which led to enormous amounts of new supply.

This has many resource industries locked in a vicious cycle. Prices are falling, so many producers have increased production to make up for them. The increased supply causes prices to fall further, which leads to more production…and so on.

This cycle will end with absurdly low resource prices and a wave of bankruptcies. We’ll eventually get an amazing opportunity to buy resource stocks at fire sale prices. But, for now, the trend here is still down.

• Oil had another horrible week…

On Friday, the price of oil fell 3.3% to $35.36, its lowest level since 2008. Oil’s 67% plunge since last June has slammed the oil industry. Exxon Mobil (XOM), the largest U.S. oil producer, has plummeted 27% since last summer. Chevron (CVX), the second-largest U.S. producer, has plummeted 34% over the same period.

The world simply has too much oil right now. According to the International Energy Agency, stockpiles of oil in developed countries hit an all-time high of nearly 3 billion barrels in September. Yet major producers continue to flood the market with oil…

The U.S., the world’s largest oil producer, is pumping more oil than it has in nearly three decades. The Organization of Petroleum Exporting Countries (OPEC) is also pumping near record amounts of oil. OPEC is a cartel of 12 oil-producing countries. It accounts for 40% of global oil production.

For years, OPEC set a cap on the amount of oil its members could produce. However, on December 4, OPEC scrapped the production cap. Since then, the price of oil has dropped 11%.

On Friday, Bloomberg Business reported that global oil stocks have lost $240 billion in value since OPEC ended its production cap.

• Casey Research founder Doug Casey called this move in oil…

In October, Doug was bearish on oil prices. He said:

I don’t know how long oil prices will stay low. But they’re going lower for the time being. Production is stable to up, but consumption is headed down with a slowing economy.

And I’m all for oil going even lower. I hope it goes down to $10 a barrel. At that point, you can buy it reflexively and make a huge killing. But I’m still short oil at the moment.

• Another bearish sign from junk bonds…

For months, we’ve been warning of trouble in the junk bond market. Casey Daily Dispatch readers know the junk bond market is where companies with shaky finances go to borrow money. These companies are often the first to have trouble paying their bills when the economy slows. That’s why economic problems tend to show up earlier in the junk bond market than in the stock market.

Junk bonds are set to have their first year of losses since the financial crisis in 2008. Last week, The Wall Street Journal reported that junk bond defaults are expected to nearly double next year.

On Friday, a large junk bond fund barred investors from pulling their money out. The Wall Street Journal reported:

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

This is a big deal. Investors don’t like to hear “you can’t access your own money.” Typically, fund managers will only restrict withdrawals as a last resort. The Wall Street Journal continues:

Third Avenue said poor bond-market trading conditions made it almost impossible to raise sufficient cash to meet redemption demands from investors without resorting to fire sales of assets.

Third Avenue’s move sparked a big sell-off in junk bonds. The SPDR Barclays High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the two largest junk bond funds in the U.S., each fell 2.0% on Friday.

Chart of the Day

The largest U.S. junk bond fund plunged to a six-year low on Friday…

Today’s chart shows the performance of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) since 2008. HYG is the largest U.S. junk bond ETF. It holds $15 billion in junk bonds.

HYG has fallen 11.3% this year, to its lowest level since 2009. HYG also crashed through a long-term “support line” during last week’s sell-off. Breaking below this support line is a bearish sign that suggests the sell-off in junk bonds will get worse.

The article Your Money Is Trapped Until Further Notice was originally published at caseyresearch.com.

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Your Money Is Trapped Until Further Notice (Justin Spittler)