Tags: Gluskin | Rosenberg | Oil | Economy

Gluskin's Rosenberg: Keeping 'Firm Eye' on Distress Signals Outside Oil

By    |   Friday, 12 December 2014 08:10 AM

Wall Street is getting worried that this year’s plunge in oil prices to five-year lows may have broader consequences for the global economy if the pain extends beyond energy companies.

David Rosenberg, chief strategist at Gluskin Sheff & Associates Inc., said he’s monitoring stock and bond indicators that would signal distress for the financial services industry.

“Concerns are intensifying over how the energy space carnage will play out in the high-yield corporate bond market,” Rosenberg said in a Dec. 11 report. “Some are treating this situation as the tech/telecom bust in the late 1990s.”

During the speculative frenzy of the dot-com rush, telecommunications and technology companies used low-interest financing to rapidly overbuild networks for data traffic that took years to materialize. A year after the Internet bubble started to deflate from its 2000 peak, the U.S. economy fell into an eight-month recession.

Similarly, the 65 percent gain in U.S. shale production in the past five years may trigger a “supply shock” that takes years to work off as the profits of energy companies disappear and they cancel drilling plans. Investors are unloading energy stocks just in case.

The S&P 500 Energy Index has fallen 15 percent this year through Thursday as the price of oil plunged 44 percent since a June peak on weakening demand and the highest U.S. crude production since 1983. Meanwhile, the broader S&P 500 Index has gained 10 percent year-to-date.

With the energy industry making up about 16 percent of the high-yield, or “junk,” bond market and some forecasts expecting default rates as high as 20 percent in the next few years, the pain may spread beyond the oil patch.

So far, the relative strength of financial services stocks “remains fine” and their investment-grade bond yields have remained steady, Rosenberg said, but he’s “keeping a firm eye on this.”

Meanwhile, junk bonds may be sending warning signs that are being ignored by stock traders, according to a report by Bloomberg News.

Prices on high-yield bonds have fallen 5.7 percent since the end of August, even as U.S. equities have climbed to new highs.

“The divergence may signal junk-bond traders are picking up on a fundamental problem of overvalued energy companies in frothy markets fueled by six years of record Federal Reserve stimulus, and that stock investors should pay attention,” according to the newswire.

The flip side is that the recent selling is “an overreaction that’ll create buying opportunities.”

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David Rosenberg, chief strategist at Gluskin Sheff & Associates Inc., said he’s monitoring stock and bond indicators that would signal distress for the financial services industry.
Gluskin, Rosenberg, Oil, Economy
402
2014-10-12
Friday, 12 December 2014 08:10 AM
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