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Is Glencore The Next Lehman? The World’s Largest Commodities Trading Company Is Toast

Toast - Public DomainAre we about to witness the most important global financial event since the collapse of Lehman Brothers in 2008?  Glencore has been known as the largest commodities trading company on the entire planet, and at one time it was ranked as the 10th biggest company in the world.  It is linked to billions of dollars of derivatives trades globally, and if the firm were to implode it would be a financial disaster unlike anything that we have seen in Europe since the end of World War II.  Unfortunately, all signs are pointing to an inescapable death spiral for Glencore at this point.  The stock price was down nearly 30 percent on Monday, and overall Glencore stock has plunged nearly 80 percent since May.  There are certainly other candidates for “the next Lehman” (Petrobras and Deutsche Bank being two perfect examples), but Glencore has definitely surged to the front of the pack.  Right now many analysts are openly wondering if the firm will even be able to survive to the end of next month.

If you are not familiar with Glencore, the following is a pretty good summary of the commodity trading giant from Wikipedia

Glencore plc is an Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, with its registered office in Saint Helier, Jersey. The company was created through a merger of Glencore with Xstrata on 2 May 2013. As of 2014, it ranked tenth in the Fortune Global 500 list of the world’s largest companies. It is the world’s third-largest family business.

As Glencore International, the company was already one of the world’s leading integrated producers and marketers of commodities. It was the largest company in Switzerland and the world’s largest commodities trading company, with a 2010 global market share of 60 percent in the internationally tradeable zinc market, 50 percent in the internationally tradeable copper market, 9 percent in the internationally tradeable grain market and 3 percent in the internationally tradeable oil market.

For months, I have been warning about the consequences of the crash that we have been witnessing in commodity prices.  We saw a similar thing happen in 2008 just before the financial crisis that erupted in the fall of that year.  If commodity prices kept going down (which they did), it was only a matter of time before firms like Glencore started imploding.

At this point, Glencore owes almost twice as much money as the entire firm is worth

Now there is every chance the merged operation could implode. If it does, it will be the resources sector’s very own Lehman Brothers moment.

With debt approaching $US30 billion and a market value of just $US16 billion, shareholders and those holding the debt are desperately looking for an exit.

The cost of Glencore’s credit default swaps – a financial instrument that insures against a default – soared overnight.

Actually, “soared” is a horrible understatement.

The cost of insuring Glencore’s debt is absolutely screaming into the stratosphere.  This is precisely what we would expect to see right before a “Lehman Brothers moment”.  Here are some of the specific details from the Wall Street Journal

Investors had to pay on Monday more than $790,000 a year to insure $10 million of Glencore debt against default for five years using credit default swaps, according to Markit, more than 40% higher than Friday. At the beginning of the year, the same insurance cost $154,000.

When Glencore goes down, they will take a whole lot of others with them.  That is because Glencore is tied to trillions of dollars worth of derivatives trades all over the planet.  According to Zero Hedge, we are looking at “the start of a self-fulfilling prophecy which leads to the Companys’s IG downgrade and the collapse of trillions in derivative notionals as what may be the trading desk of the biggest commodity counterparty quietly goes out of business.”

For years I have been ranting about the danger of derivatives.  In article after article I warned that they would play a starring role in the next financial crisis.

Now the reality of what I was warning about is staring us right in the face.

The “nothing is happening” crowd is completely and utterly clueless.  There are these people running around telling everyone that the stock market decline is “over” and that we aren’t about to experience another great financial crisis.

I don’t understand how these people can be so ignorant.  Global giants such as Glencore, Petrobras and Deutsche Bank are imploding right in front of our eyes.  As I write this, stocks in Hong Kong are down 744 points and stocks in Japan are down 677 points.  The stock markets of the 10 largest economies on the entire planet are all crashing, but the mockers are going to continue to mock.  They will continue to tell you that “nothing is happening” even in the face of undeniable evidence to the contrary.

And the sad thing is that many of these mockers are given air time on the big mainstream news networks.  They will tell you that stocks are “oversold” and that you should “buy the dip” because stocks are going to be going back to record highs really soon.

I wish that was true.  Unfortunately, the reality of the matter is that we are finally witnessing the bursting of the last great global financial bubble.  I really like how Bill Holter put it recently

In my opinion we are already well within the jaws of a meltdown/shutdown as liquidity is evaporating. There are a dozen developed countries with their stock markets already in bear markets (down 20% or more). All crashes come from oversold levels just as bank runs come on fast and are a surprise at the time. What is coming should be NO SURPRISE to anyone as we are looking at the end of not only an empire but of a flawed system which has endured for far too many years! This was a solvency problem in 2008 and “liquidity” was the incorrect tool used then. Now it is a bigger solvency problem with an illiquidity kicker attached …while the Fed has already used every tool imaginable and every last ounce of credibility. The loss of confidence in the issuer of the world’s reserve currency would be bad enough in an unlevered world, the loss of confidence in today’s “debt world” will be a DISASTER!

To wrap this up, do not let anything that may happen from here surprise you. The conditions are ripe for global currency crises and a shutdown of credit. The conditions are also ripe for hot war to explode in multiple venues. A meltdown or shutdown of markets will serve as a FINAL FLUSH of what remains left of the U.S. middle class.

We are steamrolling toward a global economic collapse that will be permanent and irreversible.

For months, I have been warning that we were witnessing a textbook example of what the lead up to a major financial crisis looks like, and now it is happening.  All of this was completely and totally predictable for those that were willing to look at the signs.

Unfortunately, there are way too many people out there that think that they know it all and that have a tremendous amount of blind faith in the system.

Now the system is failing, and that blind faith is about to be shattered.

What Recovery? Sears And J.C. Penney Are DYING

Sears - Photo by Belus Capital AdvisorsTwo of the largest retailers in America are steamrolling toward bankruptcy.  Sears and J.C. Penney are both losing hundreds of millions of dollars each quarter, and both of them appear to be caught in the grip of a death spiral from which it will be impossible to escape.  Once upon a time, Sears was actually the largest retailer in the United States, and even today Sears and J.C. Penney are “anchor stores” in malls all over the country.  When I was growing up, my mother would take me to the mall when it was time to go clothes shopping, and there were usually just two options: Sears or J.C. Penney.  When I got older, I actually worked for Sears for a little while.  At the time, nobody would have ever imagined that Sears or J.C. Penney could go out of business someday.  But that is precisely what is happening.  They are both shutting down unprofitable stores and laying off employees in a desperate attempt to avoid bankruptcy, but everyone knows that they are just delaying the inevitable.  These two great retail giants are dying, and they certainly won’t be the last to fall.  This is just the beginning.

The Death Of Sears

Sales have declined at Sears for 27 quarters in a row, and the legendary retailer has been closing hundreds of stores and selling off property in a frantic attempt to turn things around.

Unfortunately for Sears, it is not working.  In fact, Sears has announced that it expects to lose “between $250 million to $360 million” for the quarter that will end on February 1st.

Things have gotten so bad that Sears is even making commercials that openly acknowledge how badly it is struggling.  For example, consider the following bit of dialogue from a recent Sears television commercial featuring two young women…

“Wait, the movie theater is on the other side,” the passenger says.

“But Sears always has parking!” the driver responds.

Sears always has parking???

Of course the unspoken admission is that Sears always has parking because nobody shops there anymore.

I have posted video of the commercial below…

A couple of months ago I walked into a Sears store in the middle of the week and it was like a ghost town.  A few associates were milling around here and there having private discussions among themselves, but other than that it was eerily quiet.

You can find 18 incredibly depressing photographs which do a great job of illustrating why Sears is steadily dying right here.  This was once one of America’s greatest companies, but soon it will be dead.

The Death Of J.C. Penney

J.C. Penny has been a dead man walking for a long time.  In some ways, it is in even worse shape than Sears.

If you can believe it, J.C. Penney actually lost 586 million dollars during the second quarter of 2013 alone.

How in the world do you lose 586 million dollars in three months?

Are they paying employees to flush giant piles of cash down the toilets?

This week J.C. Penney announced that it is eliminating 2,000 jobs and closing 33 stores.  The following is a list of the store closings that was released to the public…

Selma, Ala. — Selma Mall

Rancho Cucamonga, Calif. — Arrow Plaza

Colorado Springs — Chapel Hills Mall

Meriden, Conn. — Meriden Square

Leesburg, Fla. — Lake Square Mall

Port Richey, Fla. — Gulf View Square

Muscatine, Iowa — Muscatine Mall

Bloomingdale, Ill. — Stratford Square Mall

Forsyth, Ill. — Hickory Point Mall

Marion, Ind. — Five Points Mall

Warsaw, Ind. — Marketplace Shopping Center

Salisbury, Md. — The Centre at Salisbury

Marquette, Mich. — Westwood Plaza

Worthington, Minn. — Northland Mall

Gautier, Miss. — Singing River Mall

Natchez, Miss. — Natchez Mall

Butte, Mont. — Butte Plaza Shopping Center

Cut Bank, Mont.

Kinston, N.C. — Vernon Park Mall

Burlington, N.J. — Burlington Center

Phillipsburg, N.J. — Phillipsburg Mall

Wooster, Ohio — Wayne Towne Plaza

Exton, Pa. — Exton Square Mall

Hazleton, Pa. — LaurelMall

Washington, Pa. — Washington Mall

Chattanooga — Northgate Mall

Bristol, Va. — Bristol Mall

Norfolk, Va. — Military Circle Mall

Fond du Lac, Wis., Forest Mall

Janesville, Wis. — Janesville Mall

Rhinelander, Wis. — Lincoln Plaza Center

Rice Lake, Wis. — Cedar Mall

Wausau, Wis. — Wausau Mall

The CEO of J.C. Penney says that these closures were necessary for the future of the company…

“As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly,” CEO Myron Ullman said in a news release.

Actually, his statement would be a lot more accurate if he replaced “continue to progress toward long-term profitable growth” with ” prepare for bankruptcy”.

It would be hard to overstate how much of a disaster 2013 was for J.C. Penney.  The following is an excerpt from a recent CNN article

It’s been a brutal year for J.C. Penney, its stock falling over 60% in the past 12 months. The company has been losing hundreds of millions of dollars per quarter, and is in the midst of another turnaround effort after ousting former Apple executive Ron Johnson last year.

Overall, shares of J.C. Penney have fallen by an astounding 84 percent since February 2012.  And keep in mind that this decline has happened during one of the greatest stock market rallies of all-time.

For now, J.C. Penney will continue to try to desperately raise more cash from investors that are foolish enough to give it to them, but all that is really accomplishing is just delaying the inevitable.

If you would like to see some photos that graphically illustrate why J.C. Penney is falling apart, you can find some right here.

And of course Sears and J.C. Penney are not the only large retailers that have fallen on hard times.  This week the CEO of Best Buy admitted that sales declined at his chain during the holiday season…

Best Buy shares skid on Thursday after the retailer said total revenue and sales at its established U.S stores fell in the all-important holiday season due to intense discounting by rivals, supply constraints for key products and weak traffic in December.

In the immediate aftermath of that announcement, Best Buy stock was down more than 30 percent in pre-market trading.

And Macy’s just announced that it is laying off 2,500 employees in an attempt to move in a more profitable direction.

So why is all of this happening?

Aren’t we supposed to be in the midst of an “economic recovery”?

That is what the Obama administration and the mainstream media keep telling us, but it is simply not true.

In fact, a new Gallup survey has found that the number of Americans that are “financially worse off” than a year ago is significantly higher than the number of Americans that say that they are “financially better off” than a year ago…

More Americans, 42%, say they are financially worse off now than they were a year ago, reversing the lower levels found over the past two years. Just more than a third of Americans say their financial situation has improved from a year ago.

That is why these stores are dying.

Things continue to get even worse for the middle class.

But a lot of people out there will continue to deny what is happening right in front of their eyes.  They are kind of like that woman over in California who was conned out of half a million dollars by a Nigerian online dating scam.  They will never admit the truth until it is far too late to do anything about it.

So have you been to a Sears or a J.C. Penney lately?

Do you believe that they will survive?

Please feel free to share what you think by posting a comment below…

18 Signs That Global Financial Markets Are Entering A Horrifying Death Spiral

The spiral staircase at the Lighthouse in Mitchell Lane, Glasgow - Photo by George GastinYou can see it coming, can’t you?  The yield on 10 year U.S. Treasuries is skyrocketing, the S&P 500 has been down for 9 of the last 11 trading days and troubling economic news is pouring in from all over the planet.  The much anticipated “financial correction” is rapidly approaching, and investors are starting to race for the exits.  We have not seen so many financial trouble signs all come together at one time like this since just prior to the last major financial crisis.  It is almost as if a “perfect storm” is brewing, and a lot of the “smart money” has already gotten out of stocks and bonds.  Could it be possible that we are heading toward another nightmarish financial crisis?  Could we see a repeat of 2008 or potentially even something worse?  Of course a lot of people believe that we will never see another major financial crisis like we experienced in 2008 ever again.  A lot of people think that this type of “doom and gloom” talk is foolish.  It is those kinds of people that did not see the last financial crash coming and that are choosing not to prepare for the next one even though the warning signs are exceedingly clear.  Let us hope for the best, but let us also prepare for the worst, and right now things do not look good at all.  The following are 18 signs that global financial markets are entering a horrifying death spiral…

#1 The yield on 10 year U.S. Treasuries has risen for 5 of the past 6 days, and it briefly touched the 2.90% level on Monday.

#2 Rapidly rising interest rates are spooking investors and causing them to pull money out of bonds at a very rapid pace

Investors have yanked nearly $20 billion from bond mutual funds and exchange traded funds so far in August. That’s the fourth highest pullback ever, according to TrimTabs data. In June, investors took out $69.1 billion — the highest on record.

#3 The sell-off of U.S. Treasuries is being led by foreigners.  In particular, China and Japan have been particularly aggressive in selling off bonds…

China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries.

The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.

China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.

#4 Thanks to rapidly rising bond yields, some of the largest exchange-traded bond funds are getting absolutely hammered right now

• The $18 billion iShares iBoxx $ Investment Grade Corporate Bond fund (ticker: LQD) has fallen 7.94% since May 2, according to S&P Capital IQ. That’s including reinvested interest from the fund’s bond holdings.

• The 3.7 billion iShares Barclays 20+ Year Treasury Bond (TLT) has plunged 15.9% the same period. Longer-term bonds typically get hit harder when rates rise than shorter-term bonds. For example, the iShares Barclays 3-7 Year Treasury Bond fund (IEI) has fallen 3.2% since May 2.

• PowerShares Emerging Markets Sovereign Debt (PCY), which invests in government bonds issued in developing countries, has fallen 12.7%. The fund has $1.8 billion in assets.

#5 In recent weeks we have witnessed the largest cluster of Hindenburg Omens that we have seen since prior to the last financial crisis.

#6 George Soros has bet a tremendous amount of money that the S&P 500 is going to be heading down.

#7 At this point, the S&P 500 has fallen for 9 out of the last 11 trading days.

#8 Margin debt has spiked to extremely dangerous levels.  This is a pattern that we also saw just before the last financial crash and just before the dotcom bubble burst…

The exuberant mood comes as margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis.

“Investors have rarely been more levered than today,” said Deutsche Bank, warning that the spike in margin debt is a “red flag” and should be watched closely.

#9 The growth rate of new commercial bank loans and leases is now the slowest that it has been since the end of the last financial crisis.

#10 According to a shocking new report, Fannie Mae and Freddie Mac are masking “billions of dollars” in losses.  Will they need to be bailed out again just like they were during the last financial crisis?

#11 Wal-Mart reported very disappointing sales numbers for the second quarter.  Sales at stores open at least a year were down 0.3%.  This is a continuation of a trend that has been building for years.

#12 U.S. consumer bankruptcies just experienced their largest quarterly increase in three years.

#13 The velocity of money in the United States has hit another stunning new low.

#14 The massive civil unrest in Egypt threatens to disrupt the steady flow of oil out of the Middle East…

After last week’s bloody crackdown by the Egyptian army, fears of a disruption of oil supplies to the West have boosted the oil price. Brent crude prices were propelled to a four-month high of $111.23 on Thursday. If the turmoil gets worse – or unrest spreads to other countries – the risk premium currently factored into the price of crude is likely to increase further.

#15 European stocks just experienced their biggest decline in six weeks.

#16 The Japanese national debt recently crossed the quadrillion yen mark, and many are expecting the Japanese financial system to start melting down at any time.

#17 In Indonesia, the stock market is “cratering“.

#18 In India, the yield on their 10 year government bonds has skyrocketed from 7.1 percent in May to 9.25 percent now.

As the coming months unfold, keep a close eye on the “too big to fail” banks both in Europe and in the United States.  When the next great financial crisis strikes, they will play a starring role once again.  They have been incredibly reckless, and as James Rickards told Greg Hunter during an interview the other day, we are in much worse shape to deal with a major banking crisis than we were back in 2008…

What’s going to cause the next crisis?  Rickards says, “The problem in 2008 was too-big-to-fail banks.  Well, those banks are now bigger.  Their derivative books are bigger.  In other words, everything that was wrong in 2008 is worse today.” Rickards goes on to warn, “The last time, in 2008 when the crisis started, the Fed’s balance sheet was $800 billion.  Today, the Fed’s balance sheet is $3.3 trillion and increasing at $1 trillion a year.”  Rickards contends, “You’re going to have a banking crisis worse than the last one because the banking system is bigger without the resources because the Fed is tapped out.”  As far as the Fed ending the money printing, Rickards predicts, “My view is they won’t.  The economy is fundamentally weak.  We have 50 million on food stamps, 24 million unemployed and 11 million on disability, and all these numbers are going up.”

We never even came close to recovering from the last financial crisis and the last recession.

Now the next major wave of the economic collapse is coming up quickly.

I hope that you are taking this time to prepare for the approaching storm, because it is going to be very painful.

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