Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics:
Glencore stock has bounced at 16% today on a rumor that some investment group could take Glencore private. Too be sure, there’s plenty of idiots out there with enough cash to pay 9x revenues for The Onion’s business section (Business Insider), but it’s another matter to find enough banks and institutional investors investors willing to finance a massive $40-50 billion buyout of an overleveraged commodity company. This is especially true given that the outlook for Glencore’s base metal products is very grim given that the world is on the cusp on the worst economic depression in history.
The bonds have not moved in response to that rumor, with the Glencore 5.95’s of 2020 trading in the 70’s. That’s 70 cents on the dollar. That’s roughly a YTM of 6.44%, or about 500 basis points off the 5-yr Treasury. That’s the equivalent of a low-B or triple-C rated bond, which reflects a fairly high probability of eventual insolvency. Furthermore, the cost of credit default risk insurance got more expensive today. Both of these markets are telling us that, not only was the rumor absurd but that the credit markets are expecting a turn for the worse.
Glencore is now going to conduct a fire sale of assets in order to start addressing its $30 billion in debt. This is the absolute worst time to sell assets which derive their intrinsic value from base metals, energy and agricultural products. This is the classic sign of a “fire sale” being conducted by a company that is walking the plank. It also tells us that the willingness of the credit market – which have behaved like moronic drunken sailors for the last 5 years – is unwilling to chase bad money with more printed money.
Glencore is entering the irreversible death spiral. We used to call the bonds issued by companies in Glencore’s predicament, “IDS bonds” – irreversible debt spiral bonds. The only event that will save Glencore is a massive helicopter drop of more printed money and I doubt even that will move the needle on commodity prices (except gold and silver, of course) other than a brief knee-jerk bounce. QE does not stimulate real economic growth.
Perhaps the best indicator that Glencore is poisonous is the fact that Carl Icahn is not trying to get involved. In my opinion he sniffs out opportunities to capitalize on bubbling Ponzi schemes better than any investor I’ve observed. The difference between Carl and the crooks who bought Glencore is that Icahn doesn’t get involved unless he has a “greater fool” in his back pocket.
The Glencore equity holders do not have a greater fool. I take that back: the bondholders who financed the original buyout are the greater fools. And the greatest fools are participants in the pension plans managed by the greater fool institutional investors.
Not only is Carl Icahn not sniffing around Glencore’s back-side, he’s issued a statement today which indicates he’s going to take his chips off the table and find a different game to play. The greater fools who will pay more than the previous fools are likely gone altogether from this market. But there will plenty of greatest fools who will try to catch falling knives…