Here’s an excerpt from last night’s post “Oil Crashes Into Bear Market: ‘It’s A Game Of Chicken'”:
“People are getting a little fatigued waiting for the production cuts to have effect,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass. “Between the U.S. shale activity and Libya and Nigeria seeing their production go up some, that’s making people very nervous about the near-term prospects.”
This should probably make anyone still long HY “very nervous about the near-term prospects” as well, given junk’s demonstrable propensity to become highly correlated with crude when things get messy.
HY issuance put the brakes on last week with just five deals pricing for $2.04 billion. That would be the slowest week since mid-February and you can bet that’s a consequence of falling crude prices. Yields on HY energy have hit a 7-month high, and MTD returns are -1.5%.
Ok, so that harkens back to a phenomenon that Goldman (among many others) touched on recently: namely the disconnect between how energy credit and energy equity are pricing the increasingly dour outlook for crude.
Simply put, this might be one time where equity is ahead of credit in terms of sounding the alarm bells. Recall this chart which shows HY energy vs. HY as a whole plotted with crude and also with energy equities vs. the S&P:
The takeaway: HY energy credit isn’t underperforming HY, but energy stocks are materially underperforming the S&P.
Somebody, as of midway through last month anyway, was wrong. And if crude crashing into a bear market this week is any indication, the asset class that was “lying” (as it were) was credit.
Well on Wednesday, Citi wants to know if you think this disconnect can persist in perpetuity. Here’s the survey question (unfortunately, you won’t be able to weigh in):
We’re going with “Underperform.”
But the punchline to this is that once you submit your response and scroll down in the actual note, the next thing you see is “Laura’s grandma’s cornflake cookie recipe”:
Because what I always like to do after I ponder the disconnect between HY energy credit and the SPDR S&P Oil & Gas Explore & Prod. ETF is bake cookies as a tribute to Adam West.