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Thursday, July 24, 2014 7:31 PM

The Piece Fits; Debunking Revisited

It Fits 

Reader Eric comments "It is amazing what internet, twitter, etc. has done for the pursuit of truth.  Here is an individual who shows where the piece fits on the plane."

From @ErzaBraam

The Piece

For a report on the piece, please see Photo of MH17 Wreckage Proves Missile Attack

Contrary to popular belief this does not prove MH17 was brought down by a Buk. Rather, the image is consistent with a missile explosion from outside the plane, not a crash, and not a bomb exploding inside.

The damage could be from a Buk, and is likely a Buk, but my understanding is that it could also be an air-to-air missile of a similar nature. If a military expert can state 100% otherwise, I would be happy to reconsider.

Debunking the Debunk of the Debunk

Several people sent me an email that allegedly debunks my debunk of a Reuters story regarding rebel admission of Buk possession. For background, please see Reuters Debunked: Khodakovsky Denies Interview Aspects.

The alleged debunk of my debunk is a Radio Free Europe Clip.

The audio clip is not embeddable,  so click on the preceding link to play.

Reader Ilya commented "Show this to your Russian speaking propaganda zombie." That ridiculous comment was in regards to Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian, and whose analysis I sometimes use.

I did show it to Dreizin and we both laughed out loud. This is my response ...

Believe a short clip by Radio Free Europe, a US propaganda site? When some of  the clip is barely audible,  and sounds like it was spliced together out of context?

Please be serious.

But hey, I am a fair guy. If Reuters wants to publish the entire interview, so we can hear the pauses, the context, and all other aspects, I would be happy to reconsider.

Meanwhile, let me repeat: In the original interview, Reuters author Anton Zverev posted quotes that are not consistent with the headline story. No amount of tampering, editing or innuendo can change that simple fact.

Once again, I quote - directly from Reuters  (who directly quoted Khodakovsky as follows) ... "What resources our partners have, we cannot be entirely certain. Was there (a BUK)? Wasn’t there? If there was proof that there was, then there can be no question."

In 100% certain terms, and clearly in context, Khodakovsky stated he did not know if other rebel units had Buks, while a previous quote shows his unit did not.

There is absolutely no reasonable way for the Reuters headline to read (as it did) "Exclusive: Ukraine rebel commander acknowledges fighters had BUK missile."

Blame whoever you want: Blame the editor, blame the author, or blame Reuters, but you cannot reasonably blame anyone who points out such an obvious discrepancy.

Mike "Mish" Shedlock

3:41 PM

Junk Bond Indigestion; Musical Chairs; Take Chips Off the Table?

The first half of 2014 sported record junk bond purchases by investors thirsty for yield, no matter how absurd the bond covenants or how risky the investment.

Things may have changed in July as the following chart shows, using JNK (the Barclays High Yield ETF) as a proxy for junk bonds.

JNK Daily

click on either chart for sharper image

On a weekly chart, however, the dip doesn't even register.

JNK Weekly

So while this could be the start of a decline, it might also be nothing.

With that backdrop, please consider Bloomberg's report Junk-Bond Indigestion Burns Buyers Gorged on Record Sales.

Junk-bond buyers are showing signs of indigestion after snapping up a record $361 billion of the debt at the lowest yields on record.

Speculative-grade bonds from the U.S. to Europe and Asia are set to post losses this month for the first time since last August after high-yield debt funds suffered the biggest weekly withdrawal of 2014. Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering in Europe yesterday amid the turmoil.

“People who were complacent before are going to have their finger on the sell button pretty quickly if some of these situations escalate,” Marc Gross, a money manager at RS Investments in New York, which oversees $5.8 billion in fixed-income assets, said in a telephone interview.

There is “a whiff of ‘flight-to-quality’ in the market, though we are far short of panic,” analysts led by Michael Contopoulos at Bank of America wrote in a report yesterday. The $2.7 billion of withdrawals from junk debt was led by U.S. funds that reported outflows of $1.8 billion, with exchange-traded funds accounting for more than 60 percent of that, according to the report.

“There has been a noticeable shift in sentiment as investors evaluate whether flows are a short-term blip or the beginning of a broader trend,” Michael Sohr, a New York-based money manager at AllianceBernstein, said in a telephone interview. “We’ve got increased geopolitical risks. Perhaps some investors believe it is a good time to take some chips off the table.” 
Take Chips Off the Table?

The preceding three paragraphs from Bloomberg are rather amusing. Specifically I am referring to these phrases:

  • Flight-to-Quality
  • Finger on the sell button
  • Good time to take some chips off the table

While it's certainly possible for an individual investor to have a "finger on the sell button" or to "take chips off the table" it is impossible for investors in aggregate to take any chips off the table.

Someone must own every bond ever sold, 100% of the time, until the bonds mature or they are called. Mathematically, 100% of the chips must be on the table 100% of the time.

Secondly, there is no such thing as a "flight-to-quality".

Rather, what happens is a major repricing event: Investors demand more yield from junk bonds as perceived risk increases. Investors demand less interest from treasuries in times of turmoil.

In a repricing event of that nature, one asset price rises, the other sinks. It's important to understand this can happen even if no shares trade!

Here's an easy-to-understand example of a no-trade repricing: Suppose the city approves a landfill at the end of your block. Without any homes being sold, the value of every home on the block would immediately decline.

Sentiment can and does change overnight (and pricing along with it) whether shares of stocks, bonds, homes, or other assets trade or not.

Every Friday the market closes for the weekend. Prices can be very different at the open on Monday, and dramatically different in a week's time. Individual issues can change even faster than indices.

Musical Chairs ThreePeat

Just like Chuck Prince, former Citigroup CEO in 2007, everyone believes they can dance while the music plays, and safely head for the door when the music stops. For an amusing recount, please see Music Stops for Chuck Prince.

Investors are fooling themselves, for the third time. It's impossible now, just as it was in 2007 and 2000, for investors to exit at the right time.

All the remains is the answer to the question: "How much more insane does it get before the junk bond bubble bursts?"  When it does burst, it's near-certain equities will go along for the ride.

And It's Gone

A reader reminded me of this South Park clip that explains everything you need to know about risky investments.

Link if video does not play: And It's Gone

Mike "Mish" Shedlock

1:54 PM

Ukraine Government Breaks Up: Prime Minister Resigns Over "Vital Laws on Energy and Army Financing"; Follow the Money

Some interesting happenings in Ukraine today, in Kiev rather than the war zone. Issues concern unpaid soldiers, pro-Russian MPs, and various oil schemes to finance the war.

Let's take a look starting with Kiev Government Breaks Up as EU Mulls Fresh Russia Sanctions

Ukraine’s premier Arseniy Yatseniuk tendered his resignation on Thursday, clearing the way for early elections aimed at producing a more reform-minded parliament in Kiev but also risking a short-term political vacuum.

Two parties quit the country’s governing coalition earlier in the day and President Petro Poroshenko backed the idea of an early parliamentary poll. New elections would be likely to reduce the number of pro-Russian MPs and supporters of ousted president Viktor Yanukovich.

Mr Yatseniuk rebuked the existing parliament for putting Ukraine’s future at risk and betraying the ideals of the protests that toppled Mr Yanukovich in February, by failing to pass vital laws on energy and army financing.

The Ukrainian government break-up came as EU ambassadors in Brussels met behind closed doors for more than eight hours debating whether to take the first step towards sweeping sanctions against the Kremlin over its support for pro-Russian separatists in Ukraine. These would target entire sectors of the Russian economy.

“History will not forgive us,” Mr Yatseniuk told the parliament, after it failed to pass a law to liberalise control of Ukraine’s natural gas pipelines system. “Millions of people made this revolution,” he said, referring to the winter protests in Kiev.
Soldiers Not Paid

Also from the Financial Times, here are a few snips from Ukraine’s Prime Minister Quits.
Arseniy Yatseniuk, Ukraine’s prime minister, resigned on Thursday after two parties quit the ruling coalition government in a move designed to trigger early elections.

The fact that the coalition has fallen apart, that laws haven’t been voted on, that soldiers can’t be paid, that there is no money to buy rifles, that there is no possibility to fill gas storages. What options do we have now?” Mr Yatseniuk said in address to parliament.
Vital Laws on Energy and Army Financing

Inquiring minds may be asking "What Might Those Vital Laws Be?"

That's a very good question that the Financial Times does not properly explain. RIA does explain its take Ukrainian Prime Minister Yatsenyuk Announces Resignation.
“If no new coalition is formed and the existing coalition in a parliamentary-presidential republic had collapsed, the government and the prime minister have to resign. I announce my resignation because of the coalition’s collapse,” he said.

Yatsenyuk also expressed disappointment with Ukrainian parliament’s decision to reject a bill that allows the government to hand over up to 49 percent of the country’s gas transport system to investors from the European Union and the United States.
Follow the Money Step by Step

  1. Prime minister Yatseniuk resigned
  2. This will lead to early elections in which pro-Russian members will be ousted from Parliament
  3. Parliament will pass a law selling 49% of Ukraine's gas and transportation systems to US and European investors.
  4. Ukraine needs the money to pay soldiers to fight an inane war.

Far be it from me to propose state ownership of energy pipelines. Yet, here's the vital question: Think Kiev is going to get full value, in the midst of a war, when it desperately needs money to pay unpaid soldiers?

Mike "Mish" Shedlock

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