2016 January Non-Farm Payroll Report

The Non-Farm Payroll numbers are out.  We added 151,000 jobs in January.  Unemployment is at 4.9%.  So what does this report tell us?

The good news is that there will be competition for workers and increases in minimum wage will add to many companies' earnings.  The U.S, economy is strong and growing.

The bad news is that this means that the Fed will most likely raise rates, which seems fine on the face of it, but the debt markets will likely get roiled over it.  Another rise in rates will stress the high-yield bond markets first as they are weighed with risky debt.  This will spread through oil and as we all know, as oil goes so does the market - at least for now.  Once the MLPs start cutting dividends we'll see a crash in oil stock prices, and this will drag indices down with them.

Then come the bankruptcies.  They'll start as Chapter 11 filings because the laws became much more creditor-friendly and debtor-onerous in 2005 when the laws changed.  Some companies will restructure and come out relatively OK, but most share holders will get hosed in the deal, if not completely washed out.  Then comes the really bad news when Chapter 11 restructurings get converted to Chapter 7 liquidations.  THEN we will see what those assets are REALLY worth.

We're probably 6 months from the start of the worst of this, but chapter 11 restructurings have already been going on.  If the courts get flooded all at once, there won't be enough buyers for assets at the current valuations to be a significant part of any restructuring and creditors will get skittish about taking equity to replace debt in a market where wells are being capped to help stop the crash in oil prices.

Those predictions of $10 oil may not be so far off the mark.  We may not get all the way there, but we're hardly done falling.

What we don't know yet, and what we won't know until chapter 7 filings spike, is how bad the write-offs will be, and if/how far they'll spread to other business debt.