Aubrey McClendon is no amateur when it comes to shady personal transactions involving his company, nat gas giant Chesapeake: Back in October 2008, just after the financial crisis erupted, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls generated from buying CHK stock just prior on margin. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly. It looks lie the story is repeating itself, only this time the margined security is not company stock, but company loans. As Reuters reports in a must read special report "Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years. But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth." Ah yes, net worth calculations, which always focus on the assets, but endlessly ignore the liabilities (as Donald Trump will be first to admit). But ignore that: what is more notable here is the circuitous way that McClendon basically lifted himself by his, or rather CHK's bootstraps: all the loans are collateralized by his 2.5% working interest in new CHK wells drilled every year. In essence a roundabout way of generating "cash" by hypothecation, and levering into an "upside" corporate case. Should CHK however incur asset impairments, and/or if the current price of gas stays at or $2.00, then not only will CHK be gutted but so will the asset quality securing the private loans to the CEO, which on top of everything have no covenants ("There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.) and thus no stakeholder protections. Is it any wonder then that CHK is getting creamed as of right now as investors are once again reminded that CHK may not quite play by the rules?
Nothing dramatic here, but the Chairman of the fermentation committee just has that unique flair in explaining things so simply, even an economics Ph.D., a caveman, or the other kind of 'Chairman', would understand...
One of the more peculiar developments this morning was the odd divergence between the Spanish stock market, which was down over 3% at last check, and Spanish 10 Year bonds (that catalytic instrument to get LTRO 3, as all they have to do is rise to 7.50% and all shall be well), which had been green on the day all day, until now. As of seconds ago, the Spanish benchmark bond just crossed back into red territory with the yield spiking from an intraday low of 5.717% early to 5.89%, finally catching up with Spanish CDS which have been wider for a while, now that CDS is once again more liquid and credible than cash bonds... At least until ISDA is called upon to decide if and when a credit event has (never) occurred with respect to Spain. And since contagion feeds on itself, tomorrow's Spanish auction is starting to look more and more concerning.
Just because these "contagion" things are never contained, as of minutes ago, French CDS has just passed over 200 bps for the first time since January, as the fact that Spain can issue debt maturing in a few weeks or months is completely forgotten (rightfully so), and as the market remembers that both Spain and France have critical bond auctions tomorrow, of which the Spanish one does not mature within the LTRO. So will Paulson publicly shorting Europe be finally correct this time? For now we don't know. What we do know is that the French contagion fear is spilling over to the country's bank sector where SocGen was down 6% at last check, and EURUSD is tumbling as of moments ago. Time to reimpose the financial short-selling ban yet?
There have been many scary parabolic charts associated with Spain demonstrated here over the past few weeks. Today, the market is focused on the following line that goes from the lower left to upper right, which if not parabolic yet, may be getting there soon. The chart shows Spanish banks' bad loan ratio, which at 8.16% of the total €1.763 trillion in loans, or €143.8 billion, is the first time loans more than 3 months overdue were greater than 8% since October 1994. Indicatively bad debt levels were about 1% in the years prior to the collapse of the country's property market. Furthermore, with the rapid deterioration in Spain in the past 2 months, expect this chart to leg up substantially in June when the series catches up to April real time data, most likely crossing double digit territory. But for now the fact that of the country's roughly €1.4 trillion in GDP, over 10% in debt is "bad" and surging, should be a sufficiently loud wake up call.
The U.S. Department of Homeland security is working on a project called FAST, the Future Attribute Screening Technology. FAST will remotely monitor physiological and behavioural signals like elevated heart rate, eye movement, body temperature, facial patterns, and body language, and analyse these signals algorithmically for statistical aberrance in an attempt to identify people with criminal or terroristic intentions. It’s useful to briefly talk about a few of the practical problems that such a system would face.
Several days ago we published the latest seminal paper by Artemis Capital Management, a must read for everyone confused about market dynamics in the "central-planning normal." Since a core focus of Artemis' long-running narrative has been the impact of endless interventions in markets, and their distortions of volatility, the firm's Chris Cole has prepared the following addendum animation showing the vol curve over the past 20 years, which ultimately has led to what we have dubbed a "centrally-planned, liquidity addicted, temperamental abortion".
As Europe approaches the halfway point of the week, equities are suffering losses on the day as North America comes to market, with underperformance observed in the CAC and peripheral bourses. Markets have been weighed down upon from the open with commentary from the Portuguese PM garnering attention in the press, saying that there are ‘no guarantees’ that Portugal will return to the financial markets as planned. A Bank of Spain release has shown the bad loan ratio for the country’s banks has increased to 8.16%, further weighing on sentiment. There was also market talk of stop-loss buying of German Bunds at the cash open, the security had sold off since then but safe haven flows have kept the Bund in positive territory.
Central Banks Favour Gold As IMF Warns of “Collapse of Euro” and “Full Blown Panic in Financial Markets”Submitted by Tyler Durden on 04/18/2012 - 06:40
The Eurozone could break up and trigger a “full-blown panic in financial markets and depositor flight” and a global economic slump to rival the Great Depression, the IMF warned yesterday. In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out. It warned that a disorderly exit of one member country would have untold knock-on effects. "The potential consequences of a disorderly default and exit by a euro area member are unpredictable... If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with full-blown panic in financial markets and depositor flight from several banking systems," said the report. "Under these circumstances, a break-up of the euro area could not be ruled out." “This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse," said the report. The risks outlined by the IMF are real and are being taken seriously by central banks who are becoming more favourable towards diversifying foreign exchange reserves into gold. Central bank reserve managers responsible for trillions of dollars of investments are shunning euro assets and questioning the currency’s haven status because of the region’s sovereign debt crisis, research has found, according to the FT.... Elsewhere, gold demand in India, the world’s biggest importer, may climb as much as 25 percent during a Hindu festival next week, according to Rajesh Exports Ltd., reviving jewelry buying that was curtailed by a nationwide shutdown.
Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
- First Japan now... Australia Ready to Help IMF (WSJ)
- "Not if, but when" for Spanish bailout, experts believe (Reuters)
- Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup (Bloomberg)
- Spain weighs financing options (FT)
- Spanish Banks Gorging on Sovereign Bonds Shifts Risk to Taxpayer (Bloomberg)
- Spain and Italy Bank on Banks (WSJ)
- Chesapeake CEO took out $1.1 billion in unreported loans (Reuters)
- China preparing to roll out OTC equity market – regulator (Reuters)
- Angry North Korea threatens retaliation, nuclear test expected (Reuters)
- North Korea Breaks Off Nuclear Accord as Food Aid Halted (Bloomberg)