Natural Gas

European cash equities are in the red across the board at the midway point, as the bourses fail to reverse the trend of the past few sessions. With data points very light today, participants continue to focus on the macroeconomic themes as speculation regarding a Greek exit maintains focus. A medium-term maturity Spanish bond auction slightly eased fears, selling to the top of the indicative range, however the appearance of solid demand was countered somewhat by limited supply and sharply higher yields across all three lines. Following the auction results, EUR/USD saw some modest support and the Bund exhibited slight weakness, but this was short-lived as the macroeconomic concerns took over once more. Unexpectedly, the 3-month Euribor rate fixing came in with its first increase since December last year, prompting some selling pressure on the Euribor strip. This move was retraced as it was rumoured that one bank had not submitted a rate due to the Ascension Day market holiday across certain European markets, prompting the incline.

• As ZH warned last week, JPMorgan’s Trading Loss Is Said to Rise at Least 50% (NYT)
• Spanish recession bites, may be prolonged (Reuters)
• Obama Lunch With Boehner Ends With Standoff Over Budget (Bloomberg)
• Hilsenrath: Fed Minutes Reflect Wariness About Recovery's Strength (WSJ)
• N. Korea Ship Seizes Chinese Boats for Ransom, Global Times Says (Bloomberg)
• Greece Plans for June 17 Vote Under Caretake Government (Bloomberg)
• Hollande turns to experience to fill French posts (FT)
• ECB Stops Loans to Some Greek Banks as Draghi Talks Exit (Bloomberg)
• Spain Urges EU to Provide More Support (WSJ)
• North Korea resumes work on nuclear reactor: report (Reuters)
• Fed’s Bullard Says Labor Policy Is Key to Cut Joblessness (Bloomberg)
• China Expands Scope for Short Selling, Securities Journal Says (Bloomberg)

All you need to know.

When inflation isn’t particularly hot, it’s praised as something desirable....

European bourses are trading in modest positive territory ahead of the US open with early trade seeing moves higher across equities as Germany printed an expectation-beating 0.5% growth in their flash Q1 GDP. Elsewhere, Eurozone growth surprised to the upside somewhat, coming in flat against the expected contraction of 0.2%. However, as time passed, Greece garnered the focus of markets once more as they face a EUR 435mln foreign-law bond redemption today. Government source comments have somewhat reassured markets that the payment will be made, but participants await official confirmation. Further assisting the moves off the highs was a lower-than expected ZEW survey from Germany, with economists noting that the French and German elections have knocked confidence in the country over the past month.

Hedged natural gas contracts have protected many producers from the full wrath of today's rock-bottom prices. They've been able to sell their production at relatively high prices... even while the spot price collapsed. But... for a lot of producers, these higher-priced hedges are about to expire. Encana, Canada's largest natural gas company, is a good example. The company had prudently hedged lots of the gas it sold over the last six months. This means it was still realizing $4 or $5 per MMBtu on its sales. Now, those hedges are expiring... and the new hedges are at much lower prices. Encana's cash flow and its economically recoverable reserves are going to plunge.

By now everyone knows that Chesapeake is a slow motion trainwreck: whether it is internal management issues, which eventually will culminate with the long overdue termination of the company's head (something the company had much control over and could avoid, but didn't, and should result in the sacking of the entire board for gross negligence), or plunging gas prices (something it had far less control over, but could have hedged properly, yet didn't), what is absolutely certain is that the firm's cash flow just isn't what it used to be. In fact, according to some, it is quite, quite negative. What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant. We said this a month ago when we cautioned, precisely about Chesapeake, that "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses. What this means, simply, is that anyone who believes traditional fundamental analysis will and should work in the CHK case is likely to get burned." Sure enough, we were again proven right: Chesapeake just announced, following today's epic drubbing, that it is refinancing its secured debt facility (with its numerous restrictive covenants) with $3 billion in brand new Libor+7.00% unsecured paper (courtesy of Goldman and Jefferies). In doing so, CHK just got at least a one year reprieve.

In the span of 30 minutes CHK managed to crush both longs and shorts in the name.

All you need to read and some more.

• PPI: -0.2%, a decline, and a miss of expectations of 0.0%, Y/Y +1.9%, Exp. 2.1%, first drop in 4 months.
• Core PPI: 0.2%, in line.
• April PPI “should allay fears of producer costs being passed through to customers downstream,” says Bloomberg economist Joseph Brusuelas
• Supports Fed’s assessment of transitory inflation increase on rising oil, commodity costs at end 2011
• Intermediate costs decline points to reduced pressure on profit margins: Brusuelas
• Core intermediate PPI, “closely” watched by Fed, increase "benign," notes Bloomberg economist Rich Yamarone

All yopu need to read.

European equities continue the downward trend throughout the morning, despite opening slightly higher. Similarly to yesterday the moves are not data-driven, however the ECB have revised their forecasts for Euroarea growth downwards to -0.2% this year from -0.1% and have revised their inflation outlook upwards to 2.3% from 1.9%. The focus remains on Greece as the PASOK leader Venizelos grabs the baton and now attempts to form a stable coalition. Commentary from Greece so far has not been revelatory; Venizelos has reiterated that he wishes to remain within the Eurozone and affirmed that his party has not changed its policy with respect to the bailout. Flight to quality is observed throughout the markets, with the German Bund already testing yesterday’s highs several times and the major cash equities seen lower throughout the continent.

Ask yourself the following. For the technologies which allowed for the increased rate of extraction of coal in the 19th century, or,  which now allow for the increased rate of extraction of natural gas from shale in the 21st century: did those technologies create the resources or merely extract them as they already existed? The answer seems rather obvious, doesn’t it? I mean, I want to be sympathetic to the view that technology creates resources, in the sense that technology makes previous unrecognized or unrecoverable resources available. But a threshold I cannot cross, however, is that idea that there are always a new resources waiting to be discovered, if we can only create a technology to obtain them.

Which brings us back to mining for minerals. On asteroids.

What we have is a Central State and an economy that has borrowed and squandered trillions of dollars on consumption and malinvestment in unproductive "stranded" assets. The debt and risk pile up, while the labor that results from consumption is temporary and does not create wealth or permanent employment. Figuratively speaking, we're stranded in a McMansion in the middle of nowhere, a showy malinvestment that produces no wealth or value, and we're wondering how we're going to pay the gargantuan mortgage and student loans. Debt and the risk generated by rising debt create a death-spiral when the money is squandered on consumption, phantom assets, speculation and malinvestments. Sadly, that systemic misallocation of capital puts the job market in a death spiral, too.

European equities continue the trend of the week as they move lower throughout the morning session, as no news is bad news from Greece. In the early hours of the session, reports from German press revealed that the Troika have cancelled their May mission to the country, on the grounds that the current political instability could derail the rescue effort. The continued risk-aversion in Europe is evident in the strong demand for both German and British securities, as both countries sell strongly in their respective auctions. As such, the German Bund contract has hit on all time highs several times in the session today and the Spanish yield on their 10-yr government bond remains elevated above the 6.00% mark. Overnight source comments speculated that the Spanish government are pressing their national banks to set aside between EUR 20-40bln in funds for bad loan provisions and capital buffers. The reports have weighed down on the IBEX 35 throughout the morning, which is currently severely underperforming its European counterparts.