Nat Gas

In a day that will be remembered for the first major snowstorm to hit New York in 2014 and test the clean up capabilities and resolve of the city's new populist mayor (not starting on a good note following reports that JFK airport will be closed at least until 8:30 am Eastern), it was only fitting that there was virtually no overnight news aside for the Chinese non-manufacturing PMI which dropped from 56.0 to 54.6, a new 4 month low. Still, following yesterday's ugly start to the new year, stocks in Europe traded higher this morning, in part driven by value related flows following the sell-off yesterday. Retailers led the move higher, with Next shares in London up as much as 11% which is the most since January 2009 and to its highest level since 1988 after the company lifted profit forecast after strong Christmas trading performance. Other UK based retailers with likes of AB Foods and M&S also advanced around 2%.

As was reported several days ago, the latest embarrassment for US foreign policy in Syria took place when the US-backed commander of the Free Syrian Army was forced to flee the country to Qatar after "Islamist fighters ran the top Western-backed rebel commander out of his headquarters." In other words, the Islamic Front, which is a more palatable name for the six major groups among Syria's religious extremist rebels, or as some call them, Al Qaeda, is now the only entity "fighting" the regime of Assad (funded with Qatari and Saudi financial generosity), which as recently as September was a very theatrically sworn enemy of John Kerry. So what is an isolated America to do in a country in which ambitions for Qatari nat gas pipelines will almost certainly rear their heads as soon as the spring of 2014? Why engage directly with Al Qaeda, pardon, the Islamic Front of course. Because the enemy of my enemy, who obstinately refuses to throw Putin under the bus or allow a Qatari gas pipeline under their territory, is my friend.

If there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings. And while the tide for the New Abnormal credit bubble has yet to expose its megalevered monoliths swimming fully naked, as for now corporations have opted for graduated semi-MBOs in the form of ever larger stock buybacks (although as rates rise this too day of reckoning is coming), the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away. From the WSJ: "Energy Future Holdings Corp. has begun sounding out banks for financing to help it operate during expected bankruptcy proceedings, which could come as soon as November for the Texas power producer."

Just when the market thought it had priced in a new equilibrium without (or with - it is not quite clear) a Syria war, here comes Thursday with a data dump that will make one's head spin. Central bankers are once again on parade starting overnight, when the BOJ announced no change to its QE program and retaining its monetary base target of JPY270 trillion. The parade continues with both the BOE and ECB, the latter of which is expected to address the recent pick up in Eonia rates and take praise for the recent very much unsustainable "recovery" in the periphery even as Germany continues to slide lower (this morning's factory orders plunged 2.7% on exp. -1.0%), which in turn lead the Bund to pass above 2.0% for the first time since March 2011. Speaking of bonds blowing out, the US 10Y is now just 6 bps away from 3.00%, the widest since July 2011, and likely to breach the support level, taking out a boatload of stops and leading to the next big step spike in rates as the second selling scramble ensues. And just to keep every algo on its binary toes, today we also get a NFP preview with the ADP private payrolls at 8:15 am (Exp. 180K, down from 200K), Initial Claims (Exp. 330K), Nonfarm Productivity and Unit Labor Costs (Exp. 1.60% and 0.9%), Factory Orders (Exp. -3.4%), Non-mfg ISM  (Exp. 55), Final Durable Goods, EIA Nat Gas and DOE Crude Inventories, oh and the G-20 meeting in St. Petersburg where Putin and Obama are not expected to share much pleasantries, and where John Kerry's swiftboat may not be allowed to dock.

The UK may be out, but Saudi Arabia isn't taking any chances. Moments ago, Reuters reported that the regime which as we reported is behind the entire conflict in Syria (hint: nat gas) has raised its level of military alertness in anticipation of a possible Western strike in Syria, sources familiar with the matter said on Friday.  Saudi Arabia's defense readiness, their version of DefCon, has been raised to "two" from "five", a Saudi military source who declined to be named told Reuters. "One" is the highest level of alert. "It is a must, no one knows what will happen," he said. And so all those who thought there would be no war and sold off gold and crude, are suddenly caught short. More curious is why Saudi is leaking this information to the media: another provocation, and an attempt to accelerate a conflict which is rapidly fizzling? Remember: for Saudi Arabia "no war" is the worst possible outcome. If so, expect more mysterious "chemical attacks" in the coming hours and days to cement the Western resolve to blow up Assad.

One of the more surprising news to hit the tape yesterday was that Saudi Arabia, exasperated and desperate by Russia's relentless support of the Syrian regime and refusal to abandon the Syrian army thus facilitating the Qatari plan to pass its natgas pipeline to Europe under Syria, had quietly approached Putin with a proposal for a huge arms deal and a pledge to boost Russian influence in the Arab world if only Putin would abandon Syria's Assad. It will hardly come as a surprise to anyone that in the aftermath of yesterday's dilettante mistake by Obama which alienated Putin from the western world (and its subservient states such as Saudi Arabia of course), has just said no. It will certainly come as no surprise because as we explained previously, the biggest loser from Russia abandoning Syria (something we predicted would never happen) would be none other than Russia's most important company - Gazprom - which would lose its energy grip over Europe as Qatar replaced it as a nat gas vendor. What is shocking in all of this is that Saudi Arabia was so stupid and/or naive to believe that Putin would voluntarily cede geopolitical control over the insolvent Eurozone, where he has more influence according to some than even the ECB, or Bernanke. Especially in the winter.

For those who don't eat or use energy: feel free to stop reading now - your inflation came in just as expected, at 0.2% up from May, and 1.6% higher compared to a year ago. However, those unlucky few who are forced to eat, use and A/C and/or commute, your inflation just saw its biggest monthly hedonically-adjusted jump (don't forget the deflationary impact of that 80 inch LCD TV you have zero intention of buying), or 0.5%, since February's 0.7% and well above the 0.3% expected. This was driven by a 6.3% surge in gasoline prices, and a nat gas price index soaring 11.7% leading to a 3.4% increase in Energy prices, even as the Food increase of 0.2%, tied for the highest since December 2012 was subdued. And while non-food and energy components did not see major spikes, June apparel prices jumped 0.9%, the highest since 2012, as did Medical Care Commodities and Services, rising 0.5% and 0.4% respectively, both posting the highest M/M jump since well into 2012.

• Risk on assets supported by yesterday's speech by Bernanke, who said that highly accommodative policy needed for the foreseeable future and that current unemployment of 7.6%, if anything, overstates health of US labour market.
• ECB's Weidmann said that the ECB has not tied itself to the mast with forward guidance, which does not rule out rate hikes when inflationary pressures emerge.
• The BoJ kept their monetary policy unchanged and retained plan for JPY 60-70trl annual rise in monetary base.

The U.S. natural gas market may be on the verge of a big swing. And it’s not about the talk of the town, Liquid Natural Gas (LNG). It's about an unexpected source of natural gas demand...

Earlier today we reported that producer prices in May rose primarily as a result of a jump in electricity and nat gas prices. Which is why it is somewhat surprising that Industrial Production among Utilities dropped by the most, or -1.8%, for the second month in a row, following last month's -3.2% decline. This drop was offset by an increase in Mining IP of 0.7% (a decline from April's 1.1%) and the general manufacturing production which increased by a tiny 0.1%, still the best result of the past three months.  Altogether, these amounted to an unchanged print in the broader index, which printed at 98.7, same as April, and the lowest since February, not to mention below expectations of a 0.2% increase. Finally, looking at capacity utilization, in May total industry CU edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average. It was also the lowest print since October 2012. Oops.

"Since we're dealing with markets that are being manipulated by central bank policies, there is no such thing as economic analysis anymore. All you have is the imaginations of central bankers, and you don't know what they're going to do, so you have to be diversified."

Moments ago, the British foreign secretary William Hague tweeted that the arms embargo to the Syrian rebels has officially ended. The irony is that as has been known for a long time, and as the FT itself reported ten days ago, the Syrian "rebels" who actually have been Qatari mercenaries, have been receiving weapons shipments for years from the wealthy Persian Gulf country, with the implicit knowledge of both Europe and the US. So why the rush by France and Britain to allow weapons armaments to resume by official channels, even if it means even more weaponization of the Assad regime by Russia and China, more bloodshed, and more death?

Simple: natural gas.

When news hit the tape in February of 2007 that TXU would be acquired by a consortium of PE firms including KKR, TPG and Goldman, for the mind-boggling price of $45 billion, to this day the biggest LBO in history, there were those who were morbidly excited about the future as money was flowing freely, bonuses would hit a record, and there was only upside, and then there were those who knew this was the can't miss top-tick indicator of the beginning of the end. The latters ones turned out to be right. And not only because a year later the entire financial system imploded and only a $25 trillion global coordinated bailout prevented the collapse of the western way of life as we know it, but because now six years later, in the worst kept secret of Wall Street of the past month, TXU, now known as Energy Futures Holdings, is on the verge of the ultimate humiliation for private equity investors: Chapter 11, and a complete wipe out of not only the equity but major impairment of the debt holders as well.

Nat Gas kissed $4 just after 10:00 EST and then subsequently collapsed to $3.891 before rebounding all the way back.  Coupled with Fannie Mae, we're in an Efficient Market!  This time, the computers were a full 7 seconds ahead of the release, not the 400 ms we've been seeing.

On January 31, 2013, (thanks to the data experts at Nanex) approximately 400 milliseconds before the official release of the EIA Natural Gas Report, trading activity exploded in Natural Gas Futures and ETFs such as UGZ, UNG and BOIL. Now that the Feds have stated that they don't think there is merit in prosecuting people who get news information earlier than others by milliseconds, is it any wonder?