Tuesday, February 9, 2016
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Portuguese-German Spreads Widen to 300bps


We are seeing a very enjoyable and serene widening of bond spreads between the aristocracy of Europe and the plebian nations. We haven’t seen this in quite some time, so it’s always an event whenever it does rear its hideously disgusting head. From past experiences with Europe, this will likely continue to a near snapping point, by which the ECB will be forced to act in order to save the whole god damned world.

Out of the PIGS, Portuguese spreads are widest v German bunds at 300bps. Therefore, by default, it is the proverbial ‘canary in the coal mine.’ We will watch it with great pleasure while eating popped corn, as the crisis develops– and envelopes the globe in terror.

Here is the 1-day spread between the haves and have nots.


And here is the 1-mo spread


It’s worth mentioning that the PIGS’ yields are still incredibly low. They aren’t indicating crisis, only potential stress that might be developing in the European banking sector.

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NIKKEI 225 Endures a Heart Attack Drop of 5% at the Open


The NIKKEI is being ransacked in early trade, to the tune of 850+ points or 5%.

Luckily, the Chinese and Hong Kongians (?) are out celebrating the year of the monkey this week, lavishing themselves with canine sushi and closed stock exchanges, as the world burns.

Here are some of the early losers in Japan tonight.



Dow futures are down over 100.

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Some Oil Drillers Are Stuck Stupid in Three Way Hedges


This is beautiful. Financial engineering at its best. Or in this case, financial engineering that got a little too sophisticated for its own good, which might lead to murderous rout of company share values.

Oil at $30 a barrel is blowing a hole in the insurance that U.S. shale drillers bought to protect themselves against a crash.
Companies including Marathon Oil Corp., Noble Energy Inc., Callon Petroleum Inc., Pioneer Natural Resources Co., Rex Energy Corp. and Bonanza Creek Energy Inc. used a strategy known as a three-way collar that doesn’t guarantee a minimum price if oil falls below a certain level, company records show. While three-ways can be cheaper than other hedges, they leave drillers exposed to sharp declines.
“At the time people hedged, they did it without thinking that oil would go to $28,” said Thomas Finlon, director of Energy Analytics Group LLC in Jupiter, Florida. “They didn’t have a realistic view about whether the market would crumble or not.”
The three-way hedges risk worsening a cash shortfall for companies trying to survive the worst oil crash in 30 years. The insurance is all the more important after oil plummeted 43 percent in the past year to $26 a barrel in January, exacerbating the pressure on debt-burdened producers.

And here are some individual cases.

Callon, ticker CPE (-24% YTD)

The trade has three parts. First, one option capped the best price Callon could get at $65 a barrel. Selling the right to profit if prices rise offsets the cost of protecting against a decline. The second piece established a floor price of $55, a guaranteed minimum that Callon would get paid even if oil fell below that point. By itself, this kind of trade, called a collar, would’ve ensured that Callon received $25 a barrel protection when oil is trading at $30.

However, Callon added a third element by selling a put option, sometimes called a subfloor, at $40 a barrel. Below that point, Callon essentially forfeits its protection. Instead of pocketing $55, the company is only entitled to the difference between the floor and that subfloor, or $15 a barrel in this case. At $30, Callon will realize $45 a barrel, $10 a barrel less than it would’ve received with a traditional collar.

If prices rebound above the subfloor, any disadvantage to the three-ways disappears.

“Our hedging program is part of our broader risk management efforts, and is designed to provide downside protection in a falling commodity price environment,” said Eric Williams, a spokesman for Callon. The price of oil futures through 2016 is at about $35, at which Callon’s three-ways would yield $50 a barrel, he said.

Pioneer, ticker PXD, (-8.1% YTD)

Similarly, Pioneer used three-ways to cover 65,000 barrels a day in the first half of 2016, or about a third of its projected output, company filings show. The strategy capped the upside price at $73 and guaranteed a minimum of $63, which would’ve ensured $33 above a selling price of $30.

However, Pioneer added a subfloor at $43. If oil’s trading at $30 a barrel, Pioneer will get about $50, or the market price plus the $20 difference between the floor and the subfloor. The difference adds up. With oil at $40, Pioneer will realize about $845,000 less every day than it would have using the collar with the $63 floor.

Bonanza, ticker BCEI, (-56% YTD)

Likewise, Bonanza Creek hedged 5,500 barrels a day for 2016, about 33 percent of its production, with three-way collars with a ceiling of $96.83 and a floor of $85. At $40, the trade would be worth about $55 a barrel, or $302,500 a day. However, Bonanza Creek also sold $70 puts, making its position worth just $15 a barrel, or $82,500 a day.

There are many more instances of this in the sector. Before going long, be sure to investigate oil hedge programs.

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Google CEO Receives Record $199 Million Stock Grant


The shares of GOOGL are up 31% over the past year. Therefore, ergo, one must break open the bank and all of the piggies to reward its new CEO with the most lavish stock grant the world has ever seen.

Pichai, who is Google’s chief executive officer, received 273,328 Class C shares on Feb. 3 that will vest in quarterly increments through 2019 if he remains on the job, according to a filing Friday from the Mountain View, California-based company.

Pichai, the former deputy of Google co-founder Larry Page, was named to run the search engine unit following the reorganization into holding company Alphabet last year. The award is the biggest ever given to a Google executive officer whose equity grants have to be reported in filings, according to data compiled by Bloomberg.


Over the past 6 months, shares of GOOGL are up 5.7% vs a 7% return for good olde fashioned long dated U.S. treasuries.

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Swag: I’m Bullish on Gold in Ruble Terms


No fucks Gartman is coming out swinging tonight, telling people he’s super bullish on gold, fading the moron public ‘who is probably short’, saying gold is due for a demonstrable move to the upside.

He’s bullish in a boat, with a goat and even behind a moat. He likes gold in dollars, yen, sterling, even in rubles. He gives zero fucks and says gold is going to trade north.

Gold is down 0.4% in evening trade.

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This Leg of the Crisis Might Lead to a Worldwide Bank Rally


Deutsche Bank coco bonds is where the panic can be seen now, as investors fear they will miss a coupon payment. Apparently, this is an issue that can easily be addressed by the ECB, which might lead to a global rally in banks–stuffing the decapitated heads of overzealous bears into duffle bags for expeditious disposal.

There’s not much more to discuss, other than banks’ CDS blowing out, oil collapsing, China collapsing and our fucking Federal Reserve wholly intent on destroying the very fabric of civilization that the good Dr. Benjamin Bernanke crafted with his very own hands.


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BEHOLD the Danger that Has the Internet All in a Frenzy


Deutsche Bank credit default swaps soared today, which motivated all of the fashionable bears to gallivant about the internets declaring an end to western finance, as well as ‘the next Lehman’ event to be forthcoming.


The big stupid German bank is holding the bag for Greek and Chinese idiocy on a very large scale. Its complete annihilation and dissolution will inexorably force the world into an Armageddon, unseen since the days of Atlantis.

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NASDAQ Rallies 60 Points to End Miserable Session


Apple was higher, as well as GILD, most of the session–which was encouraging. About 76% of stocks were lower today, led by financials. For some oddball reason, energy stocks were rallying off the lows.


Here’s my major concern. Hardly anyone left the Ark, as it closed higher by $2.77–a mere 13 cents off session highs.


It’s rough out there and the losses can become unbearable to many, especially those on margin. We will bounce soon and the Bulls will race back into the market, only to get catapulted back into the spiked wall.

For this market to truly bottom, we need to see the VIX spike, oil trade above $40, and an evacuation from bonds. Right now the smart money is still long TLT.

If you’re very long, use rallies to lighten up. If you’re in cash, waiting for a tradeable bounce, you might want to join the league of gentlemen inside Exodus to get a better handle on timing the whole thing.

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Gundlach: ‘Credit Fund Bankruptcies are Coming’

Jeffrey Gundlach, CEO of DoubleLine, speaks at the 16th annual Sohn Investment Conference in New York

In a cryptic email sent to Reuters today, bond King, Jeff Gundlach, suggested the market wasn’t panicking enough to put in a bottom. He warned of credit fund bankruptcies and other niceties.

Also, he suggested not to go about ‘flopping’ around in this market, as you’re sure to get hooked.

Credit fund bankruptcies are coming,” said Gundlach, who warned in December that the Federal Reserve might regret raising rates because of deteriorating financial conditions. “It’s not a market to be flopping around in. The trends are relentless and powerful.”

Gundlach, in emailed comments to Reuters, said: “Clearly, weaker-than-hoped-for global growth is the major factor in this weakness” in credit markets. “That and the credit overload I have been warning about ad nauseum.”

Gundlach said the CBOE Volatility index needs to be above 40 before a bottom can be made in the high-yield junk bond market. On Monday, the VIX was up 16.4 percent at 27.21. The VIX, known as Wall Street’s fear gauge, has not touched 40 since late August.

The collapse last year of Third Avenue Management, a near $1 billion junk bond fund which marked the biggest failure in the U.S. mutual fund industry since the height of the financial crisis in 2008, had ignited concerns that less liquidity in the corporate bond market would cause more volatility.

“This is not a trader’s market,” Gundlach said. “It is a freight train that you want to stay in sync with. There’s too much order and belief in markets in spite of big losses.”
He said equities are in a bear market, with the Nasdaq down 18.3 percent from its highs and “many, many, many stocks down over 25 percent from their highs.”

Gundlach is right. Despite the record drop in stocks, volatility, the index that measures fear, has been somewhat subdued.


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IHS: Draconian Cuts in Oil Company Budgets Needed


There’s nothing debilitatingly deflationary like 10s of billions being slashed from the collective operating budgets of our blessed oil companies.


A group of 44 North American exploration and production companies are planning to spend $78 billion on capital projects this year, down from $101 billion last year. Those companies need to cut another $24 billion this year to get their spending in line with a historical 130 percent ratio of spending to cash flow, according to IHS.

“These spending cuts will be particularly troublesome for the highly leveraged companies,” said Paul O’Donnell, principal analyst at IHS Energy. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.”

Oh, one little item I forgot to mention about this analysis: it’s worst case scenario was $40 crude and $2.50 natty. Now that we’re $30 WTI and heading lower, potentionally, I’m sure a few billion more will need to be cleaved.

What’s a few billion between friends? We’re all very good friends here, aren’t we?

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