Bank of America: Liquidity is Drying Up

Finally, we’re getting to the crux of the matter: liquidity is drying up. The deflationary vortex has taken hold, sending all monies of substance into treasuries, racing away from risk.

Bank of America is out with a note pointing to the systemic nature of the liquidity crunch and how it’s at the heart of the recent tumult.

The index is a composite measure of market-based indicators of risk, demand for hedging, and risk appetite, while the liquidity subindex tracks a variety of funding spreads, such as Libor-OIS.

“Compared to the broader GFSI, liquidity stress has somewhat methodically and steadily risen over the past two years: while the GFSI has moved higher in fits and starts, liquidity stress has more persistently risen, only pausing its rise at times, before moving higher,” the strategists explained. “This persistence suggests to us that deteriorating liquidity is at the heart of and may be the primary driver of broader rising financial stress.”

Merrill Lynch chalks up the seemingly structural, unrelenting increase in liquidity stress to two factors:

New regulatory and capital requirements enacted since the financial crisis that restrict trading activity and limit the amount of balance sheet that banks are willing to dedicate to providing liquidity;

Building off the above, the collapse in commodity prices has sparked severe selloffs in the emerging markets and high-yield debt and led banks to jettison the provision of liquidity to challenged sectors in particular.

“The combination of these two factors has led to a somewhat vicious cycle and feedback loop, where poor liquidity is spreading, and liquidity problems appear to be turning into fundamental problems,” the pair wrote. “Moreover, tightening of monetary policy by the Fed, first through tapering and now through tightening, may have been necessary from an economic perspective, but the tightening appears to be adding fuel to the fire of liquidity deterioration.”

Can you say ‘negative feedback loop?’

Bank stocks are getting clawhammered today, with 6%+ drops,in a number of major investment banks, including GS.

I bet the shareholders of DB, MS and GS would much prefer to be aboard my ark, rather than their nefarious banks from hell, no?

Dare I say, a brand new financial crisis is being born, right before our eyes?

All jokes aside, markets will bounce soon. It just has to. If Yellen stokes these flames anymore, we’ll fucking self destruct and take the whole planet back to the caveman ages, where Yellen will be stoned to death for not being able to carry large boulders far enough by her local warlord.

These are dark, dark times.

Note: I am still 75% cash, 25% TLT– waiting.

Shares of CHK have recovered since making a press release, announcing they have no interest in bankruptcy.

Co stated that Kirkland & Ellis LLP has served as one of Chesapeake’s counsel since 2010 and continues to advise the company as it seeks to further strengthen its balance sheet following its recent debt exchange. Chesapeake currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders.

As you were, lads.

Shall we commence another round of european debt crisis or no? I say yes.

We are seeing a very worrying development in Europe today, as the strong economies bond yields plunge, the weaker nations, the PIGS (Portugal, Italy or Irelend, Greece and Spain) soar. Forget about everything that has happened over the past two months. If this european debt crisis reemerges, look out below. There will be significant carnage to be had. Look at the Greek banks today.

The NASDAQ is off by more than 100. CHK is down 50%.

Debtwire is reporting that Chesapeake has hired Kirkland & Ellis to restructure their debt, which is in excess of $12 billion.

If true, this will undoubtedly send shockwaves throughout the oil and gas space. Already, SDRL, WLL, BBG and a slew of others are tanking.

Some of the pipeline stocks are getting it almost as bad as CHK, with WMB and ETE plunging over 30%.

Look at the carnage. Gawk at it; but don’t touch it.

The good bad news is the NASDAQ is down more than 7.5% for the month of February, just one week into it. The good news is the last time the market fell like this, in 2002, the NASDAQ rose by 6.7% in March.

However, I do bring moar news of the medieval varietal. Back in February of 2002, the NASDAQIRI fell by 12.2% or 4.6% more than the losses we have– month to date.

The egregiously worse news was in February of 2001, the NASDAQ dropped by a heart-shattering 26%, only to drop by another 17% in March.

Just a little background on those two cumulative months of complete fuckery. I remember those two months very vividly, as they were a morbidly comical part of my life, where my broker friends and I would run about Manhattan, drinking booze and lamenting over the end of the stock market. You must imagine the sheer tragedy of it all: losing 26% in one month is bad enough. But losing another 17% on top of it felt like something out of a science fiction book–twilight zone shit.

In April of 2001, stocks rose by 17.8%. In 2002, it fell 12%+.

Either way you slice it, historically, we’re completely fucked.

The Athens FTSE 20 is off by 9% now and a wide variety of Greek banks are down double digits.

Related: Austria is down 3.6%, Denmark is down 3.7%, Germany is down 2.8%, Norway is down 3%, Spain is down 2.75%.

In Germany, Commerzbank is down 6.7%.

Gold is soaring this morning, as futures plunge into the dark, rabble-rousing, sea of perfidy. Investors, for reasons inexplicable to the layman, are now viewing gold as a safe haven, something that has been absent from the industry for more than 4 years.

The traditional ‘risk off’ trade, long bonds, is working again this morning.

Gentlemen, get aboard the ark. Feel free to bring your gold bricks. We can use them to bash the skulls in of the cows onboard.

I’m going out on a limb here to suggest this guy is completely full of shit. Who is he kidding with the olde “everything is cheery and fine here in oil hell” anyways? During an interview this morning on CNBC, former Fed head, Dick Evans, gave a very positive assessment of Cullen Frost’s oil portfolio, saying all was well, nothing to see here. I got flashbacks of Baghdad Bob while watching this man spin a yarn.

In all fairness to Dick, it’s his job to stay positive and lift morale throughout the ranks. His stock has been sledgehammered to the tune of 33% over the past 3 months and Wall Street is screaming “you’re full of shit” after each and every one of this Polyana “we are a diverse economy in Texas” interviews.

The Dax is off by 2.7& and NASDAQ futures are lower by 62, Dow futures off by 170, as the ‘negative feedback loop’ of a worsening Fed stance on monetary policy, Oil, and China (FOC’d) weigh on the minds of investors.

The dollar is higher by 0.4% v the euro and breakfast hasn’t even been served in Princeton, NJ yet.

At the end of the day, this week is all about Yellen’s testimony. There is a growing consensus out there that she will dig in her heels on a March Fed rate hike, which is sure to leave traders astounded with elephantine losses.

“I don’t think we should expect Yellen to throw the towel on a March hike,” said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York. “She may emphasize the positives in the U.S. economy, particularly the still-strong labor market. Looking ahead, she may sound more cautious, and she will likely highlight that the negatives are mostly from abroad and that they are watching the global picture closely.”

Yellen talks Wednesday.