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.

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.

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.

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?

Here’s reason to believe the CEO of CHK won’t willingly file for bankruptcy. He’s just been granted a record amount of options, which are now underwater.

Nothing says “I deserve 1 million shares of stock” like driving the shares of your company lower by 90% since becoming CEO.

This company and its board is a complete joke. How is Icahn letting this guy receive anything? Carl is getting old.

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.