Forced Liquidation (Freakout) Friday


Wow. Headlines overnight are "worldwide wipeout and global meltdown." I'm just going to repeat the last line of the opening from yesterday's paragraph, "Honestly, I’m another plunge day or two from getting genuinely neutral to slightly bullish", as it still applies. For now, sitting on hands.  

Your Tax Dollars Not Exactly At Work For You: Shifting tides in short interest for the period Sept 15 to Sept 30, percent change in () .

Bigger Declines in Short Interest (NYSE):  FNM (-59), FRE (-50), WB (-25), MET (-78), WFC (-28)

Biggest Increases in Short Interest (NYSE): S (+25), WEN (+1,256), BSX (+47), CHK (+30), ODP (+50)

Thanks Ben, Hank, and that SEC guy!

This made me chuckle.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Natural Gas Storage Review & Gas Thoughts
  4. Stuff We Care About Today - E&P Metrics
  5. Rumor Watch
  6. Odds & Ends

Holdings Watch - No changes.

Commodity Watch:

Crude oil fell $2.36 to close at $86.59 yesterday accelerating with the drop in the broad markets and news that OPEC would hold an emergency meeting on November 18 implying the Cartel won't act prior to the election in the U.S. Last night oil touched $82, a one year low.

  • IEA Cuts Demand Forecast. The IEA cut its 2008 global demand estimate by 240,000 barrels of oil a day, now sees world demand of 86.5 million barrels a day this year, and cut its 2009 estimate by 440,000 barrels a day, to 87.2 million barrels a day ~ from Marketwatch. Note they still see growth next year ... that's attributable to non-developed country demand; this price fall will eventually exacerbate that demand and revitalize demand in the OECD. Price will take care of price.
  • Tropics Watch: Hmmmm, 97 Invest. Lots of tropical waves all of the sudden.

Natural gas closed the day UP $0.08 at $6.83 after the EIA announced a larger than expected withdrawal from storage (see next section). This morning gas is trading off a little over a dime.

Natural Gas Storage Review & Gas Thoughts:

EIA reported an injection to storage inventories of 88 Bcf, splitting the Street estimate of 85 Bcf and my 90 number for the week. This is the second largest injection for this week in history.

ZComment: (from the comments section yesterday but believe it or not, even in the fast paced environment of here today and destroyed a little later today I have not yet abandoned this line of thinking):

"Just looking at NG, to me it looks like preparation for a bounce is in place by traders…just waiting on the markets to comply. In other words, I think gas will likely rally with any regaining of confidence in the rest of the market. I base on the fact that that injection was fat and oil is down $2 and gas is still up a nickle." Oil went on to get crushed and gas still closed green...somewhat impressive.

"Looking at the storage situation, we are at 3,198 Bcf in storage and there are 4 weeks left in the traditional injection season. My target for some time now has been 3.4 Tcf (3,400 Bcf). I still think that can happen but we could easily slide to 3.5 Tcf with mild weather. Last year the last 4 weeks saw 170 Bcf of injections and the record is 174. We could break that this year and end up with 3.5 Tcf pretty easily if Fall does not arrive and breaking this threshold would likely put a lid on gas prices until the first really cold blast of air hits. When I say put a lid on them I mean limit the upside in what I see as a coming rally (broad market willing) to only $8 between now and Thanksgiving."

Four Weeks Left In The Injection Season



Stuff We Care About Today

E&P Stocks Have Been Destroyed, Well Beyond The Fall In Commodity Prices (circled on the right side of the graphs). These moves are for lack of a better word, insane. Anadarko, for instance has fallen from $50 to $30 in five days. It would not fall that much if Independence Hub simply sank.

E&P Metrics. Not that valuation matters now, but it will soon.

P/CF Multiples...Where we stand after the FALL.

ZComment: Right now no one cares about this. Numbers for 2009 are in general too high and are likely to fall 10 to 20% for most of the names in the group depending on their oil gas production split, the regions in which they produce (differentials to Henry Hub are generally terrible at present) , and their hedge positions. So shave the numbers by 25% and you still have pretty much the lowest current and forward year multiples of cash flow for all of the E&P names. Normally your longer reserve life, higher growth names command a premium to the names that have to fight shorter reserve life portfolios. That way of thinking is currently out the window but for the stock investor this are rock bottom prices.


Other news:

CHK Comments From A Wall Street Journal

  • CHK's leasing in the Haynesville has come to a standstill. I say, good they got what they want and don't need to over-extend.
  • CHK is backing  out of some leases in Appalachia (Marcellus Shale) before the are finalized. Also good in my book as that play will be slow to develop anyway and they are already the biggest holder of Marcellus and Huron Shale acres.
  • CHK will have $5 to $6 billion in cash at the end of the year. That one is a quote from Aubrey in the Journal and the paper points out that the company had no cash as of 6/30/08. They print cash like the Fed so Aubrey's claim is not outlandish but it does include a couple of property deals that may be delayed/tough to do in this market.

(LINE) To Buy Back $100 Million of its Units.

  • That's 7.5% of the stock outstanding.
  • This is financed via the sale of Woodford Shale deep rights for $229 million. As I was saying the other day these guys have made some pretty good buys and sales over the years.
  • The Woodford sale includes no producing reserves...so it won't affect the distribution.
  • Yield now at 21.5%

Rumor Watch:

  • CHK - CEO has a large margin call and is forced to sell - not yet corroborated.
  • XTO - same
  • CHK has mounting counterparty risk on its hedges. CHK has over 20 counterparties so that's hard/impossible to confirm. This is the kind of rumor shorts love to start during panicky times. One again, thanks to Hank & Co for shifting the shorts attention to our group.
  • T Boone Pickens is liquidating one of his funds (the commodity one) which is down 95% ytd. This one is probably true as I have 2 sources that are pretty darn reliable and they have ties to owners in the funds.
  • XCO has debt due in December which is backstopped by Pickens. Unconfirmed


Odds & Ends

Analyst Watch: Mums the word.



171 Responses to “Forced Liquidation (Freakout) Friday”

  1. 1
    calvo Says:

    Morning Z! Have you seen this piece about yesterday’s CHK sell-off?…


  2. 2
    zman Says:

    Nope Calvo, thanks. It’s true, hedge funds have been liquidating for weeks/months. At IPAA there were several CEO’s who talked angrily about the “stupid hedged funds and their stupid forced liquidations”. Fundamentals don’t matter when you have a margin call to make.

  3. 3
    zman Says:

    UK prime minister Gordon Brown today ~ “I’m concerned when I hear that the Opec countries are meeting, or are about to meet, to discuss cutting production – in other words, making the price potentially higher than it should be,” Brown told Reuters.

    “So I’m making it clear to Opec also today that it would be wrong for the world economy – wrong for British people who are paying high petrol prices and high fuel prices at the moment – for Opec to cut production.”

    At $82, this will fall on deaf ears. I don’t remember world leaders saying “produce more to get prices up” when oil was $12 a decade ago. OPEC certainly remembers those days.

  4. 4
    Sambone Says:

    Wow, looks like MS is the next to go out. look at the premarket bid.

  5. 5
    Sambone Says:

    By Nick Heath

    LONDON (Dow Jones)– Crude oil futures traded down more than $5 at one-year
    lows in early European trade Friday as slumps in Asian and European equity
    markets reinforced concerns demand for oil and products is set to slow due to a
    widening economic downturn, an outlook endorsed by the International Energy
    Agency in its monthly report Friday.
    Nymex light, sweet crude fell to $81.13 a barrel, its lowest since Oct. 10,
    2007, while ICE Brent swung below $80 for the first time since October 12 last
    year overnight, en route to a year-low $77.29 a barrel.
    Crude prices extended their overnight slide with traders seeing little reason
    to buy into falls as European equity indexes fell by as much as 10%, while the
    IEA warned global oil demand is on course to register its weakest growth in 15
    years with similarly weak growth in 2009 as the ongoing financial crisis erodes
    economic activity.
    Factors beyond fundamentals also played a leading role in Friday’s plunge,
    with investors in oil like those in other markets looking to liquidate assets
    either to cover exposure elsewhere, or simply hold cash amid fears of further
    slides in asset values.
    “Sellers are being forced to liquidate oil length in order to finance equity
    debt and the fear of a global meltdown is depressing market values at an
    unprecedented rate,” said Rob Laughlin, energy analyst at MF Global in London.
    At 1054 GMT, the front-month November Brent contract on London’s ICE futures
    exchange was down $4.07 at $78.59 a barrel.
    The front-month November light, sweet, crude contract on the New York
    Mercantile Exchange was trading $4.29 lower at $82.30 a barrel.
    The ICE’s gasoil contract for October delivery – which expires later Friday –
    was down $49.75 at $738.75 a metric ton, while Nymex gasoline for November
    delivery was down 963 points at 193.10 cents a gallon.
    With demand fears deeply entrenched across the crude market, the IEA’s
    revision to its oil consumption outlook came as less of a surprise Friday,
    instead it was seen more as an endorsement of the escalating concerns that have
    helped pull crude off its record highs above $147 a barrel, reached just three
    months ago.
    The Paris-based agency, in its monthly oil market report, said world
    consumption this year is seen rising by just 0.5%, or 400,000 barrels a day,
    the slowest rate since 1993, and by just 0.8% next year.
    “A demand revision was expected and I think there are some more to come – it’s
    not over yet,” said Olivier Jakob, managing director of Swiss consultancy
    With market attention more firmly focused on shriveling demand and financial
    market turbulence, the prospect of a potential Organization of Petroleum
    Exporting Countries’ production cut was largely impotent in halting crude’s
    slide Friday.
    OPEC confirmed Thursday it would convene for an emergency meeting Nov. 18,
    saying it was concerned about the escalating credit squeeze that had turned
    into a “deep financial crisis” and vowed to ensure the global oil market is
    kept in “balance”.
    “I’m sure they will come out and reduce production, they’re getting hurt in
    their revenues. But the impact has been non-existent – the market is in the
    grip of the whole escalating problem with assets being reduced by the hour,”
    said Ole Hansen, manager of futures and fixed income trading at Saxo Bank in
    -By Nick Heath; Dow Jones Newswires; +44 (0)20 7842 9405;
    (Spencer Swartz contributed to this item)

    Click here to go to Dow Jones NewsPlus, a web front page of today’s most
    important business and market news, analysis and commentary:
    http://www.djnewsplus.com/al?rnd=pz0rU6jVsz%2FDfuqi3KLR1g%3D%3D. You can use
    this link on the day this article is published and the following day.

    Dow Jones Newswires
    10-10-08 0711ET

  6. 6
    zman Says:

    Tudor Pickering says they’ve “poked around” CHK balance sheet and can’t come up with a way that CHK does not meet its obligations. Say’s only the company coming out and saying so will stem the decline and then that $18 will be “helluva bargain” price.

  7. 7
    antrimshale74 Says:

    Oil is now at that price were it is unprofitable for many of the newer Alberta oil sands projects. Iran and Venezuela will be running huge deficits at this price, too, so I’m sure they will have to start screaming about production cuts.

  8. 8
    antrimshale74 Says:

    Just saw that copper price and it is amazing to see it around $2.

  9. 9
    1520sbroad Says:

    z- thanks for the valuation update in the post this morning. Some pretty incredible multiples to cash flow there.

    To address the possible change to mildly bullish…
    A couple of items from conversations i’ve had with some old workmates in the past few days. ONe of the smartest guys i used to work with developed his own sentiment model that factored in about 30 different investor sentiment pieces (some basic ones like the VIX, some more complicated survey related data, technical indicators (bullish percent, various oscillators etc.) and some output from other sentiment gauges. I spoke to him yesterday about 2pm eastern and he said his model was at it’s theoretical max fear level. He has never seen this in over 15 years of running this model in it’s current state. It never showed up even in backtests going back into the early 80’s. He now trades on his own and is aggressively staging into the market.

    2 other guys that i worked with are still trading a covered call strategy and i spoke to them after the close yesterday. They said that option premiums are paying tremendous amounts even well out into the calendar. They can’t buy and cover stuff fast enough.

  10. 10
    zman Says:

    Oil down $8 pre open at $79 and falling.

    NG getting pulled down 4%.

    I wonder what the best financial service shorts are. Axys software, Thomson Reuters, who needs that stuff anymore. Hundreds if not thousands of hedge funds will be dead by year end.

  11. 11
    Sambone Says:

    Gonna be ugly

  12. 12
    zman Says:

    Sam – too true. Sure would like to see a key reversal on the broad market. Don’t see what announcement from the Rose Garden or anywhere else is going to prompt that, especially on a Friday.

  13. 13
    Sambone Says:

    Every time “W” speaks, the market goes down.

  14. 14
    zman Says:

    Pisani on CNBC saying stocks not trading on fundamentals now (duh) and

    that you can’t necessarily believe your 2009 projections (double duh) That’s what I was getting at in the post today, the numbers are discounting something south of $50 oil (my best guess) right now. That’s just not going to be the 2009 average price. Those stock price performance graphs compared to the commodities tell the story. Huge, way big, mongo giant over reaction here. Not fundamentals but panic / margin call selling.

    The rumor count is high and that’s exacerbating the once silly and now downright stupid moves.

    I did laugh when I heard Fuld was knocked out at his gym at Lehman.

  15. 15
    zman Says:

    Remember I was buying and trading DUG $40 and $45 calls 2 weeks ago. Should have stuck with that. DUG now 78. Ugh.

  16. 16
    zman Says:

    There went Dow 8,000; down 635 now.

  17. 17
    antrimshale74 Says:

    Here in Michigan there is palpable fear about the collapse of the Big 3. Our unemployment rate is pushing 10% now so you can imagine what it will be if anything happens to the auto makers. This whole thing is disgusting. Auto sales off over 50% this month so far. That’s a huge hit to the GDP, too.

  18. 18
    antrimshale74 Says:

    I almost had a stroke when I saw the OIH and XLE quotes. WOW!

  19. 19
    tater Says:

    I know its a hard question to answer quickly, but do you know offhand if any of the refiners are debt pigs? CVX and MRO have both liked their downstream. Don’t want to catch TSO if it’s full of debt.

    Also, as for technical stuff, book on these gaps from the open is that the first move back up into the gap will be sold.

  20. 20
    zman Says:

    Antrim – thanks for the local color. Agreed disgusting. Lots of that to go around. Its possible the U.S. government will buy all 3. Would be pocket change compared to the bailout, then they could mandate higher MPG cars from within. Saw that the only reason Ford does not sell their high mileage diesel here is they have no money to build a $300 mm plant. That’s nutty, think of getting off foreign oil by conserving fuel, not just dreaming about fields of solar panels. Jeez, I just turned socialist. Actually, I’m sure if the U.S. took them over they’d rank right up their with Zil’s for quality.

  21. 21
    Garyinhou Says:

    My watch list is popping hod’s like crazy

  22. 22
    zman Says:

    Tater – TSO is trading for less than the value of inventories on hand less debt last I checked. I’ll check and get back to you. Names line WNR are highly indebted. Names like XOM are debt free with huge cash load. XOM down 20% in 2 days with $40 b in cash.

  23. 23
    Garyinhou Says:

    sure seems like some computers kicked in down 600+… wild…

  24. 24
    Sambone Says:

    Just picked up some RIG at 71

  25. 25
    antrimshale74 Says:

    Does anybody know the correct intra-day low in the DOW today? I’m showing down 1300 at the open. Is that correct?

  26. 26
    BeWater Says:

    i’ve got 7882.51 djia low

  27. 27
    Sambone Says:

    9:55 (Dow Jones) Crude oil futures, whose recent moves have been dictated by
    the steep selloff in equities, recover somewhat and now trade north of $81.
    DJIA briefly went below 8000, but oil futures didn’t revisit their intraday low
    of $78.61/bbl, a level not seen in exactly one year. Nymex Nov crude recently
    about 6% lower at $81.27/bbl. (ANR)

  28. 28
    tater Says:

    Thanks much. Just getting my set-ups in place. Didn’t one of those raiders offer like $70 a share for TSO in the spring. I wonder what he’s thinking now.
    As well, I feel fairly comfortable with the OPEC guys ready to have my back any day now.
    As for the credit markets, Hooter’s just announced two new locations near my house! Somebody’s loaning $

  29. 29
    antrimshale74 Says:

    VIX up over 70.

  30. 30
    zman Says:

    Odd trading all day PVA, up 4% after a halt early. Nope up 1%. Like I said odd trading. There is definitely some selective fishing going on.

  31. 31
    antrimshale74 Says:

    Kirk Kercorian made the offer for a hunk of TSO, but I cannot remember the price. I don’t think it was $70, but it was quite a bit, even for the time.

  32. 32
    zman Says:

    Tater – yes, it was Kerkorian. He’s thanking his lucky stars…company probably not so much that they spoiled that deal.

  33. 33
    zman Says:


  34. 34
    tater Says:

    Great, now we have to bear the Bush kills the market rally. I should probably play it. It’s been money so far.

  35. 35
    antrimshale74 Says:

    He took a big hunk of GM,too, got his finance guy on board, then gave up on them and sold everything. Then he bought a big chunk of Ford, which I think he still has… something like 8%. He actually made a bit of a profit on GM, I think.

  36. 36
    Sambone Says:

    RIO DE JANEIRO (Dow Jones)–The cost to produce crude oil from Brazil’s
    promising subsalt deposits will run between $40 and $50 a barrel at current
    conditions, Mines and Energy Minister Edison Lobao said Friday.
    “When you drill a well, there is a risk you won’t find oil. In (Brazil’s)
    subsalt region, there isn’t this risk,” the local Estado news agency quoted
    Lobao as saying at a meeting in Lisbon. “And the oil is flowing generously.”
    Officials at state-run energy giant Petroleo Brasileiro (PBR) had previously
    said development of the company’s oil reserves – including the subsalt region –
    was viable at an oil price of $35 a barrel, although executives have since
    backed off the statements in recent months. International oil prices have
    plummeted in recent weeks on expectations of slack demand amid a global
    economic slowdown.
    Earlier Friday, light sweet crude for November delivery slid below $80 a
    barrel in trading on the New York Mercantile Exchange.
    Petrobras has so far announced reserve estimates for two fields in the Santos
    Basin portion of the subsalt area. In the BM-S-11 block, recoverable reserves
    at the Tupi field was pegged at between 5 billion and 8 billion barrels of oil
    equivalent. Meanwhile, the Iara field, in a separate portion of the same block,
    was estimated to hold recoverable reserves of between 3 billion and 4 billion
    Furthermore, the company has disclosed oil discoveries at several other nearby
    blocks, but has not yet released reserve estimates.
    Lobao called the string of discoveries in the subsalt layer, which extends
    from Espirito Santo state in the north to Santa Catarina state in the south, a
    “It’s practically impossible to drill a well in the subsalt region and not
    find oil,” Lobao said.
    -By Jeff Fick, Dow Jones Newswires
    Dow Jones Newswires
    10-10-08 1018ET

  37. 37
    zman Says:

    NG still outperforming oil quite handily. When we do rally it should definitely outperform.

  38. 38
    doc Says:

    Do you think chk CEO not talking to the press is a very bad sign?

  39. 39
    zman Says:

    Doc – he talked to the Journal yesterday as far as I can tell.

  40. 40
    zman Says:

    Market holding breath during Bush speech.

    Interesting to see HK flat to up.

    All refiners up.

  41. 41
    tater Says:

    Just a quick note on TA. SLB is showing the classic textbook return into the gap and then a retracement back down of about half of the total move from today’s LOD to HOD. Now it is in a consolidation pattern with the battle of the bulls and bears to break up or down. (Look at a 5 minute chart).
    Not that you have to trade with a 5 minute chart, it’s just that it may give an early clue as to whether this will truly be a reversal day, or if a sector leader like SLB fails all the way back down to a test of the LOD, then we might just be in for more downward action.

  42. 42
    zman Says:

    Bush said nothing according to Gasparino. Pretty much what I heard. Gonna take time to fix.

    Thanks Tater, appreciate your TA thoughts.

  43. 43
    arodeen Says:

    I wonder what it takes before Buffett starts showing interest in some of these all-time historic values.

    BTW – heard from the CHK office in OKC that they let 300-400 land men go yesterday. Ouch.

  44. 44
    zman Says:

    Aro- thanks for the color there. They have thousands of land men in Louisiana alone if you count their sub-contractors. Bad time for them but good time to buy a used bass boat, shotgun or four wheeler.

    CHK down another 17%. Unreal.

  45. 45
    Popeye Says:

    Well I hope I get another chance at HK in the low 9’s but you have
    to be careful what you wish for.

  46. 46
    Jay Reynolds Says:

    Offers here in the HS via CHK’s agents down from 10K/ac > 4K/ac > “not buying now”

  47. 47
    Dman Says:

    VXO doing a moonshot, hit 92 today.

  48. 48
    rlogan1301 Says:

    Z – how does dig look to you..down about 16% today..

  49. 49
    doc Says:

    Go to yahoo insider trades. chk director frederick whitmore sold 200,000shares oct 6. Will chk go bankrupt?

  50. 50
    arodeen Says:

    Stupid question: How do you calculate CFPS again?

  51. 51
    antrimshale74 Says:

    The timing of the XTO share offering earlier this year was precious. I’m sure they’re tickled pink that they got as much cash as they did when they did.

  52. 52
    zman Says:

    Doc – Bankrupt? No, not even close.

    RL – its a crap shoot on a Friday like this. Monday could be unreal down…or up. Just a dice roll as fundamentals don’t matter. If you are nimble and get a bounce you can make some coin but I can’t say I’m buying right now. Yes, group is unreal cheap, even if you haircut the estimates by 25% …damn cheap. That just does not matter right now. Waiting on a catalyst to buy in more and that’s not so much a price or fundamental things as it is a psych thing. It could be triggered by a key event like brilliance out of the G7 or OPEC saying enough is enough and cutting 1 mm bopd or more (not until November I think). Also, we are just shrouded in rumors now as all the shorties are focused on making up lies about the group.

  53. 53
    zman Says:

    Cash flow is essentially net income + depreciation + deferred taxes + plus non-cash expense items (like hedge losses). Basically you add up everything on the cash flow statement before you get to changes in working capital and then divide by the fully diluted share count. This is the measure of what they generate in terms of cash from the operating of their business. Much better than using EPS as this is a business where you are constantly plowing money back into the business. EPS has the non-cash expense of depreciation (which for oil companies is basically your finding costs) taken out of it. That makes little sense to value as all we care about is what can company A generate to sustain its activities.

    CHK down 20%.

  54. 54
    zman Says:

    Tater – can you take a look at LINE for me? Ty.

  55. 55
    PackMan Says:

    chk at $14 ??

  56. 56
    1520sbroad Says:

    CHK analyst day(s) on 10/15-16 should be interesting.

  57. 57
    tomdavis12 Says:

    Z: The following are NET cash positions. XOM 30B, MSFT 23.6B, AAPL 20.7B, CSCO 19.3B, ADP 16.9B, GOOG 12.7B, PFE 10.5B.

  58. 58
    zman Says:

    CHK analyst day…this is their first one…I was thinking of going but I may just listen from the office. Going to be interesting to say the least…it’s not a shareholder meeting where there might be some yelling at this point.

  59. 59
    arodeen Says:

    Thanks much Z, the reason for using it over EPS was the root of my question.

  60. 60
    zman Says:

    That CHK director still has over 580,000 shares. People sell for lots of reasons (including mattress stuffing) and they generally only buy for 1.

    Even if I see Aubrey sell some shares (rumor has it he’s got margin calls) that would not mean to me he lacks confidence in the stock.

  61. 61
    BirdsofpreyRcool Says:

    TED Spread over 450bps. Just to put it in perspective, TED hit a high of 300 in Oct 1987. Until this global credit metric falls back below 300… the stock market is not investable. You can day- or swing-trade. But, unless companies can fund their operations in the credit market, stocks have no where to go but down.

    That’s what’s tanking CHK… it’s not operational, it’s “credit” and “counter-party” risk (which is also credit).

  62. 62
    zman Says:

    Huge volume on CHK now, big blocks, 1 over 1 mm shares. Stock down 28% at $12.80.

  63. 63
    Dman Says:

    UPL green is kind of absurd. (??)

    CHK under $13. Sam’s $7 and something GTC not looking so crazy. Monday perhaps? Or later today…

  64. 64
    BossmanG Says:

    z, selling blocks or buying?

  65. 65
    zman Says:

    Boss – I’d bet that was a fund getting out, it was done at 15.60.

  66. 66
    antrimshale74 Says:

    Move in gasoline today… is just huge.

  67. 67
    cargocult Says:

    great time for companies to buy back shares

  68. 68
    zman Says:

    Antrim – yep, just a little bigger than the move in crude

    Oil dn 7.2%
    Gaso dn 7.8%
    Heat dn 6.7%

  69. 69
    zman Says:

    Cargo – yep, if they have the cash or cash flow, I agree. That’s what that little LINE announced this morning.

  70. 70
    jsaun14 Says:

    JPMC put out report on CHK today…

    Bullet points :
    Investors’ four main concerns –
    1) near term cash crunch
    2) knockout swaps that have a near terms average trigger price $6.28mmbt for aroung 1/3 of CHK’s Nov and Dec production and more for 2009
    3) financial counterparty risk
    4) a breach of debt covenants

    – CHK put itself in tight spot w/ spending beyond cash flow. JPMC believes CHK will burn thru $1.5b in cash during Q4 and needs to execute $540mm – 750mm in asset sales depending on gas prices to breakeven.

    – Counterparty risk – MSDW largest hedging partner. As such, JP thinks the concern about the knockout swaps is legitimate.

    “We value the proved reserves alone (minue b/s, cash taxes and G&A) at $24.51.”

    *CHK has $500mm credit facility for its midstream sub, so that will add flexibility.

    CHK might have the most upside of the large E&P’s, but it’s the riskiest because of operating and financial leverage…

  71. 71
    cargocult Says:

    I own PGH and the dividends have been steady. Just what is the market telling me about a company with a 28% yield at this price of around $8.

  72. 72
    BossmanG Says:

    any word about the lehman cds auction today?

  73. 73
    mahout Says:

    BOP #61,

    Thanks. We’d better pay attention to things like that HUGE! TED spread. At this time, cash is not king, it is world-wide emperor.

    I love CHK. At today’s price as amazingly low as it is, I know it can go substantially lower. And the really painful part is I believe it surely will. I’m standing aside on all trades.

    Bush’s little talk – really pathetic.
    I’m not blood-thirsty but when he named the lineup of guys he has working on this catastrophe, I got the vision of most of them hanging from a lamp post as proper payment for what they have done and what they have not done. For instance, the .5% “heroic” cut by Ben is waaay too late and waaay too small. These guys just don’t get it. And we are supposed to have confidence in their ability to turn this thing around?

  74. 74
    BirdsofpreyRcool Says:

    12:45- 1pm: dealers submit bids. buy-side needs to submit their orders to the dealers desk by 12:30

  75. 75
    zman Says:

    mahout – agreed on all points.

  76. 76
    BossmanG Says:

    thanks bop, if you have a chance, could you keep us updated on any news

  77. 77
    Fred Says:

    Mahout – Don’t forget this is the same group of geniuses that mishandled Katrina.

    KK offered $65/sh for TSO.

  78. 78
    ram Says:

    ZMAN – Anytime now you can scream Napa, just waiting.

  79. 79
    BirdsofpreyRcool Says:

    mahout – agree. The FED/SEC/Treasury have been BEHIND the ball on issues this whole time. They say they won’t (or will) do something… then the mrkt tanks and they do what they said they wouldn’t. It was all pretty (sadly) simple, really. The time to do what they are doing NOW was last Fall (after their denial period last summer). To have even floated the idea of “rate hikes” was evidence of just how out of touch they have been this WHOLE time. They are doing the right things finally. But who cares about the firehose arriving, after the house has just burnt to the ground?

    pathetic, really. it’s up to the markets to sort this out now… and that is not going to be pretty and it’s not going to be fast.

    2010 should be a nice year. until then, buckle up.

  80. 80
    BirdsofpreyRcool Says:

    TED out to 454 bps. The ultimate measure of global financial sentiment… and it is off-the-charts SCARED.

  81. 81
    zman Says:

    Thanks JS – same goes for all the leveraged names…see XTO decline.

    Wish they’d pin down the breach of debt covenants as a possibility if those knockouts are hit. Of course, one way to make sure they aren’t is to slash rigs in the Barnett by 50%.

  82. 82
    zman Says:

    Ram – gonna be a bit longer on that.

  83. 83
    doc Says:

    chk already traded 56million shares. now $12.56

  84. 84
    BirdsofpreyRcool Says:

    Lehman Swap Auction Initial Results Show Payout of 90.25 Cents 2008-10-10 15:13:06.460 GMT

    By Shannon D. Harrington and Neil Unmack
    Oct. 10 (Bloomberg) — Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. would be forced to pay holders 90.25 cents on the dollar under initial results of an auction today, setting up the biggest-ever payout in the $55 trillion market.
    Preliminary results of the auction to determine the size of the settlement on Lehman credit-default swaps set an initial value of 9.75 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. A final price is scheduled to be announced at 2 p.m. New York time.
    The payment would be higher than indicated by trading in Lehman’s $128 billion of bonds yesterday. The debt was trading at an average of 13 cents on the dollar, indicating credit swap sellers would have to pay 87 cents.
    More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there’s no central exchange or system for reporting trades. It’s that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market.
    The list of participants includes Newport Beach, California-based Pacific Investment Management Co., manager of the world’s largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC, and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

    Market Test

    Hedge funds, insurance companies and banks typically buy and sell credit protection, which is used either to insure a bond against default or as a bet against the company’s ability to pay its debt.
    BNP Paribas SA strategist Andrea Cicione in London estimated earlier today that a 20 cent recovery rate would lead to sellers paying out as much as $220 billion.
    “Banks can go to the Federal Reserve, or use the commercial paper market where it is still functioning” to meet protection payments, said Cicione. “But fund managers or hedge funds, once they’ve used their cash, have only one option, to sell assets.”

  85. 85
    bill Says:

    yeah 77

    Bush didnt stop the hurricane and did shoot back at the people on the ground taking shots at the rescue helicopters. He also allowed all the looters to ransack the malls

    Bush also allowed new Orleans to sink below sea level

    Only Al gore waarned us of global warming and that it can make hurricanes in September

  86. 86
    antrimshale74 Says:

    VIX up an over 72 now.

  87. 87
    Fred Says:

    Bill – No arguments from me I am just agreeing with the rest of the folks and remembering some prior management issues.

  88. 88
    doc Says:

    hk below 10 now. Does hk have a better balance sheet than chk?

  89. 89
    zman Says:

    Just realized who sent that piece on bearish issues. JP Morgan. That analyst hates CHK. No wonder he cited the issues without quantifying. I’d much more trust in Dan Pickering who this morning said they don’t see a problem with CHK’s balance sheet than Joe Alman at JPM who I would not trust to wash my dogs.

  90. 90
    zman Says:

    HK has leverage but less than CHK on a debt to total cap basis.

  91. 91
    jsaun14 Says:

    Z –

    Could you give a quick overview on how a knockout differs from a typical forward?

  92. 92
    BirdsofpreyRcool Says:

    #85 yep. New Orleans is a freak of nature. it’ shouldn’t be there at all. levees to the east, Lake Ponchartrain to the north. Not even Moses can save this town. You can’t hold nature back forever. Wasn’t the gov’ts fault.

    Fannie and Freddie, however, are (the gov’ts fault). Don’t hear the popular press screaming THAT out loud, tho.

  93. 93
    BirdsofpreyRcool Says:

    CHK… it’s worth pointing out that in the (distant) past, Aubry has run his hedge book like a hedge fund. He hasn’t done that for several years (as he has only hedged production). But a lot of people in this biz recall when he made some big commodity (unhedged) bets in the past. Don’t think that’s the case now… but, may be worth pointing out.

  94. 94
    zman Says:

    Quick note on hedges

    Generally you have 2 types. Swaps and collars.

    Swap is basically a hedge. You have a price at which if the commodity drops beneath you don’t care, you just sell your volumes at the swap price, no lower. If you can get more for your production via the market then you take that price and the swap does not come into play. Think of swap as realized price (P) >= swap price.

    Collars. These have a floor and a ceiling. If the realized prices is between the floor and ceiling you get that price. You get no less than the floor and no more than the ceiling. Fl < P < CL. These are often costless in nature. Knockouts come into play (if the hedge contract has them) at a lower or higher price. In this case, if gas falls too far below the knockout, the hedge is off. Knockouts are commonly included to reduce the cost of the hedge and/or get the counterparty to do the hedge. These are generally set at prices that the company thinks just won't occur. For CHK they were discussed on the last conference call and if they do happen they will not be the end of the world, just the difference between the hedge price and the then current gas price (which would be low $6s.) Hedge with knockou

  95. 95
    zman Says:

    BOP – 93 true and agree, he’s not been doing that since they got on the real upward and onward path with production growth.

  96. 96
    mahout Says:

    BOP #79,

    Agree most wholeheartedly with what you said and the overall outrage.

    With respect to: “They are doing the right things finally”, IMO, they have only done SOME of the right things. And all of them much too late(I include Congress in this). Unfortunately at this very late hour it will take pretty drastic action to turn it around (meaning the economies and the financial meltdown – the stock markets will follow along if those first two are turned around). Unfortunately again, IMO, this drastic action will have to include partial government ownership of some public corporations. Something none of us want, and we are quite rightly afraid of. The brutal fact is the basic underlying problem is unsustainable overleveraging in the financial sector. The only way out of this, IMO, is for our government, in addition to what they are doing now, to guarantee all deposits as some other countries have done and provide equity capital by buying new issue non-voting preferred stock from financial institutions where necessary.
    I would handle the “socialism” issue by mandating by legislation that all these preferred stocks must be divested by sale or by charitable contribution within a specified period of time, such as, five years.

  97. 97
    zman Says:

    Would also point out the proved reserves for the JPM case of $23 per share is laughable. Sounds like a $6 gas held flat in perpetuity and Joe’s (JPM analyst) typical incomprehensible haircut for the company’s PUDs (proven undeveloped reserves).

  98. 98
    antrimshale74 Says:

    There seems to be no top to the VIX. Should have bought options on it last week. Would have made quite a killing.

  99. 99
    zman Says:

    I’ll be out for an hour or two for a meeting.

  100. 100
    Sambone Says:

    By Christine Buurma

    NEW YORK (Dow Jones)–Shares of Chesapeake Energy Corp. (CHK) fell 16% Friday,
    extending this week’s steep slide amid the broad selloff in equities, and on
    concerns over the company’s exposure to the credit crisis and slowing growth.
    The Oklahoma City-based natural gas producer has borrowed heavily to fund land
    purchases and drilling amid a boom in gas production in Texas, Louisiana,
    Pennsylvania and elsewhere. This has spooked investors as the credit markets
    have frozen, and exacerbated a steep drop in Chesapeake’s market value as the
    price of gas has dropped by half since early July. In response, Chesapeake has
    cut its spending and drilling plans, and is scrambling to sell some assets.
    Analysts said unsubstantiated rumors of liquidity problems Thursday sent the
    cost of insuring Chesapeake’s debt soaring, and hit the company’s shares.
    However, these analysts added that the company doesn’t appear to be facing any
    immediate cash crunch.
    “Bottom line – unless there is some hidden situation that has developed in the
    past week, CHK will weather this storm,” Tudor Pickering Holt analysts wrote in
    a note Friday. They noted that several service companies told them they are
    being paid “promptly and currently” by Chesapeake.
    Chesapeake Chief Executive Aubrey McClendon told The Wall Street Journal that
    the company expects to end the year with $5 billion to $6 billion in cash,
    enough to keep growing without tapping the capital markets.
    “We spoke with Chesapeake management following Thursday’s 21% stock sell-off,”
    wrote Jason Gammel, an equity analyst with Macquarie Research in New York, in a
    note to clients Friday. “We are satisfied following this conversation that
    Chesapeake remains liquid, still generating a strong level of earnings and
    cashflow and remains well within the provisions of its debt covenants.”
    The difficult credit environment could make it harder for Chesapeake to raise
    capital by selling assets. Chesapeake is trying to sell minority stakes in the
    company’s midstream assets and in its properties in Pennsylvania’s Marcellus
    natural gas shale. The company also plans to sell a so-called volumetric
    production payment, which entitles the purchaser to receive scheduled
    quantities of natural gas from Chesapeake’s interests in producing wells.
    Chesapeake has aggressively purchased leases for millions of acres in natural
    gas shale formations over the past few years, at one point planning to spend
    $18 billion in 2008, more than three times the company’s operating cash flow.
    But falling natural gas prices have led the company to scale back its capital
    Chesapeake shares were recently down $2.83, or $16, at $14.88, after falling
    21% on Thursday. Shares are down 78% from their 52-week intraday high of $74
    hit on July 2.

    -By Christine Buurma, Dow Jones Newswires; 201-938-2061

  101. 101
    Dman Says:

    Z – at the risk of overloading your energy brain (not really, I know you love this stuff):

    Are there any conspicuous debt/counterparty etc etc paranoia type risks that leap out at you with HAL/RIG? Or is it just delayed projects due to credit freeze contagion?

  102. 102
    jsaun14 Says:

    Z- You nailed Joe’s $6 assumption.

  103. 103
    tater Says:

    Got a little busy there for a bit. Re#54 –

    LINE – Don’t really see anything to get excited about technically. I did a weekly and a daily view and both just show an extreme downtrend with no real ability to project anything. Sorry. 2nd and 3rd charts at the link


  104. 104
    BirdsofpreyRcool Says:

    mahout #96. agreed, I should have said “some of the right things.”

    we are moving toward the Chinese/Russian model (state ownership of private business). pretty ironic, eh?

    just to be fair, it’s not just the financials that got overleveraged. what we are seeing is a massive deleveraging on a global scale: first, overleveraged housing, next subprime underwriters, then the i-banks, next the commercial banks, now the hedge funds, then corporations, then the consumer (amazing how many people lived above their cash flow), finally the Govt. But, until all these other entities delever, the US Govt has to use it’s balance sheet to absorb all the counterparty debt.

    So, this is a multi-year process. Maybe it gets sped up by capital flowing back from overseas. But, in large part, that is what helped the leveraging cycle to begin with.

    Basically, we all need to pay down what was too much debt.

  105. 105
    BirdsofpreyRcool Says:

    TED at 461 bps. Basically a function of people piling into 3 month T-bills, which are currently yielding 21 basis points. If Paulson has his sh*t together, he could fund his TARP with some pretty cheap money right now.

  106. 106
    doc Says:

    chk already traded 73 million shares. amazing

  107. 107
    rlogan1301 Says:

    this is just unreal…

  108. 108
    antrimshale74 Says:

    Commodities are totally collapsing today. Silver off $2, gold down to $850 and copper at $2. Clearly we are in a major deflationary spiral, and yet the Europeans and Bernanke still bother to talk about inflation. Um.

  109. 109
    tomdavis12 Says:

    Z: What is your thoughts about the 30% increase in short position for CHK.

  110. 110
    antrimshale74 Says:

    Perhaps one of the oddest things this week is the huge commitment from Abu Dhabi to Advanced Micro Devices, including promises for major expansion. This seems really bizarre to me in this environment.

  111. 111
    tomdavis12 Says:

    Z: How long should it take from knocking out capex and production to seeing lower weekly inventory numbers?

  112. 112
    Fred Says:

    Z – Didn’t Nicky say something last week about the dow hitting 8,000. I think she mentioned it was someone’s prediction to go to 8,000. The wife says I need to start listening more and now I see why.

  113. 113
    Sambone Says:

    Fred – She also said 768 on the S&P

  114. 114
    Fred Says:

    Z – Bloomberg says the plunge is coming from forced CDS liquidations coupled with NO buyers.

  115. 115
    tater Says:

    I really wonder why nobody has offered a simple solution of putting a 3 year moratorium on building (dwelling and commercial) of any kind. Want to prop up the value of the stuff that all these CDO’s (and other alphabet soup) are based on? Stem the supply as a matter of national (now international) security. Nationalize the home builders and retrain the workers to build roads and pipelines.
    As for interference with contracts and “free” America issues, we are way past that.
    If all we do is reflate, then what’s to stop the problem from coming back right away? Sure beats the heck out of the US govt (read: your children’s debt load) from owning a piece of every industry under the sun (auto, housing, banks, insurance, etc).
    Supply / Demand. Isn’t that what all you guys do with fundamental analysis? What do I know, I’m just a stupid chartist.

  116. 116
    BirdsofpreyRcool Says:

    Z wanted to let everyone know that he regrets that he will be out through the close.

  117. 117
    BirdsofpreyRcool Says:

    As a follow-up, Z can see all the comments, but he cannot respond to them until after the close. So, keep the discussion rolling.

  118. 118
    Sambone Says:

    Fred – Lehman auction on CDS’s didn’t go well.

  119. 119
    rlogan1301 Says:


  120. 120
    Sambone Says:

    NEW YORK (Dow Jones)–The final result in the settlement of the credit default
    swaps on Lehman Brothers was even lower than a disappointing early estimate,
    which leaves dealer banks facing higher than expected payouts on multi-billion
    dollar insurance contracts.
    The recovery rate on the bankrupt firm’s senior debt was fixed at 8.625 cents
    on the dollar, just below the 9.75 cents published in the first estimate
    Friday. That means the sellers of insurance on these defaulted bonds are on the
    hook for the remaining 91.375 cents. That’s well above the approximate 88 cents
    envisaged earlier this week, when increased demand for paper to present in
    return for compensation inflated the market price.
    The low final rate qualifies this as one of the most expensive defaults ever
    in the credit derivatives market. Following the default of Italian food company
    Parmalat back in 2003, its debt was valued at just below 10 cents on the
    The result nevertheless shouldn’t come as a painful surprise for the sellers
    of protection on Lehman.
    Since Lehman’s Sept. 15 bankruptcy filing, there has been considerable anxiety
    that dealers who had underwritten some $400 billion of credit default swaps on
    the bank would be caught short in a massive payout.
    But sharp market moves in the value of these insurance-like contracts would
    have obliged most sellers of these insurance-like contracts to post additional
    collateral to cover their potential losses. As a result, they should have
    sufficient funds set aside to handle their liabilities in this settlement.
    “Worries over ex-broker-dealer exposures and their knock-on impact are
    misguided,” said Tim Backshall, senior credit analyst with Credit Derivatives
    What’s more, the result is to the benefit of those banks that were buyers of
    the CDS.
    “Keep in mind that the extra few billion to be paid will wind up in the hands
    of lucky buyers, making it a zero-sum game in reality,” said Tony Crescenzi,
    strategist at Miller, Tabak & Co.
    The final results of the morning’s auction were posted by administrators
    Creditex and Markit on http://www.creditfixings.com.

    -By Emily Barrett, Dow Jones Newswires

    Dow Jones Newswires
    10-10-08 1446ET

  121. 121
    Popeye Says:

    Well my order filled for HK @ 9.03 while I was out. Not complaining.

  122. 122
    rlogan1301 Says:

    xom…again wow…down 30% to 9% in 10min

  123. 123
    Sambone Says:

    I agree


  124. 124
    reefguy Says:

    Aubrey mortgaged all of his CHK stock to meet margin calls

  125. 125
    ellwodo Says:

    #124 – a speculation, or fact?

  126. 126
    BirdsofpreyRcool Says:

    The smartest HF mngr around (in my opinion) appears to be liquidating… over $6B of securities, a lot of which are in very very very illiquid. If true, Jeff Gendell, you will be missed.

    As stated, it’s the Hedge Fund deleveraging that is driving this now.

  127. 127
    ram Says:

    SAMB – pretty intense roller coaster right now.

  128. 128
    mahout Says:

    Tater #115,

    I like it!
    But far too rational- won’t work. LOL
    Don’t you know we don’t want rational solutions?

    You are not stupid, maybe a little perplexed, but who isn’t?
    I can top you. I’m dazed, confused, frustrated, and filled with foreboding and angst. Other than that I feel fine.

    How’s the beer project going?

  129. 129
    reefguy Says:

    124 is a fact

  130. 130
    ram Says:

    Did anybody notice if Maria was crying earlier?

  131. 131
    Dman Says:

    reef, #124. How does that work? He is getting margin calls on his stock or on some otehr position (NG?) and he uses the stock as security. Like a second morgage? Just confused as to the mechanics…

  132. 132
    isleworth Says:

    Reef – is that fact the reason the CHK tanking today? Did they sell him out?

  133. 133
    reefguy Says:

    Margin calls in NG, CL and other equities, Mortgages CHK so he doesn’t have to sell and zero out the homies. 33 million shares of CHK at 16 is a cool 500MM

  134. 134
    Sambone Says:

    I’m waiting on Maria.

  135. 135
    reefguy Says:

    132, others selling with the fear he was going to market with a big number

  136. 136
    mahout Says:

    BOP #126,

    Redemptions, redemptions, redemptions hitting HF’s and MF’s (and you know what large numbers of shares those guys typically hold) caused by widespread public fear and the beginnings of panic are crushing our stocks. and I just don’t think it’s going to stop until decisive and effective action is taken.
    Therefore, I see no bottom to ANY prices right now. We should have had a lulu of a bounce (lasting all day) by now. But lotsa luck, this is the great melt-down of 2008.

  137. 137
    BirdsofpreyRcool Says:

    it was the LEH CDS auction that turned the market around… there seems to be a consensus now that the bankruptcy auction of LEH’s debt won’t worsen credit market losses.

    so, the credit market (which has been holding it’s breath for a couple of days) just took a sigh of relief.

  138. 138
    Bob Says:

    Press release from SD:

    Oklahoma City, Oklahoma, October 10, 2008 – SandRidge Energy, Inc. (NYSE:SD)
    (“SandRidge”) today announced that it agreed with its Chairman and CEO, Tom L. Ward and
    certain of his affiliated entities, to acquire all of Mr. Ward’s working interest and related reserves
    in wells drilled by SandRidge since June 2006 pursuant to SandRidge’s Well Participation Plan
    (the “Plan”). SandRidge paid $60.0 million in cash for the interests, subject to post-closing
    adjustments. In connection with the acquisition, Mr. Ward and SandRidge agreed to terminate the
    Plan. SandRidge expects that the acquisition and termination of the Plan will increase its net
    proved reserves by approximately 43 Bcf of natural gas equivalent.
    The Plan provided that for as long as Mr. Ward was employed by SandRidge, he had a right to
    participate in and pay up to a 3% of 8/8ths working interest in all wells (subject to certain
    exceptions) drilled by SandRidge through at least 2016, after which the company could elect to
    terminate. Termination of the Plan will permit SandRidge to retain a greater working interest in
    future wells, thus increasing its net ownership in proved undeveloped reserves.

  139. 139
    BirdsofpreyRcool Says:

    mahout #136. again, agreed.

    the subprime originators, some weaker banks, BearStearns, F&F and maybe a few others were “real” losses. much of the rest has been the result of a “run on the bank.” I don’t know how you turn around a “crisis in confidence.” it takes a long time to build up confidence, a short time to lose it, and i have no idea how you regain it.

    but, that is where we are right now. somehow, we need to get “confidence” back into the markets. Paulson’s plan, if well-executed, might have been a big help. but, it was so poorly sold, explained, understood, interpreted, and packaged that it’s lost most of it’s intended impact. The fact that the media sold it as “bailing out Wall Street” and then Paulson himself said it would take 4 weeks to impliment, pretty much undermined the whole intent. The patient had a heart attack and is on the table and the doctor says it’s gonna take 4 weeks before he can begin CPR? that was why we sold off 777 points last friday and just kept going. Now, much more will have to be down.

  140. 140
    BirdsofpreyRcool Says:

    make that last word “done.” Freudian slip, me-thinks.

  141. 141
    BirdsofpreyRcool Says:

    Lehman CDS Settlement Auction Result

    • The auction was held on October 10, producing a final recovery rate of $8.625. CDS and other contracts covered by the CDS protocol will settle at this rate.
    • Cash payments will be made on October 21. Physical delivery notices will be issued by October 15, with physical settlement three days later. All bonds trades established in the auction will trade at $8.625.

    The CDS auction to settle contracts was held on October 10. The auction simplifies the trading logistics for participants and allows investors to cash or physically settle their contracts. The LEH auction was successful, in our opinion, because it proceeded as anticipated: dealers submitted two point wide markets, physical settlement requests were collected, limit orders were provided to fill the requests.

    What was outsized compared to previous CDS auctions was the size of the open interest. CDS protection buyers chose to deliver $5.7bn face value of bonds into the auction. CDS protection sellers chose to receive $0.8bn bonds. Thus, there was net open interest to sell $4.9bn bonds in the Dutch auction. This is not altogether surprising, considering Lehman is the largest bankruptcy in history.
    Nevertheless, participating dealers provided a level of minimum liquidity in each CDS auction, $140mm in this case. Open interest of 35x the amount of required dealer liquidity is the largest to date.

    The open interest was readily filled. There was $132bn of limit bids submitted in the Dutch auction, 25x the amount needed.

  142. 142
    tater Says:

    Hey Mahout,
    Just mouthing off I guess. I have been getting very lucky with my timing lately, so it’s really not the market that has me pissy. I just don’t share everybody’s nanny-state obsession. I kind of like it when the govt gets the hell out of the way, but I guess I’m a dying breed. Good luck to all the socialist when they realize that “free” health care, and govt backed everything doesn’t lead to utopia. Sometimes the simple solutions work very well.
    My current favorite (it changes everyday) is the super cool govt agency that they are going to create to buy up all this garbage. First of all, who are they going to hire? Obviously it’s going to have to be out-of-work Wall Streeters. Who else are they going to get? And do you think that some guy who had a bonus check last xmas for half a million is going to get excited about doing a good job for the fed for 70K/yr? No, he’s going to go to lunch with his buddies and funnel the good junk in certain directions to get a better future private job. Just watch this turn into a bigger mess than the medicare system. But go ahead. Keep screaming for bigger govt and more spending. Sure works real well, don’t you think?
    Oh yeah. I forgot, “this time it’s different”.

  143. 143
    BirdsofpreyRcool Says:


    Bill Gross is no “out of work Wall Steeter”. He is charging us taxpayers 1 basis point to manage part of the fund… i believe his usual fee is closer to 15-35 bps. That said, he will be on the receiving end of a lot of “price discovery. So, it won’t hurt his firm Nice PR, too.

  144. 144
    tater Says:

    So what’s your point, Bill Gross is Santa Claus?

  145. 145
    BirdsofpreyRcool Says:

    fwiw, I abhor the socialistic anwser to all this. But, the simple fact is that the US Balance Sheet is the only one in the world large enough to backstop a global run on the banks.

    No banks, no commerce, no jobs. Unfortunately, we got to the point where this was necessary… however distasteful, agreed!

    The real question, further down the road, is will we now and forever look to government for all our answers? We’ve been headed that way for a while… and it’s a terrible terrible direction to go, agreed!

  146. 146
    BirdsofpreyRcool Says:

    Tater, ummmm…. no. But, he’s no “out-of work Wall Streeter” either. The Treasury is putting together some of the best in the biz to handle this crisis. I guess that is my point here.

    It would be nice if he WAS Santa Claus, tho!

  147. 147
    tater Says:

    Sorry if I am testy. I just keep hearing about how govt is the answer and the fact is that it does not have a good track record, so why pretend otherwise?
    We are experiencing problems with the credit markets because nobody wants to face the music. My point is that at the expense of delaying some severe problems in order to win an election, both parties are creating catastrophic calamity in the longer term. We can deal with the former, not the latter.
    Currently conditions are a draw poker game. Why should the big players hurry when they keep getting dealt more cards free of charge?

  148. 148
    reefguy Says:

    124, 132,i was wrong…press release he had to sell nearly all of CHK to meet margin calls.
    This was on the wire!

    Next shoe: MS and GS to be nationalized over weekend

  149. 149
    mahout Says:

    BOP #139,145,and 146 and also Tater #142 and #147,

    I must be losing it. I agree with and sympathize with everything both of you said!

    BOP – I would think that to regain confidence a guarantee on all deposits (like Ireland and some others have done), would be a sensational start on that road. Would it cost a lot? Probably not. And nothing compared to the alternative.

    Tater – Government has a miserable and awful track record for sure. But are you no longer interested in the beer in the basement idea. I thought that was cool.

  150. 150
    Fiveanddimer Says:

    Here’s the latest from another guy who is not keen on government intervenion in the markets: Jim Rogers


  151. 151
    mahout Says:

    Reefguy #148,

    Holy Mackerel! You mean he actually sold nearly all of his CHK holdings? Did I hear you right? He had a boatload of that stuff.

  152. 152
    Wyoming Says:


    Did he sell out his working interest option like Tom Ward? Thanks.

  153. 153
    mahout Says:

    Reefguy #148,

    Maybe GS will takeover MS and become king of the world. Guess who would be the new CEO.

  154. 154
    BirdsofpreyRcool Says:

    Just to be clear: i HATE gov’t intervention in the markets.

    However, I have been a bond/credit trader/investor for many years. Sadly, given the corner we have painted ourselves into, gov’t intervention is the only way Main Street is going to keep most of their jobs. A run on the bank means no funding for business means massive job losses. Better to have the gov’t backstop the financial system, than to own equity in the private sector.

    And I want gov’t GONE from markets, as soon as possible. (and i’m afraid the genie is outta the bottle on that)

    Jim Rogers is one smart and successful cookie… but, he is no credit market expert.

    Again, for simplicity’s sake, the TED Spread says it all. we have NEVER been here before. this is not like any other financial “meltdown.” (which is a word too easily used by our media… welcome to a REAL meltdown. it is just plain awful)

  155. 155
    Fiveanddimer Says:

    The draft report coming out of the G7 meeting today apparantly does not include any corrdinated measures for restoring confidence in the international banking system. I’ve tried to post the Yahoo Finance link, but the system here won’t accept my post. Go to the yahoo finance and read the headline story for yourselves. If this doesn’t change over the weekend, Monday will be another bloodbath.

  156. 156
    BirdsofpreyRcool Says:

    re CHK… this is why the stock has always traded cheap to it’s peers. Aubrey is a risk jockey. At least this time, he wasn’t slingling around his own company’s hedges.

    It’s a great set of assets… but, there is (and always will be) the Aubrey risk-profile discount.

  157. 157
    mahout Says:

    BOP #154,

    I also want to be clear. I agree with #154 completely.

  158. 158
    Wyoming Says:


    You can always post a link with “http”. Getting caught in Zmans spam blocker.

  159. 159
    mahout Says:

    Five #155,

    Heard a guy on TV who talked intelligently about the G7 meeting. It looks like another bust! Italy won’t go for it.

    Lookout below, Monday.

  160. 160
    BirdsofpreyRcool Says:

    Adding to the confusion on Monday, the US bond mrkt will be closed. Stocks hate uncertainty. We all know what they do when they don’t know what to do…

  161. 161
    ram Says:

    Can someone explain the TED spread and why it’s at a critical point? Thanks.

  162. 162
    AAA Says:


    TED spread is short for T-bills over eurodollars. It is a futures spread that is long T-bill futures and short eurodollar futures(the interest rate contract, not the euro currency). The futures contracts are priced so that the interest rate is subtracted from 100 and that is the price, ie if the eurodollar rate is 3%, then the ED future will settle at 97. In times of financial stress, investors prefer the security of T-bills and will bid them up versus eurodollars, which are unsecured bank deposits. Hence, the spread widens.

  163. 163
    ram Says:

    Thank you AAA.

  164. 164
    Dman Says:

    Stunned at the McLendon blowup.

    Q. for Z: what does this mean for CHK going forward?

  165. 165
    Fiveanddimer Says:

    I’ve been listening to Paulson’s press conference, defending the results of today’s G7 finance minister meeting. He is trying to put a good face on it, but it sure seems to me like just words and no action.

  166. 166
    bill Says:

    press release from chk is aubrey had to sell 100 %33m m shares to meet margin calls.

    How did you hear rumors 4 hours before the press release

    I was asking about this earlier in the week

    aside: that means the company will issue more cheap options for him to replace some of the stock he sold

  167. 167
    BirdsofpreyRcool Says:

    AAA – ram is absolutely correct in explaining TED. Let me follow up with the reason it is an important metric on a global basis.

    The US $ is the world’s global currency. Dollars that trade outside of the Federal Reserve system are called eurodollars. These are the dollars sloshing around the world.

    When someone talks about LIBOR, they are referring to the “London Inter Bank Offered Rate,” or the rate that a bank is willing to loan eurodollars at as a benchmark. Like the “prime rate” in the US. If you’re a good credit risk, you borrow at, let’s say LIBOR + 25 bps. If you’re risky, it’s LIBOR + 850 bps. But, LIBOR rates (quoted on eurodollars) is a borrowing base rate (like the prime rate)

    US Treasury bills are (still) considered the safest instruments in the world. So, a simple measure of “corporate” risk vs “no risk” is to take the LIBOR yield and subtract the US Treasury yield of the same maturity. The spread (Treasuries – EuroDollars = TED Spread) is the most global measure of private sector company risk.

    Historically, the TED Spread is about 35 – 65 basis points. In times of stress, it is 75 bps.

    So, to be 460 basis points means that the world is scared (and running to invest in treasuries and pushing yields down) and that corporate (non-govt) borrowers are having to pay a lot to fund their daily operations (high LIBOR quotes, high rates).

    there are a lot of US home mortgages that are also tied to LIBOR… so, it doesn’t just affect corporate borrowers.

    basically, the more money a company has to pay to borrow, the less money there is to fund capital expenditures, daily operations, and all our salaries. Also, if the Fed drops rates, but the TED Spread widens, then the rate cut has absolutely NO positive affect on the commercial economy.

    When the TED Spread drops below 300, it means that some of the abject FEAR has come out of the credit market. This is what you should watch for.

  168. 168
    PackMan Says:

    To give an example, my folks home mortgage, a 5-year ARM resets on Nov 1 at the 1 year Libor rate on Sep 15 + 225 bps.

    That rate was about 2.92 on Sept 15, so he gets a 1 year fix at 5.25%.

    Shortly after Sept 15 short term Libor rates have exploded. The 1 year Libor rate is now 4.06%, up almost 1.25% in a month.

    Short term Libor rates, 1 and 3 month, are even higher, up 2% in the past month.

    My folks got lucky on the reset.

    Also note that many companies borrow with short term Libor based financing. An increase in their rates of 200 basis points in the past month will be a killer of profits if this persists much longer.

  169. 169
    PackMan Says:

    Z – I can’t wait for you to weigh in on CHK / Aubrey’s “forced” stock sale.

  170. 170
    zman Says:

    What an afternoon I missed. Responses to comments from #99 forward.

    #101 – HAL / RIG debt or counterparty risk.

    ~ as far as debt goes, nothing leaps off the page at HAL.

    RIG is highly indebted ($15 B) due to recent merger and fleet build out. $2 billion of this comes due 2009. They have $1 billion cash on hand as of mid year and can generate free cash flow of at least $0.5 B per quarter.

    Don’t know of and have not heard any counterparty risk here in the traditional sense of a financial instrument however for RIG the counterparties are the E&Ps and Major who hire them so with oil in the upper $70s we may see some contract cancellations putting earnings in 2009 and 2010 in question. Those years are largely contracted already.

    On the flipside, there are 180 or so vessels planned globally for construction in the next 3 to 4 years and this expansion has led to concerns about rates coming down as the market becomes saturated with rigs. Some of these will be delayed and others will now be shelved. Have not seen it yet but its coming.

    #102 – re Joe’s $6 gas forever assumption – that figures, he lacks vision and I’m not going to get into a rant on him but I find it unfortunate in the extreme that the global financial market meltdown allows him to run around saying I told you so.

    #103 – thanks Tater. Looking at LINE, not convinced its time to buy anything yet…22% yield looks safe for time being but I will model up their distribution and tear apart their balance sheet before I buy in.

    #104/105 – Thanks for the debt comment Bird and thanks to AAA for the good explanation of what the TED Spread is in #162.

    #109 – re short interest increase in CHK. I’ll have a post out on all things CHK this weekend.

    #111 – Tom’s question on capex knockdown vs translation to results you can see in the weekly storage numbers. That’s a good question. In 2 ways. First, its a good question because as I like to say probably to frequently, “price takes care of price” and second, because no one really knows. The decline rates of the high growth shale plays are asymptotic. Day 1 great, day 30 can be half of great, day 365 can be 30% of great. As rigs come off the plays, the surge of flush production goes away. I won’t even try to back of the envelop the effect because there are just too many moving pieces. My best guess is that it a small but noticeable rollover in production will come in Jan/Feb but I need to think it through a little more. You have wells that have already been drilled in places like the Barnett which still need to be hooked to sales, and you have a transition of rig focus from the Barnett and other areas to the Haynesville….lots of moving pieces. I will tell you that conventional production (non shale, non coalbed methane) is going to be circling the drain as its not economic at these prices in A LOT of cases and the moms and pops can’t get financing nor can the typical small and mid E&P for more drilling right now. If this goes on much longer we are going to see land rigs stacked by the hundreds.

    #138 Sandridge buys out Tom Wards participation stake. Well, they got it cheap, less than $1.40 / Mcfe. I’m guessing Tom needed the cash for margin calls.

    #142 – Bird. Thanks much for all the Lehman CDS and credit stuff. Not part of my normal world and I appreciate the education as apparently it can kick my normal world in the crotch.

    #164/169 – CHK / Aubrey blowup implications going forward. I’ll have that out this weekend.

  171. 171
    mimster90 Says:

    Zman any thoughts on evep? I am also looking a LINE. Even some of the pipeline companies are starting to look good OKS,EEP etc…

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