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Peak USA Free Ride Anybody?


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#1 Russ Winter

Russ Winter

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Posted 05 June 2012 - 07:42 AM

Don’t look now, but suddenly bank stress is showing back up in the USA, that questionable bastion of safety. Overall, credit spread swaps have spiked higher at too-big-to-fail Morgan Stanley, from which a “crisis stink” is emanating. It’s ranking right up there with Spanish basket cases like Banco Santander and Banco Bilbao. Perhaps the facade that it’s a European-only merda storm is wearing a bit thin? Peak USA free ride anybody?Morgan Stanley, generally considered a proxy for European debt, combined with the Facebook fiasco, may have created a perfect storm given commodity trading performance. I’ve sensed for some time that somebody leveraged overstayed their welcome on China and the emerging market boom. As shown in the chart below, MS had an aggressive VAR in commodities at the end of 1Q 2012 — much more so than JPM, which has admitted losses. As in 2008, the credit raters are very late in the game on this black box, but the concern is that the downgrades could trigger a margin call of up to $7.2B on derivatives contracts. Even before this, wealthy clients increasingly nervous about the TBTFs began moving money elsewhere [Merill,  Morgan Stanley Losing Grip on Wealthy].Source: ReutersPosted ImagePosted ImageElsewhere on corporate death watch, a group of dissidents led by Carl Icahn has ousted Chesapeake Energy CEO Audrey McClendon’s puppets from the BoD. So the big question now: What happens to CHK’s suicidal proclivity of destroying capital by producing nat gas at big losses? The new board is going to press hard for capex reductions. But will they cap production without incurring a substantial cost? Yes, rigs are well down, but not production.Posted ImageWithout draconian moves and a record heat wave this summer, the feared end-of-season full storage and a train wreck becomes a very real prospect. Given that CHK needs to seriously curtail production immediately, I’m not sure how the math is supposed to work. I would ask: Just how valuable is an asset that requires $4.50 pricing to break even? Not much would be my guess. Here’s what analyst John Olson, who uncovered Enron (and was fired),  has to say about CHK:

“Chesapeake has valuable assets, but they have a financial dynamic that only works in the fourth dimension: They need $12 billion when their cash flow is just $2 billion.”


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