Puerto Rico

Puerto Rico muni owners who never saw the Barron’s story or the rating firms’ downgrades are better off than those who kept up with the financial news.

Wall Street can clean up junk well enough, but it can't make it go away.

The oligarchs have taken over the asylum:

• *UKRAINE $1 BLN LOAN-GUARANTEE BILL PASSED BY U.S. HOUSE
• *HOUSE VOTES 385-23 TO PASS $1 BLN UKRAINE LOAN GUARANTEE

We are sure the auditors will be aggressively checking that this money does not flow directly from the US to Ukraine to Gazprom. But notably, we suspect, Jordan and Tunisia might be pissed as they just lst their funding. Not so much for Detroit or Puerto Rico also...

Having threatened Russia that "any military move would be a grave mistake" and sounding awefully like a "line" to be crossed, US Secretary of State John Kerry told reporters that the US is ready to bail out Ukraine...

• *KERRY: RUSSIA MILITARY MOVE ON UKRAINE WOULD BE GRAVE MISTAKE
• *KERRY SAYS U.S. PLANNING $1 BLN LOAN GUARANTEE FOR UKRAINE
• *KERRY SAYS U.S. WORKING WITH IMF, OTHERS ON AID TO UKRAINE

One has to wonder how many US jobs this will create (or save)? Or will Ukraine offer unlimited vodka to citizens of Detroit (or Puerto Rico for that matter)?

Everybody knows of the light-heartened Big Mac index that the boys at The Economist thought up in 1986 in an idle moment as a yard stick for comparisons between countries around the world.

The global crisis that began in 2007/8 has unmasked many unsustainable economic dispositions. Unfortunately, the proper conclusions have still not been arrived at, as evidenced by the fact that the same old Keynesian recipes that have failed over and over again are being implemented on an even grander scale. One must not be misled by the claims of 'austerity' being imposed, as this has evidently little bearing on government spending as such, but is rather an attempt to squeeze more blood out of an already shriveled turnip, namely what remains of the private sector. Puerto Rico seems – at least so far – not any different in that respect.

The default cycle that should have occurred, given historical patterns of issuance cycles, has morphed (thanks to the Fed) into a refinancing cycle; but while DoubleLine's Jeff Gundlach suggests that fundamentals are supportive, "the valuation of junk bonds as a category is at its all-time overvalued versus long-time treasury bonds." So despite Yellen exclaiming that she sees no bubbles, one of the world's largest bond fund managers has never seen corporate bonds (investment grade and high yield) more expensive. Gundlach goes on to note he has sold some Apple (but believes it will remain range-bound), is baffled by the valuation of Chipotle, and sees 10Y Treasury yields dropping to 2.5% or lower.

• Anti-Euro Party’s Le Pen Gains Supporters, French Poll Shows (BBG)
• Carney Renews BOE Low-Rate Pledge to Fight Slack in Economy (BBG)
• Bank of England hints at 2015 rate rise (Reuters)
• ECB bond-buying intact and ready after court decision-Coeure (Reuters)
• Canada scraps millionaire visa scheme, dumps 46,000 Chinese applications (SCMP)
• Scrap this then? Vancouver facing an influx of 45,000 more rich Chinese (SCMP)
• China's January Exports Power Higher, Up 10.6% (WSJ) ... and nobody believes the number
• Emerging-Market Shakeout Putting Reserves Into Focus (BBG)
• Wall Street's most eligible banker Fleming waits for suitor (Reuters)
• Kazakh Devaluation Shows Currency War Stirring as Ruble Dips (BBG)

The number of Americans that renounced their citizenship was 221 percent higher in 2013 than it was in 2012.  That is a staggering figure, and it is symptomatic of a larger trend.  In recent years, a lot of really good people with very deep roots in this country have made the difficult decision to say goodbye to the United States permanently.  A few actually go to the trouble to renounce their citizenship, and that is mostly done for tax purposes.  But most willingly choose to leave America for other reasons.  Once upon a time, the United States was seen as "the land of opportunity" all over the globe and it seemed like everyone wanted to come here. But now that is all changing.  As we have abandoned the principles that this country was founded upon, our economy has gone steadily downhill.

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody's turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today's disappointing jobs number which until this moment barely managed to push the S&P higher by 1%. From the report: "While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth."

• Goldman to Fidelity Call for Calm After Global Stock Wipeout (BBG)
• Turnabout on Global Outlook Darkens Investor Mood (Hilsenrath)
• EU Said to Weigh Extending Greek Loans to 50 Years (BBG)
• Second Storm Hitting Northeast Halts Planes, Schools (BBG)
• Small Banks Face TARP Hit (WSJ)
• As Sony prepares PCs exit, pressure mounts for reboot on TVs (Reuters)
• IBM Uses Dutch Tax Haven to Boost Profits as Sales Slide (BBG)
• ECB faces dilemma with inflation drop (FT)
• London Subway Strike Snarls Traffic as Union Opposes Cuts  (BBG)

Until around 3pmET, stocks had been slowly but surely rising - albeit disconnected from credit's reality - in a slow dead-cat bounce of a day. When the Puerto Rico news hit, stocks tumbled to reconnect with credit and VWAP and looked like things were going to get ugly when we were 'supposed' to have a green day of hope. VIX was instantly smashed lower again and the machines lifted the S&P 500 cash index to the highs of the day just into the US close... and then on no news, no blaring headline of catalclysmic regime change, S&P 500 futures tumbled 6 points to the day-session's late lows. That's why the big boys play late...

Following the evaluation of liquidity needs (and availability) for the Commonwealth of Puerto Rico, S&P has decided that "it doesn't warrant an investment-grade rating":

• PUERTO RICO GO RATING CUT TO JUNK BY S&P, MAY BE CUT FURTHER
• GOVT. DEVELOPMENT BANK FOR PUERTO RICO CUT TO BB FROM BBB-:S&P
• PUERTO RICO GO RATING LOWERED TO 'BB+': S&P
• PUERTO RICO REMAINS ON WATCH NEGATIVE FROM S&P

Both the G.O.s and the Development Bank have been cut. Note that 70% of muni mutual funds own this - and it is unclear if a junk rating forces (by mandate) funds to cover. Worst of all, S&P warns Puerto Rico could now face a $1 billion collateral call on short-term debt - the same waterfall collateral cascade that took down AIG.

The concept of the "Fed Put" is about to be tested.

• Winter Storm Expected to Make Northeast Commutes Harder  (BBG)
•  Invasion of Spanish Builders Angers France Struggling to Compete  (BBG)
• Toronto mayor, caught ranting on video, admits drinking a 'little bit" (Reuters)
• IBM's Hardware Woes Accelerate in Fourth Quarter (WSJ)
• Sharp Divisions Come to Fore as Peace Talks on Syria Begin (NYT)
• Afghanistan cracks down on advertising in favor of U.S. troops (Reuters)
• Microsoft CEO Search Rattles Boards From Ford to Ericsson (BBG)
• Banks Sit Out Riskier Deals (WSJ)
• Netflix Seen Reporting U.S. Web Users Reach 33.1 Million (BBG)