Capital Markets

According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasurys held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015. Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings "outflowing" start to the year in history.

Over the last 5 years the various Fed QE (quantitative easing) interventions into the capital markets has facilitated dumb luck trading into “genius” status, and no clue analysis into “spot on brilliant” prognostications. The real issue at hand is many believed their own press, and the current state of egg on their face would make many a Denny's blush. As bad as that sounds – it gets worse.

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air, as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

As so often happens, whenever there is a political spat in Europe, the rating agencies are quickly involved (thing S&P and Moody's downgrades and upgrades of Greece depending on how well the vassal nation is "behaving"), and moments ago S&P downgraded Poland from A- to BBB+ outlook negative, precisely due to Poland's new media law which has been the topic of so much consternation over the past week. In other words, S&P is now nothing more than a lackey for Brussels, threatening to send Polish yields higher if Poland does not fall in line.

In the latest Chinese domestic financing report released by the PBOC last night, there were two divergent themes: on one hand bank loans grew far less than the expected 700Bn yuan; on the other hand total social financing soared to 1.82 trillion yuan, smashing forecasts of a 1.15 trillion increase, and the highest since June. As noted last night, this may have been the catalyst that spooked the markets, because as Bloomberg confirms, "the data shows companies are turning to alternative sources for credit given banks’ reluctance to lend."

It appears the world is ganging up on The Fed as following China's recent clear and present threat should the USD strengthen, BoJ's Kuroda warned that further QQE might threaten the bank's finances - implicitly demanding moar from Yellen because he knows he's out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%), Japan (NKY -500) to US (Dow -280 points from Bullard Bounce highs) are tumbling.

• Islamic State launches militant assault on Indonesia's capital (Reuters)
• Three winners emerge in $1.6 billion Powerball jackpot (Reuters)
• European Stocks Tumble, Credit Markets Weaken on Growth Concern (BBG)
• Stocks and commodity currencies floored by new oil plunge (Reuters)
• China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)
• Anxious phone calls, tense moments before Iran's Supreme Leader okayed U.S. sailors' release (Reuters)

Having told banks and investors "don't panic" in September, amid spiking interbank lending rates and surging default/devaluation risks, it appears the massive shortage of dollars that we warned about in December has washed tsunami-like ashore in oil-producing Nigeria. Following the Central bank's decision this week to halt dollar sales to non-bank FX market operators, black market exchange rates spiked to 282/USD (vs 199 official) and CDS spiked to record highs implying drastic devaluations loom.

“Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”

A month after we first noted the major redemptions at Avenue Capital Group's credit fund (note this is a different fund from Third Avenue), and just one trading day after CEO Marc Lasry strolled arrogantly on to CNBC and told the public that "I don't think it's a time to panic, I think it's actually a time where you've got opportunities out there," Morningstar reports the Avenue Credit Strategies Fund has failed to report asset levels since about mid-December.

Saudi Arabia’s deputy crown prince Muhammad bin Salman made headlines this week when he said that the kingdom was considering an IPO of Saudi Aramco, the nation’s state-owned oil company. But there are reasons to doubt that 1) the Saudi government will actually follow through on the plan, 2) even if some shares are listed, operations will change significantly, and 3) that such a move presents a huge opportunity for investors. Sure, Aramco might be worth trillions in theory. But returning cash to shareholders is not and will not be the top priority.

An unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not. When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.

"Saudi Aramco confirms that it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the Company’s shares and/or the listing of a bundle its downstream subsidiaries."

While the list of "most hated buyside" stocks is at least actionable, not even we are sure what to do with the list of companies that are most hated by the sellside, besides perhaps revealing what it is.  So for all those wondering, here courtesy of Factset, is the list of 10 S&P500 companies with the highest percentage of Sell ratings.