Biggest Market Sell Off In Months Coincides With Largest Domestic Equity Inflow In Years (Both Of Which Aren't Saying Much)

It is only fitting that the biggest equity sell off in stocks in almost 2 months should coincide with the biggest equity inflow in years (which is not saying much: it is still in a net outflow position for the year). In the week ended January 12, domestic equity funds per ICI saw an inflow of $3,765 million following last week's outflow of $4,229. Yet this still makes it the largest inflow going back to 2009. And with everything now happening in real time, with the market having an attention span measured not in milli but nano-seconds, it will be funny if, should this sell off actually persist into the close (never underestimate the NYU business school students in charge of POMO) flows imply become a tracker of the concurrent week's market move. And yes, bond fund flows in everything but Munis were positive. Non-taxables saw another whopper of an outflow, this time for a total of $2.4 billion. Perhaps it is time for the propaganda crew to give stocks a breather and get the lemmings into the doomed municipals space (where at most recent check Illinois CDS at 280 bps were trading 100 bps wider of mutinous Tunisia at 180).

One Minute Macro Update

Markets trading slightly off this AM ahead of the housing data for December. The VIX has bounced off its lows from last week and should trend higher in our opinion, the possibility of a stellar 4Q10 GDP number notwithstanding. Preliminary earnings reports seem to illustrate growth, with financials being the only real variables early in the process.

Germany's Big Fat Greek Debt Restructuring Plan...Lie?

Europe is abuzz this morning following a Die Zeit article indicating that Germany was planning for a Greek debt restructuring, one that would allow Greek to retire debt earlier than expected. From Market Watch: "The German and Greek finance ministries on Wednesday denied a report in the German weekly newspaper Die Zeit that the German government was weighing a plan that would allow Greece to retire some debt early, using subsidies from the European Financial Stability Facility, Dow Jones Newswires reported. Spreads on Greek credit default swaps, or CDS, initially widened but then narrowed after the Die Zeit report was denied." And while everyone is of course immediately denying that the EFSF is nothing but one big ponzi vehicle, which it would turn out to be should this report be proven true, Goldman's Dirk Schumacher has released two notes which confirm that this is indeed precisely the plan. And just as Goldman dictates US fiscal and monetary policy, so its European strategists are critical in determining European pyramid, kick the can down the line plans.

Frontrunning: January 18

  • One in three Hackney families too poor to heat their homes (Hackney Citizen)
  • Just modestly inflationary: Wheat Advances, Corn Reaches 18-Month High on Rising Demand, Lower Stocks (Bloomberg)
  • CDS continues to be the most predictive instrument around: Default Swaps Outshine Bonds at Highlighting European Stress (Bloomberg)
  • US public pensions face $2,500bn pensions shortfall (FT)
  • Borrowing Returns from the Future (Hussman)
  • Fed Officials Signal Growth Pickup Won't Alter Bond Purchases (Bloomberg)...oh so the stimulus induced pick up in fudged numbers will not lead to a removal of the stimulus? You don't say
  • Citi posts $1.3 billion profit as revenues fall (Reuters)
  • Apple's Cook Faces Product Development Challenge, Google (Bloomberg)
  • China’s lending hits new heights (FT)

Can A Sovereign Debt Crisis Happen Here? A Case Study Of The 1995 Debt Ceiling-Precipitated Government Shutdown

Lately there has been a lot of chatter among the supposedly smarter-than-mainstream media that even should the debt ceiling not be raised, it would not mean the bankruptcy of America as interest payments would still be satisfied. While that technicality is absolutely true, it is even more absolutely irrelevant. What propagators of such theories forget is that lately there are just two exponential curve trendlines that are worth noting: that of the cumulative debt issuance, and of the US cumulative deficit (see chart below). Each month, the US issues around $50 billion more debt than is needed to just fund the deficit. This is debt that is on top of the debt that is needed to plug the different between revenues and expenditures. As Zero Hedge has pointed out repeatedly before, that ratio is already roughly 1 to 2, meaning for every dollar in revenue the US government issues more than one dollar of debt just to fund the deficit. And then some. As the chart below shows, in December alone the government issued $84.4 billion on top of the budget funding shortfall ($80 billion deficit and $164.4 billion in debt issuance)! So yes, while the Treasury can fund interest expense at record low interest levels, that is completely irrelevant. Unable to fund incremental expenses to the tune of hundreds of billions per month, the US government will shut down (a point when nobody will accept US government IOUs, not Social Security which passed the point of being self sustaining last year, and certainly not Medicare and Medicaid, and most certainly not private sector Defense Vendors) just like it did in 1995. Below, we present the key charts and the full report from a must read SocGen report on the sovereign debt crisis, titled Can It Happen Here? We urge all those who pretend to have an educated opinion on the US funding crisis to read this report before they open their mouths in public and once again validate their critics.

Julius Baer Whistleblower To Expose 2,000 High Net Worth Tax Evaders To The World

Two years ago when the US bailed out UBS and Switzerland from a brief but potentially terminal liquidity crisis, it succeeded in extracting a historic pound of flesh: it forced UBS to declassify thousands of bank accounts of US tax evaders which was the first nail in the centuries-old concept of Swiss bank secrecy. Today, Rudolf Elmer, a former COO of one of the biggest Swiss banks, Julius Baer, may have just nailed the last, and with that set off a chain reaction that will force a huge outcry against pervasive global tax fraud (but likely achieve nothing ultimatel). According to the Guardian, tomorrow Elmer will hand over details of 2,000 "high net worth individuals and corporations" to WikiLeaks which will make him "the most important and boldest whistleblower in Swiss banking history." And since among those exposed will be "approximately 40 politicians" expect all hell to break loose as photos of Assange having a underage orgy with Al Qaeda members are suddenly made public to diffuse what is bound to be another huge (if brief - after all human kind cannot bear very much reality).

VIX Closes At Lowest Level Since Summer Of 2007

No, not 2008. 2007. It is at the same level it traded last when the S&P hit its all time highs, when stocks moved 10% on a Cramer recommendation, when complacency was virtually infinite, and just before the first quant wipe out of August 2007. That said, the summer of 2007 did not have a politburo of 12 Fed presidents and one Chairman determining every single tick in the Russell 2000. In that regard, this time is truly is different. Expect the VIX of the policy instrument now known as the stock market, to hit 0 as vol in FX, rates and commodities approaches asymptote.

Illinois Seeks To Issue $8.75 Billion Bond To Pay Overdue Bills As Muni Issuance Market On Verge Of Shutdown

While Illinois' desire to finally tackle its unsustainable fiscal situation is admirable, the process is starting to disclose some very stinky rot below the surface. On the heels of the recent hike in the corporate tax rate, today Bloomberg reports that governor Pat Quinn is asking lawmakers to authorize an $8.75 billion bond sale. The use of proceeds? To pay $6 billion in backlogged bills: read invoices that the state has been unable to pay so far due to what technically should be classified as a liquidity crunch, and non-technically as complete lack of cash. Luckily, entities that are owed money by the state at least have a chance to get paid. Earlier, state House of Representatives defeated a borrowing bill that was designed to
eliminate the pile of invoices that is at least five months old. The state's payment delinquency also includes pension funds: local underfunded pensions are owed almost $4 billion in payments by the state. In the meantime, Chicago CDS dropped on the news of the tax hike, declining from 28 bps to 300 yesterday, the lowest since December 9. Whether this means that the state will be able to find sufficiently stupid investors whose capital will go to nothing besides funding overdue invoices, is a totally separate matter however. Perhaps a good indication of the ravenous appetite for muni debt (in addition to the fresh 52 week low in virtually every single muni bond fund), is that the New Jersey agency has shrank the size of a proposed $1.2 billion refinancing offering by roughly 40% and hiked yields on the sale as it struggled to market bonds to investors on Thursday. As the secondary muni market is plunging, the primary market for issuance is on the verge of shutting down completely. Cue in QE3.

With Friends Like Japan Who Needs Acne?

If you were worried about the Portuguese auction tomorrow fear not! Japan decided to be proactive fighting this latest break-out of European sovereign CDS rates and extend a very unselfish hand. Indeed how could one doubt their good intentions? All they want is to make sure their currency stops appreciating in order to keep the youth unenployment rate in Italy around 29%. Following China's lead Japan announced they would buy European bonds. With only 200% debt to GDP ratio it makes sense for them to go ahead and chip in to help Portugal throw bad money after an even worse structural issue. China gets relatively little bad press for supporting European markets as conventional wisdom assumes their official 20% debt to GDP ratio is accurate. Other analysts much better informed on the subject than I am, in fact some even created a fund dedicated to benefit from when China's economic miracle is exposed for the ponzi scheme it is, claim actual numbers are much closer to 120% but the people's republic uses all sorts of accounting trickery and local government vehicles to disguise the true extent of its indebtedness. Japan however shall not benefit from the general public's stupidity with debt levels well publicized. Indeed as we discussed many times before, Japan's public debt is astronomical...Obviously Japan's announcement had not so much to do with their desire to rescue Portuguese finances, but instead is aimed in my opinion to the obvious secondary effect of weakening the JPY. That will work to temporarily slow down the fall of EURJPY, but when it comes to USDJPY it is exclusively driven by the 2Y UST/JGB rate spread. So if Japan really wants to weaken the Yen they might as well start dumping their 2Y treasuries. With the time interval between solvency crises shrinking exponentially as the eventual end game approaches, I have my doubts as to how much good will come from this touching display of Eurasian brotherly love. Perhaps is this why the Dollar index refuses to trade South this morning... - Nic Lenoir

One Minute Macro Update

All the news that refuses to matter when bad, and causes manic surges in the EURUSD when not bad, continues to come out of Europe. All the other global news just refuses to matter period, unless it has to do with the Fed's linen printing habits.

And Irish CDS Is Outtahere

It seems at least one person read Buiter's 84-page "Europe is pretty much doomed" (our titling) magnum opus over the weekend. Irish CDS tells the whole story.

One Minute Macro Update

Markets finally digest weak jobs data out of US, but it is Europe that has everyone's attention. Asia weakness compounding to problems.

Trans-Alaska Pipeline System Leak Causes BP To Shutdown 95% Of Prudhoe Bay Production

Is it about to be deja vu all over again? The FT reports that "oil markets were braced on Monday for the impact of the loss of up to 15 per cent of US crude after a pipeline leak forced BP, the UK-based oil company, to shut down 95 per cent of production from North America’s biggest field...The leak is in the Trans-Alaska Pipeline System, which carries 14-15 per cent of US crude oil production 800 miles to Valdez, where it is shipped out in tankers. It is the only line carrying oil to market from Prudhoe Bay." And yes: BP will be blamed again: "Prudhoe Bay is jointly owned by BP, with 26 per cent; ConocoPhillips, with 36 per cent; ExxonMobil, with 36 per cent; and others with 2 per cent. BP is the operator of the field." And just as the authorities had managed to put a temporary lid on oil prices: "The cause of the leak is being investigated by state and federal regulators, as well as the company itself, but if it is not fixed within a few days, the incident could put upward pressure on oil prices once more." Time to go through the list of all BP CDS counterparties all over again?

A Global Album Of Sovereign Insolvency

When it comes to providing analytical perspectives and empirical insights into the realm of sovereign deterioration, few come close to the work of Reinhart and Rogoff. Citi’s Willem Buiter is one such man. In his latest summary piece describing in excruciating detail just how bad things are at the sovereign level (and judging by tonight's opening print in the EURUSD more are starting to realize this), Buiter provides a terrific country by country guide of what is now an insolvent world, starting with the merely extremely risky, going through the backstop-baiters, and finishing with the time bombs that have already gone off and everybody pretends not to care. For those who do care, this is a definitive guide to what each individual European (and not only) country can look forward to in an age of global moral hazard. The only open question: with China's interest now to preserve the Euro's viability, how will Beijing act in the next few months as the eurozone finally starts unraveling.