Category: zerohedge

During a surprise visit with US troops in Iraq on Wednesday, President Trump offered his own spin on Mario Draghi’s famous “whatever it takes” line when asked about what it would take to break the impasse and deliver a funding bill to end the partial government shutdown, which entered its sixth day on Thursday.

Illustrating just how difficult it might be for Trump to work out a compromise, Democratic leader Nancy Pelosi said yesterday that she would work to pass a funding bill similar to one passed by the Senate last month that doesn’t include the $5 billion in wall funding (instead, they’re standing by their offer of $1.3 billion) – though it’s unlikely that the president will sign it, or that both chambers can muster the supermajority needed to override the president’s veto.

“Whatever it takes,” Trump said. “I mean, we’re gonna have a wall. We’re gonna have safety. We need safety for our country.”

Senate and the House of Representatives were set to meet at 4 pm EST on the sixth day of the shutdown and resume debating ways to end it. That will include Senate consideration of a measure already approved by the Republican-controlled House that meets Trump’s wall-funding demand.

In his latest tweet bashing Democrats for placing politics above security, Trump referenced the fact that the bureaucracy has a well-known Democratic bias by reminding Democrats that “most of the people not getting paid” are Democrats.

Have the Democrats finally realized that we desperately need Border Security and a Wall on the Southern Border. Need to stop Drugs, Human Trafficking,Gang Members & Criminals from coming into our Country. Do the Dems realize that most of the people not getting paid are Democrats?

— Donald J. Trump (@realDonaldTrump) December 27, 2018

To be sure, as Reuters explains, most of the federal government, which directly employs almost 4 million people, is unaffected by the shutdown. The Defense, Energy, Labor and other departments are funded through Sept. 30 of next year. And even agencies that are affected never totally close, with workers deemed “essential” still performing their duties. “Non-essential” federal workers at unfunded agencies will remain on furlough and staying home. Both they and essential employees will not get paychecks after December until the shutdown ends. The 435-seat House was also set to reopen on Thursday.

Here’s a run down of where the budget standoff stands (courtesy of Bloomberg):

• After weeks of failed talks between Trump and congressional leaders, parts of the U.S. government shut down on Saturday, affecting about 800,000 employees of the Departments of Homeland Security, Justice, Agriculture, Commerce and other agencies.
• Analysts are still largely projecting that the shutdown drama will last until well into January.
• “We continue to believe that it is unlikely that Congress will come up with a deal to end the current partial shutdown until well into January,” said financial firm Height Securities in a commentary note on Wednesday.

Here are the latest developments:

• Trump said during the Iraq visit that the shutdown would last as long as it takes to get the funding he wants for the border wall and additional security.
• The president declined to say what level of funding he’d accept.
• Republicans said they were waiting for a counteroffer from Democrats to the proposal said to have been made by Vice President Mike Pence on Saturday of $2.1 billion for new border barriers, along with $400 million for other Trump immigration priorities.
• Even with most lawmakers out of town, some discussions were taking place, according to congressional aides.
• Trump is scheduled to return to Washington on Thursday.

These are the next steps…

• Democratic leaders in the House and Senate have been negotiating with the Trump administration. Once they reach agreement, Senate Majority Leader Mitch McConnell said he’ll seek a vote on the deal.
• If the shutdown lasts past Jan. 3, when Democrats take control of the House, Democratic leader Nancy Pelosi, who is in line to become speaker, said the chamber will pass a spending bill to reopen the government — without money for a wall.

…And key takeaways:

• The shutdown, which began Saturday, affects nine of 15 federal departments, dozens of agencies and hundreds of thousands of workers.
• Among the departments without funding are: Justice, Homeland Security, Interior and Treasury. Independent agencies, including the Securities and Exchange Commission, are also affected.
• The departments whose funding lapsed represent about a quarter of the $1.24 trillion in government discretionary spending for fiscal year 2019.
• An estimated 400,000 federal employees will work without pay and 350,000 will now be furloughed, according to a congressional Democratic aide.
• Federal employees working without pay and those now furloughed will get their Dec. 28 pay checks under a decision by the White House budget office since pay reflects work before Dec. 21.
• The remaining parts of the government, including the Defense Department, Departments of Labor and Health and Human Services, were already funded and won’t be affected by the shutdown, nor will mandatory entitlement programs like Medicare payments.

With no deal currently on the table, many Wall Street analysts see no end to the shutdown in sight:

“We continue to believe that it is unlikely that Congress will come up with a deal to end the current partial shutdown until well into January,” said financial firm Height Securities in a commentary note on Wednesday.

Even after Democrats take the House, the gridlock in Washington will persist until Pelosi caves – or Trump does.

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Special counsel Robert Mueller needs to be investigated for destruction of FBI evidence, President Trump’s attorney Rudy Giuliani said in an interview with Hill.TV’s John Solomon and Buck Sexton. 

Referencing recent reports that Mueller’s office allowed text messages from former FBI employees Peter Strzok and Lisa Page to be destroyed, Giuliani levied harsh accusations at the special counsel. 

“Mueller should be investigated for destruction of evidence for allowing those text messages from Strzok to be erased, messages that would show the state of mind and tactics of his lead anti-Trump FBI agent at the start of his probe,” said Giuliani. 

The Inspector General of the DOJ revealed in a report this month that it found large gaps in text message records between Strzok and Page, the top FBI agents in charge of investigating both Hillary Clinton and Donald Trump during the 2016 US election. Of note, the two agents harbored extreme animus against then-candidate Trump, while supporting Hillary Clinton – bias which the DOJ claims never made its way into their work. 

After Strzok was kicked off the special counsel investigation following the discovery of anti-Trump text messages between he and Page, his Mueller’s Records Officer scrubbed Strzok’s iPhone after determining “it contained no substantive text messages,” reported the Conservative Review‘s Jordan Schachtel in mid-December. 

I’m sure you’re all super shocked to find out that Lisa Page’s phone was also scrubbed pic.twitter.com/NWV9GQbBTc

— Jordan Schachtel (@JordanSchachtel) December 13, 2018

* Strzok texts he’ll “stop Trump”
* Strzok texts that NYT is upset about WaPo scoop.
* Strzok texts Page re “insurance policy”
* Mueller then smashes their phones with a virtual hammer.

Go on how you’re concerned about corruption, obstruction of justice, and collusion. https://t.co/6267rsEahS

— Razor (@hale_razor) December 13, 2018

“That should be investigated, damn it, that should be investigated fully. You want a special counsel, get one for that.” 

When pressed about whether he thought the erasure was intentional and not just a mistake, Giuliani alluded to the infamous erasure of a Watergate tape by President Richard Nixon’s loyal secretary a half-century earlier.

“It’s actually worse than Rose Mary Woods,” he explained. “She erased less than 19 minutes of conversation, but the FBI got rid of more than 19,000 messages” and the messages from the time Strzok and Page worked for Mueller are lost forever.

Giuliani said the Russia probe investigators also should be investigated for using the Christopher Steele dossier, which he called a “piece of garbage,” to justify a search warrant on a Trump adviser without telling the court it was paid for by Hillary Clinton’s campaign and the Democratic Party.

“Do I think that is improper? Yeah, that borders on, that sounds to me a lot more like a false statement than some of the ones they charged,” he said, referring to Mueller’s team. –The Hill

Giuliani knocked Mueller’s team for what he claims are “false statements” by former Trump attorney Michael Cohen during Cohen’s sentencing several weeks ago on charges mostly unrelated to the Trump campaign. 

“He just lied the other day. He told the judge, ‘I was fiercely loyal to Donald Trump.’ No, he wasn’t. He taped him surreptitiously while he was fiercely loyal. He hid it. And he disclosed it,” said Giuliani, adding that the Mueller team’s failure to stand up during sentencing and correct Cohen’s lie “is unethical in and of itself. “Making a false statement to a court, even a lawyer, you’ve to correct it.” 

Giuliani added that the Mueller probe has traveled well beyond its original mandate: 

He said Mueller’s current focus on whether Trump friends such as Roger Stone were communicating with WikiLeaks outside the campaign about hacked Hillary Clinton emails shows just how far astray the probe had gone.

“We’re now four degrees of separation from the original mandate of the investigation, which was collusion which did not occur,” he noted.

When asked whether Mueller should be the last special prosecutor ever appointed by the Justice Department, Giuliani hedged: “I never like to say never but I must say I have great pause after seeing the abuses in this investigation.”

The FBI, he added, still needs to rehabilitate itself from the damage done by missteps in the Russia probe. Giuliani said he believed that “99 percent of the FBI agents” were doing a great job but that a small group of “FBI politicians” had improperly hijacked the Russia probe during fired director James Comey’s tenure.  –The Hill

The former New York City mayor added that he doesn’t know if FBI director Christopher Wray will help right the wrongs from the Russia probe. 

“I’m uncertain because I haven’t heard anything from him … . The first way you fix problems is by acknowledging them.” 

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With consumer confidence in November printing near the highest levels since the dot com bubble, it was almost inevitable that in light of the recent economic and market turmoil, the December print would disappoint, and sure enough it did just that, when the Conference Board reported the December print dropped from 136.4 to 128.1, missing expectations of 133.7 and the lowest level since July.

While Americans’ assessment of the Present Situation was almost unchanged, at 171.6 vs 172.7 in November, it was outlooks that took a hit, as the Expectations Index tumbled from 112.3 to 99.1, a 13.2 drop which was the biggest since August 2011 when the US credit rating was downgraded by the S&P and the S&P nearly fell in a bear market, dropping 19% before rebounding.

“Consumer Confidence decreased in December, following a moderate decline in November,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

“Expectations regarding job prospects and business conditions weakened, but still suggest that the economy will continue expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in Expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”

While looking ahead US consumer turned sharply more bearish, they are still optimistic on their current conditions even as the percentage of consumers saying business conditions are “good” decreased from 42.0 percent to 37.2 percent, while those claiming business conditions are “bad” increased from 10.7 percent to 11.3 percent. Consumers’ assessment of the labor market was mixed. Those claiming jobs are “plentiful” decreased marginally from 46.8 percent to 46.2 percent, while those claiming jobs are “hard to get” declined from 12.6 percent to 11.6 percent.

Looking ahead, however, the skepticism was more pronounced:

Consumers’ optimism about the short-term future fell in December. The percentage of consumers expecting business conditions will improve over the next six months decreased from 21.9 percent to 18.3 percent, while those expecting business conditions will worsen increased, from 8.3 percent to 9.7 percent.

Consumers’ outlook for the labor market was also less favorable. The proportion expecting more jobs in the months ahead decreased from 22.7 percent to 16.6 percent, while those anticipating fewer jobs increased, from 11.2 percent to 14.4 percent. Regarding their short-term income prospects, the percentage of consumers expecting an improvement declined from 23.2 percent to 22.4 percent, while the proportion expecting a decrease rose, from 7.2 percent to 7.7 percent.

Of note, the richest Americans, those whose incomes are higher than $50,000 saw their confidence tumble from an 18 year high in October to the lowest level since Sept. 2017 in December.

 

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One of the closest correlations between major asset classes has been that between stocks and bonds. But not anymore, because as Deutsche Bank’s chief international economist notes in a Wednesday note, the historical relationship between stocks and bonds is breaking apart, prompting Slok to exclaim that “something is wrong“, as it could portend danger for those investors holding Treasurys in the hope these would cushion the slide in stocks.

it is no secret that bond prices and stocks are inversely correlated, or at least have been in normal times, but all that changed this year as Treasury prices have largely failed to reflect the slump in stocks, as MarketWatch notes.

“What is safe to say is that there is something driving equities lower, which is not impacting rates. Or there is something keeping long rates high, which is not impacting equities,” Slok wrote in a Wednesday note.

This correlation breakdown has undercut the bond market’s status as a safe haven in a year in which few asset classes have eked out positive returns. This correlation “failure” was on full display yesterday when despite the record point surge in the Dow, Treasury yields posted a very modest move higher (one which has since been faded on Thursday). And, as MW notes, if traditional havens like U.S. government paper struggle to shield portfolios from a further selloff in equities it could mean investors will lack few reliable boltholes going forward.

To show this regime shift, Slok charts the movement of the 10-year Treasury yield against percentage changes in the S&P 500 over the last five years. It shows the two correlating closely until 2018, when they split.

Another indication of the failure of bonds to keep up with stocks: the S&P 500 is down 8% YTD, while the 10-year note yield is up more than 30 bps to 2.77% leaving the bond market also nursing negative returns this year. As a result, investors with a balanced portfolio of stocks and bonds (usually in a 60/40 ratio) have been saddled with unexpectedly deep losses, which have also hit such “balanced” entities as risk-parity funds.

What is behind this odd divergence?

According to Slok, the uncharacteristic weakness in bonds may have taken hold after bond traders began to see a gradual increase in auction sizes after Trump signed off on tax cuts, bringing the reality of trillion-dollar deficits much closer and a surge in bond supply in coming years. That may have pushed bond yields higher this year, when they should have fallen along with equities if their classic relationship had held up.

“What happened in January 2018 was that the corporate tax cut had to be financed by a significant increase in Treasury supply, and maybe the reason why long rates remain so high is because the market is beginning to price a U.S. fiscal premium into U.S. government bonds,” said Slok.

Furthermore, according to Slok anyone expecting this divergence to collapse shortly may be disappointed since the breakdown of the positive correlation between stocks and bond yields may not just be a temporary problem as the federal government is projected to notch annual trillion dollar deficits for a “very long time,” said Slok, prompting traders to demand even higher bond yields in the future regardless if stocks underperform.

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The diplomatic crisis ignited by the killing of Jamal Khashoggi has largely subsided, and Crown Prince Mohammad bin Salman’s grip on power is, if anything, even stronger than it was before (having faced down incipient challenges from one of his uncles). Which is why it’s somewhat surprising to see MbS’s ailing father, King Salman, order a limited cabinet reshuffle that moved around some of the key players in the scandal (including Adel al-Jubeir, who was one of the kingdom’s key liaisons with western media during its response to Khashoggi’s killing) and removed Prince Mohammed bin Nawaf al Saud as the Kingdom’s ambassador to the UK, according to Saudi State TV station Al-Arabiya.

Amid the reshuffle, the king ordered the creation of a new political and security council (presumably to help protect his chosen successor’s flank) and – in a move that is reminiscent of a controversial decision made by President Trump this year – establishes a new Saudi space agency.

#BREAKING Saudi King Salman orders major Cabinet reshuffle

– Adel Al Jubeir relieved from position as Foreign Minister; named Minister of State for Foreign Affairs
– Ibrahim Alasssaf named as new Foreign Minister
– King also ordered formation of new political & security council pic.twitter.com/kA37Fw7C2z

— Nahayat Tizhoosh (@NahayatT) December 27, 2018

As a result of the reshuffle, more liberals and progressives will move into positions of power, suggesting that it could be part of the Kingdom’s plan to move ahead with its ‘liberalizing’ reforms to try and rehabilitate MbS’s tarnished reputation as a reformer.

Women now have more positions in finance/trade ministry. Also, #SaudiArabia has announced the establishment of a national space agency.
Today’s cabinet reshuffle is a step in the right direction for Saudi Arabia. It’ll help the country open up / liberalise faster IMO.

— 🗺 Nadia نادية 🗺 (@kutsuit) December 27, 2018

But perhaps the biggest change was apparent demotion of al-Jubeir to the lesser position of minister of state for foreign affairs and moving Ibrahim al-Assaf, formerly the kingdom’s finance minister, to the foreign affairs role. Al-Jubeir played an important role in the Saudis PR response to the Khashoggi killing, and was seen as a stalwart supporter of the Crown Prince.

Al-Jubeir

Here’s a roundup of the most important moves:

• Ibrahim al-Assaf appointed as Foreign Minister
• Adel al-Jubeir appointed Minister of State for Foreign Affairs
• Gen. Khalid bin Qirar Al Harbi has been appointed as the head of general security.
• Abdullah bin Bandar bin Abdul Aziz appointed Minister of National Guard
• Turki al-Shabbana appointed Minister of Media
• Hamad Al-Sheikh appointed Minister of Education
• Turki bin Talal has been appointed Governor of Asir in place of Faisal bin Khaled
• Sultan bin Salman moved from the presidency of the Tourism Authority and appointed Chairman of the Space Authority
• Badr bin Sultan has been replaced by Faisal bin Nawaf as Governor of Jouf region
• Musa’ad al-Aiban appointed as National Security Adviser
• Abdulaziz bin Turki al-Faisal has replaced Turki al-Sheikh as president of Saudi’s Sports Authority
• Turki Al-Sheikh has been appointed Chairman of the Entertainment Authority
• Khalid bin Qarar al-Harbi has been appointed the director of Public Security
• Prince Mohammed bin Nawaf al Saud has been recalled as ambassador to the UK (notably after saying he was “concerned” about the disappearance of Jamal Khashoggi)

But the implications of today’s decision aside, there’s one thing Saudi watchers should keep in mind.

For all the changes in Saudi Arabia today with the cabinet reshuffle, remember this. If and when MbS becomes king, he can just as easily dismiss the whole cabinet.

— Dr H.A. Hellyer (@hahellyer) December 27, 2018

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When Elon Musk called British cave diving hero Vern Unsworth “pedo guy” in response to Unsworth’s criticism of Musk’s idea for rescuing 12 teenagers trapped in a Thai cave, many people were stunned by the accusation but eventually just brushed it off.

It was when Musk doubled, tripled and quadrupled down on his claims, further insulting Unsworth and referring to him as a “child rapist” that people – including Unsworth’s lawyers – started to pay attention. There were even some whispers and murmurs at the time that Musk may have flexed his power and resources to somehow drum up evidence to support his accusations based on Unsworth’s past.

But instead it appears to simply be one more Elon Musk claim that has fallen flat on its face. A motion to dismiss filed by Musk in the United States District Court Central District of California now seems to confirm that Musk was just simply making things up. It offers no evidence for his claims about Unsworth, but rather offers 25 pages of largely hollow rhetoric as to why his statements are not actionable. 

In the motion filed early this morning and noted by BuzzFeed author Ryan Mac (whom Musk referred to as a “fucking asshole” in an e-mail about Unsworth) Musk claims his statements should be dismissed because his insults “are not statements of fact”.

With Musk’s lawyers themselves seemingly confirming that Musk’s statements had no basis in fact, the motion then goes on to try and hide behind Twitter, which his motion refers to as “a social networking website infamous for invective and hyperbole”. Yes, he is trying to hide behind the same Twitter that landed Musk as the target of a fraud lawsuit by the Securities and Exchange Commission after he tweeted that he had $420 per share in “funding secured” when he didn’t.  

We wonder if Jack Dorsey is going to get around to doling out the suspension that many say Musk deserves based on not only admitting that he was making things up when he called someone a pedophile, but also now for trying to throw Twitter under the bus as a defense.

Musk also positions himself as trying to argue that his statements were non-actionable opinion. His lawsuit argues that the reasonable reader would have never believed that Musk was “in possession of private knowledge that Unsworth was sexually attracted to children or engaged in sex acts with children”.

Perhaps this may have been true the first time Musk made the allegation, but as a reminder, the subsequent times he went after Unsworth, Musk very clearly reiterated that he was a “child rapist” who had moved to Thailand in order to take a child bride “who was about 12 years old at the time”. As a reminder, Musk wrote:

“I suggest that you call people you know in Thailand, find out what’s actually going on and stop defending child rapists, you fucking asshole,” Musk wrote in the first message. “He’s an old, single white guy from England who’s been traveling to or living in Thailand for 30 to 40 years, mostly Pattaya Beach, until moving to Chiang Rai for a child bride who was about 12 years old at the time.”

Musk’s defense team also tried to make the point that since he was using curse words, it was proof that he was being informal in his speech.

It should be interesting to see where the rest of this case goes given the fact that Musk basically just admitted that he doesn’t have any evidence to support his claims. Though we do not offer legal opinions, we can’t see any judge throwing out what now obviously seems to be a meritorious case. 

And if Musk’s decision to pay a lawyer in the ballpark of $1000 an hour to draft such a ridiculous motion makes more financial sense to him than simply trying to settle with Unsworth, it’ll just be one more piece of confirmation regarding many people’s suspicions about his ability to manage capital.

You can read the entire motion to dismiss here. 

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With traders finally accepting the reality that Quantitative Tightening means collapsing liquidity, tighter financial conditions and – obviously – lower asset prices, especially in the aftermath of Powell’s “autopilot” comment regarding the Fed’s balance sheet rolloff which sent markets tumbling during the last FOMC meeting… 

… Nomura’s Charlie McElligott reminds us of his October call anticipating a “financial conditions tightening tantrum” which was based-upon the enormous “global QT impulse” that month, for one simple reason: January 2019 should see similar “tightening” as the Fed’s balance-sheet run-off continues (including two heavy weekly QT periods during the first- and third- weeks of January). And that’s not all: in a world of fungible global liquidity, January will be hit with the double whammy of it being the first month following the cessation of the ECB’s bond-buying program.

So for those who – correctly – view the shrinking Fed balance sheet as one of the most important drivers of (declining) asset prices, and who also expect a self-fulfilling prophecy emerge as traders avoid buying stocks on major QT days (which may result in aggressive selling) here is the calendar of January – and 2019 – days that have the largest balance sheet shrinkage, courtesy of Nomura’s George Concalves. Will it be right? We’ll know as soon as the first trading day of 2019, when $18.2BN in TSYs are set to mature.

 

Putting the Fed’s projected balance sheet shrinkage in context – assuming of course Powell doesn’t fold to pressure and halt QT – this is how the Fed’s asset holdings will look like in 2019.

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After yesterday’s shocking abysmal Richmond Fed number, which plunged the most on record to the lowest level since 2009, traders and economists were keeping a close eye on today’s initial claims print as this particular leading labor market indicator is considered by many as the best alert to a reversal in the unemployment rate as well as the best advance warning to any looming economic slowdown. After all, based on the current level of the 2s10s curve, it is almost time for the jobless rate in the US to start rising…

… and which would will first be telegraphed by rising initial claims.

The good news is that according to today’s just reported initial claims number, said reversal is not yet on deck, because not only did initial claims “follow” the Richmond Fed sharply higher, but they dipped fractionally, from 217K to 216K, matching expectations, and confirming that at least for the time being, the US labor market continues to operate as expected without any notable glitches.

And while we will also get the Conference Board Consumer confidence number at 10am ET today, which may provide some additional clues on whether the US economy has taken swooned lower, don’t expect any updates on the state of the rapidly deteriorating US housing market: today’s New Home Sales data (which is published by the closed Census Bureau) will not be reported as a result of the ongoing government shutdown.

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Submitted by Nicholas Colas of DataTrek Research

Even with Wednesday’s rally, December’s 11-13% declines (S&P 500, Russell 2000) for US stocks couldn’t have come at a worse time for markets. First, there is the psychological damage of seeing such a swoon in what is a typically good month for domestic equities. Then there is the magnitude of the decline, erasing solid YTD gains in just a few weeks and making 2018 the first down year for US stocks since the Financial Crisis a decade ago.

One underappreciated problem, however, (unless you happen to manage taxable portfolios) is how money managers and investment advisors had to respond to this sudden reversal of fortune. Put yourself into their shoes for a moment:

• In a few days your clients will see a year-end statement with declining bond, stock, and commodity asset prices. Pretty much nothing worked this year… That will sting, but after a decade of gains that is a manageable issue.
• But… Say you sold some large winners earlier this year as stocks began to roll over, perhaps the large cap Tech names that everyone from hedge funds to retail investors over-weighted until recently. Those were good sales, to be sure, but in a taxable account they create a future liability and your clients will have to cut a large check to the US Treasury in April 2019.
• To minimize the tax bill from those capital gains, you need to sell some losers to offset those winners. Clients understand market-to-market losses; they can be less forgiving, however, of out-of-pocket tax payments when there is no wealth effect of rising asset prices to soften the blow. Until September, those paper gains were there. Now, they aren’t.

Here is the real-world market impact of that problem. Back on December 17th we gave you a list of the 11 worst performing names in the S&P for the then-YTD. This basket shows that tax loss selling is very much in play at the single-stock level just now. Consider:

• The names we highlighted as the biggest S&P 500 losers YTD: General Electric (GE), Mohawk (MHK), Newfield (NFX), Affiliated Managers (AMG), Invesco (IVZ), Western Digital (WDC), L Brands (LB), Alcoa (AA), Unum (UNM), Brighthouse Financial (BHF), and IPG Photonics (IPGP).
• From the last day of November to December 24th, the average decline for these 11 names was 21.1%. Excluding GE, which was only down 7.5% over the period after a drubbing through much of 2018, the average decline of the remaining 10 names was 22.6%.
• This group’s performance was much worse than either the S&P 500 or Russell 2000 over the same period, at -14.8% and -17.4% respectively. These 11 names didn’t suddenly show even-worse fundamentals in December; tax loss selling must have played roll in their dramatic underperformance.
• Today, 10 of the 11 names outperformed the S&P 500, with an average gain of 6.8%. With tax loss selling likely near the tail end (or done), this makes sense.

Next: looking at the “macro” of tax loss selling, consider money flows between mutual funds and exchange traded funds over the month. The dynamic here: an advisor sells a money-losing mutual fund, creating a short/long term loss, and uses the proceeds to purchase an ETF to replace it. This has become a common practice in the last decade, even with (or perhaps because of) murky Internal Revenue Service guidance around wash sales. Recent data shows it happened with a vengeance this December:

• The most recent Investment Company Institute data on all mutual fund/ETF flows for US equity products shows a net redemption of $8.4 billion through December 19th. Assuming that investors pulled out another $5 billion (a reasonable estimate given recent volatility) over the last week and the month’s total redemptions would be about -$13.4 billion.
• US equity ETF inflows over the last month total +$24.7 billion. Since that includes a few days from late November, we will assume that December’s inflows will resemble that figure. (Source: www.xtf.com)
• Conclusion: US equity mutual funds (many of them actively managed) have borne the brunt on December’s tax loss sales ($41 billion), only partially replaced by offsetting ETF purchases (that $25 billion from the previous point).
• Important: unless a mutual fund holds enough cash to satisfy redemptions, it must sell underlying equities as net “Sell” orders come in. By contrast, an ETF purchase only creates offsetting demand for stocks if it is large enough to force a “creation” of new shares. That clearly did not happen this month, as the ICI data shows, with ETF “creates” smaller than mutual fund redemptions.

The upshot to all this: tax loss selling made December much sloppier than it otherwise might have been. It depressed many stocks that were already on track for sizeable losses. And it made the lives of active mutual fund managers very difficult as they sold holdings to keep up with redemptions. That filtered through to single stock prices as net inflows into ETFs did not keep pace.

The silver lining in this dark cloud is the “January Effect”, one of finance’s most researched and published anomalies. Two points:

• The January Effect is NOT the idea that US stocks enjoy outsized rallies in that month. Data back to 1928 shows that July (1.6% average gain), December (1.4%), and April (1.3%) are all better bets than January (1.1%). Data here: https://www.yardeni.com/pub/stmktreturns.pdf
• Rather, the idea is that beaten up small cap stocks tend to trade higher in January as tax loss selling abates and more normal buy-sell balances reassert themselves. That 401(k) contributions to US stock mutual funds restart in January for high-income earners also helps, to be sure.

The big questions just now, made more pointed by today’s rally: is tax loss selling done, and have markets re-priced to attractive enough levels to keep the momentum going? Our thoughts:

• The answer to the former is clearly “Yes” – there are only 3 days left in the year, after all.
• But… “Healthy” markets don’t rally 1,086 points on the Dow. Recall that today’s record advance eclipsed the following prior gains: October 13 2008 (936 points, the old record), October 28 2008 (889 points) and March 26 2018 (669 points). In each case, markets chopped around for months after.
• And… Since percentage gains matter more, consider the 2 other instances where the Dow rallied closest to 5% in a day (as with today’s 4.98% advance): March 16 2000 (4.93%) and July 29 2002 (5.4%). The first was near a top; the latter was closer to a bottom, but one that would take almost a year to settle out.

Bottom line: US equity market sentiment hangs on a very fine balance just now. Tax loss selling was a reasonable (if unwelcomed)  explanation for December’s parlous performance, paired with trade/Fed/White House headlines to add fuel to the fire. But the calendar turns very shortly. The market’s fortunes need to start turning soon as well, because we’re about to lose one excuse for lousy performance.

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Shares of Asia’s largest petroleum refiner plunged on Thursday, dragging down the broader Chinese market, following reports that two senior officials at Unipec, the trading subsidiary of Chinese refining giant Sinopec, had been dismissed by their Communist Party overseers due to an unspecified trading loss.

According to Bloomberg, which cited a statement from a company spokesman, Chen Bo, president of Unipec, and Zhan Qi, the company’s Communist Party secretary, have been suspended over “work reasons” (though losses in the subsidiary’s energy-trading unit are widely suspected to be the true reason). The decision was made by the internal party committee at Sinopec and announced yesterday in an internal decision.

News of the dismissals comes one day after US crude prices posted their largest one-day jump in two years (though it’s likely that Unipec, like refiners across the world, posted large losses during the alarmingly swift plunge in oil prices during Q4, which left many refiners wrong-footed). Several refiners have restructured operations. Sinopec shares fell as much as 7.1% on the news, sending them to their lowest level in two years as shares fell in afternoon trading; meanwhile, the Shanghai Composite was down more than 0.6%.

The selloff also hit shares of PetroChina, China’s second-largest oil producer (which became the world’s first $1 trillion market cap company more than a decade before Apple), which have slumped to an all time low.

Unipec helped carry out the Communist Party’s retaliation against the US by reducing its imports of US crude (the company had previously helped establish China as the biggest buyer of American crude before the trade spat intensified).

Unipec’s purchases on behalf of Sinopec were a critical contributor to China becoming the biggest buyer of U.S. crude, before shipments were stopped due to the trade war between the two countries. Chen, who headed the firm’s trading business, said in September that the company had put a plan to boost American imports on hold as it assesses the impact of the dispute.

While it stopped buying American supplies for use in Sinopec’s refineries, Unipec continued to lift cargoes to resell to other firms in what’s known as third-party trading. More recently, an easing of tensions has spurred more shipments. Earlier this year, Unipec was also embroiled in a dispute with Saudi Arabia, saying the producer’s prices were costly and cutting purchases just as it was boosting U.S. imports.

Ling Yiqun, a vice president at Sinopec, will take over the duties formerly performed by Chen and Zhan, Bloomberg said, citing “people with knowledge of the reshuffle”. Meanwhile, Chen Gang, a vice president at Unipec, will take over administrative responsibilities. Given the opacity at Sinopec (a feature common among Chinese firms) investors are awaiting more information about the size of the loss.

“The market is closely watching for any details of the loss, including its size and how big an impact it may have on the overall operations of Unipec and Sinopec.” Li Li, an analyst with industry consultant ICIS China, said by telephone from Shanghai. “So far, the confirmed information is very limited, but it also seems that the risk is controllable.”

Though should the rebound in oil prices continue, it could take some pressure off the company’s shares.

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