From Brad Setser….

The same story applies to the official sector as a whole. Central banks sold $26.2b of long-term Treasuries, but added $66.6b to their short-term Treasury holdings. Net central bank holdings of Treasuries — judging from the TIC data — rose by $40.4b. That is consistent with the $49.1b rise in the Fed’s custodial holdings of Treasuries. Central banks by contrast are reducing their holdings of short-term and long-term Agencies. They sold $14.3b of long-term Agencies, and their short-term holdings likely fell by a comparable amount.**

Selling long dated treasuries in exchange for short dated Treasuries is a sign that they think interest rates will rise in the near future. Otherwise the move does not make any sense at all in this environment. What do they know that we do not?

From the Deal Journal (A WJS blog)….

Many of the problems originated at Merrill Lynch, which had a loss of $15 billion in the quarter, or three times worse than the last quarter. “To put [the] $15 bn after-tax [loss] in perspective, 60% of the common equity base of the company was lost in one quarter,” Goldman Sachs research analysts noted wryly in a research report this morning.

Felix Salmon has some questions.

Since Bank of America is bailing out/buying Merrill Lynch, you should also read “WSJ: Bank of America to Receive $20 Billion Injection, Support for $118 Billion of Loans” from Naked Capitalism to get a better idea of the extent of this mess.

From CNBC……

Electronics retailer Circuit City Stores reached an agreement with liquidators on Friday to sell the merchandise in its 567 U.S. stores after failing to find a buyer or a refinancing deal.

The company – which had been the nation’s second-biggest consumer electronics retailer, employing about 35,000 employees – appointed Great American Group, Hudson Capital Partners, SB Capital Group and Tiger Capital Group as liquidators.

From Reuters……

New efforts to break the deadlock between Russia and Ukraine and restore gas supplies to freezing European countries were planned on Friday, with the intervention in the dispute of a consortium of energy firms.

Paolo Scaroni, chief executive of Italian energy giant Eni SpA (ENI.MI) said late on Thursday the consortium would provide gas necessary for technical reasons to get pipelines and pumping stations working again.

The move could allow gas supplies to Europe to get under way immediately, leaving the question of reimbursement for the consortium’s gas on hold until an agreement between Ukraine and Russia on their price dispute is reached.

Meanwhile, an official from Gazprom explains their point of view on the Wall Street Journal.

From Calculated Risk comes a pretty graph showing how badly retailed sales collapsed in December.

Meanwhile, the Telegraph reports….

The OECD’s gauge of “Leading Indicators” – which gives warning of trend changes a few months in advance – shows an abrupt rupture in Asia and among commodity producers, with the most damage surfacing in countries with an export surplus that depend on sending goods abroad.

The index for Russia has seen the sharpest slide, falling 4.3 in November, China fell 3.1 and Germany was down 2.0, the worst performer in the G5 bloc for the third month in a row.

In other words, the worlds biggest net exporters are being hammered. You would think that at least the Gulf States would be setting pretty. After all, oil prices were sky high for most of last year. But Brad Setser says….

– The capital losses on the Gulf’s existing portfolio overwhelmed large inflows from high oil prices in 2008. Close to $300 billion flowed into the big Gulf funds — the Abu Dhabi Investment Authority/ Abu Dhabi Investment Council, the Kuwait Investment Authority, the Qatar Investment Authority and the Saudi Arabian Monetary Agency’s foreign assets. But the market value of their Gulf’s foreign portfolio fell by an estimated $350 billion over the course of 2008. Throw in a roughly $30b fall in the Gulf’s reserves as hot money betting on a revaluation left and the total value of the Gulf’s external assets likely went down over the course of 2008.

From Felix Salmon…..

Both Citigroup and Bank of America are down more than 20% in early trade today, and I imagine that Hank Paulson and Tim Geithner are starting work on yet another weekend deal of some description, since at this rate it seems that neither institution is capable of surviving in its present form much longer. They should embrace the inevitable and just nationalize the two banks.

The Economics of contempt has more. But I am not sure he is right that only Bank of America has problems. But recent news stories do make it seem that Bank of America is the most desperate right now.

But all the banks seem to be in big trouble right now. Look at this from Calculated Risk.

From the Free Press….

Another of the nation’s leading credit rating agencies has downgraded the City of Detroit’s credit rating to junk bond status, Mayor Ken Cockrel Jr. said today.
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The announcement by Moody’s follows Standard & Poor’s assignment of junk bond status to the city’s debt last week. The downgrade to junk bond status allows certain investors to claim a payout from the city totaling $400 million, an amount that could force the city into bankruptcy.

So far, no investors have requested the money from the city, according to the advisory from Moody’s.

Moody’s downgraded Detroit’s debt to Ba2 from Baa3 and to Ba3 from Ba1. It attributed the downgrade to the city’s $300-million budget deficit, delays in producing a required annual audit and the declining local economy.

This is why rating agencies are a joke. Any sane person knew that the city of Detroit’s debt was junk a long time ago.

From the Guardian…..

Despite an EU-brokered agreement on Monday to allow outside monitors to verify the gas flows and get the gas pumping immediately, the Russians continued to supply insufficient gas to power the system through to Europe yesterday while the Ukrainians also kept some pipelines closed, Brussels said.

“We opened the tap, and are ready to supply gas, but on the other side, the tap is closed,” said Vladimir Putin, the Russian prime minister.

But according to Brussels, the Russians were pumping less than a third of the volume of gas needed to supply Europe and deliberately entered it into the wrong pipeline across Ukraine. “If the agreement is not honoured, it means that Russia and Ukraine can no longer be considered reliable partners for the EU in matters of energy supply,” warned Barroso.

Despite the tough talk, the Europeans have little leverage over the Russians in the short term. Barroso was said to have had a “robust” conversation with Vladimir Putin, the Russian prime minister, by telephone. “This is getting close to breaking point,” said a commission official. “There is a feeling that Putin is being duplicitous, to put it mildly.”

This is all very confusing. But if I am making sense of this all, Ukraine is keeping some pipelines shut is due to the fact that they can’t get enough gas to run their entire pipeline net work all at once. Thus, they have to make a choice about which pipelines to open up and which ones to keep closed. And Russia is deliberately making it impossible for them to do this.

But various newspapers determination to be even handed is making it difficult to make sense of it all. Why is it so hard for the Guardian to spell out in plain English why Ukraine is keeping some pipelines shut?

On the plus side, Russia should be commended for teaching Europe the importance of energy security. It is a lesson that they have long needed to learn.