The Market Ticker

As we head into the second half of the year, let's take a look at the case for Bullishness and Bearishness.

First, the Bull Case, if only because I think its simpler.

To be Bullish on equities you need to believe that:

• The subprime mortgage issues will remain contained to subprime issuers and will not materially harm either primary broker/dealers or the credit markets as a whole. That is, you can have a lot of "New Century" blowups, but you can't have Bear Stearns implode. Nor can you have credit spreads generally widen out much from where they are now.
• EPS growth will continue at a reasonable pace; perhaps not double-digit but certainly high single-digits on a quarter-on-quarter basis.
• The consumer will continue to spend and this growth in spending is sustainable, which means that the consumer needs to have his wealth grow at a rate which exceeds his spending growth, whether from wages or otherwise.
• Housing will stop being a "drag" on consumer spending and GDP growth, and the housing market will recover before it does critical damage to the economy.
• Presidential Cycle market psychology. Third years of Presidential Terms have been historically very strong in the equity markets. In fact, it is rare to have a down year.

To be Bearish on equities you need to believe that:

• $1 Trillion in resets in 2/28 ARMs will occur this summer, and the ALT-A resets start to get really nasty in 2008. You must believe that this will continue to degrade mortgage-backed debt of all kinds (RMBS, CDOs, etc) and will spread well beyond the confines of mortgage companies.
• The Bear Stearns hedge fund implosion is just the first of many to come. They haven't happened yet because of intentional concealment, not because the problems aren't there.
• Housing has and will continue to be a drain on GDP and consumer spending, and the market in general will not start to recover for housing until 2009 at the earliest, perhaps as late as 2010 or 2011.
• Consumer spending is slowing already and this will continue, turning negative in Q3 and continuing at least through Q4, due to the lack of spendable income increases.
• Real borrowing costs will rise precipitously as spreads widen and risk is priced back into the market. This then shuts down the LBO and P/E funding marketplace, or so severely crimps it that the profit margin for these firms are severely damaged.
• We're up so far in the first half of the year that sustaining that sort of "run rate" is simply unreasonable. In fact, it would be parabolic.
• The Presidential Cycle theory does not apply because (1) we have a horribly unpopular President, (2) we have a historical oddity - no "heir apparent" in the race; this hasn't happened in a very long time, and (3) it is most likely that we will see a "tax and spend" Democrat win the White House, while they will maintain both Houses of Congress. This combination has no correlation with history and thus neither does the indicator. We are also coming off a business-friendly mix in the executive and legislative branch (since the '94 Republican Revolution - the current Bull really took off starting early in '95) that will help derail The Bull Market and usher in a secular Bear. In fact, this tectonic shift in the makeup of the US Congress and White House - for the first time since 1994 - is the longer-term reason to be Bearish on the markets IF we get a Democrat President.

That's the ying and the yang of it as I see it.

The one issue that I haven't raised before (here, but I have in my other blog in the past) is the issue of politics and how it relates to the markets. We have seen an absolutely incredible bull run in the markets in the last 10-12 years. One must look for why - what has really changed? Yes, "The Computer" came to the fore - or did it? Remember the personal computer made its debut in 1981, and the inevitable "more capability for less money" train began immediately.

So what really drove this huge bull market?

Washington.

In 1994 The Republicans threw the Democratic Congress out of office. Remember Contract With America?

The Democrats had held a 40+ year stranglehold on the Congressional arms of power. While we had both Democrat and Republican Presidents, Congress was firmly in the control of Democrat majorities.

Gridlock is good when it comes to Washington. Ideally you want a split of power that makes it impossible to pass bills that do not have strong popular support.

The worst possible case is a Democrat clean sweep. Such a change will lead to tremendous increases in both taxes and spending - which will inevitably drain the liquidity pool and lead to lower equity prices. Count on it. While I would love to say that I don't see it happening, I'd be lying - I do see it happening. How does this not happen? If there are one or more major terrorist attacks in the coming months. But those will rattle the markets too - a no-win, at least in the short-to-intermediate term.

I am, for now, solidly in the Bearish outlook camp on a credit, economic, valuation and political outlook basis.

I believe we will see a recession, and that it will be evident in 3Q; we may be in one now but you can only call one in retrospect.

I further believe that while not everything in the investing world will turn into a turd, we are looking at a repricing of risk that will take 20-30% off the market indices.

In the longer term we have more trouble ahead, but that's not coming for a couple of years. In the "here and now", if we get a 20-30% downward move in all probability I will shift back to the Bullish side for a while, as I do believe the markets are not "done" overall - that is, we're not about to see a permanent bear market - just one that comes home to roost through the rest of '07 and probably well into '08.

When will it turn in the broader markets? About six months before the housing market shows signs of actually bottoming. This, I believe, is not in the cards for '07 at all, and is unlikely to happen in '08.

Note that markets can go up during a bear market - for a while. There are counter-trend rallies that happen all the time, just as there are swoons that happen during bull markets.

The only remaining issue for me is one of timing - when will people be forced to 'fess up to the mess on their balance sheets. What has become clear over the last couple of months is that market participants will do nearly anything to avoid that.

This tells me one thing above all else - this is not a minor problem nor is it contained. If it were either market participants would be in a huge hurry to take their (minor) pain and put it behind them. That they are steadfastly refusing to do so, even in the face of overwhelming evidence that it exists, tells me that the pain is far worse, and the damage far worse, than they have admitted to.

Let's lead with Bloomberg's top-page story on risk being hidden in CDOs.....

"Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans. "

No kidding!

Personal income came in up 0.4%, last month revised down a tenth, spending up 0.5%. Of course headline inflation has absorbed all of the spending growth, which is not a good thing at all; this means that we're seeing no real GDP growth.

Both numbers were also below expectations by 0.2%.

Yields were whacked immediately and futures popped up a bit. The dollar, however, is getting shellacked. The Pound, by the way, is now well north of 2.00, which is up even more from yesterday. That's not so good - at all.

(Can someone please explain to me how numbers that are worse than expectations constitute "good news"? Why do I think we've got more "the market is open" crap going on here? You guys over on the Street didn't read Bloomberg this morning on the CDO mess, did you? Nor did you pay attention to Redbook and ICSC. Why do I keep thinking that this sort of "wheee!" mentality is very much like the 16 year old kid who's tooling down the highway getting a hummer from his girlfriend, totally oblivious to the cliff he's fixing to drive straight off?)

Url is back over $70 and looks to be adding to that advance. That 7 handle is likely to be noticed again today..... and I bet not in a way people like. That's not so good either.

RIMM hit the cover off the ball on earnings last night and announced a 3:1 stock split. They continue their strong followthrough with the Crackberry. Yes, they have a great business. So what? You want to talk about "overvalued"? P/E of 50 eh - and that was before the huge pop they're going to get today (20%?) You have to be nuts to short them (plenty of people have and it has led to tears - repeatedly) - but if this doesn't signal a blow-off top, I don't know what does. Shades of March 2000..... anyone remember how that ride ended? The Street seems to have amnesia...... but no, I'm not going to short it. I keep having to pull my fingers back with my teeth from the keyboard on doing it though. Why do I think I'm going to be writing about how f#&king stupid I was not to short the hell out of RIMM six months from now?

Countrywide had a blowup of their CDO ratings last night, and AHM dropped a big steaming turd as well. AHM is getting their just desserts, but CFC, so far, isn't getting hurt. Wonders never cease in this market. Or is the bottom line here that investors simply are stupid - they don't understand that big markdowns on those bond ratings mean that the company is now forced to take a huge writedown on the residuals that are cluttering their balance sheet, and oh, by the way, they got his news BEFORE the end of the quarter - which means it should show up in this quarter's results!

There will be those who say "oh this is no big deal; its just one that went bad." Uh huh. Ok. Go back to the top and read that Bloomberg article again. And again. Let it sink in. One trillion dollars. There is NEVER, NEVER only one cockroach!

I continue to hold my SDS position that I picked up the other day. I'm not sold on this "rally". Why not? The debt markets.

Its the credit markets stupid! Always!

Right now we have end-of-quarter, and guess what - hedge funds are doing their mark-to-markets right now for the end of quarter reports. When they do, I suspect there's going to be more than a couple really ugly surprises that bubble to the top.

Here's how it works - you take $100m (for example) in cash and then lever that up 10, 20 even 50 times. The prime brokers all let you do this one way or another. That's Merrill, Lehman, Bear, Goldman, et.al.

Ok, so now you go buy up all those nice high-yielding CDOs that have been so profitable for the last few years. Life is good!

Until there are downgrades. When you're levered up 20:1 a 5% hit on those values wipes you out and you get a margin call. Now what? You try to sell some assets only to find that they're not worth 75 cents on the dollar like you thought - they're worth ten! Oh that sucks. Now what are you going to do?

You're dead, but more important, your prime brokers have huge smoking holes in their balance sheets too. This is why the brokerages are trying to avoid those "fire sales" - they know that they're sitting on ticking nuclear weapons and they can't get rid of them!

This is what happened with the Bear funds and I bet its happening right now with a bunch of other hedge funds. You won't hear about this during the day, but over the weekend you're going to see a lot of sweaty palms; the blast will start to hit early next week.

We are looking at a $1t (optimistic) to $3t (pessimistic) problem here - far bigger than the S&L crisis (by five times at least and maybe by as much as twenty times.) This will not be contained and I also believe it cannot be avoided at this point in time.

The broker/dealers will try mightily to avoid telling the truth, as well the hedge funds and everyone else who is "invested" in this crap as they have a very strong vested interest in NOT recognizing these losses.

But delinquencies are delinquencies, homeowners who can't pay still can't pay, mortgage resets are less than 20% of the way through the system and the pressure will continue to build in the coming months.

The honest rating agency would look at the reset schedule over the next two years and extrapolate out the CERTAIN, say much less probable impact, then use THAT projection to re-rate these securities. That should have begun last year and by now this nonsense would be over. They aren't doing it and this, when the book is finally written on this mess two or three years from now, will be identified as the reason that a major market dislocation occurred.

The recession that will inevitably follow, however, must be laid at Greenspan's feet and his insane belief that he could not only stave off the impact of the 9/11 attacks and tech blowup, but that he could avoid it entirely through huge liquidity injections.

Wrong.

Reality as we wind down the week - and first half - is that:

• Deals in the LBO/PE world are starting to run into trouble and credit markets are tightening significantly, even though this is NOT getting much press - yet. Dollar General had a near-blow-up that left hundreds of millions with the bridge banks - something they didn't expect and do not want. Nor is this the only deal that has had "material problems"; rumblings of others are certainly out there, and two IPOs in the leveraged space (Evergreen and one other) have been pulled. Heeleys pulled a secondary stock offering yesterday. You can't fuel a bull that is running on LBOs without a loose credit market. The market is not running on fundamentals and hasn't been for more than a year. This leg is getting kicked out from under the stool!
• The turds keep coming sloppy and fast after-hours, and threaten to become an explosive flood of diarrhea, all in the credit markets. AHM and CFC's are just the latest two to add to the Bear fund blowup. The odd S&P futures action midweek after the close smelled like a big margin call, and I bet we get more of those, perhaps tonight after the close, as a consequence of some of the other downgrades.
• The credit rating agencies are coming under increasing pressure to get off their ass and honestly re-rate these debt instruments (CDOs/CLOs) prospectively. God knows if it will happen, but in my opinion it must and eventually will. When it does, it will be like Katrina coming ashore. In my view you've got the warning posted; if you play "La la la la la" like so many did in New Orleans you're going to be hiding in the Superdome quite soon. To that I say: No thank you, I'll run now!
• We reversed a trend that has held for a year, where Fed Afternoons are punctuated with monster rallies. That didn't happen yesterday and instead after 2:00 was met with big selling pressure on heavy volume. Trend shift? Maybe.
• The pattern for the last six months has been to do whatever in the morning but then close with strong volume on upward price movement. For the last week, it has been the opposite - the volume has shown up in the afternoon all right, but it has been SELLING volume, not buying. This is a tectonic shift and its not a one-day phenomena. After a week straight of this I have to take notice of it and view it as something important. This price action is common as a "distribution" mechanism near major market tops.
• The Street has both record margin debt and record bullishness. This is also a marker for market tops. Reliable? Not necessarily. But you have to look at it in the context of everything else. When the big street pundits all think the world is great and are margined to the hilt, welllllll.... Margin calls are ugly things, as they tend to beget more margin calls when they start going off.
• The dollar is getting its ass kicked once again. Watch the FX markets as they do matter, especially for inflation pressures on the import side! Yes, they help exporters, but with 70% of GDP being consumer spending, inflationary pressures outweigh help for exporters.
• China broke the 50 to the downside. Again. I'm not sold until I see it happen convincingly, but if you remember, this is one of my five markers of "big trouble in your face." That's one more of my five; assuming this holds we are now up to three.

My signals again from this article are:

• The S&P closes under the 1490 level. That's second-level support, and has been approached several times recently - but it has held. We pinned it early in the week but have yet to close below. NOT YET.
• China blows up (stocks). CHINA HAS CLOSED BELOW THE 50. Awaiting confirmation, could get it Sunday night.
• Goldman, Merrill, and Bear Stearns all close under their 50s. CHECK.
• HGX has broken trendline support. CHECK.
• The Nasdaq Composite (and DOW) break the 50. NOT YET, although we took a hell of a run at it during the last hour in the Dow.

Call it two and a half out of five.

So far.

In one of the most obnoxious cases of barring the door after the horse has left we have this from US Banking Regulators today:

"Lenders, in most cases, should verify income levels instead of relying on borrowers' statements, the Federal Reserve and other banking regulators said in guidelines issued today. They also said banks should account for potential interest-rate increases in scrutinizing whether homebuyers can pay off loans. "

Told 'ya that one was coming - the OCC telegraphed that a few months ago. Not hard to figure out. But this is certain to put an even bigger fork in the US housing market. And, IMHO, this is not only overdue it is far from strong enough. But there you have it - regulators BSing their way along while refusing to address this head on.

No matter - the credit markets will take care of it - and soon.

You know its bad when Steve Liesman starts doing pictorial "on the white board" pages on CNBC explaining how it all blows up - and at 12:45 ET today, he did just that, complete with a picture that was eerily similar to this:

Unfortunately, he kinda glossed over what happens when the low-rated tranches blow up and why it matters. Since you really need to understand this to realize why it matters, I'll go through it.

Generally-speaking, the way this works is that the lower-rated tranches ("equity" and "mezzanine") provide what amounts to insurance for the rest! That is, when losses are taken due to defaults all of that gets allocated to the equity tranche, until it is wiped out. Then it moves up to the next.

The problem is that damage to that equity tranche is not contained there. It inexorably moves up the chain because the remaining insurance value available drops as each loss is taken.

Think of it like an insurance company in Florida. No hurricanes, they make lots of money.

Ok, now we get one small hurricane. They take some losses, but still have plenty of money left. However, that does not mean all is ok, because the amount of capital that they have left to pay off subsequent losses has gone down. This means that your risk that they won't pay your claim goes up - even if you were undamaged at that point.

This is (and should be) reflected in the risk premium - the odds that you'll get hosed if you have a loss. The same thing happens here; the equity tranches have, in many cases, been wiped out, as the losses anticipated on these loans as a percentage of the total pool (e.g. percent that go into default) was only expected to be 5-6% - but now its fifteen percent, or three times the expected rate.

Likewise, in the ALT-A space, historical default rates have been right around 1%. But now they are running close to five percent.

So in effect the insurance company has folded - they paid all the previous losses and now are broke. Now your "credit enhancement" is gone on the higher-rated tranches and as a result they should be marked down - in most cases SEVERELY marked down, as there is no more insurance!

This is what's going on now..... and it is just getting started.

Remember folks - it takes six months or more from the time that someone stops paying their mortgage until it shows up as an actual foreclosure and the loss is recognized in the CDOs! We are at the start of the reset/default/foreclosure process, not the end!

You'd think that people would be repricing risk and backing off. You'd be wrong. Lookie what I found around on the net at http://www.stencorpnotes.com/:

"STEN's primary business is funding purchases of used cars and trucks by credit challenged retail buyers from independent “buy here/pay here” sales lots in Arizona. This business and the company's other businesses are described in more detail on the Company page and in the prospectus."

And what's the "headline"? Earn annual yields up to 13.31%.

13.31%?! This is all "relatively safe", right? Yeahhhhhhhhh.... ooooookkkkkk.... now you know how the hedgies and pension funds got sucked in. Lever that sort of return up 20:1 and... wow!

Looks like its not working out all that well for STEN's stock price now though....

Then look at the ABX today, which looks like a cliff today - especially the "A" tranche. Not good. While you're over there, look at CMBX - after what looked like a bit of settling down, it went parabolic - again - today. Who's in trouble that we don't know about yet, including in the commercial real estate space?

Add it all up and this is why I am holding my SDS and shorts, and just shorted CTX. Like a Cat 5 hurricane storm surge, this is likely to come ashore with very little - if any - warning.

Hang on to your hats - the wind is picking up and I see black clouds on the horizon.....

First up - KB Home - LOSS of $2.26/share, an incredible miss. Housing revenue down 46%. Has withdrawn guidance, and says cannot predict when housing conditions will include. Does this suck badly enough for you? How about for the general market? Guess we'll find out today eh?

I guess it was the right call to hold overnight.

The shocker in all of this is that KBH is not down more than it is. As I write this its down less than 1%, holding just over $40/share.

Initial jobless claims came in down 13k to 313,000 for the week, Q1 GDP deflator final up 4.2%, Q1 QDP final up 0.7%. PCE price index up to 2.4% (.vs. 2.2% "claimed"), this is not good as its a key inflation gauge and puts inflation solidly above target. GDP Price index up 4.2% .vs. 4.0% consensus, and consumption 1Q up 4.2% .vs. 4.4% consensus.

Note that this puts consumption growth at zero, price inflation way above target, and core inflation over target.

No way to spin this one guys. It would be nice to see the Fed "do the right thing" (which believe it or not is a rate HIKE) but it won't happen. They'll bleat a bit and leave rates unchanged.

The futures reacted to the downside, but the move was somewhat tempered, and treasuries reacted by selling off, driving up the 10 by about a half-percent. Of note we were below fair value up front, indicating that we should see a weaker open.

We are also seeing evidence that banks are getting nervous and so are investors about holding bridge financing on LBO deals, or buying debt that's "covenant lite":

"As several debt offerings faced resistance yesterday, bankers and investors began to wonder whether the tremors coursing through the nation's debt markets signaled that the buyout boom is in jeopardy or just suffering a temporary setback."

......

"Bankers said investors have grown wary of debt deals that offer few financial protections and yields that don't reflect potential risk."

My money is on it being significant..... but that's me....

Of course there's this to add more fuel to the fire - this time from Kia....

"Kia Motors Corp., South Korea's second-largest automaker, canceled plans for a $500 million bond sale this week, joining at least seven companies abandoning borrowing as investors cut demand for riskier assets. "

Just remember guys that what has fueled almost the entire rise of the last 12 months in the markets has been the debt/LBO/PE boom. Take the fuel away from a fire and.......

Oh, and Url. Watch that Url. Its poking back at that $70 number again. As soon as you see a 7-handle on Oil you're likely to get a violent reaction in equities; this could happen as soon as the next couple of days - or perhaps even today. Yes, the big integrated oils will like it, but nobody else will. The chart still suggests a breakout north, and I still have a mid-70s price target on oil in the next few months. If we get a hurricane in the gulf, that could be conservative, and while I don't like to admit this, I think there's a better-than-even shot that we get a bad one this year in the GOM - I live here, so I'm not sure I like saying that.... but it is what it is. When you look at huge Chinese demand (remember, most people over there ride bicycles and they'd like to trade up to motorcycles - and cars) increases it won't matter what we do here in the US - energy prices are headed north, period. Maybe not all at once, but inevitably the price will continue to rise as production is difficult to expand and demand keeps rising on a global basis. $70 oil is almost certain to translate into $4 gasoline within the next few months, especially if we get a storm! The problem here isn't just oil - its also refining capacity, which is entirely our own fault in this country. When oil is part of what drags us into this recession, go get up, look in the mirror, and blame the face you see for not pounding your Reps and Senators to allow drilling in the Gulf, shale conversion out west, and putting in place a single, federal standard for refinery permitting and construction.

This is simply not going to happen in today's political environment, which means you better get used to higher energy prices, because this is a trend that we are not finished with yet and won't be until "we the people" get tired of it and force political change to take place. And no, we're not talking about "alternative energy" either.

In political news, The Senate voted down the Immigration Bill today.

You can put a fork in this legislation until at least the fall, and I suspect for far longer than that, as nobody's going anywhere near this with the '08 election cycle coming up. This was pretty much the last-gasp attempt to ramrod a bad bill that would have hosed us horribly through the Senate. Thank God it failed.

Bloomberg continues to pound the table. Again - its about damn time.

"A cocky investor can be a market's biggest patsy.

The huge losers these days as the value of high-risk mortgages collapse won't be the little guys of financial lore but managers of treasure lodes like pension funds and hedge funds. "

My question of course is how many of those pension funds will end up being dumped on the taxpayer. That is why I'm all worked up about this.

Let's face it folks - I've no problem with people making bad bets in the markets and losing money. Even losing lots of money. Even going bankrupt.

Going bust tends to sober people up. It is, in fact, a good thing, because when it starts to happen it insures that risk is properly priced into the market.

But when that risk is taken by taxpayer-guaranteed institutions, then there's a problem, because "bust" doesn't actually hurt the people making the bet.

Not so good, as I see it, and a big part of the fuel that made this rocket go.

But now the fuel appears to be gone........

The Fed's announcement came on schedule today, and was, as expected, to leave rates alone.

The statement however, appears to be more hawkish, not less, on inflation.

Here it is, in full:

"For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those
pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The instant reaction was instantly negative, but then bounced back and ran a bit.

But only a bit.

The 10 didn't like it a bit, and spiked higher on yield to 5.12% - up nearly a full percent on the day.

Now guys and gals, let's think here.

How do you get a bullish scenario out of this on the economy?

I don't see it. What I see is the opposite - that the dual risks here are of both higher inflation and economic weakness. Further, it appears that they are paying more attention to headline numbers; the language has a subtle shift in it from the last time around, and I don't see anything indicating that an a reduction in rates is in the cards - unless the economy craps the bed!

Comparing the statements from May and June, they are also saying that the housing sector continues to be a problem. In other words, it appears that they are now recognizing that they made a bad call on housing turning, and there's no evidence that it is - or will in the near future.

The market appears to have reverse back to its former levels - perhaps as people think a bit, they are coming to the realization that housing really is a big deal.

I took profits on my HOV short (and PUTs) today, mostly because it showed up on the RegSHO list. While the immediate risk of an artificial squeeze is not high, profits in your bank can't be taken away from you and there are plenty of other juicy targets - as such it was a no-brainer.

On the currency side, nobody seems to have noticed that the Pound is now over the 2:1 psychological level. That's not so good..... or that bonds may be setting up for another move higher (in rates) after treating the 5.05% level turned into some pretty strong resistance.

The last 20 minutes of the day appeared to show a quite-severe deterioration going into the close; we failed to hold the gains of the day with any sort of conviction. In fact, the key for me as a trader today was that the SPX failed to hold over the 50, meaning we do not have confirmation of a move even the historically-significant "Fed Hype Bounce." Of course we also didn't get below 1490, but we were headed down at the end of the day..... strongly.

Given that this is probably the "best" economic day we're going to get this week, and tomorrow promises to bring us more to fret over (consumer spending and income, sentiment and construction spending numbers - wanna bet those aren't great?) I'm leaving my SDS position open along with all my short positions. Traders sure can't count on any more Fedcrap for a while now, can they?

Tomorrow could be quite the fireworks show; perhaps it will be the day that traders actually go read the ICSC and Redbook news releases from earlier in the week and learn how to add 2+2 again.....

PS: Beazer, I love 'ya. Shred some more documents please. :->

Late update: Countrywide just had a news story pop up from Reuters that one of their subprime bond issues was cut to junk status, and others had ratings cut. No body to the story yet (will update if/when there is) but that's NOT GOOD. I love 'ya Mazolla... but gezus dude, get some decent suits!

The futures this morning were, to a word, awful.

I've been watching /ES7UG last night and this AM (S&P September) and after the plunge immediately following the close yesterday, then the slow bleed last night into the evening hours, it looked like we might recover around 5:30 or so.

No dice. The deterioration since has been steady and relentless, not recovering at all until about 15 minutes before the open - and even then, the recovery has been very modest, just taking us back to the 8:30 AM levels.

This continues to smell like a margin call problem somewhere - a big one too. Selling looks to be triggering more selling, and over and over and over..... this is how major selloffs get going, and if the Margin Call Monster has been let out of his cage, it is unlikely that he's going back in quietly. He's an evil beast and a proven destroyer of trader's worlds.

Durables came in like crap. Down 2.8% on headline durables. Ex transportation was down 1%, revision for previous month down 2.5 (revised down 1%)

Business investment was down 3% (ex-defense and aircraft), which is a significant turndown.

These numbers are far worse than expected.

The futures reacted instantly and not in a good way. There was a huge bid in treasuries, driving rates down, and a huge sell in the stock futures. Both bounced but remain in negative territory, with the 10 threatening to breach 5% to the downside.

Mortgage applications were down 3.4% last week, which appears to be appropriately in line with both expectations and the weak housing data we've received thus far this week.

In more ominous news I heard a rumbling this morning that the Fed may start to look at the headline inflation rate instead of ignoring it and using just the core. This, if it happens, would likely lead to a near-immediate surprise interest rate hike, which would be tremendously bad for the markets - simply on the surprise factor. I rate the probability of this happening moderately high - anyone who has half a brain in their head can see that the food and energy series is not volatile any more - its been consistently elevated for over a year. The rationale for excluding these two items originally was that they tended to be very high one month and then low or even negative the next.

But over the last couple of years, food and energy have continued to rise in price at a rate which is increasingly significant. Food inflation has been pushing a 10% YOY inflation rate, while energy has been just as bad if not worse, and neither shows any sign of abating.

The weekly energy inventory came in with crude building but both gas and distillate (diesel fuel) drawing down. This is not a positive thing for gas prices; the problem is, once again, refinery utilization. This is likely to continue.

I love this article from Bloomberg regarding the CDO/CLO mess, which, by the way, is not over, nor is it contained, no matter what anyone might try to tell you:

"The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand.

Their focus is likely to fall on how to assign prices to complex derivatives, created by cooking together different flavors of securities whose values are driven by other assets such as stocks, bonds or mortgages.

The efforts by Bear Stearns's creditors to extricate themselves from their investments have laid bare one of the derivatives market's dirty little secrets -- prices are mostly generated by a confidence trick.

As long as all of the participants keep a straight face when agreeing on a particular value for a security, that's the price. As soon as someone starts giggling, however, the jig is up, and the bookkeepers might have to confess to a new, lower price. "

Naw, you think? :->

Isn't the more common word for that "fraud"? Its amazing how the straightest shooters on the street - Bloomberg - still won't use the right word for things. "Confidence game?" Pull the other one guys.

Not that this really surprises; as soon as the proper word for this activity starts getting used there will be some, uh, "problems" for a number of street participants. Like perhaps a few perp walks, high profile trials, maybe even some slightly-wider-than-usual stripes on the clothes these guys wear for a couple of decades.

My somewhat-rhetorical question - for how long can people in the press and elsewhere continue to not use the proper word for "confidence game?"

John Dugan, the head of the OCC, had this to say today:

"To the extent that banks' exposure rests on valuations, yes, absolutely, we're concerned about it and watching it," Dugan told the summit via telephone from Washington. "The fact that valuations can change so significantly when there are market disruptions is one of the things that I think all the regulators are paying very close attention to."

I'll believe it when I see it John. So far the evidence is that the OCC doesn't give a good damn about this abuse, as its been going on for years now, and I've yet to see ONE big lender audited by you guys and/or seized as a consequence of mispriced "assets". I think you better be paying a bit more attention to this lest you find yourself answering a lot of very tough questions in front of Congress if and when some depository institutions blow up in your face and the taxpayers are forced to make good on that FDIC insurance!

We closed out today with the S&P above the critical 1490 level but under the 50 at 1507.9, so despite the morning's apparent intent to violate (and stay violated) that brought in buyers instead of sellers. A bit surprising but it is what it is. Unless we blow back through the 50 on the upside there's no confirmed direction, and we wait for tomorrow to define whether we've now got a channel between the 50 and 1490 (which ultimately will squeeze out) or whether we have an incipient break in process.

My thesis thus remains intact - until we see a close under support on the SPX we don't have confirmation of a trend change and today, it has been denied. As such this afternoon I took some profits off the short side, ever mindful that while Bears and Bulls both get fat, Pigs can and do get slaughtered. I've got a SDS position I took this morning; if we go back through the 50 I'll lick my wounds - let's see what tomorrow brings.

This may have been nothing more than an oversold rally. Its difficult to know. Volume picked up in the last couple of hours, but the move up was decidedly lackluster up until 2:00 ET or so in terms of volume. As such I wouldn't read too much into today's price action; clearly, the market wants to hear what the Fed has to say - although I can't imagine that any surprise the Fed might unleash would be a good one, and my expectation is for no surprise at all.

Finally, I stuck the forum code up yesterday in a fit of frustration when Yahoo's boards were having trouble. I had no idea the demand was this strong for a format like that or I would have done it a couple of months ago. The pageviews there have been astounding as have the user registrations, considering that it has been active for less than 24 hours. Both the forum and the ticker blog will continue; I've no intent of getting rid of the blog, as I like the more concise, less stream-of-consciousness format. Both the forum and the ticker itself are running on my internal network infrastructure, and neither has taken any significant strain - so no worries that the load will be overwhelming. Tell your friends - the more the merrier!

Http://www.tickerforum.org

(Btw, it will also work off "Net" and "Biz" domains.....)

Why? Well, Yahoo is having problems - again - and is impossible to reach.

I'm tired of it, and I'm also more than a bit tired of the sock puppets and "create a new ID every 15 seconds" guys.

So I've decided to set up a forum for investors to talk where such crap will simply not be tolerated.

You can find it at the above URL. Register for an account and have at it.

Please be warned - I just set this up, and there may be a few bugs - but the difference between this and the others out there is that if there ARE problems, you can reach someone to get them FIXED!

Enjoy.