The Market Ticker

What a difference a day makes!

Risk is back. Or at least - the appearance of risk. Or is it?

The 10 is pushing higher, once again. And so is Oil.

Now that's a rather interesting - and explosive - mix.

Initiate it with a few CDO blowups in the hedgie space, and you have the makings of a really nice fireworks show - Bloomberg thinks the fuse might be lit!

"June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street. "

Gee, 'ya think? What has been my thesis now for a couple of months? The credit markets will define the top, and when they crack, the equity markets are screwed.

Later in the day we got this:

"Merrill Lynch sold a small portion of the collateralized debt obligations through an auction, said the person, who declined to be identified because the decision hasn't been announced. The firm plans to hold onto the remaining securities for now, the person said."

And this from Marketwatch:

"The uncertain fate of two Bear Stearns hedge funds which loaded up on mortgage-backed securities that are now souring has cast a sharp light on the fragility of the collateralized debt obligation market, a strategist warned."

And if that's not enough, here's a nice quote from Moody's Economy:

"Zandi expects the other Wall Street investors, including Deutsche Bank AG (DB) and dozens of other creditors, will give Bear even more time to sell the funds' assets.

"That's in everyone's best interest because then they won't have to revalue assets in their own portfolios," he said.

The value of the assets in these types of funds is difficult to determine because there is no active market setting prices. Once there is a sale of similar securities, though, funds have to revalue their assets based on those prices. A fire sale of Bear assets likely would trigger lower asset values on the books at numerous funds."

Let me see if I understand this correctly. We have someone from a subsidiary of the very company that rates these bonds and other instruments saying that the current "value" on the books DOES NOT REFLECT ACTUAL MARKET VALUE.

Moody's KNOWS THIS (after all, its THEIR GUY who just said it!) yet has not acted in downgrading these instruments and FORCED a mark to current market value.

C'mon folks. Where are the rating agencies on this issue? We have several market participants who have said in public that these CDOs are mispriced. One of them is an employee of ONE OF THE RATINGS AGENCIES. Yet we have this charade of "price by computer model" instead of marking to market (like, for example, what someone will PAY YOU FOR IT) in these people's portfolios.

The Rating Agencies like Moody's and Ficht exist not to rubberstamp people's lies, but to protect the bondholders and, ultimately in many cases, the public, as many of these pieces of crap are being held in pension funds!

This situation is now getting to the point where it threatens to cross the line between "I believe" and outright fraud. SOMEBODY needs to stand up here, and if its not going to be the investment banks and ratings agencies then the SEC needs to get involved and call the curtain down on this.

The ABX wasn't being fooled today. Yet more deterioration was seen. The CMBX (commercial R/E) didn't like it either. I still want to know who's in trouble on the commercial side!

Let me be clear - I don't give a good damn if every investment bank in the country goes under.

What I do care about very deeply is WHEN, not if, these marks to market happen six months from now and instead of 25% losses they are ONE HUNDRED PERCENT and as a consequence we have dozens of pension funds, which are Federally Guaranteed, dumped into the PBGC with the consequence that you and I as taxpayers get to pick up the shortfall.

But gee, Mr. Market seems to have figured it out.... this afternoon risk showed up once again and treasuries started getting shorted with a vengence. Suddenly, out of nowhere around 2:00 PM, the 10 went parabolic on yield. What's going on out there guys? Who's trying to lay off once again maturity extensions and who doesn't want to be net long in the credit markets going into tomorrow? Hmmmm.....

By the way, not all of the broker/dealers are able to keep this quiet. Here's a cute one from this morning, sent to me by a friend.....

"Brookstreet Securities Corp., an Irvine broker-dealer, has shut its doors, laid off 100 local employees and liquidated its assets because it is unable to meet margin calls on complex securities called collateralized mortgage obligations, the company's spokeswoman Julie Mains told Register reporter John Gittelsohn today."

Let me add to this - we threatened the 50 on the S&P this morning. A close below there, which happens at 1504, is a violation of first level support. If this does not hold then the next - and most important - test is at 1490, which is about 3/4 of a percent further down from there.

Nor are we done on the economics. Cheesecake Factory (CAKE) is getting the whipped cream beat out of them this morning on weak prospects. This follows Circuit City and Best Buy both having problems, with the former withdrawing guidance citing "an uncertain economic outlook."

You think Chuckie has a problem? Casual dining.... gee, what 'ya think? This is the second sequential warning out of Cheescake Factory on a weaker consumer. How many times do we have to hear the same song sung before the street listens? Same store sales weak, retailers warning, casual dining taking a hit........ naw, there's no consumer problem, right?

Unemployment claims unexpectedly jumped by 10,000 this morning. And where was most of it? California. Gee, you think the speculative building boom out there, which has now gone bust, might finally be showing up as cracks in the dam across the economy? That might continue; back to my thesis - housing busts lead economic busts, and almost inevitably drag the economy into recession. Throughout US history, every housing bust has led to a consumer recession. Every one. Believe "this time its different", if you wish, at your own peril.

The Leading Economic Indicators came in at 0.3%, which when added to the 0.3% (revised) down in April, constitutes a zero actual change. The market seemed to ignore this; the biggest contributors to the positive uptick last month were unemployment claims (inverted) and stock prices. Both have since failed to continue their advance, meaning that June's number should, if trends continue, post a decline.

The morning price action is quite interesting. We have taken two shots at big gains this morning, and both have been immediately sold into with some conviction, leading to the obvious conclusion that traders are trying to sort all this out - is a major top in? Is the CDO market problem really contained, or are we being lied to (again)? What's up with interest rates on a global scale? Are we going to see that 7-handle on Oil - or worse - an EIGHT handle?

On specific stocks, there's not much to like when one looks in the lending sector. Countrywide appears to be breaking down and has crossed under the $37 mark, headed for..... who knows? It bounced back up - volatility, once again..... but its not holding those gains. The homebuilders are basically riding the S&Ps trajectory, and none of them look healthy.

The bullish case continues to be pounded on CNBC with people saying "The economy continues to be healthy." Really? Want to eat CAKE? I don't see it; unemployment is starting to tick up, and finally we are seeing some honest reporting out of the hottest housing markets, as people other than illegal immigrants are starting to be laid off; contractors throwing in the towel - recovery in housing is not coming any time soon. Consumer spending growth is just not happening, unless you wish to ignore same-store sales and earnings reports from retailers and casual dining outlets. Inflation, of course, isn't a problem - unless you consume food or energy, in which case its a very big deal indeed. And interest rates aren't a problem either, unless of course a 5-handle is counted as "not an issue" when the market has "priced in" lower - not higher - interest rates.

The press is picking up more and more on the ARM-reset problem, which threatens to dwarf the subprime issue.

"But there is a third class of ARM users whose numbers grew during the most recent boom. They're the ones who chose ARMs because they couldn't finance their purchases any other way, and they gambled that soaring prices would make the deals work."

Then there's H&R Block, which reported earnings more reminiscent of a trash heap than solid corporate performance.

"The company reported losing $85.5 million, or 26 cents per share, during the February-April period, which is when the nation's largest tax preparer sees the majority of its revenue. By comparison, the company earned $587.5 million, or $1.79, during the same period a year ago."

Ouch.

The evidence continues to mount - the landing we're looking at here is not a "soft" one, but rather a wheels-up affair onto a runway that might have a few earthquake-size breaks in it!

Then we have the mother and father of all indicators of a credit market about to blow itself to bits, the Blackstone IPO. If there was ever a way to play the Wall Street Distribution Game that was more dramatic and obvious, I sure as hell haven't seen it in my 20+ years in the markets. You simply have to be out of your mind to buy into this, yet the word on the street is that it is oversubscribed at some stupid-silly rate, like 8x the offering share count. I've never seen a stronger indicator of a really mountainous top with absolutely no support under the precipice.

God help us when we step - or run wildly - off the edge.

Now on the contrary side, we have the Philly Manufacturing Index. I expected this to be up given the Empire State index. The Philly number was 18. The treasuries spiked up on yield. The equity markets kinda sat - good manufacturing numbers sound good, but if it comes with higher interest rates, that might not be such good news eh?

In what may be the most important indicator to come out of today, it appears we now have a confirmed Hindenburg Omen. We got the first one just a few days ago, which started a roughly 30 day clock ticking. Today we got confirmation with New highs and New lows on the NYSE both over 2.2%, coming in at 106 highs and 75 lows, respectively (the lows just BARELY met the definition, at 75.) The number of 52 week highs was less than twice that of 52 week lows. The McClellan Oscillator is negative (-11.08).

The definition of a confirmed Hindenburg Omen is two or more of these observations within 30ish trading days. We now have two in the bag. This is ominous, because the probabilities stack up as follows - there is greater than a 25% probability that we will see a 15% or more crash, and a 41% probability exists of at least a 10% decline. There is a 54.5% probability of a decline greater than 8%, and a 77.2% probability of a decline of at least 5%.

Time to load the boat on a "Hail Mary" pass? Maybe.

Remember folks, the odds of the Lotto-size win, based on historical records, are only 25%. But if the downdraft is just 20%, that sort of trade is a 50-bagger.

The math on this is simple - 25% chance of a "huge payoff", a 41% chance of a "big payoff" (20 bagger), and the odds of the trade being profitable are a bit over 50%.

Do not bet more than the lunch money on this one, because if we get only a 5% correction, or none at all, you will lose the entirety of the bet!

If you get a new yacht out of this, you owe me a trip to the Bahamas.

PS: Yes, I know the markets closed up today. That doesn't change a thing - the facts are what they are.

Labels: Hindenburg Indicator, Hindenburg Omen