The Market Ticker

Well that was like shooting fish in a barrel.

There are days I love being short. That's good too, since there are also days I've bled from every orifice shorting things.

This isn't one of the bloody ones for me, but it sure is if you're a long bagholder in Lennar - or one of those poor fools who thought Hovnovian (or some other builder) ought to be higher because its "trading under book value."

"President and Chief Executive Stuart Miller said, "The housing market has continued to deteriorate throughout the second quarter" and "the supply of new and existing homes has continued to increase, resulting in declining home prices across our markets."

No, really? Gee, that was tough to figure out. NOT.

Reading Lennar's quarterly report should be instructive as to why that sort of trading is a really, really bad idea. See "tangible book" can get written down awfully damn fast, and then poof - your thesis evaporates!

There's a lesson in here which is that trying to analyze a company on fundamentals requires that you determine the quality of those fundamentals - not just reading a 10Q an parroting whatever you might find there as a thesis.

By the way, the salient piece from Lennar is that they think next quarter will be bad too, and they expect yet another loss. Expect their stock to get pounded today; its off a buck and a half in premarket.

What's even worse here though is the magnitude of the miss and what it says for so-called "analysts." The "predictions" were for a profit of a nickel or so. The truth was a dollar fifty loss, and even if you take out the impairments (which anyone should have been able to see coming a mile away) you still had a loss on an operating basis.

The latter is really bad, because it means that they can't sell their finished product for more than they have in it, and are being forced to sell below fully-laden cost to keep themselves out of covenant trouble!

Ok, enough of Lennar; you guys know by now that I think the builders are all screaming shorts, although you might be a bit late to the party here.

While the futures are pointing up this morning, don't let it fool you. The ICSC CHAIN STORE INDEX came in DOWN 0.7% today and Redbook came in down 1.0% (from previous -0.8%) which confirms my thesis - yet another piece fitting nicely into the puzzle.

TO PUT THIS IN BIG BOLD LETTERS - CHUCKY THE CONSUMER IS FALLING OFF A CLIFF!

Let's fit it all together for you.

• Household formation WAY DOWN - 20-somethings and 30-somethings are moving back in with Mom and Dad or taking roommates. Why? They're going broke!


• Credit card debt spiked to the moon in the first quarter, and is now contracting. Why? Its called credit limits and the MEW-ATM was shut down on people in 4Q 06. The consumer tried to hold spending using plastic, but you can't do that for very long. See above for what comes next and is happening now.


• ICSC Chain Store Sales came in down 0.7% .vs. previous month at negative 0.1%. Last month this was blamed on the Easter Shift and bad weather. This month that excuse rings hollow. Redbook also came in down 1% as a confirming indicator.


• Best Buy and Circuit City had crap earnings, confirming the above.


• June Dallas Fed Mfg Production Index yesterday came in down strongly at 14 .vs. 25 last month.


• Target same-store sales came in weak, seen at low end of forecast.

Whistling past the graveyard, we are..... I smell a word that starts with an "R".....

Consumer confidence came in at 103.9, below forecast of 105. Bad bad bad. What is worse is that the confidence internals show deterioration in the job picture. Yet another page in the big story entitled "Chuckie Craps The Bed."

New home sales are down 1.6% in May. They also revised April down. Months of inventory were also up. Median price was up slightly, but this is no surprise - the higher end is selling, but the middle market and lower end is not.

The instant reaction in the markets was up - but it was yesterday too. Within minutes, the "instant pop" faded and reversed. Not so good.

Case-Schiller's index of prices in real estate have also declined. The salient 10-second quote?

""No region is immune to the weakening price returns," MacroMarkets Chief economist Robert Shiller said in a statement."

Check and mate.

Remember guys, this is as good as it gets for home sales - this is the "high point of the selling season."

There's no bottom here!

Oil is down a buck today, which is a good sign for the market, but the 10 is modestly higher.

As the market absorbed this news, suddenly the Nasdaq decided to get a bit of indigestion, and barfed up a good chunk of its gains.

Blackstone - the "hot IPO" - has now broken through its offering price and is headed lower. This is not a good sign! Considering that this serves as a proxy for the LBO/PE market in many people's minds, it begs the obvious question - have we seen the top of the PE/LBO market?

We have a very interesting situation developing in the broader markets today. The S&P is under the 50DMA and using it as resistance. The Dow and Nasdaq are using the 50 as support. If I had to take a bet on which way this breaks, it would be lower, as the S&P is simply a larger and more significant chunk of the market. If either the Dow or Nasdaq gets dragged under their 50, the other is almost certain to follow with amazing speed. This would satisfy one of my remaining "Short The Market" indicators.

As things stand right now the DJI has closed just under the 50, but the Nasdaq has managed to hold up. The S&P is below the 50, but has not broken the critical 1490 level.

I am not going to go strongly short the broad market until that happens, as the potential for a whipsaw remains real and the pain you will take being wrong will be extreme if you play this one early and get nailed. I recommend patience; once we break 1490 on the S&P there will be plenty of downside to be taken advantage of. Remember - Bulls get fat, Bears get fat but Pigs get slaughtered.

On the FX side the Yen is suddenly seen as being "not so good" as a weak currency. The interesting part of this is that Japan has sort of "wink-wink-nod-nod"ed at the Carry Trade for a couple of years now, and suddenly, it appears that The Sun Doth Rise, and they have discovered religion on the risk of those trades unwinding in a precipitous - even violent - fashion. As such the jawboning has begun, and it appears, so has the move to correct this problem. This has the potential to bring some interesting moves to the market in the coming days and weeks. This is likely to continue.

As I sit here today watching the tape stream by and the tube blabber on I am struck by something interesting - nobody is talking about the horrifyingly bad ICSC and Redbook numbers! Instead, the story of the day is All IPhone, everywhere, every day.

Talk about whistling past the graveyard!

Isn't Kudlow's - and the rest of the "Goldilocks" folks - scenario that the consumer is healthy and continuing to spend like a drunken sailor, even as his house goes down in value and everything in the credit markets crumbles around him?

Well, how do we square that, exactly, with the ICSC and Redbook numbers? Do those not quite convincingly make the point that indeed the Consumer is tapped out and now spending is falling instead of rising? Isn't this confirmation of the consumer credit report and earnings from last quarter in the consumer credit sector? And if consumer spending is falling, what does that say for the broader economy? Isn't that "R" word in play here again? Hmmmmm....

As the market has gyrated the last few days I've been sorely tempted to take some of these short profits. So far I've resisted. Why? The economic data. I may take 'em going into earnings season, as we may indeed get one more pop out of the markets from historical earnings which, in 2Q, might not be all that awful, if only because the real consumer slowdown didn't hit until Mayish in the stores.

There are also technical reasons to believe we will make one last spasmodic dash higher before it all comes apart. But the overhang keeps getting heavier and heavier, and the cracks wider and wider. Will we follow what "technical analysis" says is supposed to happen - one big final thrust before we fail and go in the ditch - or is it really all over right here - and we are now just waiting for confirmation?

In the end Wall Street is all about looking forward, not back. And if you take the blinders off for a few seconds before you hit the big "BUY BUY BUY" button, your finger might be compelled to stray over to the big red switch located just south of there........

So I remain short for now, but with eternal vigilance and a tight leash, waiting for us to break those key technical support levels - an event that I expect to occur soon.

This, by the way, is the flaw in Technical Analysis. I've heard many times how "technical analysis" predicted the '02 slide, etc etc etc. To be blunt, "oh horsecrap." Technical analysis predicted that eh? It predicted the 9/11 terrorist attacks? Yeah, right. You're not really going to dispute that this wasn't tremendously disruptive to the financial markets and responsible for a big part of the acceleration downward after the '00 tech implosion, are you?

In short my view is that while TA can help you as a trader, ultimately it is news - fundamentals - that drive the markets. And "news" must be tempered with the fact that we seem to have a major problem with "public school education" these days where people read headlines instead of news stories, and even program computers to trade for them based on those headlines!

So frequently, you will see moves that have no basis in the reality of a news item, but on the headline makes perfect sense. When that happens, beware - what you're seeing is at least somewhat likely to reverse violently when the humans take control back and invest more than 30 seconds in one of the oldest scholarly endeavors - reading for content.

BREAKING NEWS: Flyonthewall and a few other rumor sites are reporting that Countrywide Financial's Corporate Offices have been raided in some sort of subprime investigation. This is unconfirmed at present but if true, oh boy...... needless to say the stock took a huge dump as soon as that rumor got out on the street and PUT volume skyrocketed. CNBC also reported that BAC said "nuts" to the idea that they'd have any interest in the firm (there have long been "buyout" rumors flying around in that regard.) Note that attempting to trade this rumor is extremely hazardous; there may be nothing to it just like there was nothing to the so-called "buyout" rumors! You can get violently whipsawed on both long and short sides - be careful!

Late update: Reuters has this to say on the rumor - note the "no comment" response.... You gotta love it when someone's response to a question about an inquiry is "no comment." Is that kinda like "the glove doesn't fit - honest!"

Even later update - apparently there are three ex-VPs of CFC who have agreed to plead guilty to insider trading! Is that it? No idea.

There are also rumblings that the SEC's "look-see" at Bear's Hedge Fund is not stopping with Bear. Apparently they are now broadening that inquiry to cover the bonds of a number of subprime issuers, which has the potential to get very ugly very fast. I do not know at this point which firms are potential targets nor which bonds - again, this is street rumor at this point, not confirmed fact. It would seem to me that the cautious man is the wise man here..... there's little or no chance that this ends well for anyone who touched the toxic waste, and the longer it goes on the longer it looks like we've got radioactivity oozing from every corner of the box. NOTE: CONFIRMED THAT THIS IS NOW A REAL INVESTIGATION.

Late note: The futures got the hell sold out of them right after the close. This is, by the way, typically when margin calls go out. Oh, do you think perhaps someone's phone started ringing? "Heh dude, its your broker calling. He says you're broke!" I wonder what tomorrow is going to look like at the open.....

Ok, more late notes. Bill Gross of Pimco is blowing the whistle on the mess. You have got to read this:

"June 26 (Bloomberg) -- Moody's Investors Service and Standard & Poor's were duped by the make-up and ``six-inch hooker heels'' of collateralized debt obligations they gave investment-grade ratings, and investors now stand to lose all their money, according to Bill Gross, manager of the world's biggest bond fund. "

I love 'ya Bill. I've been saying this for quite a while, and its refreshing to hear someone "in the know" finally blowing the whistle - loudly - on this crap.

Remember, we now have our own forum at http://tickerforum.org/ Yes, it really is a forum for traders, linked here. The hell with the sock puppets and nonsense - let's have some intelligent discussion on trading eh? Suggestions are warmly welcomed as well. See 'ya there!

In a break with tradition, we didn't get any big M&A news this morning. Is this the liquidity pool drying up, risk coming back to the market, or a blip? We'll find out in the future, but it certainly is a sea change - this marks two weeks running.

On the open bonds rallied and the market rolled over. Flight to quality? Maybe. More probably an attempt to reposition ahead of more fun in the CDO market. While I've no proof of that, its where my bet would be placed, and if that thesis proves out this is very bad for equities on balance, as it is a further assault on the equity pool. The size of the drain appears to keep enlarging and I'm starting to see a nice swirl develop in the center!

The Nasdaq led the declines. If this pattern holds, with the 'Daq being weaker than the broader averages, it will underscore one of my prime thesis points - that the 'Daq has a habit of leading market turns, and so if you want to play "the fade", this is where you want to concentrate your bets.

There will be a mighty defense of the 1490 level in the S&P. An early assault drove the S&P well under the 50 on the day; it served as resistance this morning and blocked the "at open" advance quite solidly, with the index bouncing convincingly off it to the downside.

Existing home sales for May came in flat, falling 0.3% to 5.99m units, 10.3% below May of 2006. Inventories up 5% to 4.43 million units, 8.9 months supply. Awful!

Median price is down 2.1% from 2006.

Single family homes down, condo sales up.

Initial household formation, however, is down 70% from last year! This was a big surprise - and not of the good kind. You generally don't see that in a "strong economy." So is the economy really strong or is this an anomaly? Hmmmm.... and by the way, household formation collapsing makes getting rid of the inventory overhang much harder! Why do I think the truth is that the economics aren't as strong as we've been led to believe, and the Household Formation number is the more accurate indication? Oh, by the way, that's a leading indicator, unlike so many of the lagging ones that Bulls like to cite.

So what does the negative "household formation" number mean? Simple - this is 20-somethings and 30-somethings moving back in with Mom and Dad and/or taking roommates. Why? Do you really need someone to explain this one to you? Its called hitting the economic wall - that is, going broke.

Gas prices. Food prices. Housing is unaffordable. Unemployment is masked by all the illegal immigrants in the homebuilding industry and others working under the table. Consumer revolving credit decreased last month as people hit the wall - and went "splat".

It all makes sense, yet those who are willfully blind simply will not see. Not because they can't - but because until they're hit over the head with a 2x4 they won't pay attention to the facts.

The markets initial reaction to what was clearly awful news was positive. The home builders rolled over. At least some people are acting logically.

But the broader markets - complete with the absolute nonsense "news reporting" that there was "relief" from the housing numbers - decided to take off. The S&P moved smartly above the 50, with the Dow tacking on 100 and the Nasdaq popping up about 14.

Of course the credit markets think the situation continues to suck. The ABX continued its slide and so did the CMBX.

By the way, to those of you who think that "A" rated credit is ok - the market says otherwise. Only AA and AAA rated credit has escaped - so far - now the ABX has its deterioration all the way into the A rated tranches, with them now trading under 90! The BBBs are trading, in some cases, close to 55 cents on the dollar!

The CMBS is not doing any better; the BB rated tranche lose even more ground, while the BBBs are now worse than they have ever been historically. This not over.

You have to be out of your mind to trade this to the long side, other than as a daytrade on momentum.

Why?

Let's step back for just a moment on this and consider just what a month-over-month "slight decline" means here, along with the credit issue.

May and June are typically the strongest selling months in the year for homes. Consider that May's number for existing home sales was awful, with new home sales being supported only by huge price declines. Now consider that this down month report also came with price declines - not huge, but 2% is quite a bit on a monthly basis - that'd be 24% annually, if it was to be annualized!

Twenty four percent?! You better hope that doesn't annualize if you're a bull on equities, because if it does, the economy - and equity markets - are going to be crushed.

So what, exactly, is there to like in this report? You have one of the two strongest months of the year for home sales, yet they sucked by any measure you care to use. This is somewhat like retailers saying "Oh Christmas was kinda bad, but in general the retail market is pretty decent."

Give me a break. If Christmas is bad, the entire year is bad! What we have here so far is a total and complete bust in the spring selling season for real estate. Earlier in the spring this was blamed on "bad weather." That, of course, is now off the table - its summer. Nice try.

There is no indication that the bottom is in with regards to housing, or even being approached. Inventories continue to build and household formations are down strongly, meaning that this overheated inventory will take even longer to work through than originally forecast.

And - to work through inventory you first have to see the trend on building inventories reverse! So long as inventories keep going up there is nothing to work through, as the build hasn't stopped yet!

"The impact of housing is abating on the economy", or so many in the media claim?

I don't think so. In fact, the evidence is for exactly the opposite - the drag on the economy continues to worsen and in fact is now leading people to move back in with Mom and Dad or take on roommates, which is further depressing the housing market! Can you say "spiral downward"?

Certainly, in the home-building stocks people seem to be figuring it out. Hovnovian is in the ditch, pushing at the lows of the day. Toll Brothers is pinging to the downside, and so is Lennar, which is due to report what are expected to be dismal earnings tomorrow. And the XHB, the composite ETF for home builders, is headed for the ditch as well.

So how come the major indices responded with an uptick? There certainly isn't a good reason for it that I can find.

Yes, oil is down today and so are yields, but aren't, in the end, equity prices really all about the economy, of which 70% is consumer spending? How do you discount the household-formation and home inventory numbers?

How does Chuckie continue to spend when he can't afford his house, and is forced to move back in with Mom and Dad?

I don't believe you can make this thesis stick.

The numbers this morning foretell severe economic distress on the road ahead - perhaps very shortly ahead - and they are correlated with the other data we have received recently pointing in the same direction.

In other words, this is probably not an abberation in the data. It is, in fact, likely to be a trend. A very bad trend.

In even more ominous news, a Businessweek article suggested that people are now preferring to pay credit cards over mortgages. This is something that the Realty industry has said would "never happen" - in other words, that people would "guard their house" no matter what. Uh, no. See, people are a bit smarter - and more rational - than Realtors!

"The significance? One explanation could be that many recent subprime homebuyers simply aren't that worried about losing their homes because they don't have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. "People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to paycheck," says Oliai."

Yet more confirmation of the thesis - and the decline in revolving credit outstanding last month.

We had an interesting event here recently in Florida. In Destin there was an actual prayer service for "better Real Estate market conditions."

May I somewhat impolitely suggest that asking God for help to rescue your sorry ass when you have created a bubble from avarice and outright fraud, gleaning huge personal profits from the people who you sucked in, possibly destroying their financial future in the process, is more than a bit imprudent?

After all, my admittedly-imperfect study of the Bible suggests that God tends to frown on taking advantage of your fellow man for your personal profit - something that has been the hallmark of the so-called "boom years" in Florida Real Estate.

Indeed, it would seem to me that the wise man would stay well clear of such "prayer services", lest the Almighty become more than a bit peeved and decide that His form of relief could come via a few "bolts from the blue". Think of it as "God's Raspberries."

Perhaps its a good thing for those Realtors that God has tended to not meddle in the minor events of mankind over the last couple of thousand years.

This morning Oil was down sharply on the settlement of the Nigerian strike, only to bounce hard on news that Venezuela was basically kicking US oil companies out. Now to be fair, Chavez isn't exactly doing that, but he apparently has shoved "new deal terms" under their noses and insisted that they sign or leave. Apparently, those terms are only good for Chavez (big surprise, right?) Reports are that at least one of the big US oils said "nuts" and another is close to doing so. Here comes that 7-handle on oil! It seems that as fast as we can put one problem to bed another pops up. While my oil play is basically flat since I took it I still believe we're looking at the mid 70s - at which point I'll consider exiting and taking the profits.

In a big change, CNBS is now starting to talk about major bond defaults and credit market deterioration. While they're playing both sides (as is fine; you need a bull and bear perspective) the tone has definitely shifted. A few weeks ago there was zero attention being paid to this in the mainstream media. But now we've got the media recognizing the systemic risk - and what can happen as the liquidity pool starts to get impacted. And Steve Liesman, who has for months been pretty sanguine about this, is starting to sound a lot like me - that the deals in the pipe may be at risk as risk gets priced back into the market and cheap money disappears. This puts the LBO market at risk, and if you've got deals in the pipe, widening spreads threaten that.

The 2:00 hour came and with it a big selloff. The Nasdaq gave back all its gains, with the DOW giving back most. Ditto on the SPX. Was the market listening to CNBS? Or did people finally wake up and read beyond the headlines? Not sure - but I really liked the big green move on my portfolio right at the 2:00 hour......

And lookie what just hit the wires!

"Bear Stearns Cos. may have to salvage the second of its two teetering hedge funds after offering $3.2 billion last week to bail out the first one, Merrill Lynch & Co. analyst Guy Moszkowski said.

Investors ``can't rule out'' the chance that Bear Stearns will ``stump up even more for a similar, more-leveraged, fund,'' Moszkowski, who rates the firm a ``buy,'' wrote in a note to clients today. He estimated that the second fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, owes about $7 billion to its financiers. "

Seven billion?! Oh my GOD!

That would be $10 billion in total, or roughly half of the firm's market capitalization!

Folks, if that happens, its a catastrophe and will totally blow Bear out of the water. That would be the mother and father of all short plays, assuming you've got the stomach for the risk.

But it will also, with near certainty, kick the market over the edge in terms of technical support levels, leading off a wave of selling that WILL NOT be contained to Bear Stearns and pals!

The market smelled it and headed south as soon as this hit the wire and got under trader's skins. It did not take long, and the reaction was violent and immediate to the downside.

Nor does it stop there. We also have Goldman now potentially exposed to a similar degree:

"Goldman Sachs Group Inc. subprime mortgage bonds issued last year are being downgraded by rating companies at the fastest rate of any issuer, according to Citigroup Inc. research dated June 22."

And if that's not enough, the SEC is now interested (its about damn time!)

"Bear Stearns (BSC) may have a lot of explaining to do about a big restatement of losses at one of its troubled hedge funds—and not just to its investors. BusinessWeek has learned that the Securities & Exchange Commission recently opened a preliminary inquiry into the near-collapse of Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leveraged Fund. People familiar with the inquiry say regulators are interested in learning how the Wall Street investment firm came to dramatically restate the April losses for the 10-month-old fund, which invested heavily in securities backed by subprime mortgages, or home loans to consumers with shaky credit histories. "

And if you go beyond the sugar-coated media here in the US, you find this from the UK:

"The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs."Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Guess what? Goldilocks really did get mauled and what was left apparently got eaten on top of it! This is no longer a "specific stock" story - it has now spread to the entire primary dealer/broker sector. This is what happens when you get greedy, and these guys ALL defined that word during the Housing Boom, paying absolutely no attention to risk!

While you might hear the Talking Heads saying that "this will be contained" don't you believe it. This is getting far more serious now because as bond downgrades spread we are going to see trouble show up as forced selling by pension funds and other firms that cannot hold bonds rated below a certain grade. As those levels fall there will be more forced selling, which is going to put a real crimp in the credit markets.

There is never only one cockroach! You know it, I know it, we all know it, right?

Keep that in mind and guide yourself accordingly in the markets.

Oh, and don't believe for a minute that "all is ok" in the Dow. The entirety of the DOW's disparity today was due to the upgrade of GM - which held a nearly 2% gain despite the rest of the market going to crap around it. When you only have 30 stocks, one makes a big difference; take that out and suddenly the DJI looks pretty ugly.

Let's go through the "Five Indicators" list again:

• The S&P closes under the 1490 level. That's second-level support, and has been approached several times recently - but it has held. NOT YET. The 50, however, HAS FALLEN.
• China blows up (stocks). If their parabolic ascent is to be believed, this may occur within the next week or so. MAYBE - it closed under the 50 last night. Give it another day or two; if they keep dropping like a stone......
• Goldman, Merrill, and Bear Stearns all close under their 50s. Both Merrill and Bear have. Goldman is all that's left. BIG CHECK TODAY (New Signal)
• HGX has broken trendline support. On technicals, it appears this may continue downward. CHECK.
• The Nasdaq Composite breaks the 50. This occurs at roughly 2563. The Nasdaq usually breaks down first. NOT YET.

So we've got two in the bag, one maybe, and the other two one nice down day away.

No Omen today, although we took a valient stab at it - New Highs didn't quite get there. Unless, of course, you count the Nasdaq, where if we were to use that index we sure did.

Here's today's SPX - what a wild ride eh?

Tomorrow could be "the day" to break technical levels. I thought we had a decent shot at it today, and the market attempted a strong reversal instead in both directions - but failed to hold - twice!

In the morning we get Chain Store Sales at 7:45 and Redbook at 8:55 - both important. At 10:00 AM we get Richmond Manufacturing and New Home Sales, along with Consumer Confidence.

Of these, same store sales and consumer confidence are probably the bigger potential issues. A bad confidence number, especially if it comes with soft same-store sales, would presage a consumer slowdown - exactly what this market cannot tolerate right now. People have pretty much come to expect crap home sales numbers - the leg on the stool holding it all up is Consumer spending.

Threaten that, we have a 200+ point down day and my remaining technical indicators go "poof".

See 'ya tomorrow for The Great Roller Coaster Re-Ride - Part Deux!

With Asian Trading in the bag, we are now dangerously close to satisfying another one of my conditions for confirmation of shorting the market - China closing below the 50, taking out first level support (aka "China blows up.")

However, remember that China's market assaulted the 50 once before, and immediately bounced. So you can't call a one-day break valid - because historically, its not. If there is follow-through this evening, however, and we wake up tomorrow to find China down strongly yet again, I am going to get rather suspicious - especially if we take out my other two conditions today in the US markets.

Europe is all red as I write this (6:00 CT), while our futures look like a small bounce. But traders typically don't really get on the futures until an hour or so before the open, so that doesn't mean much right now.

And the worm can turn rather quickly on the street....

The bond market overseas didn't move much. That's likely to change this morning. The Yen sank 0.68 against the dollar, with all of the damage coming in the afternoon, at the same time the Nikkei took a turn south.

Bear is trying to coddle people again. Of course its bullshit, but you won't hear that from the mainstream press. Fact is that the company stuck about 15% of their market capitalization into this "bailout", a huge amount by any stretch of the imagination. If the CDO market continues to implode, and there's plenty of reason to believe it will, that 15% - or more - may come directly off their stock price. Yippie Kayae if you're a long holder of BSC; this may prove to be the mother and father of all shorts if you've got an appetite for the risk.

And... no big merger news this morning that I can find. So much for "Merger Monday" eh?

We are certainly in for an interesting week....... watch the 10 again this morning; the bond market opens first.

More as warranted!

Let's dispense with the silly first - BX (Blackstone) looks to be opening up in the $37 range. That's not awful, but its hardly the huge pop that people were talking about with the oversubscription ratio.

The Dow, S&P and Nasdaq all opened up moderately down. The 10 is up again, opening up 0.7%, which puts us back in the groove on interest rates - going higher. The markets are doing the "inverse of the 10" deal again this morning; the charts on my 9-pane are interesting; near perfect inverses for the first few minutes, but then they appear to have decoupled a bit. It will be interesting to see how this plays out over the remainder of the day - my guess is that the "Blackstone fever" has infested traders - at least for a while. Certainly, its all CNBS was talking about for the first half-hour!

As I noted last night, we got the Hindenburg Omen confirmation. Asian markets were down last night; I wonder how much of that was people paying attention and how much was just plain old-fashioned exhaustion.

It looks like the market is starting to consider risk once again:

"June 22 (Bloomberg) -- U.S. stocks fell on concern hedge- fund losses at Bear Stearns Cos. may signal wider problems in credit markets.

Bear Stearns, the second-biggest U.S. underwriter of mortgage bonds, dropped after people with knowledge of the company's proposal said it plans to take on $3.2 billion of loans to stave off the collapse of a hedge fund. Citigroup Inc., JPMorgan Chase & Co. and Moody's Corp. also declined. "

No, you think?

$3.2 billion? For guys that had $6b in leverage out against $600m in collateral?

So what's the truth here guys? The claim was that they lost "20%"? Really? Or was it 50%? Or was the leverage ratio more like 25:1, not 10:1?

And better - why do you flush $3.2 billion down the toilet if you're Bear Stearns? There is only one reason to do that - you're afraid of the explosion that will result if you don't do it - that is, the blast will be even bigger in its impact on your bottom line.

CNBC is also reporting that Cantor Fitzgerald is getting bids as low as ten cents on the dollar for some of the CDOs they're trying to sell! That's a ninety percent haircut!

There are a lot of liars out here on the street right now, and sooner or later, they're going to have to fess up. If the real loss was 50%, that's horrendous. It also tells you a lot about the exposure on the street to this issue and points out the fact that there is absolutely no way that this will be, or can be, contained. It simply doesn't matter whether people want it to be or not - there is some $2-3 trillion in losses out there that are being hidden under the carpet at the present time!

This can and WILL come out, and if I'm right about the magnitude of this "crash" isn't the right word for what's coming. More like catastrophe. This pile of paper is what supports the consumer credit markets! If it implodes, and it looks like that's exactly what's happening, the damage, given the leverage being employed, will be tremendous.

We haven't seen a day with the futures limit down in the AM in five or six years. We may well be headed for a few of them in the coming months.

Let me be clear - what I'm implying here is that this cycle of fraud and avarice in the markets may be worse than the '00 Tech Wreck. In fact, it may be much worse.

You heard it here first guys and gals. I may be wrong about this - but the evidence appears to be mounting that indeed, I'm right - and the pump monkeys out there are doing their damndest to keep you, the retail bagholder, from finding out, because they know what happens once the cat is out of the bag.

Unfortunately, Bear's Hedge Fund blowup has let the cinch loosen up a bit on the sack that has been kept tightly closed since February, and it appears that at least one rabid cat got loose.

Now they've got a problem - as I noted last night there's at least one small broker/dealer that has been shut down due to repricing of assets. This is likely to continue, but the "big guys" on Wall Street are almost certain to lie about their exposure until they are forced - by someone -to fess up.

And lookie what that rabid cat dragged back home and dropped in front of the door!

"June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said. "

Oops. And who do they target? One of my favorite whipping boys - Countrywide Financial and another good one for the post, Indymac Bank. Are 'ya short (or, if you prefer, "Got PUTs"), perhaps?

Then there's this from Bloomberg:

"June 22 (Bloomberg) -- U.S. high-yield debt investors, after snapping up a record $600 billion in new loans and bonds this year, are starting to push back."

No, you think?

And finally we see a ratings agency waking up.

"NEW YORK, June 22 (Reuters) - Fitch Ratings on Friday said it may cut its collateralized debt obligation (CDO) manager rating on Bear Stearns Asset Management, part of Bear Stearns Cos.' due to troubles arising from bad bets on subprime mortgages."

Hmmmm.... do you think that perhaps - just perhaps - the credit markets might be freaking out a bit? Uh huh....... The ratings agencies - late to the party, but they can't ignore it forever - unless they want to get sued out past Pluto. Not for being wrong - for willful or even collusive overrating of debt instruments in the face of hard evidence that the ratings are vastly too high.

And let's be perfectly clear on this - this is not confined to subprime mortgages or even residential housing. Today was horrible in the CMBX as well - not only is the BB up (again) and now in the stratosphere zone, nearly straight up since the 6th of June (a total of over 60 bps!) but the BBBs, As and even the "gold standard" AAA spreads are moving the wrong way. Someone (or perhaps, given the BROAD impact now, lots of someones) is/are in trouble in the commercial R/E space, but I still don't know who.

Contained? I don't think so!

Now add this - I have reason to believe (from perusing the public statements out of the OCC) that before the year is out stated income loans will be toast. This is going to be lots of fun for the homebuilders and the housing industry in general. It needs to happen, but it is not going to be pretty. If you want to know why I am quite sure this is going to happen, read this document. The salient part of it is:

"Let’s not sugar-coat what’s going on here. The practice of inflating income is at best misleading, and at worst, fraudulent. Yet if the studies are to be believed, it’s a practice that has become widespread in the riskier loans in the mortgage market."

Any questions?

The speaker? John Dugan, Comptroller of the Currency on May 23rd of this year. You know, the guy who can make that happen? Yep.

To add to this, we got another Hindenburg Omen today and the S&P closed under the 50 (not by a lot, but under is under!) There goes your first-level support. 1490 is now the critical number; if we close under that decisively, odds are very high that a major top is in and the trend to the upside has been broken, although I want to see the Dow Jones and Nasdaq also break the 50 - which they have approached but not yet done.

In addition, if there was a McClellan on the Nasdaq, we'd have a Hindenburg there too. Some people have said that the NYSE isn't "really" the right thing to use for this because of all the "bonds that trade like stocks." Well, that doesn't apply to the Nasdaq, and it too had New Highs and New Lows both over 2.2%.

Finally, Goldman broke the 50 decisively to the downside.

If you remember my list from here, we now have:

• The S&P closes under the 1490 level. NOT YET.
• China blows up (stocks). NOT YET.
• Goldman, Bear and Merrill close under their 50s. NEW SIGNAL TODAY; Goldman. All three now below. CHECK.
• HGX breaks trendline support. CHECK (from the other day).
• The Nasdaq (and Dow) break their 50s. NOT YET.

So we've got two of five, with two of the remaining three one more solid selloff away. The Nasdaq will breach the 50 at 2564, while the DOW does at 13,321 (about 40 points more down.) Monday, depending on China's action Sunday night, could reach all three targets, making five of five.

So what do we have to look forward to here?

This is my thesis, which you might note hasn't changed much over the last three months......

We have ~$300 trillion in notional value of derivatives flying around. If even 1% of those go boom, that's a $3 trillion dollar explosion - to put this in perspective, the US GDP last year was $13 trillion dollars, give or take one. That is an absolutely huge amount of money and no amount of "pumping" by the Fed or anyone else will stave off what is going to happen when it detonates and the Fed knows it.

Worse, foreigners have gotten a whiff of the stink and they're bailing on both the dollar and treasuries. This is ominous because as treasuries mature they are effectively "bought back" and a new sucker, er, investor is required to take their place. If this fails to continue at any point real interest rates will rise precipitously - they could shoot as high as 10% in a month's time, as the government will be forced to raise the offered coupon in order to finance its debt! There is really no other option, and the fear of this event - if that dynamic gets going and cascades there is no way to stop it as it is totally beyond US borders - will keep the Fed from attempting to keep the party going for much longer. As evidence of this, the TOMO activity (liquidity flush) from the Fed this week has been enormous, yet it has had almost no net positive effect. The taps are now being slowly closed, as despite the rise in bond prices the Dollar has resumed its slide, especially against the Euro and Pound. This is very likely to continue.

Next, Japan's government is getting very concerned about the effects of a forced "fast unwind" of the carry trade on their economy. They're wising up, and as a consequence they're starting to jawbone about doing something to slow it down. The market is responding by unwinding some of these trades to avoid being caught "offsides" if Japan decides to get truly aggressive. FX moves that go against you will BURY you in short order - the FX markets are amazingly liquid but margin capabilities are crazy in those markets. What this means, however, is that adverse moves have a habit of wiping people out even when the move as a percentage is quite small. This is certain to continue.

The government (ours) is very unhappy about the idea of people risking someone else's money yet treating the gain as a capital gain when they're right - and someone else's loss when they're wrong. This inequity is almost certain to be corrected, if not now (assuming Bush vetos it) down the road after the '08 elections. This change, by the way, needs to happen - carried interest is really more like a bonus than a capital gain, and while I know the hedgies and such will scream, they better get used to the idea because down the road I think it is a near certainty that the treatment will be revised. This will put a damper on private equity and LBO activity.

Real inflation is running close to 10% annually in the US. Eventually, the politicians and bankers will be forced to deal with this by raising the Fed Funds rate to defend the dollar, because most of this inflation is occurring via FX disadvantages in imports. Why forced? Because if they don't more and more nations will break their dollar pegs, a trend that is already starting in the Middle East - not a good place for it, given that we buy OIL from there. This is certain to play out over the next couple of years and will further drain the liquidity pool.

The OCC (regulators of banks) has said (if you read the right sorts of places) that stated income loans are likely to be restricted severely or banned outright this year. Guess what that will do to what's left of the bubble? Yep. Bye-bye. Return to rational valuations or you cannot sell the house. Period! By the way, this is probably the fairest way to solve that particular problem - and its a problem that needs to be solved. This process is very likely to move forward, with a formal comment period after the proposal is put out sometime this summer.

Companies that levered themselves up by buying back stock with debt and other cute financial tricks will find the cost of financing that debt has grown precipitously. When you have a D/E ratio on your balance sheet of 8:1, even small changes have ruinous impacts on your profits. This is nearly certain to hose entire sectors, especially mortgage lenders and home builders, who are in the worst possible position to be able to afford it. This trend is very likely to continue.

That's it for now - may update it later this evening or over the weekend.

Labels: Credit Market Instability, Hindenburg Indicator, Hindenburg Omen, Hurricane Warning

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