The Market Ticker

Thunk.... as in Oil Thunk? Or as in Treasury Thunk? Or as in Market Thunk?

The list of the "Bear Market" indicators I believe are important can be found on the forums. We appear to be in the process of seeing a confirmed break on the Chinese markets, which is a big deal - I'm not yet buying it, as China has shown an amazing ability to blow up and then somehow stuff the cat back in the bag, but if this 3-5% a day stuff goes on for much longer its going to start a snowball effect and from there who knows where the bottom is. 30% is on the lower end of what I'd expect there as a "correction", and those who were late to the party over there are going to get severely screwed. Psst - a 2,000 target for the Chinese Markets is not out of the question - at all - on the swoon.

Now the argument is often made that "oh this won't matter to anyone outside of China" because it is hard for foreigners to invest there, and even harder for their people to invest outside of China. Sorry, no. China's investment link to us is indirect, but it exists. As their biggest sucker, er, customer, spillover is impossible to contain.

More interesting to me is that the financials are unable to get back over the 50. This is an important marker, it is currently flashing a big fat red light, and the 50 is now serving as overhead strong resistance.

Dealflow is being (intentionally?) misreported by CNBS and others. This is no surprise - keeping the party going is important to a lot of people, and they'll try to hold that up as long as they're able. But facts are facts, and the facts are that the credit markets are getting very, very nervous. Spreads are widening, "covenant lite" deals are basically impossible to do any more, "fun" features like Toggle Bonds are being rejected out-of-hand, and debt offerings are being pulled.

The latest is ServiceMaster, which is particularly important as this is an LBO deal that is in process and now appears to be in jeopardy.

"Wall Street bond underwriters called off a $1.15 billion sale of junk bonds on Tuesday that would pay for a leveraged buyout of ServiceMaster Co., a lawn-care and pest-control company. Instead, ServiceMaster received its financing from a bridge loan directly from the underwriters, which they hope to replace in the coming months."

You hope, says I. Or is that "you dream"? We shall see!

My bet is on the bags being assigned. The LCDX says I'm right on that one too, showing even more deterioration on these deals, now up to 197 bips, ten more than Monday. Scare? I don't think so - that's real deterioration!

And oh, by the way, the 10 is back over 5.1%, and Mr. Market appears to have taken notice.

Oh, and Url. Yes, our friend Url. If you're an oil company that's great. If you're not, well, let's just say that 7-handles on oil suck for equities because higher fuel costs are a "hidden tax" on virtually everything. Oil stocks built today and prices came down a bit, but are still north of $71. The equity markets popped up a bit on that data - we'll see if it holds.

An interesting article in The WSJ is indicating what I have often seen as a concurring indicator of market tops, which is that office rents are soaring:

"Office rents are skyrocketing across the nation, driving up costs for businesses large and small, thanks to a dearth of space in some major markets and a new breed of deep-pocketed landlords who can afford to hold out for premium tenants."

The problem with this, of course, is that driving up the price of office space inevitably will crimp profit growth and that heads directly to your P&L. Decreased profit growth means multiple contraction. But it is, by the way, why commercial R/E isn't - yet - exploding in people's faces.

The key word here is "yet" - because in a recession commercial R/E of course has this little problem with businesses that don't pay their rent (and ultimately go under!)

As for that highlight in the quote I put up there? Yeah, they're deep-pocketed all right. What's their leverage ratio look like? What looks like "deep pockets" may be nothing more than creative CMBX financial engineering, and when that blows out, well...... Let us not forget that the last few times this sort of "deep pocket" game has been played there have been some tremendous deals to be had on office space.

Let me give you one example - during the 90s I needed office space for my firm, MCSNet. We were absolutely shocked at the prices being asked in Chicago. Until a little electronic publishing outfit got absorbed and just walked off on a third of a floor in Two Prudential downtown. And I do mean walked off - they basically told management there to get screwed - you know how this works - "sue us if you don't like it" sort of talk!

So MCSNet found itself with 8500 square feet of PRIME, Class A office space at what could only be called a "very attractive" price. A nice five year deal was struck, and boom - in we went. At about half of what competing office buildings had quoted us for similar facilities.

You think this won't play out again? Don't bet your portfolio on it.

Oh, and Britain raised interest rates today, saying:

"Bank of England policy makers raised interest rates for the fifth time since August and said they're concerned inflation will stay above their target, adding to investor speculation that another move is likely this year. "

I wonder if they're looking at real inflation instead of the fraud called "core" here in the US? The ECB declined to follow suit, but left in place a bias towards higher rates - which I expect we'll see here soon from them.

This, of course, makes US bonds less interesting to foreign investors, and England isn't exactly some "third world country" when it comes to safety. Expect to see more foreign funds rotate out of our rapidly-devaluing dollar and into places where it actually earns a real return. Ultimately, this will force Bernacke and friends to raise rates here - the only remaining question now is whether it will be before or after your sneakers at Wally World cost $100 a pair and the Nikes are $300.

The surprise to me here is the strength in technology. Under the surface this doesn't look good at all. I'm short AMAT on the basis of overhang in the industry and weakening pricing power. So where's the love? Pricing power problems translate into strong tech stock prices? Hmmmm.....

What I see instead is people playing the "multiple expansion" game in a handful of names, especially RIMM and GOOG. This is a fools' game guys. Chasing this sort of trade is going to get you killed. Yet it is essentially all of the Nasdaq's rise over the last 12 months. Take the ".COM of 2007" moonshots out of the index and you have a Nasdaq that is actually trading lower over the last 12 months.

Now tell me when the last time you saw P/E multiples of 50 that were sustainable. Oh, like.... never! So maybe you can develop a thesis for how this ends in anything other than tears? I don't see it guys; the market is once again playing the "we have to put the money somewhere, so it may as well go to GOOG!"

I remember this with Marketwatch. Anyone remember Marketwatch? That one sticks in my mind because it was one of the issues I got allocated on the IPO, only to see it pop huge at the open.

I sold into the rush on the opening day. That generated a nasty call from my broker at the time, who basically threatened to never give me another IPO allocation. My answer to them was quite simple - "The profits on the trade are now in my bank and allocating me shares in a company that is going to go bust and cost me my entire investment, with an 'expectation' that I won't sell when and where I feel like it, is not my idea of sound money management." They hung up.

Needless to say most of those .BOMBs did indeed explode.

While RIMM is definitely not a zero, the multiple they're trading at today is totally indefensible, especially when one looks at their balance sheet. This is a company that should be trading in the double digits, not north of $200 a ticket!

Or, if you prefer, how about GOOG? $534? Who are they kidding? P/E of 47. Amazon - P/E of 116? Apple - P/E of 42. RIMM, by the way, has a P/E of 56?! FIFTY SIX?! What the hell are you doing buying a stock with a P/E of FIFTY SIX? Do you really think this company can deliver FIFTY PERCENT EPS growth off organic growth - no balance sheet games - for the next TWO YEARS? Never mind one with a P/E of ONE HUNDRED SIXTEEN?

Horseshit!

Anyway, the long and short of it is that we're back in "overextended" territory and this is why one of my leading indicators is the Nasdaq breaking down. I know, I know, "this time its different." Ok. We shall see. My answer is "Watch the 50" and when its breached convincingly short the hell out of everything, especially if the Dow has breached too.

You listen to Cramer (who was pounding the table again telling people to buy Apple HERE) you're going to get you ass handed to you. Let's not forget his identical claim in March of 2000 eh? How'd those picks work out for you JIM? Too bad you can't be sued off the planet for telling people to buy those overpriced pieces of dogsqueeze!

I keep hearing people say "we're not in a blow-off top."

Oh yeah?

Then defend a stock trading with a P/E of ONE HUNDRED SIXTEEN, and three more trading with P/Es near or over FIFTY, ALL OF WHICH ARE CALLED MARKET LEADERS AND ARE THE ONLY REASON WHY THAT INDEX IS MOVING HIGHER.

As for BX buying HLT, a word to the wise - they overpaid. Better hope that we don't see some sort of economic slowdown or hotels aren't going to be such a great place to put your money eh? Of course this deal "is not contingent on financing." Uh huh - pull the other one. Its a cash offer but its only something like ten percent BX's cash - there is financing involved, and if it can't be syndicated then you're going to see the calculus on that one get real interesting real fast. Guess who one of the "big dogs" is on that deal. Bear Stearns. Oh boy.

In fact I'm pretty amused on this whole BX deal and looking for a good short entry. I'm not sure exactly where it is yet, but I'm pretty confident that they'll be a good short in the not-so-distant future.

Today's big move is actually in the Treasuries. I suspect, from the chatter I'm hearing, is that this is yet more unwinding (or attempted unwinding!) of collateral in hedge fund holdings. You know, attempts to meet margin calls? Yep. Mr. Hedgie had a bit of stress over the 4th perhaps? It sure looks like someone dropped a Mickey full of Viagra into the 10's yield chart this morning.....

The key here is that the 5.0% level has held convincingly and we're now moving back higher. This is at least somewhat likely to continue and is not good news for syndicating deals, especially when you add widening spreads to the picture on top of it.

Watch that 10! The gap up this morning was strong (yield, big down on price) and it has powered onward from there. IF this is indeed more hedge funds trying to dump treasuries to raise funds and meet margin calls, then you've just seen the antennae on a bunch of cockroaches peek out from the woodwork. There may well be a serious swarm of those suckers scurrying around looking for cover over the next few days and weeks!

In the aviation world when you hit a mountain due to inattention its called "controlled flight into terrain." I suspect that'll be what we'll be calling the Market's trajectory soon too if the 10 keeps it up.....

I believe that the people buying into the rally of the early part of this week will be soon proven to be very seriously mistaken about the future direction of the markets.

There is clearly an "underlying bid" on the market, as expressed over the last few months. But there are also reasons to not be sucked in, the most serious of which is the apparent contraction in the credit markets, especially given that the market's rise over the last year has been almost all caused by a LBO/Liquidity "rush."

That "rush" can turn into a "sucking sound" with frightening speed - it has before, and it will again. While we cannot know in advance exactly when, the fact that it can and will happen in the future isn't really open to debate - that's a given.

On the mortgage lending front, don't you believe for a second that Congress is done. Especially not when you see lawmakers saying things like this:

""The mortgage brokers are the wild, wild West of mortgage finance," Sen. Charles Schumer, a New York Democrat, says in an interview. "We need to bring a sheriff to town.""

That'd be a leading Democrat - you know, the party in control of both houses of Congress? Yeah. While I'm no fan of Chucky Schumer on this he's right -we need serious reform - and regulation - in that part of the industry. I know this will pizz off a lot of people, but facts are facts, and the predation in the "serial refinancing" forcing that has gone on the last couple of years is a big part of the mess we're in now. One suggestion - ban YSP under federal law. Another - put a fiduciary standard on mortgage brokers. The latter would open the door for recovery by homeowners who get roped into the "serial refinancing" game and have their equity siphoned off. Perhaps we'd see some of those broker BMWs end up in the driveways of duped homeowners. IMHO, that would be an improvement.

In an article in Fortune, we've now got the Ohio AG on the case with the ratings agencies. To this I can only say - its about damn time.

"While Bear Stearns is the most recent financial institution to find itself caught up in the subprime-mortgage quagmire, the three credit-rating agencies - Standard & Poor's, Moody's and Fitch - may be the next ones to see their good names dragged through the mud.

The reason? Ohio attorney general Marc Dann is building a case against them based on the role he believes their ratings played in the marketing of risky mortgage-related securities."

Only one problem with that byline - "good name"? Not in my opinion! S&P in particular has admitted that its models did not take into account home prices that failed to rise significantly every single year. Yet have they gone back and re-evaluated all of these deals with new model data now reflecting actual market conditions? HELL NO! Neither has Moody's or Fitch.

WHY THE HELL NOT? In EVERY area of business I've ever been involved in - and I've been involved in a number of 'em, from software development to corporate operations - when your model assumptions are proven wrong you go back and re-run your models with the now-revised assumptions.

Yet none of the rating agencies have done that. NONE! ZERO! Yes, they do their usual "annual reviews", but this is like a corporation discovering that they got ripped off by a crooked accountant but then refusing to go back and re-examine their previous balance sheets and only "looking forward", saying "oh we'll look at how that impacts things when we file our next annual report."

If this is not active and intentional ignorance of a tectonic market shift I don't know what is! The obvious question is "Why would you do that if you're Moody's?" and the plausible answer is that they derive all of their money from those companies issuing the debt!

So if they piss 'em off, they make no momo.

Conflict of interest?

I certainly think so and it appears that so does the Ohio Attorney General!

If the SEC and FBI won't get involved (and they damn well should), perhaps the states need to go after this. SOMEONE has to get on this issue and hammer these guys; the pension fund exposure is where my concern lies; as I've said many times I don't give a good damn if every broker/dealer involved in this crap goes under, along with all the hedgies who took the bad bets. My fear is that the pension funds eat this and that gets dumped on the taxpayer through the PBGC.

Kudos to Ohio.

What was amusing today watching CNBS was how in the morning we had a good bit of cheering on the markets as they advanced. Then the advance turned, and suddenly the talk was all about IPhones. Gee, surprise eh? Its amusing watching this on the "media" as the usual saw is that the Media loves bad news and thus you'd expect they'd be all over declines and ignore advances - but perhaps the truth is a bit more perverse, and that it all devolves down into "whatever sells ad space." Then Apple and RIMM do a rocketshot and suddenly its all stocks, all the time, so long as we remain focused on the Nasdaq.

And who advertises on CNBS? Brokers, mortgage companies, et.al. Gee, how much money does Scotttrade, Fidelity and Tradestation made if people say "screw this!" and sit in a money market for six months? Yeah, I know, its a rhetorical question.

In the markets today we have big divergences in the internals once again coming to the fore. The S&P, for example midday, is down four, with the A/D line looked like crap - about 2:1 decliners. But capital flows are almost 4:1 towards advancers, meaning that there are a few strong players holding up the index, and absent them, the market would be for total crap today. Who's driving it today? Names like Hilton (HLT) and Wyndham (WYN) along with, of course, Apple. Likewise, the Nasdaq has similar patterns; the names change but the divergences do not. The Dow, however, is internally consistent with both the A/D and Capital Flows reflecting the direction of the index as a whole.

Second rhetorical question for today: Do three or four names out of 500 make a market strong? Or are they going to suck in a lot of folks who are going to get buried when those names turn and follow the broader market - as they eventually must. What happens to those folks when AMZN trades at a P/E of TWENTY, or RIMM trades at a P/E of 25? Apple at a P/E of 25?

Oh yeah, let's not forget one of my favorites - the VIX was up today. I think the right word here for the market is "nervous."

Hope you can excuse the somewhat-rambling style today - the fun and games are coming hard and fast, and its tough to keep up...... but it sure is amusing to watch.

PS: The bond market closed at 5.144%. That's a blast-off any way you care to count it, up almost 2% on the day. So much for "going back down under 5%" eh? Are increased borrowing costs good?

BTW, if you have lengthy commentary, please take it to The Forums. Its tough for people to track it in both places..... Thanks!

PPS: Immediately after the close the S&P futures dropped off right around 2 full points and so did the Nasdaq Futures, and I'm not sure that its over. That smells like a margin call. We shall see in the morning, I suspect.

Looks like it may be starting that way.

Lots of people are blaming the 10 for the deterioration in the futures this morning.

I suspect its more likely the cockroach theory being proven once again correct:

"Two hedge funds that invest in subprime mortgages have run into trouble, with one shutting down and a second stopping investors from withdrawing their cash."

Gee, there's only one problem with Bear Stearns, right? :->

I love the claim that the LBOs are still going strong. Nobody reads Bloomberg eh?

"``There are some very scary analogies between high yield and the mortgage market,'' said Kevin Lorenz, a managing director who oversees $2.5 billion of high-yield assets at TIAA- CREF in New York. ``You cannot do fundamental analysis and believe that those are creditworthy companies.'' "

Heh heh..... the disinformation campaign continues...

We shall see what Mr. Market thinks of all of this today...... more later!