The Market Ticker

Here's a sampling of the WSJ content (with one from FT) right now, most of which are going to hit the street tomorrow....

"In another sign of these ripple effects, Fitch Ratings released a report yesterday raising cautionary flags about the commercial real-estate market. It projected rising defaults in this sector after years of increasingly lax lending standards, which could hit bonds backed by commercial real-estate loans."

No, you think? The CMBX says this has been going on for a while. Finally, some ink.

"John Snow, the chairman of Cerberus Capital Management LP, yesterday acknowledged that investors have lost some of their appetite for debt at a time when the private-equity firm is trying to raise billions in financing for its planned purchase of Chrysler Group."

What happens if he can't fund the deal? Think the markets will "take it all in stride"?

Then there was the misdirection of the day, this ditty on SLM:

"Shares of SLM Corp. plunged nearly 10% after the educational lender, better known as Sallie Mae, said legislation that would slash federal subsidies for student loans is threatening a pending $25 billion leveraged buyout of the company."

In a word, bullshit.

As I see it what's threatening the deal is the LCDX spreads. That's an index covering the cost of borrowing money for LBOs, and guess what - they're yawning wide.

C'mon guys, tell the truth.

I wonder - were debt spreads partly responsible for this?

"General Electric Co. and Abbott Laboratories abandoned their $8.1 billion deal for GE to buy two Abbott units that make medical-diagnostic equipment, leaving each company looking for other means to an important end."

Oh, and let's not forget this:

"“Meltdown.” We are careful about using such terms at The Wall Street Journal. They can have their own consequences for markets. And having lived through a few real meltdowns, we have found it helps not to get too wound up every time a market corrects.

But avoiding the M word just got tougher, since we see it now deployed by Standard & Poor’s Leveraged Commentary & Data service. In a report released just minutes ago, it quoted institutional loan traders, who are using that fateful term to describe the current state of their market: “Meltdown.”"

Or, if you prefer a more "continental" flair....

"European credit markets are feeling some of the same chill enveloping the U.S., as debt comes under closer scrutiny and new borrowers shy away from rising interest-rate costs.

Yield spreads on a benchmark European credit index jumped wider for the second day, raising fears that the troubled U.S. subprime housing market has dented the appetite for European corporate credit."

That's all on the WSJ's page - right now.

Ok, the "Meltdown" story is a day old.

One more....

"Investors in European and US credit markets accelerated their flight from risk on Wednesday as the turmoil from the US mortgage markets continued to spill over into other asset classes.
.....
JPMorgan observed that swings in derivatives prices were so extreme they implied “scenarios in which the core of the global liquidity system suffers a serious assault”. But it stressed “the meltdown in the credit indices seem completely at odds” with trends in the real economy, implying it should be reversed. "

Oh. Really? Is that good?

People will read this tomorrow.

All in one day.

No, there's no problem in the credit markets.

If you say so.....

Psst - don't look at carload tonnage on the railroads over the last few months either.....

Right of the cliff, that is..... or is it?

Leading the day was the MBIA claiming that mortgage apps have increased.

Of course applications do not equal approvals. One must wonder - are people "spamming" the mortgage lenders, desperate to try to get financed? There's no good way to know from the statistics. Refinance apps are down big however, which suggests that people are hitting the wall and not even trying to dig out, while perhaps would-be buyers are attempting to get money - but whether they can is another matter.

On Bloomberg this morning we found this interesting tidbit on the Subprime "contagion"

"On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn't what they get. "

Really? Wow. (snicker)

By the way, don't buy that "90 billion" number. There's a zero missing. Why? Because, well, Subprime is 10% of the problem. The other 90% is ALT-A and people still aren't fessing up on that one. They will!

Swap spreads went batshit in Europe this morning; this is likely to continue.

"Corporate bond risk soared in Europe by the most in at least three years as debt rating downgrades on U.S. subprime securities triggered a worldwide selloff, according to traders of credit-default swaps."

This is absolutely NOT contained. That's general corporate, and guess what - commercial R/E is in there too, although its only mentioned in passing.

The problem here for the LBO/PE guys, who have been propping up the markets for more than a year now, is that they can't get the deals priced and out into syndication. That's a problem, because for those deals without a financing contingency it means the banks which provided the bridge financing get stuck with the bag - and they definitely don't want it.

This is the marker to watch in the coming next few weeks and months. If the debt issue market seizes up, and it looks like it may, the premium associated with "buyouts" and "private equity" in the general equities markets will disappear off the indices with alarming speed. This, conservatively, takes us back to the lows of the summer of 2006, or down into the 1220 area on the S&P - that's a 20% correction.

Ryland (RYL) warned and expects a big loss in the current quarter. Big shock? Not!

"The home builder expects to book additional pre-tax charges of $145 million to $155 million related to inventory impairments and write-offs related to assets in Arizona, California, Florida and Nevada."

This is some sort of "surprise"?

This morning's open looks like plenty of "wishes and dreams" and a small oversold bounce in the builders, but it certainly doesn't appear to be holding - not even for a few minutes. Clack-clack-clack........ anyone know what comes next? :->

The dollar is getting creamed, especially against the Pound and Euro. This is still being largely ignored; that's unwise. We are sitting right on the lows and if we punch through things are going to get very interesting very fast.

American Home (AHM) has quietly executed huge layoffs:

"American Home Mortgage Investment Corp., the Melville-based real estate investment trust, has laid off hundreds of workers without notice or even time to clear out their desks, current and former employees said this month.

The company, which holds diverse interests in mortgage-related securities and retail lending, was once considered a highflier, posting double-digit growth quarter after quarter in recent years."

But everything is ok, right? No systemic risk, lenders will be all right, the strong will make even more money eh? Countrywide will be fine.... oh wait - perhaps they're not? God I wish there were AHM shares available to short.... I've wanted to short that pig for months with all the financial "engineering" they've engaged in....

The 10 is stable this morning, flat so far after doing plenty of gyrating this morning, sitting right near 5.04%. But then, it took off, closing at 5.08%. Shades of things to come? No - the reversal of the 'flight to quality' from yesterday. For now......

The internals in the market this morning showed divergences again that have been the hallmark of this market since the early June highs. Capital flows are significantly negative even though the indices themselves were slightly positive to flat. The direction of the break is difficult to determine from this, but the bias is certainly to the downside. On the other side there is a mighty attempt being made to find a base and rally - but.... on the basis of what?

And, right on cue, those divergences showed up as selling...... just before 10:00 ET - followed by a buying surge. Clearly, conflict rules the day - we shall see what the remainder of the day brings.

NAR's latest housing prognostications came out, and are being revised, no surprise, down. Of course the pump monkeys think '08 will turn around. But didn't they say that about '07 last year? I do recall something about a recovery in '07 coming out of those clowns..... Of course asking a Realtor about whether or not its a good time to buy a house is kinda like asking a car dealer if now is a good time to buy a new car!

Of course if you don't want to dig around to find the real news in there (and its all bad!) you can just have someone else do it for you....

"U.S. home sales and prices will fall further in 2007 than earlier expected, the leading realty trade association predicted on Wednesday.

The National Association of Realtors trimmed its sales forecast for the fifth straight month and also widened its predicted drop in existing home values."

Energy numbers out today - Decline in crude supplies of 1.4m barrels, build of 1.2m barrels in gasoline, distillate (diesel/heating oil) up by 800k barrels. Bottom line - mixed news, refinery utilization now 90.2%, which jives with the build but much lower than expected (92-93%)

The oil market didn't move much and the general markets didn't move much on the news either - call it a null for the day on energy....

Bucky (the dollar) continues to decline and is now at a new low - again. This is now getting to be extremely serious and is threatening the 80 level with some authority. The equities markets are ignoring this - for now - but you'd be wise not to! Clearly, the bet is that we will bounce off that level and it will serve as support, as it has before. While this sounds all fine and well the risks here are enormous if 80 falls.

In the "pull the other one" department today, we have this:

"The U.S. Securities and Exchange Commission's market regulation director said on Wednesday the Bear Stearns Cos. Inc. hedge funds facing severe liquidity problems will "be able to unwind in an orderly fashion.""

You didn't get the memo from S&P and Moody's, did you?

Oh, on that LBO deal flow coming apart? Try this:

"SLM Corporation, commonly known as Sallie Mae, today announced that, in connection with the April 15, 2007 agreement providing for the acquisition of Sallie Mae, the acquiring entity, owned by affiliates of J.C. Flowers & Co., Bank of America and JPMorgan Chase, has informed Sallie Mae that it believes that current legislative proposals pending before the U.S. House of Representatives and U.S. Senate "could result in a failure of the conditions to the closing of the merger to be satisfied." Sallie Mae strongly disagrees with this assertion, intends to proceed towards the closing of the merger transaction as rapidly as possible and will take all steps to protect shareholders' interests."

What a load of crap. How about "we can't syndicate the debt at a price that works for us any more."

Naw, that'd be the truth, and we can't have that.

Close it "as quickly as possible" eh? You mean "aw crap we need to find some bagholders FAST before we end up EATING this dogsqueeze!"

Why do I think this? Simple. This legislative push is not new. It is, in fact, over a month old! So why announce this now? Why not when the legislative threat first appeared? Its simple, really.

The LCDX spread is now up to 224.4 midday, and 228.8 at the close. This from 217.4 at the close yesterday. That's the buyout money premium in spreads over "safe" debt, and it continues to YAWN WIDE.

That's eleven bips in one day today, on the back of 15 yesterday!

You want to know why deals are blowing up?

There is your answer and when the LBO premium comes out of the equity markets - and it WILL - the markets are going to look like this:



And before the comments start about "The PPT", there is no need for a "conspiracy" for them to say its for reasons other than the real ones. The only reason they need is called "Force Majure" (in other words, "not our fault") and the fact that all of these deals have a divorce fee in them. If they can claim some exogenous regulatory change, they don't have to fork over the divorce fee!

In individual issue news items, Countrywide (CFC) traded over 13,000 $30 PUT contracts for July today. That contract has no bid, which means they were bought. That's an absolute lottery ticket but if it pays off...... you have to wonder - does someone know something? That's so crazily out of the money and expiring next Friday - there's no way that's rational unless someone is very sure that the company is going straight in the crapper within a week! The stock is trading near $36 right now! That is almost certainly an institutional bet as the per-contract cost for a retail investor would be positively prohibitive.

For "why would someone do this", you could look at AHM today. Down almost $2, or more than 11%, on the news leak about layoffs. Subprime contagion, given that AHM is nearly all ALT-A? Hmmmmmm.....

(In all fairness, it may simply be cheap insurance against a disaster. $64,000 worth of cheap insurance that the buyer completely expects to lose. But still.... unless you're concerned that there might be a disaster, why would you flush $64,000 - that expire before earnings?)

AP had this to say on the price deterioration in the ALT-A space:

"Shares of some mortgage lenders fell Wednesday as investors worried that problems in the subprime mortgage market could spread more widely in the industry.

"If it gets worse, the next area to see losses and price declines is the alt-A market," said Bose George, an analyst at Keefe, Bruyette & Woods Inc."

Hint to the peanut gallery: Its gonna get worse guys - lots worse. You didn't get the S&P or Moody's memo either, did you? Maybe that PUT buyer really does know something.... hmmm...... boom-boom within the next week and a half eh? Double-hmmmm.....

By the way, we have another Hindenburg today! New Highs and Lows are solidly in the "yep" column. McClellan is negative; Hindenburg Observation for today is CONFIRMED.

In the "we don't bother with things like earnings" department we have the following big misses this morning which were totally unreported: Mercantile Bank (MBWM) - almost 50% under estimates, and Sealy (ZZ), 17 cents .vs. 22.4. Let's see, we've got a bank and a consumer "durables" maker...... that's not so good, is it? I can see not reporting Mercantile on CNBS, but Sealy?! That's consumer durables in the mainstream, is it not?

Ruby Tuesday - big miss, 46 cents .vs. 53 cents, revenues down as well as profits. Same-store sales down 3.9%. Oops. Oh, they said they were going to buy back more shares. Tee hee. One must ask - with debt? How about improving the performance of your company instead! Sheesh!

Yum beat, with revenue up 8.5%, 0.39 .vs. 0.34 estimated. The story? International growth and flat demand in the US, with the biggest growth in China (Surprise? NOT!)

Motorola warned and now expects both down revenues and losses, with down demand in Asia and Europe blamed in the mobile device (handset) segment. They also no longer expect the segment to be profitable at all in '07.

So we've got the same story in play that we had before; there's growth internationally but domestic business sucks. Population goes up, sales go down. Oh, except for Motorola which just plain sucks!

How 'ya gonna spin this one guys?

Oh, our good buddy ABX? He's down - again. How 'ya like these pictures?

BBB? You're kidding, right? Try this:


Check it out at Markit - and while you're over there, look at the CMBX (that's commercial real estate); they hit records in the wrong direction across everything but AAA today as well - and AAA is getting there.

You don't think the mortgage bond market window has been smashed in by the mob, then boarded over with no hope of it re-opening any time soon, do 'ya? Nawwwwwww....

There was a burst of speculative buying in the futures going into the close; that may prove to be a severe bad bet but was responsible for the "lift" we got in the indices going into the close. We've got regional banks reporting big trouble, the ALT-A space appears to be imploding, and so far our consumer sector names who have reported haven't been doing very good. We've got same-store sales tomorrow. It'll be quite a chuckle if those numbers are bad; the guys buying into the close on the futures side are lilely to find themselves trapped.

In a "programming note" the forum now supports embedded YouTube videos. Look in the "Suggestions" for info on how to use it; since there are people who want to be able to link 'em, this seemed appropriate and even easier than linking off-forum for what are often hilarious clips of one sort or another.....

Discuss it here!