The Market Ticker

No, really!

Now that's not something I've seen lately. CURBS IN. Booya!

It is trash day here. Big green carboy thing that goes to the curb in the morning.

In there today we have a whole host of stocks, including my favorite whipping boy, Countrywide Financial (CFC). All I can say with this one is - its about damn time. Gee, got PUTs? And here's the best part of it - a big part of their problem this time around were prime loans! Oh oh..... prime loans eh? I thought this was just a subprime story, confined to those with crappy credit? Maybe, just maybe, its really a RECESSION story, and its staring us square in the face!

I guess it was the wrong move to take the PUTs off yesterday. That's ok - I have plenty of others in the lending sector, and they're going to be standing proud today. You know, bears, bulls and pigs - don't be a pig, be happy.

McDonalds (MCD) reported a loss on sale of Latin American restaurants, but inline otherwise. They're getting hammered a bit, but not too badly.

DuPont (DD) reported flat profits; no material gain year-over-year at all. That's not so good! I thought globalization was going to save everyone? Oh wait - its not! Hmmmm...... let's see, CAT and now DuPont? Maybe this housing market spillover thing really is bad? For how long can you ignore the evidence right in your face?

KKR, one of the big "hedgistan/PE guys", are having all sorts of fun today, apparently deciding that they're going to force banks to eat deteriorating bridge loans. That could blow up in their face, if not immediately, down the road. They're known as hard-nosed negotiators but there is this saying about biting the hand that feeds you...... It may also roach the LBO/PE market generally, especially if it causes actual losses at those banks.

And then you have this:

"If you look carefully, you can almost see the mangled and bloodied bodies of the CDOs, the CSDs, the RMBS and the other shaky debt-instruments being pulled from the wreckage and tossed unceremoniously on the bonfire.

Is this how it all ends?

The first whiff of trouble in the housing market and then—in a flash--all the funds in 'Hedgistan' begin teetering towards earth? 'No Value' - 'No Bids'"

Hehehehe.... you think?

Or, if you prefer....

"The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners.

Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $3.7 billion in the U.S. this month from $42 billion in June, analysts at New York-based JPMorgan Chase & Co. said yesterday. The market is 'virtually shut,' the bank said in a July 13 report."

Or for that matter:

"The cheap financing that fueled the leveraged buyout boom is over, according to Bill Gross, manager of the world's largest bond fund."

Oh, is that good? Or is it just accurate enough to say "Told 'ya so".

And let me remind you - the premium I calculate on the S&P500 due to the implied threat of an LBO on virtually anyone? THIRTY PERCENT. Now think about what the averages look like with that gone. Oi!

Then there is this - putting the lie to the claim that "this is all subprime". In a word: bullshit.

"Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc."

Apple (AAPL) got roached in the premarket this morning. Its about damn time. The cause? A CIBC report out which alleges that iPhone demand, after the initial Jim Jones KoolAid Rush, has fallen off precipitously. Not helping was AT&T's report, which while ahead of estimates, did not meet expectations. There were "street" expectations for up to 700,000 activations in the last two days - the real number came in at 146,000. Also rumored on the street are very high "buyer's remorse" returns, permitted under law everywhere on new cellphones, typically within either 2 weeks or 30 days. Its about damn time; Apple is just about the definitition of an overvalued stock. It will be interesting to see how we trade through the day on this one.

The market's action today could only be described as panic selling. Countrywide kicked it off and it only got worse from there. The DOW finished down 215 points, with the S&P down nearly 30 and the Nasdaq off almost 50.

Amazon reported sales up 35% and EPS of 19 cents, estimates were for 16 cents. The market spiked them down hard initially, then up a bit, but is now trending back into the trading range for the day before rebounding a bit. We will see how that one plays out; note that the stock sold off nearly $3 in the last two hours of the regular session, so the claimed "aftermarket spike" isn't really very accurate. Guidance was raised just slightly for the year. Gross operating margins came in a 4% on a GAAP basis, which is pretty decent. (Maybe someone can tell me how a company earning 4% can justify this sort of P/E?!) In any event it appears that the street's "first level" take on it appears to be pushing the shares higher - a lot higher, approaching 10%. Psst: you might want to look at what is happening to the housing and banking sectors! How do people spend on all sorts of crap when they're getting pinched?

Centex (CTX) reported a loss of $1.05/share (versus estimates for a nickel a share) and was immediately hammered. No good way to spin this one; I guess the analyts got the "nickel" part right, but forgot the DOLLAR! The stock was hit moderately in the aftermarket on an immediate basis - like with Amazon, we'll see how this pans out overnight and into the morning hours, but I can't imagine anyone's going to like that. They also took $192 million in impairment charges, which was all their loss and then some.

Cheesecake Factory (CAKE) reported same store sales up 1.1%, which isn't all that hot, but isn't awful. Earnings came in at 33 cents which beat lowered estimates (which were dropped in the last two months.) The stock got a modest pop out of that before settling back. Of note this stock has been slaughtered over the last few months, and there's no evidence that we're going to get any sort of significant support out of this report.

The ABX continues to deteriorate and the CMBX isn't having a good day either. Ain't this pretty?

Just incredible. Never mind this one:


You have to watch out for that idiot Kudlow saying that "spreads aren't that bad." Oh really Kudlow? What do you call eight hundred basis points, with one hundred of them showing up in the last week?!

Someone needs to whack that fool upside the head with a Clue-By-Four.

As for tomorrow, it will be interesting. Amazon's report resulted in quite an immediate pop, although as I put this to bed its starting to fade some. I wonder if people are getting it through their head? CTX's report was horrifyingly bad, although it didn't move the market much - I guess after being down nearly 4%, how much worse could it get? Of course Countrywide got slaughtered for over 10% today, and the rest of Cramer's "Horsemen" didn't do so hot either, with Apple down 6%, RIMM down almost 4%, leaving GOOG the only standout - up 0.29%.

The futures, post-4:15 PM reset, are basically flat, with the S&P up 0.2% and the Nasdaq a zero, so whatever people got, they got it up front with no follow-through afterhours. So far.

Oh, one final thought - with the reports already in on the S&P, the profit increases are running at about 7%. Note that just Friday Kudlow was saying that it was 10%! Well, it was - not anymore!

Now with a 7% profit increase rate, why are you paying more than somewhere around 7-14 on a P/E? But the P/E on the SPY is 15.6, and if you take out the energy stocks its in nosebleed territory, approaching the early 2000 levels!

Watch out guys...... tomorrow is going to be interesting.

PS: We got another Hindenburg today! The final stats hadn't updated on the WSJ's page when I posted this originally, but I was alerted to it and went back to check - yep. That makes eight, I think.... including three in a row!

Horrible earnings, cut guidance, got nailed hard.

CIBC is also out with a severely negative call on Apple.

Let's dispose of the simple first - Merck (MRK) reported better than expected results and, as a DOW component, was largely responsible for the opening pop. Credit where credit is due.

Ok, on to the interesting stuff.

Heh, what's this? Expedia (EXPE) isn't buying back as much stock as they were planning to? And how come? They couldn't get the financing they wanted! Is that good? Indeed, they cut the buyback amount by eighty percent! (The stock was punished to the tune of about 10% on the news)

Now remember kids, there are no wider consequences to the credit contraction caused by risk mispricing. None at all.

How many companies have announced stock buybacks and are doing it through debt issuance? Hmmmm..... what happens when that leg is kicked out from under the stool? Anyone got an educated guess?

How'd you like to have bought Blackstone (BX) on the IPO? Trading at $26. That's a hell of a haircut.....

A funny thing happened over the weekend - the press started actually paying attention to the data on the housing market. We got this one:

"Over the next 18 months, adjustable-rate home loans sold at the peak of the high-risk lending boom in 2005 and 2006 will be reset. Given a recent tightening of lending standards as banks try to rein in their mortgage exposures, this raises the prospect of further serious losses. Christopher Flanagan, strategist at JPMorgan, estimates up to 45 per cent of borrowers facing resets will not meet criteria to refinance into new home loans."

But of course there are those who continue to whistle past the graveyard....

"On Wall Street, where the most lucrative credit markets are barely limping thanks to the worst housing slump in a decade, there isn't a chief executive officer who will tell you there is a crisis.

A few weeks after Merrill Lynch & Co. CEO Stanley O'Neal said he saw 'no clear signs' that rising delinquencies on subprime U.S. mortgages were hurting the rest of the debt markets, borrowing costs for non-investment grade companies rose to the highest in nine months. ServiceMaster Co., US Foodservice and 19 other companies have canceled bond sales because nobody wants to buy them."

So nobody will buy your crap but that's not a problem.

If you say so.

It would seem to me that this is one of those deals where people are afraid to tell it like it is for fear of people figuring out that they've been sold a bag - or three - by those very same executives.

Oh wait - there are a few people who see it that way!

"'There is a chance that wider spreads are making the situation more worrying, especially with all the leverage in the system,' Jim Reid, head of fundamental credit strategy at Deutsche Bank in London, said in a note to clients today. 'We are close to a crucial juncture for credit.'"

You think? A bit of forced selling by hedgies wouldn't do anything bad, would it?

Oh, and then there's oil. A new research note says "perhaps $100 within months." Will that be good for the economy? I suspect not.... what do you think $5/gallon gas will do?

You think buyers in the home market still are doing ok? How "ok" is this?

""I could put anybody in a loan last year," says Stephanie Gagnon, a senior loan officer at First Capital Mortgage in San Diego. But, "In the last six months, all of the big lenders are shutting down all special programs they were working with because they've realized it's bitten them."

Now, she says, "I'm turning away 50 percent of my first-time home buyers. They just can't qualify.""

50% eh? Put a fork in the homebuilding industry kids. Not that you ought to have to be told about this by now.

American Express reported 88 cents, with card-billed business up 15% in the second quarter, issuing 2.3M new cards. The market didn't particularly like the report; the estimates were for 86 cents, so I guess two cents isn't enough. Immediate reaction was to hit the stock but then rebound somewhat, finishing basically flat with today's closing price - at least initially - but is now heading lower, outside of the day's trading range. The revenue line looks lighter than forecast, which may explain the less-than-stellar response. Also, loan-loss provisions were increased by 85%, which is huge. That's not so good either. Considering that Amex tends to market towards the higher end consumer, this is a troubling read on Chucky, and it appears that market participants may be figuring it out. It should be interesting to see if this translates into the S&P futures in the morning.

Texas Instruments came in with 42 cents EPS, with revenue down 7.4%. A MISS on revenues. They are getting positively slaughtered in the afterhours and so are both the Nasdaq and S&P500 futures. SO MUCH FOR THE TECH BELLWEATHER THAT EVERYONE WATCHED LEADING HIGHER ON ANTICIPATION OF A BLOWOUT! The "instant reaction" may be a bit overdone, but the street sure as hell didn't like the report, hammering them for almost 4% immediately.

BTW, this is what "yawning wide" on the LCDX (LBO spreads) looks like....


That's a very pretty trend, isn't it?

Here's our buddy the CMBX (Commercial Real Estate)....

That AAA (supposedly "stellar" credit) chart is, well, incredible.

The BB, on the other hand, is downright "Texas Chainsaw Massacre".... if you're unfortunate enough to own any of that crap, or need to buy a swap to protect it!


Oh, we got another Hindenburg today. In Spades. Actually, let's just call it a "Double Hindenburg", because it was - more than double the required new highs and lows! That's two trading days in a row we got 'em, and this one was far stronger than the Friday indicator, despite the fact that the indices were up today.

Countrywide (CFC) reports tomorrow before the bell. I took off my Jan 08 PUTs today in expectation that they will play their "Rabbit Out Of a Hat" game again and may see a pop in the morning. If so I will get the opportunity to buy those PUTs back at a lower price and make the same money a second time. If they instead 'fess up and look to crater I'll be happy to short into the hole premarket. I may give up a bit of potential gains this way but it allows me to protect the real gains already made.

Amazon reports post-market tomorrow as well, which will be watched closely. I'll have a full report on them tomorrow evening.

All told....

The markets amaze me at times. While I agree that all of the "bad things" that "The Bears" believe may occur are unlikely to happen all at once (or perhaps at all), doesn't it only take one of them to create a shitstorm? Credit market contraction (draining the liquidity pool), housing market collapse (more than it has, or just the follow-through from inability to refi all those resetting loans) causing consumer spending to go in the tank, oil at $100 giving us $5/gasoline shoving the consumer in the tank and bringing us insane inflation pressure, the dollar collapses (bringing us that $100 oil again)?

To be a Bull today you have to believe that none of these things will happen. Not just that all of them won't happen - but that none of them will happen.

Because if any of them do, then you're left with an equity market attempting to stand up with only one leg left on the stool.

And, if the earnings reports from the so-called "leaders" are to be believed.... that stool is looking more than a bit wobbly right now.

Short and sweet.

"Its all contained". Remember that?

Really?

No, actually its not. In fact, its far worse than you think.

Lookie what showed up on a nasty little document from the Fed. Oh, its hidden. You might not even notice it unless you looked closely. I missed it the first time I looked.

You probably would too.

That's ok.

I'll tell you where to look. Page 13, line item #34.

Its a 1,214.6B (that'd be 1.2146 Trillion with a "T") exploding debt bomb, and its on the balance sheets of "Large, Domestically-Chartered Banks".

For some sobering perspective on exactly how much this really is, have a look at the total deposits on hand, and the total assets of these institutions. That's all in the same document too.

Now take a long, hard look at that ABX again, and tell me what sort of impairment you think there might of this alleged "asset", which has not been marked to the market.

You might also note that until a couple of weeks ago, this line item didn't exist on that report.

Where'd it come from and why has it suddenly - almost magically - appeared?

Think we might have something like this coming in the credit markets?

Interesting open.

Cat missed, as noted in the my morning flash - and is getting hammered at the open, down nearly 8%. Google is firming a bit but is still down over 6% from yesterday. All three indices are down, but the losses aren't awful - yet.

Wachovia and Citigroup came in with decent numbers. Not really all that surprising in either case; Wachovia has not been involved in much of the stupidity, while Citi is still doing a great trade in all-things-banking (no marks to market on all the trash on the sheet yet, right? Don't worry - it'll come.) But Wachovia is getting the woodshed today, as NIM (net interest margins) are down and guess what - they're still getting impacted by the loan problems! And guys, Wachovia has stayed away from most of the stupid stuff during the boom. If they're getting pinched, how bad is it at places that were more aggressive?

The $64,000 question is "How many people got caught offsides between Google and Cat"?

First blush is that the number is quite large, and that this is a surprise going into expiration that traders did not expect. The first couple of hours will tell us whether this turns into something more serious or not.

Orbitz went public today but is getting hammered, trading below the offering price. This makes two IPOs in two days that have opened weaker than their offer price, and of course we have Blackstone, which is now WELL below its IPO.

So much for "people will buy any crap you stick out there on the street eh?

Cat is a big deal and a problem for The Bulls. The thesis has been that global would save the day. What they seem to have forgotten is that the consumer is still 70% of the US GDP and the consumer has this little problem due to the housing sector, which is 30% of GDP all-told.

As Cat told us today, the US Housing Market thrashed their earnings. Oops.

And the bond market is starting to trip people. We've now got people talking about the credit crunch. Gee, you think? Uh huh. And what leads the equity markets? Back to the thesis guys - the credit markets must be healthy for equities to do well, and if the credit markets implode they smother equity prices at the same time - every time. Treasuries are finding a bid as people give up on the idea of "high yield", discovering that the guys who sold it to them forgot the second half of that phrase - "high RISK."

The concept of "contagion" is now spreading, and its no longer a "subprime" story. Now the chatter is on LBO money drying up, syndications running into trouble, CLOs being downgraded globally, not just in the US, and more.

The Gig may be up folks!

The dollar is getting roached today, pinging off 80.17 on fears of that very same credit market implosion. Most of the weakness is coming from the Yen, which is strengthening.

If 80 breaks the Yen will strengthen precipitously, the carry trade will unwind with a vicious snapback and add even more damage to the implosion in the credit markets. This is the stuff crashes are made of.

Now let me say that I am not prognosticating a crash. You know, "The Big One"? Circuit breaker trips and all? Yeah, that one.

I see the potential for one, but by definition crashes cannot be called in advance, because the actual triggering event can't be known. As these are "five sigma" events they always occur due to some exogenous trigger that is not forseen (otherwise the market would would have "priced it in" before it happens, and therefore, by definition it wouldn't happen! You'd get a slide instead of an explosion.)

But - the ingredients are on the kitchen counter. This doesn't mean they're going to get baked into a cake, but it does mean that caution is advised!

Let's recap:

• Softening consumer spending. Check.
• Rapidly rising consumer debt with no new sources of equity to tap. Check.
• Record margin debt (like throwing nitroglycerine into a fire.) Check.
• Markets running not on fundamental economic numbers, but rather on liquidity flushes and LBO premiums, currently trading 30% over a "rational" PEG value based on earnings expectations.
• An imploding sector in the economy, responsible for a large (30%) component of GDP, that people recognize as bad but are discounting as a "material impact" on the economy as a whole (housing). Check.
• Credit spreads widening at the same time that people are financing everything with debt, including "buybacks" which are announced but yet not completed. Ditto with all the LBOs. This can and usually does result in "hung deals". Check.
• Many of those deals are being written with no financing contingency and thus if they "hang" someone - usually a big money center bank - gets to eat them. Check.
• Oh, and the Dollar is being roached (again) today. This is especially dangerous because a break below 80 may cause tremendous repatriation of foreign money from the US ("dollar flight") and force the Fed to try to arrest it with a surprise rate hike. Maybe.

Oh, we got another Hindenburg today. I think we're up to five or six at this point; I've kinda lost count here, but its definitely getting "more real" by the day. That you have components of an index trying like hell to pull things up on a day that's a near-panic-sale situation is not any healthier than the opposite during a buying mania, but we've had both with this series of indicators. All is not well.

By the way, why didn't the Nasdaq collapse? People talk about Apple. Nope. It was ISRG, Intersurgical, which reported a blowout quarter but saw their stock price go up 30% on the earnings to nearly $200 a share. Even more interesting, while they got several upgrades on the announcement the current trading price is above the revised price targets!

Can you say "The Speculators Are Excited"?

Then there's Apple, of course. Piper-Jaffrey raised their price target to north of $200/share on.... of course, the IPhone. Guys, pull the other one. You folks are smoking some serious crack to be using 2009 estimates (which you're conjuring out of thin air - the company hasn't provided any guidance out that far!) to try to come up with a 12 month price target. Unless my calendar works differently than yours, its 2007 right now, not 2008!

Of course in the end, its the earnings stupid! And Brunswick, which I shorted the other day expecting the boating industry to get pounded as the economy softens, lowered their outlook, pretty much as I thought they would.

"The Lakewood, Ill., company now sees 2007 earnings from continuing operations of $1.25 to $1.35 a share, down from its prior view of $1.65 to $2. Analysts, on average, had forecast earnings of $1.70 a share, according to Thomson Financial."

Well, yeah. As a boater my entire life I can tell you this - high gas prices and lack of free cash flow in households, translates into crap boat sales. And while Brunswick makes bowling equipment, they also own a lot of the boating market, including Mercury Marine (outboard, stern drives, etc) and several boat brands. All I gotta do to see this is take a gander at all the unsold boats on dealer lots around here and how many fewer of them I see racing around during the weekends. Not tough to figure out. (By the way, while they're saying "earnings", I think there's a decent chance that by the end of the year they'll change that word to "losses".... which means they're still too expensive.)

The LCDX yawned wide once again today. Given that the Cerberus deal for Chrysler needs to poop that debt out to the market, this is not a good thing. Now here's the question - is there enough trouble there to "hang" that deal? Unknown - but if so, you're going to see the credit market do one of these:

And believe me - it won't stop in the credit markets if that happens. Just one deal that hangs and equities will hang too, and it'll come first and worst in the places that have been over-speculated. That'd be Apple, Google, Amazon, RIMM. All those places where "The speculators are excited."

Let's add another tidbit. Kudlow loves to pound the table on his "Dow Theory" with the Transports making new highs. But what he's not telling you is that there has never been a sustainable rally, nor a healthy Bull Market, without LEADERSHIP from the financials, and that leadership has been TOTALLY ABSENT SINCE THE START OF THE YEAR.

In fact, the XLF (Financial ETF) double topped in February and then again in May, and since then has broken down, utterly DESTROYING support at the 200 Day Moving Average three days ago with follow-through in both of the last two trading sessions! While the Dow, S&P and Nasdaq have been moving up, the financials have rolled over with a breakdown confirmed on 6/6 in the last of several key technical indicators.

We got another spike play in the Futures into the close on the Nasdaq which (again) was taken right off after the close. That was a clear attempt to prevent the QQQ 50 PUTs from going into the money; they threatened to right at the close. It was Nasdaq-only today - no corresponding spike in the S&P.

The ABX continued its plunge. The new 07 series now has data on it and all are at or right near the lows, with the BBBs trading at 45 (!) Even AAA credit is in the ditch. The graphs are not all that useful as they only have one day's worth of data on them for the 07s, but this will change in the coming days.

The CMBX is incredible today. Check these out:

You gotta love that "AAA" credit eh? But the BB is beyond stupid:

725 basis points?! WOW!

The LCDX today closed at 271.4 - horrifyingly bad from yesterday, almost 30 more bips.

The markets themselves were down 150 on the Dow, down 19 on the S&P and down 32 on the Nasdaq, all between 1.1 and 1.2%.

It would appear that we may be at a tipping point going into next week, and if so, things are going to get very, very interesting. If spreads continue to widen and credit quality continues to be at issue, the LBO game is over - and so is the run in equities.

Have a great weekend!