The Market Ticker

Put the kids in front of Cartoon Network again. This one is not pretty and is full of salty language. If you don't want to read a bunch of words on George Carlin's list, stop right now.

Leading off GDP data came in and it wasn't very good. Nonfarm business productivity came in at 1.8% in the second quarter, and revisions downward were made going all the way back to 2004! Unit labor costs also came in a bit over estimates at up 2.1%. Both pieces of the data came in the "wrong way" for the market, and the futures showed it immediately, taking an immediate dump.

ICSC Chain Store sales came in down 0.3%. Chucky is falling and can't get up. Shhh - don't tell the market, maybe it won't care.

The WSJ had an article this morning about Jumbos going up in price precipitously. I've written about this before; its not surprising. Basically, Jumbos (> $417k) are now running at about 100-125 bips over agency paper. To put this in perspective, it is in fact normal on a historical basis for Jumbos to be 50-100 bips over agency paper; so while this is "outsized", its not catastrophically so. Many people 'get around' this problem (in normal times) by taking a conforming first and some other sort of product for the second, such as a 5/1 ARM (fixed for 5 years); this is a reasonably-limited risk situation because only the part over the conforming limit is subject to a reset, and once you pay down the principle below the conforming limit (which might be 10 or 15 years out) you could refinance into a 15/fixed, thereby not extending your amortization retirement and "pulling off" the risk of interest rates.

This whole mess, of course, can be traced to Greenspan. In fact the WSJ (again) has an interesting take on this:

"When the Fed cut interest rates to the lowest level in a generation to avoid a severe downturn, then-Chairman Alan Greenspan anticipated that making short-term credit so cheap would have unintended consequences. "I don't know what it is, but we're doing some damage because this is not the way credit markets should operate," he and a colleague recall him saying at the time."

No, you think?

(My apologies to those who don't have Journal Online subscriptions - if you're serious about the markets though, this is pretty much a "must have".... but you knew that, right?)

In the "Be careful what hedge fund you invest in" category, check this out:

"Bear Stearns Cos.' decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors' and investors' ability to get their money back.

While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings."

Ain't that nice? First we screw you on the front end with our 2/20 system, but we also got real cute with where we incorporated to insure that you couldn't come after us when we really screw the pooch! Booya boys!

In the "me thinks you doth protest too much" column we get a Countrywide-esque statement from CIT group:

"CIT Group Inc., the commercial-finance company whose shares have dropped 40 percent in the past month, said it has 'considerable liquidity' after a slump in demand for mortgages pushed some rivals into bankruptcy."

You don't care to define that, do you? How about your rate of change over the last, oh, two months? No? Why's that missing from your statements? (as if I really need to ask!)

In the "which mortgage company will implode today) we have HomeBanc:

"HomeBanc Corp. ("HomeBanc" or "the Company") today announced that it intends to exit the mortgage loan origination business.

The Company at present is unable to borrow on its credit facilities and was unable to fund its mortgage loan funding obligations beginning August 6, 2007. Accordingly, the Company does not anticipate funding any future mortgage loans, and is no longer accepting any mortgage loan applications or funding any mortgage loans previously originated and not yet funded. The Company is seeking the most appropriate course of action to preserve the value of its remaining assets."

You mean there is some value of your remaining assets? Betcha that's a small number....

Or we can talk about LUM, right?

"Luminent said last week it was not really subject to this risk. It does not issue loans, but rather purchases loans backed by good credit. The company confirmed it still planned to pay its dividend and had enough cash to keep operating.

A week later, Luminent issued a news release some analysts said spells the company's demise.

Luminent's markets "have deteriorated significantly and in an unprecedented fashion." Its lenders want their money back. The company suspended its dividend and said it will be late repaying some of its debt. It delayed certain regulatory filings and canceled a conference call to discuss quarterly earnings."

Then there is IMPAC:

"Impac Mortgage Holdings Inc. a mortgage lender whose shares have fallen 81 percent this year, said it has suspended making loans to people unable to document income, underscoring the difficult conditions in the mortgage market."

Oh boy, so let me see if I can figure this out. We have lenders all saying everything is ok, then a week later they file for BANKRUPTCY OR SUSPEND OPERATIONS, IN WHOLE OR PART, AND/OR THEIR DIVIDEND!

Where the hell is the SEC? Where are the regulators when it comes to BANKS that make statements like this, such as, for example, Countrywide?

How come we have companies (like AHM) that say "all is well, all is well, no problems, nothing wrong" and then less than a month later implode.

Forward-looking statements my ass. How about "attempts to prop up our sinking share price while we try to figure out what the hell we're going to do to get out of this goddamn mess, and we don't dare tell people how bad it is, so we'll just lie?"

You know, like what was put forward as appropriate behavior by CNBC yesterday morning - on the air?

Sarbanes-Oxley, I hope you get a good workout in the coming months when the investor lawsuits start, and you can bet they will.

People accuse me of being "too bearish."

Nope. I want corporations to release THE FACTS, not twisted crap press releases intended to deceive. While I'm perfectly happy to profit from this sort of nonsense I think it is severely wrong for companies to deceive people like this. SEVERELY.

This is going to explode in everyone's face on the long side. It WILL happen. I have absolutely no doubt that this is not contained and in fact can't be contained. The housing mess is going to detonate on the consumer's balance sheet and the hung loans are going to detonate on the balance sheets of lenders irrespective of any "bailout" actions taken.

Issuing "puff piece" press releases is a time-honored tradition but it is still wrong. I saw this crap go on from the inside when I worked for a "high flying" IPO firm back more than 15 years ago, watching them implode from the outside in as their share price support evaporated and ultimately they went under. I was one of the guys who "turned out of the lights" when it was all over, and on the way out I gave their Harvard-MBA guy (Hi Jim, remember me?) a heavy helping of shit. Not that he needed another one at that point; his plate was quite full.

This is not a new game but we were supposed to have fixed it with SOX. Well, guess what - its alive and well. The SEC needs about 2,000 more investigators and they need to start perp-walking these CEOs and CFOs straight to the federal lockup. Issuing press releases which use data intentionally predating a materially adverse change in business circumstances needs to be looked at as nothing more than a raw attempt to manipulate share prices and mislead investors.

The media is finally starting to figure it out:

"The bursting of the bubble will inflict broad damage. The cascade of private equity deals will slow to a trickle - and the firms that vastly overpaid for their targets at the peak of the frenzy in the past two years - when, by the way, most of the deals were done - will deliver extremely low returns to the pension funds, university endowments, and wealthy families that invested in them in recent years."

And if that's not enough, we now have Fitch saying that they basically made it all up when they came up with their "ratings criteria" for mortgage backed securities! YOU GOT THAT RIGHT - THE WHOLE FUCKING THING WAS PULLED OUT OF THEIR ASS!

"Change in DTI Ratio: Back-end DTI ratio data is generally more available than front-end data in the data files provided by mortgage issuers. Therefore Fitch has modified ResiLogic to utilize back-end DTI. However, Fitch continues to be concerned by the prevalence of missing DTI data. Fitch will use a default assumption for missing subprime DTI of 50%."

Read that. Then read it AGAIN. Then think about it for 20 or so seconds, and it should all sink in.

THEY ARE CONCERNED?! CONCERNED!

Not quite clear? Let me explain it:

• They said that a lot of files have no DTI data provided to FITCH whatsoever. Therefore, Fitch has no fucking idea what your DEBT TO INCOME RATIO IS! How the hell are you going to figure out what the odds of a default are IF YOU DON'T KNOW HOW MUCH MONEY IS AVAILABLE TO SERVICE THE DEBT?!
• "Stated" income loans make an even bigger mockery of these supposed ratios, BECAUSE THE "I" IS FICTIONAL! So even WITH the "not provided" DTI, the computations are worthless!
• And here's the punchline - FITCH RATED BONDS WHILE KNOWING THAT THE DATA WAS MISSING, BUT THEY RATED 'EM ANYWAY!

Guys, this is HUGE fucking news. HUGE! It is a raw admission that one of the major rating agencies has quite literally pulled bond ratings out of their ass, in that when they didn't have data to support that rating THEY MADE SOMETHING UP! And now, when they find out that these ratings were total horseshit, NOW they go back and "fix" their model BUT THEY WILL STILL TAKE A FILE WITH MISSING DATA OR ONE IN WHICH FICTIONAL INFORMATION IS PROVIDED AND GIVE IT A RATING!

(Thanks to Calculated Risk for the ping on this - I would have likely missed it.)

I am sitting here STUNNED by this. Just stunned.

How prevalent is this crap through the entire debt market?

Let me ask this "impolite" question - is this really just a residential mortgage issue, or is this crap spread through ALL areas of the credit markets? Have the issuers been making things up out of thin air for ALL of the debt they've been rating? How the hell are we supposed to know?!

I suppose I should apologize for the salty language but NOW we are starting to see exactly how many cockroaches are running around the debt markets! And to add to it, we just found a huge goddamn termite infestation in the house too, and it showed up when one of the outside walls collapsed!

This shit must stop. The Regulators - yes, the government - NEEDS TO STEP IN AND STOP IT RIGHT NOW.

The GSE's need to be PROHIBITED from buying stated paper, and any file with MISSING DTI numbers MUST BE REFUSED by the rating agencies. If the lenders won't do it on their own volition then the government needs to step in RIGHT HERE AND NOW and force the issue.

This is unbelievable. We knew that the ratings agencies had not accounted for the possibility of home prices falling, but now we find out that this isn't even half of the problem. The other half is that ratings agencies literally made shit up when they didn't have the data to support their decisions!

Yeah, I'm pissed off and the language in here is more than a bit salty, but look - now we find out that this whole thing was a house of cards and it wasn't just bad assumptions in computer models, it was the PURE INVENTION of data that didn't exist!

In short these ratings mean absolutely nothing at all! If this has infested the rest of the credit markets then we are in for a shitstorm of unbelievable proportion, because the "animal spirits" of Wall Street have no check and balance whatsoever.

Leverage ratios? THEY MEAN NOTHING IF YOU ARE INVENTING THE "INCOME", "EARNINGS" OR "EQUITY" FIGURES THAT GO INTO THE COMPUTATIONS!

I have no idea if this has expanded beyond mortgage-backed bonds, but gee, now we find out that this has been going on for five goddamn years? Just now? How come this hasn't been disclosed before now? So long as the loans were performing then making things up is ok, right? It cuts down the workload, makes everyone's life easier, nobody has to say "no", we all get paid, everyone's happy! Dow 365,000! Yeah, everyone has AAA credit! Life is good and nobody will ever default on a loan again, no matter how levered they are or whether they have any income or assets at all!

GRRRRRRRRRRRRR.

And heh, guess what? I'm not the only one who gets it! The mainstream media is catching on!

"The complete lack of foresight by the regulators and the overwhelming greediness by the players put the markets in the position they are in. I am now starting to believe that the credit bubble may go down in history as the worst bubble we have ever seen...credit on steroids created by Easy Al. (Insert your own Barry Bonds joke here.)"

You think?

And then to add to this we have Cramer come on National TV and plead for a FED BAILOUT?!

May all of you go straight to hell. You all were more than happy to screw the American Consumer by putting together a system that promised "big house profits" when in fact you knew full and goddamn well that you didn't have the data to back up even your ROSY assumptions! No, you just made the shit up out of whole cloth simply to make a profit for yourselves and now you have the balls to come on national Television and DEMAND that the Fed step in and get you out of what looks increasingly like YOUR IMPENDING BANKRUPTCIES?

NO GODDAMN WAY.

THE MARKET MUST BE ALLOWED TO PUNISH THE STUPID!

Speculation is GOOD for the markets but when you speculate and lose you MUST NOT BE BAILED OUT - you must suffer the penalty!

But at the same time we must punish those who WILLFULLY DECEIVE. The common word for that is FRAUD and this is a PROPER AND IMPERATIVE function of the government to step up.

THAT HAS TO STOP. RIGHT DAMN NOW.

Chorus for a cut my ass.

I hope the "heads of every single one" of those firms that Cramer says he talked to ends up sitting in front of The Devil himself and The Devil forces them to go bankrupt time and time again for all eternity, and in each case The Beast gets to stick you in a very impolite place.

It seems Ohio agrees with me on this point..... they're just a bit more polite and intend to apply the pain before responsible parties get to Hell....

"She added: 'In Ohio, we lead the nation in investigating foreclosure, predatory lending and misdeeds. More people should be held accountable for what is happening in this country.'

Dann has maintained the agencies had a responsibility to investors not to underplay the risk associated with securities backed by sub-prime mortgages. However, agencies state that any rating given should not be taken as proven fact."

Heh heh heh......

And what do you know - the Fed did the right thing, kept their inflation bias, and left the funds rate alone. Heh all you fools who thought the Fed was going to cut - I told 'ya there was no way Bernanke was going to sacrifice the dollar for a measly SIX PERCENT correction off ALL TIME HIGHS in the stock market!

NOT A SNOWBALL'S CHANCE IN HELL!

Well, he didn't. And the market, which bid itself up in yet another speculative frenzy expecting something that is totally stupid, took a hell of a lot of it back off. Then put it back on, plus a bit more. Now its coming back off. Then it went back on, only to sell some off going into the close.

What's reality here guys?

There is no Bernanke PUT gonna come save your ass. If you're screwed because you made some bad bets, that's just too bad! You're dead sucka! Have a nice day and take your medicine like a man!

CISCO reported this evening what can only be called mixed earnings. Depending on what you think of the results they might have been a bit of a miss on earnings (whether you want GAAP .vs. non-GAAP) but revs were up above estimates. The stock isn't moving much; apparently now we're waiting for the actual conference call. We did not get one of those "monster run" deals off the announcement.... perhaps telling.

MTG and RDN apparently are having a bit of a dispute over their pending merger; both were halted this afternoon. Both have an interest in a CDO/ABS-exposed thing called "C-BASS", which appears to have turned into a big fat zero for both of them. There's no way to know exactly what happens to these two guys down the road...... but it doesn't look pretty.

If you wanted a reason to short the entire United States, you got one today. You guys who think the "Permabull" stance is reasonable had better read this one:

"The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels."

Do you have any idea what that would do? Well, I've blogged about this before, so let's be blunt and direct - it would assrape the entire US Economy immediately and almost without possibility of redemption. It would drive real interest rates radically higher, destroying what is left of the housing industry and severely damaging corporate credit. It would result in an instantaneous stock market crash that would make '87 and even '29 look like a cakewalk. It would also destroy the dollar, then allowing the Chinese and other foreign interests to come in and literally buy anything they wanted in the United States, putting our government in the position of being unable to stop it, as we would not be able to sell our debt without their permission and acquiescence - essentially anything they demanded, we'd be forced to give them, lest the US Government default on its debt and complete what they started.

Lest you think that the "trigger event" would never happen, you'd be wrong. Today comes word that there is a new bill being introduced in the coming days that would constitute such a trigger. There is absolutely no way to know if China would actually follow through on this threat or not, but any such move - even a partial one - would spike real interest rates in a way that would be totally out of our government's ability to control or manage.

One more tidbit - Consumer Credit surged up $13.1 billion .vs. $4b consensus. May was revised up by $3.1b as well. Despite some people's claims, this is not a positive sign AT ALL. With the MEW line closed, spending is now going onto plastic. This is going to get very bad down the road - potentially ruinously bad. With ICSC same-store sales slowing, one must conclude that this is not increased consumption but rather a shift of consumption from cash to credit, meaning Chucky is hitting the wall.

The ABX and CMBX ended basically flat, which isn't anything to cheer about.

Hope nobody got nailed hard by the whipsaws today - this is yet another example of why its important to have good money management in the markets, lest you get an ugly surprise on days like today.....