The Market Ticker

Put the kids in front of the TV watching Cartoon Network.

The back half of this one is VERY salty. You've been warned.

Incredible morning.

So I sit drinking my coffee when the Durable Goods report comes out, much stronger than expected. But let's dig into it a bit, eh?

First, let's get rid of aircraft, since we know Boeing is kicking ass and taking names with the Dreamliner, and they've been distorting the numbers for the last few months.

And guys - its not shipments (what we did), its new orders (what's to come)

So while we had the bobble head on the floor of the Chicago Merc orgasming on CNBC (and considering how ugly that guy is, the mental imagery he left me with is going to scar me for life!) we need to be a bit more circumspect and look at the table instead of the cheerleaders. And let's use year-on-year numbers, shall we? That's what counts, right?

Specifically, ex-transports, New Orders are actually down 0.4%.
Shipments were up 0.4%.

Net-on-net? Zero. Hmmmm..... Oh, and ex-defense? Shipments down 0.1%, with new orders up 1.3%.

Now let's look at subsections to try to figure out what's good and what's bad.....

Primary metal products are strong across the board. Presumably, most of this is exports, although I suspect a little bridge in Minnesota might have something to do with that too. Fabricated metal products are also strong. We know China is spiking demand in these areas, so this is no surprise; in fact, you'd have plenty to fear if this wasn't good.

Machinery was fairly strong in shipments, but new orders are down, off 0.6%. That's not so good.

Computers? Down 7.4% on deliveries (!), with new orders down 6.2% (!!!!!!) Uh...... that's a bad number. In fact, its a really bad number, since virtually all new positions these days in American Business require a computer and this demand is nearly all domestic. So from this, we can deduce..... falling headcounts.

Communications equipment is also down strongly (-2.3% shipped, -1.7% ordered.) Last time I checked, employees needed phones too. But but but.... didn't CISCO say all was good in that area? Hmmmm..... maybe all the world is not CISCO?

And Semiconductor shipments? Down 3.4%. Oh oh.... what do those go into? Uh, everything?

So where's the strength?

Electrical equipment, appliances and components. Up strongly; 7% shipped, 4.6% ordered.

And just down a few more lines, we find out where the numbers came from that made this report so good - NON-DEFENSE AIRCRAFT AND PARTS. Up a whopping FORTY FOUR PERCENT for new orders year-over-year, 17.8% shipped.

I ain't impressed. We just had a major US manufacturer roll a major product announcement and of course that's going to show up in these numbers..... if it didn't, I'd be really concerned!

Futures spiked immediately on the announcement of course, but anyone remember Countryslide the night they announced their "equity investment" a couple of nights ago? How'd that work out if you bought into the spike after hours before you read the actual text of the announcement and understood what it meant? By my figures, you're down more than $4/share already!

Ouch.

Of course there is one really fugly part of this announcement that nobody wants to talk about - yet....... how does the Fed cut rates in the face of a durables number like this? Oh wait... hasn't the market "priced in" a bunch of rate cuts? What happens when Mr. Market figures out that they're not going to happen? Is that good?

And then we get the housing numbers.

Permits down 22% y/o/y, existing home sales down 11% y/o/y, but of course what do the markets do on the release? Run hard - for about 5 minutes. Why? The headline number was "up". Duh. Never mind that its the year/over/year figures that matter, not monthlies, and that July is typically a very strong month as it is the last opportunity for families to move before school starts! (do any of these "talking heads" have kids? I guess not!)

Unfortunately, reality comes back into play quite quickly. And let's look behind the numbers a bit - layoffs are coming in every day in the mortgage industry, construction is slowing....... gee, is that "R" word coming back into play yet? Maybe... but this is much is certain - the Fed ain't going anywhere with rates in the face of what look like STRONG headline numbers.

Oh, and let's not forget that New Home sales are "counted" when a contract is signed, not when the sale is closed. Heeeeellllloooooo - cancellation rates anyone? A 12.3% error rate too, remember?

Oh, Countrywide? They're earning my new name for them - Countryslide. I'd like to ski on their stock chart. Pretty please? And I really want to see the details of that Convertible offering. The 8K could have included those details if CFC wanted to, and until I see the details I'm reserving judgement on what the "material events" might be that would allow re-evaluating the $18 conversion price.

Ok, enough of that. Really, I'd like to see CFC survive. I don't think they will, but I'd like to see it happen. I mean, c'mon, you can't really wish for 60,000 people to lose their jobs, can you?

I sent another letter to Chris Dodd, this time urging Congress, if they insist on bailing out homeowners, to do it via a change in bankruptcy law. This would force lenders (and the securitizers, and CDO holders, and and and) to eat their shit sandwiches, while at the same time protecting homeowners - to the extent that its possible. It would also restore balance to the housing market. Odds? Not great, but hope springs eternal.

The Bank of England is finally injecting some "tough love". Its about goddamn time. Despite a lot of screaming from traders and firms they are declining to come to the rescue of the commercial paper market, allowing LIBOR to float upward. This is a very good thing in terms of FORCING the removal of the toxic CRAP out of the commercial paper markets - without these insane artificial injections of "liquidity" as a means of preventing the markets from punishing RAW ABUSES.

And let's be straight here - that's exactly what this has been.

The commercial paper markets are supposed to be backed by hard assets and be nearly 100% safe. But that is not what has happened in recent years! Instead, institutions have taken to putting only 20%, or even 10% of actual assets behind these issues, backing the rest with default swaps written over the counter!

This is INSANELY unsafe but it is part of what has happened with the "levering up" of Corporations WORLDWIDE.

And both Bernanke and his Pals at the ECB have been engaged in trying to SAVE that market!

Fuck that. Let it implode. True asset-backed commercial paper is and will remain safe - and possible to place. Always. Its an extremely lucrative marketplace for the lenders and a safe one as well.

But somehow, we have to remove this insane amount of leverage from business interests, or we risk entering a global deflationary spiral that ends in a DEPRESSION.

This is reality guys and gals, and no, its not the Fed's fault - its The Street's.

The Fed must not come to the rescue of these markets as they correct this imbalance.

IT MUST NOT HAPPEN, because if it does, it not only will NOT fix the problem but will cause a shitstorm of incredible proportion AND SOON.

No, Bernanke, you CANNOT get away with this until after the 2008 elections, or until YOU retire.

NOT REALITY.

Allowing OVER THE COUNTER DERIVATIVES into commercial paper is FUCKING STUPID. Attempting to BAIL OUT companies who get into deep shit as a consequence of doing this OUGHT TO BE FELONIOUS.

Remember ENRON? What precipitated that implosion?

They were unable to roll their commercial paper and literally blew up within hours.

Now think about this times 1000. That's what we are risking here, and despite what the Fed does, as I have said before, you cannot force someone to eat a turd sandwich!

Oh, and LIBOR? Guess what - a lot of commercial loans and some consumer ones (including some ARM mortgages!) are linked to it.

So I must give KUDOS to the Bank of England, and call for the ECB and The Fed to likewise stop the stupid shit and allow the commercial paper market to detoxify itself.

This will force a deleveraging of short-term corporate finance, which is going to get some people's panties in a wad, but it needs to happen.

That is.... if we do not step off the cliff into financial ARMAGEDDON first.

Yes, I mean it. This is why:

"The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letter."

This is un-fucking believeable.

Ok, let me be more blunt. This goes DIRECTLY to the safety and soundness of our FUCKING BANKING SYSTEM. The raw FUCKING STUPIDITY of this act is BEYOND WORDS. This is THREE TIMES the normal limit allowed for these institutions!

IF these brokerage affiliates are unable to meet liquidity demands, they need to be identified and either merged into other liquid organizations or fucking shut down!

Do you folks understand what happens if THIRTY PERCENT of one of these banks' regulatory capital goes to one of these "affiliated brokerages" AND THEN THEY IMPLODE?

The bank that was involved becomes insolvent under Tier Capital rules and is seized. IMMEDIATELY.

Financial ARMAGEDDON ensues as this is VERY likely to start a cascade failure in the banking system, as all the derivatives that this institution holds become QUESTIONABLE AT BEST.

Oh yeah, I know, these letters claim that all assets must be marked to market, and margain maintained.

Yeah, ok.

Exactly how fast did AHM implode a couple of weeks ago? Their "margin" was maintained TOO!

HOW FAST DO YOU GO FROM "OK" TO "OH FUCK!" WHEN YOU DO SOMETHING LIKE THIS?

There are apparently TWO of these out there right now. You can find all the 2007 Federal Reserve letters here, including the two in question.

Ok, now let's consider this on top of it:

A few days ago - right about when these letters issued - SOMEONE put on nearly $2 BILLION worth of representation in DEEP IN THE MONEY CALLS on SPY (the S&P 500 ETF.) A trade that has no "value" (that is, at best it returns what was invested) unless the S&P 500 loses THIRTY PERCENT OF ITS VALUE BY THE THIRD FRIDAY IN SEPTEMBER.

There is also a VERY abnormal open interest showing on SPX 700 CALLs.

These are both for SEPTEMBER - and ONLY for September.

What's going on here guys?

I am not normally given to "tin foil hat" types of speculation, but I will tell you this - THAT IS NOT A NORMAL TRADING PATTERN. I've been at this long enough to know that. I do not know WHY these abnormal patterns are showing up, but I will observe that "someone" did something similar with Countryslide - buying a CRAZY number of out-of-the-money PUTs - a month or so ago.

They were literally two weeks early on the company's stock taking a total shit-dive.

Ok, technicals.

We sit here having broken the first upside resistance lines. I think we're headed back to 1490 on the S&P for a retest, and perhaps 1520ish beyond that. I do not believe this is over, not by a long shot - especially not with the above out there - but I also am not going to fight the tape in the short term.

As we all discovered in April and May, it frequently takes events longer to play out than you think they will.

I may update this later, depending on whether I get the time.

Have a good weekend!