The Market Ticker

Long or short, this is going to be a tumultuous week.

We enter the week having blown through the 50% retracement levels on the S&P 500, headed for the 61.8% level. The following chart is quite illustrative....



Note that the 61.8% retracement, which I believe is a critical level, lies just above where we are today in the SPX cash - right near 1485/1490. 1490, incidentally, is that strong support level that we took several attempts to breach on the downside, as you can see from the above chart - it is now overhead resistance.

The fly in the ointment is that you also had a very nice downward trendline that was broken Friday late, just after the noon hour. That was what led me to take some of my shorts off. Why? Because its possible that we may not stop at 1490, and may head for somewhere between 1500 and 1520 before failing! If we don't stop there then you simply have to consider that this really was just a correction - and its over - at least for now. As such I am abandoning non-performing shorts and will continue to do so if currently-performing ones head north - even a bit.

I can always put them back on at higher prices.

Technicals do not a market all on their own make. But technicals coupled with fundamentals often do, and on the fundamentals we have a number of problems over the weekend, with some stresses showing up even now in the overnight electronic and Asian sessions, even though all the Asian markets are showing bright green.

First up, we have a second German Bank that got in serious trouble and was basically sold off "free" (well, not really, but close enough); effectively, they had to give it away. The culprit? Off-balance-sheet investment "conduits" that blew up. This is a story that is likely to repeat -we've now got two German banks that have gotten in serious trouble in the last couple of weeks. If and when this comes to the US things are going to get really interesting really fast.

The NY Times ran a scathing hit piece on Countryslide over the weekend. I have no way to gauge what this will do to the firm's stock price Monday, but I think its a reasonable bet that it won't be pretty. Having had my trailing stop hit Friday afternoon I can only sit back and say "damn!", but heh, it will be fun to watch.

The Home Depot deal apparently got done. That's the good news. The bad news is that it was done on seriously worse terms - to the tune of nearly $2 billion dollars - than originally agreed. That's the bad news. How this affects the firm's stock price - and the broader markets - is difficult to determine up front. What is not difficult to figure out at all is that the bloody fighting over this is almost certainly "game over" for highly-leveraged big LBO deals. Over time this will remove the PE/LBO "PUT" from the market, but it may not do so immediately. That "PUT" is estimated by many to be anywhere from 10-30% of the current equity market's price, with me being on the higher end of the scale.

In a sign of severe credit market stress, the 3mo Treasury bill came under extreme pressure overnight once again, driving down the yield in a big way. I have no idea if this will stick or not overnight, but if it does, it augers for trouble in the equity markets right around the corner.

As well it should. As I noted in my Friday Ticker, the Fed removed the safeties from the ticking nuclear weapons at two large money center banks last Monday, and nobody seemed to notice until Friday after the market closed. Could we have an implosion similar to that in Germany on our hands? Maybe! There's simply no way to know, and you can bet that nobody is going to talk until they have to on the matter.

So if I was a betting man, my money would be on a retest of the 1485/90 level with a high probability that those levels hold and we roll over from there, with all this happening possibly as soon as tomorrow.

Why?

Because all the arguments for much lower prices in the markets are there. A softening consumer. Overleveraged balance sheets that are now running into trouble within Corporate America and especially among hedge funds, LBO firms and even banks. Outright bank rescues (so far confined to Europe) and huge liquidity injections made to try to stave off a full-on collapse. A dysfunctional commercial paper market, Countryslide in trouble, and others folding literally by the day. Horribly bad housing numbers, no matter how people try to spin it - it is what it is, and its not pretty.

Add all this up and I see a recession in the cards sooner rather than later, with commensurate damage to equity prices. 30% down from here looks totally reasonable over the next six to twelve months, and it could come in fits and starts, or even "all at once" in the form of a crash.

By definition the triggering events for severe and violent moves downward in equities are almost impossible to determine in advance. But what we do know at this point is that the stage is set - the financial markets are literally balancing on knife-edge, with the recent recovery all pinned on the hope of Fed rate cuts.

While rate cuts might trigger a big rally, it won't put the Genie back in the bottle. You can't make an insolvent company solvent again by cutting interest rates. The root problem doesn't lie there; it lies in the fact that leverage was inappropriately used and now the check has to be paid.

Good luck in the morning folks..... it looks to be setting up to be quite the interesting day!

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!

Let's start with where we left off yesterday.

Right here you will find the 8K from CountryFried on their "Convertible" offering. Note the following:

"Under the terms of the Convertible Preferred Securities, set forth on the Certificate of Designations of 7.25% Series B Non-Voting Convertible Preferred Stock of Countrywide Financial Corporation (the “Certificate of Designations”), holders are entitled to cash dividends, payable quarterly, at the rate per annum of
7.25% of the Liquidation Preference per share of $100,000. The initial amount of dividends payable on each share of the preferred stock outstanding for each full dividend period will be $1,812.50. Dividends are cumulative and if dividends are not paid for six quarters, holders of the preferred stock are entitled to designate two directors to the Company’s Board of Directors until dividends have been paid for two consecutive quarters.

With respect to dividends and distributions upon the liquidation, winding-up or dissolution of the Company, the Convertible Preferred Securities rank in priority senior to the Company’s common stock and to each other class of capital stock or series of preferred stock (where the terms of the stock do not expressly provide that it ranks senior to or on parity with the preferred stock) and on parity with any additional Convertible Preferred Securities and any other class of capital stock or series of preferred stock. Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events."

Oh oh.

Read that last part of that last sentence.

Then read the rest. Several times.

By the way, there is nothing prohibiting BAC from hedging off the risk. And they either have or will. Believe me.

This sort of preferred, issued with a coupon well over LIBOR, and with a conversion price well under the current trading price, screams SHORT ME INTO THE GROUND PLEASE!

What "certain events"? Let me guess - "if the shares trade at under $18"?

That'd be known as "death spiral financing" if so.

How come there's no more color on those "events"? You have to wonder.....

Oh, and Moody's is going to love the additional debt too, which means more downgrades are coming. Once that starts then you can forget the commercial paper market for these guys too, because their cost of financing is over the margin they can sell mortgages at to consumers.

Say "Good Morning" to "Countrywide America", which I predict will be the new name of the company once BAC swallows it - for $2 billion. Savvy guys those BAC raiders...... Common CFC Equity Holders? So sorry, so sad, have a nice day.

Mozillo's interview on CNBC was, IMHO, nuts for him. He was frankly stupid to appear, and Maria nailed him pretty good with questions about "how come no discount window." Answer? "The bank didn't have the assets to hit the discount window." Oh oh.

And "He doth protest too much" about the Merrill analyst. "Totally irresponsible and baseless" eh? Irresponsible eh? Well, "we're a much stronger company today than we were a couple of weeks ago"? Hehehehehehe.... we shall see. "The business environment is not getting better" he says.... so how's what work, exactly?

And when asked "can you categorically say you will avoid bankruptcy"..... she got a dodge... and a "well, nobody can say that" and "I don't see any higher chance now than six months ago."

Of course that's why he stepped up his share sales about six months ago, right?

Ooook. You want my opinion? "The Tan Man Doth Protest Too Much".... and the more he talks, the more the market tanks! You have to love it. And then he says that housing is going to take us into recession - ON NATIONAL TELEVISION!

And if that's not bad enough, when asked if he talked to other major banks, he said he did and they told him "they were dealing with their own problems" (!)

(Here's another guy who never learned the first lesson of dealing with reporters - shut the fuck up! Anything you say can and will screw you straight up the ass!)

Oh, and the piece of data that nobody is paying attention to on CFC? This one:

"The repurchase obligations are discussed in Countrywide’s prospectuses and pooling and servicing agreements that cover about $122 billion worth of mortgages packaged and sold to investors from early 2004 to April 1 of this year.

The agreements said that Countrywide Home Loans, a unit of Countrywide Financial, would buy back mortgages in the pools if their terms were changed to help borrowers remain current. Such changes are known as loan modifications. In general, it is difficult for homeowners to get loans modified if they are in a securitization pool.

It is unclear how many modified loans are involved.

But it would cost $1.2 billion for the company to repurchase 1 percent of the loans in the pools at issue. Repurchasing 5 percent would cost $6.1 billion. When such buybacks are made, the original amount of the loan is paid into the pool and divided among the investors. "

Oh that could suck. Badly. As in "wipe you fucking out" suck. 5%? Try 10 or even 20% in my view of what will have ultimately be done in order to avoid foreclosures. Suck isn't quite the right word here.

How come that shit isn't being talked about by Bloomberg and the Wall Street Journal? Not on CNBS either. Why? Hmmmmmmm....

You think this is a pipe dream? Uh, no its not:

""We want [OTS] to go back to Countrywide, and we want them to say 'We are going to require you to restructure loans,'" Marks said."

Heh heh heh.....

By the way, there are a lot of folks saying that a "workout" under the PSA doesn't trigger this. Ok, fine enough, but the OTS forcing the issue sure as hell will! (Updated)

Oh, and you think the Commercial Paper market is ok? Uh, no:

"Coventree Inc., Canada's biggest non-bank issuer of asset-backed commercial paper, said it couldn't sell any of the $399 million in debt that matured yesterday.

Since the correction began in the non-prime mortgage loan market, about $5.5 billion in notes issued by Coventree-sponsored bodies have matured, the company said in a press release yesterday."

Gee, that's got to be a problem too, don't you think?

Speaking of which, let's spend a bit more time on this. Commercial Paper is the "blood" of commercial finance. These are short-term debt instruments (typically for only a couple of months) which are "rolled over" - that is, renewed. They are normally thought of as very low-risk, because there's just not much time during which they're "open" for you to get hosed, and if you get uncomfortable with the company, you just stop rolling it.

Of course that instantly hoses thee company that gets in trouble. This, in fact, is what ultimately shoved Enron under the bus - they failed to roll their paper, scrambled trying to find a substitute, failed and..... Boom!

Now here's the problem - "asset-backed securities" - including derivatives - have made their way into this stuff! Yes, you're not necesarily buying a "call" option on, for example, the building that a corporation owns any more when you buy their paper. There might only be 5 or 10% of real assets behind these things nowdays, with the rest being in the form of some sort of swap - that is, a derivative contract! This is being done to, of course, allow corporations to lever up beyond their actual free cash flow and have "outstanding" cash well beyond what they can actually FUND at instant in time.

This little ditty, however, destroys the foundation of SAFE when it comes to commercial paper. After all, the premise is that if you fail to pay I can just come seize your building, trucks, etc.

But what if you implode and come to do that, only to find that what I really bought was a default swap contract from some Hedge fund headquartered in the Cayman Islands, and they wrote $1 trillion worth of that crap but only have $500 million in assets?

THIS REALIZATION is what is now roiling the commercial paper markets - people actually started to READ the documents instead of just "trusting people", and they found that this was yet ANOTHER place that corporations are finding a way to "gear it up!"

You think this is going to get fixed easily or go away quietly? Hahahahahahahha.... wrong!

WHEN (not if) these things detonate it will be extremely un-funny, because this paper is EVERYWHERE. Money markets, for example. Places that people regard as extremely safe.

Guess what?

The Wall Street Alchemists lied to you (again)!

Oh, and if you think the builders will be ok, Moody's disagrees (a little late there guys?)

"Moody's Investors Services on Tuesday placed the credit ratings of three leading homebuilders under review for a possible downgrade, after the two-year housing slump worsened in recent weeks amid a collapse on the mortgage market.

Moody's said it was reviewing Centex Corp., Lennar Corp. and Pulte Homes Inc. because of a "materially weaker operating environment facing homebuilders.""

So, uh, where were you six months ago Moody's? Oh, wait, we know how this works - you wait for the company (or instrument) to implode, then you downgrade it. Got it.

Never mind that this is not just a US story, and those who tell you it is are lying:

"The European Central Bank's first ever emergency injection of three-month funds was swamped with demand from banks on Thursday, but brought little relief to an interbank lending market beset by credit worries."

Uh, that'd be bad, right?

You know that the "R" word has gotten mainstream coverage when it shows up on the front page of http://www.msnbc.com/. And today, it did.

In fact, that nice Recession call showed up almost instantly everywhere. MSNBC, Bloomberg (multiple times), CNBC (multiple times); hell, I bet its on the front page of the Wall Street Journal in the morning.

That ought to wake up Joe Six Pack and not in a way that people are likely to appreciate when it comes to the equity markets!

Oh, and don't believe that the mostly-flat close today is somehow good. It is most definitely not, considering that the futures were up nearly a full percent overnight and 3/4% this morning before we opened, with both Asia and Europe bright green. In truth this is fairly significant loss - far bigger than it looks - given where we were pointing this morning.

Reversal day? Not willing to say that, because the technicals just don't support it - but this much is evident - it doesn't change a thing about the technicals, and the amusing part is that the pump monkeys were all over the CountryFried news last night thinking it would be good for a huge pop today.

Uh, no dice there - in fact, CFC finished up a whole 20 cents, and if you were on top of that spike and shorted into it, you made a nice chunk of cash today.

Congratulations.

So we sit with a "sideways" signal still posted on the major indices from a technical perspective, and tomorrow is setting up to be a key day - not only do we have the obvious - coming off a flat day today - but also the fact that it is a Friday, and people have to choose - do I go into the weekend long, short, or flat?

Have a good evening!

Ever been Whitewater Rafting?

The start is all "ooohs" and "ahhhhhs". Pretty scenery, everyone loves 'ya, its all beautiful and serene.......

You know what's next, right?

Or maybe "Whitewater" is a good description for another reason. You know, the Whitewater land deal? Yeah, that one.

Let's get to the news.....

Beazer Homes is trying to prevent their debt from being declared in default

"Beazer yesterday filed a complaint in U.S. District Court in Atlanta against U.S. Bank National Association, the trustee for bondholders, saying they are "seizing upon" the company's delay of its quarterly Securities and Exchange Commission filing to threaten Beazer with a "declaration of default." Beazer said none of its bondholders have yet made such a declaration."

Uh huh. They will, and here's reality - those conditions are there for a reason. If you can't meet them, that's your problem Beazer.

Mortgage applications fell precipitously, down 5.5% in the last week. Anyone remember my prediction on this a while back? That as credit tightened into a full-on crunch, we would first see applications spike as people got rejected in place after place, but ultimately that they would fold and application volume would collapse? Well, we're not quite to "collapse" yet, but we're getting there.

"Applications, however, may have climbed earlier in August as a major lender hurt by turmoil in mortgage bond and other financial markets closed its doors, forcing borrowers to reapply elsewhere, said Jay Brinkmann, a vice president of research at the MBA."

Oook!

Then we have one of my favorite whipping boys, Countrywide Financial. Anyone notice that they're paying a full half-point more than anyone else on CDs? How come? Can you spell "moral hazard"? I can, and here you have it - Mr. FDIC will bail out the depositor (of up to $100,000) if we die, but in the mean time, come get a better return. A raw attempt to forestall a liquidity implosion? Looks like it to me, and I bet it doesn't work. Beware, especially if you have more than $100,000 over there.

Oh, and if you think the Discount Window is a great thing, how'd you like to find out that they took boat loans there? For anyone who's never owned a boat, here's a fact for you - they depreciate about at the rate you can burn $100 bills in your ashtray. And would the Fed do that?

"Lacker told risk managers yesterday that the Fed's district banks would even accept boat loans as collateral. It's up to the banks to establish a value for the assets as they make the loan, he said."

Yeah, so "mark to myth" (or is that "mark to a bunch of fucking lies"?) survives, with formal federal reserve approval. So much for honest dealing.

Oh, by the way, this doesn't end well. I know you've heard me say it before, but its still true.

Toll Brothers announced crap results. Their stock is marked up a few percent premarket. Let's see how the conference call goes; why do I think that premarket pop will be short-lived? Remember that Mr. Toll is one of the few who actually uses rational language (you know, like "suck") when describing the homebuilding industry. Oh, they withdrew their forward guidance too. That's good, right?

First Magnus Financial (privately held) filed bankruptcy and MGIC formally sued Radian, apparently trying to back out of its merger agreement. The former was one of the largest privately held mortgage issuers, and the latter is an interesting case that bears watching.

Radian has a very solid reason to attempt to avoid full discovery if MGIC is intending to walk off! Why? Because there's a proprietary interest issue here, in that their data becomes competitively useful to MGIC. So now they have an interesting quandry - one that I've personally dealt with, but on far more friendly terms. When I was negotiating the sale of MCSNet, my ISP, one of the concerns I had with "opening the Kimono" was that much of how we made money like bandits had to do with the bare-knuckles style of negotiating that I was known for in the industry; letting someone see our cost figures at a detail level means that they could figure out where to apply pressure to try to duplicate our results! Needless to say a failed acquisition could have been ruinously bad.

This will be a battle that I watch with more than a bit of bemusement.

Accredited Home (LEND) appears to be swirling around the bowl and headed for the drain:

"Accredited Home Lenders Holding Co., the subprime lender whose sale to Lone Star Funds collapsed, will close almost all of its retail lending business, shut half of the 10 divisions serving brokers and halt U.S. mortgage applications."

That looks like a zero to me.

And now, finally, we have the media picking up on the fact that even banks are marking gains out of total fabrication:

"There's the kind of earnings investors can take to the bank. And then there's the kind the bank can show to investors.

Word to Wells Fargo & Co. investors: Beware the second kind."

Its about goddamn time someone other than a few bloggers scream about this sort of bullshit. Its also about time that the regulators step in and put a stop to it, especially the regulators that pay attention to these minor things like, oh, Basel requirements and Tier Capital requirements. You know, those minor details about whether or not a bank is solvent?

Yeah, that.

Oh, now let's think a bit more about Wells Fargo (WFC). They had a major "computer problem", which allegedly was fixed yesterday. Yet I am still seeing anecdotal reports of trouble with people not being able to get to their accounts and accounts not updating. Hmmmm.... I think that smells like "short" to me, on the premise that their "computer problem" might actually be something having to do with that "mark to make-believe" and a big fat number in parenthesis somewhere that its not supposed to be? Yeah, I think it might. Now let's add that they're in California and where did that emergency request come from on the Discount Window again? It all smelled like CountryFried, but perhaps it was Wells? Double-hmmmm.....

Oh, we got the FDIC report today, and it wasn't all that great. Unprofitable banks are way up, and losses are up as well. And they're "closely monitoring" individual institutions (cough-WFC-cough-CFC-cough-whoelseisoutoftheSanFranFedthatIshouldshort-cough!)

Now here's something wild.

In the "someone knows something and its fuuuuucking ugly" department, look at this..


What you're looking at is a snapshot of the trades today on September SPY CALLs. There were one hundred and twenty thousand of them traded on these strikes. These are DEEP in the money; SPY is trading in the mid 140s!

Now assuming - just assuming - this was not a mistake - someone hit a "sell" button then bought 'em back immediately, or the reverse - this is someone who owns $1.7 BILLION worth of SPY and they are very sure that the price today is the best deal they're going to get.

They will for sure get called, even if the market crashes tomorrow. Nobody in their right mind would buy calls this far in the money if they were speculating on a market moon-shot - your leverage here sucks (probably something like 1.2:1 even with a huge move upward) so these had to be sold.

So those who think these were purchased outright - FORGET IT.

That's absolute unadulterated bullshit.

You'd be out of your high-footing mind to sell these naked - the damage this could do to you would be quite impressive, not to mention the margin requirements - I don't even want to think about that. So those who think this was a naked sale - forget it. It wasn't.

This has to be an institutional holder of Spyders who doesn't want to drop 12,000,000 shares of SPY on the market (lest they exhaust the bid and drive the price WAY down), so instead they sold the calls. THEY WILL GET CALLED with absolute certainty, but they have also locked the price of those Spyders - the S&P 500 - at today's price.

Let's think about this one guys.

Someone holding $1.7 billion dollars worth of SPY is very sure that the price is going down - or at least sure enough that they'll take today's price over whatever it might be tomorrow. In fact, they're SO sure that they sold the OBLIGATION to deliver those shares on the third Friday of September.

You think someone - some big someone with a big institutional holding - knows something's up?

I do. In fact I think its quite fair to say that said person is essentially 100% certain of their position, because there are other ways to hedge this trade that are far better unless you're sure.
But if you're sure, this is the best way out there to get your price. In fact, its pretty much the only way to get your price.

Now how do we know? Let's see if those contracts "stick" in the morning. Take a peek and see. If they do, then the trade is real. If not, someone made a huge and very expensive mistake and backed it off immediately.

You'll know in the morning.

BTW, someone on the forum says they called the OCC and that these are coded as "spreads" and are legitimate, meaning they will stick. Uh, if those are bear call spreads (there'd be no reason to do them as bullish spreads at this differential) that's even worse. Think about the mechanics on this one for a bit - I bet they're miscoded and actually are covered calls...... but either way.....

Technicals? S&P over the 200, but just inside the downtrend channel (barely.) Dow Jones still in the down channels. Still "sideways" on the technicals. You want to play Elliott Waves and Fib retracement levels we are sitting on the 61.8% retracement level on the 30 minute chart right now:



It doesn't get any more perfect than that.

If we don't reject here, you have to consider stepping aside on the short side - at least for a while. Not to say we won't roll over and roach - I believe we will - but this is where it either happens or doesn't, and you can't look at the daily charts on this - you have to look at the price action from top to bottom; here it is. (I'm also about to lose my maximum resolution on this, which is a 20 day chart - damn! Good thing tomorrow's decision day eh?)

I'm off my short positions other than a few builders if we don't reject here until I have something that gives me a new signal one way or another. Gotta go with what the market tells you, not what you'd like.

If you're watching the ES7UG (S&P 500 futures E-Mini September) the critical level is 1473; for cash its what's in the above chart.

See 'ya in the morning.

Late update: CountryFried financial late this afternoon disclosed that Bank America is buying $2 billion in preferred stock (new issue at that.)

"Bank of America will purchase $2 billion worth of preferred Countrywide stock yielding 7.25%, and that can be converted into common stock at $18 a share, those people said."

The fools in the aftermarket instantly bid the stock up big, $4.00. You have to be absolutely insane to think this is good news! Let's review this one guys:

1. It has a Guido-style interest rate. 7.25%?! LIBOR is under 6! Gee, you think that's good? Uh, no, its a junky rate that basically assumes that the company is going to roach!
2. Convertible at $18, nearly 25% below the closing price on the day?! Hahahahaha! How do you spell "DILUTION"?
3. Oh, and let's not forget that preferred stock has dibs on assets in a liquidation scenario.
4. Finally, why did they borrow at 7.25% if they could go to the discount window at 5.75%? BECAUSE THEY COULDN'T GO TO THE DISCOUNT WINDOW!

Oh, and let's remember that AHM did the same thing not long ago, and where did they end up? You know why? Because when companies do this they're desperate, that's why!

DO NOT BUY INTO THIS - you will get KILLED. What's worse, professional shorts will be all over this like a cheap suit playing the arbitrage game - maybe even BAC themselves!

Boy did the market have a tantrum this morning.

You had the Pump Monkeys (that'd be Cramer and others) last night basically trying to front-run another fed intervention move this morning.

And right on queue, at 7:00, the futures were spiked higher, anticipating it......... when it didn't happen, oops - back off it came.

Guys, think about this one. Another intervention? What - two trading days later? Is that good? It would appear to me that such a move would signal raw desperation. How about you?

The Yen is moving in lockstep with the S&P again. This bothers me - a lot - because currencies usually are uncorrelated with the market. Well, not for the last couple of weeks it hasn't been; there has been a near-lockstep move. Market down, Yen up. Market up, Yen Down. The correlation gets sloppy overnight but during the day, you can almost trade the S&P off the Yen/Dlr cross!

Why does this bother me? Because it says that uncorrelated markets have become correlated, and this indicates to me that there is a severe level of stress that isn't being recognized appropriately, and that foretells extreme violence in the financial markets on an imminent basis.

Last night The Wall Street Journal published an article that I have to add to the "Hall of Shame", in which they implied that Buffett might be interested in "pieces" of Countrywide Financial.

"Some investors speculate"? This makes the top page online and is considered "hard news"? Some investors speculate?!

Well in a Seance last night, some spirit told me that Rupert Murdoc was going to fall over dead in the morning from a TIA. Oh crap, it didn't happen. Time to fire the seance-master.

This sort of "pump monkey" crap has a place on Cramer's show, I guess, but in the nation's standard-bearer for business news?! You have to be focking kidding me.

Now here's the real problem with that rumor, as I see it - Warren has said repeatedly that CDOs and all this other "Alchemy finance" are weapons of mass financial destruction. He has repeated this over and over again, as recently as this last weekend!

Don't believe me, read it for yourself!

How many times do you need to hear a man who has amassed a tremendous fortune tell you that what these companies have done is beyond stupid and deserves a bankruptcy petition, not a buyout, before you listen?

He's been saying this for nearly four years!

What I want to know is this - given the full page ads that Countrywide was running trying to stanch a "run on their bank", did they get a bit of "special consideration" from the Journal?

Oh, and how do you know a rumor is complete bullshit? When CNBC runs it something like 30 times in a day! And that's exactly what they've been doing today. They got a lot of mileage out of it in the morning, but perhaps - just perhaps - people are starting to wise up. It got mentioned again around 1:00 and..... no change. Hmmmm..... how long before people realize they were sold a nice big fat bag by that rumor..... and its full of turds!

Then we have Chris Dodd, our esteemed Senator and Presidential Candidate, who had his audience with Bernanke and Paulson today. Now normally I would not really care much about that sort of thing, but in this case Dodd, if he wants to make a real difference in this mess, needs to step up and actually do something useful. What would lead me to actually consider voting for him? I'll tell you what:

1. Subpoena all of the primary broker/dealers, the Fed Governors and Paulson to find out who leaked the Friday decision on Thursday, and who traded on it. Appoint a special prosecutor and jail every last goddamn one of them.
2. Go after all these Wall Street boys and Mortgage companies (and their executives) for their actions during the "boom years" in making mortgages that they knew factually were unsafe. Mortgages that have teaser rates associated with them and which are qualified on those teasers require that the mortgage be refinanced or the property sold when they expire! Those are not mortgages, they amount to renting your house from the mortgage company! In my opinion that is fraud; we need no new laws, just prosecute the existing ones!
3. If you want to help homeowners, expand FHA availability. But do not take any action that will bail out speculators OR THE PEOPLE ON WALL STREET WHO PROFITED FROM THIS MESS.
4. Unfortunately a number of people will lose their homes. The good news is that they can buy another one at much lower prices, perhaps even their old home at much lower prices, as the banks and investors are forced to eat the losses in real estate valuation! If you want to help people in this situation, amend the bankruptcy laws so that primary mortgage debt (not refinanced, not HELOC'd, primary) is fully dischargable in bankruptcy.

How about it Senator Dodd?

Now let's talk buyouts. What buyouts? That's done. Want to see some economic evidence of harm? Look at the Wall Street banks, who just became SCREAMING shorts. Yeah, it doesn't look like it today, but heh, being in front of it is how you make your money, right?

Oh, in a Fed Speech today (by Lacker) we had a stern warning that equity market turmoil does not justify a rate cut, and further, that the Fed is not going to interfere with the repricing of risk.

Hope springs eternal.

Jobs? What jobs?

"The industry has announced 87,962 job cuts so far this year, 75 percent more than the 50,327 recorded for all of 2006, Challenger said. Nearly one-fourth of this year's cuts have been announced in August alone."

Shhhhh... the economy is strong. Remember? Don't bother us with the facts, just buy buy buy!

Oh, foreclosures? Up 9% last month, nearly a double year-over-year. But don't worry, the economy is strong and everything is ok. Now go out and buy some sucks, er, stocks.

Technically? Nothing happening right now. NDX came in over 1900, which is a reversal of the breakdown, but we've got nothing in the way of a buy anywhere. Nor do we have a sell. So technically, we've got nothing.

SPX and Transports have both held under the 200, with the SPX taking a run at it and failing.

So here's the four scenarios, in case you missed 'em;

1. Crash. Black Swan of some sort shows up and nukes the markets. Impossible to time. Probability: 20%.
2. Retest of resistance in process; we trade sideways and then break down. At present this appears to be the scenario we are following. Probability: 35%; breakdown within the next couple of weeks, but could occur any time. Trigger is likely news-driven.
3. Retest of resistance will fail; that is, we will go through the first-level resistance level and trade up to the 61.8% or even higher level from the first drop. This is followed by a far more serious plunge than we saw the first time. Probability: 35%
4. Its over. We have seen the downstroke and are about to enter a multi-year renewal of the Bull Market. Confirmation comes from a successful break and hold over the old highs. I see this as very unlikely, but you can't completely discount the possibility. Probability: 10%.

Specific-stock shorts are fine here, but broad-based market shorts have to be played with care in a sideways market. Don't do it with things you can't protect or get out of quickly. If we break north of 1490 on the S&P then you have to consider the possibility that it really is over and realign appropriately.

One indicator that concerns me includes the fact that Yen has a near-perfect correlation much of the time with the S&P 500 during the trading day as I mentioned above - this bears reiteration and is one of the factors that leads me to simply NOT BELIEVE that we have bottomed.

This bothers me because currency markets normally do not correlate well, or at all, with equities. When they do you're being told that something is very seriously wrong; currency markets are two removed from equities (the chain goes Currency > Credit > Equities), so when correlation appears between the ends you know the stress level involved is EXTREME.

Oh, one more thing - DJ Consumer Confidence (which printed after the market closed) came in at negative 20, down 9 from last month's negative 11. The economy is all doing great, and so is the consumer.

Yeah, ok. If you say so.

Anyway, this is where we are right now. Be fleet-footed and use sound money management - there are more cockroaches in the woodwork - that much I'm quite sure of.

PS: God the roachings came hard and fast. Let's see, National City has dropped all non-GSE mortgage programs, Beazer is trying to avoid being declared in default on their debt, debt downgrades on builders and more mortgage bonds came in Tsunami-size lumps this evening and more. Hell, it'd be a whole new Ticker just to list 'em all. Bottom line - if you're a builder or a lender, something probably roached you this evening. Wow.

Ok, ok, that 10% scenario #4? Might be 2%.