The Market Ticker

You have to love the duplicity of the Nation's Largest Lenders.....

"Countrywide Financial Corp., reducing costs as part of its effort to weather a credit crunch, has begun laying off employees involved in originating loans, according to an internal email.
....
Less than two weeks ago, Countrywide said it was hiring more loan officers from rivals forced to close down."

Where is the SEC?

I'm tired of this. Aren't you? How many times recently have we had a mortgage company tell us that everything was fine, citing old data that they knew was stale, and then just a week or two - or sometimes a day or two later we get the truth - and it ain't pretty!

Is this market manipulation? I think it is. I think its a raw, blatant attempt to manipulate the firm's stock price and mislead investors and I, for one, am tired of it. I'm losing count of the number of firms that have pulled something like this in recent weeks, and while I've had no position in most of them, there are thousands who bought stock after a press release like this made them comfortable that all was ok - only to find out that it was simply not true and bankruptcy was just around the corner.

Will it happen here? I have no way to know. But the pattern is eerily familiar.

Now in the interests of not misleading people, I'm short CFC. With what I believe to be damn good reason. But those who are long the stock, whether they be institutional holders or small retailer purchasers, have a right to expect that when a press release is made about how a firm has "adequate liquidity" it does not cite data that is more than a month old, when the problems that caused the liquidity crunch happened TWO WEEKS AGO!

While I'm at it, I have a very interesting email that was forwarded to me yesterday. I cannot authenticate it, but it brags, in quite plain language, that a primary broker/dealer and the sender both knew in advance that the Fed was going to cut the discount rate.

Oh, and the email says they traded on that information too.

If its not braggadocio, and reflects what really happened, that's illegal.

And yes, I forwarded it on to enforcement@sec.gov.

Not that I have any faith that anything will be done about it.

The cockroaches always come out when market dislocations occur. We usually find out later about all the nasty things that people were doing, and how ugly they really were. How many people lied. How many "analysts" were really in bed with the companies they were allegedly covering "for investors", treating the alleged Chinese Walls as toilet paper. It happened in the wreck of 2000, and its happening again.

Speaking of seeking Cockroaches, there's news on the wire that Countrywide may have the OTS seeking Cockroaches in their office fulltime.

"-Examiners at the Office of Thrift Supervision recently set up a full-time presence in a conference room at the Calabasas, Calif., headquarters of Countrywide Financial Corp. (CFC), according to two people familiar with the matter." - Dow Jones Newswire

Is that good?

Wall Street plays rough. I've written about money management and just this weekend, about the safety of your brokerage and bank accounts. Why? Because The Street doesn't care if you lose all your money. Only you care about that.

But what we should all care about as investors and speculators is the honesty of the process. Make a bad bet, get to eat it - that's how it should work. We should not be playing in a casino where the cards are marked for the benefit of certain "favored" clients!

We got plenty of bad news coming for Moody's and others in the "ratings biz":

"U.S. Senate Banking Committee Chairman Christopher Dodd on Friday called for an examination of the credit rating agencies' role in valuing the subprime mortgage securities market."

That's gonna hurt. Time to short Moody's?

Thornberg Mortgage sold a bunch of mortgages at 95 cents on the dollar. Problem is, those were allegedly "AAA" credit! Uh, you're never supposed to see those bonds trade at that price.....

"Thornburg Mortgage Inc., forced to stop taking home-loan applications last week because of a cash crunch, sold $20.5 billion of mortgage-backed securities at a discount to pay down debt it couldn't refinance. The shares fell more than 10 percent."

"We'll lose money on everything we do, but make it up on volume! Honest!"

How's that one end?

The Leading Economic Indicators came in at expectations up 0.4% after last month's disastrous number. But the market swoon started in August in earnest, and guess what - that's one of the things "baked into" that number. That could get bad next month eh?

It appears the media reads the Discount Rate cut the same way I do....

"The Federal Reserve's attempt to calm credit markets may have the opposite effect on equities after the most volatile week for U.S. stocks in four years."

'Ya think? I do.

In far more ominous news the 3 month T-Bill fell in return by over 90 bips today. This is especially ominous because it means that the Fed's "ease" didn't work last week, and now they're in a tough spot. As people flee from asset-backed paper they move towards treasuries. The problem here is that no matter how low you cut FedFunds you can't make people take a turd, and this becomes especially true if they've bit into it thinking it was ham and found out that it was a shit sandwich.

This pattern is likely to continue as people bail on asset-backed securities and unfortunately those securities are spread all through our paper markets in places that you'd never expect, from pension to money-market funds. The ugly part of this is that as investors flee this part of the credit market will be irretrievably roached, and there is nothing the Fed or anyone else can do to stop it.

You can bet they'll try, but its a futile exercise. Once screwed, twice shy.

Oh, Sentinel has officially sucked water.

"Sentinel filed on Friday, listing between 200 and 999 creditors. Those with the largest unsecured claims include Fortis Clearing America LLC, Stone Capital Group Inc. and two funds run by BC Capital Management, according to court documents."

Hope one of those creditors wasn't you! These were the guys who recently screwed a bunch of commodities traders when their so-called "money funds" (not quite the same as money markets, but the same idea - in theory) couldn't be redeemed. That's gonna hurt.

Oh, and if that wasn't bad enough for them, now the SEC is after them for allegedly appropriating client assets (the common name for "appropriating" is stealing.)

Capital One shuttered Greenpoint after the close today, reducing guidance by 30% and taking a charge of $860 million (!)

"Capital One Financial Corporation today announced that it will cease residential mortgage origination operations at its wholesale mortgage banking unit, GreenPoint Mortgage, effective immediately. Current conditions in the secondary mortgage markets create significant near-term profitability challenges, given the company's "originate and sell" business model."

Darn, I shorted it the other day (they were promptly taken to the woodshed in the aftermarket, and its reasonable to expect there will be more of that in the morning.) I guess it was a good decision not to cover that short into the crazy pop we had Friday eh?

(If we do get my expected recession, you have to wonder if the answer to "What's in your wallet?" will be "An exploding credit card!")

In signs that the credit problems are spreading beyond anyone's ability to control, Fannie Mae skipped a "benchmark" debt offering this month.

""Though mortgage lending via the quasi-governmental agency appears to be the only game in town amid [a mortgage-backed security] investor boycott, this news suggests that demand [for] even high-rated mortgage paper is scant at the moment and impacting funding plans at the agency," wrote Action Economics on its Web site."

This is troubling in the extreme and pretty much reinforces that there will be no "PUT" of those mortgages onto Freddie and Fannie.

For the un-initiated, Fannie and Freddie both are reliant on securitization to clear the mortgages held on their books. If that conduit collapses then so does the ENTIRETY of the conforming loan marketplace for US Homeowners!

That is FAR more serious than, for example, Countrywide going bankrupt. In fact, it would basically insure that the nation would undergo a DEPRESSION.

This is one of the checks and balances on both Bernanke and lawmakers in attempting to organize some sort of real "bailout." While they could lift Fannie and Freddie's caps, for example, nobody can force investors to buy their paper! If that demand disappears, then it matters not what the limits are - they implode instantly, and with it goes what's left of the housing marketplace.

On to technicals.....

Today we had an interesting day, with the market staging a late-day rally (again) to close up, after being red most of the day. But the strength wasn't in the financials for the most part today - it was in the industrials. This isn't that big of a surprise - and it tempered my fear a bit that we were setting for another "Bernanke surprise" in the morning (heh, can you blame me?)

The Yen was suspiciously tracking the S&P again today. Margin calls? Didn't smell like it, but its tough to know. Silver and gold were both up, and while it looked like currency market jitters were in play today the sort of "aw crap!" type of problems we've seen recently seem not to be on the table.

The Dow pinged but held a fairly serious resistance level, as did the transports. The S&P again hit the 200 and bounced down, confirming its overhead resistance. The Nasdaq Composite's resistance level held, and the NDX didn't get there.

So we're still sitting with the same picture technically that we were Friday; no clear signal either way. There were very few new highs or lows today and volume was light, so there's nothing there either.

Tomorrow should be interesting.... let's see how many more Cockroaches we can scare out from under the cabinets!

Ok, last weekend you got the "don't take inappropriate risk, and DO use good money management in the markets" speech.

This time I'm going to give you an even more serious sermon - that about your bank and brokerage accounts.

Let's first lay out what those limits are for federal deposit and investment insurance, and what they do and do not cover:

1. For BANK ACCOUNTS, which include CDs, Checking and Savings accounts, the limits are $100,000 per person per institution, with a few exceptions. That is, it is possible to exceed $200,000 per married couple, but you have to be verrrry careful with what asset classes are where and in what. For most people this is not worth farking around with; think of it as $100,000 per person, so if you're a married couple, you have $200,000 worth of FDIC coverage. Note that these limits only apply to traditional banking products such as CDs, Checking and Savings accounts. FDIC insurance DOES NOT apply to ANY structured financial instruments such as annuities, investments, or other "non-traditional" banking products that you may have purchased at a bank!
2. For INVESTMENT ACCOUNTS, if your institution is covered by the SIPC (most are, but check!) you have $500,000 of coverage with no more than $100,000 in cash. Note that this coverage does not cover you against market declines nor against the company you invested in becoming insolvent; it only covers you against the BROKERAGE going under. So if you buy, for example, a bond, and the company defaults - too bad. IF YOU BUY A MUTUAL FUND AND THE FUND COMPANY GOES UNDER YOU MAY OR MAY NOT BE PROTECTED AT ALL!

Ok, so let's talk about what rational steps you should take right now, assuming you have not yet done so (you really should have done this before, but.....)

1. If you have more than $100,000 in any single bank as an individual, or more than $200,000 as a married couple on Joint-Registration accounts, move enough of it to other bank(s) to get under those limits IMMEDIATELY. While you can structure deposits to get larger limits, this is not worth attempting in my view as if you make a mistake you are exposed. The base limits are well-understood and easy to avoid violating; the complex rules are not.
2. If you have more than $500,000 in assets in a single brokerage, or more than $100,000 in cash, move enough of it to other brokerage(s) to get under these limits IMMEDIATELY. If you are carrying a big CASH balance and do not intend to use it immediately give serious consideration to buying short-term T-Bills (30 or 90 day FEDERAL paper) with it so that you are not over the $100,000 free cash limits. DO NOT RELY ON PRIVATE OVERRIDE INSURANCE. Most of this is underwritten either directly or indirectly through LLoyds, which is a totally-private, unregulated operation. While Lloyds has a good record of paying claims in a global shitstorm you must assume the "names" behind Lloyds will fail to make good on their insurance obligations.
3. If you have so much in brokerage assets that it is simply unreasonable to get under the $500,000 limits, (e.g. more than $2-3 million total) then I would diversify to no less than three brokerage institutions, all of whom must CLEAR through different primary broker/dealers. Remember here that the risk is NOT localized to your brokerage; it also extends to the primary broker/dealer they clear through as a failure THERE may imperil "street registration" securities! In this case you simply are going to have to accept the risk of a POTENTIAL business failure somewhere.
4. If you have very long term stock holdings you have no intention of selling irrespective of what happens in the markets then I would call your broker MONDAY and demand PHYSICAL delivery of certificates. This removes those stock certificates from their "street name" registration and puts them in your PHYSICAL control. Note that this makes it somewhat of a pain in the ass when you want to sell them AND you're going to get charged a fee on both sides, but it is a very viable option to remove your holdings from the risk of insolvency in a brokerage. Be aware that this also removes them from your margin computation, of course. My father had (maybe still has) a BIG stack of physical certificates in his safe. Why? He grew up during the Depression. Not hard to figure out eh?

You want to know why I am recommending this? Articles like this:

"However, the turmoil could spook depositors at Countrywide Bank, an Alexandria, Va.-based savings and loan that has grown dramatically since Countrywide Financial bought it in 2000. Nearly 40% of the bank's $57.7 billion in deposits were not insured by the Federal Deposit Insurance Corp. as of March 31, according to the FDIC website."

40% exposed eh? That's gonna suck if something bad happens, and I bet its representative of the other banks and their depositors as well.

People have simply not thought of bank failures as possible. Well, it is possible. So are brokerage failures.

The last few years have seen an incredible "levering up" of risk among all financial markets. This has not been limited to hedge funds; banks, brokerages and others have all taken on more and more risk via derivatives and packaged securities backed by what we now know to be invalid ratings!

As collateral impairment has started to take hold this has resulted in what people are calling a "liquidity crunch."

If that's all it is, then it will be painful for a while, but not catastrophic.

But if the real problem is insolvency, then injecting liquidity will not fix it, and in fact is just adding more explosives to a shack that has a lit fuse running into it, so that when the detonation occurs it will make an even bigger hole.

Don't be inside the blast radius - keep your assets spread out widely enough so that you are covered by Federal Insurance Limits.

Oh, and it wouldn't be a bad idea to keep a small stash of cash (a few thousand?) outside of the system entirely.

This posting is almost certain to kick off comments from people asking about "what if the entire thing blows up and collapses." While that's nice speculation let's simply observe that even during the Depression this did not happen. If it does, however, you will want to be long lead, brass, steel in appropriate forms and soap. I am not going to get into that sort of "doomsday" situational thinking because frankly, I just don't see the path by which it occurs, but if you want to put on your tinfoil hat, then head over to the nearest firearms dealer and grocery store and stock up.

Amazing shit here guys.

Bernanke. You gotta love the stupidity in the markets, and you really have to have respect for just how stupid Ben Bernanke is.

What he did hurt. A lot. People got burned bad by this, and the market will make him pay for this in the coming weeks.

Hell, let me be straight here. I got bit for about $30k today on a mark-to-market basis. While it sucked the big fat banana, I've lost more in a day, and in terms of realized losses, it was small (two futures positions I pulled as the spike started.) Do I believe most if not all of that will be returning to my account balance? Yep. Are most of those short positions still profitable? Yep. Piss me off? Absolutely. Why put numbers on it for you? So you understand that we all look through our own pair of glasses, and I'm no different than you!

Ok, enough of my personal wine (of which I'd like a glass) and on to Bernanke's insanity.

First, the discount window cut is not a rate cut. It takes some of the "penalty" off going to the discount window, which normally has a big penalty associated with it. Note that the penalty was not removed - it was just reduced.

That is all it is.

Second, doing this today before the market opened was insane. The impact on the "big boys" in the index options market was severe and totally unreasonable. The retail guy doesn't play there, but the big institutional guys do, and Bernanke just boned them up the ass.

Fortunately the two biggest-risk trades (and the ones I was not willing to hold into something like this) were in the futures markets and I was "on the trigger" when it happened. Yeah, it blew, but I got out with my head still attached to my body. Many others did not, and those who had open positions into Index OpEx got RAPED.

Ben - why not do this after the market opened and the SOQs were recorded? That would have done the same thing in terms of the pop and the actual liquidity impact, but it would have preserved order in the index options marketplace, the playground of hedging and institutional money, which is supposed to be what the Fed cares about - not whether you make or lose money, but whether the markets are ORDERLY.

I am not arguing against the actual action taken - which appears to be both reasonable and targeted. It will not fix the problem to the extent that it is insolvency, but will help solvent banks with temporary liquidity issues (which IS the Fed's place.)

But the timing - Bernanke, you're a tool. A total and complete tool. This will reduce confidence in the system, not improve it. To that extent it spells opportunity to those who trade against the crowd - like those who had the balls to short into the pop this morning.

But it also means that we are likely to see more instability in the markets in the next few days and weeks, not less. Not because of the action but because of the timing. Just an hour or so later, this would not have been a concern; the SOQs would have been taken, the winners and losers allocated based on last night's close, and then that would have been that.

But now we get the Fed adding to market instability.

Nice.

How come? Let's look at recent history - remember that Poole just the other day said he saw no reason for Fed Intervention at this time.

The are only this two possible explanations for this action, and both raise the risk of an outright market crash to astronomical levels:

1. There are one or more banks that are literally about to suck water. If that happens, the market will crash. Since this is likely an insolvency rather than an illiquidity issue, nothing has been - nor can it be - fixed.
2. The Fed lied outright to Wall Street and the Public and intended to do this all along, knowing full well that the statement Poole made on the matter was false. In this case the market's confidence in The Fed has just been destroyed; they've documented themselves as liars.

My prediction: Bernanke just insured a market crash. Not today, probably not Monday, perhaps not for a couple of weeks or a month. But he insured that it will happen because he pulled the rug out from under the market's view of the Fed being an instrument of ORDERLY markets. Now when the jitters over the next dislocation in the credit markets occur (which will be in the next days or weeks, not months or years) nobody will know what he's going do or when and they will expect DISORDER.

What do you do when you have no reasonable expectation of order?

YOU SELL NOW LEST YOU GET A NASTY SURPRISE LATER.

Now in the grand scheme of things this isn't as bad as Greenspan's "PUT", but it vies for it in terms of stupidity. At least Greenspan was predictable.

What Ben DID is something entirely different.

It was stupid, it was insane, it qualifies as bordering on criminal. And by the way, that rally yesterday? I'm forced to be suspicious of it being ignited by a leak. Short-covering in the financials eh? Hmmmmm..... I'm not so sure anymore. Maybe more like someone being tipped off?

Now let's talk about what Bernancke actually did today.

He hiked rates for people who are solvent, but cut them for people who are not!

Is this stupid or what?

Look, I'm sitting here listening to Cramer talk about how cutting The Discount Rate is "great". It is? What the hell is he smoking? Let's be straight here - the Fed still has a penalty associated with the discount rate (which they must lest banks arbitrage the discount window and make a mockery out of The Fed) and yet they did not move the Fed Funds rate.

Yet the market treated this announcement as if not only the Fed Funds Rate was cut AND there is no risk of an economic downturn!

WRONG ON ALL COUNTS.

Further, there is ZERO relevance in this to mortgage rates or to home affordability, and the latter is where the problem lies. You can't fix that without major price declines in houses! It just can't happen.

Oh, and where did this come out of? Look at the statement - New York and San Francisco Fed Banks? Hmmmmm..... so we got one or more banks in potential trouble - like potential collapse trouble - and they might be in New York or..... California? This is bullish and worth a near-300 point rally?

Never mind clues like this:

"Anxious customers jammed the phone lines and Web site of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank."

Or this:

"Mason also cited Bagehot's rule, a basic banking principle which he explained as the need to distinguish between illiquid and insolvent organizations. "You want to lend to illiquid but not insolvent institutions," he said. Lending to insolvent institutions just enables them to dig themselves an even deeper hole.

To him, that's what seems to be happening.

"I would argue that Countrywide is insolvent. Their only asset is their pricing platform, their business algorithm, and that's not working. The next biggest asset they have is the toner for their copiers.""

Which was enough reason for me to short more. We'll see who's right on that one. By the way, a "run on the bank" can kill any bank, because none have more than a small fraction of the funds on deposit actually available - the rest is loaned out. So if everyone shows up and demands their cash.....

Oh, by the way, The UM Sentiment Index came in at 83.3 way down from 90.4 and far below expectations.

I said I was going to head to the waterpark with my kid today and did; got banged on my futures trades (who didn't who was short today?) but I only took off a couple of shorts.

I know a lot of people who read the Ticker got buried today (hope you guys read my risk management screed a week or so back!) and the interest is in what's forward, not what's behind us. With that in mind I'm going to put up some charts, leading with an extension of the one I posted last night.




Ok, so let's step back a bit and look at the big picture for a guide as to what we've got in store for us. We'll start with the SPX, although the Dow is probably the more interesting chart.



Hmmmm......



This is one of your "Tells". We have a very nice Head and Shoulders, a drop below the neckline, a ping below the 200 which didn't stick and now a retest of the neckline that held from the bottom!

I said the other night we were looking at February's numbers as the near-term target. I still think we are. But - we're still sitting here this evening with a sideways indication for the immediate future.

Intermediate term what changes my mind? A decisive break over the neckline that holds. What changes my mind that we've seen the bottom? Gotta get the primary support levels back - most importantly, SPX 1490.

What confirms my bearish indication? The 200 has to break and hold below.

By the way, the shorts got both creamed and cleaned up today. There was an amazing amount of short-covering today and the PUT/CALL ratios plummeted. This leaves the door open.

Oh, and the Yen? It is still way below the "all clear" level on the Carry.

So we go into the weekend with people having a couple of days to stew on it.

Sunday evening the Japanese get first crack, along with the Futures and FX guys. Key will be whether any "bombs" are dropped over the weekend - any late-night "specials". Then we get to see what Japan thinks of this.

Bottom line - nothing has changed, and giving money to insolvent people on a temporary basis doesn't fix the insolvency.

The mortgage companies who loaned money to people who cannot pay it back are going to suffer and so will all those who bought their paper, those who bought homes from 2004 onward will suffer, and the consumer will suffer. It is a near-certainty that we will have a recession by Christmas no matter what the Fed does. The credit markets remain jittery at best and the equity markets, staring at a near-certain recession, are likely to react as they always do to recessions. And Bernanke has taken what was looking like a sharp but orderly decline and raised the spectre of an outright crash - I now give it 50:50 odds, where before I was consider this as more of a "1 in 10" scenario - because the market can no longer trust that he will conduct himself in an orderly, transparent fashion.

Short term, money management is going to be very important, as this volatility - and these sorts of surprises - both good and bad - are likely to continue.

Oh, you think this was a "healthy" rally on good news? Then explain Gold, Silver, and the 35 New Highs and 114 New Lows.

On a day that was up almost 300 Dow points.

If you want to believe in that - as many of the "Fast Money" guys do - I have a bridge for sale.

Oh boy......

First, economics. Housing starts down 6.1%. Building permits down 2.8%. On year-over-year, its over 20% - in both. Oh, and that does not include any of the fun August mortgage issues (that'll be next month!)

Yow.

Then this morning Countrywide drew down an entire $11.5b credit facility!

"Countrywide Financial Corp., the largest U.S. mortgage lender, said on Thursday it is drawing down an entire $11.5 billion credit facility to bolster its liquidity as a shortage of credit weighs on the mortgage industry."

Oh oh. Is someone in trouble? I thought they had $50b in liquidity - so said their press release! Hmmmm....

Oh, and Moody's thwacked them with a severe downgrade across the board.

How do you spell "capital flight"?

Oh, and the regulators (at least in the EU) are tired of the bullshit with the ratings agencies. I know all about "barring the door after the horses have left" but.... at least its something:

"French President Nicolas Sarkozy and Europe's financial regulator called for a probe into Moody's Investors Service, Standard & Poor's and other ratings firms criticized for underestimating the risk of subprime debt."

I've only been calling for that now for, oh, six months. Nothing like a good old-fashioned market crash to wake up the politicians.

Then let's talk about Fitch. They put all second-lien (Helocs, etc) mortgage securities since 2005 under negative ratings watch. ALL. Read that yet? Good.

"Fitch Ratings has placed all classes of 58 U.S. RMBS subprime transactions backed by pools of closed-end second-liens (CES) on Rating Watch Negative. This action includes all classes from these transactions previously placed on Rating Watch Negative. The 58 transactions have an aggregate outstanding balance of approximately $12.1 billion. 35 of the transactions were originated in 2005, 22 were originated in 2006, and one this year. These transactions comprise the entirety of Fitch’s rated portfolio of CES RMBS from those vintages."

Oh, and if you wanted a bailout? You're not going to get one:

""There is nothing, in my judgment, that we should be doing in terms of guaranteeing market participants against losses or in terms of restraining risk taking," Mr. Paulson said. "One of the natural consequences of the excesses is that some entities will cease to exist.""

You think?

Philly Fed Index came in at a zero. That means no expansion in activity. Expanding areas were exactly balanced by contracting ones. No impact on Main Street eh? Uh huh....

Now look guys, I'm gonna talk about something that I'm late on, and fixing as I write this. That is potential insolvency in brokerages. There are a few that are pricing in insolvency right now, E*Trade being one of them (ETFC). Look at their chart!

So - if you have more than $500,000 anywhere in positions, or more than $100,000 in cash, start spreading it around right now. Do it today, do it tomorrow, but just do it.

While none of these firms is likely to go insolvent tomorrow, the risk of one or more of them keeling over is very real. This risk is not zero, and nobody - I mean nobody - can tell you that it is.

Let me stress that I do not EXPECT any of these firms to actually go under, including E*Trade. But with that said, even with the "private insurance", your money beyond the SIPC limits is not necessarily safe.

And note that any investment you may hold, other than physical bonds, may not be safe either, although ETFs and such that hold Treasuries are about as safe as you're going to get in the "not completely safe" category.

Use your heads guys. While the risk of a total financial markets implosion is not large, I can no longer completely discount the possibility.

I have no idea how far down this rathole goes, and neither does anyone else. My fear is not the actual losses on the mortgages but the fact that many of these guys have be sitting on ticking $500 billion bombs with alleged swap protection that isn't worth the paper its printed on.

If that occurs then literally any financial institution is potentially at risk, and any company that has to have access to the capital markets in any form (including short-term commerical paper) could find themselves totally out of business in a day.

In short, Cash is not just King now, it has been elevated to God status.

At least for the moment.

This afternoon? Short covering guys. This is spelled margin call and came out of Yenistan. Guess what - that's exactly what you got. The Carry started to get unwound forcibly and the result was a huge short-covering rally that ignited the financials and as a consequence the S&P on fire. The Dow got drug along a bit from its representation in there, but the Nasdaq and especially the NDX did not.

Now let's talk a bit about why that happened, beyond margin calls. As those of you who trade the options markets know tomorrow is expiration. What many of you who trade equity options do not know is that tomorrow morning index options are priced for expiration via what is called a "Special Opening Quote", or SOQ.

This SOQ prices all the components of the index at the open tomorrow and THAT is the settlement price for those options. Index options settle for CASH since you can't be long or short an actual index (you could all 500 stocks in the S&P, but that'd be kinda silly, so they don't do that); that is, if I sold you a SPX option @ 1500 and tomorrow morning at the open all the index components add up to 1425, then I owe you $75 (X 100 for each contract, of course.) The money comes out of my account and goes into yours, settling the next day. But it is not closing prices that matter, it is OPENING prices, which means that if you're going to fuck with the indices and play arsonist for index options you needed to do it TODAY.

Now there are of course also options on the Qs, on the SPYs, etc. And for those, they settle just like any other equity option - close of business Friday (they actually expire Saturday but the market is closed Saturday of course) and if exercised or assigned you end up either long or short the equity (ETF, etc.)

For this reason what happened today got some extra "gas"; I noted in a Tick that we were seeing attempts today earlier on but it wasn't taking fire. Well, you got the Margin Clerk behind people banging on their heads and a run was made at it, and BANG to the upside!

This does not mean we will get another one tomorrow, but you cannot discount the possibility.

Take a look at the Qs and SPYs for open interest on both CALLs and PUTs! There is a tremendous amount of money that is going to be thrown over to the buyers of those PUTs tomorrow unless a MONSTER rally can be kicked off.

But guys - the big guys play with the indices. They don't play with the Qs and the SPYs, they play with the OEXs, the SPXs and the NDXs. And those are all gone at the open.

Ever notice how a lot of OpEx Fridays after about noon the market quiets down and basically goes flat for the afternoon? Ever wonder why? That's the reason - the "smart money" isn't playing in the individual equities and ETF options, they're squared up and flat, and they've gone home - win, lose or draw.

Now what could change it this time? Lots of things. That OI on the Qs and SPYs for one thing. That looks like its going to be verrrrry expensive. Heh, 246,000 contracts X 100 shares X $2.50 (the 48s) is a shitload of money, and someone's gonna have to fork it over! You can bet they're not going to like that idea one little itty bit.

But in order to kick off another of these you've gotta find another place with enough short interest to light something, and remember - on the SPYs you need ten points on the SPX to move the SPYs one! The big money on the SPYs is at 150! Sorry, I think those guys are just gonna have to pay up, like it or not. Move the SPX up 10? Maybe. But seventy points? No fucking way.

Anyway, there you have it.

I took my Q PUTs off at a nice profit but replaced them with something I could trade after-hours, Nasdaq Futures. We'll see what happens with that; I did not want to risk an OpEx surprise on those.

This isn't over folks. The credit issue isn't over, the Yen issues aren't over, none of this is over. It can't be over here. I mean, c'mon. You got Countrywide saying that it tapped $11.5 billion in backup funding lines! Is that going to make it all go away? Nonsense.

But - if you're overloaded here to the point that you're uncomfortable at night? Lighten up.

Second, risk management guys. Seriously. If you go to the forum you'll see that I pinned my "Come to Jesus" posting on the ticker. If you haven't read it yet, please do. If you have, read it again. Then look at your positions and do the intelligent thing.

Hewlett-Packard (HPQ) reported good results and claims they like the following quarter. Dell, on the other hand, is restating results and apparently is cutting guidance. So - six of one, half-dozen of the other. How's it wash out? Not entirely sure, but I bet its not all that good.

Could we head north tomorrow? Yep. Its options expiration - anything could happen.

What do I expect?

From the charts the short-covering in the financials appear to have been triggered going into the close, likely due to margin clerks hitting people up as we got into the last hour or so.

So now the quesiton will become, what do we get overnight?

It could be a lot of nothing, in which case I wouldn't be surprised if some of the rediculous pops that we got today in the financials (12% in Bear Stearns?) get hammered back down. If we get bad news overnight, it will get bloody in a hurry.

Of course we might get good news of some kind overnight, although I'm not sure what sort of good news we could get at this point - and if we do, then I'd expect a run in the morning.

But on a probability basis I expect blood, perhaps a lot of blood, and here's why:

1. The Yen deal is not over. You're a fool if you think it is. I'm stil short Dollar/Yen and intending to stay there. I have a stop on it in the event I'd seriously wrong, but I don't think so. I expect the Yen will get down to 105 before this is all over. We're a long way from there, and its not just margin calls that actually went out - its also the threat of more of them if you're currently in the clear but warily eyeing the "call" level.


2. Hedgie Redemption "gotta do it now" notices were due yesterday. Hear anything about that on the news today? Neither did I. Why not? Hmmmmmm.... Why do I think that didn't go well?


3. Fundamentals. Anything changed? Nope. Builders? Crap. Lenders? Bleeding, drawing down emergency lines. Philly Fed index? Flat. Same-store sales? Deteriorating. Anything to like here? Oh hell no. Any more questions?

By the way, if we do get a run tomorrow north I'm not taking any of my shorts off. In fact, I'm inclined to short into it. Ain't no way this ends well guys and dolls, and ain't no way out of the Carry Box either - except for plenty of these:

Any questions?

Didn't think so.

As in....



Inflation came in right on target.

Countrywide got cut to SELL at Merrill Lynch on liquidity concerns, and the "B" word showed up..... oops....

"Countrywide Financial Corp., the biggest U.S. mortgage lender, was downgraded to 'sell' by Merrill Lynch & Co., which raised the possibility of bankruptcy if the company loses access to short-term financing."

No, you think?

And if that's not enough, Cuyahoga County in Ohio won't take their checks any more for mortgage filings. Certified cash only please guys..... tee hee..... (you know its bad when a few hundred bucks worth of checks possibly being bad worry a government!

Then to add to that we had the coup-de-grace today when it was reported on CNBC that CFC was hit with offers at 12%+ for their commercial paper. For obvious reasons (like instant insolvency when you lend at 7% and borrow at 12%) they won't take those offers, but it tells you what sort of trouble they're in! In other words - its very bad and may get a lot worse!

What did the market think of it? Uh, here's a daily chart - what do you think?



Mortgage applications were up but finally the media is getting it (are they reading the Ticker?); we now got this:

"In particular, the industry's turmoil "may be temporarily increasing the level of retail application activity at the large lenders that participate in the MBA survey rather than representing a systemwide increase," said Doug Duncan, the MBA's chief economist and senior vice president of research and business development, in a news release."

It'd be nice if you'd tell people this when trends begin instead of after they simply can't be avoided any more. But that would require that you REPORT instead of CHEERLEAD, wouldn't it?

NAHB (home builder) sentiment came in at 22. This is significantly below last month's 24, and continues the horrific slide in home builders. Got short?

"The National Association of Home Builders said its housing market index, which tracks builders' perceptions of current market conditions and expectations for home sales over the next six months, fell two points to 22 this month, the lowest reading since January 1991 and the sixth-straight monthly decline."

Yikes. By the way, if it breaks 20? That would be an all-time low.

Here's our old buddy the SPX.


I'd call that a decisive break below support. Next stop is the February lows around 1370ish.

If that doesn't hold we're looking at this from Friday....



Remember that one? Yep. Let's see, we have a 1225ish level (last Summer), we have a 61.8% or "phi" retrace at 1075ish, and below that, well, let's just say that if Lucifer yawns a 7-handle might make an appearance.

Same deal with the Composite:


Support? What's that? Got short? Amusingly the Composite is sitting right on top of a support level, but I don't see it holding. February's lows are my short-to-intermediate-term target; 2340ish.

As for the NDX, forget it. It not only blew the critical support level that I've been watching it then blew through the support level under it, meaning that from an NDX perspective I am expecting those February numbers again too.


Booya!

Now guys I want to show you something even worse; this is the Transports:



This is kinda bad. Actually, if this is a leading indicator on "the real deal" its a lot more than kinda bad, and we're looking at an early "tell" which may say that February is a pipe dream, and we're not targeting those levels in the near term - we may be targeting the 2006 summer lows - and goddamn soon!

Take my shorts off into the close given this chart? Fuck that! You gotta be kidding me!

The assclowns on CNBS (Kudlow in particular) are now screaming for 50 bips in rate cuts on an emergency basis, Kudlow is trying to tell the Fed to take subprime mortgages as collateral on repos!

This from a guy who claims every single night to be in favor of "Free Market Capitalism." Of course like most of the rest he's a goddamn hypocrite, and only wants "free market capitalism" when the people who do stupid things don't have to suffer the just consequences of those acts.

My answer: Fuck you Kudlow!

Look guys. Every last one of these crooked institutions that sold this paper out into the market in an irrational and unsafe manner should go BANKRUPT.

All of them.

Every single last fucking one.

For those who are "merged" companies, forcibly reorganize them. Strip off the brokerage piece, for example, and combine it with a safe and sound institution. Let the mortgage side die.

I'm personally tired of this bullshit, and I hope Bernanke has the balls to set forth some "tough love" and tell these clowns to go take a red-hot poker up their ass. To put forth the idea that the Fed should bail out people who made bad loans to those who cannot pay them back, or that the Fed should reward Wall Street for creating an EPIC housing bubble that has raped raw huge percentages of the American population for their own PROFIT, not for the benefit of the consumer, is DISGUSTING.

Tomorrow's market action? Don't be surprised if it looks like this, especially if the Yen continues to crank this evening and a carry unwind gets going. Another way to look at this would be GLOBAL MARGIN CALL.



Have fun tonight and tomorrow...... the shitstorm is just beginning.

Got Umbrella?