The Market Ticker

So this morning dawns to a huge futures ramp at 7 ET.

Well, ok, let's be concise. A gold ramp, a silver ramp, a dollar dump AND a futures ramp.

Just amazing. Even more so is the pretty parabola in GOOG's share price. Of course nobody's paying attention to the updated forecasts for Grinchmas coming out, all predicting far weaker sales than just a month ago.

I wonder why? You don't think the cut-off of the $5 trillion in fraudulently pumped home "appreciation" might have something to do with that, do you?

IndyMac Bank (IMB) reported a loss five times that of estimates. Wow. Trading premarket at $11.

Yet "big tech" fiddles along. How?

The odds are shifting once again, this time towards a potential blow-off rotation into the Nasdaq "final 3" + anything that has the word "solar" in it. Amazon has been thrown under the bus.

Deteriorating internals and narrowing leadership is never good for The Bull's case, but The Sheep don't look at the internals of the market and how sucky they are. They just look at the index numbers, so if you find a few stocks that comprise, oh, 20% of the index......

But what happens when they start to crack, one by one?

Oh, and don't look at the yield on the 10. You will be.... uh.... unhappy. As in bonds being sold off unhappy. With the Futures up, this smells like people bailing on equities and headed into metals.

That's spelled "FEAR" guys and gals.

Justified? Don't know. Surprising? Not to me.

For more on that, look at the EFF - effective Fed Funds. Stealth ease? Hmmm.... or refusal to defend your own targets? Either way, real rates are trading materially below target. So - does The Fed follow (and do an intermeeting cut, which is going to freak people out), or are they going to start aggressively draining liquidity?

And why is the EFF so low? Think supply and demand. No demand for bank credit... hmmm.... that'd be a problem right? Commercial credit demand falling off a cliff? Or inability to qualify?

Heh, isn't deterioration of credit quality what I've been talking about?

ICSC came in up 1% after two disastrous weeks in a row, while Redbook came in with further deterioration at -0.4% (from -0.3%). Weak overall is the best you can say when it comes to retail.

What percentage of our GDP is consumer spending again? Its 70%, isn't it?

The crack spread is starting to widen out a bit again, and gas prices are ramping. Wait until gas catches up with crude. $4/gallon is basically assured by Grinchmas.

Now add to this that Capital One (COF) suddenly blew up this afternoon with an announcement of bigger than expected write-offs and took a cliff-dive intraday to the tune of nearly $2, or 3.5%, in seconds. Uh, that's consumer credit guys and dolls. As in credit cards? You know, the fuel that powers spending for Grinchmas?

Oh oh....

But wait a second? Didn't they already report?

Indeed.

But the 10Qs have not been filed yet. And those are documents, and potential SarBox deathtraps.

Betcha this doesn't stop with Capital One!

We got a massive Hindy today - extreme elevations on New Highs and New Lows. Last time we got both this high (just before the August blowup) we were sitting on the cusp of a plunge......

Morgan Stanley downgraded the entire retail sector, saying that 07/08 estimates are too high, with the key issue being margins. No, really? You mean that the dollar going in the tank makes imports more expensive, and gee, where do we get all those clothes from that people sew for 25 cents/day? That'd be overseas, no?

Yoo hoo! Mr. Market!

Margins are being compressed and consumer demand is softening!

And today, although I don't have a link for it yet, word on the street was that S&P cut Q4 earnings estimates on the S&P to a gain of 6.9%.

Let's remember:

The market's premise for the recovery off August's lows was that we would have 10%+ earnings growth in Q4 and for all of 2008. That would put the P/E/G ratio at the top of the historical band near 1.5 for the entire market.

Now it is over 2 on forward estimates and the trend is horrifying; Q3 now looks to be radically negative in the 4-5% range, when just a couple of weeks ago it was forecast to be flat!

What does margin compression mean for P/Es and thus "reasonable" equity market prices?

Yeah.

Oh, and what's on the wire at CNBS - again?
"The market is clamoring for another rate cut."

More temper tantrums. I guess the dollar looking like this doesn't bother the pigmen eh?



Hope you like $5/gallon gasoline, because my $4 target is increasingly looking like you will be wishing you could buy it for that.

Yet we still don't have those 10,000 or 100,000 signatures on The Petition.

Maybe I need to go diving instead of writing tickers.... after all, its clear that people still ain't getting it.....just remember, I called the "putback" of fraudulently-originated mortgages six months ago.

Care to bet against me on the sky-high gas prices?

Oh hell, just bet against GM. They announced a whopper of a writedown after the close.

That ought to throw a bit of cold water on the Bull's case tomorrow.

Now add these two things - Plosser's comments this afternoon (Fed Governor) indicate that there are multiple governors opposed to further cuts in December, and Australia just raised rates. If the ECB does as well this will essentially force Bennie to defend their current rate and drain liquidity, which will have really bad effects.

Finally, consumer confidence (ABC) came in at -15. Booya.

Here's your technical!

Me thinks Mr. Market has finally figured it out.

Maybe.

This morning Citibank's announcement of Prince's departure - which clearly was bad news - was interpreted as bad news.

The Futures had their high of the day at midnight, and despite some heroic pump attempts, were sold.

Does anyone remember back in APRIL when I opined that any mortgage that was originated with fraud as its foundation was subject to being put back, irrespective of the expiration of a "rep and warranty" time period?

Well, guess what kids - six months later, the media is (finally) getting it:

"But if parts of the origination process are found to be fraudulent, investors can potentially force lenders to buy the mortgages back at the original price. If the assets have suffered delinquencies and have dropped in value, the lender takes a financial hit."

The Bulls on The Street subscribe to this thing called "magical thinking", in that they believe that people can commit fraud and get away with it by shoving off the cost on someone else, attaching a very short "warranty period" which will expire before the bomb goes off.

The Law says that it doesn't work that way.

Fraud voids all contracts and what's worse, the Statute of Limitations doesn't start to run until the fraud is "outed"!

It took six months for the media to figure this out?

Or is the truth that the media simply doesn't want to talk about reality? "The Street" doesn't want to talk about it either, never mind that they have plenty of $1,000 per hour lawyers who do understand it.

Why not?

Because once this is clearly out in the public eye and in their mind, this entire house of cards comes crashing down as all these bad loans are put back as far up the line as there remains money!

This will sink originating banks and mortgage companies. It will sink securitizers (which are the big Wall Street "boyz") and raises all sorts of interesting SarBox issues.

It will also wipe out every broker and real estate agent who participated in these schemes.

The second order effect is even worse - it will precipitate a full-on consumer confidence collapse; a collapse that no longer can be avoided.

The "Tech Bubble" was, for the most part, about starry-eyed people bidding up stocks that had business plans that could be written in one sentence: "We're on the Internet, give us money."

At least they were honest about it.

But the worst parts of the "Tech Wreck" were the big infrastructure players that blew up. And there, we did have fraud - claims that "The Internet is doubling in size every three months" - a claim that I, and thousands of others, knew was bollocks once the first year or two of the Internet had passed us by.

But this time it truly is different, because the fraud has become embedded in all elements of the housing bubble:

• "Grade inflation" in the claimed credit quality of securitized mortgages.
• Appraisal fraud - if the recent suit proves up, this was systematic, and if you ask Real Estate agents (and can find an honest one) they will tell you that appraisers were frequently given the "sale price" - a clear violation of their intended neutrality and, in some states, a violation of the law. The number of appraisers who found themselves "blacklisted" for failing to hit desired target prices is the stuff of legends as well.
• Mortgage fraud - an example related to me on the phone over the weekend was of a hairdresser at CostCutters who claimed $8,000 a month in income. How does this get through underwriting - say much less past the broker who is given that information? It doesn't, unless its being done completely by computer and no human looks at it - or they just don't care.

In short, the entire "Real Estate boom" that "powered our economy" over the last five years is one giant ball of fraud.

A ball of fraud that turns out to have a nuclear core, and it is now starting to "rapidly disassemble."

If you're a "Bull" in the market today you have to be willfully ignoring this.

Is that smart?

How well does magical thinking work in general?

Let's cut the nonsense - CNBC is still pumping "tech tech and more tech". How does tech survive when a huge part of the tech sales go into the financial area, and every company in that space appears to have a significant amount of exposure to these "putbacks", either directly or indirectly - and what's left is consumer sales which have been fueled by phantom "income"!

I don't get it.

I understand being bullish on the economy - when its strong.

I understand being bullish on tech - when both consumers and businesses have lots of money to spend on your products, and get tangible benefit from them.

I understand being bullish on America, because in general, its been a winning bet.

But let's cut the BS.

The "recovery" from the 2003 lows has not been driven by "solid earnings", "a solid economy" and "a solid consumer."

It has been driven by organized fraud in the housing market, from appraisals to "subprime" mortgages to pumping "interest only" and "negative amortization" loans (which brokers knew where unaffordable once they reset or recast) to outright false claims of phantom income by borrowers.

All of this produced phantom economic activity which fueled the export business - China's making things we consume but our consumption is unsustainable!

By best estimates, 6.5 trillion dollars worth has been withdrawn from their "household ATM" by US consumers in the last four years and spent.

To put perspective on this the US GDP last year was about $13 trillion dollars.

Let's presume that 20% house price appreciation over the last four years is "about right" given 3-4% real wage growth. So the rest - 80% - is the product, direct and indirect, of fraud.

That makes roughly $5 trillion over four years of phantom money that wasn't real wealth created by real economic activity.

That's 9.6%, roughly, of our GDP on an annualized basis!

But for this fraud we would have been in a deep and long recession for the last FOUR YEARS.

Now this has to be unwound. To the tune of five trillion dollars.

People talk about how the "subprime problem" is "contained" and then they put a number on it - $100 billion, $50 billion, even $200 billion.

That too is a Chimera.

The real issue is the $5 trillion in so-called "wealth" that was spent but unearned, and as a consequence was been replaced by DEBT on consumer balance sheets.

That debt now requires service and will for years if not decades to come, unless it is written-down en-masse!

Obviously, to try to unwind this "all at once" would crash our economy instantly.

50% losses in the stock market? Try 75% and an almost-certain deflationary depression.

Of course that's unrealistic.

We're not going to take the medicine in "one gulp" any more than we got the benefit from the fraud in "one gulp".

But it is beyond question that we will take the pain and cost of unwinding this mess.

It cannot be avoided.

To the extent that "The Media" refuses to address this they are complicit. To the extent that "analysts" keep spouting "buy buy buy" they are complicit in robbing your wealth. To the extent that investment banks and others on "The Street" continue to hold so-called "Level 3" assets which they claim whatever mark they can get a computer to spit out, they too are complicit.

The entire premise of this "expansion" over the last four years has been fraudulent.

There was no actual expansion. No real wealth created. No real economic activity advance.

Instead, the truth is that our "price/earnings" ratios in the market have been propped up by consumer spending that was wholly built upon a fraudulent foundation. It has been a Chimera; the idea that you can create something from nothing.

I'm tired of it. You should be tired of it. You should not tolerate this from the media, from the regulators and from the politicians.

Politicians will pander to their donors and try to pander to you, yet those donors are why we are here.

But for the "cooking" of financial instruments there was no market for these securities as there was no profit to be made!

Will you wake up? Will you get involved in signing The Petition? Will you write your own letter to Congress and The President? Will you tell your Rep and Senator that you're tired of the fraud and nonsense, that these "financial gamesters" need to be led off in handcuffs - and if they don't start demanding that the law be enforced, you will vote them out of office?

Or are you going to cower under your bed and run some stupid conspiracy theory while your savings are inflated into oblivion (and then what's left is taxed!), your salary fails to keep pace with rising prices, and your debt load goes to the sky?

Heh, its only money, right?

Yours, of course.

Your retirement.

Your children's future.

Nothing to worry about right?

Ok..... you choose.

In the latest display of "stupid" in the tech space, here's a prime example from Google's announcement on their "cell foray":

"Confirming its long-rumored foray into the mobile market, Google said Monday it is developing a free cell phone software package so the Internet search leader can more easily peddle ads and services to people who aren't in front of a PC."

If you read the article in detail, you'll find that what they're doing is producing a "stack" - which isn't really an operating system, but rather a user interface and/or "set of packages" - to run on what are now known as "smartphones". Or maybe it is an operating system. Not that it really matters.

This was worth more than $14 in "pop" today?

Are you kidding me?

For the uninitiated, this is already available for handsets, but you have to install it yourself - at least on carriers such as T-Mobile and Cingular.

Here's a picture (of my house) from Google Maps on my Cellphone....



gPhone? What gPhone? I've already got it and its already free!

YAWN!

You didn't buy their stock on that stupidity did you?

Oh, I bet you did. A lot of other suckers did. And RIMM's too. Double-yawn.

Here's your technical!

Well November dawned yesterday to a sea of blood.

Jobs jobs and more......

Up 166,000 according to the "official statements". More than double the consensus.

The problem is that 103,000 of those "jobs" are a Chimera. A ghost in a machine. They were "created" by a computer model, not by a payroll count, tax receipts or a census. What's worse, their model "created" nearly 40,000 jobs between construction and finance. Do you believe that those numbers could possibly be correct given the mess in mortgages and homebuilding?

One little additional fly in the ointment is found here:

"But a separate survey of households showed that fewer Americans were employed last month over all. The labor force shrank by 211,000 jobs, and 465,000 Americans said they were no longer working."

So let me see if I understand this correctly - the economy added 160,000 jobs, but 211,000 fewer people are in the labor force than were working last month.

Is this new math or something?

No, its our wonderful government.

Should we believe their numbers, or should we pay attention to ICSC and Redbook retail sales numbers, the former of which was +0.1% and the latter -0.3%, with both on a two-week rolling basis solidly negative. Oh, and consumer confidence is falling, the Chicago PMI is negative (under 50 at 49.7) and the manufacturing index significantly weaker over last month.

All of those numbers aren't collected by The Government.

I wonder who's lying?

The futures went insane positive on the announcement. The 10 Yield bounced higher immediately as well.

Unemployment was flat at 4.7%.

Factory orders up 0.2% in September. Not exactly roaring, but better than the negative print for August, I guess.

"The market is sound" so says CNBC.

Yeah, right. Ok.

How about Merrill Lynch?

"The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer."

SssshhhhENRONshhhhhhh.

Specifically....

"But the company's fortunes unraveled after revelations the company had used off-the-books deals to hide billions of dollars in debts."

The problem in the allegations is that they claim that Merrill had set forward a "floor buyback" price; in other words, they were exposed to a risk of loss if the market wasn't good enough. This, if true, makes the transaction potentially unlawful because it shoves off the risk of a market decline to someone else on paper, but not in reality. That sort of "book cooking" is not allowed - if you sell something and thus remove the risk from your balance sheet, it actually has to be gone, with the entirety of the risk going with the sale.

ENRON pulled this with their infamous "Barge" transactions (which, not-so-amusingly, had Merrill involved!) which came back and blew up in their face. Now we've got allegations that the same games are being played throughout ALL of the major Wall Street investment banks!

Why don't we just send in the auditors and government investigators, identify all of this nonsense, call them all out, put it all out on the balance sheets, and let the chips fall where they may?

And the real fun comes with all these "Level 3" assets - in other words, "marked to whatever I want to say it is" that all of the big "investment banks" have enough of that crap on their balance sheets to literally make them insolvent if they were to all go bad.

Now of course nobody expects them all to be worth zero.

But - are they worth even a small fraction of what is being claimed? It simply is impossible to know. and there's the problem, because we need to know as investors, as bank regulators, and as the public.

Everyone wants to talk about "liquidity" being the driver in prices. The truth is that what's really going on here - and has been - is outright fraud and deception.

Indeed, my best estimate is that a full thirty percent of the market's current "value" is based upon fraud and deception, and not on actual value.

Its wrong and it needs to stop. Yet so far we've had the typical anemic response from the regulators - instead of the aggressive, Doberman-style response that this market needs.

You don't think that the big Investment Banks making huge campaign contributions to everyone on The Hill has anything to do with this, do you?

Make no mistake about it - the fraud in the system is systemic.

Lawsuits are just getting started in the real estate and lending space. We've got suits over organized appraisal fraud out there now too, with the latest filed just yesterday.

My outrage over the appraisal lawsuit is that there are thousands of signatures on a petition sent to Washington DC more than five years ago complaining about illegal arm-twisting in the property appraisal business, and absolutely NOTHING was done.

This lawsuit is symptomatic of the underlying problem on "The Street" - marking "assets" to whatever you want to claim they're worth, just like houses.

Same game.

Same lie.

I'm tired of it, you should be tired of it, its long past time when we should simply refuse to accept it. This sort of nonsense and game has permeated the entirety of the world of finance over the last ten years, going back to the boom times of the Internet bubble.

Back then we had companies that were "valued" as worth $1 billion when they had a business model that could best be described as "I'm on the Internet, therefore I'm worth $1 billion." Mark-to-I-made-up-a-good-number.

Today we have investment banks that have market caps of $40 billion that have the basis of their value resting in a portfolio of securities that they claim are worth $80 billion because, well, that's what they say they're worth!

Now perhaps you and I are from different planets, but on the planet I'm from when you claim that you've got a value of $80 billion in some portfolio you have to be able to sell it to someone for that amount of money!

See, this is the world that I live in every single day as a trader.

My portfolio is "marked to market" every night and if some option or stock position that I have open has nobody willing to give me a bid for it, it is marked on my balance sheet as worth ZERO!

And more importantly, my cash position is either debited or credited to cover my margin requirement on those positions!

It doesn't matter whether I think those "assets" are worth a billion dollars or not - the price is marked at zero because nobody will give me anything for it.

That's the beginning and end of the discussion, and that's as it should be.

But in the world of Investment Banks, that's not how it is. All of these guys not only mark their portfolios to whatever they want to, they then pay themselves bonuses on that inflated number!

Now I am normally no fan of "landsharks" and the "sue everyone" mentality, but this time I'll make an exception.

What we need - desperately - is the mother and father of all class-action lawsuits by property owners. ALL who bought during the "mother and father of all bubbles" need to sue the banks, appraisers and money center institutions involved in this.

Yes, I'm advocating a multi-trillion dollar class-action lawsuit. Every buyer of property from 2003 until the turn in early '07 needs to get involved in this.

There is the mother and father of all class actions here from my point of view, and it has the smell of Racketeering and thus treble damages as well.

All you need for a RICO suit (and thus treble damages) is a predicate felony and a conspiracy by two or more people to commit it. Appraisal fraud gets there quite handily and the amount of money involved in any single transaction is in the tens if not hundreds of thousands of dollars. This is a multi-trillion dollar class action lawsuit that needs to be put together and filed - RIGHT NOW.

If we can't get The Government to do its job then perhaps we can get The Landsharks to go for the jugular on banks like Goldman, Merrill, WaMu, Countrywide, Morgan, Lehman, Bear, et.al.

After all, they have plenty of money, and that's what the landsharks run on right?

Why include the big money-center banks? Because they put together the "myth-based securitization" that made this all possible. They were therefore part of the conspiracy, and if you can prove a predicate felony (appraisal fraud) then everyone who touched it or participated in it is potentially on the hook!

This is the same way that, if you drive someone to the local convenience store knowing they have a gun in their jacket and they then rob the store, you go to jail - even though you didn't get out of the car! You were proximately connected to the crime and enabled its commission - bang, you're tagged.

One way or another the balance sheet games must stop. The fraud must stop.

Now let me note that I ain't a lawyer and don't play one on the Net. But it sure seems to me that if someone defrauds you then you have good cause to sue their pants off.

So - where are the lawyers? Some of you guys who are attorneys need to smell the blood in the water here. There's a lot of it, and there's also more than enough meat to go around to fill the bellies of a whole cadre of sharks!

The Petition is also a good way to try to get it to stop. But if you bought a house in the last four years, even if you were a speculator, you need to start talking to lawyers and see if you can get someone interested in the systemic fraud in the financial system.

The law firm that goes after this successfully (and I believe they'd be more than successful) would make a name for themselves 100 times bigger (and better) than the folks who went after the Tobacco companies. What's better, they'll get a lot richer.

This is a landmark issue and a landmark case. It has the potential to force all of the fraud out in the open where we can see it and clean it all up.

It may also be the only way to make it happen since our government sure doesn't want to touch it, even though it is the regulator's job to take care of this nonsense!

Oh, and today, here come the pundits (late of course) calling for the Recession that I've been predicting since, oh, APRIL:

"The U.S. will likely slip into a recession in 2008 and such a development may affect Asian economies, Morgan Stanley Asia Chairman Stephen Roach said Friday."

You think?

But wait.... where was all the blood today? It wasn't that bad, was it?

Oh yes it was. We got another Hindy today and all sorts of nasty internal divergences.

You'll see in the technical...... there's nothing to like here.

I believe this market is headed lower.