The Market Ticker

95% of America has no idea what's coming.

That's because they don't listen to the credit and FX markets.

On the other hand, a few (very few!) people do.  And those who do are reaching for new pairs of shorts, needing to replaced their soiled ones, every few hours - or minutes.

It really is that bad.

You're not being told on Bubble TV, mostly because people either don't get it or are trying like hell to figure out how they're going to get out of the mess they're in themselves, and are not all that interested in helping you find the door - its not very wide, there are a lot of people in the room with them, the curtains are on fire and they need to get through it first.

Let me give you a few hints, so you might understand:

 This is just one (of many) examples.  It is the "AA" rated "slice" of an index, specifically, the "Home Equity Credit" ABX index which is on, effectively, swaps on asset-backed paper.

As the name implies, this is Home Equity loans, the "AA", or one step down from the top (AAA) rated debt.

Notice where its trading?  10 cents.

The "AAA" slice is trading at about 50, by the way, and the "A" and "BBB" is in even worse shape.

That's nasty.

Now here's something that's even worse.

This is the "CMBX", or Commercial Real Estate (you know, shopping malls, apartment buildings, etc) spreads.  I'll reproduce two:

These are quoted as spreads, or basis points, over the benchmark which is a swap (in this case I believe its the 10y).  The important point is the direction of the graph.  Higher = worse.  In this case, a lot worse, in that these spreads have nearly doubled in less than three months!

But AAA only looks bad until you see this:

 If that doesn't peel your whig back nothing will.

Twenty-five hundred basis points over Treasuries, and for all intents and purposes since June the direction of those spreads have been straight up?

Huh?  Am I reading that right?

That's Guido-credit-card territory.

Now for the guy who wants to put one of these deals together, realize that the "BBB" piece is just that piece that gets "sliced off."  His "composite" cost is probably somewhere around 10%; figure the swap is around 5ish, and then the "blended" spread on all the components once you do your magic winds up at around 500 over that.

That's bad.  In fact its real bad; you have to be able to cash flow at that same 10% (of the gross on the deal) to break even, and of course nobody works for free.  For all intents and purposes this marks that part of the market as "done", as in "baked", "well", or more likely, "crispy."

Now I want you to sit back in your chair, grab a snifter of quality Cognac, and cogitate for a minute.

Consider the plight of a couple of firms who operate like Hedge Funds (or are Hedge Funds!), buying the slices of that paper and gearing up, making lots of money the last few years.  In fact, they crowded most other people out of the market and drove bids so high that money got very cheap for a lot of people in their marketplace.

But now the spreads have blown out on that paper as the underlying loans have started to show stress, and that paper is worth much less.  Some might be even tripping "acceleration event" clauses in the structuring, or worse, defaulting outright.  Consider those ABX and CMBX charts for just a little while, and then think about the fact that this isn't just residential HELOCs or Commercial Real Estate - it is in fact every kind of loan made to, literally, everyone.

Ok, so here you sit, geared up, oh, let's be generous and call it 20:1, maybe 30:1, maybe even 60:1, and you've been carrying marks at, oh, 98, 99 cents.  You're taking losses, and in fact they're pretty big losses, but that's only because you have a absolutely enormous amount of book out there.  As a percentage, those losses are quite small but when geared up like this you wind up bleeding out on the sidewalk screaming for a blood transfusion to keep you alive.

But now your accountants or worse, your auditors notice that heh, the ABX.HE says that "AA" debt is 10 cents.  CMBX BBB spreads are 2500 basis points over Treasuries, or close to a 30% (!) yield. 

You think about the duration times spread for a few seconds and turn white as a ghost at what this implies about the "value" of the paper you're holding, not to mention the odds that it really is a zero, and what's worse is that you borrowed the money to buy it!

Oh, and Mr. Pencil-Neck (that's the Auditor on the other side of your desk) is tapping his shoe on the floor impatiently.

He wants to know, you see, how you came up with that impairment and charge on your last set of financials.

Folks, this isn't bad, its a full-on meltdown, China Syndrome style.  Its happening right here and now, under your nose.  As this noose tightens further, and tighten it will (notice that all the "stick save" games the government has played have had only transient impacts on the progression of this problem) credit will choke off system-wide - not because people don't want it (witness the desperation of Americans evident in the latest Consumer Credit Report), but because people can't pay - they're over-encumbered and simply unable to support any more debt!

The happy-face folks on BubbleVision are not talking about it, but this does not mean it is not happening.

It most assuredly is.

Now you know, and have time to act.

I recommend running, and ignoring the fish, because the door is quite narrow and essentially every levered institution is in the room with you.

Think about who's on that list for a bit. 

That's your homework assignment.

PS: CPI up 0.8% (!) headline, 0.3% core, real earnings down; Jobless claims 450,000 last week, continuing claims to 3.4 million.  Futures bleed.