Chucky Rolls Over And Craps The Bed Tuesday!

I've been saying it and I'll keep saying it - Its the economy stupid!

And today, we get yet more information on the truth of the economy - its not as good as you've been told, and housing, as it always has, will lead this economy lower - kicking and screaming, but still, lower!

Home Depot drops its guidance but of course the stock holds up. Why? They shredded their company by selling off wholesale and buying back a lot of shares - with debt, of course. So in a contracting market with uncertain sales prospects you load the balance sheet with debt and make yourself smaller but more leveraged?! Dumb and dumber! Sell now before you get a nasty surprise!

Sears? What's to say. All those credit cards got black and they didn't buy refrigerators and Plasma TVs. No, they bought groceries and gasoline! But heh guys, listen, Bernacke and company want you to think everything is ok so you'll spend, spend, spend.

Unfortunately when you get to the cash register and the XON comes back with "Declined", that's that. Sorry, no plasma TV for you Chucky!

"During a nine-week period that ended July 7, same-store sales at Kmart's U.S. locations fell 3.9 percent while same-store sales fell 4 percent at Sears."

Earnings estimates, by the way, were cut in half.

Told 'ya so.

To those of you who are "PPT" conspiracy nuts, do you really think they have to go out and buy the futures? How about a call to some "analysts" urging them to pick on a couple of big-cap names and upgrade them? Perhaps GM? Hmmm... Upgraded eh?

GM is a company that is functionally BANKRUPT. Right now and here! Look at their balance sheet. They have a negative net worth, negative free cash flow, and negative sales trends! This is a stock that should be upgraded?! Oh hell no.

But - they're a DOW component so if we pump them, the Dow doesn't go down (as much.) Oh wait - we got a problem here; its called Chucky crapped in the bed and the stink has become overpowering! GM and Ford eh? You want a conspiracy theory? Tell me how JP Morgan justifies that call. I don't see it and I ain't buying either of these swirling turds. In fact I have a bear PUT vertical on GM. Bite me JP Morgan; may you drown in your own subprime sewage! Betcha this attempted pump game doesn't last long enough to keep my PUTs from being profitable; I've got a while - longer than GM does!

On news that the economy is going to hell in a handbasket the TNX is down hard today on yield to 5.07 before the market opens. That may well continue but its not going to help the markets, because in the end when it comes to the economy and the markets it really is all about the consumer, and the chickens are coming home to roost.

Oh, then there's Bucky (The dollar.) He's not happy. At all. Going in the crapper, be he. Rapidly approaching that nasty 80 level on what looks to be a penetrating trajectory. Bernacke's vise had a couple more turns put on the handle this morning - gotta hate being him about right now. He can't cut rates and if he raises them to defend the dollar the economy gets a big flush.

Hi Ben.

Tell your other fools around the White House that Monica isn't there to "levitate" things any more. We know you know, and its time for you and Paulson to start fessing up to the mess. And yes, I know it was Greenie who made it, but unfortunately, you've gotta clean it up. It bites cleaning up your buddy's puke but someone's gotta do it and you are the bagman on this one.

We know you'd prefer to play "Helicopter" to try to reinforce the containment but if you do we get a depression as you can't control China and other overseas investors, nor can you stop the oil nations from pricing their oil in Euros. You also know (as do we) that we've got an incipient trade war with China on the plate too and you can't tamp that one down either.

While there are plenty of conspiracy nuts that think you'll hyperinflate I don't buy it; down that road lies civil unrest, the slope of that road looks like some I've been on out near Boulder Colorado and you've got no brakes on the car. You ain't going there and both you and I know it.

In the end I believe you'll do the right thing and save the dollar because although the effect of that will suck it sucks less than the alternative, and right now all your options lead to a "that sucks" outcome in one form or another.

Are 'ya singing soprano yet? Good. Here, let me help with another twist on that vise handle.....

DR Horton says no housing recovery - they reported a FORTY PERCENT drop in orders for new homes. Bottom line: There will be no housing recovery in 2007. Told 'ya so AGAIN - except this time, try 2009+!

Beazer last night got a mention as a Hedgie took a 5% stake. Good for a pop right? WRONG! Down 1%+ this morning at the open and close to 3% today. Heh Hedgie, I hope you choke on that puke company. Officers shredding documents?! Yeah, ok, that's a company I wanna buy! NOT! Happily short and I ain't covering it yet.

As if this isn't enough we're adding another carrier to the Gulf. You know, as in IRAN? Yep. I still think we're going to bomb them. In fact, I think we have to. Why? Because they're going to get a nuke and if we don't stop them, Israel will hit them - with nuclear weapons. You think Iran doesn't have 'em? How come the IAEA found bomb grade uranium residue over there? How'd that get there if they're just making "reactor fuel"? Pull the other one Raghead; we know what you're up to and you're not going to get away with it.

We can hit them with conventionals as we have the big bunker busters - Israel doesn't. While I hate the idea of us going over there and "interfering" even more, we have put ourselves in this box by refusing to develop our own oil resources, and now have no choice unless we want our economy to be destroyed when the taps get turned off - and they WILL if there is an all-out Middle East war. This is called "the law of unintended consequences" and its what we get - and deserve - for not drilling for our own oil. Yes, I mean in ANWR, and yes, I mean in the Gulf - including right off my own beaches in Destin. You want to burn it, you've got a responsibility to go get it, whether you can see it from your 30th floor Condo Penthouse or not. I'm damn tired of all the Lieberals who fly around in private jets and drive SUVs but then oppose developing our own natural resources! Time to pay up for your hubris!

And now, suddenly, CNBS is talking about Subprime! David Faber is now actually reporting that S&P is threatening to cut more subprime mortgage bonds, with much of it likely going below investment grade. Is that good? And he's talking about the leverage ratios - 20 times; oh boy. Gotta love that gearing - so long as house prices keep going up. But now they're going down! At 20:1 leverage a 5% move wipes you out and a 10% move loses twice what you had in the game. Good night Charlie!

Nor is that the whole story. As usual CNBS soft-pedals the real problem, which is the model change. Read all about it right here:

"Given the level of loosened underwriting at the time of loan origination, misrepresentation, and speculative borrower behavior reported for the 2006 vintage, we will be increasing our review of the capabilities of lenders to minimize the potential and incidence of misrepresentation in their loan production."

And more..... they now expect values to decline about 8% before the end of 2008.

Misrepresentation eh?

Or if you prefer, how about this?

"Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies."

Its about damn time that someone said what we've all known, and did in public.

My JPY trade is perking up a LOT today as the dollar takes a crap. The market better start paying attention to this or there will be severe and possibly irrevocable consequences. The dollar problem is not funny, it is not trivial and it is not easy to fix. I remain convinced that the 80 level in the DXY is a critical point and if we breach it we may see a tsunami of foreign selling of US Treasury debt - that could push real interest rates north of ten percent almost instantly at the same time that import prices spike precipitously. Ouch.

And now the rumblings are coming hard and fast about buyout money tightening up. ServiceMaster seems to be having some trouble with its bond offerings for that LBO they're in the middle of. You think? Was supposed to price last week, didn't, will it go today or tomorrow as was then revised to? Hmmmm...... or is this the canary that falls over and starts a cascade of fear in the credit markets? Not sure - yet.

But - there is $200 billion worth of credit that has to be placed from announced deals in the next month or two! What if nobody will take it at a profitable trade for the banks?

Then the banks like Citigroup get to EAT IT!

What did you say the market cap was of all those big money center banks again? Yeah.

Heh Mr. Bond Market - Your roof is on fire! The ABX BBB tranche is reported in early trade to be under 50 and the deterioration in the LCDX has gone back to being NASTY - 7-1/2 bips worth of spread on midday today alone!!!!!!

By the way, those of you fools who are buying Apple today on the totally rediculous "research report" on that patent filing? You're a bagholder! Iphone Nano eh? Guess what - no keypad, how are you going to dial? Oh yeah, we'll use the touchpad! Ever try actually doing that sort of thing? Exactly what sort of idiot are you to buy into something like that?

Four hints: 1) Battery surprises are not cool, and I'll bet that Apple is going to get sued over the IPhone's battery policy as it stands (one year battery life, two year service contract, not conspicuously disclosed before purchase - you do the math); 2) Dialing without a dialpad sucks rocks through a hose; 3) Without the "nice big screen" there's no reason to buy a $300 NanoPhone instead of a REAL cellphone for $100 or less and oh, 4) The stock is 50% overvalued.

Now add to this that if Apple is forced to eat those battery replacements in contract - and they might be - their profit margin is cut in half on the device.

Anyone remember $24 - $14 a share - in one day - on this stock? Better go check your charts again kids. It has happened before, and if you think it can't happen again, you may get the nastiest surprise of your life.

No crying allowed six months from now when the "I told you so's" start! How many IPhones with $1000/year service contracts are they going to sell with the economy going in the crapper? Think it won't? I'll take the other side of that bet - oh wait, I already have!

As we get to the halfway point in the day the markets look sick. There is nothing to like about the internals on any of the major indices, and in the financials things just plain suck.

Not that this has stopped the BS reporting on CNBS. They're saying that there's "lots of call buying" on EBAY, AMD and MU. Well they got one right - Micron has quite a bit of volume today on the call side relative to PUTs. The others? Yeah, ok, its a bit elevated but I wouldn't call it the sort of screaming bets that were placed on AA yesterday.

Speaking of which, how'd those CALLs work out guys? Gonna be up strong today eh? Uh, no. And those $42.50 and $45 calls? Go talk to the guys over at WD40 and see if you can borrow some of their "lube" for what you're getting right about now. Those $42.50s lost 1/3d of their value immediately and the $45s lost half. Ouch. The way I count that about $2m went "poof". Even better, the PUT buyers got hosed too as the IV collapsed on top of them - both the $40s and $37.50s are down by half even though the stock is down. Been there, done that, betting on a blowout (or blowUP) number that doesn't work out leaves you sore where you sit.

Bernacke said nothing of value..... I won't waste digital ink blogging on the blather-blather-blather. Lots of nonsense, no real change or insight - at least not that I could detect, and it appears, the market didn't detect anything useful in there either. It also looks like they were expecting some support from him - and didn't get it. Can you say flush?

Oh, and right after the close, Moody's downgraded 399 CDOs with many going below investment grade! Here comes the forced sales! This starts tomorrow guys.

By the way, want to see many more foreclosures? You are going to. Why? Because these bonds are now trash and getting anyone to buy any new ones is going to be nearly impossible. This means that you can forget about any non-prime buyer being able to get financed unless they can handle 18% interest rates and any that are facing resets will not be able to refinance. This is going to generate an absolute tsunami of foreclosures in the housing market - the exact risk that I and others have been talking about.

Kids, its not a risk any more.

This is now a reality.

You want to see what a cliff looks like? Try this:


Look at that - pretty eh? Oh, and the BBB -07 closed at 51. Aieeee! The CMBX is also deteriorating again and what's far more ominous for the LBO market the LCDX closed at a spread of 217, which is a FIFTEEN BASIS POINT MOVE IN ONE DAY.

To put this in perspective over the previous WEEK we lost 25 basis points. This move compressed half of that - which was HORRENDOUS - into one day.

The internal and technical damage done today was severe. Let's line up the facts about what we now know:

• The consumer (Chuky) isn't doing so good. In fact, he's doing kinda bad. So says Sears and Home Depot, along with WD40. Congratulations; the so-called "media" might want to read Redbook and ICSC Same Store Sales once in a while. I've been blogging on this for a while and gee, its not like I had some sort of magical insight - the data's right there in front of you if you bother to look.
• One ratings agency has broken ranks and now admitted what nobody wants to - there was lots of fraud in the subprime mortgage business and the models used were invalid. Its about damn time, but again, none of this should surprise, as the data has AGAIN been there if you bothered to look. This will - not might - will - lead to forced selling of those bonds as they lose investment-grade status and pension and other funds are forced to unload. Bear Stearns tried mightily to avoid marking these bonds to market. THIS NO LONGER CAN BE AVOIDED - WE ARE TALKING ABOUT DAYS OR WEEKS HERE, NOT MONTHS AND YEARS. PUT A FORK IN IT - THIS TURKEY IS DONE.
• MOODY'S followed suit after the close. Heh Fitch - where the hell are you? Late to the party eh?
• The "rise" in the markets since the February sell-off has been all funded on liquidity flushes and hiding the truth. Guess what? GAME'S UP! While this won't immediately break down the markets (at least its not guaranteed to - of course it just might!) eventually all of this is going to be marked to market and the truth about so-called "earnings" in the financial markets is going to come out.
• SPREADS WILL CONTINUE TO WIDEN as suddenly the market has been reintroduced to this thing called "RISK" and what's worse, its not just risk that people didn't understand, it was due to active fraud and concealment! This is NOT going to go over well in the credit markets. Expect one or more big LBO deals to blow up at some time in the reasonably-near future. This ALSO imperils all those "buybacks" which are financed with DEBT that has not yet been issued. Keep poking this puppy with a fork - she's close to being DONE!
• The dollar is in the tank. This is likely to continue unless the Fed raises rates. Once we breach 80 all hell is likely to break loose in the FX markets. This will precipitously drive up real interest rates via the bond market whether the Fed likes it or not. Beware if this appears imminent - make all the money you can and do it fast, because imports - including oil - will double in price quite quickly. Gold and especially Silver might provide SOME protection, but not as much as you think it will!

Oh, and finally, we might have had another Hindenburg today. The McClellan isn't updated yet and the Lows might have missed by one. Will update that later..... but do we really need one at this point to see what's coming?

I don't think so.

Psst: Looks like we got another one, although you can argue the new lows were short one if you want. The McClellan Oscillator was negative today - barely, but negative is negative.

Tick..... tick.... tick.....

Discuss it here!