Thursday Silliness And A Look Forward To Friday

Ok, in a break with my tradition of the last few weeks, no charts tonight.

Not that you need 'em, right? I laid the thesis out last night - we have Two Scenarios, and it appears that #2 (let's see if we can go after the highs before we crap the bed) is in play.

Ok. Well enough.

Now to the meat of things.

This morning PPI came out. The headline number was hot - not warm, smoking. As in 0.9%, which on a 12 month basis is 9.6%! That's smoking hot.

But the "core" number was 0.2, which was what people expected. Now how do you get 0.2? You ignore food and energy. And food actually trended down, which means it was energy bigtime, most specifically gasoline, that led to trouble.

Also most troubling was the disparity between "raw goods" inflation and goods in various "half-done" states. The inflation rate trended down in each of those cases. What does this mean? One of two things - or both - is occurring - wage declines or better productivity. We know which it is not because unit labor costs have been reported as rising. When this trickles through Chucky (the consumer) gets the Bird Flu!

The market took off. But wait - what about bonds? They were up today in yield, not down! Huh? Well, that assumes you look at closing prices. If you ignore the gap up this morning, well then they were down in yield.

Anyone ever bother looking at a chart? Maybe not eh?

Bond prices fall for one reason and one reason only - people want to sell bonds! Now clearly, some of this was shorting. But not all. Some of was also pretty clearly foreign redemptions going overseas - or somewhere else, anywhere else. Why? Well gee, what do you think? 0.6% GDP growth, we're a debtor nation, negative savings rate, a liquidity-driven market. Do you really think I'm the only who can read the handwriting on the wall? I think not.

So why now? Simple - someone started it, and once the price deterioration began people piled in. This says it is not over because the underlying fundamental problems have not changed.

Oh by the way, about half of our US Treasury bonds are held by foreign central banks. This is a rather dicey situation, especially if nations start dropping their dollar pegs. See, if the dollar falls, there's this tiny little problem called a capital loss and it hits all the bonds you hold at once! So rather than take that risk you may as well see how many bonds you can "send home" without calamitously depressing prices - which, if you're a foreign government, works out real well because as rates go up so does the dollar! So in effect while you're selling bonds and driving down the price you're propping up the exchange rate - this can be a no-lose trade.

It does have a dark side though for those of us here in the US. It does drive up our rates, makes imports more expensive and to the extent that the people dropping their pegs make things we want (like, oh, perhaps OIL) creates some problems with those import prices. Now that's real inflation.

Now let's look at the next fun issue. Its called The Middle East.

We shall start with Kuwait dropping their Dollar peg. The UAE looks to be next. This will leave Saudi Arabia as the only oil producer with significant production that still "likes us." What might happen here? What happens when, not if, the OPEC guys form a unified currency to price oil in and its not dollars as it is now? That could suck eh?

Next, let's talk about Israel and Palestine. Not that the Palestinians killing each other is anything new, of course. But let's not downplay middle east tensions, because these sorts of things have a nasty habit of spilling over. While this is no direct threat the oil market didn't like it a bit.

Mortgage bond problems? 'Ya think? And do you really think Moody's will downgrade until they are forced to? What will force them? When pension funds and such start taking real losses. When will we see mass marks-to-market? From the ABX, I bet its sooner rather than later. Never mind that foreclosures hit a record in the first quarter. Is that bad?

We know that Chucky (the consumer) is the lynchpin of the economy. So what do precipitously rising mortgage rates mean to him? Gee, I wonder? And what happens when you get both declining home prices and affordability - at once? Still think all will be well with the economy?

Next let's add junk bond to treasury spreads. This is the price of risk - that is, if I sell you a crappy bond (crappy because I have horrible credit) I should have to pay you a lot more to entice you to take it. After all, you can get a "risk free" bond from the US Treasury.

But what is that spread right now? It is way, way down - in fact, its about 1.6% today. Now that's a crappy yield difference. For 20% more return you're going to take on several times more risk? How does that make sense? It doesn't - but its what's happening. What happens when defaults start to occur and that "risk" suddenly turns into not a word, but a real loss?

And what of Congress? You think they're going to leave their hands off the sea of liquidity? Ha! Here come the tax increases. Bet on it. Oh, and Congress just loves to make bills like this retroactive! What do you think that will do to Blackstone's IPO? Watch out guys, here comes the government and it intends to reach into your pocket and remove the money!

China. We've been rattling on them with threats about currency manipulation and recently have made comments about their defense spending. The currency problem is real but we've got little we can really do about it. The military? Well, you know what they say about opinions being like azzholes, right? I'm sure they think we're about as astute about our military as we think they are about theirs.

So why was the market up? It was open. Remember that from '99? We're back to it, even if only for a day this time.

And oh by the way, the 10 has not broken its uptrend channel on rates. In fact, it didn't even threaten to do that today. And let's not forget - it has gone through several-day sideways (but still trending up) type moves since it broke the 480 level. Is this just another one? I think so - this doesn't look like the peak to me.

What else?

How about this ditty? Let me quote this:

"It’s official. Mark your calendars. The crash of the U.S. economy has begun. It was announced the morning of Wednesday, June 13, 2007, by economic writers Steven Pearlstein and Robert Samuelson in the pages of the Washington Post, one of the foremost house organs of the U.S. monetary elite. "

C'mon..... for real? Hmmmm......

While that's alarmist, its not that off the wall.

To add to the reason for alarm, we have this little piece:

"According to “Wonder-Land,” a report by Credit Suisse analyst Ivy Zelman, the vast majority of land held by today's biggest builders was negotiated less than three years ago."

Oh that ain't good. Let's see, what if we have a ~30% decline in land values for that which was acquired during those years but not yet built on (or now built on but not sold!) Can you spell B.A.N.K.R.U.P.T.C.Y.? Hope so, because if there's anything to this we're going to see a few of them in the big builder space.

Or how about one of my favorite indices, The ABX? That was a new one today - we got a fall off in the BBB (junky) tranche but we also saw very significant deterioration in the AA tranche, which is a new trick for this pony. Meaningful? Maybe - Bear Stearns is trying to prevent a blowup of their mortgage-invested hedge fund. Success? Unknown. But the credit markets didn't like it.

Oh, and is higher oil good for stocks? It is if you're an oil company. But how about the rest of the market? I thought higher oil prices were bad for stocks, because money you dump into your gas tank can't be used to buy discretionary consumer products. How soon we forget.

So what's ahead? The CPI number, for one. If it comes in hot, well, make damn sure you have a hard-hat on. If it comes in cool, better get some earplugs and insert them, because its a certainty that more air is going to be put in the balloon.

As for my intentions in the morning I'm sitting on a few positions overnight that I would not normally do otherwise. They're not a lot of money, but if we get a hot CPI they're going to be VERY profitable. If not, well, its money flushed. The market is clearly expecting a hot number, as the premium on the SPY was radically higher on just-OTM PUTs than CALLs - clearly there is fear of that hot number, and I'll play along until the morning.

If we get more air in the balloon then I'm going to take the opportunity the rally will present to load up on plays for July. This little bit of bubble-inflating runs out of steam tomorrow after OpEx, and that will put us within striking distance of my targets.

If you wanted to play this either way the time was today or, if you're so inclined and have an account that can do so, hit the futures in the morning before the CPI comes out. For me, my bets are on the table and the ball is snaking around the wheel........ will it come up Red or Black?