Did You Eat Your Magic Mushrooms This Morning?

No?

You sure?

Did you buy stocks today?

If yes, I hope you went and checked on those mushrooms again.

In all seriousness, the rally today certainly looked the part of the "real deal". It had strong representation across sectors and was solidly green across the board.

But let's not forget my buddy here:



That's the S&P500.

We haven't violated it, but we're poking at the top of the channel.....

Now could the S&P pop up tomorrow? Sure. Might. In fact, odds aren't bad that it will tomorrow. Doesn't change a thing in my premise if it does. We're severely overbought now, running on pure adrenaline. But guys - you can't run on adrenaline for very long. That's not reality. Can stocks poke up there on the RSI and MACD basis to the moon forever? Oh hell no.

Look at the last few days. AMD says the word "LBO" on the conference call and avoids a justly-earned thrashing for an absolutely disastrous quarter. Then Wendys drops the "sale" word and BOOM! God help you if you were short that one going into the evening!

What you had happen today was almost totally predictable. We poked our head above 13,000 on the DOW, the market pulled back, and then, as the news headlines hit people's radio stations and heads, in came the buyers.

Buying..... what, exactly?

Oh, anything. If it was a stock, it got bid up. Sure, there were a few exceptions - Lennar, Honovian, CompuCredit, Usana - but in general what was a red board this morning in my "watch list" turned to green by about 11:00 AM and from there the buying just accelerated further.

This is good, right? A broad rally with lots of support from all sectors.

Hmmmm.... let me think a minute.

We've got strong overseas profit growth. We've got home builders reporting this evening, and all are reporting awful internals (cancellations of 25% and more are not good, and neither are writedowns and impairment charges!) Of course one of them, MTH, gets a HUGE boost instantly on earnings, even though they are reporting crap sales, a big cancellation rate, and 1Q net profit down 81%. That, of course, is worth $3/share in stock price in the aftermarket.

Such rational behavior.

There was one rational response. AAPL reported blowout earnings and got the expected positive response. Good for them. Let's be real - this is not a "tell" on the economy; the IPOD is a cult device and so are Macs. I applaud Jobs for throwing in the towel on his hippie processors and seeing the light - putting the Intel chips in there so they can boot Windows was, quite possibly, the thing that saved the company on the computer side, and the IPOD, while it has its flaws (the most notable being the awful non-replaceable battery that essentially makes the unit have a one-year life!) is indisputably the leader in the MP3 portable player marketplace.

Now let me ask you to do something simple. This is your rationality test for the markets and the argument that "a weak dollar is good for US companies and good for the economy."

Remember, a weak dollar means exports are cheaper in another nation (thus exporters can sell more goods as they become more affordable) but imports are more expensive.

And let's not forget - consumer spending - right here - is seventy percent of our economy.

Ok - go around your house. Grab 20 items at random. Give no thought to what they are - just random items.

Place them on your kitchen table.

Now turn each over and look for the "Made In" sticker, label, or molded-in content origin place. Its there, unless you've removed it.

Separate the items into two piles - those made in the United States, and those made anywhere else.

Do you actually have any in the "US" pile? How many? One? Two? More than four?

Four would be 20%. Betcha you don't have four.

That's your personal balance of trade. And that is all that matters to you, as a consumer; not what CAT sells or Coca-Cola sells, or Honeywell sells.

What matters is what you buy and where it comes from!

Guess what! The cost to buy those items is going up! Way up.

Your little widget over from China, if it was made in January, was made when the dollar was at 85. Now its at 81.5. That's a real 4.2% inflation rate - in three months. Over 12 months that's what - 16%? Now lets pray to God that such a trend does not continue for a year, because what would you do if everything you bought from China went up in price by 16%?

Think this won't affect purchasing behavior? Yeah, ok. Pull the other one.

Then we got this little ditty this evening after the market closed:

"NEW YORK (CNNMoney.com) -- Foreclosure filings surged during the first quarter of 2007, as home price increases slowed or even reversed and borrowers fell behind on payments once their adjustable rates began resetting at much higher levels. "

Began. Remember that word that's underlined and in bold.

We have two to three more years of these resets. Its not over.

In fact, the impact has not even begun to be felt on the economy, as these resets just started happening, and so far, only to the poorest credit risks - the subprime borrowers!

In the next six months the ALT-A holders start to reset, and this does not peak for another 12 months.

So the reality of it is that nothing fundamental has changed. But let's not be foolish - certainly, tomorrow, every newspaper in the United States will have "DOW 13,000" on the front page.

If you want to "chase" after this - and there will be a lot of people doing it in the morning - then have at it. But be extremely careful. Nothing in my basic thesis has changed.

Oh, and up in the morning - to either throw cold water - or gasoline - on the buzz we have some fun. We have Broadcom, Countrywide, Flagstar and IndyMac reporting tomorrow, with two of the banks - CFC and NDE - hitting us up in the morning.

What to expect? Well, Countrywide's estimates have been whacked on severely in the last couple of months - down by more than 30% in that time. If they can't walk over that bar Mr. Mazolla needs to be put on a ventilator. I expect both companies to make their numbers on the back of PayOption Negative Amortization, and the initial reaction to both is likely to be of the gasoline variety - after all, we know how our fabulous Gullible Schools teach people to read beyond the headlines, right?

As soon as I can get the 10Q I'll be looking at both. If I'm right about what I expect I'm going to watch this one for a good opportunity to short it with both hands. (I'd hit NDE too but they're "hard to borrow"; stocks with that sort of short interest are really better hit up via the options market.)

Now its possible that they had real cash earnings, but its far more likely that their cash earnings could fit inside a chigger's eye without touching the corners.

Oh, and let's not forget that New Century listed Countrywide as an unsecured creditor to the tune of a potential billion, but of course they filed that BK after the quarter closed. Don't expect any straightforward disclosure on that issue. Then there is the overhang of the S&P warning on bond downgrades, but that is well after the quarter closes too. Both of these issues will hit their second quarter, not the first, which means that I fully expect the second quarter to be awful for all these guys.

If anything late pops up, I'll update this....

Dislcosure: Author owns long-term PUTs on CFC and NDE.