The Market Ticker

Let's start off with the "screw your shareholders" award of the day.

It goes to AHM, American Home Mortgage.

They announced earnings today, which were IMHO awful, and like almost everyone else in this sector got a very nice (undeserved) pop. I had expected it, and bought CALLs a few days ago, which I sold into the strength (thanks guys!) for a moderate profit. Not a huge amount of money, but enough to buy the groceries for a couple of months. I'll take it.

After the close of business they dropped the hammer on their shareholders. A 4m share secondary offering, roughly 10% of the float. They'd filed a shelf a while back but of course said nothing about it in their earnings release (nor conference call I believe; I didn't listen but nobody had said anything on the boards and there was nothing on the wire until after close of business)

Now this sort of thing is somewhat routine in a strong market but in a weak one for your business it is a near-certain sign of desperation. One has to wonder - have these clowns gotten (or fear) a margin call or two? $100m is a lot of money, and they only said it was for "general corporate purposes." If they're doing well, and have plenty of cash to pay their dividend and operate, why do they need the money? Why butt-rape all their shareholders? Was this necessary? I suspect it was, otherwise, why would they have done it?

Heh guys, if you think the market is not going to punish you for that, you're delusional, especially with it coming the day you announce earnings after the close of business, when your shareholders rewarded you by bidding up the share price!

If you noticed today the markets were down. Solidly so. I will note, however, that we did not violate the wedges on any of the three primary indices today. To break support on the S&P (and thus confirm the wedge) we'd need to decline below about 1440. There is a near-term support level at 1470 but that remains within the wedge, and thus is not confirmation. In fact, if there's going to be another leg up, that's where I'd expect it will happen.

For what its worth, on a technical basis the primary indicator I use posted SELLs on all three indices today. However, as I've said before, this indicator is very subject to false positive hits, so it needs confirmation from other factors. The S&P's and Nasdaq's SELL were particularly strong - all indicators in the matrix I use were saying the same thing. The DOW's indicators are also posting a SELL, but a bit less convincing (not by much tho!) Again, these are all technical indicators standing alone, and if you trade 'em you're asking for trouble - they are extremely sensitive but not sufficiently selective to use without outside confirmation!

The other somewhat-amusing thing we had happen today is that I started to hear commentators bandying about the "R" word, along with noting that the S&P500s earnings are all coming from overseas - our in-house growth rate, to be honest, sucks. Gee, you guys are only a couple of weeks late on that call. Congratulations for finally bothering to look!

Even Cramer was railing about Bernacke and how its "his fault". Uh uh Jim. It actually is Greenspan's fault - back after 9/11. Once that bubble got inflated it had to have the air taken out of it. We are now arguing only about whether or not this will be a "pssssssst" or a "BOOM!"

This morning's numbers, as I noted, were awful. Gee, big surprise. NOT!

Then we have this little ditty from Bloomberg:

"Demand for bonds, and investors' complacency toward risk, can be blamed for the record early delinquencies and defaults on subprime home loans, speakers at an industry conference in Miami said."

Translated: "We hosed you to make money. Have a nice day."

My view? We're already in a recession. Circuit City announced today after close of business that they missed sales for April and withdrew their guidance. Oops. I guess it really is hard to buy bigscreen TVs when you're trying to juggle the mortgage and your huge credit-card balance. Go figure. Oh, they got taken to the woodshed after-hours (deservedly) too - down more than 10%. Heh, how's that "let's fire all our qualified help" decision doing for you guys?

Now let's add a few more logs to the fire.

China was named to a list of "bad actors" on piracy. This isn't really news, but they certainly won't be happy in the land of fried rice.

Investment home sales basically disappeared in 2006. Did we need a news story to tell us that the "flippers" are flat on their back and doing the "I've fallen and I can't get up" imitation? Oh, and if you think it was bad in '06, just wait until this year's numbers come out in '08!

And in an interesting tit-for-tat, China decided to require export licenses for certain steel products. It will be interesting to see how the market reads that - the gist of it is that they're trying to get rid of the export of "low-margin" (read: commodity) products. Hmmmmm....

The internals today were absolutely awful. The S&P was 7:42 with 1:4 up .vs. down volume and a more than 6:1 dollar ratio. That's a fugly number - even when we've been up on marginal bredth lately the dollar ratios have favored advances. Not today. The DOW was 9:20 with similarly bad internals, being about 1:3 on both share count and price. The Russell 2k was even worse, at 24:157 A/D. ETFs sucked across the board, being 14:272 (!) Surprisingly enough, people bought into the dip - money flow was 11:5 on the capital flow!

Now, my canary..... guys, I'm not gonna tell 'ya what it is..... don't bother with the emails :->

He's in critical care this evening. One more day like today and the sell will be confirmed on my "tell." But while we might breach intraday, the test is at the close, because I've not monitored this intraday to determine if it holds or not.

If you're really aggressive you might have shorted into the close today on the strength of the technicals, or might into the open tomorrow. Please be aware that I can't give specific advice, and also, the confirmatory signal I'm looking at still has not confirmed. I am just telling you what I'm seeing here - not giving advice! Its your money - I'm making my own bets but I can't make yours for you.

What we have right now is a canary that's in an oxygen tent, and barely cheeping......

Tomorrow could be interesting.... if we're down, the $64,000 question will be this - is this a small correction, or the start of something far nastier......

First, a note that many missed this morning on the economic data - while March consumption grew at 0.3% (which isn't bad), if you subtract price increases on gasoline, it actually fell 0.2%. That is the weakest showing since the fall of 2005 (following Katrina, which had a severe impact on spending in the LA/MS/AL area.

Month on month residential spending down 1% in March, construction spending up 0.2% .vs. 1.5% February.

Non-residential spending is up, but residential is down a full percent! YOY was running about 6% down, this is down fourteen year over year, or twice the former year-over-year decline rate!

Chicago PMI down strongly, almost 10 points. Not good!

Inflation is coming down, but the economic data is quite weak - compared to 1Q this number is even weaker, and there is no evidence of a bottom.

No good news here......

The market looks to be opening roughly flat this morning, lacking anything earth-shattering in the news department to drive it in either direction.

Consumer spending grew slower than expected (0.3%) and the PCE came in inline, which took a bit of pressure off, but neither the bond market or the futures responded much. Income came in up 0.7%, which sounds good - but where is all the illegal immigrant labor? Oh wait - they don't count in the statistics, right?

American Home Mortgage (AHM) reported this morning, with 1Q Net down 44%. Earnings came in at 54 cents, down sharply from a year ago at $1.02. Again, let's not forget that the "mess" only really started in March, so this was a 50% haircut on earnings with nothing more than one of three months in the ditch. They also cut forecasts.

Of course, bad news is good news, and the stock is up in the premarket by about 80 cents. We'll see what the trading day brings there.

Radio Shack reported sharply higher net income, most of it related to staff reductions. Cost cutting helps quite a bit, but it doesn't do anything for revenue - that was off 14.5% year-over-year. Same store sales fell 9.2%, which is not good.

On the banking front generally, RBS' attempt to topple the ABN deal looks to be gaining steam, with RBS lining up financing to power their bid. This looks to be an interesting catfight, with lawsuits and a hostile interloper. Beware if this deal blows up though - that sort of thing tends to make for a real mess.

And finally, if you're not scared enough of leverage, perhaps this will tweak you a bit. It should. Combining increasing leverage with weakening lending standards is a recipe for disaster, and there's no reason to believe that this sort of stupidity is going to end any differently this time than it did the last 99 times.

Total leverage at US equity firms appears to be quite close to $5 trillion, which is 2.5x what it was in 2002. Most of this increase seems to have come from hedge funds and private equity firms, which is a particularly dangerous development, as they have a habit of making big bets - and when they go wrong, things can snowball fast.

It appears that CDS Swap prices are starting to trend up a bit again... while this is not yet at the "ominous" level, this indicator tends to lag an "event" - so its dangerous to try to use it as a predictor, as what tends to spike it is rumors of a potential default (or a real one!)

Up at 10:00 is housing data which may move the market hard. This will be an important number, because it will be the first month in which the full mess of the financing implosion will be recognized, albeit only with about a 50% impact. If it come in very weak, it could spark a big selloff.

Overseas China is about to shut down for a week for their "May holidays." The Nikkei was closed last night; Asia had a mixed bag with China being up modestly and most of the rest of the board finishing red.

More after the housing numbers come out......

If the Democrats get the White House in '08 - and, by the way, I expect they've got a damn good shot at it, much to my chagrin, this is what you're looking at:

"By this I mean that if Mr. Rangel and his Democratic colleagues in the House have their way, the quarter-century era of falling tax rates in the U.S. may finally come to an end."

Some details....

Top AMT rate would go to 31.5% from 28%. Capital Gains would go from 15% to 31%. The top two federal marginal tax rates are likely to be as high as 50% to make up the rest.

The top 1% of earners already pay 35% of the federal taxes. This would raise that to about 40%.

It would also destroy the bull market in equities.

When people say "elections matter", this is what they're talking about.

We are now more than halfway through earnings season, and investors should begin digesting both how the real performance as been, along with assessing the fundamentals of the economy.

In a rational market, I would expect that judgement to be fairly harsh against equities. In this market? Who the devil knows!

We do, however, have some more news that has popped over the last couple of days.....

First up is a petition by Real Estate Appraisers To Stop Unfair Practices. Gee, you think appraisers have pressure applied to them in this sort of market to "hit a number"? Who'd a thunk? The charges levelled include:

• the withholding of business if we refuse to inflate values,
• the withholding of business if we refuse to guarantee a predetermined value,
• the withholding of business if we refuse to ignore deficiencies in the property,
• refusing to pay for an appraisal that does not give them what they want,
• black listing honest appraisers in order to use "rubber stamp" appraisers,

That's pretty serious stuff. Quite frankly, it reeks of fraud. They show over 9600 signatures (!) thus far; let's hope that if this is a real problem, it gets fixed - and soon.

Next up is this fun article from Bloomberg:

"With home prices in danger of falling this year for the first time in at least four decades, Americans are turning wary about borrowing against their houses to pay for vacations, education or remodeling projects. In a reversal of the ``wealth effect,'' people who once viewed soaring home values as a rationalization for higher spending appear to be pulling back. "

Really? But I thought this housing stuff wouldn't spread?

Oh wait.... that says it is spreading.......

But.... but.... but.... this is contained and will be over soon, right? Uh, maybe not:

"The sharp decline of the subprime housing market offering high-cost mortgages hasn't yet hit bottom, the head of home mortgage buyer Freddie Mac said yesterday.The number of home buyers starting such loans peaked last year, and interest rates for those buyers are due to rise in the next few years, which could cause foreclosures to spike further, Richard F. Syron said in an interview with The Associated Press."

And in the first public acknowledgement I've found that the real problem here is DTI, and that there's really no way to fix it other than for there to be a major credit contraction, we have this:

"They’ve over-obligated themselves. Of course, there are always the ones who have lost their job or have medical bills they can’t pay. But more of them are getting hung up with credit cards or house payments they just can’t afford,” said Vicki Hughes, program coordinator for Consumer Credit Counseling, a nonprofit counseling service managed by Family Resource Center."

I'd say "I told you so", but that's getting old, isn't it?

Then there's the alleged outright fraud by builders and their associated lenders, such as this:

"In turn, they filed a lawsuit March 30 against the bank; their real estate broker, D’Alessandro & Woodyard; their real estate agent, Samir Cabrera; and First Home Builders, accusing them of mortgage fraud, securities fraud and breach of contract."

Next up is the fact that the Euro appears to be headed for even more record highs against the dollar, and that we have refinery capacity problems in the US - pushing gas prices higher, with a prediction that we may reach $4.00 this summer.

Now I'd think this ought to make you kinda bearish on the US economy. But, if you want the 900lb Gorilla to start smashing the China, nothing matches this (oh wait, did I say "China"?)

"China ordered banks to set aside more money as reserves for the seventh time in 11 months to try to prevent an accelerating economy from overheating.

Lenders must put aside 11 percent of deposits starting May 15, up from 10.5 percent, the central bank said on its Web site. "

Now that, all on its own, is probably not enough to set off a major blowoff in the market.

But the risks are certainly building. When you consider that the Chinese Market has basically taken off in a moon-shot over the last year or thereabouts, one has to wonder - are we seeing 1999 again - but this time, over in Asia?

And given Asia's peg of their currency to ours, what happens when interest rates there rise, meaning that it is more profitable for people to invest in their bonds than ours?

Capital flight from the US back to China with a pegged currency effectively forces the Chinese Central Bank to print more money in order to redeem those dollars. That in turn creates more inflation and another rate hike, which makes the cycle repeat. As the rate differential increases the money flow becomes a flood, forcing a death-spiral of tightening monetary policy.

The only way to stop it is to drop the peg to the US Dollar. Such a move would return control of the Chinese Currency to its own Central Bank, but result in a flood of money rushing out of the United States - and a rapidly-declining dollar.

Can you say "liquidity problem"?

Let's hope it doesn't set up like this, but it is looking increasingly likely. Such an event would be catastropic for US equity and credit markets. It could quite literally cut equities in half and double import prices - at the same time.

"May you live in interesting times" (an ancient Chinese curse) appears to be coming to pass......