The Market Ticker

The non-agency mortgage business was killed this evening.

Most ALT-A paper is now essentially being rated as "subprime", with huge increases in overcollateralization and such required.

""Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines," said Marjan Riggi, Moody's senior credit officer, "Absent strong compensating factors, we will model these loans as subprime loans.""

The short answer to "what will this do" is that it is going to destroy most of what is left of the CDO mortgage marketplace by forcing spreads high enough that you'll think you took out a credit card loan to fund your mortgage.

Effectively, the market has spoken.

More on this when I get details; the short version, however, is that what I had predicted - roughly 30% of all mortgage activity in the US, based on 2006/early 07 levels - has just been shut down.

Nobody writing other-than-agency paper will be untouched by this. Even presumed "reasonably safe" big lenders such as Countrywide are going to get severely roached, and the ALT-A "boutique" lenders will simply be taken out and shot.

The futures are roaching hard as I write this. Tomorrow's open is likely to be very interesting, and not in a way that, if you left long positions on going into the close, you will find amusing.

Says the monster called the market!

And this morning, we got some.

Last night Sun Microsystems reported excellent earnings. Don't buy. WHAT you say? I say don't buy. This is a company with proprietary hardware trying to compete in a commodity world. They're lucky they're not bankrupt. Seriously. I've never liked the price/performance numbers on these guy's stuff. They were tremendously relevant in the early '90s but when the Intel machines came in and made MIPS of CPU a commodity suddenly things got dicey for anyone in the proprietary hardware market. Given that today you can buy a quad-core Intel chip and main board for it at under $500 now (!), Sun's got a problem and so does anyone else in the proprietary hardware business.

GM came in with a decent report - somewhat of a surprise to people - and is why the Dow futures are up strongly, dragging along the rest of the market.

ICSC Chain Store Sales came in up 1.1%, ahead of expectations - Chucky is still gasping. Surprise! It will be interesting to see where Redbook comes in...

June personal income came in at up 0.4%, with spending up 0.1%. The deflator came in at 1.9% annualized, which is basically right where expected. Q2 employment cost index up 0.9%. Redbook up 0.5%, also right inline. Spending is soft and being held up by the high end - the upper income guys are buying, but the middle and lower class isn't.

Of course to balance this we have two implosions in the credit world. MGIC (MTG) is on the ropes this morning with a horrifying detonation on their balance sheet, perhaps as much as a billion dollars, and AHM - where's AHM? Good question.

""It's very hard to quantify how bad this could get," FBR's Miller says. Bankruptcy this week is not out of the question, he says.

To survive, American Home needs the secondary credit markets to stabilize, so the company can re-sell its loans for a profit. "They need it to happen very, very quickly," Miller says. (American Home is an investment banking client of FBR.) "

Hint - that is not going to happen. If AHM's future depends on it, get the engraving tools out boys, this tombstone needs a name.

Oops - we need those engraving tools now! Lookie what just showed up on the wire:

"Based on the foregoing, the Company at present is unable to borrow on its credit facilities and was unable to fund its lending obligations yesterday of approximately $300 million. It does not anticipate funding approximately $450 to $500 million today.

American Home Mortgage emphasized that it is seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of home buyers to whom it has committed to provide mortgages. The Company has retained Milestone Advisors and Lazard to assist in evaluating its strategic options and advising with respect to the sourcing of additional liquidity including the orderly liquidation of its assets."

I see that "L" word.... you know the one.....

By the way, do not believe for a second that these guys were a "bit player." That release says that something on the order of three quarters of a billion dollars in loans did not fund between yesterday and today. This is NOT a small lender and not a "non-issue." It is in fact a huge issue and when the markets gets its arms around this - $300ish million per day in loans that just went in the poop chute - this is not going to go over well.

The stock re-opened this afternoon and immediately started trading at under TWO DOLLARS. Hope you weren't long that one guys. Once this gets figured out by the broader market it is going to roach everyone in the mortgage space. No exceptions. Remember, these guys were not subprime!

Then you've got Indymac (IMB) which reported an actual profit (shocker!) but - and its a big BUT - there are serious signs of credit deterioration.

"Nevertheless, non-performing assets, including loans more than 90 days past due, more than quadrupled from a year earlier to $515.7 million. As a percentage of total assets, they rose to 1.63 percent from 0.49 percent. The amount set aside for loan losses rose more than sevenfold to $17.2 million."

Oops, and yeah, we're just gonna take $17 million of reserves against $515 million in non-performing assets..... hmmm... oh, market share is down and so is sales volume. Never mind the pulled guidance!

Bottom line here is that the credit markets are still on life support and without them the equity market is a rocket burning its last fuel.

And what about those credit markets? TXU is rumored to be falling apart as the LBO-gorged balance sheets of banks with "hung" deals are starting to fret about what's they're eating and not liking any of it. Someone is likely to puke up a huge hairball here within the next few days, and when they do, you don't want to be anywhere near the splatter.

And by the way, don't you believe the credit markets think its all ok. It most certainly does not. How about this?

"On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show"

Is that good?

Consumer confidence up big for July, 112.6. Huh? Consumer spending was bad though. So where did the confidence come from? That number doesn't make a lot of sense. It did pop the market though on the release; it is what it is!

It looks like the numbers are roughly the same now as they were in February. So where is the confidence coming from? We've got high food and energy prices, the mortgage market is imploding around you, and yet everything is whistling past the graveyard? Not a lot of sense here. I want to see this one hold up for a while before I start believing it.

This may be simply a "delayed blast" effect - that is, while the mortgage market is imploding, housing is in the shitter, and food and energy prices are skyrocketing, so long as the credit card has room on it everyone smiles! Is the American Consumer really that blind? Might be! If so then the "R" word comes out right around the time that Grinch starts warming up his pipes...



Hee hee......

Oh, there's this little ditty too.....

"The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2007 was estimated at a seasonally adjusted annual rate of $1,175.4 billion, 0.3 percent (±1.4%)* below the revised May estimate of $1,178.4 billion. The June figure is 2.4 percent (±2.1%) below the June 2006 estimate of $1,204.0 billion."

That spells "contraction", I do believe.... but don't tell The Bulls! I'm warming up that Green Egg to BBQ them alongside Goldilocks...... she, by the way, has been bled out and is now sitting in the meat cooler so our butt steaks can be properly aged.

Oh, and the June Chicago PMI? 53.4. Expected was 58. Ouch. I think that's spelled "contraction" too.

Oil. Oil. OIL! Cracked $78. Oops.

Oh, you know our old friend the 10? The one we haven't talked about much the last couple of weeks but was the focus of attention? Its sitting right on 4.80%. Critical support? Maybe. But the move down has all been "flight to quality" or perhaps more succinctly, "dump that CRAAAAAAAP." And this afternoon it showed up again, getting roached as soon as the AHM news started flying around.

Psst - Hedgistan has a small problem too. Reports are that there have been multiple (two or three at least) funds in France that are sucking fishspooze today. Gee is that good?

And now we've got another problem - the SPX cash futures just give us what's called an "outside reversal" pattern. This is one of the most reliable technical indicators of market momentum shifts, and we got one going into the close on the month! You can bet the technicians in the futures pits saw this; they don't miss much. Does it always work? Oh hell no - nothing does. But is it quite reliable? Yep - and its also a signal that doesn't go off frequently.

We broke the 100 on the Nasdaq Composite today but are sitting right on second-level support. And the Dow Transports are also sitting right on second-level support.

This is a critical time. One by one technical support levels are falling apart, and the S&P Cash close today on the monthly is a particularly ominous sign.

Add to this all the liquidity-related issues and this is definitely a time to be cautious, as whipsaws and volatility, until we sort out whether or not the longer-term trends are going to violate with conviction or not.

Front-running this turn - assuming it comes - can be extremely profitable - but if you're not nimble, it can also be extremely dangerous!

Good luck to all!

Late Update: Another Bear Stearns hedgie fund is in trouble.

Is it time for this yet?

Named "in honor" of American Home Mortgage (AHM) who Friday, at 10:00 PM (in an eerie reminiscence of their Good Friday massacre) announced they were "delaying" their dividend - after it had been credited to many investor's accounts!

And why would they do that?

Some stammering about a kind of call they didn't like... I think they're called "Margin Calls". Anyone know?

Those are bad, right?

Anyway, they were instantly woodshedded this morning, with the immediate reaction being a 25% haircut in the premarket. There were a significant number of fools who were "attracted" by their outsize dividend payout. Then again, there were people who were attracted by New Century's too, and we know how that one ended. I can understand people forgetting what happened back in 2000, but March?

Monster.Com (MNST) announced lower than expected earnings and job cuts - they of course traded up in the premarket. I guess that lower earnings are good, right? Oh wait - wasn't the job market supposed to be "very strong"?

CNA come out with poor earnings due to writedowns on bonds (someone was doing a bit of "reaching for yield" eh?) and got hammered. I used to have a commercial insurance policy with them - they were decent folks to deal with. Too bad they weren't real smart about their investments....

Oh, Subprime isn't spreading eh? Don't tell that to AHM. Rumors are swirling over what their trading halt is about (beyond what they've said - margin calls and a suspended dividend payment) and then we have this:

"Every day brings a new failure. Borrowers ranging from Manchester United Plc, the world's fourth-biggest soccer club by revenue, to billionaire Barry Diller, chairman of Internet travel agency Expedia Inc., have failed to find lenders to refinance debt or fund share buybacks."

Gee, 'ya think?

Oh, and let me give you a hint - do you know why they call 'em "Brokers"? Think.... BROKE. As in what you'll be if you listen to this!

"U.S. stocks rebounded, pacing a global advance, after Wall Street brokerages told investors to buy shares that fell during last week's $2.1 trillion global sell-off. "

Yeah, ok. What 'ya smoking there? You didn't bother telling anyone about the LBO "Put" that is now gone, did you? Why not? Oh, you don't make any money if people sell and go to cash, do you? Naw, churning is such a profitable business!

Then you have this ditty:

"The biggest losses in equity and credit markets in five years are making the U.S. stock bulls more bullish."

Well of course. But again, no mention about how the LBO "Put" has disappeared from the market and is unlikely to return any time soon - and at recent levels, never.

Guys, credit markets. Credit markets! DAMN IT, WATCH THE CREDIT MARKETS!

And there you will find nothing to suggest that this is over. Not here, not in Europe, not anywhere. In fact you continue to see deterioration! Credit default spreads hit ALL TIME RECORD HIGHS today. Margin calls among LARGE ALT-A mortgage lenders? This spells STABILITY in the credit markets?

Horsecrap!

The threat of a forced carry-unwind eased a bit, with the Yen headed back towards 119 as the day went on. This was certainly a big factor in the bounce today.

But..... does this mean its over? Oh no, I don't think so. The story here is liquidity, and only a few - including Russell Reed from Calpers (who I just heard on CNBC), seems to have it right. He sees a change in the global liquidity picture and I agree - how can you not see that when default spreads widen to the highest on record?

As for LCDX spreads, they had a horrible morning but this afternoon came back in quite a bit. That was largely responsible for the rally today in the afternoon.

The ABX mostly deteriorated - the BBB tranche on the 07s found a small bid, but not by much. The AAA, AA and A paper got murdered - again. The CMBX found a bit of a bid today - could that really have gotten worse though? (Well, yes it could..... but....)

Oh, breadth? Horrifying. Dow is up 88 points, but 52 week lows on the NYSE were 444, with only SEVENTEEN new 52-week highs. Gee, is that good?

Who won today? Broker/dealers (big financials); oversold bounce (clearly). GM was up quite a bit today - likely due to GMAC coming in with good results and an expectation (after Ford's results) that GM's would be decent.

Now let's look at some technicals:


Notice a few things here - This is the Dow Jones Industrials, and is sitting right on the 100DMA. We pinned it but didn't penetrate - now we're trading between the 50 and 100. One way or another, we have to break that line, and this will pinch off.

Now before you get all bullish (we didn't blow through the 100) take a good look at this:

Oh oh. That ain't so good. That's our buddy transports, and he's sick - he's under the 100.

The S&P is sitting under the 100 but hasn't penetrated the 200, and on the Nasdaq, the Composite is under the 50 while the NDX (Nasdaq 100) is just above the 50.

The Russell, as I noted Friday, is a mess, having lost all support, blowing through the 200DMA like a knife through butter. The EEM (emerging markets index) is sitting on the 50.

So what do we got here?

The same thing I said we had on Friday! And it appears that we're getting scenario #2 - the most dangerous for both Bulls and Bears, where we may be moving higher to clear out the "oversold" indicators on the indices - an advance which can be violently reversed by just one tiny little credit implosion!

So the bull/bear fight here is simple - who drags who and which way?

Here's the bottom line from my perspective coming off today - this is probably an oversold bounce off the break. Now that's on the technicals.

On the fundamentals, show me some good data. Good luck. It looks no better now than it did a month, two months, or three months back. Fundamentals on the economy are middling at best and deteriorating, with housing leading the way.

Tomorrow we get earnings from IMB (IndyMac Bank) and hopefully some sort of clarity on what's up with American Home Mortgage (AHM). I can't imagine the latter will be good news, but we shall see.

Until then, have a great evening!

I wanted to comment on this in the main blog, because I'm seeing an increase in what I find to be very disturbing - comparisons of certain CEOs to Joe Nacchio (who just was sentenced) and other ugly things.

Let me state here at the outset - the entire point of running a corporation or any other company is to make a profit! If you don't believe in making profits, then what the hell are you doing in the financial markets trying to make a profit?!

Ok, with that out of the way, let me get into something a bit more specific. And I'm going to actually come to the defense of one of the companies that I personally think still has a major overpriced stock, Countrywide Financial.

That's right - I'm actually going to defend Angelo Mozillo. Ok, up to a point - I still think the guy buys the ugliest suits and ties I've ever seen on anything that walks on two legs, and I wouldn't be caught dead in public in his wardrobe. (Heh, gotta have some humor here, right?)

There have been a number of people calling for Mozillo to be hauled off in irons for "not telling us that your firm's prospects suck bilge water."

Well, I don't see it that way guys. I've been watching the same TV you have, and reading the same papers, 10Qs and 10Ks. And nowhere do I see an actionable statement. Indeed, what I see are a fairly honest set of statements.

I see omissions, but there's no obligation to answer questions that are not asked!

What I do see is people who were apparently educated in Government Schools and thus have this penchant for creating words that weren't actually spoken, inserting them liberally, or just outright making shit up.

Let's take one example - Cramer "pounding the table" on Countrywide. You saw it, I saw it, it resulted in a significant stock price pump.

Did he say Countrywide was going to be taken over? No.

He said that he believed that Bank America would be crazy not to.

Do you understand the difference between that and "the firm is going to be taken over"?

If not, you have no business investing in anything other than a spade to work your back 40.

Or take the alleged statements of the CEO - that they will be "the last man standing" in the mortgage space, to paraphrase roughly.

I believe Angelo may be correct in that statement. I don't believe that Countrywide will go bankrupt. Could they? Sure. Any company can go bankrupt.

But is it likely, given what I see on their balance sheet? Not that I see. What I do see is what I believe is an overpriced stock - one that is trading - even at these levels - with the expectation that there will be more business than I forsee in the lending space. So as a consequence I'm short the stock and intend to remain short until I either decide that I'm wrong about where I think the stock should trade or my downward price target is hit.

But let me ask you a question - did you hear him say that his stock was a good investment, or that Countrywide would survive and take market share from those who went out of business?

Don't you see the difference between those two statements?

If you heard what he said, but decoded it as "our stock will be $100 next month" you are the idiot.

Second, on his prearranged trading plan. You guys who are calling for this guy to be arrested and hauled off because he's selling on a prearranged plan while the lending space implodes around him are fools.

Insider trading is what caused the development of those plans.

Angelo is under no obligation to update that plan as things develop once it is originally filed. You can only get him on insider trading if he knew at the time he filed the original plan that the business would deteriorate.

Good luck proving that.

With that said, I know what I think when someone sells nearly half a billion dollars worth of stock, and its not very complicated to figure out.

I think they're (1) overpaid by their company, thus the firm is likely to underperform, and (2) they think the price of the stock will not be higher tomorrow.

But - its not like all this happens in secret! The Form 4s are filed and public data!

So where's the beef guys? Its all out there where you can see it.

You know what I think? I think a bunch of people got caught offsides by this market plunge the last couple of weeks. You got all giddy with Dow 14,000 and thought we were going to the moon. You piled in late and now you're getting raped, taking big losses. Maybe you were real fools and went out there on Margin and have doubled your trouble!

Well, how is this anyone else's fault?

If you're incapable of actually reading what's written on a page or spoken without adding your own words in the middle, go back to school and get out of the market until you're capable of parsing English without a fanciful twist.

If you're just looking for someone to blame for bad investment decisions, go get up, look in the mirror, and stare. There's your problem.

If there have indeed been materially false statements made by insiders in these companies, it will come out. The law exists for that purpose and as Kenny Lay, Skilling and others have discovered, while the wheels of justice do turn slowly, they do indeed turn.

In the meantime, however, quit trying to wishcast what you think someone said into what you ACTUALLY say! Grow a brain and read some 10Qs. Learn how to read a balance sheet, income statement and P&L.

If you don't know how to do these things get the hell out of the market until you learn, because you're going to get forking crushed buying and selling individual stocks without being able to read their financials!

'Nuff said - we now return you to our regularly scheduled stock market crash.

First, on the "Presidents Meeting" this morning....

What are these guys smoking? Crack is against the law guys. Their focus is basically on "global will save us."

In a word, bullshit.

The facts are the facts. GDP came in this morning inline roughly with expectations but the devil is in the details. And here, the devil is saying this to the US Economy:



In what way? The consumer. Spending growth up less than 1%. Wake up folks, this is a recession call!

How come? Simple - ICSC and Redbook didn't go off the cliff until the first week of June. They've deteriorated since and now are at a net negative run-rate. But we only had one month worth of that contribution to the 2Q GDP number, and remember, 70% of the US economy is consumer spending.

What held it up? Non-residential construction. Anyone remember this chart?


What is that? Allegedly AAA-quality non-residential construction bonds.

Gee, what 'ya think about those donuts? I think they're laced with cyanide and the patient just ate a shitload of them, which started in early July, thus, not reflected in the 2Q GDP number.

So what happens when you take out that nice "non-residential construction" number and the consumer has a negative spending growth rate?

Can you think of a word that starts with "R" and describes a negative GDP growth rate?

Paulson had a hell of a nervous tick on the air today, and was being hammered about exactly what he saw that justified his "no contagion" call. Notice how he didn't answer that question?

I wonder why not?

Heh Paulson - your nose is growing!

The real news today in the credit markets was.... no news. Not "all things are normal" - a real, honest-to-God, "no news." As in no deals getting done, packages coming back "no bid", etc. Gee, you think? That's what I was talking about last night in the ticker - people are simply shellshocked with the deterioration in the ABX and CMBX paper, and wondering - is this a general corporate paper problem too? Might be! So they're choosing to sit on their hands until they can get their arms around it. That seems like a totally reasonable position to me, but its one that won't have good effects on the "LBO mania" premium.

Reality: Margin calls are going out through Hedgistan and people are getting fuched literally by the hour, roaching the ABX and CMBX further. You're not hearing about it yet in the media, but I will predict this - you will, and soon.

Now add to this huge margin debt in the equity markets and you have a potential nuclear blast. If someone doesn't find a pair of wire cutters to kill those timers..... all of them..... "betcha gonna miss at least one!"

Oil. Oil. Oil. $77 a barrel! WOW.

Countrywide gets some rumors, but then S&P craps all over them with something you never hear analysts say - STRONG SELL. Their new price target 12 months out? $25, well below the CURRENT trading price. Oops. Buy into that rumor game this morning, did you? Well guess what - you got roached. That'll teach 'ya to "buy the dips".

Be warned - the dips are, just once in a while, headed for a waterfall! By the time you hear the roar its too late; you're going over!

Let's talk ABX, CMBX and LCDX for a minute. While the 07-AAA paper actually turned up a tiny amount, the BBB paper is now trading at 40!


As for the CMBX, that's beyond stupid. Commercial is contained eh? I don't think so! The AAA chart is above; the horror show of the BB chart is beyond words:



And finally, in LBO land, this is the very definition of "my world sucks."



Ok, now for some charts. For those who argue "PPT", where the hell were they today?

Goldilocks' limp body was seen swinging from a tree - upside down. I think the bears are bleeding her out before she goes on the barbie. They have a giant-size "Green Egg" and it's smokin' hot. I think she might go on Monday morning......

Ok, charts charts and more charts! Today was, to put a word on it, interesting. And Cramer - what an asshole. Complaining about the futures being spiked (down) at the close. Heh dillweed, you used to work in this business! Mutual funds that get a redemption are required to meet it at 4:00! So guess what happens when people see the market go to shit and call their broker telling them to, as you put it, "SELL SELL SELL" and they hold mutual funds?

Well yeah, they SELL SELL SELL. Right into the close.

Oops.

Ok, here's some charts:



Now notice this chart. The market was sold right at the open coming off yesterday, bounced, traded down mostly through the day, and then was pretty much floating around right up until the last 30 minutes, when it went off the cliff.

The Nasdaq and Dow look similar.

PPT? Oh hell no. Mutual fund redemptions. Bet on it.

Now let's look at a few more things:



This is the NDX, or the Nasdaq 100. This is, basically, the same thing as the "Qs". Note that it is sitting right on the 50 but that it cracked the (weak) first-level support just above that today. In addition volume today was lighter than yesterday, but heavier than the most recent runup. Yesterday, of course, was a blind panic - this wasn't, but it sure would have been if had fallen apart earlier in the day!

Here's the Dow:


The Dow is sitting right on second-level support, the strong support from early June and then right around the turn of the month (when it was successfully retested.)

Now you might say "whew!" We didn't go over the edge yet!

NOT SO FAST! Here's the SPX!



There's just no way to spin this one or find anything to like in here. The S&P got ROACHED today going into the close and this, along with the Russell which had an even worse horror picture, tells the story.

We are now clear of both first and second-level support, threatening the 200, with the next clear support around the 1425 level and below that, the March lows.

Now I want to show you a few more charts, these with technical indicators. These are weekly charts; click them to load a new window with an expanded image you can see easily:



This shows the SPX on a WEEKLY basis. While its tough to see here we violated the uptrend from last July today, closing below it. We also have a MACD SELL (decisively red histograms) and a DMI sell signal.

This chart bears paying attention to because if you look at the MACD it has a good record of showing actual pain ahead! In addition the DMI has been very reliable and not prone to whipsaws.

And both are saying - right now - SELL LIKE HELL - THE GATES JUST YAWNED WIDE AND THE DEVIL IS GRINNING AT ME!

Now next up is the DOW, same deal - weekly.



It too is posting a MACD sell. This is new today - up until then, it had not done so. Note that the DOW has not yet violated the uptrend from last July. However, the MACD just posted a SELL and the DMI is dangerously close to doing so. Interestingly enough these very same indicators, on the DOW, have a habit of being a bit late! So if you wait for the MACD to be CONCLUSIVELY under or the DMI to CONCLUSIVELY cross you're late to the party. The SPX doesn't have this problem. Why "whys" and "wherefores" are an interesting academic exercise and have a lot to do with the representation depth in both indices (the Dow is only 30 stocks)

If we look at the Nasdaq Composite and NDX in turn we find something even more interesting - the composite is holding up better than the NDX, even though it sure as hell doesn't look that way from the last couple of days! Again, this is a breadth issue.

The real horror show however is the Russell 2000. It is sitting on the February lows; this week was an absolute disaster, now having erased basically all of 2007's gains!



So here's the deal guys. We've violated key support levels in the SPX, the Russell is sitting on the February lows , and it is basically a given that the SPX and Russell are going to drag the other indices with us.

We are now talking about the timing, or when, not what, and how long this goes on.

Remember that a few weeks ago I said that I saw two scenarios setting up - either a break right there, or that we would push to new nominal highs, either right at or just beyond the former all-time trading highs intraday, then fail.

We did the latter.

Next week we have the same scenario setting up. I suspect that we've got margin calls going out right now in the equity markets, and that the Hedgistan guys have similar - or maybe far worse - problems. In addition the downstrokes continued in the Futures beyond the close indicating that people knew they had trouble and were trying to front-run it in the 15 minutes they had before they got locked out for the weekend.

So what happens Monday?

IF one of the nuclear weapons go off over the weekend before we open, then "what's going to happen" will be obvious. We are going to crash. Period. If you wanted to get positioned, your chance was today. Monday you won't get the chance. What will kick it off? Any of the following:

• A serious unwind of the carry. Yen somewhere under 118 will set that off, but there's no way to know exactly where it happens. In short, watch the Yen Sunday evening when the FX markets open and especially when we get into the wee hours of the morning when Europe starts trading. If it roaches hard, WATCH OUT.
• If the Asian markets go completely to crap, we will likely follow them. Note that "complete to crap" is not down 1 or 2% - its a crash over there. Remember that China cannot drop more than 10% (they actually close the markets!); perspective is important. If they open severely down and followthrough occurs in Europe, look out!
• If any of the ticking nuclear weapons go off in the debt markets. This is a very serious risk - perhaps the most serious, because it is nearly impossible to quantify and could show up suddenly during the day as well. There is simply no way to put a handle on this but if it happens - you'll know it.

Note that only the second - the Asian markets going to hell, with none of the others getting in the way leaves any chance for intervention by anyone. There is no government in the world that can stop the FX markets from unwinding if they want to; they will simply piss money into a singularity. Ditto if the implosion occurs in the credit markets. The problem with the other scenario is that it is almost certain to touch off one of the other two! So forget about the "PPT" or any other such nonsense - if we get triggered there will be no rescue.

The other alternative is that none of these things happen going into Monday. In that case we will likely open down but at some point next week - perhaps Monday - the selling will abate. It could happen at the open but I'd bet against that; in all probability we will open down and either it'll wait a day or two and slowly abate or we'll reverse hard midday one of the days next week, perhaps even Monday.

At that point we will start to rally again. This rally should stall somewhere before we get to the 50DMA, likely before 1500, but we may cross it. When that rally stalls, and it should either next week or the first week in August, The Abyss will yawn wide.

Beware for there will be many Bears - and Bulls - caught in this trap on both ends. Trying to trade this in either direction carries extreme risk. If you can't be watching the market literally tick-by-tick don't even think about trying it!

If you try to front-run either of these moves play limited risk strategies that cannot be caught offsides and inflict unlimited - or nearly so - damage upon you.

Many people will see the selling exhaust and think its over, buying "the bottom". It is very likely that this will prove to be an excruciatingly bad bet; the odds of this being a "one trick pony", with the technical damage done here, are extremely small.

I rate the odds of this being over when the selling exhausts initially at less than ten percent.

To give you an idea of where we might end up if the February lows do not hold (and remember, they have effectively already cracked in the Russell; this means that odds are they will not hold in the other indices either!) I will leave you with one final chart.

The targets, assuming we break trend at roughly 1375 - coincidentally right at the February lows (the trendline from 2003) are 1250 (there is a strong bottom there), 1160 and 1070. Below that we go after the 2003 lows as there is no meaningful support below 1070 until we get there!

Put those numbers in your pipe and smoke 'em, because if the February levels crack in the S&P the minimum downside target is 1250 - a full 20% loss - and it only gets worse from there.

Come over to the forum and let's chat!