The Market Ticker

Oi!

A funny thing happened on the way to the Bull Market this morning. It got bloody.

In big news in the mortgage market, the once-popular 2/28 "death mortgage" has been killed off by most of the lenders, including Countrywide Financial and others. This is a good thing for the market and economy as a whole over time, but it is certain to take yet another whack at the housing marketplace. With the death of the 2/28 those who are facing a refinance out of the 2 are in very big trouble as one of their few ways to continue to play the game has been pulled out from under them.

Now why is this a "good thing"? Because the 2/28 was designed to rob consumers with weak credit histories blind by forcing them to come back for another mortgage, thereby insuring a recurring revenue stream for the lenders and a deteriorating financial environment for the borrower! You will never actually own your house if you're constantly coming back and resetting the amortization clock! In effect you're renting it from the bank but you're locked into it, unlike a true rental where you can just walk off at the end of the lease!

In short, its about damn time that this form of abuse was shut down.

Guys, this "subprime" thing is not really about subprime at all. It is in fact about ridiculously loose lending standards across the credit markets, of which the subprime is the only visible feature that most ordinary consumers see.

Well, now its coming home to roost, as this beautiful thing called "risk" reappears. While "subprime" is the convenient whipping boy, it is the pustule that marks a case of systemic sepsis in the credit markets.

""Right now things are starting to come unglued," said Charles Gradante, co-founder of hedge-fund consultant Hennessee Group."

Yep. Its called risk, and it never really went away. Those who thought it was gone and that the business cycle had been repealed are discovering some nasty truths - the cycle never really does go away, risk is real, and if you don't price for it, you get slaughtered when the business end of the snake suddenly turns around and bites you!

This is very similar to what happened in the late 90s, when people were crooning about how "the business cycle is dead" and "we're in a new paradigm."

Remember Cramer's "must own list" from late February 2000? Boy was that prescient. Let me quote just a few things:

"But what about the Old Economy stocks? Can Merck raise the bar? Can Pfizer? Can U.S. Steel? Or Phelps Dodge? Union Pacific? No, no, no, no, no and no. So what happens to them? Despite the billions in buybacks and the plethora of strong buys that the Street has put out about these companies, their stocks have no traction. They just stumble along, rising and falling haphazardly with every whim and quizzical speech of the Federal Reserve chairman that still controls their destiny. If Greenspan indicates that there is more tightening ahead, these traditional companies, the ones that you measure with traditional matrices, get pole-axed as we worry about where the capital will ultimately come from if credit gets choked off, while the arms merchants in the Web war, with capital to burn, just go higher.

So, whom does that eliminate? First, any company that is a commodity producer simply can't be owned, no matter what."

Well well well. Capital choked off eh? Hmmmmm.... Can't be owned eh? You mean like XOM? How have they done in the last few years?

How's that new economy Jim? Oh wait - it went totally to shit two months after your wonderful posting here, didn't it?

Of course more recently the very same Jim Cramer has told everyone to buy his "Four Horsemen", defined now as AMZN, RIMM, AAPL and GOOG. Again, four technology names with astronomical P/Es that are entirely dependant on a "new paradigm" for their price support.

Well, we know how this dance ended last time, don't we?

Do you really believe that "this time its different?"

The housing market says its not. And guess what - you've not even begun to see the fallout from this in the greater credit markets. Nobody is talking about it in the mainstream media; the only place you're going to hear this is from people like Bill Fleckenstein, Peter Schiff and myself.

Yet the facts are that the business cycle has not been repealed, despite people claiming otherwise. Every housing market downturn has led to an economic downturn in the broader economy. Every single one. On average, in a recession, equities have lost slightly more than 30% from peak to trough, with some, of course, being worse (and a few a bit better.)

In a sign that the credit markets may be choking off even further, we are now starting to see lawsuits by existing bondholders who are having their interests damaged by these LBOs. Why? Well, taking on all that debt tends to cause downgrades, you see, which makes the existing bonds worth less - sometimes a lot less. The holders are starting to bite back:

"Once an leveraged buyouts gets under way, bondholders watch their investment-grade assets slip into junk status while the owners of shares of the same companies receive premiums as high as 25%.

Private-equity firms often issue large amounts of new debt to finance leveraged buyouts, often borrowing at least two-thirds of the purchase price. The increase in debt frequently pushes the ratings of the acquired companies' debt lower, and often they end in speculative, junk status. "

Yes, raping the existing bondholders is one of those "side effects" of LBOs, you see. It would appear that the bondholders are tired of being the playtoy of the 900lb Gorilla and have decided to try to sink their teeth into somewhere sensitive. Betcha this one has some legs!

And oh, by the way, a lot of the "newer deals" aren't 2/3rds debt financed - they're ninety percent debt financed. That leverage is why the LBO guys like 'em but the damage they do to existing debtholders is severe.

Bernanke got off easy for the most part in his appearance on The Hill. It would be nice if we had a Congress that contained people with a brain and knowledge of the financial markets, but that might asking too much. Specifically, some folks who understand that we've got a major problem here with market valuations and the Dollar, and this is not a "publicity stunt" opportunity.

I know, I know, I'm asking Politicians to act like intelligent human beings, and that's asking a lot given what inhabits the Rayburn House Office Building.

But.... hope springs eternal, and there were some decent questions. You could almost smell the fear in Bernanke's voice a few times, especially when Barney Frank drilled him repeatedly on some of the credit and housing market issues. Nonetheless, he got off tremendously easy; he's a very fortunate man in that I'm totally unelectable.

The Dollar today continued flirting with the ditch, swerving away at the last instant several times. This is a trend that bears careful monitoring for everyone who cares about the future of the markets and their investments, along with the value of anything that happens to be denominated in dollars! I had all my stops cleared out overnight in the FX markets but put two of the trades - Yen and Euro - back on this morning. So far there's been no material profit or loss on those and the stops I've got out there should prevent any serious loss - but I definitely want to "be there" if we crack that 80 level. It may be the only way I can reasonably defend against a total collapse in my dollar-denominated assets' real value!

You have to love the analysts on Intel:

"While investors, concerned about price competition with rival AMD, pushed Intel's shares down more than 4 percent a day after its second-quarter report, analysts said Intel's revenue forecast for the current quarter was conservative."

Yoo hoo! Its not the revenue, its profit margins stupid! I can sell any amount of almost anything if I don't care about profits! Is it really that hard to figure out? IMHO the investor has it right here - until Intel can demonstrate that it can stabilize margins you're an absolute idiot believing that higher gross sales justify an advancing stock price! As a guy who used to run a business while topline revenue was certainly important I was far more concerned with margins, because if they deteriorate you run the risk of a nasty pattern developing in your income statement and ultimately your balance sheet!

The pattern today in the broader indices was a big break from former patterns, where dips were aggressively bought. Today we saw the indices try to do that only to be met with even more selling, in a stair-step type of pattern through the lunch hour.

Oh, Oil. Yeah, that. It closed over $75 today, confirming the "pip" that we got yesterday. Not by a lot, but over is over. Not so good (unless you're an oil company.)

IBM reported $1.50 ex-items, $1.55 with 'em. The market appeared to be less than real impressed, although there was a small pop for a minute or two; it quickly faded back to essentially flat and within the day's trading range, but then picked up a bit. Softness was in the services division and may be responsible for the failure to impress. The "pump monkey" claim was that "investors were impressed" - 12 cents over the high of the day is "impressed"? Ooook, if you say so. Can I have some of that "impressed"? Apparently, they got more impressed on the conference call, as the shares did stage a rally in the aftermarket. We'll see if it holds.

Juniper (JNPR) came in at 15 cents .vs. 20 cents estimates; a clear miss. Looks like the market basically ignored it, with a lot of immediate gyration but then settling down to just above the 4:00 close. Call it a null, although they too got a mild rally after an hour or so.

WaMu reported 92 cents, a beat over the 89c estimates. They claim their losses on home loans were smaller than last quarter. I've yet to look at their capitalized interest, if any. Once again it looks like they did the rabbit deal - shoulda sold them $42.50 PUTs..... that's what I get for not learning from the last time! Aftermarket it looks like they're going to pin right at $42.50; that's where its trading. I'll look into their earnings report later, but my money is on it being the same game as the last time - lots of negative amort capitalized interest. They are, however, boosting provisions for losses - enough? I bet not.

eBAY showed listing numbers down significantly but had better earnings; the market seems to like it although not by a huge amount. Most of the growth in real earnings appears to have come from the fees off PayPal. The market popped 'em hard immediately but it then faded back and is now within its former range. Notably they didn't modify Q3 guidance by any material amount. Looks like people were pretty neutral on the report - until they thought about it, at which point they woodshedded it a bit, now down about 60 cents from the close.

In late breaking news that may be of tremendous significance, Moody's says it has been shut out of rating commercial mortgage deals because it won't give people the ratings they want!

"Moody's has been shut out of nine of the past 13 deals as underwriters sought
better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.

'There's no doubt in my mind that it's because of the change' said Philipp, who included a chapter titled 'Rating Shopping is Alive and Well' in a report released today. 'Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.' "

Cheating? Gee, you think?

Psst - is this good?



Or....



Or......

That last one is particularly nasty.... that's supposed to be "great" credit! Hoh hoh hoh!

Futures are up modestly on both the S&P and Nasdaq as I put this to bed.... we shall see what tomorrow brings. The morning will bring Microslut and Google's earnings before the bell.

Oh, we got another Hindenburg today. In spades.

Have a good evening!

PS: Sorry about the forum being screwed for a bit there this afternoon. One of our users tried to post an entire earnings report (near as I can tell it was freaking huge!) and while the forum can internally handle the machine choked trying to serve it to dozens of people all at once. I've cut back the maximum posting size; if you break up something like that it will be fine as that will cause the processing to be broken up too. (For the techies among you, the problem was buffer thrashing - not a big deal.)

Well the 4:00 AM 5-alarm fire was cancelled.

What fire? The dollar. Last night after the Bear Stearns mess it appeared that 80 on the dollar index might fall. I stuck on some currency trades, put stops under 'em, and set the alarm for 4:00, intending to get up and perhaps find that the snowball had started smashing houses.

Nope - at 4:00 all the stops had fired and I was back out clean with a small profit. Good enough. We bounced off 80.23, which is dangerously close to a breakthrough - but didn't get there. So back to bed I went to get a bit more sleep.....

JP Morgan reported decent numbers, but didn't get much help in the premarket. Pfizer and Altria (God, its Phillip-Morris guys; Altria - sheesh - you make cancer sticks!) reported declines in profits, with Pfizer missing big.

Downey (DSL) got their head cut off. Now THAT'S a bad earnings report. Down 32% on profits. The shape of things to come in the mortgage lending sector? The bad? This stock has been "un-shortable" for a long time (no shares) but recently it became shortable again - and I missed it! ARGH! But.... I got PUTS! :) They ought to trade "interesting" today. Seeing as I'm sitting on 50 long-dated 65s, I'm smiling a bit this morning.

Also, CIT Group (CIT) missed as well with a nice red 70 cents; another consumer and commercial finance company falls. They're exiting the home lending market (gee, you think that's a good idea?)

Bloomberg is reporting that the Chrylser LBO is running into some trouble. Naw, you think?

"Chrysler increased the interest rates on $12 billion of loans it is seeking to fund a buyout by Cerberus Capital Management LP after investors balked at the money-losing carmaker's original terms, lenders said. "

I know, I banged this drum before, but its important - if this deal goes "boom" the fallout will be ugly.

CPI came in at headline 0.2%, core up 2.2 YOY (up 0.2%). The big movers here were food (up strongly) offsetting a decline in gas (down a fair bit.) Overall "inline" but nothing to get excited about on the good side.

Housing starts revised down last month but housing starts up 2.3% for June. Building more inventory into a down market with a big supply overhang eh? How smart is that?

The futures didn't like either number much, although the reaction was fairly muted. Of course when you start as weak as we did this morning........

Gonna stick this one up here as the afternoon deserves its own post with WaMu reporting today. That one ought to be interesting.

Have a profitable day!