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?