The Market Ticker

Got priapism?

The Bond Market does.

Our government never ceases to amaze me.

They of course announce a "bipartisan stimulus package" to supposedly "help" our economy.

The bond market no likey, to put it bluntly.

The TNX, 10 year Treasury Rates, spiked hard - by more than 20 basis points, to 3.64%.

That's a six and a quarter percent change on the day!

Oh, and before someone says "oh it was rotation out into equities", no it wasn't.

It was the bond market telling our government to quick jacking around with bullshit "handouts" and tampering with sound mortgage lending practices!

What Pelosi tries to giveth, the Bond Market taketh away, and faster than Pelosi-cum-clown can try to hand it out.

Specifically, what the market didn't like was the prospect of bypassing OFHEO and indexing Freddie and Fannie to "average" home prices for the rest of the year.

Well DUH.

Oh, that wasn't all of it.

We also found out that a supposed "rogue trader" caused a multi-billion-dollar loss for a French Bank, which they had to unwind last week and into Monday.

Then this afternoon The Fed claimed this had nothing to do with their deliberations, and further, that they didn't know about it before their teleconference?

One word: HORSESHIT.

Let's talk about what probably really happened at The Fed.

• Ben and Buds saw a precipitous drop in commercial credit demand last week. They were faced with either draining huge amounts of liquidity or dropping the FFT.
• Instead of allowing the market to sort out what was going on or doing the right thing and telling the banks - both in the US and overseas - to fess up to what was going on "or else", they PANICED, and held an emergency meeting via teleconference, "agreeing" that the solution was an emergency rate action. This decision was allegedly made (according to Steve Lies-man) Monday night.
• NOW we find out that the "collapse" in credit demand (and flight to Treasury debt) was actually caused by this "rogue trader" who spasm'd the equity markets worldwide. Or was it? Was that a rogue trader or was it really an institutional attempt - with authorization - on their part to bail themselves out of a bad position or three? Hmmm... who knows.... but the CAUSE of the panic is now clear.
• And NOW the crack-whore equity market is demanding another 50 bips in rate cut next week!

Now this wouldn't be so bad except that BenDover had to inject a shitload of liquidity to maintain the target today. In fact, the slosh took a fairly sizeable rocket shot northward.

The bond market, being experts at sniffing out bullshit, saw all of the above and, having behaved itself up until this point along with a slowing economy, reversed hard, rocketing the cost of money for government debt upwards by six percent in one day!

Oh, and if you look at the short term (13 week) Bill market (the IRX) it rocketed higher by NINE PERCENT!

But but but you sputter, I thought BenDover's move was going to make mortgages and other loans more affordable?

Well let's see.

On 1/18 the 10 year closed at 3.648%.

Today, the 10 year closed at 3.640%.

Rate cut? Lower interest rates for mortgages and other debt?

Where?

BenDover cut the FFT by 75 bips and the Treasury Market gave him the finger, taking it ALL back in less than 24 hours!

You had about three hours yesterday to capture that lower mortgage rate.

If you didn't lock yesterday, tough crap - you missed it.

And if The Fed - and Congress - doesn't listen to the Bond Market and stop this stupidity government debt costs will continue to skyrocket and drag private debt costs higher, instead of the other way around, and will ultimately force the government to contract itself due to an inability to meet its interest obligations.

You only think The Fed controls interest rates.

It doesn't, and this is what the debt markets do when they get pissed off at government stupidity.

You want to know what I think homeowners who are upside down ought to do after being RAMMED by the politicians today and Ben Bernanke on Turesday?

After seeing Ben Bernanke AND our government DRIVE UP, RATHER THAN DOWN, DEBT COSTS, DIRECTLY AND INDIRECTLY SCREWING MORE AND MORE PEOPLE?

They should walk away. Send in the keys. Fuck it. Yes, your credit will be trashed for 7 years. So what?

Tell the bank to get fucked.

Today we had reported the first ANNUAL decline in home prices since the statistics began in the 1960s, and in all probability, since The Depression!

THIS IS NOT OVER.

House prices will continue to decline for the next TWO TO THREE YEARS, and if you're underwater NOW, you're going to be MORE UNDERWATER in a couple more years.

YOU WILL BE A DEBT SLAVE UNLESS YOU ACT TO STOP IT!

CUT YOUR LOSSES! Screw it. Check with an attorney to see if you can have other assets attached (in MANY states the answer is "no" on a purchase money mortgage) and tell the people who have screwed you - and us - to get fucked.

You can either default the debt NOW, or LATER, after throwing even more money down the rathole. But either way, as the economy contracts and your job comes under stress, if you're upside down you're screwed.

Better to take the pain RIGHT NOW and cut off a finger rather than losing an entire LEG in a year or two!

Hell, even Cramer recommended doing this ON NATIONAL TELEVISION a couple of months ago!

Oh, and guess what - the mainstream press is even talking about it! Read all about it right here!

LISTEN UP FOLKS: YOU HAVE EVERY RIGHT TO TAKE ANY LEGAL ACTION YOU WISH. Analyze this as a pure BUSINESS DECISION, talk to an attorney, and then ACT.

SAVE YOURSELF.

(Note: You MUST speak to an attorney before attempting any of this and get LEGAL ADVICE BEFORE YOU ACT. I ain't a lawyer and don't play one on the net, and even if I was, its not legal to provide legal advice over the Internet! If you screw this up it will ruin your life. The law protects you but only if you follow it.)

As this deflation of the monetary base gains steam if you do not act you will have thrown away valuable money you could have otherwise held on to. Go rent a place first - so you pass the credit check and dig yourself out of your personal housing hell!

Beware equity investors.

The short bus is busting at the seams.

Buy this rally? Oh hell no.

It won't take long before reality sets in.

This is a time to sit on your hands and patiently wait for the opportunity to throw darts at the quote page of the Wall Street Journal, then short whatever you hit.

That day is coming, and soon.

Here's your technical.

Dead cats do bounce, and the markets proved it today, going from big-fat-red to big-triple-digit-green. V&M crossed around 2:00 CT to the positive side, and from there it was "To the Moon Alice!" for everything.

And no, I don't think the bounce is over.

Nor do I think it changes a thing in the intermediate term.

In fact, I've said for a while that we'd get this sort of bounce, and if you were one of the poor bastards trapped in long positions, you'd get a decent chance to get out.

Well, today you got the start of it.

If you're a Bear and overstayed your welcome without stops, well, go look up the definition of "squicked" on Google.

This sort of day is why I preach money management and stops! Always! My expectation that something like this was coming is also why I've been almost exclusively playing in the futures for the last couple of weeks, discharging option positions into the weakness, with a few choice morsels here and there for "special situations" (like the VIX yesterday.)

The rally is likely to go on for another week or so, probably into the FOMC - at which point the Goldilocks Crack Whore is likely to be disappointed with the size of her hit, and Hissy Fit #2 will almost immediately ensue. Of course it could go longer - but if I had to place a bet.......

The price action today smelled like a few big quant funds exploding. Big Cap Tech, which has been heavily owned, was sold and homebuilders and lenders where bought - which have been heavily shorted. There were also a bunch of "dark trade" markers left on the charts of a number of stocks that strongly suggest institutional buys and sells via "dark pool" trades - huge volume spikes with no meaningful share price movement in what it is otherwise a fairly idle volume tape.

Rumors today are flying all over that the monolines may be in talks with the State of New York and private banks to structure some sort of capital package. Who knows if this is true.

Note carefully, however - if the government actually buys any of these firms your common equity will be a zero! So buying their stock is an absolute high-wire act that I would not even consider. I did, however, take a SMALL CALL position on MTG today. Key word here - SMALL!

I will be playing this bounce long and when it looks ripe it will be time to really load the truck on the short side - the next move down is likely to make the previous one look like a Girl Scout picnic.

Here's your technical folks - enjoy!

What started it?

China finally came out and admitted it - they can't delink with us, and in fact they have banks over there who have problems caused by our subprime slime.

Peter Schiff, eat my shorts. Your clients are fixing to get a pounding up their backsides if they were following your thesis that "the rest of the world will be ok".

Two days of declines sequentially in global markets, and the crack whores are back out on the street screaming for more drugs in the form of "A Fed Fix."

Never mind that The Fed doesn't set interest rates, and besides, isn't it time that the crack whore detox and put her trash out in the street instead of stinking up the kitchen?

Perhaps the markets think not, but I think so.

Let's cut the crap here and put reality on the line.

We still do not have clarity from our financial institutions. We still have banks who are playing "Level 3" games with their balance sheets. We still have, believe it or not, banks making mortgages to people without any material amount of money down on the table with "back end" ratios in the 40s and even reaching 50% allowed.

There is no "hyperinflating" out of this. It will not happen, and those who think it will need to put down the crack pipe made out of pure tinfoil and insert a new brain to replace the one they fried listening to all the crooners and toofers who pollute our cable TV spaces and the blogosphere.

The global selloff in equity market is not a crisis. China's market doubles in a few months and then when it has a 30% decline people come out screaming for more drugs?

Oh, you mean stocks can only go up? Apple to $300, Google to $1,000, RIMM to $200, as Cramer and others have claimed? Like in 1999? Or is that like houses? Affordability doesn't mean anything? Earnings which have hit a cyclical peak and started to decline don't count any more? We don't pay for earnings growth any more, we simply want prices to go higher so we can have yet another bubble?

How about some reality here.

• We are in a recession.
• It is a consumer-led, classical recession.
• It will be deep and long, because our binging on cheap, intentionally under priced credit was unbelievably overextended.
• Commercial credit demand will contract and the velocity of money already has, and this will continue. The Fed will follow the short-term commercial credit demand down resulting in zero or near-zero interest rates, but The Fed does not control this process and never has.
• This will not end until all of the bad debt is recognized and defaulted, and rational lending guidelines have returned to the debt markets. For instance, 30 year fixed mortgages with 20% down, 6 months of seasoned reserves, and no more than a 36% "back end" ratio. No more "negative roll" auto loans. In short, no more crack for the whore; she has to detox and put her clothes back on.
• The more our government meddles in trying to put more crack on the streets the longer and more painful the process of taking out the trash will be.

Last night the S&P futures went lock-limit down for the first time since the tech wreck in 2000. 1255.50 pinned them - no bid.

Then, right around 3:00 AM, people started bidding cautiously on yet more rumors that the Crack Dealer would be pumping out drugs yet again.

Guys, why do we have this garbage floating around trading desks? Why should The Government guarantee anything? Monolines? Interest rates? More crack for the whore? Why?

How about this - how about if you're over leveraged, you FAIL and go down the toilet!

From every corner there comes a demand to prop up this and that. Its the monolines, its the mortgage bonds themselves, its one thing or another (or, for that matter, all of it!) Calls for RTC V2 come fast and furious, with Cramer leading the charge with a $250 billion mop and dustpan.

Not only is this crap it must be avoided at all costs, for down this road lies another Depression similar to what we experienced in the 1930s.

Why?

Because if you prevent people from suffering the consequences of their failures and yet try to "monetize" the losses what happens is that those with money to lend, which the Government and private industry both rely on, take their ball and go home! After all, the first rule of investing, whether you're investing in debt or equities, is don't lose the principal!

This credit mess was NOT an accident.

It was the result of intentional mispricing of risk for profit and hundreds of billions of dollars were siphoned off by everyone in the chain from mortgage brokers to investment banks.

Those who were responsible for this must be forced to eat their losses.

You want to see 20% interest rates again? Preventing the recognition of those losses by the guilty parties will insure it as those with actual money say "no mas!" and put their funds somewhere that fraud and blatant theft are punished instead of being rewarded.

You CANNOT force someone to lend. Our government must have credit available to it in order to function. The cost of that credit must remain rational or the squeeze on the federal budget and ultimately the people will make what is going on now look like a Girl Scout picnic.

It is time to cut the crap and take our medicine.

But heh, let's have one more hit off the crack pipe eh? BenDover sure thinks so in that he's playing "bitch" to the market. Fine and well; now let's watch him have fun defending it; the futures sure as hell didn't buy it, within 20 minutes they pinned the lock limit level again, bleeding off the ENTIRE pump they got originally!

Gee, what's the truth here?

That's simple: Commercial credit demand and monetary velocity has gone off a cliff and we are rapidly sliding towards ZERO on the FFR; it will make no difference at all just as it didn't in JAPAN!

Here's your technical!

Or the global market's, for that matter.

Essentially all of Europe was down 5-7%. The futures traded overnight and until midday, and at the close (until 5:00 PM) the /ES S&P futures were down almost 60 handles, or 4.5%, with the Nasdaq 100 /NQ futures down 75 handles, or 4%.

The DOW, were it to open here, would be down about 500.

And if you're an "equity investor for the long term", all you can do today is sit and cry, because the equity markets are closed.

They won't be tomorrow, of course.

But before we get our crack at this, Asia, then Europe, get a go at Round #2. Will the collapse continue? Good question.

This is, basically, what I've been expecting since April. Yes, it took longer to unfold than I originally suspected, but now the world markets are coming to grips with reality.

Slowly, but its happening.

Barring some sort of massive intervention (which cannot be ruled out) we will have a severe decline tomorrow at the open. It will be very tempting to "short the hole", but down this road lies great risk.

Remember folks, Bear Markets are not necessarily kind to Bears. They have a habit of stealing the money of all through violent whipsaws and both spikes and collapses in the VIX, which makes playing the options market particularly treacherous.

Always remember that until your paper profits are reduced to cash and in your hands, they're not yours! Also remember that attempting to catch the "last tick" of any move, in either direction, frequently leads to tears.

If you got any material part of this decline since the turn of the year and profited from it, you've outperformed virtually everyone.

In a Bear Market, your benchmark to exceed is CASH.

The not-amusing part of this, if you're stuck in a 401k or simply haven't heeded the warning signs and are long the market, is that there is nothing you can do at the present time.

Please remember - Bulls make money, Bears make money, but Pigs get slaughtered. And its very, very easy to be a pig in this environment and go "all in" short (or in PUTs.)

Resist the temptation.

If you have some "lotto tickets" at this point in time, you're likely looking at big winners tomorrow. Consider cashing out at least your cost basis in those positions, if you're inclined to let the rest run.

1220, my intermediate term target on the SPX, appears to be in play - perhaps as early as tomorrow. Due to the holiday this could actually happen without tripping the "lock limit" on the futures, as it will be over two trading days. We are within 45 points of that target now.

Should we get to 1220, I am almost certain to take nearly everything off and bank the money.

Can we go lower than that? Absolutely. In fact, 1070, my "full bear" target, is in view. But expecting us to go there in a straight line is almost beyond comprehension.

We have, for all intents and purposes, crashed here and now. Assuming we were to open right now the market would have lost nearly 20% of its value in less than three weeks' time. By any definition you care to use, that's a crash.

The margin calls will be flying fast and furious tomorrow, which is likely to create interesting dislocations. Those of you who like metals may be in for a truly ugly surprise.

Yes, there will be rallies. As I noted in the technical Friday night, I put some "lotto" style plays back on into the close because I was greatly disturbed by what I was seeing in the market internals, and it appeared that we were heading for Niagra.

The River DeNile flows there, you know.

Goldilocks?

She's what's for dinner.

There will be a technical at The Tickerforum under "Ticks" later this evening, once the Futures are trading and Asia has had a bit of time to digest its breakfast.

Good luck!

Yeah.

Folding.

As in "The financial system is folding."

I know, I know, The Fed will save us.

Really?

How come they haven't already?

Perhaps it is because they can't? Because they really don't set interest rates, but rather follow the market? Because they know you can't "fix" someone who has borrowed too much by lending them even more money?

Today Jim Cramer and Larry Kudlow, on their respective shows, floated an even more outrageous proposal - to effectively steal at gunpoint several firms in the United States and fold their assets and liabilities into the public debt.

Yep.

The Monoline insurers, specifically - Ambac, MBI, etc.

Why?

If you remember at the end of the year in my "Year In Review" I talked about how, in fact, there is only so much "spread", or potential profit, in a particular debt issue, and that "spread" is determined simply by the risk of the issue.

To reduce it to simple terms, if you have a certain risk of not paying your loan back then that commands a higher interest rate than a "risk free" loan - that is, US Treasuries (loaning the Federal Government is generally thought of as being "without risk".)

The chimera (read: FRAUD) is that you can "lay off" this extra risk and not pay for all of it.

For the sake of argument let's say that the "risk difference" is 200 basis points over Treasuries on a given transaction for a given duration.

If you don't want the risk the only way you can lay it off is to give someone ELSE the entire 200 basis points! If they take the "liability" for less than 200 basis points then you have bamboozled them, and if they only reserved 100 basis points (for example) eventually they will go bankrupt because the true risk is twice as high!

It cannot be otherwise.

But if you do that, then why not just buy Treasuries? After all, why go through this entire exercise if indeed it doesn't make you any money?

The obvious answer? YOU WOULD NOT DO SO!

But these banks and other institutions did.

What we have here is a giant con game.

What has to happen here?

Simple: Those institutions that have managed to con others into taking risk for less than its actual price need to eat the consequences, and what better way to make them do so than to let the monolines all blow up!

Now there will be those who say that "we can't allow that".

To which I say "horsecrap!"

We not only CAN allow it, WE CAN'T PREVENT IT!

There ARE solvent banks in this nation - banks who made PRUDENT loans.

There ARE others who can step in the place of Citigroup, Lehman, Merrill and others.

Why don't Kudlow and Cramer suggest that these banks simply issue enough capital stock equal to their current outstanding, diluting all their existing stockholders by half, and use that cash?

Preposterous? Like hell it is.

Let's look at a few of these banks and their market caps, all in billions.

Merrill Lynch: 44.40
Lehman: 28.32
Morgan Stanley: 47.65
Goldman Sachs: 82.19
Citibank: 121.79
Bank America: 159.65

Total: $484 billion dollars

Gee, we have a $150 billion problem according to Cramer and Kudlow? It would seem to me that the root cause of this problem, the securitization of loans by the above firms (and a few others not included) which were all performed on the basis of improperly laid-off risk, inured to the benefit of these firm's market cap! Therefore, if we are to TAKE capital at gunpoint to solve this problem we should take it from THOSE WHO STOLE IT IN THE FIRST PLACE!

Why isn't this being proposed?

Because this isn't a $100 or $200 billion problem. Its much worse than that, and they know it.

And while they might try to "paper it over", if the government actually tries to step in the interest rate on the 10 year will go north of 10% - way north, perhaps as high as 20% - essentially immediately.

That will squick the Federal Government instantly - Bernanke and Paulson know this by the way, which is why it won't happen. Oh, and so do a good number of the members in The House and Senate. I'm sure they've been briefed and "get it" - although you'll never hear them admit that.

These realities are why you're hearing palliatives on the TV like sending everyone a $600 check.

THAT they can do.

Fix this? Can't. Those who are screwed will be cut adrift.

There is no other choice.

Got debt? You're in trouble - maybe ocularly screwed blind.

Got cash? Real, unencumbered cash? You'll be doing quite well.

Hope you're in the second group, and not the first, because its too late to change where you are in this regard at this point.

Remember, the market is closed Monday - have a great long weekend, and I'll see you Tuesday!

Here's your technical!