The Market Ticker

From the WSJ today:

"As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes."

"Raising concerns?"

Let's look at this in more detail.

I've written repeatedly that in my opinion these people are fully justified in walking away and sticking the bank and investors with the bad paper (but of course - you must talk with both a tax and legal professional before doing such a thing so you understand all of the trade-offs involved.)

I want to explain the "why" behind my perspective and opinion.

The individual referenced in the article is an E7 in the military. This makes dissecting things fairly easy, since military pay scales are public.

With Iraq "bonuses" and the tax-free nature of pay for serving in Iraq, this gentleman makes a pre-tax equivalent of a civilian making about $80,000.

Under traditional underwriting guidelines, this means he can afford a house that costs $240,000, providing that he has 20% down and no significant amount of additional debt. His total "back end", including his house payment and all additional mandatory debt service, should not exceed $2400.

(The math on this is $80,000 / 12 = $6666 monthly; 36% of that is $2400)

If he puts 20% down (or $48,000) and gets a 30 year fixed loan at 6.25% his P&I is $1,176.05. This leaves him about $1,300 for property taxes, insurance, his car and credit card payments.

Now let's run this for the house he actually bought ($455,000) and assume he did one of those fabulous "zero down!" deals.

Assuming that he did a conventional 30/fixed again with the same interest rate, his P&I is $2786.99. That doesn't sound so awful, but it is in fact over 36%, and we haven't paid the insurance, the property taxes, his car payment or anything else.

The loan is unsound in the first instance, and that is with the most favorable terms available - a 30 year fixed mortgage at 6.25% fully-blended (e.g. zero points) which is likely better than the terms he could have obtained.

More damning, should the Iraq deployment and/or war end, and E7 makes about $35,000 a year! In other words, absent deployment to Iraq this family can afford a house that costs about $120,000 - maximum.

The foundation of lending is in fact what is called the "Three Cs", just as it is with diamonds - except that the "Cs" are slightly different.

Those are Character, Capacity (to pay) and Collateral.

Sound lending requires you evaluate all three.

Character? Check - this individual is in the military at a known rate of pay that is unlikely to decrease materially, and we can generally presume that a military job is secure.

Collateral? Ha. A bubbly area that has experienced rapid price increases. Remember that a house typically "turns over" to a new owner in 7 years. The odds of a bubbly market remaining bubbly for another seven years certainly aren't all that good. Horrible odds? No, but not great odds. So therefore the collateral has to be judged as "shaky" and given a valuation haircut against the loan. This makes a zero-down loan inherently unsafe.

Capacity? Not a snowball's chance in hell. The original loan on the original terms is unaffordable under traditional safe underwriting guidelines, even assuming his "heavily bonused" present pay. Should he not be redeployed or the war end, this house was priced at nearly four times the maximum safe affordable limit for this individual's income. PERIOD.

Therefore, this loan fails the "Three Cs" test and is presumptively unsafe.

More importantly the bank knew this when it made the loan but did it anyway.

The bank, in short, gambled with its capital that home prices would continue to increase rapidly enough that two of the three "C"s didn't matter.

Now the bet has turned out badly, and the borrower is going to walk away and "stick" the lender with the loss.

In my opinion the borrower should evaluate this from a strict business perspective with full knowledge that the lender intentionally violated the standards of safe lending at the outset and treated his loan not as a sound residential mortgage but as a gambling instrument.

When looked at this way the decision becomes quite simple - you look at the impact to your credit rating and for how long it will last, you evaluate whether or not your mortgage is a "recourse" loan (e.g. can the bank sue you or are they limited to recovery via the collateral and, if the former, whether you have enough other assets for it to matter or do you simply file bankruptcy if that were to happen) and from there you make your decision.

That's it, in a nutshell.

To those crooners who say "oh but you have a moral obligation to try to pay the loan" I will remind you that the bank had a moral obligation to make sound loans in the first place and intentionally violated those principles. The bank or other lender in question then sold that paper off to investors knowing that the underlying loans were unsound on traditional underwriting principles.

Who wants to argue "morals" and "ethics" with me with these facts irrefutably established?

Now the person who has been screwed by a lender who treated their credit and home as a gambling device is suddenly supposed to become a full-on evangelical priest in their behavior while the lenders are assaulting little boys in the rectory of the same church?

I think not.

Millions of loans exactly like this one were made during the last four years. In my opinion every one of the borrowers in this situation should perform this evaluation and make their decision based strictly on the business merits above, with no moral or ethical qualms of any sort.

Recognize one thing right up front - the banks and other lenders made these loans and sold this paper off intentionally gambling on the direction and magnitude of home prices, exactly as someone who buys PUT or CALL options does in the securities markets.

Do you feel bad for me when I buy a passel of PUTs and have them expire worthless? Of course not - I gambled knowingly using the best information I believed I had at the time and was wrong. As a consequence I lost money. Oh well.

If you are in this position, do not be rooked into raiding your retirement accounts (pretty much the only "bankruptcy-sheltered" money you have) to try to stay out of trouble. Make a pure business decision after consulting with competent tax and legal advisers.

By the way, the lenders are freaking out - they know. Essentially all no-down-payment programs are gone and we are rapidly headed to where you need 20% skin or you're not going to get the loan. The only exceptions soon will be FHA and VA, which is pretty much where we were before the Tech Bubble.

Incidentally, this is how it should be.

There will be exceptions from lenders who portfolio their loans, but you can forget about the "can you fog a mirror" loans - they're done and not coming back. For those markets dependant on those, you're about to see the waterfall cascade effect as forced short sales and REOs hit the market this spring.

Buckle up - this is going to get fun.

PS: The PMI firms are likely all dead (should have kept those shorts on damnit!) and both Fannie and Freddie are very likely to be in serious trouble either now or very shortly. Possibly critically bad. As I said the other day, I believe Fannie in particular is a short-to-zero candidate due to their attempt to prevent market-to-market losses via their "secured to unsecured" program; I'm willing to bet there are some CDS games in there somewhere too that make preventing those marks a bit more "urgent" than they would be otherwise.

Dow down 315, S&P down 37 handles. Booya boys.

4Q GDP up 0.6% (anemic, but as expected)

The internals, however, were not bad and deteriorating. Real disposable incomes falling 0.3%, with core price inflation rising at 2.7%, out of the Fed's "comfort zone" by 40%.

Initial claims were moderate but the killer is continuing claims - they continue to increase, and this is bad news. Has the feedback loop been initiated? I've been saying that we're either on the cusp of this or its already over the edge - looks like we're finally starting to get recognition of that in the media.

Next up, we have a funny situation - MF Global, one of the largest clearing firms in the futures and commodity markets, announces a $141 million bad debt provision - for alleged "bad trading" by one of its registered reps who (they claim) exceeded "authorized limits." I am chuckling on this one because there are a number of "players" in the futures business (and some of their more-rabid customers, including a few on the forum) who believe these guys walk on water while everyone else shucks their oysters for 'em.

Looks like the water had a bit less viscosity than they thought and indeed that emporer has no clothes! Heh guys, that was limp!

Next up we have Thornberg Mortgage (TMA). Bastidges. You know the old saying about being "early", right? Well guess who had February PUTs (that'd be me) which went out worthless - and now they disclose margin calls on Jumbo A Paper, cratering instantly in the premarket, down about $3 - and for an $11.50 stock, that's a LOT - about 20%! You know what they call someone who's early on an investment call? Wrong. Heh, I get to chuckle even if their "hide the sausage" game was maintained just long enough to eat my PUTs.

Sprint/Nextel lost reported a huge loss and is getting shellacked. Naw, you think? You guys have all gone too far. 2-year contracts, surly customer service, hidden fees disguised as claimed taxes and ramping prices - into a slowing economy. Push too hard and you get push BACK, in this case right into your so-called 'earnings', which are better stated this time for what they are - losses. Congratulations cellcos - its about damn time you got yours, and I'll bet that we get some more headed towards the rest in the future. Will we see them start to recognize that in fact a text message costs far less than a phone call to carry and route, and instead of ramping their cost to try to force people into "prepaid packages" the right move is to make them almost free? Probably not, but we should. Oh, and how about we cut the contract crap and let us bring our own equipment (or buy it at retail)? Why that would make too much sense!

Pimco is back on CNBC this morning again asking for The Government to "halt home price deflation." Gee Pimco, were you asking for them to halt home price inflation? Of course not - that was good!

How about some truth here out of you Pimco - you and everyone else passed 4th grade math.

Home prices cannot appreciate over long periods of time faster than incomes; it is mathematically impossible.

So now YOU - yes YOU Pimco - along with everyone else who were all for the outsize profits you got from a huge ponzi-like asset bubble - are in for some losses as some of that profit (which no doubt you spent) comes back out, and instead of admitting that you were supporting an unsustainable and fraudulent ponzi scheme you go crying to the government to bail your sorry ass out!

Life doesn't work this way guys. A "bailout" will not only fail it risks turning a recession into a depression, and I, along with a few others who are HONEST, are going to hold your feet to the fire on this point at every opportunity.

There is no such thing as a free lunch. Home prices WILL contract so that the median house is 2.5-3x the median income. The only point of disagreement is whether we will do this via the market, and those who did not speculate or undertaken unsafe and unsound actions (e.g. grabbing "home equity" to spend on plasma TVs and boats) will be left whole and "ok", or whether we will instead take what is a ramp in cost for mortgage money and spread it to everyone else, taking what is a recession and turning it into a DEPRESSION.

That is the choice here folks. It is one that policymakers and you need to contemplate, very carefully, before you start clamoring for "help" from Uncle Sugar.

The only action here that will work is to force all those who are hiding losses and avoiding transparency into the open whether they like it or not.

Once this occurs the market will clear. Further, it will happen whether those market participants like it or not - it can either happen "voluntarily" via regulatory jackboot application (if verbal arm-twisting doesn't work) or it will happen as capital flow is choked off and bankruptcy results. Those who are currently sitting on these illiquid securities and playing games - you will not get away with this, although you think you are smart enough to "wait it out" - instead, all you are doing is provoking capital aversion and ramping spreads.

Its time for The Government to do its true job - to prosecute fraud and abuse.

'Nuff said.

Oh, you think Bernanke doesn't know this? The hell he doesn't. Today, he said "there will probably be some bank failures" in his testimony on The Hill. No kidding? Gee, what a shock; was I not predicting this back in April of last year?

Ben yammers about how the current price inflation is due in large part to commodity prices which are set in global markets. No kidding? Gee Ben, why are commodities which are produced on a global basis spiking in terms of dollars?

Might that be because the dollar is cratering as a direct consequence of the refusal of the Federal Reserve, along with the other regulators, to force people to take their marks and recognize the losses they are now attempting to hide? In short, the dollar is falling because of a lack of trust and you are in no small part responsible for that!

People say "we have no market there we can't mark to it." I say to that "then the current, today, value is ZERO and that's what you mark it at for today."

If the market reappears for that paper tomorrow then you are perfectly welcome to mark it up tomorrow. But for today, they are valued at zero.

The Fed and Congress have set up a system that does not mandate that all such securities trade on a public exchange which creates this problem in the first place, as there is then no margin supervision nor any way to get an HONEST value!

There is a simple solution to this BEN and CHUCK SCHUMER:

No regulated financial institution is permitted to buy, sell or hold any instrument that is not traded on a public exchange with published bids and asks, and all such instruments are marked every night at the last trade if available, or the bid if no trades had taken place during that trading day, and no "off balance sheet" vehicles are permitted under any circumstances.

You do this and the entire problem disappears immediately. Yes, there will be some firms that are rendered instantly insolvent by this change. However, we will know immediately WHO is insolvent and who is not.

I, and every other "ordinary investor", is required to use exactly this method of valuing our portfolios every single night!

THERE IS NO JUSTIFICATION FOR EXEMPTING INVESTMENT BANKS AND OTHER INSTITUTIONS FROM THE RULES THAT THE REST OF US MUST FOLLOW.

Congress has clearly read The Petition and I suspect some of them are reading The Ticker. GOOD. Its about damn time. You folks are our elected representatives and paying attention and questioning what you are told in an effort to discover THE TRUTH is why we elect and send you to Washington! YOU HAVE BEEN LIED TO REPEATEDLY!

The Dollar doesn't like this chatter one bit. Neither do the equity markets. And frankly, Ben looks like he is about to have a stroke right here and now.

I don't know how this story ends but I do know this:

Trust will not return until the intentional hiding of risks and losses stops; you only get to screw people "for free" once. We used our "once" - now we either stop it or we find ourselves with continuing destruction of trust, our currency and our economy, and at some point, the rush to the exits by the very foreign governments and holders that we rely on to finance our profligate spending will initiate.

IF AND WHEN THAT HAPPENS IT WILL BE TOO LATE TO FIX IT.

PS: Looks like Dell missed on both revs and profits, about a nickel light on earnings. Booya.

Neither goods or currencies, it seems.

Durable goods orders decreased 5.3% on the month. Oops. Ex-transport, it was still down 1.6% (transportation orders, such as aircraft, are frequently very volatile), which is not a good sign at all.

But the truly bad news is that all of shipped, unshipped, and more importantly inventories all increased, with the latter at all-time highs. Ramping inventories are often the sign of a recession in process, as manufacturers are frequently dumb enough to build right into slowing demand, just like homebuilders are.

The Dollar. Ouch. We broke out of what should have been a reversal pattern to the bottom on the DX, now trading below 74.5. Currency speculators have been piling into the "short dollar" trade; it remains my view that this is an extremely crowded trade and the ship is listing, but so long as the consensus view remains that "we're screwed and everyone else will be fine" this is likely to continue - for a while.

Unfortunately for those speculators that "consensus view" is almost certainly wrong. But the "hate America" crowd is a large group, and they'll run straight off the cliff to their own destruction. 'Tis fine with me; the thesis that says "oh America is screwed but we'll decouple" is the nuttiest thing I've ever heard; come talk to me about that when America isn't well beyond the majority of global GDP.

Fannie reported a crushing loss of $3.80/share; a number which simply stuns. Housing has (or will) bottom this year? Ha. The impact of subprime foreclosures hasn't even really begun to be felt yet; what's being foreclosed on now defaulted in August! To believe that we're near the bottom is to deny both history and common sense. Come talk to me six months after the peak of subprime and ALT-A resets have both passed. That will be in a couple of years!

The Dow has put together a several-hundred-point rally over the last few days based on..... what? Hope. The old 'slope of hope' claim. Yeah, right - pull the other one.

In other "bearish prognostications" I have to add Kunstler. He's even more bearish than I am on America, but his angst derives from the same place mine does - our politicians' insatiable desire to buy votes via the K-Street lobby instead of the public's weal. The former insists that the banking system not be forced to take its marks and call a zero a zero (if you can't sell it, its worth zero - ask anyone at a garage sale who winds up still having a garage full of crap!) while the latter would benefit tremendously from those-who-are-zeros being forced into the light where they wither and die from exposure (by literally being embarrassed - then shorted - to death.)

OFHEO was apparently strong-armed into removing part of the Fannie and Freddie caps which spiked the markets by a good 70 points immediately. Any rational analysis says that this doesn't mitigate risk, it adds it - and given that there is no real guarantee on these institutions by the government and Fannie just posted a huge loss, do you "double down" into a declining market?

Speak of "doubling down" here's a hattip to CubGuy99 on the Forum, where this little gem was dug out of the Fannie 10Q (I hadn't gotten to reading it yet)

"The total number of loans we purchase from MBS trusts is dependent on a number of factors, including management decisions about appropriate loss mitigation efforts, the expected increase in loan delinquencies within our MBS trusts resulting from the current adverse conditions in the housing market and our need to preserve capital to meet our regulatory capital requirements. For example, we recently introduced a new HomeSaver Advancetm initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases."

You gotta be kidding me.

This shit is legal?

We take a delinquent SECURED loan and replace the delinquent part with an UNSECURED LOAN WHICH IS INHERENTLY OF LOWER QUALITY FOR THE EXPLICIT PURPOSE OF NOT REPURCHASING THE BAD PAPER AND THUS TAKING THE MARK TO MARKET LOSS THAT WOULD BE REQUIRED.

Heh GSE "Agency Paper" buyers!

WAKE THE HELL UP - IT LOOKS LIKE YOU ARE BEING SYSTEMATICALLY SCREWED ON PURPOSE AS THIS SURE AS HELL APPEARS TO THIS WIZENED PAIR OF EYES TO INCREASE, NOT DECREASE, THE RISK YOU ARE TAKING IN HOLDING THIS PAPER!

If there is any rationality in the pricing of risk this SHOULD result in a decidedly-nasty impact on the price of that agency paper.

Note to those same agency paper investors: THERE IS NO GOVERNMENT GUARANTEE ON FANNIE AND FREDDIE PAPER.

To the Pedestrian Investor: If you own a bond fund, including a money market fund that holds "agency" paper, you damn well better wake up and pay attention to this lest you get a very ugly surprise at some point in the not-so-distant future!

AS FAR AS I AM CONCERNED THIS DISCLOSURE MAKES FANNIE A POTENTIAL SHORT TO ZERO CANDIDATE.

Late in the day Charlie Gasparino said that Dinallo is considering getting legislation passed that would outlaw the writing of swap insurance on CDOs.

The market did not react much to this, unlike the pump it got from the "bailout" chatter - but it damn well should have, because if this comes to pass it will destroy the issuance of these securities under the claim that they are "AAA" paper. Securitized paper will be forced to trade at its underlying credit quality and the games will STOP!

The impact of this cannot be overstated.

THIS NEEDS TO HAPPEN but this is NOT priced into the market. NOT EVEN CLOSE. It will essentially "fork" a huge part of the securitization revenue stream permanently, which destroys one of the Bull's pillars - that "the market for these loans will come back."

Uh uh!

Bernanke talks and gets pounded repeatedly about mortgage rates being market set instead of Fed set. Gee, you think some of these fine Congresscritters have read the Petitions? Oh, but you say, Congress never listens. They never care what we think, and its all a waste of time.

Yeah, ok. That's why I have heard multiple references to specific points that have been raised, right? Your voice is never heard or paid attention to, which is why Bernanke has been repeatedly roasted over these very issues?

Now consider this - how hard would he have been pounded if there had been 100,000 signatures on those same Congressfolk's desks instead of 1,000?

I'll answer it for you - he'd have the Chrysler Building up his butt right about now.

WHEN, not if, you lose your job, gasoline is $5/gallon and your food bill has doubled as we see continued stupidity I do not want to hear you WHINE about the outcome, when you had the opportunity to do something about it and REFUSED.

Again, a plane ticket to DC is about $500, round-trip. Your time? I don't know what that's worth. Nor do I know how you assign value to the future your children and grandchildren will have.

But I do know the possible range of outcomes, with a reply of the 1970s being about the most benign. The "middle", or most likely case, is something like Japan - a 20-year+ moribund economy with ramping unemployment, but no possibility of the "stick save" they got from personal savings (because we don't have any.)

The worst case is a 1930s rerun - or beyond.

Think Ben doesn't know this? WRONG. He admitted it in his testimony, if you listened carefully. In fact, he said way too much but the fact that the market didn't immediately sell off 500 points means that essentially nobody paid attention to him - or traders have the cognitive capability of a flea. I heard it, and stuffed a bunch of TWM in my IRA. Any questions?

So what's left?

Well, Sir Bucky will eventually turn, but only when our mess is recognized as "less bad" than everyone else's. That day is coming, by the way, and sooner than you think.

This doesn't mean it won't be bad for us. It will be. Very bad. Maybe ruinously so.

We have refused to develop our own energy resources out of a misguided sense of "green", which has extended to prohibiting any new nuclear energy development for 30 years. The bad news is that it takes 10 to get a new plant online, 5 or more on a crash program, so we're now 5 years away from deploying any new nuclear electrical generating capacity - right when we need to get as much energy production into non-foreign-sensitive areas as possible.

We've foolishly decided to burn our food, which has contributed mightily to the ramp in commodity prices, never mind the above with energy development. Burn up natural gas to make electricity, and guess what - that's the "raw material" for ammonia, which is the primary input to fertilizer.

As for oil itself, we have lots of it off the Gulf Coast. We've refused to drill for 90% of what we know is there and has been found over the last 20 years. Fat Cats don't want to see the lights of a drill rig at night from their 30th floor condo window, ergo, we can't go get it. Can we refuse to fill their Gulfstream sitting at the Destin Airport since they're largely why we have gas headed to $4 and beyond? Oh, by the way, diesel fuel is used in tractors too, which means even more energy price inputs to agricultural prices.

Make sure when you go to the grocery store you thank the liberals. They're the reason that Milk is now north of $4/gallon - a 30% increase in less than a year. They're the reason that hamburger has nearly doubled in price, as has pork, and chicken is headed there too. They're the reason that wheat has gone lock-limit-up multiple days in a row on the commodity exchanges.

In short, your liberal buddies (and perhaps even you) are the reason we have huge price ramps in commodities at the same time that our artificially-postponed price increases in everything else that we shoved off into the rest of the world while we were allowing the mad creation of shadow credit (which should have immediately rebounded into price increases here and this signalled the monetary disaster that shadow credit can cause) have started to boomerang.

For those who say "but we need to save the planet!" or trot out some euphemism about "Global Warming" you had better not be the ones complaining when you lose your job and then are forced to stop consuming energy as your house and car are next to disappear! Such is the price of your folly; forced conservation is such fun when it is served up on you eh?

Let's talk geopolitical risk - what's really driving metals prices. Its not talked about, but it should be. China has north of 1.2 billion people. Russia, which shares a border with China, has 140 million, or about 1/10th of China.

Russia has a net surplus of both oil and natural gas, and in addition has a surplus of land per-capita. China has a dearth of all three. So long as China can pay for what they need, this is not a serious problem.

But as we flush, to believe that China can turn to internal consumption and pick up the slack, with a per-capita income of under $2,000, where ours is more than 10 times as high, is pure fantasy.

I wouldn't take that bet at any odds.

What I expect to happen is that China will eventually run out of ability to subsidize, and will turn to what nations have always historically turned to when faced with severe internal pressures and a resource-rich nation sharing a border with them.

Now consider Russia's dilemma in this situation. They have 1/10th of the population and a conventional military that is tiny by comparison to China. What option do they have should a serious threat to take resources by force appear on their border?

And should they take that option, how does China respond?

This isn't a situation you want to see, no matter how bearish you might be on the economy.

For those who think that metals are responding to "inflation", think again. Between this, the risk of a wider Middle East conflict, and the newest activity in the Balkans, you need not look very far to find good reasons for people to be concerned about geopolitical stability.

Or, if you prefer, history. Gold's spike in 1980 wasn't "inflation". Have we really gotten to the point where we don't teach history any more in our schools and a simple search of historical precedent is too much to ask? Iranian Hostage Crisis anyone? And gee, wasn't the collapse in gold's price closely tied to the outcome of a certain Presidential Election and the certainty that said President-elect would, if the hostages were still being held on his inauguration day, "settle that instability" in a decisive way?

How soon we allow people to forget that which is inconvenient to those who have something to sell.

Don't be a sucker.

Case-Schiller came in horrifyingly bad, with home prices falling nearly nine percent in three months.

Annualize that, dudes. Wow.

PPI came in worse. Headline up 1%, core up 0.4%. Zero-point-four eh? That'd be nearly 5% in price inflation on an annual basis for core, ex food and energy.

I've written for nearly six months that the import price trend has turned towards rising prices from Chindia, and guess what - it is no longer being absorbed, but is now coming our direction.

There is a big lag effect on this, of course, but now we are facing the reality of it.

Duh.

Consumer Confidence is now solidly in recession territory, coming in at 75, with expectations now at 57.9, a 16 year low. Ignore this if you like, but the facts are the facts, and equities, on average, lose 30% in a recession. We're only halfway there. If you wish to gamble that we don't go the rest of the way, be my guest. This indicator, by the way, is a highly reliable one - because expectations drive consumer behavior, and when consumers think the situation sucks and will get worse, they spend less.

Bang.

And don't look at foreclosures.

"U.S. home prices plummeted at the end of last year and bank seizures of property almost doubled in January, indicating the housing slump is deepening."

Here's the nasty part - it takes roughly six months from the time you stop paying and the notice until you get a foreclosure - so this means these actions are the result of people defaulting LAST JULY!

The peak of subprime rate resets? March of this year.

So you can expect the foreclosure rate to ramp for another seven to eight months, and that's just from subprime. Now add in "Negative Amortization Exploding Debt Bomb" loans, otherwise known as "Option ARMs", and........

Bottom, what bottom?

Oh, and don't talk to the FDIC. Word is out that they're recalling/hiring. Now why would that be? They are expecting bank failures! Gee, is that good news?

The market "shrugged it all off" this morning, with a nice pump coming from IBM's claim that they have authorized more share buybacks. The Dollar didn't though, doing a Wile-E-Coyote imitation..

What sort of stupidity are people playing with here? The "word on the street", if you listen to CNBS, is that "The Fed doesn't care about inflation any more."

Would be that people would ever understand what inflation is and isn't.

But no! We're going to export all our manufacturing base to places that will sew your jeans for 10 cents an hour, and then be surprised when the folks doing the sewing start demanding a raise - and that filters back to us? What sort of stupidity are we dealing with here? Probably the same sort that thinks there's a "Free Lunch" to be had anywhere else in the markets - or in life.

The reaction to last night's Ticker announcement has been interesting. I find it less than amusing that there are apparently a bunch of folks who think that I have some obligation to fund the video site for them so they can try to make money - and give it to them. Never mind that the video bandwidth consumption is on track to top three terabytes this month and in the neighborhood of 5,000 unique viewers were being recorded daily for the Technical videos.

Guess what percentage of those people had donated? Uh huh.

Oh, that bandwidth number? It's Tera with a "T".

This is the very same ENTITLEMENT MENTALITY that leads people to say that "Health Care is a RIGHT", or "Retirement (at someone else's expense) IS A RIGHT".

You know what? You're wrong. You know what else?

THOSE OF YOU WHO BELIEVE THIS ARE WHY WE HAVE THIS MESS IN AMERICA TODAY.

As for The Ticker, we'll see on whether its worth doing the work to implement access filtering. It might not be. But this much I assure you - the more people whine about being "entitled", the more likely I will put in the time and effort to implement it.

I'm getting disgusted with a very significant percentage of the population of this nation and their attitudes towards entitlements.

'Nuff said.

Come join us over at The Forum. Yes, it is still free to access, and will remain so, although I have recently implemented a "must be registered for a while before you can post" filter.

Why?

See, we have this spammer who is trying to sell software to..... wait for it..... print fake paycheck stubs so you rip off lenders.

No, I'm not kidding, and yes, I think he should get a "special date" with Bubba for that stunt. I have helped him along in that endeavor by reporting this garbage to the FBI.

I've decided to implement a few changes, but first, let's do the nooz.....

Home Sales continued to go in the ditch, while inventory continues to build dramatically. The headline is down 0.4% on rate, but that's not the important story - the important story here is inventory. With inventory exploding higher price declines will accelerate.

The market spiked all over on this release - but - why? Higher? I guess this means that the short bus riders think we'll get more "rate cuts". Ooook.

Let's talk about this Ambac/MBI/et.al. stuff for a minute. Its one giant circle jerk. You buy insurance from someone and then you buy some of their stock so they can pay off your insurance if you need them to. Huh?

Oh, and then S&P "affirms" MBIA's AAA rating. Uh huh. What is their capital-to-written-book ratio again? AAA means "can pay through anything but nuclear holocaust."

Go pull their 10Q or 10K and then you tell me - does that accurately reflect reality?

Here's reality - if we had any hint of truth in our financial markets, and any sort of honest regulation in our banking industry this sort of nonsense would result in an immediate audit of the institutions involved with forced write-downs of the allegedly-insured instruments - whether the people who had the valuation issues like it or not.

Expecting the Cops to actually do their jobs? Yeah, ok.

I think we should sprinkle some cocaine in with the annual reports - then we'd get interest in locking people up for a consensual adult act, where ripping people off for hundreds of billions doesn't even garner a solid look.

Who, me cynical? Naw....

Next up we have the fact that the GAO's chief - a little-known title of the "Comptroller General" - one David Walker - has resigned. Why is this important? Well, he's been one of the biggest loudmouths out there, with a multi-billion dollar megaphone, hollering about the funded mandates and just plain old-fashioned unaffordability of our government's long-term view of spending, particularly when it comes to entitlements.

Simply put, Social Security and especially Medicare will not exist in their present form for very much longer, and if you are counting on that happening, you are in major financial trouble in the years to come.

MarketWatch put it more succinctly:

"This sounds to me like the ultimate sell signal on America. As the next president is just under a year away from having the operational authority and consensus to take any definitive action, the Bush administration will have to act. In a highly charged election year such as this, controversial new economic proposals are unlikely to even be discussed."

An interesting - and pretty tough to argue with - perspective.

Your 'tell' for what's going on "for real" remains in the bond market. The TNX is still in a troublesome breakout north from a potential bullish flag, and should that potential be fulfilled 4.20% on the TNX is the target. This will bring much wailing and gnashing of teeth among the housing market, because 30 year mortgages are largely influenced by the TNX. This means we could easily see 30 year money in the 7% range - still below historical averages (which are right around 8%) but the difference between a 5% and 7% rate on buying power is quite severe - it results in a roughly 25% reduction in purchasing power!

People call this the "Greenspan Conundrum" yet it really shouldn't be a conundrum at all. Anyone who believes that The Fed controls interest rates needs to have their head examined.

The truth is that we've been in an artificially low rate environment for the better part of a decade. Chindia, to be blunt. We have exported much of our workforce and come to rely on inexpensive imports and labor. This has produced huge amounts of profit in those nations which, of course, are denominated in dollars since they are exporting to the United States and we, of course, pay in dollars.

Those dollars have to go somewhere, and the obvious place is a nice safe Treasury Bond. Safe in that the principal is "known good", of course.

Well, yields are the inverse of price, so if you have strong demand for these bonds, prices rise and yields fall.

This allows the government to fund its spending binge cheaply and also was a large part of the fuel for the housing bubble.

Unfortunately the virtuous cycle can (and now has) turned vicious. Rising expectations in these overseas nations has forced them to spend their money at home instead of plowing it back into foreign nations. This is a serious problem for us, because now the demand for those bonds drops off and..... rates go up! That of course causes budget deficits to go higher as federal borrowing costs increase, which puts even more pressure on the bond market, which causes deficits to go higher, which..........

Now add onto that wage pressure - as wage pressure appears in Chindia wave demands increase and that increases COGS (cost of goods sold.) We've avoided the price portion of our inflationary binge for years due to the import/export model, but no more! Now all that pent-up price pressure we exported is headed right back here, precisely at a time when our economy is slowing. This looks like inflation but its not - the inflation already happened but we "put off the price impact" on foreign nations!

Oh, and both of these pressures are likely to continue too.

Not that banks have learned a damn thing. What did I see on CNBS today? An ad for Wachovia - selling Option Loans! The same toxic exploding debt-bomb monsters that can land you straight into negative-equity hell.

Time to consider moving my account out of there.....

Short term we're doing about what I expected after Friday. Up. No big surprise there. We're going to continue to get BS and games for quite some time. Its called a bear market folks, and if you're not prepared for it, well, the long-term sell signal you got a couple of weeks ago should have put you in a nice safe treasury money market - or an insured CD (if under $100k!) If you're trading this, you either are prepared for this sort of garbage or your portfolio will come under relentless attack. That's just reality.

This is not going to go away any time soon, if you wan to look at the historical precedent for this go have a look at the S&P 500 from 2000-2003!

Ok, administrative stuff.

The Ticker is only going to be accessible to people who have logins on The Forum and are "gold" contributors. If you look to the left of this pane you will see a link for "Ticker Classics"; that will continue to be open access, and some of the Tickers will be posted there as well.

And guys, let me be clear here - if you donate to the Ticker Forum, its a donation. You're not subscribing to anything. The text at the bottom of the page makes this clear - what I'm doing here and elsewhere is 100% voluntary. You're not buying a subscription nor am I incurring an obligation. If you want that sort of relationship with someone there are dozens if not hundreds of places where you can find what you're looking for. This ain't it and I ain't interested in that sort of thing.

The obvious question in all this, however, is "why do it at all then"?

The answer is simple - 1000 signatures on the petition. I have done the ticker as an open, public resource because I like to, but there comes a point when you must decide - do you take time off from your trading to help educate other people for nothing and find that they attach not only no value to it but are happy to swill beer and whine for more government bailouts and handouts, or do you put your efforts out there for people who give a damn?

Well, I'm in the second camp. Nine months of doing it the other way has failed to produce a significant number of educated people who will get off their ass. It may have produced people who were saved from the downdraft (good) but we're still looking at a potential economic depression (bad).

Now let's look at the second-order problem. The Video server is getting severely loaded. It is receiving several thousand viewers per day. Unique viewers. As these video files are huge, this is turning into a real problem - one that is threatening to force me into a dedicated server environment in a colocation facility. If you've shopped those with "unlimited" bandwidth (many terabytes) you have some idea of the cost. Hint: It ain't cheap, and while I'm willing to do this stuff, obviously people are finding it of value (and hopefully profiting from it) or they wouldn't keep coming back.

Therefore, "the market" has decided that either I'm being robbed or there's nothing of value here and this is all for giggles.

I guess we'll find out which it is.

http://market-ticker.denninger.net/ will forward over to the Ticker Classics site when this change goes into effect, unless you're coming from one of the "approved" places - in which case you'll get what you're expecting!

If I can figure a way to keep the Tickers more available, I will - but what I can't reasonably do is be forced off my existing infrastructure environment into one that comes with 10x the operating costs - and eat it. That, basically, is where the rubber hits the road.