The Market Ticker

Across the board today guys and dolls.

First, we got the CPI, and it was smoking, coming in up 4.5% year/over/year. "That's hot." Core was up 0.3% monthly, which is well over The Fed's "preferred" level of 2-3%.

Let's remember that The Fed isn't really all that concerned about price changes per-se - this is why you hear Bernanke talk about inflation expectations instead of actual inflation.

Why?

Because if people expect big price shifts (either way) they change their behavior in ways that hurt the economy in the present case. Duh.

The Mortgage Bankers Association reported a huge decline in morgage interest. Naw, you think? Why? The rocketshot in the TNX, mostly, which has now broken its bearish flag in the expected upward direction and is headed for 4.20%. Just like the last time we had interest rates on a declining trend people didn't take that 5% 30/fixed for the one week they had it available, and just like the last time it is now spiking higher, and may move considerable higher still if current trends keep up.

As I pointed out previously this puts Bernanke in a horrible spot as in order to help housing (which got us into this mess) he's going to have to either jawbone in a way that tanks the market (thus provoking flight into bonds) or simply shut up when the market would otherwise tank anyway, and stop trying to prop equities. In a particularly dangerous development for him a small or slow slide in the equity markets no longer looks like it helps; he now needs a massive selloff to drive bonds. This is what happens when you try to inappropriately meddle in the markets Ben - you just coil the spring tighter! Congratulations, fool. Your proper and appropriate action to take was over a year ago when you should have clamped down on the fraud and nonsense in the market instead of the "wink-wink-nod-nod" parade with your buddies on Wall Street and in Treasury.

Putting a condom on after you have sex will not prevent pregnancy!

We've also got oil and gold rocketing on geopolitical concerns (Nigeria again, with claims of politically-related killings), and oil, of course, flows through to prices virtually everywhere. That's not so bullish.

Housing is sitting near levels last seen in 1991, which ain't so bullish either. Yet this is what passes for "journalism" in that referenced article:

"A glut of unsold homes, mounting foreclosures and falling prices signal the housing slump will continue to detract from growth, setting the stage for more interest-rate cuts. Federal Reserve Chairman Ben S. Bernanke last week said the Fed was ready to act in a 'timely' manner to keep the expansion from faltering."

We need to start revoking journalism degrees, or perhaps just rename them to "BS From The Ministry of Lies" instead.

The Fed doesn't set interest rates, which is trivially easy to prove by looking at the bond market and Fed Funds overlaid. Never mind that homeowners and buyers are going to be quite "impressed" with the fact that mortgages have gotten much cheaper since The Fed started cutting rates.

Oh wait, they haven't? You mean that mortgages are actually more expensive now, going over 6% recently, than they were when Fed Funds was at 5.25%? How the hell did that happen? I told you six months ago this was going to happen when the "rate cut" mavens were out in droves AND NOW IT HAS.

Where, oh where has journalistic integrity departed to?

"The Ministry of Truth, Light, and BenDovering"?

Hmmmmm...

Here's reality on housing - its not about mortgage rates, it is about affordability, which has been horrible for years as a consequence of the bubble and intentional mispricing of risk.

Now we're going to get the hangover from our drunken spending binge, and like a drunk who has puked his guts out, even the provision of more booze won't stop it from happening - we're entered the "acute alcohol poisoning risk" range should there be more booze poured into the gullet.

Oh, and don't pull this horsecrap about "nationalization" out of your hat. Northern Rock? Oh, you mean "Granite"? What's Granite? A very-dodgy SIV/Conduit thingy that has as its "beneficiary" some charity that likely has never heard of it (they just stole the name perhaps to put on their paperwork?) which holds some of the "assets". Or are they assets? And if so, are the liabilities there too? Oh, probably not - the "other rock" (you know, the Northern one?) has those, right?

SIV eh? Sounds like a virus...... looks like a virus...... IS A VIRUS!

This whole conduit/SIV/SPE/SPV nonsense is just another way to say "RIP OFF."

So when does it unwind?

When we figure out where the hell the COPS have been, they stop eating donuts and start doing their job!

Remember the names of the COPS:

• Paulson
• Bernanke
• Dodd .et.al. (yes, including Ron Paul)
• OCC
• OTS
• State Regulatory Agencies
• The FDIC

You'll need them when the sheepie (that'd be you, eh?) finally wake up and get pissed off enough to do something about this mess.

What's "wake up and do something" mean? Sign the petition that's been on this site. Get off your butt and pick up the phone. Get off your butt and take a car or plane ride to Washington DC and get in your Rep's and Senators' faces?

Oh, that's too expensive eh? It takes too much time eh? Really? $500 or so is too much eh? If this whole thing blows up in all of our faces, and it is increasingly likely to do exactly that, your children will end up getting screwed out of THEIR ENTIRE FUTURE!

$500 is a lot of money eh? $1,000 is a lot of money eh?

WELL I HOPE THAT IF YOU DON'T SPEND IT RIGHT NOW YOU DON'T HAVE ANY KIDS, BECAUSE HERE'S WHAT'S GOING TO HAPPEN:

• This financial weapon of mass destruction is going to detonate.
• It will make it impossible for the government to pay your Medicare and Social Security benefits.
• It will result in double the tax burden you have now being laid on your children and grandchildren, OR MORE.
• And when that happens, if I am still alive I'm going to spend MY MONEY on a full page advertisement in The Wall Street Journal (or whatever the "mainstream media" is at that point) telling your kids (who will then be adults) that you screwed them on purpose because you were too much of a cheap jackoff to get on a plane and go raise hell in Washington DC to put a stop to this crap!

I wonder what their reaction will be to "Dear Old Dad" when they're living in poverty as a direct consequence of you fiddling while Rome burns?

This much I can tell you for certain - I've run two petitions on Market Ticker trying to get the sheepie (that's you, again) to wake the hell up and take 10 seconds out of your precious lives to bitch - loudly - and neither has resulted in any material uptake.

That's fine. I'll continue to rabble-rouse until I get tired of wasting my effort, but believe this - if you think I'm going to be one of those who will backstop your way of life when it all comes apart (and it is, right here and now guys and dolls) you're sadly mistaken.

I'll teach you how to fish, but I ain't catching 'em, cleaning 'em and cooking 'em for 'ya.

Oh, and now we have people whining about how "Wall Street" has abandoned its "neediest" clients. Get this:

"A year ago $20 million would have gotten Luminent Mortgage Capital Inc. access to $640 million in loans to buy top-rated mortgage-backed securities. Now that much cash gets the firm no more than $80 million."

With no margin supervision, over long periods of time.

Of course these people are "needy" even though us ordinary folk can only have 2:1 margin in equities and, while we can have 20:1 in the futures market, we're marked to market every single night and if we exceed it, its margin call time.

Whine whine whine moan moan moan. How about you guys have to live with mark to market every single night and if you can't get a bid it counts as a ZERO, like it does for me?

WHERE ARE THE DAMN COPS AND HOW COME THESE GUYS GET TO DO THINGS THAT NO ORDINARY PERSON CAN?

As for the how history rhymes? Try this:

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."

You've heard this on Kudlow, Cramer, CNBS generally, and everywhere else right? In fact, I just (while writing this) heard another version of the same thing on CNBS.

The cite?

- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

Any questions?

THAT IS WHAT YOU ARE CONSIGNING YOUR CHILDREN - AND YOURSELF - TO IF YOU DON'T GET OFF YOUR BUTTS PRETTY MUCH IN THE "RIGHT NOW" TIMEFRAME.

PS: KKR might be having a little trouble with their commercial paper... so says FT....

Here's your technical!

So last "long weekend" we get big dump (and a surprise "rate cut"), and this time we see a huge rally on...... nationalizing Northern Rock?!

Or is it Ms. Crack Whore? The futures market is pricing in a full 75 bips of interest rate changes at the March meeting. Another 75 bips? Yep.

It would appear, from where I sit, that its Ms. Crack Whore who is starting to jones just a bit once again. She's in "giddy mode" right now, but don't worry, the "Ms. Nasty" side will soon appear. It always does when the drugs wear off.

Don't look behind that price curtain over in China. Nor in our nation, for that matter. The most ominous portion of that "price curtain" is the trend y/o/y of import prices from China - we are now going into the ninth month since the trend changed and we started to see higher prices coming from The Land Of Slanty Eyes instead of lower ones, and the trend continues to accelerate.

In a word, "duh".

We have dozens of so-called "economists" who have claimed we've had low "inflation" for the last four years. That's a lie - we've had very high inflation, in fact, but we have managed to "export" the effects of it overseas, particularly to China.

Now we're in trouble because not only are we going to suffer the deflationary "must happen" that comes after a hyperinflationary credit creation bubble, but at the same time we're getting the snapback from the pricing pressures we shoved off overseas!

This, of course, along with oil, leads people to talk about "inflation". Well, if you use a price measure for inflation, ok. That's not a particularly useful definition though, because in case you hadn't noticed, the reason your Jeans are $20 at WalMart is because prices have been depressed over the last 20 years or so by outsourcing those jeans to places where people work for a nickel an hour. May I remind you that back in the late 1970s and early 80s when I used to need a pair of jeans they were actually more expensive than they are now?

Hmmmm...

I guess it depends on what you're looking at when it comes to prices, yes? Don't price disk drives or jeans if you're looking for "price inflation", or for that matter, anything electronic, electrical, or similar. In 1991 I bought a 27" - count 'em - "tube" television and paid nearly $800 for it; I may even still have the receipt laying around somewhere. Philips. Nice set. It has long since gone to the great TV graveyard in the sky; today such a set is barely a couple hundred bucks, and an LCD high-def costs less - but has ten times the capability (and picture quality!) I just replaced my old crusty waffle iron and it was cheaper than the one I bought several years ago, priced in dollars of course. How come? Same reason.

Oil? Now there's something that has gone up in price.

What do I think about all this? I think you better pay lots of attention to something the "short bus" riders don't - the TNX, or 10 year yield. Its telling me that we're fixing to have a lot of "fun" in the equity markets quite soon.

Part of the reason is something people aren't talking about at all in the media - that would be the Elephant In The Room, which is the 30 year fixed mortgage rate.

It is higher here and now than it was a year ago, now at 5.82% .vs. 5.77%, and has skyrocketed by a full 40 bips in the last month! 30 year fixed mortgage money is quite-tightly correlated with the TNX!

This is especially nasty for, of course, that sector of our economy that started this mess - housing. And if that Bullish Flag which broke decisively this morning is any indication we are headed to 4.20% on the TNX - 10 year treasury yield - sooner rather than later.

Unfortunately there is no such thing as a free lunch. Risk aversion drives down the yield on bonds as people flee into them, but risk acceptance drive up yields. Sadly for the crooners this entire mess was driven by money that was cheaper than its true risk-adjusted premium, and we have now backed ourselves into a corner where the only way we can have even a fleeting resurrection of that "cheap money" is for the stock market to collapse!

What's even worse for "Da Bulls" is that this rotation doesn't look to be into equities - it looks like people are buying oil and metals with the money coming out of treasuries.

That ain't so good...... and in fact, could be really bad, in that it squicks Bernanke and company's attempt to "manage" things. What brings down commodity prices? A slowing economy. Oops.

Now couple this with willful ignorance of risk as expressed in the VIX moving lower even on days that aren't so good for equities and you have a market that is setting itself up for some truly ugly realities down the road - and perhaps not very far down the road either.

It would appear that our "correlation risk" game is afoot once again, similar to what happened in August. Of course we know what the markets did then, right?

There are a few people who are honest about this making no sense - Art, who frequently shows up on CNBS in the mornings, said it best today when he commented that the futures being up more than 100 points on the Dow made no sense given the news flow and general realities in the market.

If you think that's nutty you should see what's happened in Britain. In the wake of the Northern Rock nationalization affordability, as expressed in the maximum amount that banks are willing to lend against housing, has immediately come back in to about 3.5x income! This is an absolutely enormous shift downward from levels of just a week ago and is being totally ignored in the FTSE. It won't be for long - it is essentially guaranteed to force a huge downward adjustment in home prices over in England, just as we're facing the same sort of deflationary collapse in our housing market. When you add in the fact that the government just took on the risk from Northern Rock..... Oi.......

But heh, don't expect rationality from this market, because you're not going to find it - at least not today.

Oh, those monolines? MBIA played "shuffle the chairs" in the boardroom and then came out and basically said they have "no business being in the structured products insurance biz." Naw, you think? Hmmmm... so how do you exit that business without raping the banks and others who have relied on you eh? Me thinks you don't, which is likely to be a rather severe problem, no?

Got gravity?

Here's your technical!

So let me see if I get this right.

Northern Rock is bankrupt, so the British Government "nationalizes" it (that is shorthand for "we come in, seize the assets, take it over, throw out the private businesspeople, and call it 'property of the government.'") Oh, and the private (you know, "ordinary Joe") shareholders? Speculation is that they'll get a big fat zero for their trouble. Certainly, they won't get much.

This results in a 3% rally in the FTSE and more than a 1% advance in the US Futures, never mind that we're closed for President's Day.

A what?

A bank - and a major mortgage lender - going tits-up is cause for a rally?

Did I wake up this morning and find myself on Mars?

Yes, yes, I saw the news that Quatar's SWF is "investing" in one or more banks, and might put in as much as $15 billion.

That has worked out delightfully well for all of the other so-called 'smart money' thus far, right? They've all made money hand over fist, yes?

Oh, wait, that's not how it has turned out? You mean these clowns have all lost their ass thus far? Well how the hell could I have gotten it that wrong?

There are many who will claim that the market's refusal to "sell off big" in the face of bad news means we have hit the bottom and there will be nothing more than "up up and away!" from here.

That's a very nice fantasy.

Unfortunately these same people said the very same thing back in October, and you know what happened in November, right? Then they said the same thing in the early part of December, when we rallied on bad news. Of course the last week of December and into January made that early December period a rather, uh "profitable" time to buy stocks, yes?

Then there is the "monoline problem." Is it serious? Well, what do you think? One of the "plans" being floated would split these firms into two and give the banks "a big equity position in the 'good' side to insure they're made whole."

Uh, wait a second. Made whole? Perhaps you can explain why they should be made whole? Oh, you mean that fraudulent "insurance" - that is, where you sell yourself something and then pat yourself on the back that your risk is now covered should somehow be subsidized? Yeah, I think that's what we're talking about.

Never mind this "money quote" from Bloomberg:

"'The authorities' encouragement of such a solution reveals their fundamental misunderstanding of basic commercial law and principles and also their sense of desperation,' said Musashi Capital's Mercer."

Really?

I think the authorities understand basic commercial law quite well. They're just choosing to ignore it. Basic commercial law says that you can't ignore insolvency and intentional mispricing of securities when you file your 10Qs and 10Ks (so says SarBox, along with just general commercial legal principles relating to fraud), and it also says that you can't write an "insurance" contract with yourself and claim your risk is "covered". Yet both things appear to have happened en-masse over the last three or four years and in fact are what made the property bubble possible - without that artifice we would have never had housing prices shoot the moon and folks making $8/hour cutting hair would not have been able to "buy" a $500,000 house (which is really only worth $250,000, but heh, that doesn't matter so long as there's another sucker, right?)

I would have loved to pull that crap and gotten away with it when I ran MCSNet. Oh wait - a lot of other people in the Internet business (and others in the 95-00 timeframe) did pull that sort of stunt! Like Enron's famous "barge" transactions, MCI's famously inflated "internet growing at 30% a month" claimed statistics and "price targets" put forward by Wall Street banks who underwrote the IPOs and were using those entirely fictitious "projections" to unload their shares onto the public - who then took 50, 75, even 100% capital losses.

Amazing.

WHERE ARE THE COPS? You know, the real cops! The ones that, were I to attempt this sort of nonsense with my TAXES, would come and kick in my door in the middle of night and haul me off to the hoosegow!

Distilled down folks, here you have it:

• Britain was just forced to take a bank and turn it into a government piece of property, because it was functionally bankrupt.
• We still have the "monoline" insurers out there making ominous ticking noises, with all sorts of delightful plans being floated, most of which will immediately squick all the common shareholders. Never mind that any such "bailout plan" is almost certain to trigger instant lawsuit heaven for years during which there will be TROs and counter-TROs while the existing book of business withers away on the vine and is eaten by snakes.
• The "word of the day" is obscure. All of these "plans" feature one central point - not coming clean as to the depths of one's exposure in this area or that. Absent that central point, none of these "deals" make any sense at all, and none would get done. That's sort of like trying to figure out exactly where you'd like to bury the body so nobody can find it, yes?
• "Market participants" have not increased their IQ by one iota over the last few months, despite punishing and repeated losses when they buy into the thesis of "buy because bad news is not producing a rout." Of course a month later the rout comes anyway - too late, you already bought!

By my math we're down 15% from the highs in the S&P 500. Is this a good time to buy?

Let me just leave you with an old, but classic statistic - on average, stock prices fall by 30% from peak to trough in a recession.

That means we're only 1/2 done, and if you use the last recession as a guide (2000-2003) it took you seven years to get back to "break even" if you bought at the top of the S&P 500, and that assumes you don't care about actual purchasing power.

God help you if what you wanted to purchase in 2006 was a house!

PS: Caroline Baum appears to be trying to rehabilitate herself by calling out Hanky Panky. I have to give her credit for that one..... now if we'd just get a more-honest view of the departing of "hard money" from our banking system (rather than reliance on someone from - gee willikers - a bank, who just might have a tiny conflict of interest when it comes to reality.....) I know, I know, that's asking for too much.....

... let me redefine the term a bit.

"FIRE" meant "Finance, Insurance, and Real Estate" for the last few years.

Now we need to redefine it to "Fraud, Insolvency, Ripoffs and Explosions"

As in "tape bomb" explosions, you know, the kind that sink the stock market?

Yep.


Fraud

Let's boil this all down shall we, with references and tidbits from previous Tickers, but not the whole thing - look folks, that you need to read is not a bad thing, its a good thing, 'K?

The simple fact is that this entire credit bubble was driven by fraud, and intentional, even willful blindness on the part of regulators.

All of them.

Both State and Federal.

The Federal Government did in fact step in to preempt state regulation of mortgage issuers, thereby preventing anyone who "got out of line" in allowing the real estate bubble to inflate from stopping it.

The State Governments (particularly NY) did in fact grant waivers to the monolines allowing them to become "other than monolines" - that is, to insure CDOs.

Neither State or Federal governments did a thing about off-exchange derivatives - their willful blindness included the total disregard for margin requirements, capital adequacy ratios or anything else even remotely related to proper oversight.

Neither State or Federal governments did a thing about the "liar loans" and inflated appraisals, even though there was a petition filed with the Federal Government as early as 2003 complaining about it - by appraisers! HUD did its own study and found that more than half of all "no-doc" loans were contaminated by fraud at an extreme level, with incomes overstated by more than half, and yet there was no enforcement action taken.

Investment banks sold this garbage off to anyone who would buy, without a hint of fiduciary responsibility to the investor. (Not that such has ever been in their charter, natch.) They further kept creating and selling these instruments even though they had every reason to believe that the "housing price bubble" could not inflate forever - in fact, it was mathmatically impossible for it to do so.

In short, there was absolutely no oversight of any material sort at all by anyone for more than a decade, and the "animal spirits crowd" ran rampant.


Insolvency

That's the key word here and now.

We have builders who have been granted waivers from debt-covenant violations - just look through the major builders' EDGAR filings, and you will see them left and right. What does this mean? That they'd be bankrupt if they didn't get them. The very definition of intentionally-overlooked insolvency.

We may have bank insolvencies being covered up by The Fed and others. We have no way to know, but the H.3 report strongly hints that in fact The Fed is the only and entire reason that banks have working capital to make loans with. Does this make them insolvent? There is no way to know because the collateral that is being taken via the TAF is "opaque" - the entire point of the TAF was to prevent banks from having to identify themselves in accessing The Fed's primary credit facility!

Corporate and municipal insolvencies? Not yet, but those are likely coming soon, and in significant numbers. If you're The Port Authority of NY and you just had to pay 20% for short-term financing, what do you think that will do to your operating cash flow? Put in perspective, this takes an $80,000 interest payment and turns it into a $400,000 one. Is that good? Delphi is in danger of having its exit from Chapter 11 (restructuring) scuttled, which could lead to a Chapter 7 (boom, you're dead) filing - again, due to seized credit markets.


Ripoffs

Too many to list, but we can take a stab at a few.

• Homedebtors who lied about income to "afford" a bubble house.
• Realtors who played "time to get in the game", "buy now or be priced out forever", and similar refrains, all, of course, to insure that their commission payments kept flowing.
• Mortgage lenders who sold people "teaser rate", "Option Arm" and other similarly exploding mortgages, a rip-off in two distinct fashions - in the first instance in that they allowed people to buy something they couldn't afford, and in the second instance in that even if the bubble continued they insured that the buyer would have to come to refinance again and again as soon as the teaser expired or "recast" happened. Since fees were in fact the overwhelming profit center within these lenders, it simply would not do to have a buyer purchase a house and only visit the lender's office once in 30 years. No, we had to make sure they came back at least every two years for another bite, so we could strip their equity with even more fees. In the stock market world this is called "churning" and it happened through the entire real estate marketplace.
• Wall Street, who bought and paid for ratings, shopping them hard to get that coveted "AAA", and then claimed that these ratings were "impartial." In a pig's eye something is impartial when you're writing the check. "AAA" debt doesn't trade at "90", say much less 50 and 60. Ever.
• Ratings agencies, who are not compelled to list their accuracy ratios nor will they downgrade alleged "AAA" (not to mention "AA" and "A") credit when the market says it simply isn't worth what it was sold at. Witness Citibank, which has this very pretty chart up on its web site, and yet paid eleven percent for capital recently. Can there be a company with an "AA" or better credit rating that pays 11% for capital when Fed Funds is at 3% (to be fair, it was at 4.25% when they did that deal, but still.....)

Explosions

You only think you've seen 'em all.

There will be many more. Until all of the above are stopped, the markets are subject to "tape bombs" going off without warning.

The simple fact of the matter is that houses are still radically overpriced - 30% on a national basis and double or more "fair value" in many "bubble" areas such as California. This correction in pricing will happen whether or not the government or Wall Street likes it. I can guarantee you that they won't like it, and it will almost certainly take down all the "private mortgage insurers." Ultimately this development threatens Fannie and Freddie who are relying on those private mortgage insurers to keep their "book" whole just like the big investment banks are relying on "monoline" wrapper policies.

Commercial Real Estate is likely as big a mess as residential. The "cap rates" on these deals has been insanely low - too low for a debt market that won't give away free money. Well, the free money is pretty much gone, and those deals which were done predicated on "free money" will explode in investor's faces. Typically commercial R/E lags residential in a downturn by 12-18 months. Guess what - time's up!

Consumer credit capacity is pretty much done. Oh sure, not for everyone, but it doesn't have to be for everyone. The fact of the matter is that even a 10% contraction in consumer credit capacity is calamatous for the entire economy, because the consumer is 70% of GDP and they've spent $6 trillion over the last few years in the form of MEWs. That, to put this in perspective, is 10% or so of GDP all on its own. If half of that - conservatively - has disappeared it will place a 5% downward bias on GDP; now add in the additional effects from the construction sector and you've got the potential for double-digit declines in real GDP growth. I do not expect it to get that bad, but a mid-single-digit contraction is not only reasonable, it is expected at this point.

To those "economists" who don't think it will happen, I simply want to ask how they passed fourth-grade math....... there's nothing complicated in figuring this out.

We're nowhere near the end of this mess. In fact, I think I just heard the Umpire shout "Play Ball!" - that's how early in the game we are.

The folks with actual money have been ripped off to the tune of over a trillion dollars thus far and they're not about to let it continue. Those who think that "Sovereign Wealth Funds" are going to continue to throw money into a furnace need to have their heads examined. None of these "investments" have gone well; every single one of them has turned out to be a huge net lose.

Never mind the so-called "great investors" like Bill Miller. I do seem to recall that Legg was a big buyer of Countrywide Financial at as much as $40/share, never mind a number of his other "great calls" on value. Exactly how much of a loss have you taken on that one dear sir, and how much more is to come? Your upside there is capped now - that's kind of a problem, no?

Until the fraud, rip-offs and insolvency are flushed out of the system, the explosions will not cease. Oh they may be hidden for a while, but that is simply because someone cute put a pressure vessel around the blast so you didn't hear it.

It still happened.

Unfortunately pressure vessels have a working pressure limit, and it is rapidly being exceeded. When (not if) they fail you simply get a bigger blast than the original with "extra shrapnel" for your trouble.

For the near and intermediate term, here are the players on the field that you need to watch:

• Long term interest rates are rising. The TNX, 10 year treasury yield, which (loosely) controls mortgage funding costs, has posted a bullish flag. Twice in the last two days it has threatened to break out of that north - decisively so. The target on the TNX, should it confirm, is 4.20%, which would be a calamity for what is left of housing, pushing rates on 30 year money into the mid 6s at a minimum, and possibly even higher. The nasty here is that if equities move higher the TNX will move higher as well as some of the "risk adversion" money comes out of bonds into stocks! This move is all that has prevented a rocket shot in the TNX over the last two months - which means that paradoxially, The Housing Market benefits from a stock market crash!
• The monoline insurers and banks appear to be headed for a nuclear confrontation regarding how they will deal with the CDO/monoline mess between them. There are no good options here, only bad ones; the "long side" bet here is to go "long lawyers." If the monolines are split up then the CDO portion of the firm is likely to get hit on its ratings instantly, which will in turn translate into enormous BASEL-II mandated capital reserve charges at the banks. This will precipitate tremendous and instantaneous forced contraction in lending capacity. A straight credit downgrade of the monolines does precisely the same thing. I see no scenario that is remotely plausible that can prevent this from happening, as the actual amount required to "backstop" it all is tied to the eventual contraction of home prices, and the exploding CDOs go exponential in number and cost as the maximum home price decline increases.
• Lots of people are talking about how "bank credit continues to increase and this means the economy is ok." Wrong. Bank credit is being involuntarily expanded as companies (and people) are drawing down "available" credit lines in anticipation of those lines being shut off and as a response to seizures in the credit markets. Witness Countrywide Financial which drew down all of an $11 billion facility in late summer. The banks are wising up to this game and either have or are withdrawing the remaining "non-drawn" lines.
• Lots of folks are still talking about "hyperinflation", and citing "M3" and similar. This is pure nonsense; if you want an example of this idiocy listen about 44:45 into this audio link. The fact of the matter is that "M3" did not capture the shadow credit creation by non-bank entities but it sure as hell does capture the forcible conversion of that "shadow" credit into bank credit! If you invest today on the premise of a "Weimar Hyperinflationary Explosion" you are going to get killed. We already had severe monetary inflation but the statistics failed to capture it - now we're experiencing the deflation that must follow as debt defaults but most are failing to recognize it due to the original false signal. Simply put, the cost of government debt service makes an intentional decision to "hyperinflate" as a potential path "out" impossible; compare the outstanding present federal debt ($9 trillion) .vs. the Federal Budget ($3 trillion in the latest budget) and the problem that such a path presents becomes clear. The government's funding costs can and will exceed the entire budget if they attempt this sort of scheme, which is why the government will not allow it to happen. The Federal Government is NOT going to put the shotgun of monetary policy into its own mouth and pull!
• Equity markets still do not take into account negative S&P earnings estimates for the next quarter, nor do they account for the haircut in full year 08 earnings that is now certain to occur. As usual the "analysts" are behind the ball. We have just now seen the 1Q estimates go below zero. What's the "P/E" of the S&P 500 if the "E" is negative?
• Equity markets are NOT discounting a consumer spending recession. Not even close. We are 12% down from the peak right now, more or less. In recessions equities typically lose 30% of their value. This is likely to be a deeper than "typical" recession and thus losses of up to 50%, peak to trough, cannot be ruled out. To those who say "stocks are cheap" based on the theory that treasuries are yielding almost nothing, I simply point at Japan and what happened to their equity markets when they went through a credit bust, or, if you prefer, what happened to the S&P 500 from 2000-2003.
• Short interest is falling rapidly and there are still too many bulls, with margin debt remaining extraordinarily - and dangerously - high. Markets don't bottom until nobody wants to own stocks. We're nowhere near there. So long as you hear people like Kudlow telling everyone to "buy buy buy" and every analyst on CNBC is talking about how there's a great "buying opportunity" either right now or just around the bend, we have further to go.
• The political landscape favors The Bears at the present time. Obama is leading Hillary in the Democratic Race, but irrespective of which of the two is the Democratic candidate either is likely to win, simply on the economic landscape come November. People will vote their wallet and both are promising Bread and Circuses. The ugly in there is that both are also promising to get rid of "Bush's Tax Cuts For The Rich", which means dividend and capital gains rates will go up significantly. These tax cuts made stocks more attractive in the 2003-2006 time frame, and their recission will make them less attractive going forward, shifting investment preference to tax-free municipal bonds. Since the market discounts events ahead of their occurrance, a likely Democrat White House will add significant downside pressure to the equity markets.
• Bull markets don't feature "spike bottoms", but bear markets do, and those spikes almost never hold. How many times do you need to be screwed buying one of these "relief rallies" before you give up? So far you've been fooled in August, November and it looks like January will be #3. When do people wake up? That's hard to know, but eventually the most-ardent Bulls run out of rocket fuel - or margin capacity.

BOOM!

"Bond insurers may be split into two pieces to bolster credit ratings and protect municipalities and bondholders, New York's top insurance regulator plans to tell Congress."

Game over.

A few days ago I predicted that this was exactly the outcome that we would get out of Buffett's "proposal." It appears that Dinello has the same idea, and why not?

Oh sure, there will be plenty of rattling around, like the death-rattle of an old man lying in bed with pneumonia, but the outcome is now a given.

This, by the way, was the only way out and has been for quite some time. That this would be the path taken became clear as soon as Buffett started talking about reinsuring the munis, as that can be funded even if the government ends up paying the bill for the existing bonds. That's an $8-10 billion problem - bad, but, affordable. Remember, we just blew $165 billion on a "stimulus" that won't stimulate anything but sure looks good in the vote-buying contests.

The banks and others have run the "systemic risk" scam for years, arguing that we "can't allow them to fail" because, among other things, municipalities would get killed.

Well, that argument is now over.

As for the "we're too big to fail" argument, good luck with that. See, not everyone in these markets were imprudent. Goldman, for example, was apparently shorting these securities all last year, and presumably is well-hedged against a CDO explosion. They're fine, right? (so long as they weren't lying!)

Bear, Citi, Merrill? So sorry, so sad. Merge the solid portions with one another and cut the rest off to die.

Oh yes, the howls of protest will come, and the "favors" will try to be called in the Halls of Congress. Bet on it.

Bet on the argument failing too.

Why?

Because to actually bail out those folks is simply not possible - the total cost would exceed a trillion dollars and the upside of that estimate could be six or more trillion, or essentially the entirety of the MEWs taken over the last three years, most of which were taken against false appreciation and thus weren't real!

There is simply nothing Congress can do about this.

Further, when you look at what has happened over the last few months, The Fed has shifted towards more secrecy instead of more transparency and has gotten exactly nothing out of it in terms of positive result!

Why?

Because the problem is secrecy in the first instance!

The way out of the box is to cut that shit out. But that means getting very aggressive with the fraudsters and schemes, and simply saying "no more of that crap boys!"

Do you expect The Fed to do this? No - not until it becomes apparent that they have to. Why? Because they can manage their own risk without it, and that's all they care about.

Who has to fix this? OCC. OTS. Congress. State regulators, especially in the insurance space.

This is where the problem originated and where it has to be dealt with.

This, by the way, is why I am so negative on Ron Paul. He sits on the committe that could have put a stop to this crap four years ago, and did nothing to effectuate that change.

There are a lot of people who think I'm way too rough on him or should even embrace him. Nope. The way I see it, he had a responsibility to do something and failed. He's even worse than most of the other fraudsters on The Hill in this regard, because with the exception of people like Chris Dodd, who also has the authority to act (and didn't) most Congresscritters simply aren't on the responsible committees.

So while the blame is generic, when we drill down into it, we have to point the finger at those who could have acted but failed to.

The Bond Market no likey what's going on. The 10 is threatening to break out of a bullish (for rates) flag, which presages a potential 4.20% 10 year rate. This will instantaneously translate into higher mortgage and other "long money" rates, destroying what's left of the housing industry.

There is only one way to prevent this, and that's for the stock market to blow up so that people run like hell into bonds, pushing yields down!

Pick your poison Ben.

Who wins here?

The credit market.

The Street crooners are again out screaming, but did you notice anything today? They're a bit more nervous. There's a bit of a lisp in their words, and a bit of panic in their happy-talk. Oh sure, they say "people want mortgage debt" again, referencing the CMBX (commercial mortgage) deal that got done. What they don't talk about is that it went at over 200 basis points beyond Ts, which is four times what that same deal would have priced at in terms of spread just one short year ago.

They also don't talk about what a 200 bips spread does to all the existing commercial deals out there that have 50 cap spreads...... uh, can you say "dead"?

See, this is the misdirection of the media - all intentional too, as all of these "market participants" know full well that if you have a 200 bips spread on costs with a 50 cap spread on income you're screwed! Unless these spreads come back in and soon commercial R/E will be decimated over the next year - there is simply no other possible outcome!

Don't look at the home sales numbers either - down 21% Y/O/Y in the 4th Quarter, the steepest quarterly drop ever recorded. Gee, you think? Prices are still far too high relative to incomes, and the sales dropoffs will not turn until that goes away!

There has been much digital ink spilled trying to "paper over" the SOMA downturn and reality in the credit markets, with people like Kudlow pointing to the C&I (commercial and industrial) loan ramp rate and saying "see see see its all ok!"

Uh, false.

Those loans are involuntary! Firms and governments are increasingly finding that they CAN'T access the normal debt markets on their own, and are turning to banks as their last option, as the cost of money there is much higher.

Now add to this that we've got a slowing economy and banks are trying to take down risk as their balance sheets are bloated as well, and you have a recipe for disaster.

Involuntary credit demand is not "good", it is VERY BAD.

This sort of "misread" is the same thing that has happened with the so-called "Shadowstats" M3 "reconstruction."

The moonbats claim that The Fed discontinued M3 because they're trying to hide something. In fact they discontinued M3 because it didn't tell you the truth; it was simply NOT capturing any of the "shadow" credit creation caused by all the fraud (and undercapitalized "insurance" which, in fact, is worth zero), but it sure is capturing the forcible repatriation into bank balance sheets when there is no other when it comes to access to capital for companies and governments.

Yet there are STILL people who refuse to read out here.

Heh, that's fine. If you want to ignore all of:

• The Port Authority of NJ is forced to pay 20% for short-term money after their auction rate security auction failed (along with $250 billion of others!)
• Spreads have blown wide open virtually everywhere.
• SOMA is being aggressively drained by The Fed.
• Home prices have contracted by 6% in the last year, and will likely drop by more than that in 2008.
• Stock market prices are off 10+% in the last three months.

Heh, if all you look at is food and fuel, we've got a tremendous inflationary problem!

But if you look at the actual monetary base then it is clear what is going on.

Here's the technical!

PS: Happy Valentines Day. Was your Valentine Green or Red? :->