Wednesday Wipeout!

DFC (Delta Financial) has apparently delayed both their results and conference call, which was supposed to be before the market open - hmmmm..... another implosion?

Novastar (NFI) says they're going to start making subprime loans again. How's their stock price been lately?

Freemont (FMT) had its share price implode today but there's no obvious news out there. Whassup on that one? Hmmmm.... a leak of some kind? If so this is really bad because these guys are a bank; this is not some random lender dependant on warehouse lines for their survival.

And finally, Luminent (LUM) appears to be going down the toilet right here and now:

"The San Francisco-based real estate investment trust announced the default notices after suspending its quarterly dividend on Monday, a week after calling the dividend "secure.""

Read that guys. One week ago they said everything was ok.

Who else has done that? AHM, who imploded a few days ago, said the same thing a month before. And Countrywide Financial has said the same thing, although so far, they're still alive and "well", if you believe in their rally today.

So far.

The Mortgage Banker's Association said their application index of new mortgage applications rose strongly (8.1%) last week. As expected, the cheerleaders were out in force this morning on the number, saying this:

"'We're at the bottom right now in housing,' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. 'The biggest declines are over.'"

In a word, bullshit!

I put forward my expected pattern for this index and the underlying home sales a month or so ago. In short, I predicted that we'd see first a precipitous spike in mortgage applications as people panic due to the credit tightening, "spamming" every lender in the hope of getting financed. Then, a month or two later, probably in September and certainly into the 4th Quarter, applications would collapse as people give up, simply being unable to buy and coming to the realization that "its over" (for them anyway.) About this time the cheerleaders would be getting ready to eat yet another big helping of crow.....

What also spiked the number this time around is that those lenders who have gone "boom" (and there have been a lot of them the last week or so!) result in a re-application as people scramble to try to figure out how the hell they're going to close on a deal that just had its funding disappear!

Toll Brothers (TOL) reported what can only be deemed poor preliminary results, with revenue down 21% and signed contracts down 31%. That ain't good. Oh, and they're not providing any forward guidance either. I wonder why?

The credit markets are all buzzing about "we're back open for business." Yeah, ok. How about "let's take the best deals we can get to go and shove 'em through the crack in the wall that seems to have appeared, hoping like hell it doesn't close back up on us!"

China's "nuclear currency option", which I wrote about last night, is getting some press. Quite a bit of it, in fact. CNBC has featured it, which surprised me. It also got a feature on Marketwatch, which I like - and they're right by the way:

"Massive sales of U.S. treasuries would doubtless cause interest rates to rise and, combined with the already faltering U.S. housing market, probably push the U.S. economy into a recession we're probably overdue for."

Indeed.

But then Paulson did something totally fucking stupid on national television - he said that the reported Chinese "nuclear option" is "absurd" (his word, not mine!)

Slap the Chinese in the face to embarass them eh? Heh Paulson, you're a focking idiot. You think you can just slap the goddamn Chinese GOVERNMENT around on national TV? That takes balls. Someone needs to tell this clown that he's not working for Goldman any more and as a result he can't do that sort of crap without taking the risk of an immediate "I told you we would" sort of response.

Late yesterday S&P said they may cut ratings on 207 more "classes" of ALT-A MBS bonds. The key take-away? Right here:

"S&P said it had put the securities on watch for downgrade to reflect the increase in payment delinquencies, 'as well as our expectation that losses on the collateral will exceed historical precedent and may exceed our original expectations'."

You think?

Then there's this!

"Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said.

The three issuers are probably the only ones to defer payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's. The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free, said Lee Epstein, chief executive officer of Money Market One."

Is that good? Delaying making payments eh?

You know what happens when you do that? Lenders start pulling back credit lines! Guess what - that's the "nuclear winter" credit deal again......

CISCO is of course playing "cheerleader" today, but I think Mr. Chambers is more than a bit overly optimistic. And by the way, I like those guys' stuff - they probably still remember me out there as I did a fair bit of business with them and we both played "bare knuckles" from time to time, so while in the grand scheme of things we were a gnat on an elephant's ass, they might still remember our travails......

Nonetheless, global is important to them (and everyone else in the space) but its not the whole story, and can't be. If you can't grow the US sales base you're eventually screwed. Right now CISCO is riding the wave of video-on-demand, FiOS and other similar initiatives, and that will continue for a while, because it cuts costs for providers. Same basic calculus we had - when we wanted to open a new POP the computation went something like "is it cheaper to buy the connectivity "all-in" from someone with a jack on each end, or is it cheaper to buy the boxes on both ends and then purchase a raw pipe?" So long as the answer is the second (and it is right now) that will be the way it gets driven, and they'll do well.

There are still enormous "blank spaces" in the coverage of the Internet, even in the US. Hell, I'd love to have 100 acres somewhere, but going "off grid" connectivity-wise prevents me from doing it. Anyway, that bodes well in the short term but I wouldn't buy their stock here - too expensive with a P/E of nearly 30. If I held any (I don't) I'd be a seller into the strength. When the "R" word starts becoming more and more evident (and it will) you're going to see indiscriminate P/E contraction. That won't turn out well for the high-flyers.

MTG and RDN are fighting as I noted yesterday; they are both equal partners in a derivative/Hedgistan play called "C-BASS" which is imploding. MTG re-opened this morning and is up very strongly on a relief rally; that's not smart kids. If MTG breaks up the deal they either will have to pay the breakup fee or fight it out in court, both of which will be expensive and they're still on the hook for their half of the $1b C-BASS loss! What is far worse is that they've got a $180 million breakup fee and that's all the cash they have, according to their most recent balance sheet on Yahoo Finance! So if they blow this off and pay up, they're broke! Now what do they pay for that C-BASS impairment with? Farts?

I call this a potential bankruptcy in the making. Buy buy buy eh? Dumb dumb dumb!

Oh, and lest you think that these crazy rallies in the homebuilders are a good thing to pile into, you better read this from the cheerleaders of real estate!

"The National Association of Realtors trimmed its sales forecast for the sixth straight month but pared back its predicted drop in existing home values.

Existing-home sales should hit a pace of 6.04 million units this year, down from the 6.11 million units it predicted last month."

Every month brings another downward revision. Six in a row now, even by their own admission.

Ok, so we bid up TOL by 6% today? Uh, that sounds like a gift to me - on the short side.

This isn't contained to the US either. The UK seems to have a little problem of their own for the same reason....

"The U.K. has had a property bubble every bit as crazy as the U.S.'s. Valuations were stretched, and lending criteria loosened. And now arrears are starting to rocket, even while the economy remains healthy."

Oops.

On fundamental economic news today the freight index fell again for June. This is a leading indicator on forward demand and is similar to the tonnage reports (but broader-based) that are generated by the various shippers. It is now down 3.4% YOY and at the lowest level since February.

We got another Hindenburg today (New highs 125 / New Lows 167). Incredible. Trade the long side of this so-called "rally" at your own considerable risk. While I will note that technically speaking the Hindenburg has been vindicated (one of the outcomes which is considered "confirmation" in the 75% accuracy camp is a 5% correction, which from the top at 1550ish on the S&P we got - in spades - was about 7% total) the fact that we're still getting indicators means that there is a high probability that the dislocation that this indicator forecasts lies ahead of us, not behind.

So how'd 'ya like that whipsaw today? A rumor that there was a "nasty surprise" coming from a money center bank was what started it. But really, the news here wasn't a rumor - it was a statement of raw fact by Bush (on camera no less) that should put the fear of God into the builders and lenders in the market. He basically said there would be no bailout of the lenders by Fannie and Freddie; his point was that they need to get their houses in order first! And you know what - he's right. They haven't timely filed audited financials in a long time, and any other firm would have been delisted by now.

A bit of tough love perhaps, but this is exactly what we need right now.

Speculators are good in a market but when you speculate and lose you must be forced to take the loss and eat it. It is only through such forced recognition of losses that the efficiencies of the market are able to work.

It'll take a bit - maybe a day, maybe a few more days - before this sinks in. But "sink" is likely the operative word here..... this was a tremendous opportunity to load up on the short side in builders and lenders, provided you have the discipline to recognize that it is possible that Washington MIGHT try to bail things out!