Plunger Thursday!

Ok, who turned out the futures?

Let's see what sort of toxic mix we can come up with today! Oil heading up bigtime, credit tightening, some more rumors from Hedgistan, and the new one for the day, now rumors that there's a big bank in trouble in Germany and $90 billion stuck on a US bank's balance sheet in "hang fire" LBO money!

Oh, that'd do it - and did.

The futures looked awful when I woke up. Not "limit down" awful, but awful nonetheless. Clearly, we are looking at a lower open at this point.

Durables came in up 1.4%, a bit below expectations. Ex-transport was down 0.5%, an awful number. Heh, where is that great capital spending boom? Oh oh.... The entire economy looks pretty crappy ex-Boeing Aircraft orders!

Weekly jobless claims came in at 301,000, not a bad number.

New Home Sales were out this morning and came in down 6.6% to 834,000 units; previous revised down as well. This is AWFUL. Median price down strong as well; builders are having to offer price cuts to get even the anemic sales numbers they're posting! Bottom? Oh hell no!

Heh Kudlow! What 'ya think of those Durables and Home Sale reports?

Here Larry, have some grilled Goldilocks buttsteak! BBQ sauce is on me.

Guys, watch the YEN! The dollar has found a bid but so has the Yen, and it is strengthening against the dollar, now solidly into the 119s, threatening to force an unwind of the carry trade! You only think you saw selling at the open today in the DOW - if that comes apart you're going to get a repeat of the February "fun times" in the indices, and this time it may not stop with one day.

And why is all this happening?

Well gee, take your pick!

Mass loan refinancing in the commercial space - which is a problem now!

"Junk-rated companies that have tapped generous loan markets in recent years could soon face funding difficulties, according to Fitch.

A report by the rating agency published on Thursday predicts that more than half of the $1,300bn leveraged loans market in the US will need to be refinanced in the next three years."

Oops. That wouldn't be bad, would it?

The ABX? What ABX? It continued to make new lows. C'mon man, what do you make of THIS?

5% losses in AAA paper value in a week?! That is simply never supposed to happen. EVER. PERIOD.

Folks, I don't think most people that are away from the markets and not immersed in them understand how serious this is.

As for the CMBX, its awful too. Like insanely awful. NINE HUNDRED BIPS OF SPREAD ON BB DEBT?! NINE HUNDRED?!



Yeah, and lookie at the supposedly "safe" AAA debt too:


The LCDX pulled a real yawner today. As in "yawned wide." Or is the more accurate way to look at this that the LBO folks are looking for a new pair of underwear right about now?




AAA PAPER LOSING 5% OF ITS MARKED VALUE IN A WEEK IS NOT A THREE SIGMA EVENT. IT IS NOT A FOUR, OR EVEN FIVE SIGMA EVENT.

IT IS ROUGHLY EQUIVALENT TO YOUR ODDS OF BEING HIT BY LIGHTNING AT 3:02 PM TOMORROW WHILE YOU ARE SITTING IN YOUR OFFICE CHAIR ON THE 43 FLOOR OF AN OFFICE BUILDING - THROUGH THE GLASS!

IF this percolates through the debt markets, and there is absolutely no reason to believe it will not, then it is going to absolutely DESTROY the credit markets for ABX securities. Gone. Finito. End. Done. Period.

This means the total and complete end of all securitized mortgages that do not go through Fannie, Freddie or FHA, and it may even hit Fannie and Freddie paper!

It is also at least somewhat likely to totally slam the door closed on ALL leveraged paper for quite some time until the market figures out exactly how this event occurred and exactly how to prevent it from happening again. This means the immediate end of LBO deals, that many if not most currently in the pipeline will either be eaten by the banks involved or they will blow up, and the LBO premium will come out of the equities market - and rather quickly.

The severity of this event simply cannot be overstated, nor its potential impact. The seizure of the credit markets, if it actually happens, will make what we saw today look like a Girl Scout picnic!

What was there to say about the market action? Let's look at some charts!



Heh lookie that! A close below 1490. That's a big deal. A very, very big deal, because it is the first time we've seen that and it is a clear violation of second-level support.

But - and this is the cautionary note here - it is only MARGINALLY below.

Here's the Dow:



Now that's a problem too. The Dow is, in fact, sitting right on second-level support. It blew through it but didn't hold.

We did the same thing on the Nasdaq Composite; same deal - below the 50, pinged the second-level support but didn't close under it.

Now here is another thing to think about here....



That's the Qs kinda - the NDX or Nasdaq 100, which is basically what the Qs are.

Note something interesting - it pinged the 50 but didn't break it. Why not? Cramer's "Four Horsemen" - Apple, Google, Amazon and RIMM - more specifically, Apple and Google, both of which took only modest losses or even booked big gains.

But look guys - I referenced this pattern at market tops last night in my special bulletin, and it is even more true here. How many people who are sitting on big Apple positions right now but work during the day and can't trade will go home tonight, see three hundred points off the DOW, a big gain in Apple, and wonder - "Am I next?" How many of those people stick "screw it, dump it now!" orders out there overnight and into the morning? You know the headlines will be all over the papers in the morning on the plunge!

Good question. Market psychology is almost impossible to read accurately. But here's what we do know - today and Tuesday, rallies were sold into with a vengence, instead of dips being bought.

One more chart, this one I'm going to do with all the technicals in it:



This one is a chart setting I don't usually use, but it is very important here. This is a 2 year weekly chart on the SPX. It is important because it shows that not only was weekly support broken today but far more ominously, weekly momentum - the MACD - rolled over today and sent an intermediate term SELL. If you look at this chart over longer periods of time, when the WEEKLY MACD turns down it reliably presages lower prices in the immediate near term. Now this signal, by the way, tends to be late telling you when its over, but it is an excellent indicator of real pain.

Note also that we lost serious Relative Strength as well, Stochastics are in the ditch and for the first time since February the weekly DMI turned negative.

These are all very bearish signals!

What kicked it all off today? Two things:

1. Rumors that there is a German bank that is in potential trouble and that at least one US bank is on the hook for more than $80 million in bridge loans that they cannot syndicate.
2. A potential forced unwind in the carry trade. What? Yep. The same thing that blew up the markets in February!

The latter is a really big deal. In the wee morning hours the Yen started to strengthen precipitously as rumors about the hung deals swirled, and against the dollar it was bid hard. The Yen is now under 119. Somewhere in the 118-117 range this gets totally out of control. Exactly where? I don't know. But this is potentially very serious and if it starts to melt then we're going to see the liquidity disappear almost instantly.

The LBO deal window has snapped closed and been chained.

So now we wait. Tonight will be very interesting over in Asia. WATCH THE FX MARKETS TONIGHT! If the Yen continues to strengthen .vs. the dollar (and perhaps even if it holds here in the 118s) you will see something nasty happen over in Asia. (PS: Late update - we got a little problem here; 118 is now being assaulted in the Yen; if it breaks into the 117s things are going to get nasty fast!)

How about us tomorrow? Well, much will depend on the GDP report tomorrow morning. Consensus is for 3.2%; if it comes in weak, and certainly down in the 2% or worse range, then Katie Bar The Door!

Read the market action in the morning before committing anything serious to this. But - we could certainly be seeing the start of something serious on the downside; we have, at present, the DOW, Transports, and Nasdaq sitting on second-level support with the S&P under it. If those levels break then we are targeting the February/March lows and, if those levels do not hold then the Summer '06 levels are a potential downside target!

BE AWARE that if we close up tomorrow this does not mean the danger is over! Indeed, in all probability it means that something far worse is still on tap!

Where we sit with a full analysis of the technicals and internals will be put up over the weekend, including, of course, tomorrow's action.

PS: For those who argue that there is an active "PPT" who prevents "plunges" - where were they today? It would have been trivial to spike the S&P futures 2 minutes before the close - we've seen it done before - and prevent this critical support violation on a closing basis. It didn't happen. Draw your own conclusions.