Let's lead with Motorola (MOT) - missed big, losing its mojo in the phone business, reported a loss. The Bat is getting its comeuppance. I've never liked that company so I've had plenty to smile about watching them sink into the abyss. These guys led the "piss in a cup" parade many, many years ago, back before I ran my own shop, prompting me to tell an interviewer that he could collect his sample by opening wide. He wasn't impressed (and no, I did not get the job!)

Hershey says sales were flat. Oh, and profits non-existent. What, isn't Chucky eating Chocolate anymore?

PIMCO is starting to see the bleedover into the economy.

"A slowdown in the U.S. housing market and losses in mortgage-linked bonds will lead the Federal Reserve to cut interest rates, said Paul McCulley, a bond fund manager at Pacific Investment Management Co."

Psst - there's a word for what's coming, and it starts with an "R". Betcha you can guess the rest. That's the only reason the Fed would cut rates, and they can only do it once it goes global so as not to destroy the dollar in the process.

Weekly Jobless claims came in at 301,000, previous month revised to 309,000. Interest rates moved up a bit to 5.05%, up 0.86%, still in the range. The futures didn't move much on the report.

Honeywell (HON) reported this morning, beating by 3 cents. The premarket gave them a small boost immediately on the report; we'll see if it holds.

Juniper, which got nothing right away off their earnings report, seems to have woken up this morning and is running hard. The Speculators Are Excited. Again.

The WSJ is starting to bang the drum a bit louder on the credit markets.

"If you're not a bond trader, should you care? After all, the nation's stock market is giddy. The economy, despite the housing bust, is growing. Unemployment is low. Inflation, though higher, remains moderate.

All true. But if something mars the picture, history suggests it will involve credit markets."

No kidding. Its just that every market crash through history starts there.

China's economy expanded at the fastest rate in 12 years.

"Gross domestic product expanded 11.9 percent from a year earlier, the statistics bureau said in Beijing today, exceeding all estimates of 23 economists surveyed by Bloomberg. Inflation climbed to 4.4 percent in June, the fastest since September 2004, breaching the central bank's 3 percent target for a fourth month."

The problem for them is that we're exporting our inflation there, and they are certain to eventually stick a big "Return to Sender" stamp on what we're sending them. Maybe sooner than we think. Maybe by unlocking the Yuan and allowing it to float. That'd be fun for us. NOT!

Oh, here's an interesting statistic - and one that ought to rattle you a bit.

In 2000, market leverage (bonds and stocks) was about $300 billion. It of course declined in the crash but since recovered in equities to about $350 billion.

But bond market leverage has risen to north of $1.4 trillion.

Now is all this leverage destined to implode? Not necessarily. But what history teaches us about leverage is that people take it on while hedging, thinking they have correlation figured out sufficiently well to protect them against something going wrong.

History says that's a bad bet; the desired correlation only works in "healthy" markets. When markets decouple from fundamentals and start to run on "The speculators are excited", as they're doing now, one of the first sacrifices is accurate correlation between the underlying and financial instruments used to hedge. This has proven correct over and over again, yet the market speculators never learn the lesson, inevitably becoming drunk on the power and money they are swimming in as they continue to "drink their own Kool Aid."

Harley-Davidson (HOG) had good results but is talking about increasing delinquencies on their motorcycle loans. Gee, you think? And Harleys ain't cheap. So if they've got a problem with delinquencies, what does that say about the the health of The Consumer?

The morning opened up strongly, with an instant pop on the DOW over 14,000. Did I sell my Q 50 PUTs? Nope. I don't think this thing is going to hold. I've got a stop on my DXD trade which will fire a bit over the 14k level; I don't think its going to go off, but I could be wrong. We will see as the day develops.

Leading indicators came in down 0.3%, which is not good. This makes the cumulative run rate negative 0.7%, which suggests a recession in the offing. The market took an immediate crap on that, although it was somewhat muted. We shall see what happens as the day progresses - are people finally starting to pay attention to the data once again? Hope springs eternal!

Bernanke is getting roasted today on The Hill, with him being nailed on inflation, homeowner MEWs, stagnant median income and more. He's having a lot of trouble deflecting the incoming fire this time around; the Senate Banking Committee seems to have a bit more brainpower than the House did yesterday.

Bernanke seems to be having this problem with the idea of debt and appreciation. He said that "well if my house went up by $1,000 and I took out a $500 loan, my debt went up by $500 but I'm still ahead" in response to one of the questions asked of him today.

Time to take the gloves off here: You are a ****ing liar Ben and you know it. A HELOC or mortgage taken over 30 years requires total payments of three times the principal over the term of the loan and as a consequence of this you lose when you do that unless you take less than ONE THIRD of your appreciation! The music ALWAYS stops and when it does SOMEONE is left holding the bag!

One of the forum members stuck a great avatar up - I just have to reproduce it.....




Gotta love Photoshop.....

Oh by the way, if you think that the first half of 2007 marked "better" underwriting on home loans, you're wrong. It didn't.

"Subprime mortgage securities created in the first half of 2007 are about as likely to default as those made last year, according to a new series of benchmark credit derivatives."

You mean that lenders didn't respond to defaults by actually cutting the crap and returning to responsible lending? Well well well.... so we still have people trying to stick the buyers of that debt. Got it.

At some point this crap has to come to an end. Obviously, the market will eventually take care of it, but now we get to the real problem, don't we? Will the government step in and try to bail out the people who made these bets and wrote these CDOs? If they do, I'm going to be royally*****ed because that amounts to the TAXPAYERS paying off when people commit FRAUD! I don't care if people want to make unsafe loans, so long as when they blow up they EAT THEM.

Philly Fed Index came in at 9.2 .vs. expected 10, all internal indicators are down, new orders and employment, prices paid level and prices received down. Not a good report although I wouldn't call it disastrous.

More bonds being slashed in the mortgage space.... gee, 'ya think?

"Eight classes of mortgage bonds, including some issued by a Goldman Sachs Group Inc. (GS) trust, were cut to "BBB" from "AAA" as S&P applied its new assumptions, it said. In all, S&P cut ratings on 418 classes, or portions, of second-lien bonds."

THAT IS HUGE! From AAA to BBB in one step?! Holy ****! That is simply NEVER supposed to happen in the bond markets.

The repercussions of this WILL filter through. It may take a while, but it is inevitable. These deals will not be able to be sold at anything approaching the current price in the months to come, which means that real interest rates on these lines are going to do a moonshot, further depressing the housing market as affordability is further destroyed.

This has already started with some lenders putting 100-200 basis points (that's 1-2%) on their offered rates already. Its not enough - the total spread increase will likely wind up somewhere around three to four hundred basis points.

Oh, in the "Its just two Bear Stearns Hedge Funds" column, we have this:

"Basis Capital Funds Management Limited (ACN 092 478 441) as the responsible entity of the Basis Yield Fund advises that the Basis Yield Alpha Fund Master in which the Fund indirectly invests most of its assets has liabilities to its financiers secured over most of its assets. The financiers have reduced their valuations of those assets as a consequence of the disruption in US credit markets following concerns in relation to sub-prime residential mortgages and have made margin calls. The Master Fund is in default in meeting some margin calls which has resulted in a number of its financiers declaring events of default."

They go on to say that the losses, at what they think they can sell the assets for right now, would be around 50%. Oops. Good thing they're in Australia eh? Oh wait a second - I thought this problem was localized and wasn't going to spread? Hmmmm..... Given that this was a $1b fund (roughly) and considered Australia's "fund of the year" last year (no kidding!), this is interesting. You know, $500m here and $500m there and pretty soon we're talking real money!
Oh, BHP said "nuts" to the idea of chasing after Alcoa this afternoon. Oops. Alcoa dropped 5.5% almost immediately and with it some of the steam came out of the Dow and S&P. The LBO acquisition boom is drying up as people are starting to take a far more critical look at WHAT they're buying given the precipitously rising cost of debt issuance! More and more, they're going to find that the numbers just don't work.

Those who bought those AA calls and didn't sell them into the run? 9 million shares worth of calls took losses between 60 and 80% within seconds. Yes, it really was that bad, and this is what happens to you when "The Worm Turns." Expect there to be more and more of this in the coming months, making playing the long side more and more dangerous as this ugly thing called RISK comes back into the market.

FOMC minutes are out with worries expressed both on inflation and growth. This is not good; that's spelled STAGFLATION. "Housing contraction to continue for several more quarters, along with concern about a credit crunch."

Oops. The market doesn't like it either; as soon as those hit the wires and people started to read the markets came down a fair bit.

Short version is that they stuck more weight on both sides of the scale. Of course this means that when one of those weights come off, we get a rocket effect on the other side, and both are bad!

Google got SHELLACKED in the aftermarket on earnings. While the numbers don't look that bad it wasn't what the street expected and they got pulverized immediately, down almost $20 instantly, and it has continued, down as much as $30! Light a bit and WHAM. Now you know why that option premium was as high was it was. This hit the Nasdaq Futures instantly as well.

Sandisk came out with 12c EPS with 15% revenue increase; the market seemed to like that one, driving the price up about $3 on the announcement. We'll see if that holds; by the numbers this is a miss .vs. expectations, but they're getting a big pop initially, fading back as people digest it.

Capital One came in at $1.62; interestingly, they affirmed guidance of $7-$7.40. That looks just a bit aggressive to me. Chargeoffs increased significantly as well, as did delinquencies. Card revenue increased significantly but total loan amounts didn't go up much (higher interest rates charged plus fees/delinquency charges?) Their stock got a small pop out of that which almost immediately faded; call it flat.

Microsoft reported 39 cents ex-charge for the Xbox, inline. The market didn't like it much, revoking a good part of Mister Softee's gains during the day, which were quite substantial, only to think "ok, that's inline, we'll leave 'em alone." No material move; as I post this its fading back again.

Net-Net the Nasdaq futures are right back where they were before the market opened! This could be a verrrrrry interesting open tomorrow, as it now appears that people got just a wee bit excited beyond reality. Oops.

Option expiration is tomorrow and it looks to be setting up to be a really raucous one at that!

The ABX site over at Markit is a mess - it looks like they screwed up internally (this wouldn't be the first time.) But looking at the numerical tables there is absolutely nothing to like here, with the deterioration continuing. The AAA tranches are bad news, with the BBBs recovering just a bit.

The CMBX spreads are still working and they're flat on the day. Here 'ya go!



I just can't get over the spread on that "AAA" credit. Wow.

The LCDX yawned from 238 to 244 today, going in the "definitely wrong direction" for buyout money. This is next guys.

Someone linked this on the forum too.... it was just too cool...... I think it dates back to '99....




Time for me to go out on a limb here. Yes, I know I said February was the top, and obviously - I was early. Looks like that makes me early twice eh? (The last time - in '99 - I wasn't blogging, but it is what it is.)

I've seen notices (as I've noted in the ticker) that 2/28s and 3/27s (plus 3/37s) either are dead or will be nationally within the next few months. In addition, stated income loans are apparently being banned in Minnesota and this is almost certain to spread nationally as well.

Therefore, I believe it is totally reasonable for me to postulate the following:

30% of the housing market from here will disappear within the next month or two. Mortgage applications will continue to look ok for another month, maybe two, but will then crater as it becomes obvious that nobody in that space will be able to qualify.

Contracts signed may hold up for another month, but will then crater. Closings will crater as well, starting no later than August and continuing onward.

The housing decline will go from something that looks "orderly" right now to an outright rout, becoming more panic-based as the 3rd and 4th quarter continues. There is no chance that this remains orderly. 30% of the GDP is linked to housing in some fashion; as a consequence we will have a recession beginning likely in the 3rd quarter, but certainly before Christmas. It is unavoidable at this point in time.

When this becomes obvious to the equity markets, certainly before the end of the year and very likely susssed out in advance - possibly as soon as within the next couple of weeks - we will see The Bear wake from his slumber.

If I'm wrong your Christmas present will be to watch me eat part of my WSJ on camera and post the video on the blog!

There 'ya have it, as I see it.

BTW, let me plug the forum again here at http://tickerforum.org/. If you're not there you might want to think about trying. Its got RSS enabled as well which is nice if you just want to watch what's going on during the day - pick your reader, all work well, and the RSS system is actually intelligent unlike those for Yahoo and other sites (which have a habit of changing the IDs, causing you to get things you've already seen for a second time!) There are a couple of areas (including people's trade logs where several folks are posting in real time) which requires registration, but most of the forums can be looked at without being logged in.

Until tomorrow, have a great evening!