"Earnings are not going to be a problem," said Michael Metz, chief investment strategist at Oppenheimer & Co., in New York. "The speculators are very excited. Unless it is a major surprise, the external (factors) won't matter. The markets are feeding on themselves."

Let me strip out two sentences there that appear to be the only ones that matter to me...

The markets are feeding on themselves.
The speculators are very excited.

You think this might be one of the definitions of a "major surprise"?

"The threatened buyout of student lender Sallie Mae may still go ahead -- but the $25 billion price tag could be negotiated down.

Sallie Mae said on Wednesday a group of private equity firms and banks threatened to scuttle their buyout of the company, blaming proposed legislation to cut government subsidies to student lenders."

Hmmmm..... oh, and you know how I said that the reason for the claim of legislative changes was to avoid paying the "Divorce Fee"? Here's your proof:

"The deal has a break-up fee of $900 million, but if the buyers could prove the legislation has a "material adverse impact" on the transaction, they would not have to pay the fee."

$900 million eh? I bet most people would lie a lot for $900 million. What do you think?

The Press is starting to notice more of the "mortal hazard" (or is that "moral") inherent in the way hedge funds and others determine what a CDO is worth.

"The worry is that well-heeled hedge funds, Wall Street proprietary trading desks and ratings agencies may be too optimistic when analyzing or valuing exotic mortgage investments. As a consequence, future drops in market prices may be more severe and possibly trigger panic selling by sophisticated investors.
.....
Recent troubles at hedge funds run by Bear Stearns, Braddock Financial Corp. and United Capital Markets have highlighted the problems inherent in that approach. Even so, fund managers are resisting market views on the value of subprime assets and continuing to "mark to model," claiming declines represent short-term volatility."

The problem here is that you can't call this "short-term volatility." As I've explained on the forum, when a mortgage-backed security takes losses, those are real and are not going to be fixed.

This is different than a threatened corporate bond default. The latter is often able to be rescued, because the corporation can be bailed out, they may be able to restructure their other debt and thus avoid bankruptcy, and if they do, they can make the "defaulted" coupon payments and continue onward.

So it is quite often true that commercial bond "default threats" are just threats, but don't materialize into real losses of either coupon or principle.

This is not true in the mortgage-backed security space, because when a homeowner gets foreclosed, that mortgage is dead and gone forever!

While a "troubled" mortgage can be rescued, the ratings agencies do not count "lates" -only initiated foreclosure actions! That is, a deterioration in a consumer's credit doesn't hit the ABX until they actually stop paying. This is tremendously different than a corporate bond issue, where a deteriorating balance sheet frequently causes bonds to be downgraded long before the "bust" occurs.

In other news, Clayton Holdings has been subpoenaed by the NY AG's office. They're a company that does "due diligence" on mortgages for CDO/MBS security issues..... one wonders - exactly what are they looking for? My guess? Evidence of systemic fraud in the issuing process and/or either "intentional blindness" or worse.

And on Bloomberg....

" Investors asking how many beans make four in the market for collateralized-debt obligations are realizing that the likely answer is three if you're lucky, fewer if you're not. "

and....

"The two assessors should scrap every appraisal on the subprime portion of the $503 billion of CDOs sold globally in 2006, according to Mehernosh Engineer, a London-based credit strategist at BNP Paribas SA. Because people were able to borrow money without credit checks in last year's freewheeling mortgage market, the rating companies have no right to use inductive reasoning to predict the likely defaults on subprime CDOs.

'Their models are basically unable to predict any 'normal' behavior due to this overriding fraud factor,' Engineer wrote in a research report this week. 'The right thing for the rating agencies to do for the 2006 vintage would be to withdraw all ratings.' "

Yeah, like that's going to happen. It should, but it won't. See above though for why this is particularly nasty problem, and why investors appear to have not understood what they were buying.

Of course you had the Buffett Rumor bouying housing stocks Friday. Never mind that all of the builders violate basically everything Buffett believes about companies. High free cash flow numbers, low debt, stable balance sheets. C'mon guys, pull the other one. Which Hedgie was trying to force a short-covering rally with that load of bull****?

Then there's this - which ties into my Friday posting on the Dollar and why its important...

" The dollar fell to a record low against the euro and the weakest in 26 years versus the pound on speculation declining consumer spending will weaken the economy and dim the allure of U.S. assets.

The U.S. currency dropped a fifth straight week against the euro and pound amid growing bets that the Federal Reserve will cut interest rates this year to spur growth. U.S. reports next week are forecast to show a slowdown in housing starts and manufacturing, which may fuel more dollar selling.

'Retail sales is the piece of data to destroy the last standing hope of dollar bulls,' said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. 'We are going to see a consumer-led slowdown through the rest of the year, which doesn't bode well for the dollar.'"

If/when that happens we find out if Bernacke intends to sacrifice the United States Economy - not just temporarily in the form of a recession, but permanently through a hyperinflationary spiral followed by an economic collapse!

Psst - a consumer-led slowdown doesn't bode well for the economy either, nor for the equities market.

Funny how the guys in the FX markets actually pay attention.

You want to know why?

Because in the FX markets even retail investors have 100:1 leverage, and if you don't pay attention you will be utterly wiped out in days playing in that snakepit!

I occasionally play in the FX markets, but I do it with lunch money, because I know what can happen to you if you're not "on the ball" to a strong-enough degree.

So will the equity markets ignore this and charge higher?

We shall see.

But the next time you hear the Bulls talking about how good things are, ask them this - why do the guys in the currency markets think that the US economy kinda sucks and is deteriorating, not improving?

And if they're right, isn't it kinda foolish to be BUYING stocks here?

Things that make you go "Hmmmmmmm."

Next week shall be interesting.....