Pretty crazy market day today.

Let's lead with what the market should be paying attention to.

China trade deficit up 17% YOY, adding fuel to what is almost certain to become an anti-China trade bill rattling around the House and Senate, and adding to the "drop the dollar peg" campaign. With a strongly Democratic Congress, some sort of action is a near-certainty, and with the President's fast-track trade authority gone, there is little Bush can do about it if that gets attached to "muss-pass" legislation.

Oil is up big again this morning, now pointing at the $74 level. That's a very strong rise over the last couple of weeks.

Cerebus is apparently having some trouble finding bagholders, er, suckers, er, investors - yeah, that's the ticket - for the $60 billion worth of debt they need to issue to close the Chrysler acquisition. Banks are increasingly looking at being involved in it almost like buying Chrysler stock, as opposed to issuing bonds. Gee, 'ya think? I do. In fact, I think that's exactly what issuing debt in a market like this is - you're an equity holder and if the company fails you get stuck with a 100% loss just like an equity bagholder. Congratulation.

Now who wants to own an auto company with a blood-red balance sheet again? But weren't they all upgraded? How has Ford (F) done since then? Yeah.

Retail sales came in tepid and uninspiring. For those who cite WalMart, make sure you look at Macy's numbers first! Considering that June is supposed to be the second-best month of the year (right behind the Christmas season) this isn't something that I'd call "great". Yet investors seized on the WalMart same-store gains (coming off a weak May) and started bidding up the futures - and WalMart shares - immediately.

The Dollar is setting new 52 week - and multiyear - lows.

Oh, and this morning Marriott missed by two cents. While net was up and so were rates, it didn't translate into growth as predicted. So call it a mixed picture - neither a solid beat or a solid bust.

Oh, and let's not forget Motorola. They warned and are clearly going to have (another) bad quarter. As I noted last night they're a dog-squeeze company and have been for quite some time, but still, they're huge and a miss is a miss is a miss - or is it?

Alcan got a rival bid from Rio (based in London) - but before you go all gaga, note that credit default swaps yawned on this one - the debt market is not impressed. Oh, Rio was down 5% too - did someone overpay? Looks like it, given that Alcoa said "nuts" and threw in the towel after the close.

Alcoa went rocketing higher - which is exactly backwards when you have a deal blow - because now people think they're next. IMHO that's a mistake guys. Hint: If you have those $42.60 CALLs, I hope you took the profits. If you have the $45s, you're even. Good luck on there being more on that trade.

Oh, and we got a very strong economy! In fact, its booming! Look here!

"The number of U.S. properties in foreclosure climbed 87 percent last month from a year earlier as home prices fell and lending standards tightened, making it harder for borrowers to sell homes and refinance mortgages. "

That's great news! Why, it makes me want to go out and buy stocks. All of them. I don't give a damn what they are, just so long as they're stocks! Consumer discretionary? Let's buy! After all, people need lots of new stuff when they get kicked out of their house, right? Construction equipment? BUY! Gotta build lots of houses. Truck engine suppliers? BUY BUY BUY!

Days like this make you wonder about sanity. Yours. CNBS commentators. The markets in general.

But - fighting the tape is unwise; the market can remain irrational for far longer than you can remain solvent.

Curiously, my shorts are doing ok. On a day when the doors are being blown off the broader indices, that I've actually got some positive numbers on my board, and the negative ones are only slightly so, makes one wonder - am I really seeing the sort of index moves that are being posted, or is this all some sort of game, where the truth lurks just beneath the surface of the water, much like swimming in a shark-infested ocean - at night - with lots of splashing, thinking to yourself how warm, inviting, and wonderful the water is. My big loser for the day is my open CALLs on the VIX - they're getting smashed, although they're still profitable. While its tempting to take the remaining money on those, I'm not sold - yet - that this is wise.

Let's not forget record margin debt either. Why? Well, how's this quote sound?

"NYSE officials attribute the trend to recent regulatory changes effectively allowing both small and big investors to take on more leverage, or borrowed money, from their brokers. So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.

Wall Street has had a love affair with leverage in recent years, typified by hedge funds and private-equity firms that make use of it to buy companies and stocks and bonds.

Such financing can also amplify losses if investors' bets go the wrong way. But regulators say that doesn't necessarily translate into more risk. "I wouldn't necessarily say that leverage equates to risk," said Grace Vogel, executive vice president for member regulation at NYSE. "

They said that in '29 too. How'd that work out?

A big part of this on the retail side is the introduction of what is called "portfolio margining", which many "quick moving" brokers now offer, including Interactive Brokers and ThinkOrSwim. The key here is that it reduces margin requirements, especially on complex option trades.

For example, if I were to buy calls for December and sell them for August, a somewhat-popular "hedging" strategy, the short position is theoretically uncovered and thus exposed to very high margin requirements. However, "portfolio margining" squares all the open positions in my account irrespective of time and thus treats this much like a vertical, reducing the margin requirements to a small fraction of what they would be under the "old way."

The problem here is that market dislocations can result in these options not moving in lockstep as one would expect, and the result of that can be real losses far beyond your "reserved margin." Thus, while these sorts of strategies look safe, they really are not. This is the sort of bet that gets hedgies in trouble when things go wrong, and it can bite individual investors just as hard.

The former margin computation method kept a lid on this sort of game because the margin requirements were pretty severe when you attempted it, keeping the size of your trades under control. This "portfolio margining" change has blown the lid off that restraint and the result has shown up immediately - an 11% increase in margin debt.

The NYSE's complacency on this is, in my opinion, severely misplaced and when, not if, there is a severe market dislocation this is going to generate a tsunami of margin calls. My bet is that it comes soon.

Parabolic debt increases always signal instability. Always. This is a rule that is more than 100 years old and its just as true today as it was in '99 and '29. We're seeing the effects, as the increased leverage allows people to buy far more than they otherwise would, driving up indices across the board. But when that buying fades, the losses are multiplied too, and this is where the "ahhhh" turns to "aieeeeee!"

Oh, the 10 is backing up again on yield. Sshhhhhhhhh - don't tell anyone.

The price action today is pretty incredible. Let's face it - this is what distribution and a blow-off looks like. Up 283 with a weak store sales report, no reason to believe there's a thing to like in the ABX. Who 'ya trying to fool here?

How's this look with that nice "AA" quality credit?


The rest don't look any better.

If you like the CMBX instead, how's this look?


So let me see if I have this right. Credit markets are still in the ditch. The dollar is collapsing. Spreads are yawning wide on the announced deals, which means it will be hell getting them syndicated - if they can be syndicated at all.

That's a good reason for nearly 300 point rally in the Dow!

Oh, I'm not the only one noting this. Look what showed up this afternoon!

"Collateralized Debt Obligations are the CDO bonds under fire, soon to suffer huge losses, subject of debt downgrades, object of failed auctions. We are talking about hundreds of billion$ in bond losses. A vicious circle has begun, sure to continue for a length of time ten times greater than what is expected, like into 2010. Home values are on the decline, the basis collateral for such asset-backed bonds, some of which hold car loan portfolios also in trouble. Homeowner defaults are on the decline, the basis income for such asset-backed bonds. The foreclosure process will aggravate the already swollen supply of homes. Hedge fund collapse will aggravate the already shaky supply of CDO & mortgage bonds. This is a worst case scenario unfolding on a horrific scale.

....

My hip pocket estimate is an initial figure of $2 to 3 trillion in bond losses from CDO plus MBS bonds at a minimum. Match that with $4 to 6 trillion in home equity losses at least . Included in my estimate is the collateral damage of another $1 trillion in losses to high grade mortgage bonds and corporate bonds , since packaged in the same sewage as leveraged CDO bonds. A housing valuation decline CANNOT happen without a corresponding asset-backed bond decline of similar magnitude. Credit derivatives are undermining the USDollar. The ruling elite engineered a bond bubble to trigger a housing boom, in an opportunistic fashion so as to rescue the system from the 2000 tech/telecomm stock bust and recession. In the process, the big brokerage banker brokers seized a chance to sell bonds and earn huge fees, while grossly misrepresenting the quality of many of the bonds. In many instances, junk bonds packaged as ‘AAA' gems. However, they forgot to avoid ownership of their own corrosive bonds, and exposed themselves to hedge fund clients with outsized lines of insane credit. SO THE RULING ELITE WILL EAT A $1 TRILLION PILL THEMSELVES !!! "

Took a DIA trade early this afternoon but took it back off (at a hell of a profit for an hour!) when the fade began right near the close, although we then spiked into 4:00. I'll put it back on tomorrow if we start to run again. Something just doesn't feel right here. You've got HUGE new highs on the NYSE, but also a lot of new lows - no Hindenburg as we're positive on the McClellan for sure and highs are more than 2x lows, but still, that many new lows? Same picture on the Nasdaq. Volume is light; no sellers. The 10 is up on yield big too. The LCDX improved a lot today but is there really anything to cheer here in that regard? I don't see how.....

What's going on here? Short squeeze I suspect, especially in the futures. We'll see what happens after the close with the futures, and this little curl on the close doesn't do good things for my stomach trading this long as anything other than a daytrade.

Aha - confirmation - as expected, the futures trended down right after the close. There went the gains of the last few minutes and on the Nasdaq, back to near the 3:30 level. Oook. Got it.

You didn't go long here into the close did you?

Hmmm.... someone manipulating things with a bit of futures buying? Naw, nobody would do that, right? Not like, for example, some of Cramer's buddies? A little engineered short squeeze? You gotta wonder. And those shorts I didn't close? How come there are some kinda ugly after-hours trades coming across on them? Oooookkkkkk.

Oh, Yahoo message boards apparently don't like my blog being linked. Ok, whatever. Tell people on your own or, if you really like it, say something yourself :)

I sure think taking that DIA option trade off was the right thing to do. We'll know in the morning. The only other thing I did today was getting rid of some Lennar PUTs that actually went up today while the stock was up. They were in the money; there was no particular reason for them to do that, so I took the trade off at a dandy profit.

See 'ya in the morning!

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