The morning's action with the futures and the bond was a bit.....odd.

In the early morning hours there was significant buying activity in the futures, all the way up until about 7:30. From there we slid to end about flat in the S&P, down a bit in the Nasdaq, but up a bit in the Dow.

Lexmark threw some cold water on the tech "I'll buy anything that breathes" game with a nice big fat earnings warning. A bit over 20% miss expected eh? Hmmm.... and blamed on...... slower consumer sales of consumables. They got whacked for about 10% premarket - signs of sanity?

Naw, Chucky's fine...... booya!

The 10 is backing off this morning on yield; Oil started off weak but has recovered most of its losses in price. How this plays out during the day will be interesting, as will the coupling of the 10s yield to the futures - as the 10 fell, so did the futures - the opposite of recent trends.

Alcoa reports after the close.

Boeing appears to be headed up today after rolling out its "Dreamliner". Good company - but can it fire on all cylinders? By the way, pay close attention to the dichotomy here - Boeing's move towards a composite airliner presages potential trouble in the metals space, especially aluminum; aircraft grade aluminum is one of the most profitable areas for players like Alcoa.

The homebuilders are headed lower this morning, aborting their popup game from Friday. Short squeeze over, it would appear. Looks like my thesis - that this may have been short-covering to try to meet margin calls on other bets (maybe in the CDO sector?) may have been correct, rather than a secular sea change.

In the "nosebleed" sector Cramer's "4 Horsemen" appear to be ignoring the "E" part of the P/E game again, especially GOOG. Enjoy it while it lasts guys and gals.....were I you, I would not bet the farm on those 4. Just remember Cramer's record from early 2000...... if you started with $10,000 on those picks you might even have had beer money left a year or two later - if you like cheap beer.

Bloomberg, once against ahead of the curve in the honest reporting department, posted this overnight on the credit situation:

"What started as a financing squeeze in the subprime-mortgage market now threatens other parts of the economy. Borrowing costs for companies are climbing as banks and investors demand more for their money. Consumers feel the pinch from rising interest rates and sagging house prices.

As a result, the economy may struggle to achieve the 2-1/2 to 3 percent growth rate that most forecasters inside and outside the Fed have penciled in for the second half of the year. "

No, you think? Someone's watching the LCDX? C'mon man, reality isn't important in this market is it? BUY BUY BUY BUY BUY BUY BUY BUY BUY!

Cramer says so; shouldn't we all follow through?

In a word - NO.

Guys, beware the "valuation trap." And here I believe we've got a problem in the broader markets, say much less in the "heady names of The New Tech Boom."

Here's the problem. In the end, stock prices rise and fall based on fundamentals - earnings growth and cash flow. That's the beginning and end of it. Yes, over short periods of time you see dislocations in this - like you do now with RIMM, AMZN, and others.

But look at EBAY back in the late 90s. Was it a great company? Sure! eBay is a company I love to hate. I buy and sell things there, not professionally but as a way to find something I want or dispose of some piece of tripe laying around my house that I don't want any more. But - being a "great company" or even a "great innovator" does not mean that its a great stock.

If you overpay, then it does not matter how great of a company you have. You're still going to lose your ass. If you bought any of these companies back in the 90s, you either lost money or made nothing - over eight years! That sucks.

So instead, if you're inclined to play the long side, look for companies that are fairly valued and have room for their multiples to expand based on cash flow and earnings relative to their current stock price.

Example: Last summer I bought a boatload of NVDA right around $19. Why? Because it appeared evident to me that they were going to crush ATI, their primary competitor, and on that basis they were dirt cheap. I was rewarded with a nice double near the end of the year. I set a trailing stop under it as it got up into "nosebleed" territory and let the market take me out.

Now today, its $44. Should I buy it again? Oh hell no.

Why not?

P/E of thirty five?

Today, despite having broken out on a technical basis and with every technical indicator saying "buy buy buy buy buy BUY" I would instead SELL. Not short - at least not here - but buy? Hell no!

Why? Because one earnings disappointment and this stock loses $10 in a day. You will not escape that falling axe and it will cut your balls off.

Now am I saying that this time around the stock is due for a $10/share fall overnight? No. I've stopped following the company since I sold it, so I can't express an opinion on its current earnings picture. BUT - it is priced for perfection at these levels, and if it disappoints, even by a little, you are going to get crushed.

Boeing is another example. Great company. P/E of thirty-three?! You've got to be kidding me. This is a major industrial concern - they make airplanes for crying out loud! At a P/E of 20 I'd consider them fairly valued. Here? God help you if they disappoint.

This, ultimately, is the problem with the market right now. We've got a single-digit earnings growth estimate on the broader market yet we have companies priced for 30% earnings growth rates - or more. We have entire sectors - the ones that feed consumer spending - housing in particular - in the ditch, suffering what on a charitable basis is a recession and which, by some measures, could be reasonably called a depression instead.

This is an unstable situation. It means that the market is priced in a zone where small problems can turn into huge plunges in equity prices. While this earnings season may be all sweetness and light, if those "E"s don't start to reflect a reasonable PEG ratio - certainly no more than 2.0 - we've got ourselves a little problem with valuation out there.

So if you want to play the long side here, what do you buy?

That's a problem. There are plenty of good companies, but that doesn't make them good stocks. Frankly, I'm having a lot of trouble finding good long candidates...... which leaves me shorting homebuilders and sitting with a lot of cash.

Midday the market is doing the "oscillate around the zero line" thing. The 10 is down to 5.16%, which you'd think would be good, and oil is down a bit, although still well over $72 - you'd think that move would be good too. Its not translating.

The Nasdaq is being held up by Amazon (up 3.3% - PE of 116 guys, let's not forget!) and GOOG, up almost 1% (another nosebleed deal.) Apple is down a bit and RIMM is sitting pretty much flat. Nothing to be exciting about there.

The DOW is being supported by Boeing and GM, both of which are materially higher. Boeing, in particular, looks overextended - their P/E is up there in "tech stock" range; while they're a great company I just don't buy the valuation. GM is coming off a short-term oversold condition but I wouldn't bet on that one holding up - did someone suddenly wave a magic wand and make their labor cost issues disappear? I don't think so! BA also looks to be setting up a very pretty double top, having failed to break through to the upside. I won't short it here, but if it rolls over I'm in on the short side with them; there might be a very nice trade setting itself up on that one.

Indeed, there's a lot of those (double tops) in the charts right now. How many of those can you have without a number of them failing and dragging down the indices? Gotta get some breakOUTs or you're gonna see some breakDOWN.

Should one capitulate here on the short side? I'm not at this point. Why not? Mostly the VIX. The nervousness hasn't gone away - indeed, it keeps creeping up. Midday, we're up to 15.29, which is seriously elevated over the "all is good, Bull is intact" range - which is more in the 10-12 area. That sort of nervousness can cause the indices to float up, but it also identifies stress, and when there's stress the obvious question is "how many straws can we load up on that camel?" Show me a VIX dropping precipitously down in the 13 range, I'm out of the short side and will buy a run. Absent that I'm a skeptic.

An interesting dichotomy is appearing in the indices and futures - last week we saw futures trading above the indices, typically by 0.2-0.3%. That was the cause of the "drift upward", net-on-net. Today we're seeing the opposite - the indices are slightly above the futures. While we're not where we would trigger a sell program arbitrage game, this is a bearish divergence. Intraday, we've had at least one run at triggering those arbitrage points - those can produce very violent moves in the indices. This is a change from last week when the dichotomy was - all week long - on the bullish side.

In addition beware those who cite the "Put/Call" ratio as supporting a major run in the indices as a contrary indicator. If you look at individual equities the ratio is far stronger the other way. As an example, look at Broadcom (BRCM) - August CALLs have traded 22,000 contracts today alone on the $32.50 and 35 strikes - with the stock at $31.15 - and only a few hundred PUTs. To hit the latter the stock would have to blow through all of its recent resistance levels and basically challenge the double-top from which it declined! Don't get me wrong - I like Broadcom and they have a recent patent lawsuit win under their belt - but this sort of activity is simply unsupportable on any kind of objective analysis given the recent price action and earnings expectations. Admittedly this is an extreme example but the same general pattern holds in a lot of the tech sector. Would someone please pass the bong those guys are toking off?

Today we got this....

"Consumer borrowing posted a hefty increase in May, reflecting the biggest jump in credit card debt in six months.

The Federal Reserve reported Monday that consumer credit rose at an annual rate of 6.4 percent in May, far above the small 1.1 percent gain of April. The advance was about double what analysts had been expecting.

The increase was propelled by a surge in the category that includes credit cards, which rose at a rate of 9.8 percent in May after having a tiny increase of 0.2 percent in April. The jump in credit card debt was the largest since a 14.5 percent rate of increase in November."

Ouch. Yeah, we can't pull out mortgage equity any more, so now we'll run the credit cards. This is a huge net negative in the end, although don't be surprised if the markets consider this a "good thing" as it will keep consumer spending from collapsing - immediately anyway.

The problem with debt in a rising rate environment of course is that the carrying costs go up - a lot - as interest rates rise. This is especially true, of course, for variable-rate revolving debt - that would be credit cards - and debt with a high margin (that'd be credit cards again.)

Who's trying to kid whom here? Consumer debt is up at a record, vastly surpassing wage growth. So how the hell do you service all this debt? Ultimately you do not, which means that when the wheels come off it will not just be foreclosures but a massive wave of bankruptcies on top of it.

Oh, and let's not forget - we did "bankruptcy reform", which means that now, instead of the pain being taken (by banks and lenders) immediately, we instead pushed it back to the consumer, which means that the overhang will persist for YEARS and could turn what was going to be a quick, sharp recession into a full-on consumer-led DEPRESSION.

Why? Well what happens when you go BK but can't discharge the debt? You get garnished. That drives down your standard of living until paid off, which takes years. During that time your credit is destroyed but more importantly (for the economy as a whole) so is your discretionary purchasing power.

But heh, it was all a good idea, right? Was that before or after the housing market went to crap, which was the "out" that the banking industry counted on (go BK, be forced to sell the house to get rid of the garnishment, even in states like Florida which protect primary homes.)

But what now, when the equity in the house is less than the mortgage? Oops!

Now add into that weak ICSC and Redbook same-store sales. Heh, let's see, weaker sales and higher consumer debt. How do you spell "Recession?"

The bankers love it of course - you can't walk off. But the broader economy is going to hate this. Watch this one play out over the next couple of years. When history is written on the entire mess, 10 years+ from now, one of the key items that may be identified as contributing to the depth and severity of the economy malaise will be the alleged "reform" of bankruptcy laws.

The law of unintended consequences has a nasty way of biting with "special attention" paid to those who think they can avoid its impact. Indeed, wouldn't it be just delicious if the very same banks and finance companies who claimed that this reform was "fair" were the ones who ultimately get reamed through a near-destruction in consumer discretionary spending when the inevitable wave of bankruptcies by overleveraged consumers hits them square in the balance sheet?

There was a huge deterioration on builders going into the close. Lennar, Beazer, Centex, Pulte - all fell off a cliff in the last 15 minutes. So much for "buying support" or a "short squeeze" - if that's a squeeze I'd hope that you'd get squeezed better then that when it comes to sex, otherwise you'd never enjoy it!

Going into the close the CNBS cheerleaders were out in force - the Dow and S&P shy of the record closes that would mark a breakout, and yet - no dice today. Indeed, what you've got instead in the last few minutes is a bit of deterioration instead of a charge upwards. It wasn't particularly sharp, but it certainly was there.

And that VIX - hmmm.... up today. Not as strongly going into the close, but still, 15 is 15. Not quite the "all is rosy" scenario that the Bulls would like to paint.

Amusingly, with my net short positions and a "green" index board I'm up today. Not huge, but still, positive is positive. So much for the "wisdom" of covering in the morning. We shall see what tomorrow brings after Alcoa's announcement........

Speaking of Alcoa, here we go!

"Net income for the quarter was $715 million, or $0.81, an eight percent increase from the first quarter of 2007. Net income for the second quarter 2006 was $744 million, or $0.85.

For the first half of 2007, income from continuing operations grew to an all-time record of $1.39 billion, up from last year's $1.36 billion first-half results. First half 2007 net income also reached a record $1.38 billion compared to $1.35 billion in 2006."

That's called "A MISS", and the market read it exactly that way, never mind the "pump monkey" view that they tried to put on with the lipstick. It was still a pig, and the instant reaction was to whack the stock down to $41.31 in the aftermarket, down almost a buck and a half. It subsequently bounced back up some but is still below the 4:00 close.

By the way, that's a ~2% revenue increase on what was a strong currency gain with exports! Take that out, the numbers are dog****. Look at US only, I bet its really dog****. The full 10Q is not yet available - but it doesn't take a rocket scientist to see that when you have huge international demand and yet you miss, domestic has to be in the crapper.

That 81 cents, by the way, was revised today. The real number was 85 cents, which means it really is a miss. They got 2 cents worth of help and 4 cents worth of hurt from items.

The futures didn't like it much either, taking an immediate whack on the S&P. Its not much but then again neither is AA's representation in the S&P.

The pump monkeys are out in force on CNBS on this one, but its not holding much water. Then you add in Boeing's Dreamliner, which has a composite body, cutting aircraft aluminum demand. Duh.

Finally, they're extending their Alcan offer - never mind that Alcan told them to shove that offer where the sun doesn't shine. They weren't impressed and you shouldn't be either!

Now let's look at a few other favorites.... my good buddy the ABX went waterfall on the "AA and A tranches today, with serious deterioration in the AA as well! We are now below the February levels on all tranches, which is new territory - even the "supersafe" AAA doesn't look so good now!

The LCDX looks bad too, although it did recover a bit into the close today. Nonetheless, its not in a good range and is definitely trending the wrong way.

All in all what we've got right now is a bad housing market (duh), Alcoa just reported a miss, real interest rates are backing up, something big is happening in the ABX space but we don't know what yet and consumer credit was up strongly this month on credit cards, but ICSC same store sales have been awful and deteriorating.

Breakout to new highs in a strong Bull run? I don't see it - at least not yet.

Discuss this post here!