The futures this morning were, to a word, awful.

I've been watching /ES7UG last night and this AM (S&P September) and after the plunge immediately following the close yesterday, then the slow bleed last night into the evening hours, it looked like we might recover around 5:30 or so.

No dice. The deterioration since has been steady and relentless, not recovering at all until about 15 minutes before the open - and even then, the recovery has been very modest, just taking us back to the 8:30 AM levels.

This continues to smell like a margin call problem somewhere - a big one too. Selling looks to be triggering more selling, and over and over and over..... this is how major selloffs get going, and if the Margin Call Monster has been let out of his cage, it is unlikely that he's going back in quietly. He's an evil beast and a proven destroyer of trader's worlds.

Durables came in like crap. Down 2.8% on headline durables. Ex transportation was down 1%, revision for previous month down 2.5 (revised down 1%)

Business investment was down 3% (ex-defense and aircraft), which is a significant turndown.

These numbers are far worse than expected.

The futures reacted instantly and not in a good way. There was a huge bid in treasuries, driving rates down, and a huge sell in the stock futures. Both bounced but remain in negative territory, with the 10 threatening to breach 5% to the downside.

Mortgage applications were down 3.4% last week, which appears to be appropriately in line with both expectations and the weak housing data we've received thus far this week.

In more ominous news I heard a rumbling this morning that the Fed may start to look at the headline inflation rate instead of ignoring it and using just the core. This, if it happens, would likely lead to a near-immediate surprise interest rate hike, which would be tremendously bad for the markets - simply on the surprise factor. I rate the probability of this happening moderately high - anyone who has half a brain in their head can see that the food and energy series is not volatile any more - its been consistently elevated for over a year. The rationale for excluding these two items originally was that they tended to be very high one month and then low or even negative the next.

But over the last couple of years, food and energy have continued to rise in price at a rate which is increasingly significant. Food inflation has been pushing a 10% YOY inflation rate, while energy has been just as bad if not worse, and neither shows any sign of abating.

The weekly energy inventory came in with crude building but both gas and distillate (diesel fuel) drawing down. This is not a positive thing for gas prices; the problem is, once again, refinery utilization. This is likely to continue.

I love this article from Bloomberg regarding the CDO/CLO mess, which, by the way, is not over, nor is it contained, no matter what anyone might try to tell you:

"The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand.

Their focus is likely to fall on how to assign prices to complex derivatives, created by cooking together different flavors of securities whose values are driven by other assets such as stocks, bonds or mortgages.

The efforts by Bear Stearns's creditors to extricate themselves from their investments have laid bare one of the derivatives market's dirty little secrets -- prices are mostly generated by a confidence trick.

As long as all of the participants keep a straight face when agreeing on a particular value for a security, that's the price. As soon as someone starts giggling, however, the jig is up, and the bookkeepers might have to confess to a new, lower price. "

Naw, you think? :->

Isn't the more common word for that "fraud"? Its amazing how the straightest shooters on the street - Bloomberg - still won't use the right word for things. "Confidence game?" Pull the other one guys.

Not that this really surprises; as soon as the proper word for this activity starts getting used there will be some, uh, "problems" for a number of street participants. Like perhaps a few perp walks, high profile trials, maybe even some slightly-wider-than-usual stripes on the clothes these guys wear for a couple of decades.

My somewhat-rhetorical question - for how long can people in the press and elsewhere continue to not use the proper word for "confidence game?"

John Dugan, the head of the OCC, had this to say today:

"To the extent that banks' exposure rests on valuations, yes, absolutely, we're concerned about it and watching it," Dugan told the summit via telephone from Washington. "The fact that valuations can change so significantly when there are market disruptions is one of the things that I think all the regulators are paying very close attention to."

I'll believe it when I see it John. So far the evidence is that the OCC doesn't give a good damn about this abuse, as its been going on for years now, and I've yet to see ONE big lender audited by you guys and/or seized as a consequence of mispriced "assets". I think you better be paying a bit more attention to this lest you find yourself answering a lot of very tough questions in front of Congress if and when some depository institutions blow up in your face and the taxpayers are forced to make good on that FDIC insurance!

We closed out today with the S&P above the critical 1490 level but under the 50 at 1507.9, so despite the morning's apparent intent to violate (and stay violated) that brought in buyers instead of sellers. A bit surprising but it is what it is. Unless we blow back through the 50 on the upside there's no confirmed direction, and we wait for tomorrow to define whether we've now got a channel between the 50 and 1490 (which ultimately will squeeze out) or whether we have an incipient break in process.

My thesis thus remains intact - until we see a close under support on the SPX we don't have confirmation of a trend change and today, it has been denied. As such this afternoon I took some profits off the short side, ever mindful that while Bears and Bulls both get fat, Pigs can and do get slaughtered. I've got a SDS position I took this morning; if we go back through the 50 I'll lick my wounds - let's see what tomorrow brings.

This may have been nothing more than an oversold rally. Its difficult to know. Volume picked up in the last couple of hours, but the move up was decidedly lackluster up until 2:00 ET or so in terms of volume. As such I wouldn't read too much into today's price action; clearly, the market wants to hear what the Fed has to say - although I can't imagine that any surprise the Fed might unleash would be a good one, and my expectation is for no surprise at all.

Finally, I stuck the forum code up yesterday in a fit of frustration when Yahoo's boards were having trouble. I had no idea the demand was this strong for a format like that or I would have done it a couple of months ago. The pageviews there have been astounding as have the user registrations, considering that it has been active for less than 24 hours. Both the forum and the ticker blog will continue; I've no intent of getting rid of the blog, as I like the more concise, less stream-of-consciousness format. Both the forum and the ticker itself are running on my internal network infrastructure, and neither has taken any significant strain - so no worries that the load will be overwhelming. Tell your friends - the more the merrier!