Friday, August 31, 2007

A Great Explanation for the So Called 'Bin Laden' Options Trades has figured it out. Click Here.

S&P Up 16; Dow Up 119

A Bush/Bernanke offensive sent stocks higher on the notion that both men have donned their housing bubble/credit crunch capes and will be our heroes. Our spies in Jackson Hole snapped this shot of Bernanke being pulled over for speeding while rushing to monitor the credit situation.

The FHA part of the Bush plan will help an entire 80,000 people qualify for FHA insured mortgage refinancings... 80,000. Yes, 80,000. Did I say, 80,000? I keep saying it thinking that if I say it enough, we'll somehow become impressed. While I'm not for bailing out nitwit speculators who knew just enough to be dangerous, 80,000 compares to 2-million adjustables that will reset over the next 2 years. Oddly enough, last night the administration pre-warned the press that this Bush program would cater to certain subprime borrowers who were facing foreclosure. Yet today the president told us the FHA insured mortgages for - the chosen 80,000 - would be for people with "good credit". Good credit and subprime are not synonymous, so the administration is apparently unclear about what a 'prime' borrower is and what a 'subprime' borrower is. Let's just hope the President won't declare the subprime battle won and done in a few weeks.

While that market rallied today, the fade into the close was noticeable. The minute chart below shows a quick move to the exits in the final 15 minutes. Unless there's more great news in the view of the bulls over the weekend, we could see an extension of today's late day exodus come Tuesday.

The chart below shows engulfing red candles following white bodied candles where stocks ended off the highs of the session. This happened in early August and when the market peaked in mid-July... something to mindful of.

NYC Housing Bubble Blog

Folks, a hat tip to, for throwing my home price story up on the NYCHousingBubble blog. This is another great resource. Check it out!

Thanks, too, to

September Can Be The Cruelest Month

August may be going out with a bank, but investors are bracing for what could a bad September -- knowing that it has a well-deserved reputation for being the worst month of the year. spacer

Since 1929, stocks have declined an average 1.2% in September, compared with an average gain of 0.59% during all months of the year.

"There's been a frequency of negative numbers," says Sam Stovall, chief investment strategist at Standard & Poor's. "September is the only month in which it falls more than it rises, meaning that since 1929 the S&P has been down 53.57% of the time in September."

Why is September so bad? Part of the reason is a seasonal slowdown of money flowing into the market, so there's less new money coming in to push up prices. In additon, Stovall says some mutual funds "have October as fiscal year-end, and may be selling losing positions from mid-September until mid-October."

Tense This Year

This September is likely to be particularly tense on Wall Street. A wave of mortgage defaults has sparked a worldwide credit crunch, forcing the Federal Reserve and other central banks to inject billions of dollars into the financial system in recent weeks.

The Fed also cut the discount rate earlier in August and is under intense pressure to cut its benchmark federal funds rate when it meets Sept. 18. Stocks have been subject to steep declines on worries that the Fed may hold off on changing the fed funds rate. But there's also concern that the central bank may be forced to cut rates because the housing and credit crunch will push the economy into a recession.

"If a rate cut happens, it will be because things deteriorate dramatically," says Michaal Panzner, a Wall Street trader and author of the book Financial Armageddon. "The Fed is managing in text book fashion and doesn't want to go back to the Greenspan days of quick rate cuts and that will weigh on prespective."

There's also a worry about a slowdown in consumer spending, the main driver of the U.S. economy. Although Americans are continuing to spend, many retailers are forecasting a weak back-to-school and holiday shopping season.

Due for Down Month

"We're due for another down month--fundamentals bear that out," says Panzner. "Earnings are always a cyclical phenomenon and that will dovetail well with what we'll see on the ground with back to school sales."

"The refocus again will be on the consumer next month, which will lead to more questions about recession," Panzner adds. "We're going into September with wariness over where the next shoe is going to drop."

There is one positive note among the gloom: stocks have actually gone up the past three Septembers. Last year alone, the S&P 500 rose more than 2% during the month after the Fed stopped raising interest rates.

Stovall says more investors also have become aware that Septembers are traditionally bad and have panicked less.

"A pessimist would say it's time to bail out of the market," he says. "But the person who sees the glass as half full would reason that stocks go up over the long haul."

Thursday, August 30, 2007

S&P Declines 6; Dow Falls 50

The path of least resistance... down... simple as that ahead of the Bernanke speech and with more brokerages downgrading one another. Tech was supportive on the notion that technology companies are less debt encumbered and thus a safe bet in this market. That's all well and good unless the economy goes down the crapper and tech orders go with them - but for now tech is seen as the safe haven. I guess pigs do fly. Still, for a 6 point down day in the S&P, VIX jumped over 5% as fear remains.

Bernanke To Make the Markets Less Cranky?

The text of Gentle Ben's speech will be released at 10 a.m. New York time and I wouldn't put it past the Fed chief to say something that could amount to a bull raid on the market. Recall, on March 21, stocks staged a rally after the Fed switched its bias. In April Bernanke told the markets the Fed was monitoring subprime woes and a few days later Freddie and Fannie injected billions into the system, helping the market take off. Just a few weeks ago, Bernanke snuck in the discount rate cut before the market open on an expiration Friday and again the stock market went through the roof.

Perhaps I'm giving Bernanke too much of the benefit of the doubt, but the guy has built up a bit of a track record by saying and doing things that have incited some bullish responses.

But the issue remains - how does a rate cut of a quarter or a half get people to resume participating in risky speculations that had once upon a time given a boost to the system? A 2 point cut in the overnight bank lending rate, as AutoNation's CEO Mike Jackson has been begging for would certainly reignite things. But that's the fantasy of a CEO-easy-money-crackhead who needs more cheap-money-crack so his customers can buy more cars than they need. Bernanke wants to be the anti-Grennspan by many accounts and seems to want to get away from the model of lowering fed funds at the blink of an eye.

Push, Push in the Bush

To make things more intriguing, there are reports that our President is going to introduce some token measures to get folks through the rough mortgage times: Bush Plans Steps to Help Troubled Borrowers. The administration never ceases to amuse with the thought that it can "jawbone" banks to hold off on foreclosures. That's not the way things work nowadays. Decisions on foreclosure are largely automated and rest with the investors of mortgage backed securities. They call the shots and tell mortgage servicers what to do. You can bet the MBS people are going to continue to give the thumbs down on loans that go past 90 days past due and release the lions.

Will a Bernanke-Bush one-two lift the markets ahead of a long weekend, or will it be too little, too late? Stay tuned.

Bubble Troubles Bubble

Freddie Mac profit slips 45% on credit provisions Sure, let them take in more mortgage paper.

H&R Block May Close Loan Business as Losses Double (Update1 The OptionOne deal always had a stench to it

H&R Block May Close Loan Business as Losses Double (Update1 Well, of course it's heightened

Sears Profit Falls 40% on Lower Sales; Stock Drops (Update2) Much of this is Sears specific -- Eddie Lampert is not a retailer... and a guy who can't hire the right people. This is also indicative of the consumer... and a greater interest to make that dollar go further at better run and stocked stores.

Also Wal Mart (WMT) was downgraded to Sell at Merrill Lynch.

Really the big kahuna... the commercial paper market: Warning on US commercial paper. Gartman has been early, way early... but he's right and coming into his element now.

Recession Odds Increase

Accurately predicting a recession is about as easy as pinpointing the landfall of a hurricane several days out. That's still not stopping CEOs, government leaders and economists on both sides of the fence from weighing in on the matter with increasing frequency.

The U.S. economy with a $13-trillion output of goods and services, as guaged by Gross Domestic Product, or GDP -- is not only the world's largest economy, but thus far has been a reslient economy.

This week the government released its second estimate of growth during the second quarter of the year. A rapid 4% growth rate was reported. The second quarter seems like the distant past as the "perfect storm" of events has converged to threaten future economic growth.

The problems range from a rapidly declining housing market, wild stock market swings, to credit market turmoil which is drying up financing to a wide range of consumers and businesses -- far beyond the original flash point of defaults by subprime borrowers.

The slump in the housing market and the loss of easy credit has sparked worries that consumers could take the economy over the edge if they become tapped out, or become vulnerable to job losses.

Consumer spending accounts for about 70% of GDP and during the housing boom - they felt wealthy because of cash from the home equity ATM and a wealth effect from rising home values. Now the housing ATM reads 'insufficient balance' and the wealth effect from rising home prices is all but a fond memory.

"Out there, there will probably be some kind of recession, whether it's a year or so, I wouldn't know, I'm not a trained economist," says John Bogle, founder & former CEO of The Vanguard Group. But Bogle, who points to "cycles that come and go" as reason why things will turn negative, assigns about a 75% chance the economy will contract, but didn't say by how much.

A text book definition describes a recession as two consecutive quarters of falling GDP. The National Bureau of Economic Research, also known as NBER, goes a few steps further: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The NBER is the group charged with officially declaring the start and end of a recession -- the last one being in 2001.

Optimists, however, remain. At the U.S. Chamber of Commerce, it's chief economist doesn't see a recession over the next 12 months.

"It's clear over the last year-and-a-half the economy has downshifted and things are not doing quite as well. But having said (that), I don't think we're on the precipice of a recession," said Martin Regalia, vice president for economic policy at the U.S. Chamber of Commerce. Regalia remains in the camp that sees defaults in subprime mortgages as a largely contained event that won't spread to broader housing and lending markets.

That view is in stark contrast to chief executives like Michael Jackson of AutoNation who sees a crimped consumer. "You're 17 rate increases have worked, mission accomplished," said Jackson of what he would advice the Fed to do. "Be careful, you've brought recession into play here. From my 40 years in the business, I look at the American consumer. They've pulled back, and everytime they pull back you bring recession back into play."

Most economists are unconvinced that recession is on the horizon. The consensus forecast of 50 top economists surveyed in early August for the Blue Chip Economic Indicators report called economic growth to slow but see it remaining above 2% through the end of 2008.

"The consensus of economists has never forecast a recession. That doesn’t mean individuals haven’t, but the consesus forecast tells you little," says Paul Kasriel, chief economist of Northern Trust. "The consensus always ends up being surprised."

Kasriel uses two indicators that he says are both flashing a "recession signal".
"My first indicator is simple and has correctly called recessions since 1970 with no false readings," says Kasriel.

His indicator looks at two variables. One is the spread between 10 year treasurys and the Fed Funds rate. The other tracks the Fed's monetary base.

The first says, Kasriel is "negative with fed funds above the 10 year treasury, and the quarterly year over year change in the Fed's monetary base is contracting"
When both those conditions exist, it suggests recession is on the way, according to Kasriel.

His other indicator is looking at the Index of Leading Economic Indicators, or LEI. Kasriel says the quarterly year over year change in the LEI has been negative. He says that indicator has worked over the nearly 5 decades with the exception of a period in 1967.

Kasriel notes that while the bulls will try to celebrate today's likely upward revisions to 2nd quarter GDP, "it's just a look back and that things can change very rapidly".

He also cautions that weakness in personal consumption in the 2nd quarter report was a noticeable red flag, running at just above 1%.

While he doesn't think we're in a recession now, he says we're on the "cusp" and said there have been past instances where economic growth has been strong one quarter and the next quarter would mark the start of a recession.

Thanks to housing, recession is not far away.

Wednesday, August 29, 2007

Bogle Boggles

A brief quick note. One of the most noteworthy comments on CNBC today came from Jack Bogle, the founder of Vanguard. He said that he sees a 75% chance of recession, though he didn't specify when. Bogle kept it simple, noting that cycles come and go and that the good times are cycling out.

Bogle also noted that in his 55 years in the financial markets, he has never seen markets as volatile, pointing out that total share turnover now exceeds 150% during the course of a year as speculators have taken over the market. Share turnover, he said, was about 20% when he was starting out, oh so long ago. Yes, speculators and investors -- two completely different entities.

Steps and the S&P

3 steps down and your out, is the potential I see on this chart. The first step being the first test of 1430 in early August, the 2nd step being the brief test of 1375 later in the month. Yesterday we retested 1430 and today rebounded back to where we were at Monday's close leaving the market far enough away from a 3rd step re-test, for now.

But there's a lot more to it than technical analysis.

The impact of expected Fed action in September remains a wild card. The discount rate cut took the market off the lows nearly 2 weeks ago, but the inertia remains from a variety of systemic ailments. Gentle Ben will be speaking Friday in Jackson Hole, Wyoming. Will he engage in further jawboning ala the love note to Chuck Schumer to try to instill further confidence? Ultimately, the market is demanding real action by way of a fed funds rate cut for not only a psychological boost, but to remove inertia. Words won't be enough and time is getting tighter for the Fed ahead of its 9/18 policy meeting. The pyscho boost from a fed funds cut would give temporary further relief to the stock markets, etc, but will the Fed by giving back 1/4, or 1/2 point take real pressure off areas like commercial paper, or help a few hundred billion in LBOs receive their funding in the next 60 days, or save borrowers from defaulting on the coming wave of ARM resets?

S&P Up 31; Dow Up 247

A little letter from Ben to UpChuck Schumer lifted the market today.

Wall St rallies after Bernanke pledge

Ah, so much love on Broad and Wall today...

The Honorable Charles E. Schumer
United States Senate
Washington, D.C. 20510

Dear Senator:
Thank you for your recent letters of August 8 and 22, in which you express concern about the potential effects of volatility in financial markets and the tightening of credit conditions on homebuyers, consumers, and the economy as a whole.

I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets. As you recognized, the Federal Reserve has also taken steps to increase liquidity in the markets. In particular, our changes to our discount window program are designed to assure depositories of the availability of a backstop source of liquidity so that concerns about funding do not constrain them from extending credit and making markets. Also, the Federal Open Market Committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate subprime mortgages. Over the next several years, many such homeowners will face significantly higher monthly payments and, consequently, an increased risk of losing their homes to forced sale or foreclosure. The federal banking regulators have encouraged banks and thrifts to work actively with troubled borrowers to modify loans or to refinance as needed to avoid default or foreclosure and have jointly issued guidances to address underwriting and disclosure practices related to subprime mortgage lending.

The twelve Federal Reserve Banks around the country are working closely with community and industry groups dedicated to reducing the risks of foreclosure and financial distress among homebuyers. The Board is also engaged in these issues; for example, Governor Randall Kroszner serves as the Federal Reserve’s representative on the board of directors of NeighborWorks America, which has a program to encourage borrowers facing mortgage payment difficulties to seek help by making early contact with their lenders, servicers, or trusted counselors. And as I noted in my testimony in July, in order to strengthen consumer protections, the Federal Reserve Board is currently undertaking a comprehensive review of the rules regarding loans subject to the Home Owner Equity Protection Act as well as some rules pertaining to mortgage-related disclosures under the Truth in Lending Act.

It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example. One public agency with considerable experience in providing home financing for low-and moderate-income borrowers is the Federal Housing Administration (FHA). The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets.

As you note, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are currently assisting in subprime refinancings. However, the GSEs’ charters limit their ability to take on higher-risk mortgages and their programs are relevant only to a relatively small share of subprime borrowers. The GSEs should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. The current caps on GSE portfolios–which were imposed for safety and soundness reasons-need not be lifted to allow them to accommodate new borrowers. Currently, the GSE portfolios include substantial holdings of GSE-guaranteed mortgage products, which are easily placed in the private secondary market even under current conditions. Thus, the GSEs could readily sell these securities to make space for new mortgages if they wished to do so. Policymakers may also want to encourage the GSEs to increase their mortgage securitization efforts, which are not constrained by their portfolio caps.

We will continue to keep the Congress informed of developments in the subprime markets and in the credit markets more generally. As you know, Federal Reserve governors and staff have made numerous appearances before the Congress and in other forums on subprime-related issues. Board staff members have continued to brief members of Congressional staffs on these matters. Board staff members are also assisting the Government Accountability Office in the report that they are preparing that will provide a comprehensive review of developments in the subprime mortgage market.

Again, thank you for your interest and please be assured that we are following these issues closely.

Ben S. Bernanke

Tuesday, August 28, 2007

S&P Down 34; Dow Down 280; Wilshire Down 343

Another 2% day for the markets - down 2%, that is and across the board.

I wasn't paying attention yesterday, but an options pro on the street warned me this morning of what he called a "dispraportionate" rise in the VIX and VIXN yesterday relative to declines on Monday. Yes, fear remains as folks wrap up their summer holidays.

If you thought a "conduit" was a pipe that wires are run through, YOU ARE INDEED CORRECT, SIR (in my best Ed McMahon voice addressing Johnny Carson). However, in the financial markets "conduits" are typically bank-owned credit investment vehicles, or funds, which hold asset-backed securities that are bundled into packages and backed by short-term debt from the commercial paper (CP) market. With yields up in the CP market and people viewing conduits as used TP there's been paralysis in this vital part of the credit market, which begets paralysis elsewhere.

The problems in the CP world clearly demonstrate that the discount rate cut is a non starter.

Today we found out that State Street (STT) reportedly has a $20 bln exposure to conduits. It begs the question that if a seemingly venerable citizen of the financial world has this kind of exposure, who else is up to their eyeballs? This is sort of like Senator Craig of Idaho. Nice suit and tie, American flag on the lapel, but then it's revealed that he was busted for a "brokeback" bathroom stunt.

Housing numbers look weak... no surprise: Drop In Home Prices Shows Signs of Worsening. In that piece that I did for, I had the chance to chat with Gary Shilling, I think one of the most keyed in people to understanding what's going on, The outlook for the housing industry looks dreadful. Anyone looking for opportunities to buy by the end of this year, or even early next year will be early, way early.

Home Price Decline to Accelerate - Count On It

It won't be pretty folks. If Goldman and Shilling are right, and historically housing bubbles have always deflated back to about where they started, consumer spending will die out and we'll see a recession by early next year.

Gary Shilling, who I chatted with today for this piece for CNBC and who is quoted below, thinks we will see a recession due to the housing crunch by the end of the year. Good luck folks.

If you think the decline in home prices is bad now, just wait.

Two reports out his week show the once high-flying housing market is quickly losing altitude and that prices are likely to head still lower.

According to the S&P/Case-Shiller Home Price Index released Tuesday, prices fell 3.2% in the second quarter, the sharpest decline since the index was created in 1987. The pace of decline accelerated from 1.6% in the first quarter.

On top of that, the National Association of Realtors reported on Monday that the median price of existing homes eased 0.6% in July, to $228,900.

Both reports portray weakening housing prices, but the declines have been in the single-digits or smaller so far. That may be about to change.

"I think we’re yet to get to the main event," said Gary Shilling, president of A Gary Shilling, a money-management firm. "We continue to look for a 25% decline in median single-family house prices. I think this is really just getting started."

Of course, for first-time homebuyers, a decline that big would be good news. But for existing homeowners, a 25% drop could be devastating, Shilling said.

It "would wipe-out the equity of the average homeowner who has a mortgage," he estimated.

Shilling's forecast may sound as if it's on the fringes, but he said, "a number of people are not in our camp, but moving toward it."

Last week, Goldman Sachs chief economist Jan Hatzius said in a note to clients that "our working assumption has been that U.S. home prices are about 15% overvalued."

And On Tuesday, another Goldman economist, Andrew Tilton, expressed concern that prices are falling at a faster-than-expected rate.

"It does look like there's a bit of acceleration in the pace of decline and this comes before the credit crunch," Tilton said.

A Variety of Issues Today

Merrill lowers Bear Stearns, Lehman and Citi... only to Neutral? Ok.

Home Prices: US Home Prices Fell by Record in Second Quarter, Index Shows... no surprise to anyone who's paying the slightest amount of attention, but still - YIKES.

Barclays shares fall despite Sachsen denial... There's always three sides to a story, in this case: Barclay's, The FT's and..... THE TRUTH.

I'm not a huge fan of the Times of London's business reporting. During the LBO boom they called 20 of the last 5 takeovers. Are they now going to call 10 of the next 5 banking dislocations? State Street bank has highest exposure to conduits

Monday, August 27, 2007

National Mortgage News: Subprime & Alt-A Sharply Deteriorates

"The default rate on subprime mortgage loans hit a record 13.44% in June after rising 100 basis points from that of May, and the foreclosure rate jumped to 5.44%, which also topped the previous record set back in August 1997, according to a Friedman Billings Ramsey report. The default rate on alternative-A loans moved up from 2.69% in May to 3.0%. "The default rates on alt-A and subprime loans deteriorated sharply in June from May, after six months of gradual erosion," FBR managing director Michael Youngblood said." (read more here, subscription required).

The above taking place even before further financial world angst set in during July and August

Unusual Options Trading In S&P Puts Recently

This was a column that I whipped up at today (

What does it all mean? Anyone's guess since as Andrew Wilkinson points out, we don't know who the end users are. Many of the options involved are in the September 1300 to 1400 strike range, but there also a 700 strike September put with OI over 100k... probably just specialist games.. but who knows.

Not everyone on Wall Street is convinced that the worst is over.

In fact, some investors are betting tens of millions of dollars that the market is
headed for a selloff--a major selloff.

The reason: worries about a worsening credit crunch, along with speculation that the Federal Reserve may defy expectations and hold off on cutting interest rates at its Sept. 18 meeting.

So far, over $500 million in so-called put options have been
purchased betting that the benchmark Standard and Poor's 500 index will tumble
anywhere from 5% to 11% in September.

Some investors are even buying put
options calling for 52% decline. A "put" option increases in value as the
underlying stock or index falls.

To put it in perspective, a 5% drop in
the Dow Jones Industrial Average would be the equivalent of 667 points. An 11%
decline would equal 1,468 points. And a 52% drop? You don't even want to know.

The upshot is that some major investors are putting up big money that
the market is facing a major decline.

"There is still fear and investors
are buying crash protection," says Todd Salamone, senior vice president of
research at Schaeffer's Investment Research.

Of course, there are always
investors betting on big declines--they're called bears. What's unusual is the
amount of money being put up on such a doomsday scenario.

"The activity
in those puts has been a lot more aggressive then we have seen in the past,"
said Bill Lefkowitz, options strategist at brokerage firm Finance Investments.
"Part of it is the environment and volatility where the Dow Industrials can
easily swing over a hundred points during the day, or session to session."

Salamone of Schaeffer's points out that the index options have been "put
dominated over the last several months." And the bets may have as much to do
with hedging portfolios--basically an insurance policy you hope you don't
need--as much as outright speculation.

"We don't know who the end users
of these options are and often they are specialists, pros looking at arbitrage
plays, so the common man doesn't necessarily need to be concerned," adds Andrew
Wilkinson, a senior market analyst at Interactive Brokers. "But it’s a
legitimate build of people wanting protection against the next 10% down should
it come."

Whatever the reason, Lefkowitz says worries about what the Fed
will do about interest rates are spurring big investors to buy protection in
case of a major market drop.

"If the Fed doesn't cut Fed funds, the
options market is telling you that the overall stock market will come down
hard," says Lefkowitz. "We could be quickly under the 1400 level of the S&P
500 if the Fed doesn't act."

Fed-fund futures and a variety of market
pundits have been forecasting a 100% likelihood the Fed will lower the benchmark
lending rate, now at 5.25%, meaning there's no room in the market from the Fed
for a surprise.

Lefkowitz also says the activity isn't strictly driven
by money managers looking to protect portfolios. The put options are tempting
enough for speculators to jump in. He says even if the market doesn't fall to
below S&P 1400, the put options could still easily rise in value by "20, 30,
40 percent if we saw another large down day."

S&P Down 12, Dow Down 58

It was a dull day, but beneath the surface worries lurked over how much more crunch is ahead in the credit crunch following Sunday's Home Depot (HD) news (Banks Play Hard Ball With Home Depot Forbes).

Existing home sales fell in July, but the problem with this series is that it's a sampling that largely reflects completion of deals signed a few months back... way before the worst of the credit crunch hit. Tomorrow the quarterly Case Shiller index will be released for the 2nd quarter. What's the best indicator of what's going on TODAY? Call a local Realtor and have her take you around to some fairly inexpensive and expensive homes and find out how long they've been on the market and what original listing prices were - then you'll have your answer... Very Crappy. Better yet, attend some Sunday Open Houses around the neighborhood.. again you'll get the same answer.

Sunday, August 26, 2007

Will Home Prices Retrace to 1995 or 1997?

The short answer is no one knows.

Perhaps it will be somewhere between what's ahead in this post and those who glibly feel there will be little price depreciation - "that it's different this time, etc"...

I had thought I had seen most of best blogs out there on things financial. This morning I stumbled upon this guy, Charles Hugh Smith, who makes some salient points about speculative bubbles, retracements and the disconnect of present home values vs. average national incomes of Americans.

Two Irresistible Reasons Housing Will Retrace to 1997 Prices

While I realize that U.S. housing is not the Nasdaq stock market, or even what the Japanese real estate market was, Smith might be on to something, unless someone is going to pipe up and tell me that reversion-to-the-mean after a bubble doesn't apply in housing.

Back to 1995, or 1997 prices? Wow, that would be draconian for most and is would seem to many to be a doom and gloom scenario. Have these "doom and gloom" corrections occurred in the past in housing? If you were to take a myopic view and use something like the HPI which goes back a whopping 17 years!, you're happier than a pig in you know what that just a little depreciation in housing is all that will happen. But longer perspective, for those of us who are intellectually honest, is needed. Let's go back the "Gay-90's"... no, not Greenwich Village in 1990, but 1890.

The above figures are adjusted for inflation.

Even with alchemical like rejiggering to bring the trend line up 30% to account for whatever silly whim, or blind-bull argument there is, there would still seem to be a ton more downside in housing then the consensus expects. Something to think about.

The Fed with its recent helicopter drops and bending of the rules is already thinking about this and if present behavior is any indication, the central bank will try its hardest to make sure there is no such return to '97 prices.

Society would become a bad place if reversion to the mean in housing took place.

Money and Sports: Michael Vick

Sometimes there is some justice in the world: Vick's wasted fortune of historic proportions. This guy is not only going up the river for his blood lust, but will have to seek post-slammer employment in perhaps the food service, soda bottle deposit-redemption, or cleaning industries.

Ding Bat Dingell

If your home has more than 3,000 square feet, Congressman Dingell wants to make filling out your tax return easier by eliminating a key deduction.

Dingell's proposal to limit mortgage tax break has critics (Freep)... that's an understatement

The Mortgage Implode-o-Meter Is being Sued!!

I cannot believe the audacity of corporate entities out there -- to sue a web site that has given invaluable information to the public. is being sued by Loan Center of California.

Details about the litigation are here: Good grief, after you read that, you wonder why the company would spend money to sue a small website when warehouse funding lines are being pulled on it. Hello?

Aaron Krowne has done an excellent job reporting on the mishaps of the mortgage industry, please consider contributing to his legal fund at his main page: where this is a link to donate.


Saturday, August 25, 2007

A New Breakfast Cereal!

Thanks to for the laugh!

Redstone Thinks He Will Live Another 50 Years?

He's already 84.

Sumner's superjuice Sumner Redstone plans to live 50 years more, drinking MonaVie. (more).

Good luck to him, though I may try some of that MonVie juice to see if I can feel like a guy in my 40's, like Sumner now does, instead of an 84 year old!

The story got me to thinking about one of Abraham Lincoln's favorite poems, Mortality, by William Knox (the last stanza summing things up quite nicely):

Oh, why should the spirit of mortal be proud?
Like a swift-fleeting meteor, a fast-flying cloud,
A flash of the lightning, a break of the wave,
He passes from life to his rest in the grave.

The leaves of the oak and the willow shall fade,
Be scattered around, and together be laid;
And the young and the old, the low and the high,
Shall molder to dust, and together shall lie.

The infant a mother attended and loved;
The mother that infant's affection who proved;
The husband, that mother and infant who blessed;
Each, all, are away to their dwelling of rest.

The maid on whose cheek, on whose brow, in whose eye,
Shone beauty and pleasure - her triumphs are by;
And the memory of those who loved her and praised,
Are alike from the minds of the living erased.

The hand of the king that the sceptre hath borne,
The brow of the priest that the mitre hath worn,
The eye of the sage, and the heart of the brave,
Are hidden and lost in the depths of the grave.

The peasant, whose lot was to sow and to reap,
The herdsman, who climbed with his goats up the steep,
The beggar, who wandered in search of his bread,
Have faded away like the grass that we tread.

The saint, who enjoyed the communion of Heaven,
The sinner, who dared to remain unforgiven,
The wise and the foolish, the guilty and just,
Have quietly mingled their bones in the dust.

So the multitude goes - like the flower or the weed
That withers away to let others succeed;
So the multitude comes - even those we behold,
To repeat every tale that has often been told.

For we are the same that our fathers have been;
We see the same sights that our fathers have seen;
We drink the same stream, we feel the same sun,
And run the same course that our fathers have run.

The thoughts we are thinking, our fathers would think;
From the death we are shrinking, our fathers would shrink;
To the life we are clinging, they also would cling -
But it speeds from us all like a bird on the wing.

They loved - but the story we cannot unfold;
They scorned - but the heart of the haughty is cold;
They grieved - but no wail from their slumber will come;
They joyed - but the tongue of their gladness is dumb.

They died - aye, they died - we things that are now,
That walk on the turf that lies over their brow,
And make in their dwellings a transient abode,
Meet the things that they met on their pilgrimage road.

Yea, hope and despondency, pleasure and pain,
Are mingled together in sunshine and rain;
And the smile and the tear, the song and the dirge,
Still follow each other, like surge upon surge.

'Tis the wink of an eye - 'tis the draught of a breath -
From the blossom of health to the paleness of death,
From the gilded saloon to the bier and the shroud
Oh, why should the spirit of mortal be proud?

S&P Up 16; Dow Up 142

Is the cover of the latest issue of Fortune, one of those contrary magazine indicators? I'd say the shock has only just begun, but what do I know. The people in the know are profiled here: Buffet,Mack, Rogers, Paulson, etc. I've read through much of the Fortune articles which feature the usual talking head postulating on what happens next. The profiles section feature statements by the Buffets in their own words.

Away from the sensational Fortune cover... The angst continues at the Fed as it pulls out all the stops to stabilize the "conduit" of the financial system. A primary reason for Friday's stock market rally: New York Fed Accepts Asset-Backed Paper as Collateral (Update3), Fed accepting asset-backed paper as collateral, Banks Have $891 Billion at Risk in CP, Fitch Says (Update1) (thanks to Stuart for asking the insolvency quesiton).

But the stop-pulling doesn't stop there. The Fed is even nicely bending some rules: Fed bends rules to help two big banks (thanks to DonB for bringing this my attention).

There are many dark connotations to the above developments if they don't work, which seems likely since this problem is ultimately a OTC derivatives problem - yes, that little market with notional value of $30 TRILLION. It still appears, from a near term charting standpoint, as if the market has a shot at testing the 1500 level on the S&P 500 (a little above the 200 day moving average) perhaps as early as next week, or early in September. As we get deeper into the month, a retest and even breaking of the August lows is quite possible as everything from bank writedowns, the Fed meeting, earnings pre-announcements will be thrown at the market in September.

Friday, August 24, 2007

Getting A Mortgage Still Easy if You Have Near Perfect Credit

Until a few months ago, it seemed that anyone who could fog up a mirror could get a mortgage.
Now, with a credit crisis roiling the industry, some consumers might think they have a better chance winning the lottery than finding a home loan.

The truth is that you can still get a mortgage. It just may not be as easy--or as cheap--as it was over the past few years.

"If you have good credit, can document your income and have money for a downpayment, it’s largely business as usual," says Greg McBride, senior financial analyst at

Borrowers seeking non-"jumbo" mortgages of $417,000 or less and have good credit "will get the red carpet rolled out for them at the bank," McBride adds.

But if you are lacking in any of that criteria, or need to get a jumbo loan, be prepared to be turned down or pay a much higher rate.

"If you have poor credit, cannot document income, or looking for 100% financing -- it's tough sledding," says McBride.

Subprime loans for people with credit scores of 600 or less? Forget it. The standards have been tightened to the point that subprime mortgages, 20% of the mortgage market last year, are a thing of the past.

Also gone are a variety of products ranging from "no-money-down loans" with low teaser rates to interest-only mortgages that increase the amount owed to the lender over time.
And for borrowers between prime and subprime, the so-called alt-A loans, getting a mortgage will also be harder to find.

"They tightened up the market and there are less lenders to utilize," says Cindy Saxman, broker and owner of Guilford Funding in New York.

"A lot of the banks have withdrawn their no-income verification financing, and lifted rates and requirements for larger loans. There are still lenders out there, but it's a tough situation for many who were once able to qualify."

Even for borrowers with good credit, getting a jumbo loan of $417,000 and above could cost more than one percentage above the rate you would pay for a so-called conforming loan, says Bankrate's McBride.

The reason is that Fannie Mae and Freddie Mac, the government-sponsored mortgage backers, can't buy jumbo loans from banks, so they're riskier for lenders to make.

Guilford's Saxman says a borrowers' FICO score remains the top criteria that lenders use to set the interest rate.

According to, a borrower with a top level credit score of 850 can expect to pay about 1.6 percentage points lower than a borrower with score of 620.

On a $216,000 30-year fixed-rate mortgage that would mean the lower scored borrower would pay $82,000 more over the life of the loan versus a borrower with a higher score.

The type of loan also is a big factor. The rate on a home equity line of credit, which increases a borrower's debt level and risk, is averaging 8.47%, according to

The average rate on a more conservative 30-year fixed-rate mortgage is averaging 6.17%, according to Bankrate.

Some relief for borrowers is coming thanks to lower Treasury market yields. That has pushed mortgage rates down across the board.

Freddie Mac, a government-sponsored loan buyer, says the average rate on a 30-year fixed-rate loan fell 0.1 points to 6.62%.

Issues with the borrower aren't the only hurdle. More companies are either merging with bigger lenders, or are going out of business, leaving fewer lending choices and options., a web site that tracks mortgage businesses, counts 131 lenders which have either shutdown since late 2006, or have been merged with bigger competitors.

My column on this stuff also appears at: where I do freelance reporting.

Thursday, August 23, 2007

Dow Down Quarter-point, S&P Down 1-1/2

A big fade from the early BofA/Countrywide jamming. As I noted today - a sweet deal for Bank of America (BAC) and one of total desperation for CFC: Bank of America Gets Sweet Deal.

At least Countrywide's well tanned Mozilo was forthcoming about his view that a recession is a likely outcome from the housing problems. He ought to know - then again, anyone whose head is not completely deluded by the lies of the talking heads ought to know that. All the "good" that came from 1% Fed Funds is now being taken off the table multiplied by the impact of LEVERAGE - that doesn't come without a recession? The president of Thornburg mortgage told CNBC he's also worried about recession: Thornburg: Mortgage Markets Disfunctional.

There are only 6 trading days left until September 4th. 9/4 is post Labor Day Tuesday. The bulls ought to use the next six trading days for all they're worth. You can count of further dislocation disclosures next month, along with increased hand wringing over 3rd quarter earnings. September will likely live up to its well deserved and sullied reputation.

Nibbling & Early Positioning

A quick options scan (not recommendations just observations) shows that some big bets continue to be made against the market.

The call screener was very quiet, aside from a strangle play in Guitar Center (GTRC). Recall, to much fanfare back in June, GTRC was to be bought by Bain Capital at $63. The stock finished today at $57.95. Volume in the GTRC chain was nearly dead, but more than 5,000 calls traded in the November 60 strike, and more than 5,000 puts traded in the November 55s.

On the Dow Diamonds (DIA), a usually fairly quiet options play, more than 12,000 contracts traded in to the September 129 and 128 strikes. The volume was more than enough to exceed open interest in both strikes.

In the iShares Russell 2000 (IWM), there was plenty of spread trading action in the September and October contracts, but one play that caught my eye was the October 70 strike where over 50,000 contracts traded vs open interest of just 3k. The IWM is presently at 78, a swoon to 70 would exceed the worst of the August intraday lows.

There was also a smattering of out of the money put trades in Financial SPY (XLF) puts that exceeded open interest in the October 35 and 30 strikes.

Garmin's (GRMN) chart is featuring what appears to be a spectacular double top chart ($104 area) that to some means trouble. Volume exceeded 5,000 contracts in both the October 90 and 85 puts (bearish time spread?). Volume was high enough to exceed open interest in the October 90 strike.

Wells Fargo (WFC) - A Ticking Time Bomb?

This is some pretty neat accounting alchemy: Wells Fargo Gorges on Mark-to-Make-Believe Gains

Day At the Races Not

Last night, I said it could be a 'day at the races today'. That was after just scanning the B0fA deal.

On further inspection, Countrywide (CFC) has sold its soul.. totally desperate. Great deal for BAC.

sent by Motorola Q Phone

Wednesday, August 22, 2007

Dow Up 145; SnP Up 17

Brief tonight. News that Bank of America (BAC) is going to pour $2 bln into Countrywide (CFC) has sent S&P futures up 10. Unless some countervailing piece of bad news surfaces tomorrow, it's going to be a day at the races for the bulls.

As noted over the weekend, the Fed set the stage for a rebound, and the symbolic discount rate cut, for now, is slowly ushering in some renewed confidence.

There's a lot of space between the 50 and 200 day moving average in the S&P... 50 dma is up at 1500 - let's see how far up they will push the market in the coming days.

Tuesday, August 21, 2007

Dow Down 30, S&P Up 1

More backing and filling, it's as simple as that amid guessing over what Warren Buffet might buy, or what the Fed will do next as the asset backed commercial paper market remains seized.

A few positives for stocks included: a bit more nibbling in the financials and continuing interest in tech.

The T-bills surge started to slow today and we'll have to see if that means the 'constipated owl' is starting to get regular again (ie. parts of the credit market unfreezing). I would be inclined to think that a 200 basis point drop in short end t-bill yields doesn't portend good things ahead. That type of near unprecedented capital flight doesn't happen without consequences to wherever that money came from.

Best place to pay closest attention to: the conduit -- or ABCP (asset-backed commercial paper) market. DJ Despite Fed Efforts, Asset-Backed CP Market Still Not Working

A note about foreclosures. This AP story was merely a regurgitation of numbers with little critical thinking.: U.S. Home Foreclosures Jump Sharply in July, Up 9 Percent From June.

Yes, we know foreclosures are going up. Sure it's neat to sensationalize and say foreclosures were up 90% year over year, but the real story is that run rate of 180,000 a month growing at 9 percent sequentially. That translates into significant annual numbers, with no let up in sight as 2005 ARMS continue to reset.

But even if annualized thinking doesn't float your boat, the other major concern with this data is that 180k a month and growing foreclosure activity, while fairly small in the grand scheme of things, has sure led to a gargantuan reaction in the credit markets as the impact of leveraged financial products behind those defaulted mortgages has magnified the intensity of the foreclosures by up to multiples of 10. Who needs fear mongering when you have this levered reality to contend with which has already forced the Fed's hand? Ah so.

Chris Dodd

Big meeting today between Chris Dodd, Ben Bernanke and Hank Paulson.

I was disappointed Ted Kennedy didn't show up so that he and Dodd could do the sandwich move on Ben and Hank.

It could have been called a "Regulator Sandwich"... a variation on the infamous Waitress Sandwich.

Even though we didn't get the "Regulator Sandwich", Dodd was still focused on "tools": Dodd: Fed to use 'all tools available'.. hmm.

Could you imagine Paulson in the middle of a Teddy/Dodd sandwich?

Monday, August 20, 2007

Dow Up 42; S&P Down point-39 (.39)

I had the opportunity of opening my contact book to talk to a fine bunch of economists today... Gary Schlossberg at Wells Fargo Capital, Chris Rupkey at Bank of Tokyo-Mitsubishi and Tony Crescenzi at Miller, Tabak for my column on what's next from the Fed Market Buzz: Why Investors Might Not Want Another Rate Cut.

Sure, rate cuts have traditionally meant better things for the stock market, BUT (and this is a Big BUT) the sudden shift to rate cuts will mean that the Fed -- which had until 2 weeks ago eschewed the idea of rate cuts because it recognized the inflation, rate differential and moral hazard problems -- will again be bowing to crisis in the banking system which led it to do a policy-180 last week. Crisis is not a good word in the markets, even the recently euphoric stock market and the bulls should be careful of what they wish for.

Put another way, if the bulls get their inter-meeting fed funds cut (meaning Fed action before the next official FOMC meeting on 9/18), it will have come at the price of more market turmoil going into the cut.

Remember, Bill Poole, of St Louis Fed Bank fame, told us 2 days before the Fed cut the discount rate that it would take a market "calamity" for the Fed to move. Bill Poole chooses his words carefully and is no Larry Lindsey. He doesn't make stupid statements like Ben Bernanke did early on in his Fed-tificate with a certain tv reporter.

No, Poole meant what he said folks and that to me is an indication, given the Fed's recent behaviour and statements that we would most definitely be in the calamity zone should an inter-meeting fed funds rate cut appear.

Be that as it may, the bulls flocked to what they feel are bullet proof tech stocks today, giving enough juice to the Dow and Naz. As I noted over the weekend, monetary stimulus could give the stock bulls something to work with for a little while.

To belabor the point - it sure ain't business as usual. The intraday slide in yields of t-bills was nothing short of astounding today (a 20 year event) - over 100 bps drop in some yields on the short end. That basically means the credit markets are still tied up in knots.

In John Mauldin's email today, he sent this excellent flow chart (Flo she does know) about the complex situation in progress.

To save the bull's butts on Tuesday - Warren Buffet!! Headlines late tonight that he may buy parts of Countrywide (CFC): Buffett could buy parts of Countrywide -- WSJ. That might offset negative news about Capital One (COF): Capital One Will Close Loan Unit.

Oh, over the weekend, HIgh School 2 musical became the most watched basic cable t.v. program. Yikes. as a point of reference - this is a real musical, lol....

Sunday, August 19, 2007

More Mainstream Media Amusement

How Missed Signs Contributed to a Mortgage Meltdown

The above piece makes the completely ludicrous statement that "what started out as a crisis in an obscure corner of the credit market — subprime debt, for borrowers with weak credit — managed to infect stocks and bonds."

What the? "obscure corner of the credit market"?! A picture is worth a thousand words (those $ figures are in the billions). Yes, an obscure corner of the credit market generated mortgage originations to the tune of nearly $2 TRILLION in three years to subprime borrowers. It was obscure in 1994. If lenders can get 30-cents on the dollar out of foreclosed homes, what kind of losses are we talking? Yikes.

Saturday, August 18, 2007

You Can't Handle the Truth!

This has been floating around on the web....

Where is Tom Cruise when you need him???

I'd like to draw some parallels to a clssic movie:

A Few Good Men

“If your orders were that Private Santiago was not to be touched, and your orders are always followed, then why did you need to transfer him off the base?

Why the 2 orders?”

…and then cinematic magic took over as Kaffee (Cruise) and Jessep (Nickolson) go at it.

Well this is how I see the same scenario with yesterday’s rate cut!

The part of “Kaffee” will be played by Joe6pack
The part of “Col Jessep” will be played by The Big Businesses that are forcing the Fed’s hand.

Kaffee: If your press releases and financial statements said that you company is growing and subprime was contained, and your information is accurate, then why did you need a rate cut? Why the 2 orders?

Col. Jessep: You want answers?
Kaffee: I think I'm entitled.
Col. Jessep: You want answers?
Kaffee: I want the truth.
Col. Jessep: You can't handle the truth

Col. Jessep: Son, we live in a country that has big businesses, and those big businesses have to be guarded by men like Bernake. Whose gonna do it? You? You, Lt. Home Owner? I have a greater responsibility than you could possibly fathom. You weep for middle class, and you curse our 2006 bonuses. You have that luxury. You have the luxury of not knowing what I know. That the middle class’s death, while tragic, probably saves our corporate spreadsheets. And my existence, while grotesque and incomprehensible to you, saves our wealthy buddies in the hedge funds. You don't want the truth because deep down in places you don't talk about at parties, you want me on wall st, you need me on wall st. We use words like Leverage, Liquidity, BLS. We use these words as the backbone of a life spent profiting off of something. You use them as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very financial markets that I make, and then questions the manner in which I get bailed out for my mistakes. I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up a phone, and buy some stocks. Either way, I don't give a damn what you think you are entitled to.
Kaffee: Did you order the rate cut?
Col. Jessep: I did the job I...
Kaffee: [shouting] Did you order the rate cut?
Col. Jessep: [shouts] You're goddamn right I did!

What Will I Be Watching In The Coming Week?

A few things...

  • First and foremost - dollar/yen. All roads lead to and from the carry trade.
  • All things related to credit markets: commercial paper, secondary mortgage market, junk bonds, etc.
  • Gold. Bernanke has effectively told us he doesn't give a hoot about the dollar's value.
  • How the stock market behaves Monday - a post expiration Monday. Many folks short going into expiration had to cover Friday which further enhanced the market's rally. The general tendency during the bull phase had been an upward bias to the market in expiration weeks as options market makers were able to unload short futures positions they bought in response to puts they sold in prior weeks. Then, the cycle would restart post expiration where put open interest would build again, forcing the market makers to re-short futures which in turn led to a dampening effect on the stock market after expiration. It will be interesting to see if the bulls really do have a head of steam and come overcome these shorter term cyclical pressures.
  • Beyond looking at things like XLF and XBD, more important are individual names like Countrywide Funding (CFC) and Bear Stearns (BSC).
  • Fed funds and how far they remain below the present target of 5.25%
  • 3 and 6 month t-bill activity
  • Hurricane Dean

Just a few things that come to mind along with the 100 other things on my market monitor.

Dow Up 233; Bounce To the Ounce

Last Sunday this blog broached the possibility of some sort of inter-meeting move by the Fed. And then on Monday, Paul Kasriel at Northern Trust told me a cut in the discount rate would make life easier for the Fed as opposed to pumping the system via daily injections. Well, the discount cut happened, as we all know, after what I would call real 'panic' set in this past week, especially Thursday.

In my book a real panic involves not just participation by the Wall Street minions, but when Main Street America becomes involved. Main street America got noticeably involved this past week as a run started to take place by depositors at Countrywide (CFC) Bank and money by the billions, according to Trim Tabs, poured into money market funds. I find it ironic that a variety folks (mostly bulls) fear mongered about the "panic" they felt was happening as early as 4 weeks ago and convinced themselves and others to use the "panic" they felt was occurring as a contrary indicator to buy, or the famous "this is a buying opportunity" line. Now they'll all say they were right all along if we do finally get a bounce out of the Fed actions -- an amazing pack of lies that perpetually goes on by those who feel they're entitled to perpetual stock market gains.

Say what you will about how the Fed could care less about 'moral hazard' and has said "Uncle" after just a month of market melodrama by deciding to follow the typical bailout script of Big Al Greenspan -- the more active participation by the Fed to try to plug the leaks in the proverbial dam is something that the bears should be very respectful of in the near term.

Any thinking individual knows the Fed can't fix the gargantuan OTC derivatives problem (especially a notional $30-TRILLION in credit default swaps) with a few rate cuts, but for the small in comparison stock market the monetary accommodation could still mean the chance for a some sort of rebound near term -- provided that the extra lending money being provided can unseize the secondary mortgage market and the commercial paper markets.

Plus, if Barney Frank and UpChuck Schumer have their way, OFHEO will soon be forced to allow Freddie Mac and Fannie Mae to take on more mortgage junk (stupid) - so you'll have some fiscal stimulus thrown into the picture to bail out the mortgage banking crooks.

With all this bailout for the financial den of thieves in mind, the S&P 500 200-day moving average at 1454 will likely be broken soon. It will be important to wait and see what happens at the 200 day and whether the market came make a run to 1500, the 50 dma. I sure think that a retest of 1375 area will be retested but 'when' will be a function of how much the monetary and potential fiscal stimulus (our tax dollars) can lift the market.

With discount rate cut by 50 basis points and 90 treasury paper trading at the wide spread it is vs. the Fed funds rate - there's no doubt the Fed is on its way to an overnight bank lending rate ease in September of at least a quarter-point, and another (thank you, Sir!) in October -- and probably more as it becomes apparent that consumer and corporate consumption has caved in the face of adverse financing conditions (eventual recession). It would not surprise me to see another cut of 25 bps in the discount rate before the September 18th meeting as a precursor to eventually getting Fed Funds down to at least 4.75% over the next few Fed meetings. Inflation lip service be damned. At the end of the day, the Fed and its other world counterparts will do anything and everything to keep the OTC derivatives bubble from popping.

It's a shame and ominously noteworthy that the Fed has taken these actions after only a month of bloodletting. The big danger is that the Fed will empty its quiver too soon and will be out of options when the you-know-what really hits the fan and the Fed has to contend both with liquidity and insolvency issues AND dollar weakness and economic malaise later in the year and early next year. Longer term the outlook doesn't look good for that fan that will get hit and be knocked squarely off the table, nor the stock market, or much of anything else but gold.

Bernanke & Co., not only addressed liquidity in a minor way relative to the real problems out there, but also market sentiment. The discount cut will be studied for years to come. Perhaps it should be investigated as well since folks seem to get wind of something big coming late Thursday as the market rallied 300 Dow points off the low.

By doing the rate cut before the market opened on an expiration Friday, similar to 1998 (though this scenario the Fed is dealing with is unprecedented and nothing like 1998) the Fed managed to send quite a message to the shorts. With S&P, SPX, OEX puts and short calls open interest into the 7 figures, Bernanke re-balanced the scales a bit by destroying a good bunch of shorts on Friday morning. That evened the score a little versus the large number of bulls who had suffered over the last month. The first thing I thought of when I heard about the discount rate cut was 'wow, what a disaster for anyone short S&P futures, or holding a ton of puts'. On margin, a 30 point move the wrong way means instant annihilation.

This attempt to even the score by inflicting pain on the previously giddy bears will make for interesting trading going forward. Who will be more gun shy after the severe whipsaws of the last three weeks? Will the shorts take it easier this time around, the bulls - or both? Perhaps with psychology so damaged and whipsawed on both sides we will see a modicum of restraint by the bulls and bears leading to a little less volatility?? Probably not, but the VIX holding to about 30 after the Friday rally is statement unto itself about the shell shocked investment landscape.

The coming days won't mean a return to smooth sailing.

Friday, August 17, 2007

Dow Down 15

Very brief post tonight. S&P futures down 5 as yen carry trade unwinds at a quicker pace. That and a near shut down of the commercial paper market, along with expiration will make for interesting trading on Friday.

The rebound from a 340 point deficit was pretty amazing stuff, but way too convenient for the Dow and other indexes to hit the 10% official correction levels and then rally like a bat out of hell. You sure can expect a retest of the day's lows at some point, but given the very oversold condition of the market, you can't rule out a stronger snap back soon, which would merely inflict more pain and gnashing of teeth if we then retest the lows of today. When has this market not been retesting lows after snap backs recently? Plus, following days of decline, I would imagine specialists are loaded to the gills with inventory and no doubt want to off some of it to the slow learner "buy on the dip crowd".

I'd guess S&P 1430 would be a resistance area to the upside in bounce back scenario and 1375 would be support to the downside.

Thursday, August 16, 2007

A Quick Note

No snap back this morning... not yet in the stock market. Why? Because there are clearly some systemic problems. Look no further than the huge slide in 3 and 6 month T-bill yields. A 90 bps slide in the 3 month since Monday's close is not merely a flight to quality move. As a trader friend on the Street has mentioned, "money is not going where it needs to go... major liquidity problem". Be careful here, folks.

Wednesday, August 15, 2007

Thank You Wall Street Journal and David Gaffen

The Marketbeat section of the Journal, written by David Gaffen has been reading this blog recently. Thanks very much!

MARKETBEAT's inside look at the markets

I was in rare form when I wrote the post about the brothel which David picked up on:

Blog Roll — Even the Ugly Whores Get Arrested

Dow Slides 167; S&P Down 20; VIX Nears 31

Is this.. The Beginning of the End?

No, those weren't giant grasshoppers - those things climbing the buildings were OTC Derivatives - invading the futures markets in Chicago! I love the way the lady screams and knocks the 1000 pound desk right over.

All kidding aside. It was another ugly day. While a test of S&P 1400 looms, something blogged about over the weekend, and may come as early as tomorrow morning; an oversold bounce is not out of the question, BUT that will largely depend upon the news of the coming days and how open interest looks on indexes going into expiration Friday. Interestingly, the market is also on the verge of another dubious milestone - a 10% decline, or the first 10% correction in the 4 year old bull market which could happen tomorrow.

Carry trade unwinding has started to have more than a whiff of forced acrimony to it and that's where things will get very interesting in the coming weeks. The stock market down around 9% from the top has been gripped by fear and selling, but for something closer to panic one needs to look at the yen carry trade situation. Going into deeper levels of forced unwinding, the yen carry trade unwinding could bring us to a new level of danger and volatility in the stock market and could spur real stock panic. The Dow was down 167 today... that's not a panic drop.

As I mentioned the other day, the August Countrywide in the money straddle was pricing in a move of at least 10% in the stock, and we got it today. Merrill put a note out this morning about bankruptcy possibility. Angelo Mozilo, the founder and ceo, age 68, has sold around $72 mln worth of CFC over the last year or so. It's hard to imagine a company with 54,000 employees going under, but we've seen Enron, Delphi, Worldcom, a bunch of airlines, etc go belly up, so why not CFC? With a market cap of $12 bln, CFC sure doesn't qualify to be on the list of "too big to fail".

My options screener has had a lot of other interesting activity on it.

Over 5,400 IMB September 10 puts traded today vs open interest of about 1500. IndyMac closed at 19.
There were also a bunch of big put trades in the December 27 and 28 XLF strikes.
LEH Jan 42.5 puts also interesting - over 5k traded vs open interest 1384. LEH is a $52 stock.

Tomorrow's Heard on the Streeet column of the Journal highlights Beazer's BZH woes, a stock I love to hate.

Fasten your seatbelts for more fun and games Thursday. Tech was pretty firm until the last hour and a half of trading - many bulls still out there trying to catch the bottom - that a panic does not make. We're no where near full capitulation. WIth the market down just 9% from the high vs the overall gains of the bull market, some make the bad assumption that folks are irrationally selling. Maybe it's no so irrational if it's, say, a bunch of folks locking in some nice gains from the last four years of a great bull market and not just the hedges dumping? I find it ironic that the folks who use the "fear monger" accusation are actually the ones creating fear with faulty theories and calling bottom after bottom which creates fear when the bottom doesn't lock in. But that's another post for another time.

Dow Slides 207; SPX down 26

It's been a bad week for me health-wise with near uncontrollable blood sugar levels this week... bad stuff when its up in the 300s and 400s each day and the 'endo' says just take more insulin and call me in the morning. So I went to sleep at 7 pm last evening feeling completely washed out and find myself up early this morning.

As for the markets, Howard Lindzon makes some great points about Goldman squealing like a pig and the market needing a Whoosh. We're not there yet as we've just barely broken some major support in the Tuesday session. I'm still looking for a test of a much longer term and more important area - the 1375, 80 wk moving average for the S&P 500 which had previously held over the duration of the bull. While I am no longer convinced it will hold and we're likely in for an average bear (meaning down about 25% from the highs) to set in during the months ahead, I'm not willing to declare the bull dead until that ultimate area of support in the 4 year bull market cycle is broken. But things sure don't look good and ultimately these so-called support levels will not be a magic brick wall to stop selling, though everyone and their uncle uses these support areas and the charts are uncanny for illustrating where the market has taken breathers on the way up and now down. At the very least this week, it looks as if 13k on the Dow will be taken out (right, it's just a number and no harm done in taking out 2 millennial marks in the space of a couple of months, right? lol).

In my CNBC options report, I noted the heavy put buying again in the financials: Options Report: Financials May Face Another Big Selloff. Countrywide, in particular, is looking like a real time bomb. And Paul Foster at makes the excellent point that we will be waiting until late September and earnings in early October to learn more of the damage that's happening now to the financials.

Speaking further of options, this is an expiration week and open interest on various puts remains biased to the put side, but it's still an early call on whether strong sell programs are triggered on Friday because traders could exercise or roll those puts.

Don't let anyone fool you. The use of leveraged financing to purchase risky assets is not going to be unwound in a couple of weeks. OTC derivatives tied to risky assets, also purchased with leverage will not be quickly rewound either, if ever. There are some bloggers who brag about being nearly 100% long in this environment - they're worth reading for entertainment purposes and if you like to watch a slo-mo train wreck and someone learn the hard way. Yikes, is all I can say. Same goes for the 'bullish' tv talking heads who keep chiming in about how this is a "buying opportunity". That's even scarier since unlike us bloggers, there's a real audience for the boobs on the boob tube.

The stock market is a discounting mechanism that looks out several months. I would imagine that these sagging market levels have a great deal to do with credit market consternation, but also a realization that the economy is at risk for at least a mild recession early next year. 15x S&P 500 p/e is fine in continued strong times, but what if Fed Funds futures are correct and the Fed has to scamble at the end of the year to lower rates to avert recession? I'd be careful of putting any weight into the theory that the stock market is a "victim" and that it's being mispriced. It's going to take a quarter or two to know the answer.

Warren Buffet did some stock buying in the spring with Dow Jones and Bank of America getting the attention late Tuesday. But that's the problem - spring - in the past... I'd like to see what he's buying these days.

For the time being, any negative headline out of hedge funds, commercial paper and even about personal consumption will get the market into a tizzy. Be careful out there. I'm sorry to say we're not going to be waking up anytime soon to a 'new day' when all of these problems will simply be gone - not when they're measured in the multi-trillion dollar range and on a global basis. In fact, at the risk of sounding very bearish, there's a great risk we wake up one morning to a real day of reckoning. But maybe that's my high insulin intake making me grumpy tonight - let's hope so.

Oh, nice to see this bum got his money out in the nick of time.. Insider Trading at American Home?

Monday, August 13, 2007

Dow Slips 3

In my CNBC options report today, I covered the less than enthusiastic options speculation in the XLF: Options Report: Traders Still Cautious On Financial Sector. There was never any great head of steam in the XLF today, up about 3/4% and then a late day reversal.

I also talked to a variety of interesting folks to throw this story on the interest rate outlook together:

Quick Fed Rate Cut Appears Less Likely. Paul Kasriel of Northern Trust was especially thought provoking. One of the things left on the cutting room floor is that when the Fed does start to head off a recession by cutting rates, Kasriel believes the Fed will immediately be behind the curve.

One of the best interviews of the day today on CNBC (imho) - a combo of Mickey Siebert and Mike Metz: Yep, about 100 years of Wall Street experience and wisdom combined.

David Walker - A Guy WHo Really Gets It...

Learn from the fall of Rome, US warned. Of course, no one will listen.

The Comptroller General's work can be found here:

Sunday, August 12, 2007

March 21, 2007 Post

Don't Fight the Tape.

Some will say the 30 VIX comment was a lucky guess. I don't think so. Bonds 101 has been explained many times here. Containment is wishful thinking at best and at worst an effort to fool the sheeple into complacency... there is no containment when one part of the credit market implodes (subprime) and that was clear as ABX was falling off a cliff 5 months ago (search to your hearts content with the term 'ABX'). Now, it has spread well beyond subprime to a worldwide OTC derivatives debacle with the Fed using a garden hose connected to gasoline to try to put the flames out. Yes, they're giving the creators of 'financial instruments of mass distruction' even more cash to play with. Worse yet, the Fed is tossing out billions into a multi-trillion dollar black hole. Cool.

S&P futures up 10 tonight.. get ready for more fun and games!

Intra-Meeting Rate Cut Coming?

Interesting reading from (click here).

I'm getting my kids one these on Monday.

Thanks to the Daily Reckoning for the laugh.

A Subject Near and Dear To My Heart...

Hedge funds braced for more pain...

Didn't they teach in Math 101 that there are no "right" models, but perhaps some "useful" ones which in the blink of an eye can become "useless"?

Great News

I was thinking about how adjustable rate mortgage originations gained a massive head of steam in 2004, 2005 and much of 2006. So really, the good news is that by 2012 (adding one year for the foreclosure process on 5 year adjustables granted in 2006 that will adjust higher en masse in 2011) we'll perhaps be approaching the end of the housing crash. So that's great news... some time in the 2013 to 2018 time frame, when we finally get the 7 year adjustables out of the system, a bit of normalcy should return to the housing markets.... something to look forward to!

Options Expiration Friday Ahead

S&P 1400 is another area of interest to me on the way down to the 80 week moving average (1375) given huge open interest on the putside in both the August SPYs and the SPXs at 140 and 1400, respectively. Of concern is this past Friday's run up above 1500 only for the index to close back at the 50 week moving average. As Dirty Harry said, "Do you feel lucky" about another run to 1500? Yes, it could happen. But given the mayhem in the Russell which has led to the downside in this market, and is already testing its 80 week moving average, it is likely that S&P will soon follow suit and test its 80 week. Remember, there had been a carry trade of sorts going on with funds and other characters selling puts on the SPX and using proceeds to buy calls on the IWM. They ended up being too long on the SPX and also had to scramble to dump long bets on the IWM.

The open interest condition on SPX and SPY can change by the end of the week, so it will need to be monitored going into Friday's expiration.

Future Bear (BSC) Sale, or is That Just More Bull?

Barron's throws the longs in Bear Stearns (BSC) a pacifier and blankie by suggesting that Bear Stears could fetch $200 in a takeover scenario and even attract the deep pockets of China, or Warren Buffet should Bear face liquidity problems. The article might help Bear shares to enjoy a bounce on Monday.

Doesn't It Often Start This Way? BZH

Beazer Delays 10-Q Filing

That this stock is still a "teenager" is amazing given that it's under federal and state investigations. What I find amusing is that the company is trying to pin it all on the former chief accounting officer... yep, that's the ticket - the guy rigged the books all by himself.

Friday, August 10, 2007

I've Been Away

I've taken a break for the last few days.

First, the issue of Fed injecting liquidity. We covered that here months ago, I think if you use the search term 'window' you'll find the places to look for not only Fed Repo activity, but also the activity of the Treasury department. Fed injections are only about two-thirds of the story. The bigger point that is lost on most folks is that the Fed has been injecting huge gobs of liqudity into the markets every trading day for better than six months, though the activity this morning is about 3x larger than usual. The bigger point, especially demonstrated by the ECB, is that central banks at all costs will try to do everything possible to stave off a seizure of the markets. Consider the size of the BNP Paribas situation vs what the ECB has poured into the markets. You can read between the lines and guess that it's more than BNP that's in trouble. The liquidity injections also have very bearish overtones for the dollar and bullish overtones for gold.

The stock market has been very volatile (understatement of the year) but still resilient as we remain stuck in last spring's range. Last Friday's lows need to be retested, at least. Many are hoping for a double bottom and maybe it will come to pass, but 1375, the 80 week moving average, remains an area of interest to me since it has withstood several tests over the span on the bull market. Let's face it - no one knows where the bottom and the best thing you can do is shut-off anyone who spends too much time talking about whether a bottom is about to set... they're dolts. The housing phenomenon was set up over a period of years and won't be quickly worked out to the satisfaction of the "short attention span people" who are champing at the bit for their "market bottom"

By the way... can we get an apology from folks who poo pooed subprime as a non-factor... an apology that they dared blog about what to do with your money with such ignorance? Can we get an apology from these folks who failed to understand Bond Market 101 that simply states an implosion in one area of the bond market would set off a chain reaction? What will it take for them to realize that contagion has set in? Let's see... secondary mortgage market is dead to the point that Countrywide and Washington Mutual are at their knees, just like so many of their defaulted customers. Let's see... LBOs are a gonner for the time being. Let's see... a variety of quant hedge funds (the smartest guys in the room, supposedly) are down 20, 30% in a few weeks, Let's see, an AXA money market fund in Europe is down 26%... but the biggest factor goes back to the central banks injecting liquidity. Contagion has set in with subprime being the foundation of sand.

That leads me to one other lie that's being spread - that the stock market is the victim. Yes, I've heard this preposterous theory this morning. Sorry, wrong - totally wrong. Nothing in this market is isolated. When the brothel is raided, both the most attractive and most ugly are thrown into the squad car. Specs are risk averse to pretty much anything that has risk tied to it in the U.S., and the U.S. stock market is a risky place... beware the folks who want you to believe stocks are a sure thing and safe bet.

By the way, it may be summer - but it's anything but a 'thinly' traded market. This isn't the 1930s, this is the 21st century, when you can fire up the Bloomberg, or whatever trading platform you use whether you're in the Hamptons or in Europe. Anyone who's anyone of Wall Street can and is participating in this market.

A note on crude. Likely to slide to the mid 60's before we see $80. Selling in outer months vs front month was interesting... fund liquidation.

Don't rule out anything today. Test of last Friday's lows? Maybe, but then a short covering rally? That could be too, Have fun. I will be back to regular postings sometime soon. Some terrible things have happened in my family which will take all of what I'm made of to fix.