Friday, July 11, 2008

Fed "Sticksave" Rumor Saves the Markets

Just a quick note on today.

Well we avoided Black Friday after Reuters reported that the Fed might allow Fannie and Freddie to access the discount window. Stocks bounced on the rumor, and then faded at the end of the day. The Dow ended up down 128 points. Here is the Reuters article:

"WASHINGTON (Reuters) - Fannie Mae and Freddie Mac said on Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the country's two largest mortgage finance companies.

U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages.

A key senator said the U.S. Federal Reserve was considering allowing Fannie and Freddie to borrow directly from the central bank, spurring speculation that the Fed may take action as early as this weekend. Fannie and Freddie shares, after taking a beating, recovered some of their earlier losses but ending lower on the day.

Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said he spoke with Fed Chairman Ben Bernanke and Paulson. Dodd said they were looking at various options, including opening access to the discount window, through which the Fed acts as a lender of last resort for the U.S. banking system.

Investors were worried that the mortgage agencies might run short of capital, placing the fragile U.S. economy at even greater risk and deepening the housing slump. Dodd sought to reassure investors about the health of the two companies."

Quick Take:

Well, we avoided a financial crash for the time being. This is a critical time for the Fed. Bernanke's legacy may be decided on how he reacts to the Fannie Freddie disaster. If these two GSE's fail then we face a systemic risk to the financial system.

Moral Hazard is seriously in play here. Ben won't be sleeping much this weekend.

Lets see what he and Paulson can come up with.

What a week! Stay tuned!

What a Morning! Financials Capitulating?

I wanted to jump on real quick with a note as the markets go haywire this morning. Fannie and Freddie are crashing on insolvency worries. Oil is also going through the roof on reports that Israel may be getting ready to attack Iran.

In case you woke up late, here is what happened this morning.

"July 11 (Bloomberg) -- U.S. stocks tumbled, extending the longest stretch of weekly losses for the Standard & Poor's 500 Index in four years, as oil jumped more than $5 a barrel and financial stocks fell on growing concern about the health of Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, each lost nearly half of their value, dragging down shares of Bank of America Corp., Washington Mutual Inc. and Wachovia Corp. Wal-Mart Stores Inc. and Walt Disney Co. declined after crude advanced to a record above $146 a barrel, leaving consumers with less money to spend as fuel bills increase.

The S&P 500 lost 15.9, or 1.3 percent, to 1,237.49 at 10:27 a.m. in New York, its lowest level in two years. The Dow Jones Industrial Average fell 161.7, or 1.4 percent, to 11,067.32. The Nasdaq Composite Index slid 26.83, or 1.2 percent, to 2,231.02. About three stocks fell for each that rose on the New York Stock Exchange.

``It's the worst of both worlds,'' said Matthew Kaufler, portfolio manager at Clover Capital Management Inc. in Rochester, New York, which oversees $2.7 billion. ``Watching two government- sponsored entities evaporate before our eyes from an equity perspective, and the damage that does to investor confidence on the one hand, and watching the price of oil, which is clearly meaningful from a consumer and business perspective, continue to escalate upward creates other pressures.''

Quick Take:

I am amazed at the speed at which Fannie and Freddie are falling apart. How the government decides to handle this problem will tell us a lot in terms of where we go from here.

Paulson and Bernanke will have some long sleepless nights this weekend. The sad thing is I don't know what they can do other than try to keep this crash orderly. Paulson's statement was bland today because they are trying to figure out what in the hell to do.

Stocks are deep in the red. The financials seem to be capitulating. Anyone short in this sector might want to take some profits due to the threat of a huge bounce based on government intervention.

I really don't know what to say here folks. I am speechless. Oil, financials, Fannie and Freddie. we are witnessing unbelievable destruction today. If Fannie and Freddie go under there is no housing market so I assume the government will do something to keep them alive.

Remember folks, no bank wants to do loans without the government backing of Fannie or Fannie. Expect interest rates to shoot up to the 9-10% area if a solution to the Fannie and Freddie situation isn't found.

Whats scary is I still don't see market capitulation! Until this happens we are going lower. The debt bubble is blowing up.

DOW 9000 at some point? Its not out of the question.

Stay tuned.

Thursday, July 10, 2008

Foreclosure Activity Rises to Highest levels Since the 1930's

Good Afternoon!

Anyone feel like they just got off a roller coaster after watching the markets today? Fannie and Freddie continue to be center stage. Paulson and Bernanke were again out barking that both are safe and the government will be there if capital issues arise.

The big question is slowly becoming are Fannie and Freddie too big too fail? I gave you my answer last night. The government will ensure their survival, but that doesn't mean they cannot fail on Wall St.

I will reinforce what I said yesterday. The government will not take on $5 trillion in "bubble debt". This is the amount of housing debt that these two Ponzi machines have ran up. Our government is not that stupid.

Back to today. So Paulson and Benanke were grilled by Congress this morning. They answered many tough questions with the same "everything will be ok" rhetoric that they did yesterday.

They gave no firm data on why they think Fannie and Freddie are well capitalized. They also failed to explain exactly how they plan on saving these two GSE's if they do begin to fail. I believe their failure is inevitable as private entities.

I mean lets look at the foreclosure data that was released today:

"Foreclosures Rose 53% in June, Bank Seizures Tripled

July 10 (Bloomberg) -- U.S. foreclosure filings increased 53 percent in June from a year earlier and bank seizures rose the most on record as deteriorating property values and higher rates on adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in 501 U.S. households, entered a stage of the foreclosure process, RealtyTrac Inc., a seller of default data, said today in a statement. Bank seizures rose 171 percent, the most since the Irvine, California-based company began tracking statistics on default notices, warnings of a scheduled auction and repossessions in January 2005.

``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater.''

Foreclosure activity is the highest since the Great Depression of the 1930s, said Rick Sharga, RealtyTrac's vice president of marketing. Home prices, which fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas, have created a cycle where shrinking equity drives homeowners into foreclosure, which in turn further pushes down home prices, Sharga said."

My Take:

Yeah right Mr. Bernanke, everything will be just fine. Give me a break. It doesn't take a brain surgeon to realize that the above data shows that the housing market is on the brink of collapsing . Foreclosure activity hasn't been this bad since The Great Depression!

How can they be so confident that Fannie and Freddie are fine when housing is literally self destructing as we speak?

Banks are grabbing homes at the highest rates on record. Prices are free falling, the credit markets remain frozen. Paulson and Bernanke are starting to look like fools as they try to calm the sheeple. Plain and simple.

Notice the statement by Mark Zandi above explaining that foreclosures are worsening and will stay with us until the next decade.

What happened to the second half recovery that Wall St. promised us?? HA! What a joke! Now we are hearing that this will last well into the next decade. What does that mean? 2015 or 2016?

Remember folks, the economy will not grow to any large degree without housing and Wall St. Bank of America's Ken Lewis said in his speech yesterday that he saw the housing issue being with us until 2013.

You are slowly but surely hearing the reality of the housing story. Its going to be a long, slow, painful process before housing begins to recover.

Rick Santelli

This is one of the few guys that I love on Bubblevision. The bond guys tell you the real story on Wall St. He made a great point on the Fannie/Freddie debt today from a bond traders perspective.

He explained the reason spreads are widening on this debt is because the bond market believes that Fannie and Freddie will get buried before Congress gets a chance to act and help.

He also explained that Fannie and Freddie came too late to the capital raising party which is making traders even more skeptical about Fannie and Freddie's future as private entities.

You see, the SWF's and big money guys threw billions and billions to Wall St. over the past year when all the firms raised capital. They were then pummeled by losses as the financials continued to lose billions and watched their share prices plummet.

So ask yourself this question if you were a big money wealth fund that has already been burned by throwing billions at Wall St.:

If Fannie and Freddie came to you asking for capital so that they could continue to do loans in a housing market thats in the midst of the biggest collapse since The Great Depression what would you say? Ahhh No?

So the bond market is asking the logical question: Where is the money going to come from if the big money guys are out of the game? Its pretty obvious Fannie and Freddie's next stop will be Washington DC. The bond traders think that by the time help arrives it will be too late.

These companies are in deep trouble as private entities, and there is no obvious answer as to how this plays out.

Bottom Line:

The foreclosure data today was horrific and took us another step closer to The Housing Time Bomb.

2016 can't come fast enough.

Wednesday, July 9, 2008

Fannie and Freddie Take Down The One Day Bull Market.

Good evening!

That rally sure didn't last long. I was surprised by the violent reversal today. The Federal pump lasted exactly one day. The market is starting to say "heard this one before" as they continue to dump stocks.

The Fed is beginning to lose all credibility because all they do is talk and talk and talk. When it comes to taking action like raising rates to strengthen the dollar or exposing the banks balance sheets, they bury their head in the sand and do NOTHING. They are all bark and no bite! Hmm how else can i put it. Remember the little boy who cried wolf?

The drop today IMO is all about the three F's. Fannie, Freddie, and fear.

The market sent a strong message to the powers that be today. They listened to these grand speeches by the pigmen and the Fed yesterday and reacted by coughing "bull****" as the government told us everything is going to be just fine with the economy and housing.

A Notice from me!

From here on out, I consider Fannie and Freddie to be the housing market. Anytime you see these words on this blog think "the housing market". I say this because they are the only ones doing loans and they own most of the bad debt.

This is what housing has morphed into folks. Housing is guaranteed by two GSE's. What happens to these entities will eventually tell you what will happen to housing. Follow these two companies every move if you are looking for forward looking indicators as to what happens to the housing bubble.

Derivatives traders lower their own credit ratings on Fannie/Freddie

Here is where the trouble for the markets started today. Remember the part where they told us Fannie and Freddie were in strong shape and had the full support of the government? Well by midnight, here is what derivative traders thought of this arguement:

"July 9 (Bloomberg) -- Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage-finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. Washington-based Fannie Mae fell 73 percent in the past year on the New York Stock Exchange and McLean, Virginia-based Freddie Mac lost 60 percent of its market value.

``Investors are viewing even an implicit guarantee from the government as potentially troublesome,'' said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California."

Quick Take:

Gulp! In a nutshell, traders don't believe the government is willing to take on the $5.3 trillion in debt that Fannie and Freddie have piled up. This would double the government's debt and the government is not obligated by law to do this. As a result, these companies are being treated like any other financial firm. Bad companies get bad credit ratings.

What if Fannie and Freddie Failed(a must read)?

Here is a great piece on what would happen if they failed, along with the most likely scenarios of how this will all play out.

Here is the problem these two firms face:

"If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."

Clearly, investors remain concerned. Credit default swaps - a kind of insurance against the possibility of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) defaulting on their corporate bonds, are at their most expensive levels in 14 weeks; both companies are expected to report steep losses for the second quarter; and their main business, mortgage securitization, is under pressure as home price values decline and foreclosure numbers rise.

"The major issue is that these are very leveraged financial institutions, leveraged much more than any other bank, and they have lots of mortgage assets. As real estate values decline every day, the value of [the mortgages that it bundles, guarantees, and sells] are called into question," says Dalton Investments co-founder Steve Persky, who has been focused on distressed mortgage assets.

The possibility of government aid looms because it's hard to see how the private market can help the companies. Their stock market values have dropped so low that it would be difficult for them to raise money. For example, Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company's market capitalization - the number of outstanding shares times the share price stands at $8.7 billion."

Quick Take:

Would you lend these clowns any money? I wouldn't give them a dime unless I expected it to be a donation.

Back to the Piece.

So with an inability to raise capital what are the likely scenarios on how this plays out:

"The disaster scenarios

The Federal Reserve and the Treasury have taken great pains to point out that the government is not obligated to bail out either Fannie or Freddie if they face insolvency. It's debatable where the legal obligations lie, but as a practical matter, the government can't let these institutions fail because they are being counted up on to help fix the mortgage mess. If Fannie and Freddie were unable to buy and back loans, banks would stop originating them and the pool of homebuyers would shrink, causing home prices to fall even further.

Fannie and Freddie must constantly borrow money in order to operate; if for any reason borrowing costs rose sharply they would not be able to make good on their guarantees or even fund their day to day operations. This is when the government would feel intense pressure to step in and, at the very least, pay contracts in a timely manner.

In an April report, Standard & Poor's said an Armageddon scenario whereby Fannie and Freddie are insolvent is unlikely, but that the mere possibility of failure at either is a greater threat to the economy than the actual collapse of any investment bank."

The bailout scenarios

So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid. Fannie and Freddie could even do a preferred stock deal with the government, much like the deal forged by Citigroup with the Abu Dhabi Investment Authority, says Egan.

That would allow give officials the ability to argue that they weren't bailing out the companies, but rather making an investment that would pay off in the long run.

Mason has a diffferent twist on a possible intervention. If either were to face insolvency, he says the government should purchase a large voting block of equity in the institution and use that as a tool to eliminate any dividends, replace officers and manage the firms back to solvency.

"But [a rescue] would be a political situation, so it would be messy," says Mason. "Fannie and Freddie would fight against having officers replaced. They would want to keep the dividend."

The doomsday scenario could cost taxpayers more than $1 trillion, says the S&P report. The report went so far as to say that a government bailout of Fannie or Freddie could force the agency to lower its rating on the creditworthiness of the United States."

Final Take:

As you can see there are no good options. The reason the traders are killing Fannie and Freddie's debt ratings is because these two will not be saved BEFORE they drown in their own debt. This makes them potential zero's in the stock market.

There is no way the government is going to take on $5 trillion of inflated, bloated "bubble debt". They will sit tight and wait for both companies to self destruct. Billions of dollars of "bubble debt" will be defaulted on and wiped clean while they wait which will make things much easier on the Fed's balance sheet.

This is when we will see the sticksave from the Fed. Intervening early and backstopping the $5 trillion of debt that these two ponzi machines ran up simply makes no sense. Sweden waited for a 50% correction in housing pricess during their housing bubble before their government intervened.

The sad thing here is who do you think finally ends up paying for this? Go take a look in the mirror.

Tuesday, July 8, 2008

The Government/Jamie Dimon Pump

Just a commentary tonight.

Today was a very interesting day. We heard a lot from Paulson and Ben Bernanke today as well as a very passionate speech by Jamie Dimon. I thought all of their speeches contained many fine ideas for how to regulate the financial system in the future.

I thought their call for hope and belief in our financial system was very sincere and genuine. All three are doing the best they can in a very bad situation. I think after today's speeches, you can pretty much conclude that Fannie and Freddie aren't going anywhere.

The government will not let them fail, and they realize the housing market would come to a standstill if these GSE's were to go under. This rallied the financials and the markets as a whole. Alcoa beat earnings after hours so a follow through on todays rise in the markets would not be unexpected.

Ok back to the speeches. I noticed a common element in all three of these speeches. All of them described excellent ideas on how to regulate and control the financial system. this is all well and good. However, none of them gave us any answers on how to solve the problems we are in today. You know why? Because there are no good answers.

Things will never be the same in our financial markets folks. I suspect that the powers that be saw the economy staring off the edge of a cliff again yesterday after the Fannie/Freddie news hit. It was the same cliff we stared over when Bear Stearns collapsed.

They realize that they need to act now and act decisively or this house of cards is going to come tumbling down. The problem is I personally don't know what they can do to fix the current problems that we have. I think all three of them realize this as well.

As a result, they simply talk about what they will do in the future to avoid these problems versus fixing the current mess we got ourselves into. I mean lets be rational here. Whats your playbook on fixing the economy going to look like when you are facing the following questions/issues below?

How can you fix the fact that a person making $60,000 a year cannot afford the $600,000 house that he/she bought with a mortgage product that is no longer available?

How do you fix inflation without raising interest rates and destroying the financial system?

How do you help Americans pay off credit card debts that on average are $9000?

How do you stimulate an economy when your consumers have no money to spend as they face a deadly combination of ridiculous mortgage payments and high inflation?

The answer is you can't without having a severe recession and massive deflation back to affordable levels. Sadly, there is no playbook to get us out of this situation.

Today's speeches were like a vaccination against future financial catastrophes. However the problem facing us today is we need a cure for millions of very sick patients that are in dire financial straits. A vaccination doesn't do anything if you already have the disease!

So how do we get this patient back on its feet? Step 1 is Transparency amongst the financials!

No one wants to admit the mistakes they made during this moment of financial insanity because many financials would destroy themselves in the process. The government realizes this so they give us lip service about demanding transparency in the future. Well what about doing it NOW!

There will be a point where they realize that transparency has to start today not tomorrow. I felt like we took a step closer to this reality today based on what I heard in those speeches. You can tell they still aren't quite ready to pull the tranparency trigger. However, as this crisis continues, there will be a moment of clarity where the Fed realizes transparency must be done right now..

When this clarity hits, its going to be very violent and painful to watch.

We all must realize that our current disease needs to be treated today before we can get to the the other side where "the patient" can begin to recover. This is going to take a lot of pain, discipline, and sacrifice but it can and will be done.

I have always been someone who likes to "keep it real". What I saw today was a lot of damage control, ideas for the future, and hope.

What I am looking for is a cure for a very sick patient.

Pending Home Sales Drop More Than Forecast

Good Morning folks!

As I write to you the market is flipping from red to green looking for direction. Well, pending home sales came out today and were back in the red down 4.7% after actually popping slightly in April. This has quickly quelled any hope that the rise seen in pending home sales in April was possibly signaling that we had found a bottom.

Here is the home sales scoop from Bloomberg

July 8 (Bloomberg) -- Americans signed fewer contracts to buy previously owned homes in May for a third month in four, a sign house prices have yet to touch bottom.

The index of pending home resales fell 4.7 percent, a bigger decline than forecast, after a revised 7.1 percent gain in April, the National Association of Realtors said today in Washington.

Would-be buyers are holding off purchases as they expect further price declines, and as rising mortgage rates and tougher lending standards make it harder to qualify for loans. Record delinquencies on home loans have led to concerns that Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, may need to increase their capital by $75 billion.

``After a healthy bounce in April, the housing market appears to have lost steam again in May and June,'' said Mike Larson, a housing analyst at Weiss Research in Jupiter, Florida. ``Unless and until the economic clouds part, we'll likely see the housing market continue to struggle.''

Economists had projected the index would fall 3 percent, according to the median forecast in a Bloomberg News survey of 38 economists. Estimates ranged from a drop of 6 percent to a 0.2 percent gain."

Quick Take:

This number shouldn't have been a surprise given the current lending standards and higher interest rates seen in the last few months. What amazes me is how these numbers keep coming in worse than economists forecast. How can these economists not see the slow motion train wreck that I and many of you see so clearly?

Are they dropping acid when they write these research reports? Anyway, this number took away any hope after a promising April that housing is rebounding.

Commodities Breaking Down?

An interesting development this week has been the big drop off in oil and commodities. Dennis Gartman who is a well known commodities guru talked in his newsletter today of a potential popping in the commodities bubble.

Many were expecting the stock market to pop if the commodities like oil came down in price. Guess what? Its not happening folks!

The main problem with this theory is energy stocks have soared during the commodities run. This sector has basically been carrying the DOW. Imagine where we would be on the DOW without energy? If commodities breakdown, we are about to find out.

This brings me to my big question. Where does the money go if the commodities run is over?

Financials? HA! Yeah right. No one with a brain is going to touch these right now.
Consumer staples? Crowded trade and most have underperformed.
Tech? I can't see this being a leader as the consumer falls apart.
Healthcare? Performed poorly. Pharma is a nightmare. National healthcare risk looms.
Consumer related companies? As I said before. The consumer is dead.
Transports? Anyone seen Fed Ex, UPS and the airlines lately?

Obviously my point is there is nowhere left to hide in the market. This does not bode well for equities. I expect too see a lot of the smart money head to the sidelines in cash waiting to pick up distressed assets after the market is done tanking.

That's what I would be doing if I was a Warren Buffet. Houses will be pennies on the dollar in certain bubble areas when this crash climaxes.

Billions of dollars are waiting to be made once this storm passes. The smart money is foaming at the mouth already!

Monday, July 7, 2008

Fannie and Freddie Rock the Markets/IndyMac on Life Support

Ok folks!!

Its going to get very interesting over the next several days. I see a Wall St. panic right around the corner. Traders acted like they saw a ghost today as the market bounced all over the place.

What looked like a solid start this morning turned into a mini panic as the Freddie and Fannie news hit the wires.

"July 7 (Bloomberg) -- Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Quick Take:

Lets put this in perspective. The total capitalization of Fannie and Freddie is about $80 billion. When the street heard the news that these two may need to raise capital equal to what they are worth, everyone ran to the exits and sold all the financials. The DOW violently reversed course.

Could Fannie and Freddie fail?

So what would the ramifications be to the housing market if these two went under? Lets put it this way, they are doing 80% of all residential loans right now. In other words, if Fannie and Freddie go bye bye, there will be no lending or housing market.

The banks are broke and don't want to lend any money unless its government backed. Now obviously, the government is not going to let this happen. The questions now becomes what do they do about it? This is becoming an enourmous mess folks!

My guess is we are looking at a nationalization of housing. Here is the scary part. There is no way the government is going to take on housing at ridiculously overinflated prices. Sweden let prices drop 50% from the highs before they nationalized it.

Why would the government take on all of that debt? My guess is the government will keep Fannie and Freddie alive and allow them to cut some corners and allow for prices continue to plummet. How fast are home prices falling? Check this out.

This quote from the article says it all:

``Prices are going down so fast they can't go down much longer,'' said Christopher Thornberg, president of Beacon Economics LLC in Los Angeles, who predicts a total decline of 30 percent nationally in the housing recession. ``We've never seen prices fall like this.''

Once the free fall levels off, the government will then pull the trigger and do some type of nationalization where they guarantee the loan values. This will not happen until housing is affordable!

It makes no sense for the government to nationalize housing at unaffordable levels and take over debt that will never get paid off. We are heading back to 3x income everybody. Mark my words! This may mean price drops of 50-60% in the bubble areas.

I can smell the fear in the air among home sellers as Wall St. spirals downward. Panic is on the verge of occurring all over the country as sellers flock to the exits getting whatever they can for their house. It happens the same way everytime when a housing boom ends.

The VIX Rises

The VIX(measures fear in the market) finally started to rise but it still has a way to go.

July 7 (Bloomberg) -- The benchmark index for U.S. stock options jumped to a three-month high as Freddie Mac and Fannie Mae plunged on the New York Stock Exchange, leading financial shares to the lowest since 2002.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, added 8 percent to 26.77 at 1:43 p.m. in New York. The index, which measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, advanced 64 percent since its 2008 low on May 15. The S&P 500 dropped 1.5 percent today.

``It remains a `shoot first, ask questions later' market when it comes to the financials,'' said Steve Sosnick, equity risk manager at Timber Hill LLC, the market-making unit of Interactive Brokers Group Inc. in Greenwich, Connecticut. ``If Fannie and Freddie are in trouble, and the stocks are telling you people think they are, then financial stocks have to be affected. Everyone's worried about financing.''

Quick Take:

I hate to say it guys, but until the VIX gets back into the upper 30's, I don't think this wave of selling is over. We are only in the mid twenties right now. The VIX hit 37 when Bear Stearns blew up. Until we see some type of capitulation in selling, stocks are going to continue to slowly bleed.

Today was the first day where the VIX finally started to spike. If we get back into the upper 30's and drop to around 1220 on the S&P, we may hit a short term bottom. I think there will be another leg down following this wave when the banks, home builders, and other financials start failing.

This will then be your bottom folks. I have no timeline on when this will happen but we still have a ways to go.

The one thing I can say on my timeline of the bursting debt bubble is its happening at a much faster pace then I ever could have imagined. The bottom may be here sooner than we think if we continue to blowup at this pace.

IndyMac Hangs by a Thread

IndyMac all but went under today as they scramble to survive. Here is the news:

"July 7 (Bloomberg) -- IndyMac Bancorp Inc., the lender that's lost almost 90 percent of its market value this year, will fire half its employees after regulators said the company is no longer ``well capitalized'' and the quarterly loss widened.

IndyMac will slash its workforce by 53 percent to 3,400 employees and curtail lending, the Pasadena, California-based lender said on its Web site. The company said it is working with regulators on a new business plan.

``We don't expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets,'' Chief Executive Officer Michael Perry said in the statement.

IndyMac, which was the second-biggest independent U.S. mortgage lender last year behind Countrywide Financial Corp., has lost almost $900 million in the nine months ended in March amid tumbling home prices. The company is focusing on mortgages that can be sold to government-sponsored enterprises like Fannie Mae and Freddie Mac."

Quick Take:

In a nutshell, this bank is toast. When it happens it will be one of the largest bank failures in history. this was the second biggest mortgage lender in the country! They were unable to find capital. I doubt the FDIC will allow them to survive very long without being able to hit their capital requirements. The stock currently sits at .50.

Bottom Line:

Stay tuned. We are witnessing the largest financial crisis in 70 years. You will be telling your grandchildren about this one years from now.

Lets just hope we can find an orderly way out of this.

Its All About Earnings This Week

I hope everyone enjoyed their holiday weekend.

Today is a quiet day in the markets. Earnings season begins later this week so I expect things to really get interesting later in the week. We had an early pop this morning. No substantial news behind it. Microsoft showed some renewed interest towards Yahoo which is helping tech. The Financials continue to drop like a rock.

Some of the big industrials report this week, and I am curious to see how rising oil prices and costs on goods due to inflation have affected earnings.

Something tells me their earnings are going to be worse than anyone expected due to these increased costs. The problem many of these companies have is they cannot pass on the costs to the consumer because they are too weak to afford price increases. Wages are falling right now in the US when you include inflation. Something has to give here folks and my guess is it will be lower sales.

I expected some of these larger companies to start fighting back on accepting these price increases and it looks like automotive has had it with th rising cost of steel.

This is from the WSJ:

"In an effort to curb the relentless rise in steel prices and bolster their own frail finances, some auto makers are beginning to push back on price increases, saying they won't pay surcharges on agreed-upon supply contracts.

The resistance is one of the first strong signals to steelmakers that their hardest-hit customers have reached a tipping point and may not be able to withstand higher prices.

Some auto makers are threatening to fight the additional charges in court, saying that financial terms of a contract can't be altered, according to people familiar with the matter."

Quick Take:

Desperate measures need to be taken by the big three if they want to stay alive. The steel mills and automotive have a long past when it comes to fighting over prices. Steel has basically doubled in 6 months between soaring scrap surcharges and higher manufacturing costs due to high oil prices.

If the Fed isn't going to come in and try to control inflation then more companies are going to follow suit and start fighting prices and surcharges. They will be forced to in order to survive. Companies don't last long if they are running at a loss due to soaring costs and the inability to pass it on.

The steel mills will be in big trouble if they lose their pricing power with the big three because it is such a large part of their business. The stock prices of steel stocks have been soaring due to higher profits and these could become nice shorting candidates depending on how the big three do in price negotiations.

The automotive companies have a history of winning these battles because they such a large part of the steel mills business.

This is why the Fed has to reign in inflation. We face a major blowup in the economy if they continue to ignore it and companies start running at a loss.

What are these analysts smoking?

I had to laugh when I read this article. Notice Lehman is one the firms predicting the biggest rally in the S&P in 26 years. These pump monkeys continue to amaze me. I love one of the quotes in here from an analyst that finds this report ridiculous. Of course I do as well. Its always amusing to see what the delusional bulls are thinking so here it is.

"July 7 (Bloomberg) -- Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor's 500 Index will gain the most in 26 years during this year's second half. That isn't going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.
Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts' earnings estimates for this year still represent a decline from 2006 levels, making the strategists' optimism harder to justify, investors say.

``If they're accurate, I'll give them a big kiss,'' said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. ``I don't think those are very realistic figures"

Unrepentant Bull

Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank's New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman's global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent
The S&P 500's rebound ``is going to be one of the greatest roars we've seen,'' Bianco said. ``The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.''

The Money Quote:

``A monkey with an abacus is probably better at the end of the day,'' said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion."

Final Take:

If I had to chose one of these clowns to manage my money I would take the monkey with the abacus!! I guess when Rome is burning you will say anything to get things going again. Remember that "generational buy" call on the financials a couple months ago? How did that work out.

That's it for now folks. Things are quiet out there. Have a great Monday!