Free Candy!

I must admit, I did not like yesterday’s mid-day show of strength. The SP500 bounced (again) off support @ 1490… I had been hoping that weak earnings from Merril Lynch and another seriously scary housing number would be the catalyst to break that level of support. I will remain patient, although I have cut my index shorts by half.

Orders for Durable Goods in U.S. Unexpectedly Fell (Update3): “Orders for U.S.-made durable goods unexpectedly fell in September, restrained by a slump in demand for military equipment that overshadowed increases in business investment.

The 1.7 percent drop followed a 5.3 percent decrease in the prior month, Commerce Department figures showed today. Excluding a 39 percent decline in defense equipment, orders rose 0.7 percent.

Rising demand for capital equipment, a sign of business spending, may ease concern the housing slump will lead to a broader economic slowdown and end the expansion. Overseas demand and increasing business investment in new machinery will keep manufacturing growing in coming months, economists said.”

While the number is not quite as weak as the headline would suggest, a 0.7% increase excluding defense equipment is not exactly a sign of economic strength either.

Merrill Lynch May Write Down $4 Billion More, CIBC Analyst Says: “Merrill Lynch & Co., the largest brokerage firm, may have to write down another $4 billion in the fourth quarter as the value of subprime assets continues to drop, according to CIBC World Markets.”

This is more bad news for Merril, but hardly a surprise. Consider also the usual suspect, from Bear Sterns to Goldman and everybody in between, will most probably follow up with further write downs of their own over the coming quarters… I think its simply unavoidable.

Merrill Lynch Ratings Cut by S&P, Fitch After `Startling' Loss: “Merrill Lynch & Co.'s credit rankings were cut by Standard & Poor's and Fitch Ratings after the securities firm posted the biggest quarterly loss in its 93-year history.

S&P lowered New York-based Merrill Lynch to A+ from AA- after the investment bank wrote down the value of subprime mortgages, asset-backed debt and leveraged loans by $8.4 billion, causing a $2.24 billion loss. Fitch also reduced the firm to A+ from AA-, its lowest ranking since August 2002.”

When the debt ratings of major Wall Street players start to get cut it is a signal that the Bull market is OVER. These guys are at the center of this money making universe. When they are wounded like this all risky activity gets scaled back quickly… way scaled back. Risky assets classes won’t find the sponsorship they need to continue to outperform. End of story. This cycle is over. (Don’t worry, there will be another one. There always is.)

O'Neal's Subprime Shakeout Shows Peril of SIV Bailout (Update3): “Paulson's plan, announced last week, may do little to address the lack of transparency that has roiled global fixed- income markets since July 31, when two hedge funds managed by Bear Stearns Cos. went bankrupt following losses on securities tied to subprime mortgages. Investors aren't willing to rely on estimates by Wall Street traders to value these bonds and there's no central trading system or exchange. Fitch Ratings says the value of SIVs, which own more than $320 billion of bonds, fell to 73 percent as of Sept. 28 from 100 percent in July.”

The articles knocking the SIV bailout plan are coming fast a furious. M-LEC is not finding many friends on the Street. It may therefore be doomed to fail. Watch these developments like a hawk…

Japan's Exports Grow at Slowest Pace in Two Years (Update2): “Japan's exports grew at the slowest pace in two years in September as shipments to the U.S. fell, a signal that the nation's economic expansion may cool because of waning demand in its largest market.”

I almost missed this little headline yesterday. Pay close attention if you’re in the ‘Chindia will save us camp’. US economic weakness will spread to Japan, and Europe and from there to the EXPORT DRIVEN economies of China and India. Some weakening is already evident.

“Growth in exports to China slowed to 16.5 percent last month from 23.7 percent in August. Asian exports increased 8.3 percent after climbing 16.4 percent. Shipments to Europe rose 13.2 percent in September after August's 15.5 percent gain.

Shipments to the U.S. fell at the fastest rate in almost four years as a housing recession led to a drop in demand for construction equipment. Japan needs export growth to ensure the economy rebounds from a second-quarter contraction as falling wages keep the lid on spending by consumers at home.”

Oh and the housing situation is about to get worse. The bulk of the ARMs resets are coming up…
It looks like the Bulltards are still blindly chasing the Candy Truck…