U.S. Payrolls Rose 132,000 in June; Unemployment Rate at 4.5%

" Employers in the U.S. added 132,000 workers to payrolls last month, wages grew and the unemployment rate held near a six-year low, signaling the job market will continue to sustain American consumers.

The increase in employment followed a 190,000 gain in May that was larger than previously reported, the Labor Department said today in Washington. The jobless rate held at 4.5 percent for a third month. "

Meh. This doesn't give the rate cut argument any ammo... the futures market remains somewhat indecisive following the data, still indicating a slightly lower open for equities. Bonds are decidedly weakening in response as the yield on the 10-year note (-12/32) climbs to 5.19%.

Keep in mind that the rally in equities over the last six months was fueled by rate cut speculation.

Source: U.S. Payrolls Rose 132,000 in June; Unemployment Rate at 4.5% (http://www.bloomberg.com/apps/news?pid=20601068&sid=aGafGaqHWqK0&refer=economy)

SSEC (Update1)

No Thanks, We're Stuffed...

" The world's biggest bondholders have had their fill of leveraged buyouts, convinced that increasing mortgage delinquencies will drag down the U.S. economy and drive debt-laden companies into default. "

What happens when you can't raise the funds for your massive leveraged buyouts?

" Investors are getting skittish just as private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group Inc. prepare to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. In the past two weeks alone, more than a dozen companies were forced to postpone or restructure debt sales. "

This all sounds so familiar...

" "There are some very scary analogies between high yield and the mortgage market,'' said Kevin Lorenz, a managing director who oversees $2.5 billion of high-yield assets at TIAA- CREF in New York. "You cannot do fundamental analysis and believe that those are creditworthy companies.''

Leveraged buyouts caused sales of high-risk, high-yield debt to rise 70 percent to a record $1 trillion during the first half of the year, according to data compiled by Bloomberg. Bonds and loans rated below BBB- by Standard & Poor's and Baa3 by Moody's Investors Service are considered below investment grade. "

This is his how credit bubbles begin to unwind. With a weakening buyout bid in markets, multiplies will have to contract and markets will tumble...

Source: LBO Debt Alarms Fidelity, Lehman, TIAA-CREF Managers (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aRI4tPjHRmK4&refer=home)

Ghost Towns? In Spain?

The real estate bubble is quietly bursting... everywhere...
It is now so bad in Spain, entire developments sit abandoned.

" The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the Housing Ministry started keeping records. "

Its so obvious looking at the numbers...

" Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry. "

Capitalism, as always, will sweep away the excess in the most efficient and ruthless manor.

" New and existing house prices will drop by 20 percent from now through 2009, Bernardos estimates. The country built an average of 432,411 houses per year from 1996 to 2005, more than France and the U.K. combined. "

How could all this happen?

" Spanish home prices have more than doubled since 1998, exceeding growth rates in the U.K. and Ireland, two of Europe's fastest-growing markets. The increase has been driven by a drop in interest rates to less than 3 percent from about 15 percent as Spain adopted the euro, household incomes that swelled as women joined the workforce, and a surge in vacation home purchases by Northern Europeans, mainly Germans and Britons. "

Sound familiar?

" As prices start to decline, Spanish homeowners may face the same challenges as buyers in the U.S., which is in the second year of a housing slump. Falling prices may spur higher delinquencies as buyers face difficulty refinancing. Spanish buyers may face an even higher risk of losing their property because housing prices are based on appraisals rather than actual sales, and appraisers often inflate values. "

Deliquincies and defaults... different country, same story.

" Defaults on Spanish home loans in the first quarter were the highest in at least four years, according to Standard & Poor's. The S&P Spanish RMBS delinquency index for loans backing residential mortgage-backed notes increased by 23 basis points to 1.75 percent during the first three months, S&P analysts wrote in a report on May 29. That compares with an index level of 0.7 percent in March 2004. "

The UK is next...

Source: Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2) (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar3L878k5YM4)

Investors Shun `Falling Knife' of Real Estate Stocks.

No, this is not a US headline. This a European headline.

" Rising interest rates and declining profits from real estate are pushing investors to ditch European property stocks after a four-year rally. "

Buy the dip? Find a bargain? Not even close...

" The dividend yield, or what a company pays to investors as a proportion of its share price, is the lowest ever for real estate companies, according to JPMorgan Chase & Co. That suggests the stocks have more room to fall before they become a bargain. "

The leaders on the way up, are the leaders on the way down. The Bank of England just raised rates too.

" Stocks in the U.K. and Spain, the markets that led the boom, have been hurt most in the recent slump. "

Source: Investors Shun `Falling Knife' of Real Estate Stocks (Update3) (http://www.bloomberg.com/apps/news?pid=20601109&sid=aplRXmosXJJw&refer=home)

Bank of England Raises Rate.

" Bank of England policy makers raised interest rates for the fifth time since August and said they're concerned inflation will stay above target, adding to investor speculation that at least one more increase is likely this year.

The nine-member Monetary Policy Committee increased the bank rate by a quarter-point to 5.75 percent, the highest since April 2001, the central bank said today in London. The panel, led by Governor Mervyn King, said in a statement that "the balance of risks'' to price stability still "lie to the upside.'' "

What does this mean for the average person?

" Higher rates will add to pressure on consumers shouldering a record 1.3 trillion pounds ($2.6 trillion) of debt. Chancellor of the Exchequer Alistair Darling said in a Financial Times interview yesterday he's concerned Britons who took out two-year fixed rate mortgages in 2005, when the bank rate dropped to 4.5 percent, will now be faced with higher repayment costs. "

The UK embraced subprime and other exotic mortgages with almost as much enthusiasm as the US and will face the same consequences... eventually...

" For consumers with variable-rate mortgages, each quarter- point rate increase adds about 30 pounds a month to repayments on an average 25-year mortgage of 200,000 pounds, according to the Council of Mortgage Lenders. Payments on a loan of that size will be about 150 pounds more each month than they were a year ago. "

With the pound hitting one record after another consumers and businesses are starting to get squeezed from both sides.

" "Rates are now at a level that will prove painful for hundreds of thousands of homeowners and manufacturing,'' said Adam Lent, head of economic affairs for the Trades Union Congress, which represents more than 7 million workers."

Source: Bank of England Raises Key Rate a Fifth Time to 5.75% (Update4) (http://www.bloomberg.com/apps/news?pid=20601068&sid=abLV1BnGzIpE&refer=economy)

$SSEC

Technical weakness is showing up in some of the hottest indexes around the globe. If the party ends in Shanghai, you can bet on it ending most everywhere else. The argument that global growth, in particular China and India, will pull the U.S. economy through its current weak patch could vaporize very very quickly...

Learning the Wrong Lessons from Your Mistakes...

The Asian 'Tiger' economies have long since recovered from the 'Asian Currency Crisis' of 1997 and they all swore they've learned their lessons.

" Since the late 1990s, Asian economies "have re-emerged to be among the fastest growing in the global economy,'' Zeti Akhtar Aziz, governor of Bank Negara Malaysia, said in Manila. "Our steadfast reform and restructuring effort have rewarded us with strengthened macroeconomic fundamentals and sound and stable financial systems.'' "

A combination of economic growth and policy reform have led to the accumulation of massive currency reserves.

" Ten years after the start of the Asian crisis, the region's $3 trillion-plus of foreign-exchange reserves are having two noticeable effects. One, scaring away the speculators who attacked the region's currencies in 1997. Two, giving Asia enormous financial influence around the globe. "

Believing themselves safe, the revitalized 'Tigers' have failed to understand the consequences of their actions.

" The dynamic has taken on a powerful inertia. Central banks can't easily dump their reserves; markets would react by driving asset values lower, leaving governments with massive losses. If they stop stockpiling reserves, their currencies will surge. "

The solution? Take more risk!

" Having gotten themselves into an untenable situation, governments are looking for ways to use the money more productively. That's leading to the creation of more so-called sovereign wealth funds, government-owned investment entities. Their assets will grow to $27.7 trillion by 2022 from about $2.5 trillion today, Morgan Stanley predicts. "

More fuel for the asset price inflation bubble, and just as the current economic cycle is starting to look a little vulnerable...

" Today, untold numbers of hedge funds are trolling the globe for profits, and taking on huge leverage to do it. The boom in private-equity firms is another new wrinkle, as are sovereign wealth funds. Add to the mix countless investors borrowing cheaply in yen and investing in higher-yielding markets and you have a multifaceted recipe for shaky markets. "

What happens when the inevitable de-leveraging begins?

" The irony is that the tool Asia hoped would protect it from market turmoil -- foreign-exchange reserves -- may be sowing the seeds of bigger problems. "

Source: New Bubble Appears as Asian Tigers Roar Again (http://www.bloomberg.com/apps/news?pid=20601010&sid=arpYb6GkH7kU&refer=news)

But You Swore it was 'Contained' ...

All the talking heads swore subprime was a tiny little problem contained to an insignificant little corner of the debt markets.

But the smart ones, the ones who really understand economics, they know better.

" Anthony Bolton, who helped turn Fidelity International into the U.K.'s largest mutual fund manager, said declines in subprime mortgages and collateralized debt obligations may indicate that investor confidence will soon fall, leading to a drop in equity markets.

Investor's appetite for risk may slide as a result of declines in the investments, which have forced some funds to close, Bolton said. The collapses may mirror the drop of split capital trusts in the U.K. earlier in the decade, he added.

" For the first time I can see what may be the catalyst,'' Bolton, 57, said today in an interview at the Fund Forum conference in Monaco. "We have started to see it with the subprime and the CDOs. It has started to percolate out.'' "

In the meantime, they've all been busy getting out of the way...

" Bolton said he is protecting his fund by buying more shares in larger companies, which he says are more stable in a market decline, and selling smaller stocks. The amount of his fund invested in larger companies has climbed to almost 50 percent from about 20 percent a year ago, he said. "

Source: Subprime Declines May Signal Market Turn, Bolton Says (Update1) (http://www.bloomberg.com/apps/news?pid=20601010&sid=adK9hk5joONs&refer=news)

Sound familiar?

Did you really think subprime was only a U.S. problem?

" U.K. lenders are selling home loans to customers who don't need them and don't always check whether a client can repay the debt, practices that may lead to "serious wider consequences,'' the U.K.'s financial regulator said. "

The industry behaved the exact same way in the U.K. as they did in the U.S. only the bubble hasn't burst... yet...

" Poor record-keeping at some mortgage brokers means they were unable to prove mortgages sold to clients were suitable, the FSA said. Some firms failed to check information they were given was believable, the regulator said. "

Want a mortgage? Got a pulse? Ok. Sign here...

" U.K. debt as a share of income touched 163 percent in the fourth quarter of last year, the highest since 1992, according to Citigroup figures. A first-time buyer can purchase a home for 3.2 times his or her annual income, according to the Council of Mortgage lenders. "

Unlike in the U.S., the Bank of England isn't even considering cutting rates...

" The bank's forecasts in May showed that four rate increases since August won't be enough to tame inflation, which has exceeded the 2 percent target for more than a year. "

" Bank of England policy makers will probably raise the benchmark interest rate for the fifth time in a year this week as Governor Mervyn King wins more support for an increase to curb inflation, a survey of economists shows. "

Source: Bank of England Will Probably Raise Key Rate to 5.75% (Update2) (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5Gee7E4DBAg)
Source: U.K. Subprime Lenders' Practice Is `Poor,' FSA Says (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aVfG1VT3ILws&refer=home)

AAPL - (Update1)

Moving stop from $119.00 to todays low of $121.50. Holding to see if prices can move above $127.50. Volume needs to confirm any new highs.

Treasury 10-Year Notes Fall Most in 3 Weeks as Risk Stabilizes

Yields managed to hold the 5.00% level and are now pushing higher...
The safe haven bid unleashed by Bear Stearns' subprime problems seems to have run its course.

" Treasury 10-year notes declined the most in three weeks as a drop in a measure of the perceived risk of owning U.S. corporate bonds reduced demand for the safety of government debt. "

Source: Treasury 10-Year Notes Fall Most in 3 Weeks as Risk Stabilizes (http://www.bloomberg.com/apps/news?pid=20601009&sid=a7OeaTjtpZs4&refer=bond)

AAPL Derivative Plays...

To bet on AAPL and the iPhone without betting on AAPL, simply buy the suppliers...

" The most expensive model, which retails for $599, has component and manufacturing costs of $265.83, El Segundo, California-based ISuppli said today on its Web site. Excluding costs for logistics and royalties, Apple generates margins exceeding 55 percent, the report said. "


Source: Apple's IPhone Sells for Double Costs, ISuppli Says(http://www.bloomberg.com/apps/news?pid=20601087&sid=amXGY6M1IQGk&refer=home)

Factory Orders Fell Less Than Forecast.

Read between the lines. Note the strength in technology spending. Durable good orders also showed the same strength in technology. The charts further illustrate the rotation into technology with the NASDAQ making new highs while the DOW and S&P are exhibiting more and more technical signs of weakness.

" Orders placed with American factories fell less than forecast in May as demand for computers, electronics and fuel helped make up for a decline in aircraft bookings, a government report showed. "

Source: U.S. Factory Orders Fell Less Than Forecast in May (http://www.bloomberg.com/apps/news?pid=20601087&sid=aiw0CWbwxMvs&refer=home)

Existing Home Sales Drop to Five Year Low.

Pending existing home sales dropped to levels not seen since immediately post Sept. 11th. Take note, because tighter loan standards, more stringent regulation and finally rate resets all haven't even worked their way into these numbers... yet.

" Americans unexpectedly signed the fewest contracts to buy previously owned homes in more than five years in May as buyers waited for lower prices and lenders made it harder to get mortgages. "

The seriousness of the situation is just barely starting to sink in...

" The picture in housing is still negative. '' David Sloan, senior economist 4Cast Inc.
" Housing has had a more dramatic correction than anyone anticipated. " Jeffrey Mezger, CEO KB Homes

Source: Pending Sales of Existing Homes in U.S. Fall to Five-Year Low (http://www.bloomberg.com/apps/news?pid=20601087&sid=agSR1kumLhCM&refer=home)

AAPL

Watch for a breakout on better than expected iPhone sales.

Source: Apple's IPhone Sells for Double Costs, ISuppli Says (http://www.bloomberg.com/apps/news?pid=20601087&sid=aWY7lZOXFHJ8&refer=home)

Yes, low rates can hurt growth too...

The BOJ is concerned that maintaining low rates for a long period of time will have negative economic consequences.

" Failing to raise rates soon "could cause large swings in economic activity and inflation,'' Deputy Governor Toshiro Muto said in a speech in Tokyo today. Fellow board member Kiyohiko Nishimura said "to stand pat for a long period of time is not a prudent strategy." "

Talking tough and even raising rates won't adversely affect the carry trade as the yield gap is still rising between high yield currencies and the Yen.

" "The Bank of Japan will probably raise interest rates in August, or maybe in September,'' said Masuhisa Kobayashi, chief Japan bond strategist at Barclays Capital in Tokyo. "Judging from the strength of the economy, however, there won't be any surprise if the bank attempts to raise rates this month. "
Source: Bank of Japan Policy Makers Say Keeping Rates Low Hurts Growth (http://www.bloomberg.com/apps/news?pid=20601068&sid=ayq3rov59ldM&refer=economy)

When even socialist countries are creating jobs...

You have to be impressed when even socialist countries are creating jobs. The world economy must be so good that even these governments can't mess it up or they have reformed quite a bit more successfully than previously thought.

" The jobless rate in the 13-nation euro area declined for a seventh month, dropping to 7 percent from 7.1 percent in April, Eurostat, the European Union's Luxembourg-based statistics office, said today. Producer prices rose 0.3 percent in May after gaining 0.4 percent in April, according to a separate report. "

Considering the EURO isn't exactly helping, these numbers are all the more impressive.

Source: Euro-Area Unemployment Rate Declined to Record in May (http://www.bloomberg.com/apps/news?pid=20601068&sid=a2j3C3.kqiBY&refer=economy)

China to Sell Dollars

Uh oh. China to sell dollars... enough said.

" The currency strengthened by the most in two weeks also on speculation the central bank will sell dollars as China sets up a fund to manage the country's $1.2 trillion foreign-exchange reserves. The government on June 29 approved a 1.55 trillion yuan ($204 billion) sale of government bonds to establish the new asset-management company, which will seek to boost returns. "

Source: Yuan Rises Past 7.6 for First Time Since July 2005; Bonds Fall (http://www.bloomberg.com/apps/news?pid=20601089&sid=az0DP08TJQLg&refer=china)

China to `Moderately' Tighten Monetary Policy.

The central bank is talking tough again, but until they slam on the brakes in a meaningful way investors aren't going to listen...

" China's central bank said it will "moderately" tighten monetary policy to control investment and lending growth and prevent the economy overheating this year.
The statement was posted on the bank's Web site today after a monetary policy meeting for the second quarter.
The bank reiterated pledges to continue to reform its exchange-rate system and to give the market a bigger role in setting the yuan's rate. "

Source: China's Central Bank to `Moderately' Tighten Monetary Policy (http://www.bloomberg.com/apps/news?pid=20601080&sid=aGodD2jrWME8&refer=asia)