Michigan Consumer Confidence Index Gains to 92.4

" Confidence among U.S. consumers unexpectedly jumped the most since October this month, helped by an unemployment rate close to its lowest in six years and gains in incomes.

The Reuters/University of Michigan's final preliminary index of consumer sentiment rose to 92.4 from 85.3 in June, which was the lowest in 10 months. The reading compares with an average of 88.6 in the 12 months through June. "

That is a fairly decent jump... and honestly quite surprising. Gasoline prices have risen 31% this year. That combined with weakening housing prices and rising rates should have but somewhat of a damper of consumer confidence.

Source: U.S. Michigan Consumer Confidence Index Gains to 92.4 (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=anjtso261iho&refer=home)

Nobody Wants the US Dollar Anymore...

In the case of Iran, they can kill two birds with one stone: Enrage the US and make an economically sound decision.

" Iran asked Japanese refiners to switch to the yen to pay for all crude oil purchases, to counter the risk that U.S. dollar transfers may be frozen by increased sanctions.

Iran wants yen-based transactions "for any/all of your forthcoming Iranian crude oil liftings,'' according to a letter sent to Japanese refiners that was signed by Ali A. Arshi, general manager of crude oil marketing and exports in Tehran at the National Iranian Oil Co. The request is for all shipments "effective immediately,'' according to the letter, dated July 10 and obtained by Bloomberg News. "

As the dollar declines, commodity producers demand higher prices and central banks the world over have started diversifying their reserves.

" Iran is cutting its U.S. dollar reserves to less than 20 percent of total foreign currency holdings, and will buy more euros and yen as tensions with the U.S. increase, Central Bank Governor Ebrahim Sheibany said on March 27. "

This is not an isolated incident. Iran joins a growing list of countries in the process of shunning the dollar.

Source: Iran Asks Japan to Pay Yen for All Oil, Starting Immediately (http://www.bloomberg.com/apps/news?pid=20601087&sid=aLaColVYu5LA&refer=home)

WTIC: Crude Oil Sneaking Higher

" Crude oil rose in New York and Brent oil in London touched an 11-month high on reduced production in the North Sea because of a pipeline shutdown and maintenance at regional fields.

Chevron Corp. and ConocoPhillips said they lost output from North Sea fields that produce oil and gas after BP Plc closed the pipeline. BG Group Plc said its Armada oil field in the North Sea has been shut for maintenance since June. The International Energy Agency said in a report today that global oil demand will rise 2.5 percent next year. "

Source: Oil Rises as North Sea Output Slips on Closed Pipeline, Repairs (http://www.bloomberg.com/apps/news?pid=20601087&sid=aNO55PmHNFS8&refer=home)

U.S. Retail Sales Fell 0.9% in June; Drop 0.4% Excluding Autos

Sobering numbers, considering yesterday's euphoric rally...

" Retail sales in the U.S. fell in June by the most in almost two years, raising concern near-record gasoline prices and falling home values are taking a toll.

The bigger-than-forecast 0.9 percent decrease followed a revised 1.5 percent gain the prior month, the Commerce Department said today in Washington. Purchases excluding automobiles unexpectedly fell 0.4 percent, the most since September. "

The consumer really is slowing down.

Source: U.S. Retail Sales Fell 0.9% in June; Drop 0.4% Excluding Autos (http://www.bloomberg.com/apps/news?pid=20601087&sid=awxSspXYRr3s&refer=home)

COMPQ, SPX, INDU: Ninja Style Breakouts To New Highs Across All Markets.

VIX: Higher Trading Range?

U.S. Foreclosures Jump 87 Percent as Lending Practices Tighten

" The number of U.S. properties in foreclosure climbed 87 percent last month from a year earlier as home prices fell and lending standards tightened, making it harder for borrowers to sell homes and refinance mortgages. "

In summary, housing prices are falling, rates are rising AND lending standards are tightening. The perfect storm? Not quite. When the majority of ARMs rate resets kick in later in the year, then it will be a perfect storm.

" An estimated 58 percent of properties in the foreclosure process are linked to borrowers with subprime loans, and RealtyTrac expects U.S. foreclosures to reach 1.8 million by year's end, Rick Sharga, a spokesman for the company, said in an interview. "

These mortgages are spun into MBSs (Mortgage Backed Securities) which are then piled into CMOs (Collateralized Mortgage Obligations) where they are sliced and diced beyond recognition into different tranches of varying risk and return. The entire thing is rated investment grade and sold.

" "We're running much further ahead of what we had anticipated in terms of year-over-year,'' Sharga said. "Historically, 40 percent of properties entering default make it as far as auction, with half of those going back to banks and the other half to investors.'' "

Either way, both the banks and investors will sell these properties. They are not in the business of property management after all. For example, Bear Serns is now sitting on unwanted property in Georgia... and elsewhere...

" It's a mess,'' said Kiwanna Ford, 31, who grew up next door to the vacant brick ranch-style house four miles south of the DeKalb County Courthouse. Bear Stearns seized the property three months ago after Ford's neighbor stopped making payments on his mortgage. ``If we wanted to sell our house right now with that next door, it would hurt,'' she said.

Bear Stearns, the second-biggest U.S. underwriter of mortgage-backed securities now reeling from the worst housing decline since the 1930s, never planned to take possession of the three-bedroom house. After selling the property last week, Bear Stearns said it still owns 18 houses in the Decatur area acquired since November. Citigroup Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. are listed in public records as the owners of at least 35 homes in the suburb, where 19,000 people live seven miles east of downtown Atlanta. "

I guarantee you, that the financial ninjas on Wallstreet did not expect their complex financial formulas to turn into empty houses in the swamp... Surpise!

Source: U.S. Foreclosures Jump 87 Percent as Lending Practices Tighten (http://www.bloomberg.com/apps/news?pid=20601087&sid=aGBN_ct.a0jk&refer=home)
Source: Bear Stearns Meets Possums in Georgia as Foreclosures Increase (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1IaEO5f_3kQ)
Source: The Forgotten Resets (http://www.attheselevels.com/archives/678-The-Forgotten-Resets.html)

Initial Jobless: -12,000 to 308 000

" First-time claims for jobless benefits fell last week to the lowest in almost two months, adding to evidence that the labor market is holding up going into the second half of the year.

Initial jobless claims decreased by 12,000 to 308,000 in the week that ended July 7, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, dropped to 317,750 from 319,250.

The figures suggest employers are holding on to workers as the rate of unemployment hovers close to its lowest in six years. Strength in the job market, with rising payrolls and income, will help sustain consumer spending even as fuel costs rise and home values decline, economists said. "

Source: U.S. Initial Jobless Claims Fell 12,000 to 308,000 Last Week (http://www.bloomberg.com/apps/news?pid=20601087&sid=aCEaobDLNwaA&refer=home)

USD: At Critical Support.

When Mark To Model Becomes Mark To Market.

Imagine sitting on billions of leveraged dollars and you get to choose how to value them? How convenient is that? Isn't mark to model fun?

" At least a third of hedge funds that invest in asset-backed bonds pick and choose values for their investment that help mask wide swings in performance, according to a survey of 1,000 funds worldwide by Paris-based Riskdata, a risk management firm for money managers.
" If you have five different brokers you will get five different quotes, so if you don't have an objective valuation process you can choose the quote which for you is the most interesting,'' said Olivier Le Marois, chief executive officer of Riskdata. "There's no consensus on where the market price is.'' "

Downgrades by Moody's and pending downgrades by S&P are about to shatter that illusion.

" The downgrades may force sales, giving investors who have relied on estimates real prices to value their own holdings. That would be novel in the market for asset-backed bonds.
The securities, backed by everything from student loans to auto payments to mortgages, almost doubled to about $9 trillion outstanding since 2000, according to the Securities Industry and Financial Markets Association. "

Source: Subprime Losses Drub Debt Securities as Ratings Drop (http://www.bloomberg.com/apps/news?pid=20601009&sid=aDjWdjsLHeZM&refer=bond)

$800 Billion Market Becomes Unhinged.

" On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn't what they get. "

Moody's downgrades are making explicit what everybody was refusing to acknowledge all this time. Downgrades are pending from S&P.

" More than a few investors would like to know what took the New York-based rating companies so long to discover a U.S. liability of Iraq-sized proportions. "

That really is a good question. Find the answer, find the money... or follow the money and you'll find the answer.

" Investors depend on guesswork by Wall Street traders for valuing their bonds because there is no centralized trading system or exchange for subprime mortgage securities. Credit rating companies supported high prices because they failed to downgrade the debt as delinquencies accelerated. "

Source: Subprime Losses Drub Debt Securities as Ratings Drop (http://www.bloomberg.com/apps/news?pid=20601009&sid=aDjWdjsLHeZM&refer=bond)

Rates Officially Rising in Every Major Economy

Rates are officially rising in each and every single major economy now. The great global liquidity experiment is winding down.

The statement from the ECB just re-iterates their commitment to raise rates further.

" European Central Bank policy makers including executive board member Juergen Stark said inflation may accelerate in the euro region, suggesting they support raising interest rates further. "

Source: ECB Policy Makers See Risk of Faster Inflation in Europe (http://www.bloomberg.com/apps/news?pid=20601068&sid=a9DUEHCNowqU&refer=economy)

LBO Credit Quality Falls

" Investor confidence in the ability of companies to repay debt used to finance leveraged buyouts fell to the lowest in at least nine months in Europe as lenders shun risky assets. "

The easy and cheap money that was financing this LBO mania is in the process of drying up and getting expensive.

" The U.S. subprime mortgage rout is spreading across debt markets worldwide, with investors demanding higher interest margins and tougher safeguards, or covenants, on loans to buyout firms. New York-based Kohlberg Kravis Roberts & Co. offered lenders a discount and added restrictions on its debt to raise $1.4 billion for Dutch DIY retailer Maxeda BV last week. "

This will ultimately pull the LBO 'bid' from the market that has kept each correction shallow over the last year.

" Private-equity firms need to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. in New York. More than a dozen companies were forced to postpone or restructure debt sales in the past three weeks.

U.S. high-yield loan prices fell to a four-year low yesterday, with covenant-lite loans losing the most, according to Standard & Poor's LCD unit. "

A cancellation of one of the big pending LBO's might be a catalyst for a significant equity markets correction.

Source: LBO Credit Quality at Nine-Month Low, Loan Derivatives Show (http://www.bloomberg.com/apps/news?pid=20601087&sid=a4o0UVgHCzLM&refer=home)

Bond Risk Soars Most in Three Years on Subprime Debt Downgrades

" Corporate bond risk soared in Europe by the most in at least three years as debt rating downgrades on U.S. subprime securities triggered a worldwide selloff, according to traders of credit-default swaps. "

More importantly are the scope and consequences of this repricing of risk.

" "More pain will come,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. "There are signs its spreading to emerging markets, equities and the yen.'' "

The actual downgrades by Moody's and the pending downgrades by S&P make explicit that the credit quality simply isn't there for these instruments. These downgrades will force liquidations of positions. These liquidations will be the first mark to market some of these instruments have seen and they will be much much lower than the market to model projections currently being used...

Source: Bond Risk Soars Most in Three Years on Subprime Debt Downgrades (http://www.bloomberg.com/apps/news?pid=20601010&sid=annFLZY.nFrY&refer=news)

Canada Raises Rate, Says Further Move May Be Needed

" The Bank of Canada raised its benchmark interest rate for the first time in more than a year and said a "modest'' tightening may still be needed to slow inflation.

Policy makers pushed the target rate for overnight loans up by a quarter point to 4.5 percent, the highest in six years and 75 basis points less than the Federal Reserve's target. All but one economist in a Bloomberg News survey predicted the increase. "

No surprise really.

Source: Canada Raises Rate, Says Further Move May Be Needed (Update4) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aH3oUdu4pUfs&refer=home)

S&P May Cut $12 Billion of Subprime Mortgage Bonds

The first of many downgrades.

" Standard & Poor's said it may cut credit ratings on $12 billion in bonds backed by subprime mortgages because losses will rise beyond its previous expectations. Ratings of 612 classes of residential mortgage-backed securities were placed on CreditWatch with negative implications, New York-based S&P said today in an e-mailed statement.

The bonds represent 2.1 percent of the $565.3 billion of similar bonds rated by S&P during 2006.Standard & Poor's didn't do this willingly. It took quite a bit of verbal abuse. Investors have criticized S&P, Moody's Investors Service and Fitch Ratings because their ratings on bonds backed by mortgages to people with poor or limited credit don't reflect the fastest default rate in a decade. Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven't changed. "

S&P learned some obvious lessons.

" S&P said it also plans to change the methods it uses to rate existing and new mortgage bonds to reflect the increased likelihood of mortgage defaults and losses. "

The big boys bought their precious time though. They should either be out, hedged or outright short by now...

" "S&P's actions are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for.'' "

Source: S&P May Cut $12 Billion of Subprime Mortgage Bonds (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aZQFKZhqnUZk&refer=home)

USD

The dollar is at critical multi year support @ $81.25 and Bernanke speaks @ 1:00 PM today.
A violation of these levels would result in a spike in yields and a drop in equities...
If support holds, the dollar should rally back for a test of $83.00 and buy some more time...

Can't Sell Them in Europe? Try the US!

" Ahorro Corporacion Financiera SV, the investment group owned by 43 Spanish savings banks, is turning to U.S. investors as a property slowdown makes it harder to sell mortgage bonds in Europe.

"European investors have had their fill,'' Sanchez-Guerra said in an interview. "The dollar market opens an avenue to new investors.'' "

Europeans investors have had their fill because they know better. Its a matter of proximity. They understand their own property markets. For example, German investors know what is happening in Spain because they have 'vacation' homes there. They know the bubble has burst because they can't unload their homes and they can't fill them with renters either.

(See My Blogpost: Ghost Towns? In Spain? )
(See My Blogpost: Investors Shun 'Falling Knife' of Real Estate Stocks)
Strangely, that news hasn't yet sunk in over here though...

Source: Ahorro Corporacion Targets U.S. With Spanish Mortgage Bonds (http://www.bloomberg.com/apps/news?pid=20601009&sid=aUP5sfvg2IbE&refer=bond)

Hedge Funds Shorting S&P 500 at `Crowded Levels,'

Contrarian indicator?
Or do they know something we don't?

" Hedge funds are short-selling Standard & Poor's 500 Index futures by the most in three years, a Merrill Lynch & Co. analyst said, and recommended investors buy the securities before the funds have to settle their obligations. "

Merrill thinks the shorts are wrong and that the party shall continue.

" "Large speculators'' had the biggest short-interest position on the contracts in the week through July 3 since mid- 2004, Mary Ann Bartels, Merrill's chief market analyst, wrote in a report to clients today. The bets, which speculate that the index is going to fall, require about $45 billion to buy back the securities for reimbursement, she estimated.

Short positions have reached "crowded levels'' and "we view this as a contrary indicator and readings continue to be bullish for stocks,'' Bartels wrote in a weekly note on hedge- fund activity. "Short levels provide a floor on price.'' Merrill, the world's biggest brokerage, used data provided by the Commodity Futures Trading Commission's weekly Commitments of Traders report. "

The argument is rather simplistic. The record level of short positions can also be attributed to increased merger and LBO activity and the increasing use of complex trading strategies such as pairs and spread trading. This is a complex situation that requires a closer and more thorough look. I intend to write a lengthy report on the dramatic rise in NYSE and NASDAQ short positions later this week.

Source: Hedge Funds Shorting S&P 500 at `Crowded Levels,' Merrill Says (http://www.bloomberg.com/apps/news?pid=20601084&sid=aqA7JIw6ArvQ&refer=stocks)

China Loves Playing with Fire.

Talk about playing with fire...

" China's trade surplus soared to a record $26.9 billion in June, exceeding economists' estimates and supplying ammunition for U.S. lawmakers threatening sanctions unless the yuan appreciates faster. "

The YoY change is incredible.

" The trade gap, released by the customs bureau today, widened by 87 percent from a year earlier after exporters rushed to beat cuts in export tax rebates. "

Let the trade wars begin...

" More than half of the surplus was with the U.S., where lawmakers last month introduced legislation to punish nations that use their currencies to gain an unfair advantage. Today's figures may heighten tensions already exacerbated by scares over Chinese exports from contaminated seafood to defective tires. "

Its the undervalued Yuan.

" The country needs "to tackle the root cause of China's bloating trade surplus: the significantly undervalued currency.'' "

Changes are being made. But are they enough?

" The yuan has strengthened 9.2 percent since a peg to the dollar was scrapped. That compares with a 12 percent gain by the euro and an 8.9 percent fall by the yen. "

Source: China's Trade Surplus Soars to Record $26.9 Billion (Update4) (http://www.bloomberg.com/apps/news?pid=20601068&sid=asWUJisr4ZqA&refer=economy)

TNX

Higher rates are here to stay. Support @ 5.00% held. The correction has run its course. Time to challenge new highs.

INDU

Decision time! New highs, or back into the range. We will know by the end of today.

Home Depot Cuts Forecast on Housing Market

The housing market woes are just getting started...

" Home Depot Inc., the world's largest home-improvement retailer, cut its forecast for annual profit after the U.S. housing slump deepened and the company sold its contractor-supplies unit. "

The impact on Home Depot is not insignificant.

" Earnings per share will drop 15 percent to 18 percent in the year through Feb. 3, Atlanta-based Home Depot said today in a statement. "

Neither will be the impact on the U.S. economy as a whole.

Source: Home Depot Cuts Forecast on Housing Market, Unit Sale (Update3) (http://www.bloomberg.com/apps/news?pid=20601010&sid=aJKcrK3ujxSY&refer=news)

U.S. Housing Sales to Tumble to Six-Year Low on Rates

" U.S. home sales in 2007 will drop to their lowest level since the start of the five-year housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac.

Sales of new and previously owned homes probably will total 6.28 million, down 7.1 percent from last year, according to the world's second-largest mortgage buyer. It would be the lowest since 6.20 million homes were sold in 2001. Residential lending will drop to $2.75 trillion, the lowest since 2002, the McLean, Virginia-based company said in today's forecast. "

Some things to consider about 2001:
1) Tech bubble had burst and the damage was winding its way through the economy.
2) September 11th was a significant blow to already vulnerable U.S. consumer confidence.

The worst is still to come in this housing market...

Source: U.S. Housing Sales to Tumble to Six-Year Low on Rates (Update3) (http://www.bloomberg.com/apps/news?pid=20601010&sid=aH3.IwJhFk_w&refer=news)