U.S. Michigan Confidence Index Rose to 90.4 in July

" Confidence among U.S. consumers rose less than expected in July as gasoline prices dropped from record highs and the labor market continued to show strength, a private report today indicated.

The Reuters/University of Michigan's final index of consumer sentiment rose to 90.4 from 85.3 in June. Last month's figure was the lowest in 10 months. The reading was below the university's preliminary figure, released on July 13, showing the confidence level at 92.4. "

Source: U.S. Michigan Confidence Index Rose to 90.4 in July (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aksMS2QUG.GM&refer=home)

The DOW's Wild Ride

U.S. Economy Grew at a 3.4%

" The U.S. economy grew last quarter at the fastest pace in more than a year, propelled by rising exports, commercial construction and government spending.

The 3.4 percent annual pace of growth for gross domestic product was the fastest since the first quarter of 2006 and followed a 0.6 percent gain in the first quarter, the Commerce Department reported today in Washington. The Federal Reserve's preferred inflation gauge rose at the slowest pace in four years.

Spending on commercial construction projects rose at the fastest pace in 13 years, helping to overcome another drop in homebuilding. Factories ramped up production to fill orders from Europe and Asia that made up for a slowdown in consumer spending. Smaller price increases may be of some comfort to Fed policy makers, who have said inflation is their biggest concern. "

Source: U.S. Economy Grew at a 3.4% Annual Rate in the Second Quarter (http://www.bloomberg.com/apps/news?pid=20601087&sid=a19LPcy.9iow&refer=home)

Bond Risk Soars by Record as Investors Flee Corporate Debt

This is what things look like when a credit bubble BEGINS to deflate:

" The risk of owning corporate bonds increased by the most ever in Europe and Asia on concern banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts, according to credit-default swap traders.

A sell-off in the U.S., Asia and emerging markets extended to Europe, where the cost to protect company debt approached the record high in 2005 when General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings. Deutsche Bank AG's risk premium jumped to five times the amount on June 1.

Investor wariness caused more than 40 companies worldwide to reorganize or abandon borrowing plans in the past month. The retreat forced banks to take on $20 billion of LBO loans they had planned to sell for Kohlberg Kravis Roberts & Co. and Cerberus Capital Management LP this week.

"The big risk in the coming weeks and months is that you get forced selling of credit with institutions, both from the hedge fund side and the bank side,'' said Bob Janjuah, chief credit strategist at Royal Bank of Scotland Group Plc in London. "The global economy is a debt-fueled confidence based scheme. All assets are and will be impacted.'' "

The last sentence is very important: " THE GLOBAL ECONOMY IS A DEBT-FUELED CONFIDENCE BASED SCHEME. " The key word here is CONFIDENCE. That level of confidence is moving from 'we are invincible' and 'this time its different' to something more realistic. Watch the Yen to verify the extent of the global de-levering through the Yen carry trade unwind.

Source: Bond Risk Soars by Record as Investors Flee Corporate Debt (http://www.bloomberg.com/apps/news?pid=20601087&sid=awXnHna932f4&refer=home)

DOW: Trend Change?

VIX Index Surges to 13-Month High as Stocks Tumble Worldwide

See also Blogpost: VIX: Volatility Quietly Rising

" The benchmark for U.S. stock volatility surged to the highest in 13 months on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings.

The Chicago Board Options Exchange Volatility Index jumped as much as 21 percent to 21.95, the highest since June 2006. Higher readings in the so-called VIX, derived from prices paid for options on the Standard & Poor's 500 Index, indicate traders expect bigger stock-market swings in the next 30 days.

"When it shoots up that means there's a great deal of uncertainty,'' said Michael Koskuba, who helps manage $59 billion at Victory Capital Management in New York. The S&P 500's decline of as much as 2.6 percent, the most in five months, is a ``pretty good jab to the ribs.''

Spikes in the VIX have coincided with stock-market declines. The index rose the most ever on Feb. 27, climbing 64 percent to 18.31, as the U.S. equity market suffered the worst rout in almost four years.

The VIX has come within 2 points of 50 on only three occasions in the past decade. The first, on Oct. 8, 1998, came as losses mounted from Russia defaulting on its debt. It reached another peak 10 days after the terrorist attacks in September 2001, and again surged in July 2002 as fallout from Enron Corp.'s collapse drove down shares of its main lenders and former rivals. "

Source: VIX Index Surges to 13-Month High as Stocks Tumble Worldwide (http://www.bloomberg.com/apps/news?pid=20601087&sid=aOh1HaTUBLrQ&refer=home)

Absolute Capital Hedge Fund Suspends Withdrawals

The same thing as the Bears Sterns hedge fund collapse, only in Australia.

Source: Absolute Capital Hedge Fund Suspends Withdrawals (Update5) (http://www.bloomberg.com/apps/news?pid=20601010&sid=alyYqteqJHco&refer=news)

Home Sales Fall

" The U.S. housing recession deepened last month and orders for durable goods unexpectedly fell, suggesting the economy will slow in the second half of the year.

Sales of new homes declined 6.6 percent, the most since January and more than economists predicted, the Commerce Department said today in Washington. The department also said that orders for goods meant to last several years, excluding airplanes, cars and trucks, dropped 0.5
percent.

The figures signal that the economy will struggle to maintain the 3 percent pace of growth that analysts estimate for last quarter. The surprise drop in durable-goods orders also means growth may become more dependent on exports. "

Source: U.S. Economy: Home Sales Fall, Durables Orders Drop (Update1) (http://www.bloomberg.com/apps/news?pid=20601068&sid=a8kXXBQyU4.M&refer=economy)

Yen Advances After Equity Declines Prompt Carry Trade Unwinding

" The yen rose against all 16 of the most actively traded currencies as global equities fell, prompting traders to reduce investment in assets funded by borrowing in Japan.

Japan's currency rose to an almost three-month high against the dollar, 1.7 percent against the Australian dollar and 2.8 percent against the Brazilian real. The 10-year swap spread, a gauge of what companies pay over benchmark lending rates, rose to 73.30 basis points, the highest since February 2002.

"The risk theme is very pervasive today,'' said Brian Taylor, chief currency trader in Buffalo, New York, at Manufacturers & Traders Trust, which has $50 billion in assets. ``As credit spreads widen, we're seeing the carry trade being unwound.'' "

Source: Yen Advances After Equity Declines Prompt Carry Trade Unwinding (http://www.bloomberg.com/apps/news?pid=20601087&sid=aV10d_Nt7e08&refer=home)

U.S. June Ex-Transportation Durables Orders Drop

" Orders for U.S. durable goods excluding transportation equipment unexpectedly dropped in June for a second month, casting doubt on forecasts that gains in business investment will help sustain the expansion.

Excluding transportation equipment, demand for goods meant to last several years fell 0.5 percent, after a revised 0.2 percent decrease in May, the Commerce Department said today in Washington. Total bookings rose 1.4 percent, led by a jump in orders for commercial aircraft.

Companies may be pulling back as consumer spending slows, offsetting record overseas demand for American goods. Federal Reserve policy makers have said a lack of business investment is a risk for an economy already depressed by the biggest housing slump in 16 years. "

Source: U.S. June Ex-Transportation Durables Orders Drop (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=azHrqiaEjv84&refer=home)

U.S. Initial Jobless Claims Fell 2,000 to 301,000 Last Week

" First-time claims for jobless benefits unexpectedly fell last week to the lowest in two months, a sign that the U.S. labor market remains resilient.

Initial jobless claims decreased by 2,000 to 301,000 in the week that ended July 21, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, fell to 308,500 from 312,500. "

Source: U.S. Initial Jobless Claims Fell 2,000 to 301,000 Last Week (http://www.bloomberg.com/apps/news?pid=20601087&sid=adLkYbszUDA0&refer=home)

DOW: Opening Below Support, 50 day EMA Next?

VIX: Volatility Quietly Rising

Yield Curve: Flattening and Testing Support

DOW: Testing Support

Defaults on Some `Alt A' Loans Surpass Subprime Ones

The plague is spreading... up market.

" Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.

The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, New York-based Citigroup analysts led by Rahul Parulekar wrote in a July 20 report. The figures represent the percentage of balances in a mortgage-bond pool expected to default in the next year based on 90-day trends.

The speed at which Alt A hybrid ARMs are being paid off due to home sales or refinancing has also fallen to about the same level as for subprime ARMs, which typically prepay more slowly, the analysts said. Slower prepayments can make the same rates of defaults more damaging by leaving more of the initial balances outstanding to eat into bond-investor protections. "

Alt-A mortgages are just under prime:

" Alt A mortgages, short for Alternative A, are loans that fall just short of the typical underwriting standards of Fannie Mae and Freddie Mac, the two largest mortgage companies. They're usually granted to borrowers with good credit records who seek atypical underwriting or loans, such as reduced proof of their pay, lending on an investment property or so-called option ARMs.

There are a lot of them too:

" More than $800 billion of subprime mortgage bonds and $700 billion of Alt A bonds are outstanding, with ARM bonds totaling more than $600 billion and $450 billion, respectively, according to a March report by Zurich-based Credit Suisse Group. "

Source: Defaults on Some `Alt A' Loans Surpass Subprime Ones (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aeWSvfvHw3cQ&refer=home)

KKR, Blackstone Find `Tide Is Going Out,' Pimco's Gross Says

" The cheap financing that fueled the leveraged buyout boom is over, said Bill Gross, manager of the world's largest bond fund.

"The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote today in his monthly commentary on Pimco's Web site. The shift "promises to have severe ramifications for those caught in its wake.''

The resistance of fixed income investors to LBO debt has increased borrowing costs and will bring an end to lax financing standards, Gross said. An index that tracks the risk of below- investment grade companies has fallen this month as losses from subprime mortgages mount, increasing the implied cost of protecting high-yield bonds to the highest since May 2005. "

Source: KKR, Blackstone Find `Tide Is Going Out,' Pimco's Gross Says (http://www.bloomberg.com/apps/news?pid=20601087&sid=aXM8NBgbhBSI&refer=home)

INDU: Massive Negative Divergence