I'm not sure I believe this.

Let's start with that which is market-based.

That's MF Global, a major futures clearing house.  There was an earnings warning out on them yesterday but that price action suggests something far more serious - like insolvency.  Down 40% in one day?  That's a bit more than a "warning", don't you think?

If they - and I stress that I know exactly nothing about the firm in terms of its financials - were to blow up, it could produce absolute chaos in the futures markets.  Many futures contracts are not covered by SIPC protection, among other problems.  Clearing firm bankruptcies are no laughing matter!

Now this may be a street overreaction, but if you remember there were rumors before that turned out to be a "rogue trader" type of event.  Now the stock is back to where it was then, all in one day.  Not good and until clarity is available you have to be cautious on this one.  How?  Good question - who clears your futures trades and how sound are they?

Point being, this is potential "black swan" #1.

President Bush has called for opening offshore drilling (its about damn time) but the response of the Democrats was frightening:

"House Democrats responded to President's Bush's call for Congress to lift the moratorium on offshore drilling. This was at an on-camera press conference fed back live.

Among other things, the Democrats called for the government to own refineries so it could better control the flow of the oil supply."

Oh crap.

Let's start with the facts.  The "crack spread", or the difference between a barrel of oil and what gasoline sells for from that oil, is at all-time narrows.  What causes this?  Simple - refiners know that if they try to get their traditional margin people will buy less and they lose.  So they're narrowing their margins!

What does this means to you?  It means you're paying less for gasoline right now than you should be on historical measures, compared to the price of oil.

Now do you really think that government can do this job at a lower margin?  Pull the other kids.  Government does this and the price of gasoline will probably go up by $1/gallon!

Now there is a "black swan"!

Let me be clear - opening the continental shelf to offshore drilling will not immediately solve our energy problems.  Standing alone, it makes only a temporary dent in the problem.  As I have pointed out before in Musings, we have to put forward and prosecute a full solution to this problem, because whether oil is biotic (as most scientists think) or aboitic (as some believe) the fact remains that we're drawing it out of the earth at a rate which guarantees depletion.  This doesn't mean that "we're going to run out!" but it does mean that the cheap, easy oil has been extracted and the average cost of extracting a barrel from the ground is only going to go higher over time.  Since energy is an absolute requirement to grow and maintain GDP, we better get this sorted out or we are headed for some severe pain.

You want worse?  FHA is (again) trying to kill "down payment assistance".  This needed to die years ago but it keeps on going like the damn Energizer Bunny, and there are "non profits" who have a metric ton of business coming off this lobbying like crazy to keep it.

Absolutely nothing, by the way, has changed a bit with regards to Fannie and Freddie underlying this entire market.  If anything its getting worse, as The Senate appears hellbent on passing their $300 billion "let's bail everyone out" bill.

Mark my words - somehow all this crap will end up guaranteed by the taxpayer.  All of it.  It will blow up and it will result in at least a trillion worth of damage to the Public Balance Sheet.

Huntsman Chemical's deal appears to be blowing up:

"June 18 (Bloomberg) -- Hexion Specialty Chemicals Inc., a unit of Apollo Management LP, sued to cancel its $10.6 billion acquisition of Huntsman Corp. because banks probably won't provide debt financing. Huntsman stock plunged.

Huntsman's net debt has increased and its earnings were lower than expected since the companies agreed to merge in July, Columbus, Ohio-based Hexion said today in a statement. The capital structure for the combined entity is no longer viable and would render it insolvent, the company said."

That's a potential panic trigger too.  Anyone remember 1989?

Have a look at the regional banks.  NCC, BKUNA, WM, FED, DSL, WB, RF, etc.  Pick one.  How many of those stock charts look like an imminent FDIC takeover?  Can the market be wrong?  Sure.  It is all the time.  Is it wrong about all of them at once?  I can't tell you which one(s), if any, are safe and which are not.  Why?  Because I can't dig through their balance sheets sufficiently well with the information we're given as "peons" to know what sort of tomfoolery has been engaged in!

I started writing about this more than a year ago with WaMu, when they reported more "capitalized interest" than actual cash earnings - and in fact their cash earnings were insufficient to support their dividend. 

What's "capitalized interest"?  Its the negative-amortization from "Option ARM" mortgages, basically.  Banks get to report that money as earnings even though they didn't actually receive any cash.  This is all fine and well so long as you will eventually collect that money.  But what happens when the value of the house drops below the outstanding mortgage balance?  Is that "capitalized interest" still "money good"?

Now try to figure out which of the banks has a problem with this.  Good luck.  The market has decided that the answer is "all of them" because they can't separate out the good from the bad.  Have a gander at the volume of PUTs - bets on decreasing stock prices (perhaps to zero!) that are being bought the last few days - those purchases have been ramping at an alarming rate.  Not good.

Next up are the bond insurers:

"June 18 (Bloomberg) -- Bill Ackman was right: the world's largest bond insurers aren't worthy of a AAA credit rating and may be headed for the bottom of the scale.

Ackman, the 42-year-old hedge fund manager who says he stands to make hundreds of millions of dollars betting against MBIA Inc. and Ambac Financial Group Inc. if they go bankrupt, will tell investors at a conference in New York today that losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent."

Sometimes the shorts are right, eh?

Shall we hop across the pond?

"``The Monetary Policy Committee is prepared to take whatever action is needed to return inflation to the 2 percent target and to keep expectations of inflation in the medium term anchored to the target,'' King said in London. ``We believe that a slowdown in the economy is necessary to dampen price and wage pressures.''"

Ah, the good old intentional recession!  Is that good for stock prices?  (As an aside, its almost certainly better for the nation than the stupidity displayed by Bernanke, who has managed to engender a "crack-up boom" in the commodity markets through his insane alphabet soup nonsense trying to prevent a recession that should have been far longer and deeper six years ago!)

Oh, those two hedge fund managers at former Bear Stearns who were the "heads" of of the funds that started the entire credit crisis?

They're under indictment this morning according to reports on CNBC and in the WSJ.  While there is an element of "scapegoatism" in these busts, and I'm sure that is how many will characterize them, I would instead call these prosecutions "a good start."

Why?  Because there has been a tremendous element of crookedness across the board in lending over the last decade.  The "consumer impact" came with the housing bubble, but the same sort of hucksterism and fraud infused the entire tech bubble as well.  As a businessowner in the middle of that mess I saw it on a daily basis - the number of hucksters that came through my offices trying to get me interested in this or that sort of scheme (all of which, on analysis, came down to "con the public/shareholders/investors out of their money, and hope you can make a profit some time down the road") were rampant.

While many people call this "animal spirits" and an essential part of the capital markets, I call it fraud because the projections upon which these "deals" were based are intentionally overinflated compared to any sort of reasonably-likely outcome and, in many cases, compared to what is mathematically possible on a sustainable basis.

The Wall Street Journal is now putting forward opinion on the "housing bailout boondoggle", noting that Countrywide will be one of the big beneficiaries - and that Dodd got "special" customer treatment:

"If borrowers and lenders take full advantage of this new federal program, and Countrywide loans go south at roughly the same rate as those from other lenders, this suggests a potential taxpayer bailout of more than $25 billion for Countrywide-originated loans.

....

Meanwhile, Mr. Dodd continues to insist that, though he knew he was a "special" Countrywide customer, he didn't think he was getting any special financial benefit. But a $75,000 reduction in mortgage payments is no small matter for anyone living on a Senate salary of $169,300. Why else would he be known around Countrywide as a "Friend of Angelo" – Angelo being Countrywide CEO Angelo Mozilo.

.....

That's an excellent idea, in addition to a Congressional and Justice Department probe of Countrywide, Fannie Mae and the favors they seem to have spread around Washington. American taxpayers need to understand more about who they're being asked to bail out here, and why.

Ding ding ding ding ding.  The Journal gets it, and I just renewed my subscription as a consequence.

Unemployment claims came in at 381,000 down slightly from last week, and continuing claims is down to 3.06 million.  The futures oscillated a bit but didn't move much overall.  Nonetheless, they are up somewhat this morning, leading to the likelihood of a bit of a rebound at the open - the question is, can any sort of bullishness this morning hold up?