This morning we woke up to an interesting dynamic - the futures up, LEND having issued a 10Q with a "going concern" statement and basically imploding on the news, and rumors that the "spike" yesterday into the close were due to a "fat finger" mistake in the futures market.

The "spike" nonsense is just that - let me put a bit of color on what I said yesterday about this, and explain a bit about the specialist system on the NYSE.

Institutions often issue what is called a "Mark On Close" or "Market on Close" (MOC) order. These are used to get the closing price on a given security, and when you're buying (or selling!) a lot of stock, they attempt to blunt the impact of a huge order moving the price against you (which otherwise DOES occur.)

So let's say that the Specialist gets one of these (say, from a mutual fund - a 401k investment choice) to buy 100,000 shares of Frobozz Corp.

In a flat or "orderly" market where the price is drifting upward, he will accumulate the shares ordered during the day from people who are selling. He's a buyer of your shares. Let's say for the sake of argument that the shares start at $99, and drift upward towards $100 during the day.

You get your 100,000 shares at $100, the specialist bought them at an average price of $99.50, and so he made a nice chunk of cash! $50,000 to be exact - all on the spread.

As you can see, being a specialist is often a license to print money.

But what happens in a fast market like we had yesterday? Well, if he does that "grab 'em during the day" game he risks being nailed badly. What happens if he is forced to deliver them to you for $90 a share on the mark at close, but he paid $100 for them? Oh that's bad, right? Yeah. He could lose a million bucks!

So in a fast market the specialists will not buy into the day. He will wait until just before the close to minimize his risk, then execute those orders going into the close. He does this because he wants to make sure he is not on the wrong end of the trade!

Well, what happens when 100,000 shares of buy orders for Frobozz hits 20 minutes before the market closes? You got it.

Now the same thing happens in reverse when there are big liquidations in mutual funds. Again, in a fast market, the specialists are not going to sell those off through the day, for the same reason - he doesn't want to be on the wrong end! So again, he will wait until the last 30 minutes when MOC orders are released, and you will see a huge downdraft, which we have also seen lately, haven't we?

Do we need some "conspiracy theory" to explain yesterday? No. We just need to observe that it was the first of the month, 401k inflows happen on the first of the month, and the market was extremely volatile all day. We therefore had the potential for such a whipsaw setting itself up, and when the market started to move the futures guys piled in as well - but note that they took a good part of it back off after the close, meaning they didn't believe what happened was "real".

And, in fact, it wasn't.

Ok, enough with the explanations...

The rally yesterday afternoon spiked the Asian and European markets a bit, with the Asians trying to figure out what was going on...... the Europeans took a "better" view of it and bid up prices somewhat.

New Unemployment Claims came in just over 300,000, basically inline.

Manufacturing orders came in software than expected, up 0.6% .vs. 1.0%. Heh, is that a softer economy? Me thinks so!

The rumors continue to fly fast and furious, with the latest being that there is a fourth Bear Hedgistan explosion that is being hidden. We shall see. These rumors - and actual news - are coming literally on a daily basis now. This is likely to continue as the credit situation continues to tighten and liquidity is drained.

The market has not yet gotten its arms around the Moody's announcement on the securitization credit rating process as I outlined in the ticker the other night. It will. When? I can't tell you that, but what I can tell you with certainty is that the squeeze in the mortgage marketplace will get much worse, will implode more lenders and will materially impact all of them.

The warning on this was when S&P said they were re-jiggering their models for mortgage ABS issues. But - they didn't put any hair on that dog. Moody's did, however, and then turned it rabid and let it loose.

Ignore this at your peril if you are long the market.

As I have said repeatedly - 30% of the demand that exists now in the housing market is going to be flushed as the ALT-A and Subprime pipeline is either shut down entirely or repriced to near credit-card rates. This IS happening - right now - and it WILL drag the economy into a recession. This will not end until there is a serious price contraction in housing prices so that affordability returns to historical norms.

Now go back and read that again guys. And then again. And then again.

Then contemplate that 20-30% of GDP is in some way connected to housing.

Consider what happens to GDP if 30% of the housing market "disappears". No, it won't hit GDP for 10%, because some people still buy stuff at Home Depot for their house, etc.

But cogitate on what sort of impact you think it will have. Maybe 2, 3%?

Now what was 1Q GDP again? And 2Q?

Finally, dwell on the definition of "Recession" for a few minutes.

Is it all clear yet? I suspect so.

I know I'm pounding the table on the same damn thing, but that is because I think this is the most important issue in front of us right now when it comes to investing - and the economy in general.

There are rumors flying all over the mortgage space today, all bad news and all from big lenders. One rumor pertains to paper being "stuck" to the tune of several billion dollars (enough to severely damage the firm) and a second being a claim that liquidity problems might be in the immediate future, along with a bleating plea for Fannie and Freddie to come to the rescue. Neither has gained any real traction as of yet, but if either of those is true you are going to see an immediate reaction among the bank and housing sector.

Oh, and one appears to be related to IndyMac Bank. Countrywide issued a denial that they had liquidity problems, but I noticed that the number they cited for their liquid borrowing capacity wasn't quite the same as the one on their recent conference call. Hmmmm..... if you had "X", now have "Y", it can thus be surmised that you're filling what was "X" and the water level is now to "Y", what happens when "Y" reaches zero?

Just curious, you know....... not that this would be anything bad.... would it?

If you ask the credit market, they think there's a problem. Specifically:

"Credit-default swaps based on $10 million of Countrywide's bonds jumped as much as $75,000 to $260,000, according to broker Phoenix Partners Group. The contracts are trading at the highest levels since at least July 2003, the earliest prices available, according to Credit Suisse Group."

So... just what's the truth here? Moody's says that the corporation's debt is secure, the company says it has plenty of liquidity, but the swap market ain't buying it. Hmmmmm...

My sources in the bond market say that its totally quiet. As in anything you send out comes back "no bid." It doesn't matter what it is - there simply is nobody willing to pick it up as they can't figure out the risk.

Oh, and American Home? Read it for yourself:

"American Home Mortgage Investment Corp. will be closing its doors Friday, after several attempts to sell of all or some of its divisions to rival lenders went up in smoke this week, numerous employees said."

Goodnight.

The Trucker's Association (ATA) reported tonnage down again last month. Watch transport tonnage as it is a leading indicator of the economy and a potential slowdown! Its happening; the numbers have been down consistently now - a decline of about 3% on the second quarter .vs. last year.

The internals in the market today were horiffic for a day that posted a "numerical" advance. Not bad, terrible. Rally my ass. Tell me why, then, on a day when I'm net short up to my eyeballs and the board has all three indices green I have a flat account today (no material gain or loss.) The internals tell the story; the number of new highs and lows, specifically.

The ABX? What is there to say? It resumes its tankage today and now is in the range that is just plain "unbelieveable."



That's AAA paper - allegedly - going at about 92 cents. Unbelieveable.

The CMBX resumed its parabola after a pause for a couple of days. Check this one out:

You gotta be kidding me.....

Well, actually, they're not, are they?

Have a great evening - more if anything interesting comes up!