First up - KB Home - LOSS of $2.26/share, an incredible miss. Housing revenue down 46%. Has withdrawn guidance, and says cannot predict when housing conditions will include. Does this suck badly enough for you? How about for the general market? Guess we'll find out today eh?

I guess it was the right call to hold overnight.

The shocker in all of this is that KBH is not down more than it is. As I write this its down less than 1%, holding just over $40/share.

Initial jobless claims came in down 13k to 313,000 for the week, Q1 GDP deflator final up 4.2%, Q1 QDP final up 0.7%. PCE price index up to 2.4% (.vs. 2.2% "claimed"), this is not good as its a key inflation gauge and puts inflation solidly above target. GDP Price index up 4.2% .vs. 4.0% consensus, and consumption 1Q up 4.2% .vs. 4.4% consensus.

Note that this puts consumption growth at zero, price inflation way above target, and core inflation over target.

No way to spin this one guys. It would be nice to see the Fed "do the right thing" (which believe it or not is a rate HIKE) but it won't happen. They'll bleat a bit and leave rates unchanged.

The futures reacted to the downside, but the move was somewhat tempered, and treasuries reacted by selling off, driving up the 10 by about a half-percent. Of note we were below fair value up front, indicating that we should see a weaker open.

We are also seeing evidence that banks are getting nervous and so are investors about holding bridge financing on LBO deals, or buying debt that's "covenant lite":

"As several debt offerings faced resistance yesterday, bankers and investors began to wonder whether the tremors coursing through the nation's debt markets signaled that the buyout boom is in jeopardy or just suffering a temporary setback."

......

"Bankers said investors have grown wary of debt deals that offer few financial protections and yields that don't reflect potential risk."

My money is on it being significant..... but that's me....

Of course there's this to add more fuel to the fire - this time from Kia....

"Kia Motors Corp., South Korea's second-largest automaker, canceled plans for a $500 million bond sale this week, joining at least seven companies abandoning borrowing as investors cut demand for riskier assets. "

Just remember guys that what has fueled almost the entire rise of the last 12 months in the markets has been the debt/LBO/PE boom. Take the fuel away from a fire and.......

Oh, and Url. Watch that Url. Its poking back at that $70 number again. As soon as you see a 7-handle on Oil you're likely to get a violent reaction in equities; this could happen as soon as the next couple of days - or perhaps even today. Yes, the big integrated oils will like it, but nobody else will. The chart still suggests a breakout north, and I still have a mid-70s price target on oil in the next few months. If we get a hurricane in the gulf, that could be conservative, and while I don't like to admit this, I think there's a better-than-even shot that we get a bad one this year in the GOM - I live here, so I'm not sure I like saying that.... but it is what it is. When you look at huge Chinese demand (remember, most people over there ride bicycles and they'd like to trade up to motorcycles - and cars) increases it won't matter what we do here in the US - energy prices are headed north, period. Maybe not all at once, but inevitably the price will continue to rise as production is difficult to expand and demand keeps rising on a global basis. $70 oil is almost certain to translate into $4 gasoline within the next few months, especially if we get a storm! The problem here isn't just oil - its also refining capacity, which is entirely our own fault in this country. When oil is part of what drags us into this recession, go get up, look in the mirror, and blame the face you see for not pounding your Reps and Senators to allow drilling in the Gulf, shale conversion out west, and putting in place a single, federal standard for refinery permitting and construction.

This is simply not going to happen in today's political environment, which means you better get used to higher energy prices, because this is a trend that we are not finished with yet and won't be until "we the people" get tired of it and force political change to take place. And no, we're not talking about "alternative energy" either.

In political news, The Senate voted down the Immigration Bill today.

You can put a fork in this legislation until at least the fall, and I suspect for far longer than that, as nobody's going anywhere near this with the '08 election cycle coming up. This was pretty much the last-gasp attempt to ramrod a bad bill that would have hosed us horribly through the Senate. Thank God it failed.

Bloomberg continues to pound the table. Again - its about damn time.

"A cocky investor can be a market's biggest patsy.

The huge losers these days as the value of high-risk mortgages collapse won't be the little guys of financial lore but managers of treasure lodes like pension funds and hedge funds. "

My question of course is how many of those pension funds will end up being dumped on the taxpayer. That is why I'm all worked up about this.

Let's face it folks - I've no problem with people making bad bets in the markets and losing money. Even losing lots of money. Even going bankrupt.

Going bust tends to sober people up. It is, in fact, a good thing, because when it starts to happen it insures that risk is properly priced into the market.

But when that risk is taken by taxpayer-guaranteed institutions, then there's a problem, because "bust" doesn't actually hurt the people making the bet.

Not so good, as I see it, and a big part of the fuel that made this rocket go.

But now the fuel appears to be gone........

The Fed's announcement came on schedule today, and was, as expected, to leave rates alone.

The statement however, appears to be more hawkish, not less, on inflation.

Here it is, in full:

"For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those
pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh."

The instant reaction was instantly negative, but then bounced back and ran a bit.

But only a bit.

The 10 didn't like it a bit, and spiked higher on yield to 5.12% - up nearly a full percent on the day.

Now guys and gals, let's think here.

How do you get a bullish scenario out of this on the economy?

I don't see it. What I see is the opposite - that the dual risks here are of both higher inflation and economic weakness. Further, it appears that they are paying more attention to headline numbers; the language has a subtle shift in it from the last time around, and I don't see anything indicating that an a reduction in rates is in the cards - unless the economy craps the bed!

Comparing the statements from May and June, they are also saying that the housing sector continues to be a problem. In other words, it appears that they are now recognizing that they made a bad call on housing turning, and there's no evidence that it is - or will in the near future.

The market appears to have reverse back to its former levels - perhaps as people think a bit, they are coming to the realization that housing really is a big deal.

I took profits on my HOV short (and PUTs) today, mostly because it showed up on the RegSHO list. While the immediate risk of an artificial squeeze is not high, profits in your bank can't be taken away from you and there are plenty of other juicy targets - as such it was a no-brainer.

On the currency side, nobody seems to have noticed that the Pound is now over the 2:1 psychological level. That's not so good..... or that bonds may be setting up for another move higher (in rates) after treating the 5.05% level turned into some pretty strong resistance.

The last 20 minutes of the day appeared to show a quite-severe deterioration going into the close; we failed to hold the gains of the day with any sort of conviction. In fact, the key for me as a trader today was that the SPX failed to hold over the 50, meaning we do not have confirmation of a move even the historically-significant "Fed Hype Bounce." Of course we also didn't get below 1490, but we were headed down at the end of the day..... strongly.

Given that this is probably the "best" economic day we're going to get this week, and tomorrow promises to bring us more to fret over (consumer spending and income, sentiment and construction spending numbers - wanna bet those aren't great?) I'm leaving my SDS position open along with all my short positions. Traders sure can't count on any more Fedcrap for a while now, can they?

Tomorrow could be quite the fireworks show; perhaps it will be the day that traders actually go read the ICSC and Redbook news releases from earlier in the week and learn how to add 2+2 again.....

PS: Beazer, I love 'ya. Shred some more documents please. :->

Late update: Countrywide just had a news story pop up from Reuters that one of their subprime bond issues was cut to junk status, and others had ratings cut. No body to the story yet (will update if/when there is) but that's NOT GOOD. I love 'ya Mazolla... but gezus dude, get some decent suits!