Ok, let's start with Fannie.

They have a horrific loss, right? Fair value of their assets cut by 2/3rds? Dilution out the ying-yang?

So why does the stock take a rocket ride north?

Simple - OFHEO (their regulator) loosened their capital constraints.

Now wait a second. Fannie did say that their credit losses were expected to significantly increase through 2008 and 2009!

So let me see if I get this right - Fannie is going to increase leverage into a declining credit environment - lever up into worsening economic conditions for their business?

Is it just me or does that sound particularly insane to anyone else? Never mind the idea of buying a stock when the company says they're going to pull something like that?

That, by the way, sparked a broad-based rally in the markets. It wasn't strong, but it was there, and it turned what was a red tape into a green one.

The idiocy of this market knows no boundaries.

Let me remind you that if you're betting that the government will "bail out" Fannie if they blow up, that they "bailed out" Bear Stearns too, and it got you 1/10th of your stock price in the process. How's a 90% loss - or worse - sound? Not good? Then what the hell were you doing buying the stock?

"Heh, the house is on fire!! I know - I know - let's put it out with this bucket of GASOLINE!"

Now let's talk about the next ticking nuclear device - FHLB "advances". The FHLB system is the Federal Home Loan Bank system, and has been the funding source for hundreds of billions of dollars worth of mortgages since the secondary markets seized - including a huge amount out to Countrywide, which of course, as we know, made a lot of "liar loans" and didn't tell anyone that's what they were. The other big participants? Banks like WaMu and Wells. Oh boy, all the poster children of California and Florida.

I wonder how much RISK the FHLB system is under right now? They do have a "superlein" against the assets of said banks....... but......

Minyanville updated their famous ALT-A tranche from WaMu. I'll let the delinquency numbers speak for themselves, because quite frankly, I'm close to speechless:

• January - 19.3% delinquent, 13.5% foreclosed, 1.83% REO
• February - 22.69% delinquent, 11.62% foreclosed, 3.56 REO
• March - 25.3% delinquent, 13.35% foreclosed, 4.44% REO
• April - 29.07% delinquent, 13.87% foreclosed, 6.21% REO

Notice a few things - this cesspool was originally nearly all "AAA" credit, although only 11% of the loans were "full doc". In one year, 30% of the loans are at least 60 days behind.

Absolutely nothing without full-documentation should ever be rated AAA. Do we need any more evidence? Mish does a nice job of digesting the rest - have a peek.

Now where is the action by the bond rating agencies to withdraw all ALT-A ratings?

Oh, we wouldn't do that now that we've been found to be massively wrong, would we?

And where is Congressional (or prosecutorial!) action to go after these clowns who claimed this was "AAA" credit when the very standards necessary to rate that credit were simply invented rather than measured? You know, made up out of whole cloth? Manufacturered? Or, to be less polite, "fraudulently inflated"?

Speaking of cesspools, there is some resistance building to all the "bailout NOW!" screaming coming from Congress on housing. At least in a few places:

"The Bush administration signaled it will veto foreclosure-prevention legislation being advanced by House Democrats that would offer states $15 billion in grants and loans to buy and refurbish abandoned homes."

and

"The House tomorrow will also consider Frank's plan to let the Federal Housing Administration insure up to $300 billion in mortgages after loan holders agree to reduce the principal. That legislation drew sharp criticism today from House Republicans at a news conference in Washington.

'What we're talking about here is a $300 billion bailout for those who were scamming the market,' said House Minority Leader John Boehner, an Ohio Republican. The lawmakers offered an alternative plan including a one-time homebuyer tax credit of up to $10,000."

My God, Mr. Boehner has a brain! Congratulations dear Sir; you're one of the few.

Institutional Risk Analytics penned a beautiful note on Countrywide being acquired, echoing what I (and today, Chuck Schumer!) have said about valuation:

"Given the outline above, our view is that the equity of CFC is worth $0."

The full analysis is worth a read; its pretty much how I see it. Contingent liabilities are going to be insane and BAC has to be nuts to accept that risk. I wouldn't.

Countrywide, for its part, is now "promising to improve" its foreclosure and billing practices. Uh huh. The allegation leading to this "promise" comes from lawsuits and complaints over their conduct in bankruptcy court when homeowners run out of rope! The not-amusing part of that, of course, is that a big part of how those people wound up in bankruptcy in the first place were loans that they claim they didn't understand and shouldn't have been sold, as they were clearly unsustainable. I've spilled my share of digital ink about the stupidity of allowing DTIs beyond 36%, qualifying on other than the fully-amortized rate, and what the true intent of these "loans" was - what you won't find me doing is shedding a tear for these clowns now that some of the blowback is hitting them in the face.

Next up, UBS is now facing a tax-evasion probe (!)

"One senior bank employee was 'briefly detained' by U.S. authorities as a 'material witness,' the firm said in an e- mailed statement."

So in addition to packaging up crap loans and intentionally ignoring risk management guidelines (acts they admitted to in their self-published "audit") UBS might have been helping US Citizens evade paying the IRS their fair share? That's rich. Nor is it confined to America, apparently - the German Authorities are also sniffing around.

Gee, do ethical problems in one place perhaps signal them in another? Nawwwwww....

The Fed's Hoenig gave a very hawkish speech last night in which he stated that the inflation was at "unacceptably high levels." He's talking about price inflation, of course, but gee, how come its happening? It wouldn't be a $200 billion "hot money" blob that Bernanke and crew (yes, I realize you're a non-voting member, but....) have stuck out into the market to tamp down the trading range on Fed Funds, would it? Alphabet soup anyone? Just don't ask how much it costs!

Goldman Sachs now says they expect oil to hit somewhere between $150 and $200 in the next 6-24 months. I'll take "under" on that one for time. Unless Bernanke drains the swamp there's no reason for people to pull their commodity bets, as that trade is going in exactly one direction - north - and I see no evidence that Ben is going to do the right thing, nor that Congress is going to force his hand.

Welcome to $4 gasoline, and if we get one hurricane in the Gulf this summer or that $150 prediction proves up, better make that $5.

Vallejo, CA has voted to file for bankruptcy, in what is like the start of a trend. This bodes very poorly for municipal debt; the problem is shrinking revenue from delinquencies and forced lower home prices. Local and state governments were imprudent during the housing boom, ladling on the spending when they got the increased tax revenues, but with no plan for when the worm turned, as it always eventually does.

Now the problems are showing up, and this will spread. The highest concentration will be in California and Florida, of course, but it won't be limited to those states. I warned months ago to get away from Municipal Bonds in mutual funds, as your ability to control risk is limited, and to be very careful if you're buying individual issues. In particular, only bonds backed by "general revenue" are reasonably safe, and even those are not immune. If you hold a fund you're taking a terrible risk as the hit to NAV can be particularly severe if you get unlucky with the mix of what blows up. Since these funds are usually bought with the intention that you'd never lose principal, you have to think long and hard about what you're doing getting involved in these funds at the present time.

Europe saw consumer spending decline by 1.6% in March, a huge knock that came from price inflation in necessities. Of course we've got the same problems - and more - here in the US, but what we don't have is a Central Bank that seems to give a damn. Yeah, I know, Hoenig made noises last night.

That's all these are, and my money is on there being zero follow-through, because draining the liquidity swamp (which needs to happen NOW, not in a year or two) means the end of the "great levitating act of 2008" that the hot money slosh-bubble created.

It appears that the SEC is trying to drive a knife into the claim that "swaps" are "above the law." In what is arguably a seminal case, they are going after people involved in a tawdry Jefferson County Alabama bond fiasco where there are allegations of outright bribery in the process of contract awards. Market participants have claimed for years that these are "contracts" and not "securities", and thus outside regulatory scrutiny.

Nuts, says the SEC. Let's hope they win this one; a little jail time sounds good to me. Make sure he gets "Bubba" as a cellmate, and give the guards earplugs.

CISCO reported after the bell Tuesday and beat expectations by a couple of pennies but Chambers, being his usual honest self, gave a somewhat-dour outlook:

""We're continuing to see our U.S. and some European customers remain cautious in their views about their own economies," he told analysts on a conference call."

I've worked with these folks before; they're not sandbaggers. If they say things are soft, they're soft, and a 5% order growth in the US is soft. Especially when you consider that government orders in the US grew 20% - take that out and then go back and re-run those numbers.

They're barely positive.

Disney (NYSE: DIS), on the other hand, managed to get people to show up at their theme parks - at least thus far. No doubt a good part of that was foreign visitors - we live within an easy day's drive, and have noticed that as the dollar has tanked, the foreign contingent has increased radically at their Orlando properties. This is ok for Disney, but is it good for Americans? Well, if you work for Disney, it keeps you in a job, but.....

One thing I find amusing is that Eiger, their CEO, claims that 75% of their hotel rooms on-resort are "value" or "moderately" priced. I don't know what Eiger calls "moderate", but I certainly don't consider their resorts to be either value or moderately-priced, especially not when one considers what you get for the money. In fact, we have stayed on-property exactly twice - and only when we found outstanding "last minute" deals. Quality off-resort rooms at places like Hampton Inn are essentially always cheaper, the rooms have walls that aren't paper thin, the people aren't packed in like cattle, your car in the parking lot isn't a 45 minute walk from the front of the hotel and amenities like Wifi Internet are included in the price. I don't see the "value" in the on-property resort accomodations - sorry.

This is, I suppose, good for Disney, as out-of-country visitors simply don't know better. But their "value" resorts in Orlando, in my experience, are both overpriced and under-featured. I will give their staff fair credit in being helpful and fair - that they are, in that the one time I had a problem on-property they took care of it efficiently and fairly - not something you're assured of off-property. But serious folks, there's a Hampton Inn just out the back gate in Lake Buena Vista that frequently can be had under $100/night and IMHO its both more comfortable and convenient than dealing with the on-property "2-hour bus ride" game.

Legg Mason, "legendary" Bill Miller's employer, reported crap earnings - negative $1.81/share. Bill Miller has become somewhat of a Wile-E-Coyote in recent months, having earned the badge of "great investment" for buying stocks like Countrywide last summer before it blew up. In fact, over the last year or so if you shorted anything Miller bought you'd have done very well. One wonders how he manages to do worse than a dartboard, or why investors in his funds tolerate this sort of thing. Yes, I know he has a winning record, but when you make that many bad calls in a row over the course of a year, isn't it time to change the horse you're riding before it breaks both front ankles?

Yesterday there was a rumor started that Yahoo's CEO had been "benched" and other executives tasked to "reach out" back to Microsoft to try to restart talks. This, of course, led to an immediate and strong rocketshot in the stock.

This morning we get actual news that Bill Gates has said "nuts" to the idea of anything further with Yahoo - they've made their decision, wasted their time and money, and are done.

In other words, the rumor was likely total horse****.

Now the question - will the SEC investigate and prosecute those who promulgated that false rumor with the clear intention of spiking Yahoo's stock price? After all, its obvious that a lot of Hedgies (and others) got caught with their pants down on the wrong side of that trade. Look at the volume on Yahoo CALLs going into last weekend and what was going on is obvious - there were huge bets placed on that deal happening, and they turned out to be wrong.

Rather than suck up the loss, the next move was market manipulation. Felonious, but heh, it only gets investigated when it makes stock prices decline, right?

Its all ok if people get screwed so long as the price goes up? Never mind that trading is a zero-sum game - for everyone who wins on a price increase someone else loses, either by being short or being the person who sold and missed the price increase.

But those folks don't matter...... isn't that right Chris Cox?

Someone bought a buttload of May VIX 25 CALLs yesterday. A LOT of them. It may have been a hedging transaction, but still, it gives you pause. Those expire in two weeks, and you have to wonder - exactly why would you do that? I didn't catch the other months, so I don't know if it was a calendar spread, but my first reaction when I saw it was "huh?" To put this in perspective for the VIX to go from 18 to 25 would be a huge move upward - and be accompanied by a monstrous sell-off.

Pending home sales were down 20% y/o/y and 1% monthly, off a downward revised last month number. Price targets now claiming to be down 2.4% for the year, which is about 1/4 of what Fannie predicted. Gee, would you expect that Realtors would be less or more bullish on the price of homes in their predictions?

Obama won the primary in North Carolina, adding more to his delegate and popular vote counts. Absent skulldruggery, it looks very likely he will be the nominee. This is something you really need to pay attention to as an investor, as Obama has basically guaranteed that your Capital Gains and Dividend tax rates will double if he is elected.

Gee, is that good for stock prices?

The Fed is asking for permission to pay interest on bank reserve balances on deposit with them. This is being played as a "not big deal" but in fact it is. Whether it has a positive or negative impact is open to question; the immediate difference is that it would eliminate some revenue to the Treasury, but not much.

A bigger issue is what it would do to the debt trading markets. Most other nation's central banks do pay interest; we are the outlier. However, this does "decouple" areas of policy and action at The Fed that have been coupled before - exactly what impact it would have is not clear.

Let's hope Congress doesn't "rubber stamp" this, and insists on some sort of formal, public explanation and comment period (yeah, right - like Bear Stearns, yes?)

First Quarter Productivity came in up 2.2%, with unit labor costs in up at 2.2% as well. This sounds good, but you need to be thinking about what squeezing employees does to spending. See, the way this usually happens is that employees are prodded to produce more while costing less, which is great for the employer but not good for the employee. Real hourly compensation is negative, down 0.7%.

So where did this productivity gain come from? Squeezing hours and demanding more out of employees for the same dollar in wages. The numbers don't lie.

The crooners keep calling this "great" for profits, but what happens to consumer spending? Great? Well, c'mon. Let's be straight with people - there is a major problem with shifting these costs in a fashion that makes more money for business in that 1/3rd of the CPI is housing costs, but 70% of GDP is consumer spending.

The yield curve continues to move upward. Uh, what happens to mortgage rates if the yield curve moves up, especially on the long end? That's good, right?

So you squeeze both ends of the curve to goose profits and Wall Street cheers the data release, but how long will it take before people start to think - wait a second, how long will those "great profits" last when the vast majority of people get it from both ends? Hmmmm.... so our spending all goes to gasoline and food, shifting away from iPODs and trendy "toys".

What happens to corporate profits over time, and aren't stock prices supposed to be based on forward looking profitability?

Now there's something to think about.