Yow.

28? That's lower than last month, and by no means is good. Oh, to find a number that bad you have to go back to..... 1991! Aieee!

The instant reaction was a little swoon in the indices, but they're now (12:15 pm CDT) clawing back. By the way, 50 is the "midpoint" in that index. 28? That sucks; no two ways about it.

In other housing-related news Moody's is finally fessing up and downgraded 131 more mortgage-backed bonds, sticking 237 more on review (negative.) Now if they'd only review and actually rate the real risk on the rest of the crap out there. Fat chance - how much business do you think they'll do with the issuers if they start downgrading en-masse, given the known risks to the collateral and the reset schedule (which isn't exactly non-public information!)

Next, Merrill Lynch, which was going to blow the final whistle on a hedge fund that Bear Stearns spun off (and which made some bad bets in housing) appears to have put things on reprieve. Apparently a lot of additional skin (a couple of billion!) is being put in, which outlines just how bad this got - and there apparently also is a deal on "no margin calls." Oh boy is that amusing. Of course you know how the "prisoner dilemma" works right? The first guy to break ranks can win big at the expense of everyone else. It will be interesting to see if anyone takes advantage of this possibility to "rape thy neighbor" in the coming days - what I've heard so far is that this isn't quite done yet, and the natives are still restless....

In the "money doesn't make your smart" department, we have this ditty - apparently wealthy people don't think their home prices will fall (even as everyone else's do.) Make sure you tell that to the folks out on the east coast who have had to cut prices on their eight digit homes - sometimes by 20% or more - to sell them. Oh, that has to sting, no? DeNile is not just a river....

Finally, in news of the odd apparently the rumor mill is all over WaMu (WM), claiming they might be a buyout target. Yeah, right. They're not only full of toxic waste in ALT-A and Pay Option (neg-am) loans (and in fact couldn't even meet their divvy from cash flow last quarter!) but have subprime credit card exposure on top of it! You'd have to be nuts to buy them, but heh, you know how the rumors are these days, right? Buy some stock, start one, sell into the runup that inevitably follows. When are you fools going to learn - if you pile into this crap you're going to lose your ass! How many times has this rumor been going on Countrywide? Has the company been bought? No? Weeeeelllll!

I shorted TOL this morning, and had an order out for PUTs on BHS (tried to short it but no shares available) which got filled on a "magic bounce" - not sure what happened, but suddenly there was a 30 cent spike in the trading price on the stock and my below-market limit order filled. It immediately traded back to the middle of its daily range. Someone playing games with rumors again? Wouldn't surprise me. That's a fairly thin issue and as such is kinda dangerous, but I also think its likely to pay pretty big - I'm playing August on it.

TOL*****ed me off; I had a vertical on them which went out Friday and the OpEx crap made it slightly unprofitable. Looks like I just got it back on the short..... that'll work.

On the broader markets we've got a major problem with oil prices right near $69, and let's not be silly about the CPI numbers - core is irrelevant, especially when "Owners equivalent rent" (a big part of the CPI) subtracts out increases in utility costs! So energy price increases actually result in core CPI decreases.

You have to be kidding me. Only in our government is a cost of living INCREASE a "decrease" in a key inflation statistic.

A 7 handle on oil is going to be most interesting; that is likely to wake people up bigtime, and I think we're headed there. Maybe sooner than later; I would not be shocked to see oil trading in the $75 area within the next 3-4 weeks. As they say "is that good?" Only if you're an oil company! In that line, you might consider USO.....

In the area of "unintended consequences", The Bush Administration's plans to mandate ethanol content increases has led the oil industry to cut back refinery expansion plans. What happens if those "alternative fuels" push doesn't pay off - or drives food prices up through the roof, forcing them to be scaled back or even abandoned? Can you say "that's gonna suck!"

We have an interesting situation developing in the 10 year bond, with it threatening to violate the uptrend channel of the last two months. However, at least at present the lower boundary looks like it is holding as support. Should that channel break then the 10 no longer can be considered as a leading indicator on equities. I would not, however, go long bonds here, even though it sure looks tempting - the secular trends all point to the need for higher real interest rates, at least in the short-to-intermediate (days to a couple of months) term. A massive cut in rates is unlikely until the evidence of a huge recession is up on us. While I believe we're going to get one, that doesn't mean I'm going to try to "front run" it - why not take the better - and higher - entry point?

Lacking the follow-through that had to be there for me to buy in, I'm not going to make any major-sector long-side bets here. I see nothing on the economic calendar that is likely to move things in a major way, and plenty of downside risk. On the internals the markets today are showing more disturbing divergences - the A/D line is slightly negative but the New Highs on the NYSE are absolutely destroying New Lows - a 10:1 ratio as of this time (1:00 PM.) This sort of divergence just adds yet one more "la la la la la" whistling-past-the-graveyard sort of color to the broader market.

As this continues, assuming it does, I am going to be very tempted to start taking some "Hail Mary" trades. Things like the 44 Q PUTs for July - a 10% down move nets you a 8 bagger, an 11% move a 15 bagger, and a 20% move.... oh boy..... (~55 bags?! Wow!) Of course these truly are Hail Mary passes, and have a 90+% chance of being worth ZERO. In other words, the only way these work on the "money odds" is if we get a blowup - not just a correction. If its a zero, do it again next month.

Why do I think this may be a good play? Because I am becoming increasingly convinced that the "trigger event" is going to be a credit market dislocation of some sort, and it is nearly impossible to predict these with accuracy. As such I am becoming more and more convinced that the right way to play this is to remain mostly in either cash or tax-advantaged yielding things, have perhaps a 5-10% exposure in oil via USO as a short-term trade (stick a trailing stop under it once we see the 7 handle show up), with a 1% play in "Hail Mary" instruments like those 44 PUTs, buying them again if and when they expire worth nothing.

On the close the markets were down, although not much. The Nasdaq Composite was down a whole 0.11, while the SPX and DJI were down 1.86 and 26 pts, respectively.

Tomorow should be interesting with permits and housing starts out before the bell. I wouldn't be surprised if both numbers suck rotten eggs - in fact, if they don't it'll be time to short the builders even harder - who in their right mind builds inventory when you already have too much?

Have a good evening!

PS: No, the PPT didn't "get me". I was helping a friend with his boat engines. See, I have multiple talents! Typing with greasy fingers.... time to stuff the pie hole. First order of business for an organism - food!