This is a more macro-economic view, to go with all the technical analysis that I've been doing lately, and recaps what I've seen over there last two or three weeks - some of which happened while I was out of town.

I was keeping up on it, but not able to write easily..... so you get it all at once!

First, let's start with Housing. One of my favorite areas, of course.

It sucks.

First, in a little ditty that gained zero notice in the mainstream media during market hours (gee, I wonder why - it was released before the market closed!) we have this:

"A second study forecasting millions of foreclosures sweeping the nation in the next few years, says it won't matter what the Feds do to fix the problem.

"Foreclosures Will Affect 2 Million Homeowners" by upstart housing market researcher HomePredictor.com says subprime mortgages are the culprit. "

2 Million eh? That's double the previous forecast.

And why? Well, to say it directly from the article: "Today, by and large, the soaring rate of foreclosures is more directly associated with poorly underwritten loans. "

Duh. Liar loans, loans written with escalator clauses and "teaser rates", 2/28s offered to subprime borrowers who, statistically, are not going to fix their credit in time to refi, and oh, by the way, real interest rates? They're rising, and anyone with half a brain knew they would - they were at historically unsustainable low levels. These loans should have never been made!

And finally, we see lenders starting to dump homes on the market. So far, prices are "sticky." That won't continue - count on it - as inventories swell.

This sums it up pretty clearly for you.....



Next up, we have the CBOE. What? How's the CBOE involved in this? Well, as of the 19th of June you will be able to trade options on whether or not a particular company will have a "credit event" - aka "bankruptcy." And who are these companies? There are only five - they are..... drum roll please....... GM, F, LEA, HOV and SPF!

Wow. Let's see, two automakers, a auto-parts manufacturer (which is, by the way, in the middle of a deal to be LBOd) and two homebuilders. These are the first five - maybe the ones that the market seems to think have the biggest risk of a big fat BK in the next couple of years? (That announcement gave me quite a chuckle as I'm short HOV!)

Then we have the totally misleading headline reading "Stocks EXTEND Rebound After Selloff."

Extend? Did someone miss the previous three days? What sort of absolute bullcrap reporting is that?!

Why did people buy today?

More M&A rumors, basically. US Steel was rumored to be a takeout target around noon and that was it - off she went, up 8% or $9.25/share, dragging the S&P up, and as soon as the S&P got a fire lit under it people piled in. And to add misleading to outright fraudulent, the article says that "bond rates back off five-year highs of 5.25%." True, but misleading - rates were still up by 0.39% on the day!

And by the way, let's dispel something right here from that article - they stated that "A move in the 10-year bond yield above 5 percent Thursday -- a level not seen since last summer -- sent stock market investors rushing to bonds."

Bullcrap again. If people had been buying bonds, the interest rate would have gone down. Bond prices move opposite to rates - if there is buying pressure, interest rates fall, not rise.

It is people selling bonds that makes the yield go up.

However, there was strong interest in bonds at 5.25%. Well, yeah. So we bipped off 5.25% overnight, but to say that the bond didn't continue to decline in price is just plain false - it most certainly did.

So what was going on when both bonds and stocks were declining in price? To the extent this was selling and not shorting, people were taking money out of bonds and putting it somewhere else - in this case, almost certainly outside of the United States. That is, this selling was either (1) foreign entities repatriating assets, (2) hedge funds shorting bonds to square positions or (3) US investors and institutions selling bonds so as to buy assets outside of the United States (or, to buy things other than stocks such as, for example, currencies.) We know they didn't buy gold because that fell in price also.

Let's talk about this shorting of bonds for a minute, because its important. Why would a hedgie short bonds? Well, because he thinks the price is going to fall would be the obvious reason. But its not quite that simple.

See, most of the subprime mortgage obligations, and the ALT-A obligations on Option ARMs, had an initial expected maturity of 3 years or so. Why? Because in about that amount of time the 2/28s would all be expired on the "2" side and the Option ARMs would have hit recast, forcing refinances. This results in the debt being retired and eventually the bond goes away.

Ok, so what happens when you can't refinance any more? Your LTV is over guideline (or even underwater) and/or the new interest rate is higher than the old? You're screwed. So now the loan stays out there, and average maturity of those bonds goes up. This is not a good thing if you had intended that they be retired in three years! So how do you get rid of that extra duration you don't want? You sell treasuries; you are then short a bond and long a bond, roughly, and if the coupon you're long on is higher than the one you pay on the short, your position is a net null yet earns a profit.

Note that there's a potential problem with this little scenario. What happens if the bond you're long doesn't perform? Now you're short a treasury that may have gone down in value (that is, you can't cover the short without taking a capital loss) and you have a coupon payment to make on the short without having the income to cover it! That can get very bad very fast. So these guys making those trades - and twice in the last week they have been entered at a near-panic rate - are making a further bet that defaults won't be ruinously bad for them. With rising real rates this may turn one to be one very bad bet. I think its reasonable to assume that some credit-spread insurance has been purchased to lay off some of that risk, but that just moves the bomb from one person to another - it doesn't keep it from going off!

So what was honest in the reporting about equities? That a $2/bbl price decrease in oil had something to do with the stock market being lit on fire. But wait - that's not good news! Here is why:

"``The most recent economic data points to a slowdown, bond yields are surging and there's a risk of additional rate increases,'' said Eric Wittenauer, an energy analyst at A.G. Edwards & Sons Inc. in St. Louis. ``A weaker economy points to weaker fuel demand.''

A weaker economy? But but but but.... I thought everyone on the Kudlow show and CNBC said the economy is picking up steam? Is that perhaps not the truth? Hmmmmm..... let's look at the data again.

Go pull that article up again about the April Trade Deficit. It came in lighter than expected, which everyone thinks is good. Add to this the consumer credit numbers - revolving credit was down.

What made up the big drop in the trade deficit? Consumer goods imports were down strongly. You know, things like Plasma TVs? To quote the article:

"To a large extent, the weaker imports reflect the fact that U.S. consumers are tempering their spending habits amid falling home values and high gasoline prices. "

No, really?

Yet the WSJ opines: "Combined with recent upbeat data on manufacturing and business investment, the April trade report "plays well into the economic-rebound scenario," said Joshua Shapiro, chief U.S. economist at consultancy MFR Inc. in New York. "

Perhaps Joshua would like to explain how consumer spending falling by that sort of figure is good? Oh sure, the balance of trade is a good thing to see narrow, but let's be honest here - if it comes off consumer spending it is not accretive to GDP, unless that money is spent on domestic products and services, and we know from the consumer credit report it was not!

Now let's take a look at another troubling statistic. In a new report from CEPR, we found that:

"At the end of the first quarter of 2007, the ratio of equity to home value stood at 52.7 percent, another record low. This ratio stood at 54.3 percent at the end of 2005. It had been at 57.9 percent as recently as 2000, and was close to 70 percent until the nineties."

Folks, this has profound short AND long-term public-policy and economic implications, with the long-term implications far more ominous than the short term.

In the short term, it is reasonable to believe that equity-to-value will continue to decline both due to price decreases and foreclosures. Those 2m foreclosures are going to hit hard at equity to value numbers, and the ripple effect on home prices is going to hurt even more. We also have slowing productivity and rising material plus unit labor costs - putting upward pressure on inflation. This is the real reason the bond is moving higher and it is ominous for mortgage rates - which will put further pressure on equity percentages.

This process just begun in the first quarter and we have not seen any material impact from it yet in economic numbers. But you can take this to the bank - we will. The mortgage-equity withdrawal is effectively gone and consumer debt numbers tell us that consumers are hitting the wall on their credit cards, which means there is an impending consumer spending slowdown coming to a store - and a stock market - near you.

The more serious problem is longer-term however. As our demographics continue to shift, with huge numbers of people (the "Baby Boomers") entering retirement, you'd expect that home equity would be near all-time record highs. Why? Because for most people, their house is the greatest store of wealth that they have. While homes are not a particularly good investment from a pure appreciation point of view once you subtract all carrying costs, the fact remains that they have been a storehouse of wealth upon which one can draw in retirement, either by selling your home and downsizing to a smaller place (pocketing the difference) or, now, through reverse-mortgages and other similar financial engineering.

These options are, for many boomers, now gone, as they have spent the equity they had built in their homes over the last five to seven years on ordinary consumer consumption. This means that these individuals will be relying more upon Social Security than would otherwise be the case, and that program is already overstressed.

Now let me add a few more things to the mix here...... and this is where reality gets truly ugly.

M3, total money "creation", in the US has been hidden since Bernacke decided that we mere serfs didn't need to know any more. Cute. He then cranked up the printing presses and started dumping huge amounts of money into the markets. I know, I know, people scream about "The PPT!" Give it a rest - this is all public information and that someone doesn't add up the numbers for you doesn't mean you can't. If you're too lazy, who's fault is that? If you bother to get out the calculator you'd see that in the last few months we've been "creating" money at an annualized rate approaching 14%! Now this is truly frightening, because growth of money is actual inflation, whether recognized or not! It inflates something, and usually whatever it inflates deflates with a big "boom" down the road.

What is it inflating? Right now its preventing a market implosion along with a housing implosion, via all the cheap liquidity and deal funds that are flying around. However, this behavior has provoked two Middle Eastern nations, Kuwait and Syria, into dropping their dollar pegs! Others are certain to follow and this has extremely serious implications for the United States as the current move appears concentrated in the Middle East. The immediate result of such a drop will likely be that oil we import from those nations will instantly become more expensive, and at some "critical mass" point we will see oil priced with the FX disadvantage (to us) in the number. When that happens expect a $20 increase in the price of a barrel of oil and a buck a gallon to immediately appear in the price of a gallon of gasoline!

Finally, I want you to pay very close attention to the ABX spreads. We got a few days warning of the big February plunge from them. They are deteriorating again, with the BBB tranches now at levels last seen just after the February wave of subprime explosion! While the "A" tranches are not quite as bad, they too deteriorated significantly today. The CMBX (commercial real estate) spreads also ticked up today, but they've got a lot further to go before they get near historically-threatening levels. If these indices do not recover in the next few days the probability of a credit-market dislocation will begin to rise precipitously! Something bad is going on in this segment of the credit market, yet it is not being reported - yet. Do not get caught on the wrong side of this; you know what we got in February!

There are many, especially the Kudlowesque, who are still standing up and smiling about "Goldilocks". Did you notice that he didn't say anything about her when the Bears were taking turns raping her under the kitchen table this week? But today, she's back with her hair all fixed up and pretty-like. Uh huh. You think the Bears are done eh? I think they are warming up the BBQ pit and intend to have a Goldiroast, pig-style with her buried in the sand soon.

Is this it? I don't know. But I don't think this "event" is over; if I had bought into that I'd have closed all my shorts here and gone back long into the close. No thanks. We should find out next week; we'll get a retest at minimum of Thursday, and if that 50 breaks, then, well, that wasn't it. You pile in all the various elements - higher borrowing costs to make deals work, consumer spending slowdown is now in evidence (April's sales numbers were awful and May's only a bit better - yes, they were up but anemic) and the 900lb Gorilla in the room - the ABX indices are going in the crapper again.

Remember that all REALLY BIG stock market dislocations initiate in the credit markets. NEVER FORGET THIS because in order to be able to effectively manage this risk and forsee "unexplained" blowups in the stock market you must always keep your ear at the door of the credit markets in the hope you can detect trouble there before it spills over - because invariably, it DOES!

Honestly, I want to see it now. A good healthy decline down to the February lows would be good for the market in the short term. But if we get that, longs need to be taken with extreme care, because the party is not over, especially if we don't get all the way down to the February lows! If we stop part way and reverse, be careful - this is a second warning, much like February, and the "main event" is still yet to come - likely with either zero or one trading day's warning, and not something that my "Canary" can help you with, as it will be credit-market initiated and not due to any sort of orderly process.

If we ping the 50 again and hold the prudent trader is going to get out of the shorts and wait for a new signal before proceeding, because there is every possibility we will resume a parabolic rise. Being caught "offsides" has been ruinously expensive over the last few months, but there is also a significant risk at this juncture that something bad is coming in the ABX marketplace, and if that happens, what we saw this week will look like a tea party. As a consequence be aware that you can get caught "offsides" long as well as short!

I made good money this week trading the short side and and still have a profit in my positions even after today, mostly because I went with the hunch Thursday morning, but I'm well-aware that it can all evaporate in a few days, and am very interested in preventing that.

Keep your nose sniffing the air, your ear pressed against the door to the credit markets, and be at your trading desk the next couple of weeks.

If you can't do that then I'd get out to cash and wait until we know what's going to develop here!

Oh, on that Canary. I think I'm going to bury him - this time anyway - in a closed casket. He did his job and died with honor. I've got reasons for this, not the least of which is that I think I found a new indicator that I want in his next reincarnation....... so for now, anyway, I'm going to keep all the details under wraps.

What I will put out there is that the Emerging Markets ETF - EEM - is an important part of him. If you have been reading The Ticker, you should be able to figure out most of the rest.