Did you take your short profits?

I took some - but left some others open. Specifically, I closed my QQQQ PUTs at a profit just after noon when I saw the parabolic ascent developing. I also closed a couple of other profitable PUT positions; specifically, those that were in the money but had a lot of extrinsic value left. Those are a sucker play going into expiration week because you're going to lose three of seven days of that extrinsic value over the weekend! That's a great way to come in and find anywhere up to 1/2 of that value gone Monday, depending on exactly what happens to volatility on Monday AM. If its flat, you can buy 'em back Monday without taking the extrinsic hit (that is, they'll be cheaper if the underlying doesn't move!)

Why? I don't think its over, especially for homebuilders, which is where my actual shorts (other than the index shorts, that I still hold) right now.

Here's the reason:



Reversal in the bond? Hell no. And what does the Fed - and history - think about this? They think the 10 should be over Fed Funds. This means it should be over 5.25%.

Note that candle pattern well. Red, you'd think, would mean "closed down from yesterday". Uh, no. It means "closed down from the open." In this case the open was a huge gap-up from yesterday, and in fact before the markets opened it was up even further, pinging 5.25%. So in fact the bond on the day actually posted an advance in rate of 0.37%!

You go from 4.7 to 5.25%, that's 55 bips. Have people forgotten about mortgage resets? That's a solid half-percent increase in real interest rates, and it will make even more people unable to qualify for those refinances.

So now we've going ARM resets ongoing (and increasing!) which pop by more than a half-point, you've got long rates up by a half-point which means you'll have a significant number of people who can't refinance out of the mess, this further impacts affordability, and, well, this is somehow going to leave the housing industry "able to recover" starting towards the end of the year?

Horsecrap! If anything you can put a fork into the housing industry with this development - its done!

Here's something to think about:

$200,000 loan, 6% mortgage, 30 years. $1193.14 in P&I
$200,000 loan, 6.5% mortgage, 30 years. $1257.33 in P&I

How much does this hit the imputed value of a house, assuming 30 year fixed mortgages? About 2-2.5%, or about 1/4 of the percentage change in rates.

Now this doesn't sound like all that much, but in fact its three times the present NAR estimate of house value decreases for the current year.

In other words, its big. And what's worse, if you're on the cusp of LTV "critical mass", it will prevent you from refinancing at all.

How'd you like it if you were a homebuilder and the NPV of your entire asset base was cut by another 2% instantly? I think you would believe that would suck! Yet that's exactly what is happening here.

Now multiply that by your leverage ratio and you see some real trouble. Just go pull the DTI ratios on the companies you like and see what 'ya got. Do you like some mortgage lender with an 8:1 leverage ratio? Gee, what 'ya think an 8% cost of borrowing increase does to them? Hmmm... let's think about that a minute.....

Here's the SPX:


We got both support and resistance today, with that nice horizontal line being the latter. The index took a run at it but couldn't quite get there, and it also pinned the 50 to the downside and then bounced up.

Buy why did the indices recover? Mid morning, I thought that pin was going to pop the 50 like a 16 year old girl in her boyfriend's back seat. Didn't happen.

M&A chatter did it. Again. REAL M&A? No. More rumors.

Oh, and one real thing - oil was down by $2/bbl. Now that's real news. But oil

Do I think this is over? Hell no. Chatter is great but as you can see it didn't manage to break back through support-turned-resistance, and that's why I held my short index positions over the weekend.

This is why:



There's the channel we've been trading in since the February blowup, and we got nowhere near getting back into it today. In fact, we didn't cover the previous decline.

On the S&P the A/D line "ran the board", as it did on capital flows - in fact, on capital flows the A/D was absolutely crushing on the advance side; $1.55b / $34 million. Ditto on volume, 2.3b .vs. 148m shares. But when you look at the broader indices, such as the NYSE as a whole, the A/D line was 67/29, which is nowhere near as strong.

Over the next couple of weeks I expect to see another 5% come off the major indices, and we'll see where the bond goes. If it starts coming back down, that may be it - for now. If not, and it keeps going after that 5.25 level, then I'm looking for at least a retest of February.

As for the lenders and homebuilders, there is absolutely nothing to like here. Let's not forget Countrywide Financial's telling statement which was printed in a local paper in California:

“"If we can milk it along for a few years, we have a chance of recovery,” said Mike Gross, Eestern managing director for Countrywide Home Loans. “Otherwise, your business gets wiped out.”"

I'm still stunned to see that in print. Yet, it is, for all intents and purposes, likely an accurate read. Why? Because this entire industry built a house of cards and now is facing a rising real rate environment - gee, how do you think they're enjoying all those mortgages in the pipeline with a rate lock right about now?

Never mind falling home prices and, with rates going up, decreasing affordability even with prices coming down!

Oh, and the whole mess is leveraged at an 8:1 - or higher - ratio.

Gaak.

That's not a business I want to be in.

One final note. You have to love some of the "news release" times. Like, for example, the Consumer Confidence number released today after the market closed.

Its reading? The worst in 10 months; economic conditions down to 96.8 from 113.2 (under 100 is negative.)

You don't think that this is going to hit consumer spending, do you? Gee, didn't I say something about that yesterday when the credit report came out?