On a dinghy in a sea of debt

So here we are, on dinghy in a sea of debt and derivatives and no land in sight. As an approximate $250 billion worth of M&A activity is still in the pipeline, news that financing for Chrysler and Alliance Boots, two of the highest profile private equity deals on the dockets essentially shatters the myth of the “LBO-put.” And folks, this is it. You couldn't get through even 2-minutes of market commentary without a strategist, portfolio manager or LBO pirate proclaiming "liquidity" as being the primary catalysts for stocks to continue their upward trajectory. This is leaving and frankly, there isn't a good fundamental reason for owning a broad basket of stocks anywhere, at current valuations amidst a backdrop of slowing world growth. And this week's "set back" feels a bit more acute than what we went through in late February when the first wave of subprime issues roiled markets. Take a look at the leveraged bond funds that trade on the NYSE. Even as Treasury rates fell like a rock this week, usually good for fixed income and often very good for leveraged bond funds, many of these funds were actually being purged. Folks, leverage is getting unwound and I sense that this last week is just the beginning. Given the duration of this re-leveraging process of the world's financial system that began in late 2001 after 9/11, the untold amount of debt and levels of derivatives backed by even more leverage, makes it utterly impossible to get one's arms around the situation. The fact that the White House hastily assembled a coffee klatch consisting of its economic advisers, including Hank Paulson, yesterday for public viewing and emceed by Dylan Ratigan of CNBC America, was odd and felt more like hand holding than anything else. Doesn't it take a death in the family for strangers to offer you their hand? Still, CNBC and its ilk continue to site the copious amounts of reserves resting in “sovereign funds” as being earmarked as a prop for the world's overvalued, over leveraged paper assets. Just don't tell China that they've already lost roughly $750-million or 25-percent of its $3-billion investment in shares of private-equity group, The Blackstone Group (BX), which it had purchased from funds in its "sovereign fund" just last month. If I were China, I might begin to wonder if there isn't something else we could do with these funds. It seems possible and probable that China is soon going to grow weary of being the lender of last resort for the debt-binging U.S.A. They already own a slug of U.S. Treasury debt that only loses money, year after year, due to the wilting value of the U.S. Dollar. Regardless, the week was a shot over the bow for the leveraged crowd.

Check please

Stock futures in the U.S. collapsed in the morning about the same time DR Horton (DHI) and Beazer Homes (BZH) rolled-out their depressing “lack-of-earnings” reports. Rumors were also swirling concerning potential credit problems roiling Germany’s financial markets as a CEO at a major German bank up and left without warning. Obviously, as previously announced LBOs are struggling to scrape together the necessary financing, many of the major Wall Street investment banks are being forced to open wide. Today, credit-default swaps on Goldman Sachs Group (GS) and Bear Stearns (BS) rose to records on concerns investment banks will be stuck with this toxic debt. We’ve been sliding towards this point for some time now and the day of reckoning for the woefully over-levered world financial system appears to be knocking on its doorstep. Whether or not the world’s investment banking cartel and central banks are capable of stemming an all-out rout remains to be seen, but forestalling the massive and accruing global financial imbalances has only guaranteed eventual disaster when its shear weight renders the “cartel” irrelevant. The Dow Jones Industrials suffered is second largest set-back of 2007, down over 300-points, but still a mere 3.5-percent from its all-time high.

Amazon (AMZN), a second chance to impale yourself on its overpriced shares

Amazon.com (AMZN) saw its market-cap increase by over $7-billion today--essentially 100-times their reported quarterly net income. The bulls were eager to try to paint Amazon's "better-then-expected" earnings as summarily magnificent for all of tech, even though Amazon is actually a retailer. Google (GOOG), on the other hand, was deemed to be "company specific" when they disappointed with their slowing rate of net income growth as reported last week. Shares of Amazon.com now trades at a trailing 12-month P/E (price/earnings) ratio of 120x and a forward (expected) 12-month P/E of 62x. A multiple often reserved for companies on the brink of cures for serious medical ailments. Unfortunately, Amazon is a retailer that doesn’t make anything. Six full "self-serving" brokerage firms upgraded shares of the online retailer. Earnings and margins have improved dramatically for Amazon over the last two quarters, but that is primarily due to a huge drop in capital spending. Upon hearing news of the “better than expected” increase in net earnings of $0.19/share, Jim Goldman of CNBC proclaimed that this number bodes very well for technology in general. Again, in case people don’t know, Amazon is a retailer, not a tech stock. And morevover, Amazon’s recent improvement in reported earnings can largely be attributed to its slower pace of technology upgrade costs relative to prior periods. Got that? Amazon is spending less on technological upgrades, which would summarily bode "less well" for technology. Also, let’s dissect the Amazon number to put things in its proper light. The headlines said that earning per shares surged 280% year-over-year. Not a lie. But this $0.19/share quarterly number, pathetic for stock trading just shy of $90/share, is being compared to the 2Q number a year ago of $0.05/share, which just so happened to be the worst quarter since its 1Q number back in 2003. Nevertheless, its proclamation of a “280% increase in net income" is pretty relative. Unfortunately, that will be the easiest year-over-year comparison for Amazon for a while. After increasing by nearly 25-percent today, closing at $86.18/share, Amazon.com now sells at a forward P/E of 62x. Of course, the market is making a bold assumption that the slowdown consumer spending, already visible across an array of consumer related data, will not become even more problematic. Also, Amazon now trades at a higher price than even its highest price seen at the epic heights of the dot-com bubble back in February or March of 2000. To sum it up, Amazon is among the most ridiculously priced stock on the U.S. stock market, again. However, for those that missed the opportunity to impale oneself on shares of Amazon in the year 2000, you've been given a second chance.

Canaries chirp an ugly tune

Today felt as if reality intrudes. Shares of Apple Inc (AAPL) fell over 8-points when AT&T (T) said that its subscriber numbers for customers of Apple's iPhone were well below even the most sobering of estimates. As the exclusive service provider for Apple’s iPhone, possibly the most over-hyped piece of silicon and plastic ever, said it signed up just 146,000 iPhone subscriber customers in the first two days of the iPhone rollout. Some analysts had estimated sales of the iPhone to be somewhere "north of 500,000." Even as many semiconductor issues were getting hit rather hard, particularly the capital equipment makers thanks to another airball by a major semiconductor company, Texas Instruments (TXN), Sandisk (SNDK), the maker of flash memory was up as much as $1.60 before finishing essentially flat based on some regurgitating by Jim Cramer. This was even in light of the bad Apple data point from AT&T. Apple, as you know, is a major buyer of flash memory for its many i-gadgets….As folks were being forced to grapple with more bad news from their “non-housing” play, tech, everything even slightly related to housing, mortgages and CDOs were cracking-up. Countrywide Financial (CFC), the largest mortgage lender in the U.S. missed earnings by a wide margin and dramatically lowered forward guidance. Then its CEO Angelo Mozilo slathered on a thick layer of reality on during his conference call with analysts. He uttered the “D” word while trying to describe the prior precedence of home value depreciation. “D” as in Depression. Finally, as the housing and mortgage complex was unraveling, the Yen set out on a pretty robust spring of its own. The yen, probably the most putrid currencies on the planet, is ironically also the currency most likely to see the biggest appreciation in value vis-à-vis other currencies as the great credit bubble unwinds. The yen has been the source of a tremendous amount of leveraging due to its nearly free borrowing costs. These yen will be “called” as the most leveraged “carry-traders” are forced to unwind their bets. Even though crude oil sold-off over $1/barrel, the precious metals finished nearly unchanged after trading green most of the day. This remains to be a healthy development as it concerns the precious metals versus similar broad market sell-offs in late February and again in June when news of the Bear Stearns hedge funds were being felt. Finally, the “canaries in the coalmine” as it concerns the private-equity and hedge fund bubbles, the major investment banks, continue to get sold. Goldman Sachs (GS) closed under $200/share for the first time since early March.

Lastly, Bill Gross’ August Investment Outlook reads like an emotional catharsis. The missive from the “Bond King” may have also been part and parcel to some of the overall angst that accompanied the day’s trading as the Dow Industrials suffered its second largest sell-off of 2007, down over 200-points. Below is a small teaser of Gross’ recent prose:


“That the golden glazed surfboards of the 21st century seem unique with their decals of ‘private equity’ and ‘hedge finance’ is mostly a mirage. Wealth has always gravitated towards those that take risk with other people’s money but especially so when taxes are low. The rich are different – but they are not necessarily society’s paragons. It is in fact society’s wind and its current willingness to nurture the rich that fills their sails.” And, “If gluttony describes the acquisitive reach of the mega-rich, then the same gastronomical metaphor applies to today’s state of the credit markets. Stuffed! Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan’s Famous Coney Island style – are having a serious bout of indigestion.” And in regards to the backing-up of junk bond yields and its relationship with the mortgage/subprime convulsions, Gross says, “Some wonder what squelched the hunger of potential lenders so abruptly, while in the same breath suggesting that the subprime crisis is ‘isolated’ and not contagious to other markets or even the overall economy. Not so, and the sudden liquidity crisis in the high yield debt market is just the latest sign that there is a connection, a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy…..To be blunt, they seem to be thinking that if Moody’s and Standard & Poor’s have done such a lousy job of rating subprime structures, how can the market have confidence that they’re not repeating the same structural, formulaic, mistake with CLOs and CDOs?”

You can read Mr. Gross’ full depressing Investment Outlook below:

Bill Gross, “Enough is Enough”

Every pullback, no matter how miniscule, is a “buying opportuity”

For a day that saw a pretty sprite bounce in the indexes, the “canaries in the coalmine,” Goldman Sachs (GS), Bear Stearns (BSC), Lehman Brothers (LEH) and their ilk, barely got a look today. Housing and mortgage was again the stand-out weak-link. Remember how intimate housing had become with the market as a whole a few years ago? Its astonishing how folks have been able to pretend that the crashing of the same will have no broader repercussions...After hours, Altera Corp. (ALTR), a manufacturer of programmable logic devices, said second quarter profit increased year-over-year, despite a dip in revenues. Revenues declined 4% year-over-year to $319.7 million from $334.10 million. However, it was even worse than that. If it wasn’t for some good old channel stuffing, Altera would have reported a large miss. Receivables increased from $130-million just 3-months ago and $93.3-million at the end of December to $188.5-million in the June quarter just ended. Also, year-over-year growth in North America dropped by 19-percent. But as most well educated semiconductor has learned to do, they too rolled-out some plans to financially engineer their reality. Altera declared a 4-cent per share dividend and said that it intends to repurchase up to $1.5 billion of its common stock from the beginning of 2007 through the first half of 2008, using a “long-term credit facility.” Also, Texas Instruments (TXN) saw revenues drop to $3.42-billion from $3.70-billion year-over year even as Inventories increased slightly year-over-year. Gross profits dropped from $1.907-billion to $1.784-billion. No growth at all. Why the infatuation with tech and semiconductors? I see nothing but overcapacity, collapsing margins and lower profits. At least its not housing. The Dow Industrials recovered nearly 100-points of what it lost last Friday.

Coming into focus

Joining the “what are they thinking parade?”, Chipmaker Xilinx (XLNX) posted higher quarterly profit, but revenues fell on weakness in Europe. The company also guided revenues to be flat to down slightly sequentially for its September quarter. First-quarter revenue fell to $445.9 million from $481.4 million. Profits were $84.3 million, or 28 cents per share. Analysts, on average, were looking for net profit of 29 cents on revenues of $452.9. Miss, miss and lowered guidance. I’ve been chronicling the semiconductor and capital equipment group over the last week and I don’t see a real encouraging theme here. But this is the sector that is not specifically housing and mortgage, so by default it has been a “Buy” for Wall Street for a lack of any other viable theme. Again, these folks aren’t paid to warn folks to head for the hills, so they have to come up with something and it usually involves the recommendations of a group from which they get some of their underwriting and M&A fees. Advanced Micro Devices (AMD), Intel’s primary rival reported its third quarterly loss in a row last night on its prolonged price war with Intel. Advanced Micro said its net loss was $600 million, which equates to $1.09 per share loss for its second quarter, compared with a profit of $88.9 million, or 18 cents a year earlier. This loss occurred even as Revenues were up 13-percent to $1.38 billion, from $1.22 billion a year earlier. What does that say about an industry that shows robust sales increases but loses that much money anyway? Just think when demand falls off as the so-called “contained” housing and mortgage crunch works its way through the pipeline. As a reminder, Intel came in with horrific margins earlier in the week. Sandisk (SNDK) said that its average price per megabyte sold declined 65% on a year-over-year basis and 26% sequentially. SanDisk is largest manufacturer of flash storage cards used in cameras and other consumer electronics gadgets. Accounts Receivables also increased sequentially to $311.7-million from $144-million in April. But shares surged this morning because Chief Executive, Eli Harari, predicted that demand for some of SanDisk's memory products could “outstrip supply” in the coming months. More empty promises from another chip related CEO, but little beef.…. Cypress Semiconductor (CY) said “second-quarter profit rose sharply.” No kidding, that was the headline. But that feat was achieved by the liquidation of 7.5-million shares of SunPower Corp. (SPWR) that it had owned and subsequently counted the proceeds as revenues. Its balance sheet raised numerous questions with huge bulges in Accounts Receivables, Inventories and Goodwill. Away from chips, Google (GOOG), of course is one of those “love the company, suspicious of the current stock price things.” Its price took a pounding today after reporting year-over-year net-per share profit growth of just 25.8-percent. A stock with a $171-billion market that trades at a 46x multiple is just plain vulnerable when it becomes clearer that it’s in the twilight of its hyper-speed earnings growth era…. On the private-equity front, shares of previously LBO’d online travel agency Orbitz Worldwide (OWW) fell 3-percent in its reintroduction as a public company. Orbitz was spun off from Travelport, which is part-owned by private-equity firm Blackstone Group (BX). This was even as underwriters had to lower its projected offering price. This spells trouble for all those LBOd deals that have been financed and are targeted to be reintroduced into the IPO market in the future. And we can pretty much forget about the deals that have been announced, but not yet financed. Instances like the Orbitz fizzle will certainly add to consternation among bankers concerning the viability and wisdom of these deals. And for anyone with cognitive abilities, I believe it’s safe to conclude that the environment is only going to deteriorate from this point forward in spite of protestations otherwise. The denial we’re about to see concerning this issue will navigate a similar path of denial seen traveled by that of housing/mortgage and CDO parade of denial…The yen popped higher around 10:15 AM EST in the U.S. It looks like someone is being forced to reverse their carry-trade. A chart of the yen looks fairly appealing to me. Also very noteworthy was the fact that gold moved higher even as the subprime/CDO/structured credit complex stressed again. The dollar index, now down to levels last seen in 1992, may have been the primary catalyst for gold’s sturdiness. This was in stark contrast to the first major convulsions in late February and again a few weeks ago when news of Bear Stearns’ un-hedged, hedge funds hit the tape, gold had headed lower with everything else in those two prior instances. The Dow finished lower by 149-points, just 1.1-percent from its all-time high. Naturally, seeking a flight to safety, Apple Computer (AAPL) was up over $4/share at one point during the day indicating that even on a day of risk aversion, a palpable lack of fear was still easy enough to find.

“Resilience" or “Delusion”

Punk Ziegler, the boutique finance and banking research and broker, lowered their ratings on four of the largest U.S. investment banks to “SELL”. Dick Bove, Punk’s banking and finance analyst, said "I do not view this as a Bear Stearns problem but a systemic one." Following Bove’s research over the years, he’s worth listening to. More interesting was their own proprietary estimates on the growth of U.S. M3 (broad money supply). As you might know, Ben Bernanke and the U.S. Federal Reserve decided for us in March 2006 that publishing M3 data was no longer relevant and too costly. Punk & Ziegler estimate that M3 is currently expanding at apace of over 13-percent!!!! Perhaps Ben and his friends at the Fed had realized that being on the cusp of a housing crash in the U.S., they would soon have to start printing money like never before? Fairchild Semi (FCS), was the latest major semiconductor to report no growth and little prospects for the immediate future. Revenues, year-over-year, were essentially flat; margins dropped and Net Earnings dropped a lot. They also gave weaker forward guidance of 2-percent sequential revenue growth from an expected 4-percent. Cash and short-term investments have dropped by nearly $139-million since the beginning of the year—a nearly 24-percent drop in cash equivs. But of course, according to the “Delusionists Guide to the Galaxy: Bad news is always isolated, and good news can be extrapolated as also being good for the entire universe.….Motorola (MOT), which had already warned was a horror show!!!. Revenues dropped from $10.8-billion to $8.73-billion year-over-year!! IBM, of course reported positive numbers, and all else was forgotten. Within the first minute of trading, the Dow was again busting thru the 14,000 level. Yesterday’s news, which looked a little disconcerting along the subprime/CDO/structured credit-front, was essentially wiped clean within minutes of this mornings opening of trading in the U.S. If the bubble apologists hadn’t been so wrong as it concerned housing, and later subprime, as it migrated from froth, to peak, to “leveling-out”, to “correction”, to “difficult”, to “Get me the hell out!!!”, I would be far more open to accepting their current thesis that the structured credit problems will be isolated. It won’t be, and sometime over the next 6 to 12-months, a large number of folks’ net-worth’s are going to wiped-clean. The “canaries in the coal mine,” the large Wall Street investment banks weakened as the day wore-on. Goldman Sachs (GS) and Lehman Bros. (LEH) even broke thru some minor resistance back to levels last seen in early April…American Home Mortgage Investment (AHM) crumbled into the close on a rumor that a Wall Street investment firm had withdrawn a credit facility. It’s a small company, less than $1-billion market-cap. But nonetheless, it looks like another portfolio of mortgage-backed securities may be getting singed. A mere fly on the windshield as the Dow closed at a new record high, and exactly on 14,000. What a coincidence? Ya know, if it took a million or so thrown at the Dow futures in the last few seconds of trading today, the Wall Street cartel, I’m sure, believes its money well spent for reaching a new century mark and the soon-to-follow arm-waving that it will elicit on the night's news cycle.

There was never a housing bubble; subprime won’t spread; and pigs fly

As mentioned yesterday, as reported by the Wall Street Journal investors in the two Bear Stearns (BSC) highly-leveraged hedge funds have been mostly wiped-out. The firm said that its more highly-levered fund was worth nothing and the “safer” fund was worth less than a 10th of its value from just a few months ago. In the past few months, the portions of the index that tracked especially risky mortgage bonds with junk-grade ratings had been falling. But now, the portions of the index that track safer mortgage bonds, with ratings of triple-A or double-A, are also falling sharply. The question I have is: Do the prime brokers that have huge lines of credit extended to this leveraged cabal of gunslingers really have a handle on their own exposure? And as it concerns the dark matter of the CDO and derivatives market, how vulnerable, now, are the counter-parties of all of this stuff? I honestly don’t believe anyone knows. You may think you have insurance on a lower tranche of the ABX should it fall further, but not if it’s backed by a counterparty that ends-up like of those Bear Stearns hedge funds. Both Yahoo (YHOO) and Intel (INTC) released disappointing numbers last night. Coupled with news of the crashing Bear Stearns “un-hedged” hedge funds, most of today’s trading over in the U.S. felt like it could be a trial run for that point in time when reality finally intrudes on the bull’s celebration of speculation, delusion and denial. Gold silver and oil all were up strong today. The gold mining stocks even got into the action and feel like they may finally be leaving their recent well carved-out base over the past 12-months behind them. Back to beloved tech---Intel lowered its expected “cap-ex” budget for 2007 from $5.5-billion to $4.9-billion adding more question marks to the wisdom behind yesterday’s huge breakout for the semiconductor cap-equip manufacturers. Gross Operating margins could only be described as atrocious. Even as Revenues for the quarter, year-over-year, increased from $8.009-billion to $8.68-billion, Gross Margins were just $4.075-billion versus Gross Margins of $4.171-billion for the same quarter a year ago. No growth in the thing that really matters. Of course, helpful to achieving what sounded like a solid 44-percent growth in Net Income was a 16-percent tax rate this quarter versus last years 29.4-percent. The glaring item on its balance sheet raising question marks was the “Other Current Assets” item growing to $1.269-billion from just $0.464-billion three months ago; which can probably be attributed to its factoring some accounts receivables which, in turn, was probably a function of some good ole’ fashion channel stuffing near the end of the quarter. After a few quarters of improvement, Intel appears to be back at its old tricks of feeling compelled to playing the financial engineering game so as to make the “headline” numbers look respectable. Coincidentally, Dutch-based, ASML Holding (ASML) saw its new orders down almost 70% year-over-year. The stock actually was positive during the pre-market before closing down. Lastly, according to Semiconductor Equipment and Materials International, bookings for semiconductors were $1.65 billion in June, which was essentially flat with May's 1.64 billion and down from $1.78 billion in June 2006 said in a report today. We should soon be a approaching a day of acknowledgment that we’ve once again been sold a bill of goods on another failed recovery for the gluttonous semiconductor industry….Also, the U.S. Bureau of Labor Statistics released their useless data on consumer inflation, the Consumer Price Index (CPI). The Pound Sterling broke through the $2.05 level for the first time in 26 years. United Technologies (UTX) was the latest company to express concerns that the housing slump has turned out to be worse than expected as it has taken quite a toll on its air conditioning business. Notice how the slide in sentiment as it concerns homebuilding has moved into the “acceptance” stage of being pretty serious. Unfortunately, I believe we remain well entrenched in the denial stage as it concerns how subprime and the CDO/derivatives markets ultimately affect the world’s financial system. And on the heels of these “toxins” descending back to earth will be the junk issued over the previous 12-months that has fueled the private-equity boom. Given as much, it’s easy to see how we might witness three waves of credit crashing upon itself….After being lower most of the day, the major U.S. indices closed at or near their daily highs. The S&P 500 closed lower 3-points and 0.6% from its all-time intraday highs. The bull’s declare this to be representative of “durability.” Given the clear and emerging threats, I can only conclude this to be a near record-setting level of complacency and denial.

Great news for semiconductor stocks; underlying business doesn’t matter

According to a Reuters story today: “Shares of chip equipment makers Novellus Systems Inc. NVLS and KLA-Tencor Corp. KLAC rose sharply on Tuesday after they expressed optimism about the second half.” Yea, its always about next quarter, next half or next year for the semis. Its been that way for most of the last two years. Today, Novellus (NVLS) said second-quarter profit grew 8.8 percent. They essentially matched LOWERED expectations which they were forced to adjust lower on June 28th ahead of last night’s announcement. The Wall Street Journal described its report in this way, “Novellus Systems gained on stronger-than-expected earnings.” Yes, stronger than expected (lowered) expectations!!! Is that where we are? As long as you get the number to a level where you, the CFO, knows its beatable a week or two from now? The stock rose $3+/share!!! It was the smallest increase in earnings over the preceding 12-months. Second-quarter orders fell 19 percent to $332.2 million from the preceding three months. They also lowered its next quarter sales range to between $380 million and $395 million versus the previous expectation of $400.4 million. The stock closed at $29.90 on June 27th, before its warning. Since then, news concerning the strength of its current and immediate future has deteriorated across the board; first with its June 28th warning and then again with its lowered forward guidance last night. Sequentially, Novellus’ Revenues increased from $396.97 million to $416.30, but Receivables grew even faster from $371.7 million in Q1 to $421.89 this quarter rendering the growth in revenues primarily a function of channel stuffing. Revenues in the year ago quarter were also $410.07—essentially unchanged. No year/over/year growth in revenues!! Also of note, just yesterday, the semiconductor's own business affiliation association, the Semiconductor Equipment and Materials International group said that sales of equipment used to make microchips are expected to rise just 1-percent for all of 2007. Again, the semiconductor and capital equipment group couldn't’t look less dull and toppy from a fundamental point of view. But not being mortgage or housing apparently is enough for the bulls, I guess. Of course, based on this “overwhelmingly, ebullient” earnings report, the entire capital equipment sector literally exploded higher—even as most of these stocks were already at or near 52-week highs. Lam Research (LRCX) in particular is now trading higher than even its peak price of April 2000. Throw in what KLA-Tencor’s (KLAC), John Kispert said during an afternoon meeting with analysts. He said bookings, which are cancellable, rose a whole 2-percent during its usually strong June quarter. He also said he is “optimistic” about industry spending on NAND flash memory in the second half of 2007; even though this product sector has experienced a crunching glut which drove some NAND prices collapsing as much as 70-percent earlier this year. I’m always baffled by the market’s ability to continuously grant the CEO’s and CFO's of this group benefit of the doubt in spite of their histories, broadly speaking, of being far too optimistic just as business is deteriorating. Of course, this group, more than any other industry, was also the subject of numerous option “backdating” issues and more recently they have nearly institutionalized the “leveraged stock buyback.” Given that its executives are compensated with high levels of stock and option grants, these occurrences always smack of conflicts of interests. But again, more than probably any other industry, investors seem to always take the bait with mouth wide open. So the semis went en fuego today, setting a new 52-week high—even as Best Buy (BBY), the stock best representative of “end demand” for this group, spent most of the day plumbing near 2-year lows. Conclusion: Almost no remaining viable investment options compared to the copious amounts of excess debt and credit (money supply) equals higher prices, for now…..The other major news for the day was the release of the totally useless PPI (Producer Price Index) and oil broke above $75/barrel…. Also, The NAHB/Wells Fargo housing market index dropped four points to the lowest since January 1991 and the third lowest reading in the 22-year history of the survey. Also, Bear Stearns’ (BSC) “High Grade Structured Credit Enhanced Leveraged Fund” may be worth nothing according to sources cited in the Wall Street Journal. Its other less leveraged (read: safer) fund is estimated to be worth 9-percent of its original value….The Dow Industrials closed at a new record high.

Dark matter darkens

ACA Capital Holdings (ACA) is the latest sad tale enveloped by the worsening CDO and subprime fiasco. Having just gone public last November, the stock is now down nearly 65-percent from it high of early February. The stock dropped another 20-percent today when it revealed that it continues to struggle with its subprime exposure. The interesting tie-in is its relationship with Bear Stearns (BSC) which as of its IPO date last November had owned 27 percent of ACA stock through one of its private-equity funds. Among other financial engineering services, ACA provides financial guaranty insurance products to participants in the global credit derivatives markets and structured finance capital markets. In addition to this news, the lowest tranche of the ABX index was clobbered again. As a result, we saw more weakness today in shares of some of the hedge funds in drag, Goldman Sachs (GS) and Bear Stearns (BSC). The market as a whole was nearly able to act as if none of this mattered. The Dow Industrials closed again at an all-time high and just short of 14,000.

Greenback on a precipice

I had said in my June 27th post: "I believe a potential explosive 'paired trade' opportunity is developing as the quarter is coming to a close—to go long gold, silver, and miners and go short semiconductors and financials." With the dollar in a near free-fall this week, gold and mining shares have finally come to life after a miserable 2nd quarter. The dollar dropped again today and crude prices closed above $74/barrel for the first time ever to compensate for the confetti most of the world's crude is denominated in--the woeful U.S. dollar. The dollar is sitting at a very critical technical level that if broken, could trigger the next dramatic leg down for the U.S. currency. Its my belief that gold bullion has suffered over the past year mostly out of a vacuum being created as risk appetites have surged around the world essentially leaving smaller amounts of excess credit availing itself to the prudence of gold bullion. We saw a similar phenomena occur during the late 90s tech and dot-com bubbles where those markets literally sucked capital away from traditional industrials, banks and "value" stocks. With the dollar resting at a critical precipice, it seems possible that gold and silver could really catch fire. Not only does the gold price have some catching-up to do, given the incredible credit growth over the past 12-months, but a break below 80 for the Dollar Index could breed a new batch of people and institutions looking for protection from the ravages of currency debasement. The other part of my prediction, as it concerns the semiconductor group, feels on track from a fundamental view. Samsung, Tokyo Electron and Micron Technologies (MU) all issued a fresh batch of bad news this week. This is in addition to Novellus (NVLS) and LSI Logic (LSI) a couple of weeks ago. Unfortunately, with risk-seeking at such high frothy levels, I am playing that side of the trade a bit more cautiously. It might be worth watching how Intel (INTC) trades after their announcement next week, good or bad, before adding to these shorts.

"Relief rally": Relief from what?

Of course, the news du jour was that something triggered a stampede of buying on Wall Street today sending the Dow Industrial to a fresh new all-time high of 13,861 and the Nasdaq to a new 6 1/2-year high of 2702. The bulls called today’s giant ramp-job a “relief rally.” A relief from what? From its prior ratcheting down from severe acute delusion and denial to just a heightened state of denial and then back again to severely delusional? So far, since mid-March, all the angst from a worsening housing and mortgage situation has spooked the S&P 500 into a nearly 4-percent correction in June. It should be noted that today’s fresh new high on the Dow industrials coincided with a fresh new high for the Canadian dollar, Australian Dollar, Swedish Krona, Euro and probably several other currencies. The yen, the currency backing the third largest portion of worldwide assets, was again about the only currency that dropped against the dollar. Its quite obvious that the world's paper money is being debased at a breathtaking pace, and that is causing asset bubbles across the globe....."Not so terrible" retail sales figures form the plethora of U.S. retailers were given partial credit for the day's biggest point gain in the Dow since 2003. The other assist were a slew of new LBOs and mergers. The headline, of course, was one that had been wasting ink for a couple of months now. Alcoa (AA) appears to have lost out on its pursuit of aluminum competitor, Alcan (AL) , which agreed to be acquired by Rio Tinto Group (RTP) for $38 billion. Alcoa's (AA) attempt to takeover the Canada-based aluminum producer was officially withdrawn later in the day. Shares of Alcan leapt $8/share to $98/share on the final Rio bid. The buyout price, if finalized, would put Alcan shares at over $100/share. Shares of Alcan could have been had for $30/share about this same time last year. Seems that stock and financial assets become even more desirable near their tops for some strange reason, yet when it comes to shopping for milk and eggs we usually pine to make the acquisition at low prices. Funny thing, that stock market. That's the history of the corporate world; to buy near the peaks of asset values instead of scooping-up bargains during bear markets. Alcoa, which was in the mid-30s when this silly bidding war began a couple months ago, rose into the low $40s when news of their interest in Alcan emerged a couple of months ago. I guess because the current market sentiment is to conclude that any acquisition must be a good thing for both the buyer and the buy-ee. Alcoa rose another $3.50/share today on the news that they had lost out on the bidding war. Again, none of this really makes a lot of sense. When sanity ruled the day a decade or two ago, it was customary for the market to initially punish an acquisitive company and then reward it if a the deal fell thru. For this stock to end higher by nearly 20-percent over the span of this nonsense, especially given that their earnings have not grown over the past year, makes no sense other than the fact that apparently just making headlines reminds folks that their shares are available for purchase. The disconnect witnessed on a daily basis is hardly rivaled by the stupidity witnessed in the late 90's and the same just about a year-and-a-half ago in the bubbly housing and condo markets of London, Madrid, Sydney, Boston, Las Vegas, South Florida, Phoenix and California. In fact, the current M&A, private-equity, hedge fund, credit bubbles feel like the summer of 2005 as it concerned the mania surrounding real estate.

Yesterday's suprime news, water under the bridge

U.S. stock futures were all over the place pre-market today. Nasdaq futures went from essentially fair value to over 10-points below fair value and back to just under 3-points below fair value all in about 45-minutes in the morning. I usually have CNBC America droning-on in the background and I did not hear a mention of this peculiar behavior absent anything we didn’t hear yesterday..…Stocks managed to open flat and began to climb shortly after the opening. After a late morning swoon, stocks powered to solid gains over about 30-minute period. From there, we just moved back and forth until another pullback in the early afternoon. The Nasdaq “kissed” the break even line around 2:56 PM EST and then was defended by some pretty large buy programs. Its amazing how many "picture watchers" are operating out there. This has been a common occurrence in recent months with both the Nasdaq and the S&P 500 indexes….We heard after the close that Motorola (MOT) pre-announced revenues lower by a pretty wide margin. Motorola (MOT) expects second quarter sales to be in the range of $8.6 billion to $8.7 billion versus $9.4 billion expected. They blamed lower volume demand in Asia and Europe. That part is a bit disconcerting since those economies have been doing somersaults over the U.S. This news will surely be dismisssed as "company specific" in the morning by the various well-dressed men and women they call "analysts." And to a degree, they might be partially correct. In a nutshell, it was a day that felt like the bulls were trying their best to ignore the previous day's tumultuous subprime news and if they can just let that day float down the river a ways, and out of sight, everything will be alright.

bad news, might finally be BAD NEWS

bad news might finally be BAD NEWS: I guess Apple (APPL) was up again because some sharp dressed fellow at JP Morgan (JPM) said that the company plans to launch a cheaper version of the iPhone in the fourth quarter fashioned after the ultra-slim iPod Nano music player. Of course, everyone that just sunk $600 into their “fat version” will gladly switch to something less cumbersome in a matter of a few months. Never mind that Apple failed to even sell-out of its "fat version" like most WS analysts had projected....Earnings Season Arrives!!!... Last night, Alcoa (AA) failed to elicit any excitement with its earnings report, which showed no year-over-year growth. Also, hedge fund in drag, Sears Holdings (SHLD), warned of a nearly 50-percent earnings miss. Ouch. Year-over-year same store sales at both its K-Mart and Sears retail stores were lower, again. But Sears’ warning, really being just a hedge fund in drag, is more of a proxy for the finance-centric economy, Wall Street, and all its catered-to hedge community....Home Depot (HD) also warned of disappointing quarterly results, but played their "massive debt-financed stock buyback" card--again. The stock actually rose modestly on the, wink, wink, don't forget how confident we are in our own depressing business. We're willing to leverage ourselves to the gills to prove it to you..…The Euro broke to a new ALL-TIME high against the "safe haven" U.S. dollar late in the morning. Canada's central bank bumped its benchmark lending rate higher. The dollar don't hunt ..…Finally, the "well contained" subprime problem seems to be crawling out of its container. The two major credit rating agencies, Standard & Poor's, a subsidiary of McGraw-Hill (MHP), and Moody's Investor Service (MCO), decided to unshackle themselves from its uncompromised Wall Street grip and actually serve the public good by downgrading about $12-billion of subprime morgtage bonds. More worrisome to the "hedged" (that's a laugh) community, S&P made its intentions known that it also plans to examine the credit ratings on the CDOs that contain this debt. This is exactly the news that the folks at Bear Stearns (BSC), et al. did not want to hear. This places Wall Street's "mark-to-model" pricing franchise at great risk. It was no mere coincidence that the lower end of the ABX Index gave-up nearly 12-percent in a matter of minutes once word of this spread. It was also no coincidence that about 5-points were lopped off from shares of Bear Stearns (BSC) and Goldman Sachs (GS)---also un-hedged funds in drag.

Denial

Two companies that I happen to like, even in this over-leveraged world, Johnson & Johnson (JNJ) and ConocoPhillips (COP) announced large stock buybacks today. ConcocPhillips' buyback amounts to nearly 10-percent of the company's oustanding shares. But again, we're witnessing stocks going up more on the basis of financial engineering and less on even the most congenial outlook that even the most optimistic bull can conceive. The only other reason for another day of advancing stock prices was a fresh new batch of announced mergers and acquisitions, which always occur en masse near market bottoms--NOT!! Also, the bulls are gearing up for what is "sure to be" another robust earnings season..... Of course, the airball tossed by Lexmark (LXK) was deemed to "mean nothing" according to the nearly delusional CNBC market commentator, Bob Pisani, from the floor of the NYSE. For those keeping score, Lexmark just happens to be among the world's biggest manufacturers of printers and ink cartridges and their warning of a pretty wide miss for its fiscal 2Q and a breakeven for Q3 was deemed to "mean nothing" for the rest of tech, Dell (DELL) included, which ended flat on the day. Lexmark was whacked for about 8-percent. The current brand of stock bulls are like those really hungry scavenger dogs that you drive up to as they rip and tear at a dead carcass in the middle of the road up until the very last possible millisecond just before they scurry for safety as you think they're about to roll up under your auto to become part of the pavement. Except, I'm not so sure many of these folks will actually pull away safely. These bulls, I believe, think that a few tons of screaming metal is incapable of doing bodily harm. "Denial" is the word that comes to mind.

McJobs

Another closely watched farce, the U.S. jobs data, came in a bit better-than-expected on Friday. Upward revisions to prior month's data had the bulls focusing on the "strong" data as an excuse to push stocks higher even though the questionable data demotes another bullish thesis, a possible rate cut later in the year by Gentle Ben and the U.S. Federal Reserve. Regardless of how closely the jobs data from U.S. Bureau of Labor Statistics may or may not be, a true reflection of employment reality over in the States does not deter from the quirkiness of the report. Their Net/Birth Death Model , designed by the agency's econo-computer wonks, once again accounted for more than 100-percent of the total net new non-farm jobs supposedly created in the U.S. during the month of June. Their model is supposedly designed to estimate the number of jobs lost or created each month that their "hard count" survey is incapable of accounting for. But its interesting how frequently the Net/Birth additions have accounted for more than the total net in recent months and years; which means that their traditional survey is often registering a negative number, or actual job losses. The total net job gains in June were reported to be 132k of which 156k were attributed to their little guesstimate model. However, if indeed the jobs data is at least an impressionist view of reality, the imbalance of newly created jobs seems a bit more likely. Of the 132k of supposed new jobs, 138k (more than the net total) came entirely from the Service Providing sectors: Education and Health services, Leisure and Hospitality, and Government.

So yes, the U.S. is a jobs making machine. So long as you can fill up your tank and stock your cupboards on a hamburger server's salary, its all good. Oil spiked higher as did the 10-year Treasury rate. The ladder didn't matter. The Nasdaq closed at a fresh six-year high. Don't ask. Its weird.

Risk-seeking missile

Today we saw crude futures trade back above $72/barrel, German authorities declared a heightened state of "terror alert," the 10-year U.S. Treasury rate spiked ten basis points, another leveraged mortgage-related hedge fund, Capital Asset Management, has frozen redemption requests, General Motors (GM) said it sold the fewest number of vehicles in a single month, June, since 1993; and another major private-equity group, Kohlberg, Kravis, Roberts & Co. announced that they're cashing in--presumably at or near the top of that bubble. What to do? Buy some of the riskiest, highflyers that also have the potential of dropping like lead weights when consumers come to realize that eating is a tad more important than texting friends over the latest Brittany Spears or Paris Hilton gossip. Research In Motion (RIMM) and Apple (AAPL) sailed higher to new all-time highs. The disconnect between some stock and asset valuations amidst a backdrop of downright frightening fundamentals is simply jaw-dropping.

A "run" on leverage AND bad debt

When trading in the U.S. resumes tomorrow the news most likely to carry the day will be Blackstone Group's (BX) latest proposed buyout of Hilton Hotels (HLT) for $26-billion and the Kohlberg Kravis, Roberts & Co.'s $1.25-billion IPO filing (another private-equity firm going public). Its kind of fitting that we see a meeting among families that helped to create two of the biggest bubbles in the early part of the 21st Century; one being Balckstone Group and the private-equity bubble and the other being the American heirs to the Hilton Hotels empire, Richard Howard Hilton and his wife Kathy, parents of pop icon bubble, Paris Hilton. But the most important news as it concerns the evolving, swirling undertow that is being downplayed by CNBC, The Wall Street Journal, et al. is news of another hedge fund experiencing convulsions. And once again, the genus of its problems stems from the crashing real estate bubble and the toxic mortgage paper that its backed by. Key Biscayne, Florida-based United Capital Asset Management, apparently has stopped allowing investor redemptions. On the heels of Bear Stearns' (BSC) imploding hedge funds, also due to mortgage-related losses, the four portfolios managed by 36-year-old, John Devaney has reportedly been "deluged" with requests to withdrawal funds from their portfolios. Devaney reportedly controls more than $500-million in assets among his four managed hedge funds. John Devaney, and his wife, Selene, have made news in recent years with their high-profile purchases of prime real estate in Colorado, Florida and the Bahamas. The couple paid $16.25 million for a home previously operating as a bed and breakfast in Aspen, Colorado just last year. The Wall Street Journal reveals that the couple also owns about 20 other homes in Florida and the Bahamas. Devaney also purchased a 142-foot yacht within the past two years and named it "Positive Carry." Its spreading, yet denial reigns.

That's normal

An office building with an upscale address, 450 Park Avenue sold for $1,589 per square foot, or about $510 million. According to the Wall Street Journal, the price is believed to be the most expensive confirmed sale of commercial real estate on a per-square-foot basis in U.S. history. The building was sold by a partnership that includes New York State Common Retirement Fund and Taconic Investment Partners LLC. The partnership had paid $158 million, or about $492 per square foot, in 2002--a 223% return on a piece of real estate in just five years--that's normal. Somerset Partners LLC, a New York-based private-equity firm won the right to impale themselves on a price that seems nearly impossible to turn a profit.....Oh, the dollar hit 26-year low today against the Pound Sterling while crude prices seem to be compensating for the confetti that its denominated in, and crossed over $71/barrel. Still, undeterred, the Nasdaq gained nearly 30-points and the Dow about 126-points.