TGI July!

Wow, we made it through Q2 – congrats to all the survivors!

Actually it's been a fantastic quarter but a very stressful one as we've gone from bullish to bearish so many times I've forgotten which side of the fence I'm on some mornings.

I'm not kidding, we've had the virtual portfolio so well balanced that some day's the market has gone one way or another and I've cursed the thing out until I look at the balance and say – "Oh, I guess I DID want that to happen."  This is probably not the sort of thing an analyst (and soon-to-be hedge fund manager) should admit, so forget I said that and just bask in my omnipotence – It will make both of us feel better!

I got my positioning statement out of the way last night so please read that, as I'm not going to get into it again this morning, but what I do want to get into is this article, brought to my attention by Trader Mike, possibly the only guy I know who reads more than I do:

“The losses are going to be phenomenal'' for funds worldwide holding subprime debt, said Peter Schiff, president of securities brokerage Euro Pacific Capital in Darien, Connecticut. “My guestimate in the subprime world is that the majority of loans are going to go into default. Not just 5 or 10 percent, but the majority.''   This comment came as Caliber Global Investment, a $908M subprime fund had to shut down.  Caliber will seek an “orderly return of all of its capital to investors over the next 12 months in order to maximize value for shareholders,'' Caliber said in its statement.

As of March, about 11 percent of the subprime mortgages included in bonds were delinquent by at least 90 days, in foreclosure or already turned into seized property, the highest since 1997 and up from 5.37 percent in May 2005, according to a June 1 report from Friedman Billings Ramsey Group in Arlington, Virginia.  Buyers of bonds backed by mortgages to people with poor or limited credit histories stand to lose as much as $75 billion, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund.

Barry Ritholz is also on the warpath with this scathing comparison of CDO Hedge Funds to Enron.

So, in order for the markets to go up, we have to ignore this, ignore $70 oil and continue to ignore 8% non-core inflation as if that doesn't matter either.  While we are at it (or pointedly NOT at it) we should also ignore a tragically weak currency, inflating trade and budget deficits and we are not even going to discuss global warming, health care or social security as the election draws near.  If we can put all those things in a "lock box" we should be just fine so – Gooooo markets!

We did catch a HUGE break this morning as consumer prices in Japan fell .1% in May, a dip that may keep the BOJ off the table just a little bit longer, giving some extension to the carry trade, which has been bailing out our economy for years.  “It is true Tokyo CPI for June betrayed the market expectations, but jobs data were better than expected, (3.8% unemployed)'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America N.A. in Tokyo. “Good jobs data should be a tailwind for the BOJ.'' Fujii still expects an August rate increase but I'm not so sure so let's keep an eye on rates to see what the carry traders think.

Shanghai dropped another 2% on both sides of the exchange and Hong Kong dropped 165 points, reversing yesterday's gains but the Nikkei picked up 206 points led by exporters celebrating the Yen's continued decline.  PTR locked up the rights to develop Canadian oil sands, joining CEO, who have already made some substantial investments with our neighbors to the North.  XOM, meanwhile, shut down their Singapore refinery for maintenance and bought back another (estimated) $180M of their own stock yesterday.

Europe is trading down this morning but mainly because there was a bomb found in London, which ruined a strong opening over there.  The above-mentioned Caliber fund shutdown was also bad news but usually these foiled terror attacks end up in relief rallies and the day is young.  Back home, our PCE Inflator did come in at .1% this morning, and the markets should take this well.  Personal income was up .4% and Personal Spending was up .5%, more or less in-line so we can expect that and the end of quarter window dressing to keep us over 13,400 today and probably getting a push up to 13,500 at some point.

We picked up a green on the NYSE since Monday and the Nasdaq has a chance to lead us forward today but the SOX took a disappointing bounce off of 505 yesterday and need to be watched closely.  If those two can't get it going on IPhone day, coupled with RIMM's report, then we have some very serious problems.  We have a lot of indices at critical points on our chart but today is not the day to take market movements seriously.

Kudos to Happy Trading, who got us into the RIMM July $175s last week at $6.20.  Happy is ecstatic this morning (as well he should be) and we are going to be ignoring chart action during this end-of-quarter nonsense.  Oil remains a concern and Zman and I will be keeping a close eye on $70 but they are probably determined to max out the prices into the holiday driving week so what can you do?

According to the WSJ: "As defaults on home loans mount, mortgage companies are scrambling to work out deals to help as many borrowers as possible stay in their houses.  On the surface, it seems an obvious tactic. Lenders usually end up losing money on foreclosed homes because of legal and other costs and the need to sell those properties fast, often at a knockdown price. Also, politicians are pressing mortgage companies to minimize the damages foreclosures cause to families and neighborhoods. 

"Still, the effort to hold down foreclosures threatens to create clashes between mortgage companies and investors in securities backed by bundles of home loans, a $6 trillion market that has been shaken recently by losses on some of the riskier types of mortgage bonds. And because of the way these securities are sold, these efforts can pit groups of holders against each other."

I'm not trying to put a damper on the party today but I just want to remind people that this is still here, it's a very real problem involving over a Trillion dollars worth of real estate and the lives of millions of US homeowners and it might, just might, not all work out so great.  Please keep that in mind before you BUYBUYBUY ahead of the holiday.

I maintain my mainly cash position but we have been putting our toe in on some call positions while we remain well hedged to the downside but a finish between 13,450 and 13,500 puts us exactly where we want to be for the month as we sold the majority of our calls just over 13,500 and, while we want them to expire worthless, we also want to be able to sell them again before the market turns down any further.  We need to watch the 13,400 line as a danger zone but I can't imagine fund managers want to end the first half on a sour note. 

Have a great weekend,

– Phil