Wary Wednesday Morning

The Fed begins thier 2-day meeting today but there will be no word from the governors until tomorrow's 2:15 statement.

Hank Paulson will jump in to fill the talking head vacuum with a 1:30 speech at a NY Investing Conference and we may get some hints as to the official spin on subprime so let's keep a close eye (ear?) on what he has to say.  Also from the Treasury, we will get the result of a $13Bn 5-year note sale where we should finally find out what those things are worth after seeing them bounce up and down over a quarter point in the past week.

We already got some bad news from the MBA Mortgage Application Index which fell 3.9% last week, a 4-month low.  This was expected by us as I predicted last week that higher rates would put a quick damper on lending activity.  Sadly though, the last time we hit a level this low was February 16th and we all know how that month ended!  Rising mortgage rates, falling prices and a record number of houses on the market may be scaring away prospective buyers, deepening the real-estate recession. A recovery will probably not take hold until 2008 at the earliest, economists said. 

It should be noted that this index was BOOSTED by refinancing – the purchase index fell by 4.9%!

While Chinese locals continue to plow their hard earned money into the Shanghai A-shares (up 2.6% today), the rest of Asia had a bit of a sell-off with the Hang Seng trading down 98 points and the Nikkei off 216 points for the day.  Money flew out of Chinese savings banks in April ($21Bn) and May ($37Bn) as investors there threw more and more of their savings into, according to our pumper friend from yesterday, the "irreversible uptrend."  The back-to-back reductions marked the first drops in yuan household deposits in six years, and stand in contrast to the period from 2000 to 2006, when such savings ballooned by 2.5 times.

Europe is down about half a point ahead of our open and is likely waiting on our Fed as well so we'll move right on from there.

Over here I think we may be heading for a more prolonged downturn as the SEC has turned it's attention to CDOs, which means they will persist in the headlines and provide a very strong downdraft to the markets (much the way the options scandals did with tech last year).  That means at this point a sharp drop would be preferred to a slow bleed that could go on all summer (although we'll make more money on the slow bleed!).  Responding to a question at a House committee hearing, SEC Chairman Christopher Cox said the agency's enforcement division has "about 12 investigations" involving collateralized debt obligations.

David Fry notices a subtle change in sentiment that has taken over the S&P and we'll be keeping an eye on this pattern to see if it becomes more of a trend, which would not be a friend to the bulls:

Durable goods were off 2.8% in May but April was revised up to 1.1% so things have been getting worse pretty quickly in the past 30 days (but you all thought I was nuts when I said the data sounded suspiciously good last month!).  This blew away consensus estimates of just -.8%.  Capital Goods (meant to last 10 years or longer) were off a whopping 7% with non-defense orders down 8.3%.  Defense realted order climbed 6.7% on our "troop surge" so thank goodness we were able to bail out our starving defense contractors while we continue to debate whether it's worth $20Bn to insure the health of 43M uninsured citizens.  

We should get a nice boost in this number next month as BA orders hit (Paris air show) but the ex-defense number was -3% vs. +1.2% last month, a pretty steep drop.  On the bright side this should finally help us take out the $67.50 level in oil.

If the market can't pull it out today on very solid retail numbers from NKE (32% jump in profits), positive IPhone reviews and great earnings from ORCL, then I can't imagine what the Fed is going to say tomorrow in a 2 paragraph statement that is going to make everything all better.  

ZMan and I will address the nation on MN1 this morning at 10:25 and we both remain cautious ahead of the report as last week may have been a timing aberration.  If there is follow through today with additional large builds, then we'll know our Gulf tanker speculators are finally giving up on the game and that could lead to weeks of pain in the oil patch but I'm actually eyeing more calls than puts this morning as some issues are shaping up for a possible bounce on the slightest drawdown (or Nigerian rebel attack).  OPEC has taken to threatening us to (and I am not kidding) stop trying to stop using oil – or else!

This is a clear sign of desperation from OPEC and they are paying the price for not hiring me when I offered to bail them out last September when it became clear to me that they were doing a very poor job of running their "lemonade cartel."

Gold continues to fall and the dollar stays flat so this is more about a slowdown in the global economy than inflation but the Fed will have to keep up the inflation talk because if they can't convince foreigners to keep buying notes we're going to have a lot of trouble funding the next troop surge! 

Telling your prospective investors that you are raising rates because you are concerned about inflation in your "overheated" economy is a lot better than telling them you are doing it to attract money before they notice your economy is falling as a flood of dollars flies out of the housing market, grinding your economy to a halt while your leadership has a spending habit that would shame Imelda Marcos as we continue to consume oil at any price and our Congress continues to grant tax breaks to the oil companies who made more profits last year than our entire deficit and half the political candidates paraded in front of us continue to pretend that raising taxes is the worst thing we can do.

It's no surprise then, that "the World's greatest investor" has decided to back Clinton.