OUTLOOK FOR WEEK JULY 30
by Stephen Tetreault
July 30, 2007

I mentioned last week that as a technician the charts and indicators were flashing mega-divergences and SELL-signals on a near-term basis as during the past few weeks as we have seen some significant periods of whipsawing volatility. I sill believe we currently have two opposing forces at work, those who desire to book profits and greed or missing out on hyped-continued bull-rally...as there is excessive leverage all leaning to the LONG-side!!

Its been about 5+/- months after stock markets around the world were shocked by whopping 9% plunge in the Chinese markets back in February and once again the markets around the globe were shaken violently this week, however this time it was the good old USA that was the primary contagion.

Most traders/investors breathed a sigh or relief and for some desperation as the closing bell sounded on Friday, and now they will be reflecting upon and assessing the damage from the past 2-days stock-market plunge, or collapse depending on the phrase you want to use. Nevertheless, we continue to see that most of the talking butt-heads were reiterating their continue rhetoric of extreme optimism all over the airwaves on Friday in an attempt to cool off the intense selling. They attempted to put a floor under the selling by once again touting, inferring and reiterating their very-bullish positions, as they stated that while there were some genuine concerns about the credit crunch {most stated emphatically that it will be a very-limiting short lived event}, as they still believe that the wider macro-economic environment remains very-robust and sound and the stock market sell-off was not supported at all; as there was a huge disconnect, as they still see great underlying fundamentals that should ultimately support the markets {Kudlow even stated that the current market as it closed on Friday was 20-25% undervalued}.

I believe that this pull-back could have further to go, especially once margin-calls are hit on Monday morning and redemptions late afternoon��.. however I also suspect that we are getting close to a potential re-entry point for dip-buyers and traders as we are according to my technicals maybe 5-12 hours away from a potential short-squeeze induced rocket ride relief rally, as quite a few near-term sellers have been almost all washed out. Like I said for the past several weeks now expect quite a bit of volatility in the near-tern and I think will be a traders paradise (not great for investing though) as these volatile moves up/down with provide decent buying/selling opportunities.

Please be safe though when trading as we are just becoming embroiled in a corrective phase and during this uncertain period of contagionous debt/credit issues I would recommend staying away from trying to buy dips and taking on large long-side plays in firms with high levels of debt; as this selling event was perpetuated by deep concerns about increasing credit risk, and it was exasperated and accelerated by highly-over-leveraged hedge funds that were forced to unwind losing positions.

The talking buttheads were in complete agreement (as if their messages were scripted). The repeated almost incessantly that the global equity markets suffered similar correction early this year (February) and they very quickly rebounded, as Kudlow put it this is the greatest economic expansion/boom known to mankind and nothing can derail it. Well you all know my opinion of Kudlow, he's an paid shill/hypster with a set political agenda,

This scenario that is playing out in the markets right now is certainly a lot more gloomy this time. As from my vantage point virtually almost all risk markets are crumbling in upon themselves and losses are more widespread, increasing both the negative tonality of risk aversion and the probability that some financial institutions are nearing insolvency; and unlike the hypsters I believe this credit crunch could have a devastating impact. As at first blush we will see a rising cost of credit which will slow down (eventually halt) the financing of takeovers and new investment which have been one of the primary speculative bullish underpinning of this market. This higher cost of debt/credit could hit equity valuations very hard; and it could easily spill over into a sustained increase in the cost of capital, which could act as a cancer and a major-drag on this recent bull-rally, and it could easily negatively impact growth in our country and globally.

Currently given the unknowns that are looming such as the various positions of large institutional-trading firms and the inherent potential for liquidations in small and large) hedge-funds it is next to impossible to know at this juncture whether fear will trump greed this week or vise versa.

Lets face it, it is weeks like this one; with wild-rollercoaster type moves; that unfortunately for the bulls resulted in triple-digit losses in the equity markets, along with rising credit market jitters, and a path-or earnings releases that indicated weakening profits; along with rumors; innuendo�s and announcements that billions of dollars of financings have been stalled due too a buyers strike; as they are not comfortable or taking risk at these levels of return�.that is being offered that often set the stage for apocalyptic visions of doom and gloom dancing in the bad-news-bears heads.

As you are aware from my mega-warnings that I issued last week and the week before I had already forecasted that the end of July heading into August would be a dreadful time to be a LONG-side investor. As history has dictated (I know that we keeping hearing that it is different this time by the hypsters on CNBC and the various cheerleading bubblevision media) that according to my analysis the next 6-12 weeks of trading are going to be extremely volatile with in my opinion a significant downward-trend bias, coupled with many-tradable rallies & selling events. As historically and according to my research and back-testing each of the previous occasions (18 out of 21 such occasions since 1900 where my technical indicators signaled a potential for a Mega-Reversal what followed were some extreme and significant losses over the ensuing 6-14 weeks. Some of the most wildly known dates on my hit list were such memorable dates as of the month of August 1987 where we saw a crash that stripped 32-35% from the value of our markets in the ensuing 10-12 weeks three months, and the most recent being March of 2000, after which the SPX, Dow and especially the Nasdog were sucked into a whirlpool or should I saw cesspool of losses, the worst bear market in recent memory.

During this past week, I have fielded many emails that asked for all the technical-parameters that I utilize to make my reversal-calls�well I'm not yet willing to give away the farm but I will give you some of the old tried and tested technicals

Some of my criteria are strictly quantitative and as such are based on data/indicators like rising government and corporate bond yields; a price-earnings multiple peaking above 17; the SPX index soaring to levels greater than 7.5% or greater beyond its 52-week moving average; the number of stocks above their weekly 10eam vs. 20ema and what direction the trend is moving. The number of stocks above their Monthly 10ema vs. 20ema and the trend bias. The weekly/monthly VIX, VXO, VXN reading, as well as weekly/monthly and specific trends using the McClellan Oscillators, and a specific analysis utilizing volume and money-flows along with block trading�and the last bit of technical information that is very useful is the breath-trend and new-highs vs. new-lows on a daily, weekly and monthly basis. These are the primary indicators, the others are propriety to T-Waves; I will be discussing many in depth over the ensuing weeks; so stay tuned

Also please do not forget that I have over the past several weeks that we have born-witnessed to at least 5-6 conformational Hindenburg Omen set-ups/conjoining indicators; between the end of June and this past week; and I have repeatedly give links to this significant convergence indicator (likes to Hindenburg Omen set-up, link). I have mentioned many times that when my basket of propriety and tried and tested indicators match up with the infamous Hindenburg�it quite often results in a significant stock market plunge of 12-20%.

The markets do not necessarily implode very-soon after a confirmed Hindenburg Omens is seen (this recent run of 6+/- is almost unheard of though), but almost every major stock market drop has been preceded by the dreaded Omen; hence you can see why I monitors these developments so closely; and I have read analytical experts on this indicator that have spastically calculated that there is a 73-76% chance of a more than 6% decline within 41 days after the Hindenburg Omen is confirmed at least three times as a 25-30% chance of a major crash when we see 4-5 conformational reading within a 4-5 week period of the first reading.

So why am I so darn concerned about the health of this market, and the global markets as well? as a seasoned trader/investor I have learnt, most-often the hard way; that no matter how euphoric and wonderful things look, the so-called giddiness and positive bullish climate won't last forever. Even as most market experts and participants remain in a primary perma-bull-mode. After such a bullish-market-run which sector or stocks will investors rotate into as some new-or-already participating sector in order to find the liquidity to push the indexes even higher? So far this earnings season which began this month has not really clearly shed light on the tonality and sentiment heading forward into the summer doldrums or what yet to expect heading into the fall as its not very clear whether corporate profits will keep pace with over-all market expectations

For those of you who are not great at technical analysis and tracking indicators like the Hindenburg Omens, then hopefully you have other common sense skills (I know that this is rare for wall-street) about economics, business cycles, credit/debit cycles; and investor psychology are your areas�I use all of the aforementioned, hence the uncanny accuracy of T-Waves calls. The recent contagion as I have previously stated to this mega-bull-run/rally problem, started in the U.S. sub-prime mortgage markets and is filtering now over to the ALT-A markets as well as into some of the prime markets. These are/were issues that were not suppose to impact the markets negatively according to the vast-array of talking buttheads, and the malaise/contagions were not supposed to have a big impact on the rest of the credit markets; well we have seen that they were wrong again and I was right (but a tad bit early).

Currently no one wants to touch what I call uncertain debt or even some high-quality stuff these days without getting well compensated (back to norms in my opinion) for their risk. This scenario whish has just started to manifest itself and as such it has shut off the flow of cheap/easy money to the huge buyout funds. It has been the euphoric spending spree; and massive amounts of speculation surrounding the next potential take-out-play which has been jacking up stock prices and forcing companies eager to stay out of their grasp to also take on new debt (some utilized free-cash-flow) to engage in expensive share buybacks (when their stocks are making new-52-week highs) programs and other silly ass measures which has also resulted in near-parabolic stock-price appreciation.

When we look at the recent batch of lackluster earns (many warnings from top-notch firms like XOM, CAT etc.) we see a path of slower corporate profit growth, a slowing economy and signs abound of an extremely over extended consumer (not to mention concerns about falling home values) and we have the ingredients of a witches brew, or the making of a stock-market storm that could easily turn into a force-5 hurricane in the weeks/months ahead.

Well folks in a nut shell it was a bloody week for the major indices as Wall Street suffered its worst losses of 2007, and it was the lead sled-dog in global stock market melt-down as traders and investors finally took the rose-colored glasses off and unplugged their iPods that have been playing a constant loop of �lets part like it’s 1999� and �Don't worry be happy� as they came to the realization about the building contagions within the mortgage and corporate lending markets.

Once again the indexes closed lower on Friday after a tumultuous week in which the SPX experienced its worst overall loss since September 2002 as heightened credit market concerns battered stocks to a pulp. On a global basis the London markets saw all their gains this year wiped out; and there was heaving selling as well in other global market. European stocks were lower and corporate debt markets saw further sell-offs.

After the herd of investors who for many months have been ignoring the looming contagions as they shrug off the negatives concerning sub-prime mortgage problems and the cancerous environment for corporate borrowing, and they almost like a choreographed dance finally decided it was time to hit the sell buttons and book some long-over-due profits.

Fueling the plunge this week were renewed concerns that higher corporate borrowing costs will curb the rapid pace of M&A and LBO takeovers that has been a primary catalysts that has driven stocks higher this year; and when coupled with a lackluster and de4terioating environment for home sales and the increasing number of defaults in subprime loans which will lead to further debt defaults, and as such weigh on corporate earnings was a perfect-witches brew. Worse yet we saw that a strengthening of the Japanese currency indicates an unwinding of the carry trade, in which investors borrowed such cheaper currencies to buy higher-yielding assets around the globe which has been another significant source of liquidity for these expanding euphoric giddy global markets.

The skittishness in the corporate debt markets showed clearly as investors cast doubts that the current backlog of bond and loan deals totaling approximately 372-billion dollars would clear quickly; this month we saw that new issuance of new high-yield debt sunk to the lowest level since October 2002 at the trough of the last credit crunch.

The heavy selling that stare this malaise which eventually led to a mini-panic selling episode was sparked by news that banks had been forced to pull debt sales for two of the biggest private equity backed buy-outs in the market. Chrysler, the US carmaker, failed to attract demand for loans valued at $12-billion and Alliance Boots debt worth almost 7.8-billion was left on the respective bank�s balance sheets. This precipitated fears about a possible end (or stagnation) regarding this euphoric �leveraged buy-out boom�and this contagion added to the expanding crisis in mortgage markets, where one of the largest lenders said this week that problems in the risky subprime market were spreading to more conventional loans.

I found it ironic that Henry Paulson in an interview on CNBC stated that both the mortgage lending as well as that leveraged buy-out markets have been marked by excesses. He stated and I quote �I think we could use some more discipline. We are seeing a reassessment of risk and that is leading to a market adjustment.� he said, adding that it was �healthy� that risk was being �repriced. Paulson the ultimate hypster stated that problems in the mortgage sector should remain �largely contained.� Stocks briefly enjoyed a snap-back relief rally after Paulson�s remarks but then they quickly resumed their descent.

By the close of trading on Friday the SPX had dropped 75+ points on the weeks as it dropped 4.9% for the week to close at 1,458.95 while the Nasdog dropped a massive 125.36 points or 4.7% as it closed at 2,562.24. The giddy Dow lost a whopping 585.61 points or 4.2% to end the week at 13,265.47. A flight to safety saw US government bonds rally. I read a report that indicated the index of main indicators of risk across various asset classes compiled by UBS indicated that risk-aversion had hit its highest levels since the terrorist attacks in September 2001.

Why, you ask am I so darn negative, with my doom and gloom prediction�simply, global financial conditions have been supported by strong growth (aboard) with easy-and bountiful liquidity, supercharged by a mega wave of speculation regarding M&A/LBO activity (with easy access to debt markets), a large wave of corporate buy-back announcements {key-word = announcements, as these firms are under no obligation to carry through with the announcements if conditions sour} and to top-off this witches-brew we have seen/experiences what I can only sum up as an unprecedented risk tolerance level and euphoric state that has surpassed all-other that I have researched.

And these situations are changing, and not for the good, as global liquidity is starting to dry up, with central banks tightening (expect our of course) and as we saw this past week with the wild vacillations and extreme whipsawing sell-offs that caught so many by surprise (**That is unless you subscribe to that premier-market timing site called T-Waves)! To say the least the market is embroiled in a new-pricing exercise as participants attempt to re-priced �RISK�

I have also written about the housing-market contagions and subprime contagions long-before they were popular catch word�.and I am still extremely concerned that the markets are caught in a cesspool/whirlpool and that the problems in the subprime mortgage market could spiral out of control into a proverbial financial crisis on a global basis, a huge negative tsunami the likes that have never been experienced before. With a high level of uncertainty in the financial markets about who will take the losses from more than $1.0 to $1.3 trillion in shady-and at times fraudulent mortgages, we could be just one/two hedge-fund blow-ups away from a global liquidity crisis; as when the house of cards that this global bull-market has been built-upon starts to crumble it will in all likelihood collapse.

Please understand that a global meltdown is not far-fetched as the risks are growing everyday! The huge subprime debt contagions are growing as a recent study on subprime debt that I bought from Moody�s basically concludes that this so called housing crisis could be deeper and last longer than many on wall-street dare believe. And the increasing negative contagions are increasing like a fast acting cancer�which could spread like a wild-fire as we continue to see mounting mortgage delinquencies and defaults; which will very-soon pose the most serious threat to the global financial system and economies in my humble opinion�I believe that even the central-bankers around the global are quaking in their boots at the mess that they have made by the largest bubble-ever seen.

I laughter out load when our infamous Treasury Secretary Henry Paulson, (thanks to Bush, he's the proverbial fox put in charge of the hen house) tried to reassure the markets with a mid-afternoon televised pep talk�it was a fricking joke, the cheerleading rhetoric that spilled from his mouth. He basically stated that �Lenders and borrowers should exercise more discipline." and he repeated his views and said that almost all senior administration folks support the premise and conclusion that any problems in the subprime market would be "largely contained" this man must be on some real strong psychotropic drugs as I'm also a seasoned economist that started writing about this disaster in the making several years ago, and for the most part-most scoffed at my conclusions. Well unfortunately I get the last laugh.

These underlying contagions are only the proverbial tip-of-the-iceberg, as the cracks are just developing as the problems start to take on a life of their own. Goldman Sachs chief economist Jan Hatzius stated in a note to clients, stated that the housing correction could be less than half over, if history is any guide as "The dramatic deterioration in the mortgage market suggests at least the possibility that the credit crunch in the mortgage finance industry could become as bad as in the bad old days of the 1970s and 1980s." I bet that you didn't hear about this forecast/outlook on bubblevision as its not in the cheerleading program-book.

He also utilized another historical comparison, that to the Asian financial crisis of the late 1990s (this will certainly spook most investors) as unlike that financial crisis, global capital would likely run-away from our markets, not to them, as the impetus for this crisis lies within our rocky financial system.

It wasn�t to long ago (I know the cheerleaders on bubblevision want you to forget) that Bear Stearns was forced to write off the value of two of their large hedge funds that had invested heavily (they like many hedge funds were way overleveraged) in securities backed by various subprime debt instruments, and after the hedge-funds went sour the powers to be were in a mad-dash/scramble to mitigate the fall-out and contagions�and I think they have done a very-pitiful job at it!!

In my opinion there will be many more such blow-ups; as so many hedge funds are so extremely over-leveraged. And if I'm right it could take just one/two more events like the Bear-debacle for the financial system to actually freeze up, and become very-stagnant at best. Now if you are a bull (with a multitude of LONG-positions)�you better pray that there's NOt another shoe to drop amongst the major hedge fund-community, that results in a new-debacle!!! As if this happens it could elicit a crisis of confidence in these types of investment-vehicles and the rats would no doubt make a mad-dash for the exits as they come to the realization that they have all been cruising aboard the Titanic instead of the good-ship-lollypop�.resulting in what I call a global shock wave!!

From my in depth analysis the potential for this type of Tsunami is higher than many who frequent the bubble vision airwaves (with personal agenda�s) want to publicly acknowledge; according to my calculations and analytics it’s a 33% probability�.I hate a one in three chance of such a contagion playing out!!!

I found this a refreshing attitude among large fund-managers: Pimco�s chief investment officer Bill Gross clearly doesn't feel he's a target in the highly hyped {at least by those on bubblevision like Kudlow} war on prosperity�.as in his monthly news-letter, he clearly and very articulately dismissed claims by the likes of that famous CNBC hypster Lawrence Kudlow, and private-equity and hedge-fund managers along with their so-called champions who basically contend they would back-away from their current path of activities and produce less wealth if they were required to pay taxes on their �fair� share of their fund profits at the personal income tax rates (which we all are forced into paying) rather than at the capital gains rate of 15% which most of them pay. He went on to state that America's top earners are benefiting from a low tax burden that has allowed disporportiately and in my opinion quite unfairly; the wealthiest and segment of the populace to claim a mega -share of the wealth economic pie. We know that wealth has always gravitated toward those that take risk with other people's money (key-words are other-people's money�not theirs per say) but this disparity becomes exasperated especially when their political friends have insured that tax-rates are kept historically low. Gross wrote. "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" this was a great-quote that I will utilize again. For those not in the look most general partners at hedge funds and private-equity funds receive a management fee equal to 2% of a fund's assets (this can be a huge premium in itself) but it doesn't stop their as most get another 20% of a fund's profits; while not taking the risk in most cases {some managers get upwards of 40% of the profits} so you can all see what a great deal T-Waves rates are �J�. Furthermore the management fee is taxed as ordinary income, however (most Americans are ignorant to the fact that) the profit share of the pie referred to as "carried interest," is taxed as investment income at the 15%-rate; this is very-often a joke folks as these paid manipulators �carried interest� claims are bogus in my opinion as they are not truly capital gain since these so called managers don't have skin in the game themselves. Warren Buffett recently stated that its "far better to admit" that the effective tax rate for the most wealthiest of Americans overall averages about 15% as a result of income derived largely from investments�.while those of their salaried and therefore less-incentive workers who are the back-bone of the firms profits is nearly twice that of those squawking and yelling the most about a potential rebalancing of this inequality in the tax-code. A recent New York Times article indicated that the top 0.01% of earners approximately 14,588 families who made more than $9.5 million in 2005 had 5% of total income, a post-war peak. Bill Gross in his remarks said the figures show that it's time to begin thinking about redistribution of wealth.

Our US Gross Domestic Report

Unfortunately for the markets, (I outlined the proverbial goldilocks scenario in my morning chat-IM and how to play the releases)�we saw that second-quarter pro forma preliminary numbers came in better than expected; after falling off a proverbial cliff in the first quarter. According to the fuzzy-math experts at our commerce dept. our economy rebounded in the second quarter, growing at an annual rate of 3.4%, the fastest pace since the first quarter of 2006�.and now for the news-that was so popularized on the various bubble-media stations:

I was somewhat amazed (but I have come to expect these pro forma manipulations) that most of the so called improvements in the second quarter was concentrated in stronger trade performance, better investment in structures, and get this faster government spending�in my opinion it rested with a super rebuilding of inventories after significant reductions in the past two quarters. The report stated that overall business investment was strong, led by fastest growth in spending on nonresidential structures in 13 years. These so called gains somehow offset a sharp slowdown in consumer spending (the very-same-folks that are the demand side of the equation) and a decline in investments in homes. (link-for report)

Unfortunately this in-line (pro forma report indicating growth) was a bullish report, but it removed the markets wild card on Friday�the premise that the FED-heads would come to the rescue with some ill deserved rate cuts; and as such the markets responded just as I had forecasted�they sold off (we reaped some huge benefits) but that is another story.

What also went unnoticed on Friday by the talking butt-heads was that GDP rose just 0.6% in the first quarter, as it was revised down from the previous 0.7% estimate., and when combined with the current pro forma preliminary numbers for the second quarter it produces a 2.0% average growth rate for the first half of the year�this is very unsettling and as such I would expect market-unease; while in a trailing 12-month analysis we see that the economy has grown 1.8% in the past year. Now if I'm right (and I often am) we should start to see a ground-swell of skittish-institutional investors who are sitting on a huge pent-up profits, as worries start to surface; as I have to assume that their in-house economists/analytical-staff are as astute as I am, and that they are also seeing many cracks forming within this economy/market, the most important element in my opinion will be a distinct slowing down of GDP in the second half of year and next as the resilient consumer is growing extremely wary/tired and they are under pressure from the ever weakening housing sector.

Consumer spending and equipment investment growth remained significantly below trend and as such, in my opinion have done little to inspire confidence that the second-quarter's pro forma greater than expected growth can be sustained, as it was mostly due to inventory-builds and fuzzy-math. According to the report consumer spending increased 1.3% in the second quarter after a 3.7% gain in the first; this is a softening not a strong-bullish trend. While the inflation data painted a mixed picture as I was very surprised to see that the highly manipulated core price index (excluding food and energy) retreated to a 1.4% annual rate in the second quarter from 2.4% in the first, pushing the on-year gain down to 2.0%, somehow they managed to poke the number right into the top of the Fed-head's proverbial "comfort zone" and of course this was all that was touted on the various bubblevision channels. But for those who read the report and do not rely on others for direction, we saw that the headline consumer inflation accelerated to rapid rate of 4.3% on an annual rate, the fastest pace since the fourth quarter of 1990 (this fact must have slipped by guys like Steve Liesman the great CNBC economic analysts).

We also saw that real disposable income fell 0.8% annualized in the second quarter, after rising 5.9% in the first quarter; and of course the great-American savings rate was 0.6% in the second quarter, down from 1.1% in the first�back on its downward trajectory.

With worries about credit quality and availability mounting, futures markets are once again pricing in a rate cut by the Fed-heads by the end of the year, as the federal funds futures market now sees a 96% chance of a rate cut by Dec. 31, up from about 47% just a few days ago, and the odds of a rate cut at the 10/31/2007 meeting rose from 18% to about 40%. The Fed-heads have kept their overnight lending rate target at 5.25% for more than a year�.however I still believe the street has it wrong as I believe due to looming inflationary clouds the Fed will have to remain "biased" toward raising rates, as officials will no doubt have to conclude that the risks of higher inflation outweigh the risks of a slower economy.

Consumer-sentiment index improves to 90.4 in July. Thanks to gasoline prices dropping a bit and stock markets hitting relative new-highs during this past month, the mood of consumers brightened as one would expect as the University of Michigan reported on Friday that their reflected consumer sentiment index rose to a reading of 90.4 from 85.3 in June; and this was the best reading since February. We saw that the expectations index reached a five-month high of 81.5, up from 74.7 in June, while the current conditions index increased to 104.5 from 101.9 on a month-to-month basis�I was surprise to say the least at signs of such a positive tonality of sentiment, however it was worth noting that all three indexes were below their respective mid-July preliminary readings, indicating confidence faded as the month went on. Consumers were expecting inflation to rise 3.1% over the next five years, up from the 2.9% expected in June.

HAVE we been mislead?

By those on bubblevision that have proclaimed that capital spending will be our saving grace? We saw a WEAK report on capital spending on Thursday (which did very-little to boost investor confidence) as capital spending by U.S. businesses slipped for a second straight month in June, while demand for airplanes helped pushed total orders for U.S.-made durable goods higher, according to the pro forma report from the Commerce Department. Excluding transportation goods, orders fell 0.5%. Orders for core capital equipment goods the kind of stuff that businesses invest in to increase their productive capacity fell 0.7% last month, and this is a back-to-back loss as we saw a 1.5% decline in May. It appears that the excuse of the day is that the recent credit problems in the financial sector have restrained and dampened business confidence and I do not see a chance in this direction at all as such it will likely keep capital spending plans restrained in the third quarter, not favorable bull-market indicators.

The report on durable-goods manufacturing was also weaker than expected. As most talking butt-heads and so called economists had been looking for a 2.5% increase in total orders. Also we saw that orders dropped an upwardly revised 2.3% in May. The talking-buttheads that have been pranced about on the various bubble vision hyping media have been forecasting strength in capital spending to offset soft consumer spending in the second quarter clearly this has not been the case.

� Shipments of durable goods dropped 1.1% in June, reversing a 0.6% gain in May, as shipments marked their Weakest reading since a 1.5% decline in February furthermore we see that shipments are down 0.4% in this year to date.

� Unfilled orders rose 1.5% in June. And inventories rose 0.2%.

� Orders for transportation goods rose 6.1%, including a 29% increase in bookings for civilian aircraft. Orders for motor vehicles fell 1.4%. Shipments of transportation goods fell 1.1%.

� Orders for computers and electronics, excluding semiconductors, fell 4.6% last month, including a 13% drop in demand for communications equipment. Shipments of electronics, including semiconductors, fell 4%; so please explain why there have been so much hype about expansion in this sector.

The International Monetary Fund raised their 2007-08 forecasts for the world economy, with large developing nations leading the increase. In a report released on Wednesday, the IMF increased the average global growth to 5.2%, up from the already-brisk 4.9% rate predicted in April. The major upward revision was concentrated in China, India and Russia, which IMF officials said will likely contribute more than half of this year's world economic growth (what happened to the good-old USA)�well we saw that they trimmed the 2007 growth outlook in the U.S. was dropped to 2% from 2.2%. As the housing sector will continue to be a drag on the U.S. economy through 2008, but the negative impact will diminish over time, they said. And although consumer spending is likely to slow in the second quarter from high energy prices, consumption should continue to contribute to growth in the final six months of the year.

On a negative note the IMF also stated that global inflation risks have edged up, increasing the likelihood that central banks will need to further tighten monetary policy. In particular, some emerging markets faced rising price pressures from energy and food prices. Financial market risks also increased, it said, as credit quality has deteriorated in some sectors and market volatility has risen. The fund cited a weakening of credit discipline in the subprime mortgage sector and the loan market associated with leveraged buyout activity.

ARE the days of CHEAP & EASY financing over ?????

The days of cheap financing are over, not only for subprime mortgages but for the big leveraged corporate buyouts.The announcement on Wednesday that Wall Street's investment banks can't sell the debt that would take Chrysler Group private is yet another nail in the coffin of the credit bubble that's propped up the financial markets for the past few years.

Wall Street makes money when it uses other people's capital. When the investment banks are forced to pony up their own money to keep a deal alive, it's a sign of desperation�not very market friendly at all. Though corporate debt defaults are still very low, even the AAA-rated corporate market has been contaminated by the distrust fostered by the fraud and defaults from the subprime mortgage sector.

Debt has grown much faster than the economy over the past five years, and now we may be seeing the first signs of a stalling debt-market as quite simply the economy is incapable of generating the income to pay the interest on the mega ballooning debt loads. And now suddenly, the buyers are seriously considering the possibility that the debts owed by low-income homeowners and shank-credit folks will never be repaid. It now appears that folks are waking up (maybe some have heard my mega-warnings that I continue to write about as debt cannot grow forever, like the proverbial bean-stock.

These idiots have been in what I call a buying frenzy, and sensibility and common sense were brushed aside as the greater fool theory took hold and the contagions were either forgotten or ignored. They even were swept up and through positive affirmations began to believe their own lies; and worse yet they began to believe that the more they leveraged their risky positions the more profit and more secure they would be.

A brief over-view of the beige-book

According to the release most regions of the country continued to enjoy moderate growth, while there were signs of softening in a few districts. Fed districts banks in Kansas City and Dallas reported decelerating growth, while Boston and Atlanta said conditions were "mixed." Seven regions reported "modest" or "moderate" growth, while only Philadelphia reported " improved" conditions. The tone of the report suggests that the economy is not very robust at the start of the second half of the year; this would have been a complete surprise if you were only watching bubblevision, and not reading my reports. I see things cooling off significantly and the housing sector contagions will certainly spill over and adversely impact consumers.

Signs of weakness were quite evident; as consumer spending rose at a modest pace, but four of the 12 Fed banks reported sales as "mixed" or "below expectations." There was an overall tonality that high gasoline prices had restrained spending.

Sales related to housing such as furniture and home repair materials and up-grade accessories were weak or declining, the survey found. Also we saw that new car sales were described as "lackluster" or "flat" in many areas. According to the report our well-known housing sector continues to decline, but there were signs of stirring in some areas. As some regions did note increased activity in some individual [residential] market segments; while household lending declined in most regions and several districts reported decreasing demand for mortgages and tighter underwriting standards.

Signs of strength�were noted in business spending was mentioned frequently in very-positive terms in addition however we saw in the report that labor markets appeared to remain tight as employment increased in most regions and in many sectors of the economy. Another positive factor was strong export demand in a number of districts. The fed-heads noted that commercial construction and office real estate were generally more active than during May and June. There were cost pressures for businesses but prices at the retail level continued to increase at a moderate rate, the study found. Wage gains were also moderate.

Just Awful Housing Data!!!!!

On Wednesday we say dismal existing home-sales data�.as sales of existing homes dropped 3.8% in June to a seasonally adjusted, annualized rate of 5.75 million units, this is the lowest sales pace in nearly five years, even as frustrated sellers pulled their homes off the market by the thousands (due to being upside-down in their loans). Sales of single-family homes plunged at a 30% annual rate in the second quarter, the steepest decline in 28 years, according to the National Association of Realtors�.sales of single-family homes were down 12% in June compared with the same period last year. Even with a significant 4.2% drop in the number of homes for sale, the supply remained at a 15-year high at 8.8 months.

The talking butt-heads didn't find these numbers as a surprise, but I found them very disturbing. As from my vantage point it supports my premise that the slump in the housing sector will be longer and deeper than the parade of talking butts care to admit. This weaker than expected headline data was only the tip-of-the-proverbial iceberg as the underlying data within the report was also very-disturbing and weak!

I was surprised to see that the median sales price inched 0.3% higher compared with a year ago, marking the first year-over-year price increase this year. The NAR outlook for 2007 single-family housing starts is now 9% lower than it was at the beginning of the year, while their 2008 forecast has been slashed by a whopping 15%, as their respective forecast is for housing starts of 1.42 million this year and 1.45 million in 2008. The key reason is the unanticipated and sudden turmoil in the subprime-mortgage sector which has resulted in more stringent lending requirements for home buyers, and is unfortunately spreading into other higher-quality loans. Also we have seen that delinquencies and foreclosures are rising.

I have as most of you know that have followed my reports for the past 2-years, have been trying to issues very timely warning about this housing downturn, as it is clearly a result of the unsustainable boom when home prices and sales rocketed without respect toward valuations and real fundamentals. This euphoria was also driven by the easy-money policies of the fed-heads and an "overly aggressive monetary policy" which dropped interest rate to historic lows. At the same time, there was an unprecedented level of buying by investors and speculators who were flipped homes like they were MacDonald hamburgers, where this correction is very unique in that it wasn't caused by higher interest rates or a weakening economy at least up until recently.

Then to add gasoline to the fire�.on Thursday we saw another crummy NEW-Home sales report!!! As sales of new homes declined more than expected in June, falling 6.6% to a seasonally adjusted annual rate of 834,000; and when compared with last year sales are down over 22.3%. This reported sales pace in June was terrible as it was the slowest since March's 830,000 and is the second slowest level of sales since 1999. And when we look at combined new and existing home�they fell 4.2% to 6.58 million annualized, the lowest level recorded since September 2002. And I certainly do not expect any improvement in sales until 2009 at the earliest. And it will probably be 2010-2011 before the excesses are wrung out of this mega bubble before the market even begins to stage a turn around. We also saw that new-home sales for the previous month was also revised lower; as May's sales pace was put at 893,000 instead of 915,000. Still we saw that inventories of unsold homes were unchanged at 537,000, and these inventories are down 5% when compared with a year earlier, indicating that builders are having only modest success in working off the excess home-supplies. With inventories twice as high as they should be, I don't have any idea what builders are thinking; as still they are building�After completion, a home now takes 6 months to sell, the longest lag-time since 1993. At the end of last year, it was taking just 4.3 months after completion to sell. The report indicated that the median sales price was $237,900, down 2.2% compared with June 2006. Still home builders have continued to pile on incentives, including offering free vacations and new cars, to sell homes and reduce their inventories; however they are not working as well as expected, worse yet these incentives are not subtracted from the sales price as reported; also sales are reported when a contract is signed, not at the closing of the sale; as such cancellations are almost never recognized. And we know from the recent reports from the various home builders that they have reported a large increase in cancellations in recent months.

On Friday we saw that vacancy rates for U.S. housing units declined in the second quarter after experiencing sharp increases over the previous year, according to the Commerce Department. The so called vacancy rate for owner-occupied units fell to 2.6% from a record 2.8% in the first quarter. The vacancy rate for rental units fell to 9.5% from 10.1% in the first quarter. The number of vacant housing units fell by 175,000 to 17.4 million. The number of vacant homes for sale fell by 142,000 to 2 million. The home ownership rate fell to 68.4% from 68.6%.

We also saw on Wednesday that the volume of applications for both mortgages to purchase homes and those to refinance existing loans decreased last week, as did the interest rates on fixed-rate mortgages (a welcomed sight) according to the Mortgage Bankers Association. Refinancing applications dropped a seasonally adjusted 1.4% for the week ended July 20 compared with the prior week, while purchase applications decreased by 5.0%. Total mortgage application volume fell a seasonally adjusted 3.6%, compared with the week before, but volume was up 13.1% compared with the same week in 2006. The MBA also reported that the average interest rate for 30-year fixed-rate mortgages was 6.59% last week, down from 6.61% the previous week, while 15-year fixed-rate mortgages averaged 6.24%, down from 6.29%. The rate on a one-year ARM averaged 5.62% last week, up from 5.60%, according to the MBA, whose survey covers about half of all U.S. retail residential mortgage originations.

The high levels of Liquidity that had continued to push upward on the major indexes, may be abating This market hysteria/euphoria could have more legs; (key word�.could) and here is one of the primary underpinnings, as it relates to excess-liquidity�thanks in large part to the recent tsunami wave of cash that is being injected into the markets from private equity M&A, LBO�s and mergers, and if the pace keeps up through September, then this year 2007 could indeed be the most bullish over-extended bull-run on record. The primary reason that may even convince me to turn cautiously bullish is the incessant buyouts and merger deals�that could inject an estimated $380-$390 billion in cash into the markets as a result of deals slated to close in the next four months. This liquidity, maybe 70% give or take could easily be put back into stocks, thus propelling the already overextended indexes higher, as hot-money seeks high-margin returns.

According to an article I read this past week, mutual-fund and institutional money managers are expected to plow a good majority of these gains into stocks and other assets, that could easily result in a multi-billion dollar boost to U.S. financial markets. The question that remains to be answered will the wait for, or even be afforded a decent pull-back into to enter this dangerous setting, where valuations are higher than average in an economically deteriorating environment. According to thee analysis I read enough cash will change hands from completed private-equity and merger deals over the next 90-120 days to potentially send the markets higher by 5-10% into the end-of-the-year.

Now what they analysts forgot to include in their headline analysis, is that they are still calling for 3.5-4.0% GDP growth, they are forecasting the interest rates recede in Q42007, and that inflationary pressures abate and retrace, oh and of course their analysis doesn't account for ant type of unexpected shock to the market, such as a big jump in oil prices or terrorist attack, middle east turmoil, or attack of Iran.

I do not rule out this premise/conjecture at all however the complete idea of further unbridled increases of new merger-driven speculative increases in stocks goes against my analysis that is calling for higher interest rates and tightening credit restrictions that should slow down these euphoric capital investments in coming months.

For the flip-side of the scenario and in support of the bullish premise, my TrimTabs Investment Research report noted this past week that Biderman is also confirming the paradigm that with so many cash deals still left to be completed, a slow down is speculation is unlikely to show up anytime soon. He went on to elaborate that so far this year, M&A activity and share buybacks are taking place at a rate extraordinary/ phenomenal rate of almost $2.74 billion a day; such a high-level of borrowing, and cash infusions from M&A and buyback activity doesn't slow when personal income growth is surging as it is now. he went on to infer that the individual investor has yet to climb back into the stock market (so this bull-train needs to suck them into the fray) before he starts to question the health of this bull-run). He doesn't understand in my opinion that Mom & Pop investors are not participating as they did in the late 1990's in the wealth being created, as it is going into the hands of the top 10%...the wealthiest Americans are getting richer. And his comments bear this out as so far this year, less than $10 billion has been injected into U.S. stock mutual-funds; and this pales in comparison to the first half of 2000, when some $200 billion was invested in those types of funds. He went on to say that was the primary signal for last market top; as between late 2000 and February 2003, there were outflows almost every month until the market bottomed. He went on to speculate that although those levels have yet to return to their turn-of-the-millennium heyday, that doesn't mean individual investors are completely out of the game. As his firm estimates that some $144 billion has gone into international stock mutual-funds over the past 12 months (into the creation of some real-mega bubbles), while another $128 billion has gone into bond mutual funds; which is the highest level in over five years. Another $565 billion was invested in money market funds and bank savings accounts over the same period (safe havens, for folks very-afraid of getting burned in the stock market, like they did in 2000-2003).

In another research note that I read this past week; it alluded to the premise that institutional investors, meanwhile, may be moving away from stocks, according to Muhlenkamp Fund manager Ron Muhlenkamp. He stated that right now, pension funds love bonds, and they're giving money to the private-equity guys, who are selling bonds and buying stocks. Since stocks have been on a multi-year run, pension fund managers, in my opinion, if they are smart will likely to put new money into different segments of the market, bonds, tips as they'll be looking to a greater degree to rebalance their portfolios and diversify into alternative investments and asset classes and away from the red-hot and extremely over extended markets.

A Contagion worth reflecting upon!!!.

The huge market contagion on Tuesday was cause by subprime-loan contagions precipitated by an earning/miss-warning from countrywide and their comments that were generated from their

Countrywide reported Q2 (June) earnings of $0.69 per share (excluding their $0.12 tax benefit), this was $0.24 worse than the consensus of $0.93; revenues rose 5.9% year/year to $2.55 billion vs the $2.9 billion consensus, hence a miss on EPS and revenue! Then they lowered their 20007 EPS guidance to $2.70-3.30 from (consensus of $3.65) vs. their prior guidance of $3.50-$4.30�hence a mega-drop off in expectations!!!

They stated that during their conference call that this quarter they experienced softening home prices which continued to affect many areas of the country and delinquencies and defaults continued to increase across all mortgage product categories as a result. Due to these adverse conditions, they incurred increased credit-related costs during the quarter, primarily related to its investments in prime home equity loans... They anticipate that the second half of 2007 will be increasingly challenging for themselves and the industry. Absent a reduction in mortgage interest rates, production volumes are expected to fall and competitive pricing pressures are expected to increase. They went on to state that volatility in the secondary markets has increased significantly and liquidity for mortgage securities has been reduced as a result. These conditions are expected to adversely impact the secondary market execution and further pressure gains on sale margins. Furthermore, additional deterioration in the housing market may further impact credit costs.

On the conference call CFC stated that delinquencies and defaults were rising across all investment tools... they stated that lower home prices may effect credit... they noted that the S&P Case-Schiller is a strong tracking tool for the health of their market-place. They continue to study further tightening of loan standards for both subprime and prime...stating that until the market can understand future ratings from (the various rating agencies) they will have difficulty investing in credit areas... saying a large question remains that even if CDOs recover would their be buyers again for the instruments. They believe that the markets will force the weaker mortgage companies to either work with bigger players or look elsewhere for business.... they expect to see reduced sale margins until the current market adjusts.

When they were questioned about their prime portfolio, they stated that so far what they have seen in delinquencies is due to people losing jobs (how could this be as all I have heard according to the Bush and his administration, is that this is the best of times for job-seekers), losing health, lost marriage, more so than any resets at this point in time; they went on to say that the definition of prime may not be as high as some think.

They then went on to say-the most-startling comments yet heard in the markets of late, which really sent them into turmoil as they stated that they are seeing home price depreciation at levels not seen since the Great Depression. They stated that a small percentage of lost homes are due to payment shock; however 60% is due to some sort of loss of income while 25% are attributable to death/divorce.

On the conference call they noted that so far the subprime contagion isn't the primary story this quarter rather it is home equity borrowers who pulled money out of their homes�.they stated that the most stable part of the business they have is retail; and they expect to hear mergers and people going out of business in the near future. When pressed and asked if CFC was planning on laying off people, they said that they have their sales force who create value and then you have those that process business which is driven by volumes flowing through operations; if that decreases they would need to lay off people so this is an area where they would make the appropriate steps to cut costs.

They went on to state that areas were pricing accelerated (I call it creation of the bubble) for example California or Phoenix and Las Vegas, where people had stretched themselves very-thin to get into the homes they bought they are seeing high delinquencies; in San Diego they see high delinquencies because of an oversupply in speculation-buying (what we know as flipping) while in Florida they have seen a higher rate due to unemployment.

Everyone knew that CFC would report a terrible quarter, and they surely delivered. However, while everyone expected some pretty tough comments from their earnings release regarding the subprime contagion, what caught the markets attention and resulted in the subsequent selling were their comments on Prime loans: They incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans! This was a new contagion that the markets were not-immediately equipped to deal with as such the huge wave of selling (easy to hit the sell-buttons when jitters and uncertainty arises) as this was a mega-serious contagion facing subprime and Alt-A loans, which were somewhat already known however CFC to my knowledge was the first firm to cite these �Prime loans� as a new contagion. Simply stated even if all the issues facing subprime loans can be contained, the best case scenario CFC seems to be signaling that there's no relief in sight for the broader housing market, which could signal larger risks for the economy, heading forward

© 2007 Stephen Tetreault
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Stephen Tetreault
T-Waves
Southern Maine, USA
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