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Fleck Rap



Leveraged Lenders Lending to Overleveraged Consumers Spells "TILT"

Overnight, nothing much happened, and our equity futures traded a few points on both sides of unchanged. The early action was rather quiet and mixed, with tech slightly firm, for a change, and financials/cyclicals weaker. It's worth noting that in the early going, even though existing-home sales printed slightly better than expected, the news didn't really do much for housing stocks. They attempted a bounce but failed, sort of continuing the pattern in which good news has trouble taking stocks higher. A classic case is Goldman Sachs. Despite beating the number by a mile yesterday, it's now down on the two days, lending credence to the idea that a serious undertow is at work in the market.

Tech Beckons as Lenders Teeter

After the early selloff that ended about midday, a pretty good burst to the highs turned all the averages green, with the leader being the Nasdaq, powered by the Sox. But with a couple hours to go, it started to fizzle, such that by day's end, we were about back to where the day began. The weakness was more pronounced in the S&P and Dow than in tech -- with today a "move the Jell-O around the plate" day, where problems in leveraged-lending land caused bulls to chase tech instead. Heaviness was also seen in cyclicals and housing stocks, though the outsized losses were reserved for leveraged financials.

Since tech has led the charge lower, whether today's strength in technology is just a deep breath before everything gets in gear to the downside, or an early sign of stabilization leading up to a bounce, is impossible to say. We'll just have to be on red alert for clues as to which outcome starts to gain the upper hand.

Yellow Dog Gnaws at Euro Leash

Away from stocks, motion was back, this time with the euro being pounded for almost 2%, as ECB head Trichet said the central bank may lower growth forecasts, leading folks to anticipate a rate cut. With the euro lower, the Canadian/Aussie dollars followed suit, though the yen was higher. The metals were modestly lower (approximately 0.75%) on the back of this, again fueling the notion that gold is shrugging off the mantle of a commodity that's supposed to trade in lockstep with the euro. Up until recently, on a day when the euro was down 2%, gold would have been down at least 2%, and probably more, in my opinion.

Fed School of Sidestep Dancing

Of course we had some humor today, this time provided by Atlanta Fed head Jack Guynn. First, he noted the sharp rise in steel/energy prices. Then, speaking from both sides of his mouth, he suggested that rates wouldn't stay low for "too long," but also allowed as how there was no need to raise them anytime soon. The Fed and the government in general have been working overtime, trying to tell everybody how wonderful things are. This will only add to the mess when folks realize that things aren't wonderful, and that basically, no one in the government can be trusted. But we're not quite at that psychological inflection point . . . yet.

A Leaning Tower of Leverage

Shifting gears slightly, as I noted a couple weeks ago, I sold my Annaly Mortgage because I am uncomfortable with real-estate-oriented collateral, and very concerned about the low quality of consumer debt generically. I think that the level of debt is too high, and that the assets consumers are borrowing against are vastly inflated. The combination of those two will cause huge problems, in my opinion. Essentially, we have been attempting to borrow our way to prosperity. When the effectiveness of that strategy has reached its limit, we're going to see a lot of trouble, and sooner, rather than later. Are we there yet? I wish I knew, but I am paying very close attention.

Along that line of reasoning, I have recently shorted a handful of companies that are leveraged lenders to leveraged consumers -- companies like Capital One Financial (COF), Fannie Mae (FNM), General Motors (GM), Washington Mutual (WM), New Century Financial Corp. (NCEN), and Novastar Financial (NFI). I don't have any particular catalyst for these companies, and I may get chased out right away. I am only noting these names, because if the idea is right, it will matter to everyone.

The Debt-Domino Effect

If the consumer is losing, or about to lose, the ability to finance a lifestyle beyond his means, this will impact a whole host of industries, and the economy as well. Therefore, I suggest folks put those companies and others like them on their radar screen for monitoring, not shorting. As I said, I may cover my shorts at any time, either because they worked well in the short run or because they weren't working yet. But I think the idea is valid.

To repeat, I believe that the amount of debt in this country, at all levels, is far too high, and that the collateral behind it is very suspect. I am convinced that this is going to be a huge problem, though I have no idea what the timing is for that.

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Positions in cof, fnm, gm, nfi

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