More Credit Worries Ruin the Day

Word of trouble from the country's 10th-largest mortgage lender abruptly pulled the plug on the stock market's attempted recovery, with the Dow wiping out a two-day rally to end Tuesday with a near 150-point loss, and a monthly decline of 1.5%.

Concerns about credit markets and bad-home loans resurfaced with news that American Home Mortgage Investment Corp. might liquidate its assets after failing to meet margin calls. "That again brings up the issue that we don't know how the credit crunch is going to affect financials," said Art Hogan, chief market strategist at Jefferies & Co. The Dow Jones Industrial Average closed 146.3 points lower at 13,212, with 26 of its 30 components taking a hit. "There is not one signal that says the credit markets are okay; there is a tremendous amount of uncertainty, and it is going to take some time for confidence to return to the market," said Mike Malone, a trading analyst at Cowen & Co.

The S&P 500 fell 18.64 points to 1,455.27, giving it a 3.2% drop for the month, while the Nasdaq 100 dropped 37.01 points to 2,546.27, putting it on course for a 2.2% drop for July. "There is also attention being paid to crude oil possibly reaching new highs," said Hogan of Crude-oil futures, which advanced above $78 a barrel, with the September contract closing at $78.21 a barrel.

The Dow had surged more than 120 points in the early going after General Motors Corp. reported a return to profitability. The automaker's stock retained some of its advance, with its stock up 0.74%. But the market shifted course, and American Home Mortgage's stock lost nearly 90% of its value, after the mortgage lender said it had missed margin calls from lenders and had hired advisers to review its options, including liquidating its assets. Another indication of the shaky credit market came from IndyMac Bancorp. Inc. which reported a 57% slide in second-quarter profit from the year-ago period, with the mortgage lender declining to offer a full-year forecast due to the uncertain outlook for the housing and mortgage markets.

Given the market's massive drop last week, it's no surprise that doubt lingers, said Al Goldman, chief market strategist at AG Edwards. "After the emotional shock to the system that we had Thursday and Friday, it would be very unusual to have it go back up and away," he said. Volume hit 1.8 billion shares at the New York Stock Exchange, while 2.4 billion shares were traded at the Nasdaq. Declining stocks beat advancers 9-7 at the NYSE, and by 18-11 on the Nasdaq.

Stocks spent much of Tuesday in recovery mode, extending solid gains from the prior day, in an effort to shake off the stiff losses incurred the week before.
Tuesday's earnings and economic reports mostly offered support, with the Commerce Department reporting core consumer inflation increased 0.1% for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years.

Other stock-friendly news included the Conference Board's report that consumers were more positive about the economy and their own finances in July than at any time since 9/11.

Business activity in the Chicago region worsened in July, according to a survey of corporate purchasing managers. The Chicago purchasing-managers' index fell to 53.4% from 60.2% in June, with the number below economists' expectations.

Treasury prices climbed, pushing yields lower, after the stock market turned negative. The benchmark 10-year note closed up 7/32 at 97-27/32 with a yield 4.775%.

The dollar traded little changed against other major currencies. In New York trade, the Euro stood at $1.3699, compared with $1.3692 late Monday. Gold futures extended the prior day's gains, boosted by rising oil prices. Gold for August delivery climbed $2.80 to close at $666.90 an ounce.

The Bleeding Has Stopped...

Stocks in the U.S. closed firmly higher Monday as traders overcame their early tentativeness and looked for bargains in the wake of last week's selloff.

The major averages alternated between positive and negative territory before going to the upside for good around midday. The Dow Jones Industrial Average rose 92.84 points, or 0.7%, to 13,358.31, and the S&P 500 added 14.96 points, or 1.03%, at 1473.91. The Nasdaq Composite climbed 21.04 points, or 0.82%, to 2583.28.

For the bulls, who watched Thursday and Friday as mounting worries about the credit market crushed stock indices, the ascent was a welcome development. The Dow lost 208.10 points, or 1.54%, to 13,265.47 on the final day of trading last week -- a pullback that followed a decline of more than 300 points the day before. Also last time out, the S&P 500 dropped 23.71 points to 1458.95, and the Nasdaq sank 37.10 points to 2562.24.

The financial sector had a rebound, aiding the rally. After both fell by more than 5% over the previous five sessions, the KBW Bank Index was higher by 1.6% and the Nasdaq Financial Index rose 1.3%.

Many other groups also recovered and closed up. Among the winners, the Philadelphia Gold & Silver Index added 3.3%, the Amex Oil Index was higher by 1.7%, and the Philadelphia Semiconductor Sector Index also rose 1.7%.

About 4.07 billion shares changed hands on the New York Stock Exchange, as advancers topped decliners by a 5-to-3 margin. Volume on the Nasdaq reached 2.36 billion s

In the absence of any economic data, Treasury prices lost ground. The 10-year note was down 10/32 in price, yielding 4.80%, and the 30-year bond lost 18/32, yielding 4.97%.

After finishing a penny shy of its record close during the last session, the September crude contract gave back 19 cents to $76.83 a barrel. Gasoline prices were off by a penny at $2.08 a gallon.

Second-worst day of 2007 Down 311

A tidal wave of worry about housing and credit markets swept over Wall Street Thursday, sending the Dow industrials tumbling 311 points in its second-biggest point loss of the year. The 30-share Dow Jones industrial average was down as much as 449 points earlier in the session before moving off its lows and closing down about 2.3 percent. The Dow sank 416 points on Feb. 27 on worries about slowing global growth.

The broader S&P 500 (down 38.45 to 1,479.64, Charts) tumbled 2.3 percent while the tech-laden Nasdaq (down 64.86 to 2,583.31, Charts) fell 1.8 percent.

Treasury bonds surged as investors sought safety, taking the yield on the 10-year note to 4.77 percent from 4.91 percent late Wednesday. Bond prices and yields move in opposite directions.

Oil jumped briefly above $77 a barrel but then turned lower along with stocks as traders worried that slower economic growth would dent demand for oil. Light crude for September delivery slid 86 cents to $75.02 a barrel on the New York Mercantile Exchange. Elsewhere, the dollar fell against the euro and the yen, and gold fell sharply.

Trading curbs, used to slow down the market in the event of a big move, were imposed by the New York Stock Exchange late this morning.

Credit market fears, which prompted a selloff that dragged the Dow down 226 points Tuesday, again unnerved investors and put pressure on stocks.

More disappointing news from the housing sector also weighed on investors. Homebuilders including D.R. Horton (down $0.75 to $16.73 and Pulte Homes (down $1.20 to $19.55), the nation's No. 2 and No. 3 builders, posted huge losses. And a bigger-than expected drop in new home sales in June added to those woes. The Commerce Department reported new home sales tumbled 6.6 percent.

The two big selloffs this week come just a week after the Dow hit another record, closing above 14,000 for the first time.

Overall, the earnings news investors considered Thursday was mixed. Dow component Exxon Mobil (down $4.97 to $87.82), the nation's largest oil company, posted a decline in quarterly profits, sending its shares 5.5 percent lower.

But embattled automaker Ford Motor (up $0.14 to $8.11) surprised investors reporting an unexpected quarterly profit early Thursday, helped by reduced losses in its North American operations. Ford stock climbed nearly 2 percent in late afternoon trade.

Apple (up $5.52 to $142.78) shares jumped over 5 percent after the company reported results that beat Wall Street's estimates after the market closed Wednesday.

Dow component 3M Co., (down $0.47 to $89.15) known for producing Scotch tape, reported earnings that topped Wall Street estimates. The stock edged higher.

Among individual issues, 29 of the 30 Dow components were lower in afternoon trade.

In other economic news, orders for big-ticket items meant to last three years or more rose less than expected in June.

Jobless claims fell unexpectedly last week, the government reported.

Market breadth was negative on significantly heavier than normal volume. Losers topped winners by more than 10 to 1 on the New York Stock Exchange on volume of 2.41 billion shares. Decliners beat advancers more than 6 to 1 on the Nasdaq on volume of 3.08 billion shares.

Worst Day for Stocks in 4 Months

The selloff that started at the opening bell accelerated into the close today, with the Dow shedding more than 200 points, and the SPX experiencing its biggest one-day selloff since March.

The breadth in the market was horrible today. There were nearly 3000 decliners on the NYSE, more than 93% of the volume was to the downside, and there were also 352 new lows. That is one lopsided day.

Perception is reality in the market. And today, with rumors spreading about the subprime market, scary comments from CFC, and bears like Bill Gross trotting out on CNBC spreading more fear, it doesn't really matter what's behind the comments. The market is in the grips of a selloff.

You can see the rise in fear in the +10% spike in the VIX (back to March levels), the rise in the ARMS Index (1.60), or the surge in the put/call ratio (1.42).

Stocks Up on Merger Monday

Stocks in New York opened the week on a high note, as a string of buyouts and upbeat earnings reports had traders moving to scoop up equities Monday.

The Dow Jones Industrial Average closed with a gain of 92.34 points, or 0.67%, to 13,943.42. The S&P 500 was up 7.47 points, or 0.49%, to 1541.57, and the Nasdaq Composite advanced 2.98 points, or 0.11%, to 2690.58.

Robert Pavlik, chief investment officer with Oaktree Asset Management, said the rebound from Friday's selloff should give investors confidence in the market.

"This earnings reporting season has been very decent, and traders are now hopeful that the negative reports we've had will be the exceptions rather than the norm," he said.

About 3.14 billion shares changed hands on the New York Stock Exchange, as decliners matched advancers. Volume on the Nasdaq reached 2.06 billion shares, with losers outpacing advancers 8 to 7.

Brightening the mood were several mergers, including a mammoth combination that will see oil drillers Transocean and GlobalSantaFe join forces. The combined company will have an enterprise value of $53 billion, and shareholders will receive cash totaling $15 billion. Transocean climbed 5.5% to $115.96, and GlobalSantaFe added 4.8% to $78.33.

Another deal had Cerberus, a private-equity firm, setting plans to acquire United Rentals for $2.83 billion, and Barclays has raised its bid for ABN Amro to more than $93 billion.

At the same time, the Nasdaq dropped 32.44 points, or 1.19%, at 2687.60. All three major averages were lower for the week.

In the absence of any economic data, Treasury prices were little changed. The 10-year note was down 3/32 in price, yielding 4.97%, and the 30-year bond was off 5/32, yielding 5.07%.

Meanwhile, the September crude contract traded as the front-month benchmark for the first time. Oil dropped 90 cents to close at $74.89 a barrel, and gasoline prices were lower by 6 cents at $2.10 a gallon.

Overseas, markets were mostly higher. London's FTSE added 0.6%, while Frankfurt's DAX was up 0.9%. In Asia, Tokyo's Nikkei slid 1.1%, but Hong Kong's Hang Seng was better by 0.3%.

Monday Morning Outlook

After last week's drubbing, stocks are getting a nice bounce in early trading. A lack of any bad economic news coupled with more M&A activity is luring buyers back into the market.

On the earnings front, both Merck (MRK) and Schering-Plough (SGP) reported strong results. That is lifting the drug sector. In M&A news, the big merger in the oil patch is Transocean (RIG) and GlobalSantaFe (GSF). Also, URI is being taken private for $6.6 billion, and there is a rumor that Tellabls (TLAB) could be taken out.

Oil prices are plunging more than a buck, pushing crude prices back down below $75. Bond yields are also steady, witht the 10-year around 4.95%. These two factors should help support equities.

Asian markets were mixed overnight, with China and India up, but Japan and Australia lower.

The pressure on the financial sector is not going to go away overnight, even though it has temporarily been forgotten by investors this morning.

Harrington wins British Open

Padraig Harrington of Ireland won the 136th British Open at Carnoustie on Sunday, defeating Sergio Garcia of Spain in a four-hole playoff.

The Week in Review

The major averages finished the week lower, as investors digested some disappointing earnings results and ongoing concerns about the economy and the health of the sub-prime mortgage lending, following the market's recent strong gains.

Corporate financials took center stage in the past week, with second quarter earnings season now in full swing.

Overall, the reports have been moderately good, but not outstanding, with large multinational companies faring the best because of foreign exposure as well as substantial share buybacks.

Twelve Dow components highlighted the lengthy earnings calendar, which also included reports from other luminaries such as Yahoo! (YHOO), eBay (EBAY), Google (GOOG), Abbott Laboratories (ABT), Harley-Davidson (HOG), and Southwest Airlines (LUV).

Also reporting during the week were a host of financial companies, including KeyCorp (KEY), Merrill Lynch (MER), JPMorgan Chase (JPM), Washington Mutual (WM), Citigroup (C), Bank of America (BAC), and Wachovia (WB). Despite some better than expected results, however, lingering concerns about sub-prime lending held the sector back.

Both the Dow Jones Industrial average and the broader S&P 500 index closed at record levels on Thursday, led by strong gains in the Technology sector. Strength in the semiconductor sub-group, in particular, was weakened by a disappointing report from Intel (INTC) mid week, but reinvigorated by IBM (IBM), which posted better than expected results, to lead the sector.

The markets reversed course on Friday, however, as lackluster results from blue chips Caterpillar (CAT) and Google unnerved investors. An inline report from Microsoft (MSFT), following several strong quarters that exceeded analysts' estimates, also weighed on sentiment and prompted shares to retrace their gains.

The flurry of earnings news during the week was also accompanied by Fed Chairman Ben Bernake's semiannual report to Congress, in which he warned that weakness in the housing market could hurt economic growth. Ongoing concerns about the housing market and the health of sub-prime loans has been a major concern in recent weeks, and continues to act as a headwind for the market.

In terms of economic data, the June core PPI rose 3%, according to a report from the Labor Department. That was slightly higher than the 0.2% gain economists were expecting, and raised some inflationary concerns. The core CPI was up 0.2% last month, in line with expectations.

Meanwhile, Housing Starts rose last month, but Building Permits tumbled. June Housing Starts were reported at a 1.467 million annual rate, just above the 1.450 million rate that was expected. Housing permits plunged 7.5% in June to just a 1.406 million annual rate, versus the consensus estimate of a 1.490 million rate, reflecting the bleak outlook for the housing market.

Dow Sinks 149 To End Week

The Dow lost about 150 points Friday, a day after closing above 14,000 for the first time ever, as a spate of weak earnings news and continued housing fears rattled markets. The Dow sank over 1 percent, according to early tallies. The broader S&P 500 and the tech-heavy Nasdaq each fell about 1.2 percent. The dollar hit a all-time low against the euro, bonds jumped and oil fell.

Stocks had rallied Thursday, pushing the Dow, a blue-chip barometer that tracks 30 large companies, to its highest finish ever. But a big miss from Dow component Caterpillar dashed hopes of another record setting day Friday. The heavy equipment maker said its net profit fell 21 percent and posted earnings of $1.24 a share, versus estimates for $1.49 a share. Caterpillar (down $4.38 to $82.60) shares slid over 5 percent, although they were down over 9 percent earlier in the session.

Lackluster earnings in the tech sector also weighed on stocks. Google (down $28.66 to $519.93) reported earnings late Thursday that missed Wall Street's estimates even as its quarterly sales soared. The earnings miss - only the second since the Internet search firm went public in 2004 - rattled investors who have grown accustomed to solid results from the company. Google shares tumbled 5 percent.

Swedish firm Ericsson, the biggest maker of cell phone network equipment, also reported earnings that fell short of analysts' expectations early Friday. Ericsson (down $2.37 to $39.72) shares fell 5 percent.

"Google and Caterpillar have really taken the wind out of the sails," said Todd Clark, Director of stock trading at Nollenberger Capital Partners in San Francisco. "But this is just some healthy consolidation. The market really looked a little long in the tooth yesterday."

"Earnings are partly a factor, but they are not the whole thing," said Larry Peruzzi, a stock trader at The Boston Company Asset Management.

Peruzzi said the fact that the Dow hit the 14,000 mark Thursday, but just barely, was also giving investors pause.

"As the market gets up there, it acts as a reflection point," he said, noting that the Dow has often dropped after hitting other psychologically important benchmarks like 12,000 or 13,000.

He also said from comments Federal Reserve member William Poole that the subprime mortgage sector was large enough to affect the broader housing market dampened the mood. Defaults on mortgages in the subprime sector have risen sharply in the last few months, resulting in the implosion of several subprime mortgage lenders and funds that bought the repackaged debt. Poole's comments follow those from Fed Chairman Ben Bernanke, who earlier this week told lawmakers that subprime losers could total $100 billion. While so far limited, Bernanke said a housing slowdown had the potential to cut into consumer spending, hurting the broader economy. His comments helped stocks close lower Wednesday.

The Dow has set a record close in five out of the last six sessions. Thursday investors said upbeat earnings from companies such as IBM, Honeywell International and Bank of America helped lift the benchmark index.

But the stock market rally belies fears about the wider economy. In the first quarter of 2007 the economy grew by just 0.7 percent, well below normal.

And on Friday the dollar hit a record low against the euro and declined verses the yen on fears weakness in the U.S. housing sector could crimp consumer spending, further weakening economic growth.

Treasury prices rose as money poured out of stocks and into safer government debt. The yield on the benchmark 10-year note fell to 4.95 percent from 5.01 percent late Thursday. Bond prices and yields move in opposite directions.

Overseas, major Asian markets finished the session higher on Wall Street's record day Thursday. European stocks started the day higher but finished in the red as the earnings news rolled in.

Oil prices fell, with U.S. light crude for August delivery down 35 cents to close at $75.57 a barrel on the New York mercantile Exchange. Oil is near its all-time trading high of $78.40 hit last July.

Market breadth was negative. Losers beat winners by more than 3 to 1 on volume of 1.64 billion shares on the New York Stock Exchange. On the Nasdaq, decliners topped advancers by over 3 to 1 on volume of 2 billion shares.

COMEX gold for August gained $6.60 to settle at $684.70.

Dow Above 14,000

Wall Street logged another historic milestone Thursday as the Dow finished above 14,000 for the first time ever, helped by positive corporate earnings while investors kept a close eye on the Federal Reserve's outlook on the economy.

Fed Sees Growth Risks "More Balanced"

WASHINGTON (Reuters) - Federal Reserve officials believed downside risks to U.S. economic growth had diminished between their May and June meetings, suggesting little likelihood that the current housing market downturn would spark a near-term cut in benchmark U.S. interest rates.

U.S. stocks seen lower as subprime woes resurface

Downbeat earnings news from Intel, Pfizer and Yahoo also pressure stocks

U.S. stocks were set for a lower opening on Wednesday, a day after the Dow Jones Industrial Average first breached the key 14,000 level, as woes from the subprime mortgage market resurfaced while earnings reports from Intel Corp., Pfizer Inc., and Yahoo Inc., disappointed investors. Investors will also monitor the Congressional testimony from Federal Reserve Chairman Ben Bernanke, whose views on the economy and inflation may help shed light on whether the central bank will eventually tweak interest rates.

Inflation and Fed's Bernanke
The market showed little reaction to news that consumer prices increased a moderate 0.2% in June, a touch higher than the 0.1% expected, with falling energy prices offsetting rising food prices. Excluding volatile food and energy prices, the core consumer price index also increased 0.2%, in line with expectations. Bernanke may be grilled about the meltdown in the subprime mortgage market, amid criticism that the central bank under former Fed chief Alan Greenspan made few efforts to prevent banks from extending dodgy loans to unaware borrowers.

Other markets
Bonds were flat, with the benchmark 10-year Treasury is unchanged at 95 24/3

The dollar was basically flat against rivals, though earlier it fell to new lows vs. the euro and the British pound. Overseas stock markets also were weaker, with the FTSE 100 fell 0.9% in London and the Nikkei 225 dropped 1.1% in Tokyo. Crude oil futures rose 18 cents to $74.29 a barrel ahead of weekly energy data

Another Mixed Day - More Green than Red

For a second straight day, stocks finished mixed. A batch of better than expected earnings, more proof the market remains awash in liquidity, and the first drop in producer prices since January initially armed the bulls with enough momentum to power the Dow to its fifth straight victory and, more notably, above 14,000 for the first time ever.

However, some hesitation heading into another deluge of corporate earnings, a closely-watched update on inflation (e.g. CPI), and the beginning of a two-day testimony before Congress from Fed Chairman Bernanke left some questioning whether the market's sizable gains of late are sustainable.

The Dow closed in record territory again; but its best performer was not among the two components in focus after topping Wall Street's expectations. Johnson & Johnson (JNJ 62.75 -1.05) beat forecasts and backed its full-year profit outlook but lowered its 2007 sales growth guidance. Coca-Cola (KO 53.06 -0.79) also checked in better than expected but continued weakness in North American sales left investors questioning the 52-week high shares hit a day earlier.

The Dow's salvation was American Express (AXP 64.80 +2.92), which accounted for all of the Dow's 20-point gain. The stock soared 4.7% after Goldman Sachs upgraded the stock to Buy and raised its price target to $77 from $66.

A technical breakout in General Electric (GE 40.77 +0.65), the second most heavily-weighted name on the S&P 500, was another bright spot and was the biggest reason behind Industrials pacing the way among just four sectors finishing higher. As evidenced by the Nasdaq turning in the best performance among the major averages, Novellus Systems (NVLS 33.03 +3.34) essentially calling the bottom in bookings helped validate optimism throughout Technology and support our recent upgrade on the sector to Overweight.

KLA-Tencor (KLAC 61.78 +5.08) later in the session offering some upbeat commentary out of the SEMICON West conference also helped pave the way for Intel (INTC 26.32 +0.37), a suggested holding in the Briefing.com Active Portfolio, ahead of its report tonight. A 3.1% rally in Yahoo! (YHOO 27.52 +0.82) ahead of its results after the close and a 2.5% surge in Microsoft (MSFT 30.77 +0.74), which also reports this week, provided additional sector support.

Materials (+0.6%) was the day's third best performing sector. Basell agreeing to buy Lyondell Chemical (LYO 47.05 +6.93) for $12.1 bln in cash and a $2 bln buyback from Rohm & Haas (ROH 61.27 +5.54) earmarked chemical stocks among the session's biggest winners. After being up as much as 1.6% at $75.35/bbl level intraday, crude for August delivery heading into expiration and closing relatively flat was also noteworthy.

Unfortunately, subsequent deterioration in the Energy (-0.9%) sector removed much of the leadership that had helped the S&P 500 recently hit historic highs and contend with the lack of participation from the more heavily weighted Financial sector.

The latter was in focus after Merrill Lynch (MER 86.86 -0.53) posted a 31% jump in Q2 profits; but its CFO saying the market for subprime debt has yet to stabilize prompted a reversal in MER shares and, had it not been for the rally in AXP, the sector would have slipped further into negative territory for the year.

Separately, today's headline PPI unexpectedly falling for the first time in five months due to a drop in food and energy prices was also welcome news for investors. When it was all said and done, though, investors opted to wait for Wednesday's more influential CPI report to get a better inflation read for Fed policy direction.
Nasdaq +14.96 at 2712.29... NYSE Adv/Dec 1449/1800...

Market Stages An Impressive Rally; Catches Most Traders Off Balance

If you didn't watch the market today, you are likely tuning in at the end of the day and asking yourself, "What happened? Did we have some huge buyouts? Did oil plunge? Did we catch Bin Laden?". But the answer is no, to all of the above. The news wasn't even that exciting.

What counts is that sentiment in the market is terrible, short interest has surged lately, and investors remain underinvested and poorly positioned for an ongoing rally. The market loves to catch the majority leaning the wrong way, and that is exactly what happened today. How else can you explain a nearly +300-point day in the Dow?

The strength in today's market was palpable. The semis led the way, gaining +2.90% on the day. Banks and brokers were also strong, rallying +2.53% and +2.30%, respectively.

We really thought that the SPX was due for a bit more of a correction. Although the SPX broke its 50-day on Tuesday, it failed to follow through on the downside, and today's surge makes for new highs on what was looking like a triple top formation.

While that may sound like a lot of industry jargon, the takeaway is that today's action is significant, and should be respected.

Market Gets A Bounce

The market is getting a lift in early trading, although it remains to be seen if it can last until the closing bell. Remember, it wasn't that long ago that we saw repeated up opens in the market get sold into the close.

Asian markets were down across the board overnight, carrying over the weakness that the U.S. markets experienced yesterday. There has been some question as to whether the downgrade of $12 billion in subprime debt was enough to cause yesterday's selloff.

The market had gotten overbought, and was due for a selloff. So yesterday's news merely provided a convenient catalyst for everyone to take profits at the same time. That is why the breadth was so negative yesterday.

The bears are pressing their hand, and trying to knock the market lower still. The SPX is struggling to stay above its 50-day average, and hasn't made a new high since June 1st. As such, it is likely that this correction could last a bit longer, though I don't think it will be too severe in terms of how low we go.

Bond yields are coming closer to testing the key 5.00% level, with the 10-year yield currently near 5.05%. If you look at the chart of the 10-year yield like you would a stock, you would likely conclude that the trend is down right now.

Are We Sick of Hedge Funds and Sub-Prime Chatter?

In an FT article today, Hedge Funds Profit From Subprime Bets, it's reported that hedge funds who bet against subprime loans found themselves at the top of the performers list for June.

...some fear that undisclosed or mis-priced investments in the hard-to-value bonds and equity of structured products linked to subprime, such as collateralized debt obligations, could lead to surprise losses at some funds as they report later this month. Christian Zugel of New Jersey-based hedge fund manager Zais Group, said in a note to investors last week that losses from residential mortgage CDOs could reach $60bn-$100bn, far more than the $52bn estimated on Monday by Credit Suisse.

“We believe we are entering a severe crisis, with potentially heavy losses for many market participants,” Mr. Zugel wrote.

Everything You Want To Know About The Markets

Everything you ever wanted to know about the markets in 98 pages of graphs by Mary Ann Bartels of Merrill Lynch. Her monthly chart book is out. Four major macro themes drive her view:

1) International reserve assets are potentially a powerful source of global equity demand. The desire of countries such as China, Japan, Russia, and Norway to enhance investment returns for government funds and/or reserve accounts is only the beginning of a long-term structural trend that could increase significantly the demand for global equities, in our view. These 4 countries control nearly half of the world’s $5.25 trillion in international reserve assets.

2) Secular trend of ’42-’68 all over again? The new secular bull market in stocks from the 2002 lows is taking place in the context of a commodity bull
market and a maturing multi-decade downtrend in yields. It would seem, therefore, that this new uptrend has the potential to be an “inflationary,” making it more similar to the 1940s-1960s bull market than to the 1980s-1990s bull market, which was a “disinflationary.” Similar to the Marshall Plan in Europe, the rebuilding of Japan, and the development of the Interstate Highway system in the US after WW II and into the 1960s, the infrastructure development in emerging economies such as China and India will help drive the current secular bull market, in our view.

3) The global secular decline in long rates appears completed. The break above long-term downtrend lines for global yields marks just the beginning of a shift to a secular uptrend in global long rates that could potentially represent a 20-year cycle. Higher rates (lower bond prices)would provide support for our other macro themes and reflect a shift of funds out of long-term debt into riskier
assets to enhance investment returns for government funds and/or reserve accounts (Macro Theme #1) or into infrastructure development in emerging economies (#2). In our view, both would help fuel a secular bull market for global equities.

4) Individual investors = shift back into equities. Individual investors have largely sat out the advance from the 2002 lows. Stocks and mutual funds as a
percentage of total household financial assets reached a record high of 37.2% in late 1999 and fell to 22.7% during the 2000-2002 bear market. Currently near 25%, this indicator suggests that individual investors should be a substantial source of liquidity for the equity markets. In our view, stock and mutual fund
investments as a percentage of total household financial assets could meet or exceed the late 1999 highs as the secular uptrend from 2002 continues.

Subprime Downgrades Sink Market

The markets really took it on the chin, especially in the last hour of trading. The SPX fell -1.4%, while the NDX fared a little better, losing -0.87%.

Breadth was negative, with significant deterioration in the net new highs index. On the plus side, the VIX spiked +16% and the ARMS Index finished at 1.90. Both of these represent a dramatic increse in investor anxiety, which has helped the market bottom quickly during the last several pullbacks.

The media will likely say that it was Bernanke's speech that gave investors pause, but it wasn't. It was all about the subprime market and the downgrades we got from the credit agencies. That is why the broker index (XBD) declined -2.88% on the day. LEH fell -5.0%.

The earnings warnings in the retail sector didn't help, as many fear that the consumer may be in dire straights. But as earnings season plays out, we will see that this is not the case.

Next product wave in February 2008

Microsoft on Tuesday said it would formally unveil the next wave of its enterprise products -- including the long-awaited "Longhorn" version of Windows Server -- in February 2008 at a launch event in Los Angeles.

In a keynote at the Worldwide Partner Conference, Microsoft Chief Operating Officer Kevin Turner revealed that Microsoft will launch Windows Server 2008 (formerly code-named Longhorn), Visual Studio 2008 and SQL Server 2008 in Los Angeles on Feb. 27, 2008. As is customary when Microsoft rolls out major products, the event will be the first in a wave of launch events across the world.

The timeframe may seem a bit off for customers expecting Windows Server 2008 to be available before the end of 2007, which is the current plan. According to Microsoft, there will be no change to this schedule, though the formal product launch won't come until next year.

Turner called the trio of products the "big dogs" of Microsoft's enterprise product portfolio. "It's the biggest single launch we will have at Microsoft in one day [in 2008]," Turner said, adding that colleague Andy Lees, a corporate vice president in Microsoft's server and tools business, told him to call it a "feeding frenzy of opportunity" for partners.

"There are hundreds of billions of dollars available to you through the monetization of these products," Turner said.

While that's all well and good, one partner attending the keynote said it's sometimes a daunting task for a partner -- especially a small business -- to work with Microsoft to seize the opportunity Turner mentioned.

"Figuring out how to work with this organization [is] a constant struggle," said Linda Gillis, marketing director for Squirrel Systems, a British Columbia company that provides restaurant point-of-sale software and services.

She said her 175-person company has a particular challenge because while it is based in Canada, 80 percent of its sales are in the U.S., so it's hard to find the right person within Microsoft to work with on sales engagements. However, "we are making headway," Gillis said. One of her goals at the partner conference is to make even more gains in this area, she said.

During his keynote, Turner reminded thousands of partners in the room that Microsoft has made a concerted effort to be more transparent about its product strategy to prepare them for releases, and reminded them of the products the company delivered in 2007. Those included Windows Vista, 40 million copies of which Turner said Microsoft delivered in the first 100 days of release, and Microsoft Office 2007.

"We talked about those products for a lot of years and they came to fruition [in 2007]," Turner said. Vista and Office are especially conducive to helping partners earn revenue, the former in particular representing a "$300-billion partner opportunity," he said.

Do diets work?

The great majority of doctors think so. Experience tells us to expect an enormous failure rate, yet most of us continue to hold out hope that the diets we prescribe will result in lost weight or other health benefits. Why do we keep believing?

You can call it Cash 2.0

You can call it 'cash 2.0': a new age of wireless payment technology that may replace even the smallest cash transactions in the coming years with the wave of a credit card or mobile phone.

But as major corporations like CVS, McDonald's, and Walgreens begin deploying new RF, or "contactless," payment technology, the Federal Reserve is taking a closer look at the technology and is asking the payment industry and card companies, among other questions, whether the new payment systems are secure.

The rapid deployment of RF-equipped contactless payment technology was behind a meeting at the Boston Federal Reserve in May. According to interviews with those at the meeting, the payments industry argued that, while not foolproof, the new RF payments systems are a vast improvement over existing, "magnetic stripe" payments technology and that Americans' casual handling of their credit cards poses a far greater risk to sensitive financial information than wireless hackers that might target the cards.

Contactless payment technology uses RF technology embedded in credit cards, mobile phones, or USB devices to negotiate credit and debit transactions. As opposed to older generation magnetic strip technology, the RF cards can be waved in front of a card reader.

While most consumers in the U.S. have yet to use the new cards, the availability of contactless payment technology is growing by leaps and bounds. Between 18 and 20 million RF-enabled credit and debit cards were issued between 2005 and 2007, according to Randy Vanderhoof, executive director of the Smart Card Alliance, an industry group. Payment card company Visa has issued seven million of the cards globally, the majority of them in the U.S., said Brian Triplett, a senior vice president of emerging product development at Visa.

"Adoption is growing at a faster rate than any other payment technology introduced in the last 50 years," said Vanderhoof, with banks like Chase Manhattan, Wells Fargo, and Keybank among the first to issue the cards.

The major advantages of the cards are speed and convenience, especially in the realm of "small value transactions" under $25, he said. That's because RF equipped credit cards reduce the time it takes to complete a transaction by almost two thirds from cash transactions and take less than half as long as traditional credit or debit card transactions, according to a presentation given at the Federal Reserve by Peter Nash, CVS's director of store treasury operations.

That decrease in checkout time means increased customer volume for high-traffic retailers like CVS and McDonald's, compared with cash or traditional credit card transactions. And studies show that consumers who use credit cards for small purchases tend to buy more with each purchase, said Avivah Litan, an analyst with Gartner.

RF cards are also being used by transportation authorities in cities like Boston and New York, where subway riders now use contactless cards instead of tokens to pass through turnstiles.

So far, the biggest obstacle to commercial adoption has been merchant acceptance of the new platform, which requires them to purchase and install RF reader terminals and pay higher costs per transaction than with traditional magnetic stripe cards, said Litan.

Still, one security expert on the RF enabled payment cards says that bigger problems are lurking behind the scenes with contactless payments technology, about which too little is known for consumers to be put at ease about the security of their financial information.

Kevin Fu was part of a team that published research that raised concerns about the security of first-generation RF-enabled credit cards in 2006. That study revealed that some of the cards transmitted cardholders names and account numbers in the clear to reader devices, and, in some instances, were susceptible to so-called "replay" attacks in which data eavesdropped from an RF card was "played back" to a reader, which accepted the data.

Speaking with InfoWorld, Fu, who is an assistant professor of computer science at the University of Massachusetts, said that in the last year, the card industry has corrected some of the faults of the first generation of RF cards but that many cards still broadcast information like a credit card account number in an unencrypted form.

Card companies don't consider the account number to be "personally identifiable information" or PII, acknowledged Nasreen Quibria, a senior payments industry consultant at the Federal Reserve Bank of Boston.

"Stealing information from these cards is not as easy as it may seem, but I'm concerned that consumers are unaware that their information is being broadcast in the clear," Fu said.

The payment card industry continues to take a dim view of Fu's research, arguing that attacks that eavesdrop information from RF cards would be all but impossible to carry out successfully outside of the laboratory, that newer generation cards mask the account holder's name, and that an arsenal of other security features stand between fraudsters and successful transactions, including CVCs (card verification numbers) that are generated dynamically with each transaction and hefty back-end fraud detection systems, said Visa's Triplett.

"Each (contactless) transaction is unique. There's data that's generated on the card itself, then encrypted and sent through the network for validation of the transaction," Triplett said. "It's not just the 16 digit account number. You have to have additional information."

"If you look at fraud on card platforms versus other kinds of payments, it's a small fraction," he said.

Triplett noted that card issuers like Visa reviewed Fu's research when it came out but concluded that they had the "right level" of security in place for stakeholders in the payments system: consumers, banks, and merchants.

Still, the payment industry may be making at least one concession, turning a recommendation that RF cards be shipped with protective mailing shields into a mandate, Triplett said. The shields prevent eavesdropping of card information while the card is still in its mailing envelope -- a technique that Fu and his fellow researchers used to obtain card information.

Outside of that, the payment card industry is limited in what it can do by a legacy infrastructure of card readers that can't handle RF transactions. That means that even new RF cards have to sport magnetic stripes that contain cardholder and account information on them in unencrypted form, said Triplett.

"You have to look at the complete picture, and when you get the full picture, you see that the RF makes (payments) more secure," he said. Besides, if all else fails, consumers have zero liability for fraudulent transactions.

Still, payments industry experts anticipate a long-running arms race between the payment card industry and increasingly sophisticated fraudsters who will be motivated to test the limits of the new system, especially as contactless payments features migrate to cell phones and other devices.

Still, Fu and others say that the payment industry's preference for keeping the details of how its contactless technology works under wraps will make it difficult to assess how well the industry is standing up to hackers.

"Public scrutiny is important," he said. "It's great that they're doing work in-house, but we won't know if it's not working unless there's public scrutiny and openness," Fu said.

SSL is one such example of a widely used encryption technology that has been vetted and improved through the efforts of independent researchers, Fu said.

Crucial components of the contactless payment system, such as the protocols used in contactless transactions and the algorithms used to generate the dynamic transaction codes, should also be open to scrutiny from independent security researchers and cryptographers, Litan and Fu agreed.

"I think the dynamic CVC code is a good security scheme, but the only reason I say its good is because (the payment card industry) told me. I haven't heard that from a third party researcher," she said.

But security researchers interested in the inner workings of the RF technology shouldn't hold their breath, according to Triplett at Visa.

"We're aggressive in having people look at risk and inform us, and we share that information with critical stakeholders, but that's not something we're going to open up to industry groups to report on," Triplett said.

That approach limits visibility into the industry's system but could prove disastrous if hackers were able to crack a critical payment component like the algorithm for creating the dynamic CVC codes, Litan said.

In the end, though, the debates about possible hacks are academic, especially when compared to the quotidian nature of most credit card fraud, which often stems from ordinary theft or sloppy behavior, such as restaurant patrons in the U.S. handing over their magnetic stripe card to waiters and waitresses before paying their bill, said Jania.

Despite that, the security of the new payments technology is an issue that consumers are concerned about, said Karen Webster, a researcher at Market Platform Dynamics.

"There seems to be a schism between the perception and the reality (of security risk), but clearly in the mind of the consumer, it's an issue," she said.

For now, security in contactless payments is a small issue because despite the millions of RF cards issued, readers are still hard to find and there's no evidence that contactless payments are catching on with consumers.

A survey of around 4,000 16-to-43-year-olds by Market Platform Dynamics in 2006 found that the cards were being used for only around two percent of purchases under $25, according to information presented by Karen Webster of Market Platform Dynamics.

But as readers become more plentiful (CVS, for example, has installed 40,000 RF-enabled, signature capture Payment Terminals in 5,400 stores) and "killer apps" like payments through mobile devices take off, the payments industry will have to be poised to respond to increased interest from hackers and fraudsters.

"As payment mechanisms and form factors change, we can expect the security methodologies to evolve along with them," said Jack Jania, vice president for financial services at secure card maker Gemalto.

The U.S., for example, may soon join the EU and countries like Mexico in embracing the EMV (Europay, MasterCard, and Visa) standard for authenticating debit and credit card payments.

"I see it as being inevitable," Jania said. "Security is like a staircase that you're always climbing."

Al-Qaeda threatens 'response' to Rushdie knighthood

Al-Qaeda second-in-command Ayman al-Zawahiri said the group is preparing a "precise response" to Britain's decision to bestow a knighthood on author Salman Rushdie.

A nano iphone soon to follow

Apple will follow up its debut iPhone with a cheaper version based on the iPod nano, a JPMorgan financial analyst said yesterday, echoing comments last week by bloggers scouring the U.S. Patent and Trademark Office database.

Kevin Chang, a Taiwan-based analyst with New York's JPMorgan Chase, said that Apple will release a less-expensive iPhone in the fourth quarter, according to Reuters.

Chang, who based his forecast on unnamed sources in the supply channel and an Apple application with the U.S. Patent and Trademark Office filed last week, said a follow-up to the current iPhone could be based on the iPod nano, Apple's flash drive-based music player. "We believe that iPod nano will be converted into a phone because it's probably the only way for Apple to launch a lower-end phone without severely cannibalizing iPod nano," Chang told Reuters.

At $300, a scaled-down nano-based iPhone might sell as many as 30 million to 40 million units in 2008, Chang argued. Apple's CEO, Steve Jobs, has fixed the iPhone sales target through 2008 at 10 million handsets.

Apple's iPod nano currently sells for between $149 and $249.

Both Unwired View and MyiTablet, for instance, noted that the patent described a touchpad-based device that would serve as only phone and iPod. Unlike the current iPhone, the cheaper alternative would not boast a large screen or allow Internet browsing.

The patent application spells out a touchpad similar to the iPod's click-wheel that would change modes -- and its display -- depending on the application. When in phone mode, for example, the circular touchpad could show dialing numbers in a style reminiscent of long-obsolete rotary phones. Switch to music mode, and the touchscreen reverts to a traditional iPod click-wheel for traversing artist or genre lists.

Apple introduced the iPhone on June 29 to fanfare and long lines of customers.

$19 mil price tag for space station toilet

Paying 19 million U.S.dollars for a Russian-built international space station toilet system is a bargain compared to building one from scratch, a NASA spokewoman said Thursday.

"It's akin to building a municipal treatment center on Earth," said Lynnette Madison.

Another plus is astronauts are familiar with how it works because it's similar to one already in place at the space station. The new system will be able to transfer urine to a device that can produce drinking water.

The new "loo" is scheduled to arrive at the space station in 2008. It will also offer more privacy for a crew expected to double from three to six by 2009.

The system will be installed on the American side, and the current toilet system on the Russian side will remain in place.

The space station toilet physically resembles those used on Earth, except it has leg restraints and thigh bars to keep astronauts and cosmonauts from floating away. Fans suck waste into the commode. Crew members also have individual urine funnels which are attached to hoses, and the urine is deposited into a wastewater tank.

Crew members using the current toilet system on the Russian side must transfer tanks of their urine to a cargo ship, which burns up in Earth's atmosphere once undocked from the station.

The 19 million dollar toilet system was part of a larger contract valued at 46 million dollars that NASA signed this week with RSC Energia, a Russian aerospace company. The extra equipment includes software updates for the station's inventory management system, a spare air pump and engineering support for a mechanism which allows space shuttles to dock with the space station.