American Home Mortgage bombshell...

Now we know why American Home Mortgage shares haven't traded in the last day and a half. The company is in a whole heap of financial trouble, per the following comments from its just released update (I've bolded some of the more important parts):

"American Home Mortgage Investment Corp. today reported that it is working diligently to determine how best to resolve the liquidity issues that have recently developed with respect to its business. These issues are primarily the result of the unprecedented disruption now occurring generally in the secondary mortgage market.

"American Home Mortgage noted that this disruption has fueled concerns in the market regarding credit risk, causing many market participants to suspend the purchase of loans from a variety of originators including American Home. Accordingly, American Home is currently experiencing a hindering of access to its traditional credit facilities. Additionally, American Home's lenders have initiated margin calls in response to the decline in the collateral value of certain of the Company's loans and securities held in its portfolio. The Company has received and paid very significant margin calls in the last three weeks and has substantial unpaid margin calls pending. Further pressure on the Company's liquidity presently exists due to its warehouse lenders effectively reducing, in this environment, their advance rate on new loans made by the Company.

"Based on the foregoing, the Company at present is unable to borrow on its credit facilities and was unable to fund its lending obligations yesterday of approximately $300 million. It does not anticipate funding approximately $450 to $500 million today.

"American Home Mortgage emphasized that it is seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of home buyers to whom it has committed to provide mortgages. The Company has retained Milestone Advisors and Lazard to assist in evaluating its strategic options and advising with respect to the sourcing of additional liquidity including the orderly liquidation of its assets."

AHM last traded at $10.47. An early price indication shows the stock potentially trading for between $1 and $4.

UPDATE at 2:30 p.m.: AHM trading at $1.44, down 86%. Ouch.

S&P/Case-Shiller index for May: Home prices down 2.8% YOY

The S&P/Case-Shiller home price index for May was just released. According to the firm ...

* The U.S. composite index of home prices in 20 cities dropped 0.23% in May, the same amount it declined by in April. Prices fell in 12 out of 20 locales.

* The monthly declines have slowed, but the year-over-year rate of change has worsened. Prices were down 2.83% YOY in May, up from a 2.1% decline in April.

* On a YOY basis, prices fell in 15 out of 20 markets. They were down the most in Detroit (-11.06%), San Diego (-6.96%) and Tampa (-6.67%). The sharpest gains were registered in Seattle (+9.06%) and Charlotte (+6.99%).

In other news, construction spending fell 0.3% in June, versus forecasts for a 0.2% gain. The weakness came from (surprise, surprise) residential spending. It dropped 0.7% after falling 0.5% in May. Nonresidential spending rose by a much smaller margin than in recent months -- 0.1% vs. 2.5% in May.

on the upside, on the downside

This market is all over the map, swinging from extreme pessimism/desperate selling to extreme optimism/manic buying. Crazy, that's for sure. So to be fair and balanced this fine morning, let's look at the upside and downside news on the wires.

On the upside ...

-- Buyers are coming back into the corporate debt and derivatives markets. Bloomberg says "Corporate Bond Risk Drops By Record, Halting Three-Day Rout." It cites a sharp decline in the price of credit default swaps, which offer protection against bond defaults.

On the downside ...

-- Yet another hedge fund seems to have suffered a ... er ... minor hiccup. Sowood Capital Management reportedly managed to vaporize more than 50% of the value of two of its funds in July, about $1.5 billion, according to reports. Alpha Fund Ltd. was down 56% so far this year, while Alpha Fund LP was down 51%.

On the upside ...

-- Another firm, Citadel Investment Group, stepped up to buy Sowood's assets as part of the unwinding of the two Sowood funds. No details on the terms, but this is the second time Citadel has swooped in to scoop up distressed assets. It teamed with JPMorgan Chase last year when Amaranth Advisors blew up due to natural gas bets that soured.

On the downside ...

-- Mortgage insurers MGIC Investment is potentially facing a total wipeout on its investment in Credit-Based Asset Servicing and Securitization, fondly known as C-Bass. According to Reuters ...

"C-BASS said its lenders had been demanding that it put up more cash all this year, with lender margin calls totaling $290 million in the first six months of the year amid turmoil in home loans for borrowers with poor credit histories.

"The situation worsened in July, though, as C-BASS, which at the beginning of the year had capital of $926 million and $302 million of liquidity, had to meet another $260 million in margin calls during the first 24 days of the month, the venture said.
C-BASS, which is co-owned by MGIC and Radian."

On the upside ...

-- It doesn't seem to be spooking the market like the last round of bad mortgage news did. Stock futures are up sharply, the yen is declining, and risk-taking measures have picked up. Dead cat bounce or something more? That's the question on everyone's mind ...

You know things are getting ugly in mortgage-land ...

When the yachts start going up for sale! According to CNNMoney.com ...

"A hedge fund manager whose fund ran into trouble from the sell-off in securities backed by subprime mortgages is having to put his huge yacht up for sale, seeking $23.5 million.

"John Devaney, the CEO of United Capital Markets, a fund that specializes in buying and selling bonds that are backed by the mortgage payments, particularly adjustable rate subprime mortgages, has put his 142-foot yacht "Positive Carry" up for sale, according to a yacht broker's Web site."

Things must really be getting serious. LOL.

Actually, if you want to talk about something serious (seriously), check out American Home Mortgage Investment. Shares of the mortgage REIT that specializes in Alt-A lending still haven't resumed trading on the New York Stock Exchange after being halted early today. The company announced late on Friday evening that it would delay dividend payments "until it obtains a better understanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the Company's balance sheet and overall liquidity. The disruption in the credit markets in the past few weeks has been unprecedented in the Company's experience and has caused major write-downs of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities."

Census: Homeownership falls, vacancy rate dips in Q2

The Census Bureau just released details (PDF link) on second-quarter homeownership and vacancy rates. In the quarter ...

* The U.S. homeownership rate fell again. It dropped to 68.2% from 68.4% in Q1 2007. The homeownership rate hasn't been this low since Q2 2003.

* Looking at the longer-term chart (This one goes all the way back to 1965), you can see that homeownership rates soared throughout most of the past decade and a half. Falling interest rates and much more aggressive financing are the reasons. With credit conditions tightening up and interest rates no longer declining, we'll likely see homeownership rates stagnate or decline for the foreseeable future.

* If there's one bit of good news in this report, it's that the homeowner vacancy rate actually declined -- to 2.6% from the record-high 2.8% in Q1 2007. It is still well above normal, however. Until the housing bubble burst, we had never seen a vacancy rate above 1.9% since record-keeping began in the 1950s.

It's the end of the world as we know it ...

That's the name of a great R.E.M. song (And yes, for you purists, I left off the "(And I feel fine)" part). It also pretty much summarizes trading activity in the bond and credit derivatives markets. Just get a load of these quotes from a Bloomberg story ...

* "An index allowing investors to bet on the U.S. leveraged loan market fell to its lowest since it began trading two months ago."

* "Benchmarks gauging the risk of owning investment-grade corporate bonds in the U.S. and Europe had their worst day on record."

* "An ABX index tracking default risk on the safest subprime bonds fell to its lowest ever and premiums of mortgage securities guaranteed by government-chartered companies Fannie Mae and Freddie Mac rose to the highest in four years."

* "Credit-default swaps on Goldman Sachs Group Inc. and Bear Stearns Cos. rose to records on concerns investment banks will be stuck with high-yield, high- risk debt that they are unable to sell."

* "The extra yield, or spread, investors demand to own investment-grade corporate bonds instead of U.S. Treasuries jumped the most for a single day since July 2002, when WorldCom Inc. filed for bankruptcy. The spread for junk bonds had the biggest one-day widening since June of that year."

A plague of locusts swarmed over Wall Street, while the Hudson River ran red with blood ... Okay, I made those last two up. But clearly, all is not well in corporate finance land. Will things get as bad as Long-Term Capital Management in 1998? Or is this just another hiccup akin to what happened earlier this year? Place your bets.

And on a side note, aren't you glad to see the subprime mortgage problems are "well-contained?"

As ugly a day as I've seen in a long time

Pull up a chart of almost any home builder ... any broker ... any bank ... any mortgage lender. Look at what's going in the credit markets (junk and corporate spreads ... mortgage derivatives ... CDOs). It is ugly with a capital U out there.

I said a few days ago that "something stinks." And I said at the end of June that a lot of signals were pointing to chaos ahead. Looks like that's what we're getting -- in spades. Ironically enough, the day I wrote my June post was another one in which I was pulling kid-watching duty, working on and off from home. Maybe I should just go to office every day to avoid jinxing the market.

New home sales for June look awful

We just got the second major report on housing activity in June -- new home sales. Here's what the numbers showed:

* Sales tanked 6.6% to a seasonally adjusted annual rate of 834,000 from a revised 893,000 SAAR in May (previously reported as 915,000). That was worse than economists' forecasts for a 2.7% decline to 890,000. On a year-over-year basis, June sales were down 22.3% from 1.073 million in June 2006.

* For-sale inventory came in at 537,000 new homes. That was unchanged from 537,000 in May (previously reported as 536,000) and down 5% from 565,000 in June 2006. On a months supply at current sales pace basis, inventory was 7.8 months, up from 7.4 in May (previously reported as 7.1) and 6.4 a year earlier.

* Median prices fell 1.3% to $237,900 in June from $241,000 in May (previously reported as $236,100). Prices were down 2.2% from $243,200 in June 2006.

There isn't much to like about these numbers. We saw another sharp drop in sales and another decline in median prices. Moreover, the raw number of homes for sale was unchanged and the months supply indicator popped up again. Clearly, home builders are struggling for business in a changed housing market. We'll need to see prices come down, incentives pick up, and construction activity cool to get supply more in line with demand, and to overcome the headwinds from a tighter mortgage market.

Fed Beige Book excerpts...

The Fed's latest Beige Book report on economic activity was just released. My 100 words or less summary: Residential real estate stinks ... commercial is doing well (so far) ... inflation pressures are running relatively high ... job growth is ho-hum (hey, that's only 23 words!) Some excerpts:

-- "On balance, consumer spending rose at a modest pace, although a number of Districts indicated that sales were mixed or below expectations. Several reports indicated that capital spending increased, and expenditures for most business services continued to rise. Employment increased further in most regions and in many sectors of the economy. Most Districts said that residential construction and real estate activity continued to decline. Commercial construction and real estate markets were generally more active than during the previous reporting period. District reports indicated that manufacturing activity continued to expand during June and early July. "

-- "Contacts generally reported ongoing input cost pressures, particularly for petroleum-related inputs, while prices at the retail level continued to increase at a moderate rate. Energy and natural resource activity remained at high levels, or in some instances, rose further."

-- "A number of Districts noted that high gas prices restrained spending; Chicago also noted a negative impact from high food prices, and Dallas mentioned that wet weather depressed sales. Five regions indicated that retail sales of items related to housing--such as furniture and home repair materials--were weak or declining. Retail inventories were generally at desired levels across the country, while Atlanta and San Francisco observed some increases. New vehicle sales in many areas were described as "flat" or "lackluster," although dealers in Philadelphia and Chicago noted some improvement between June and early July."

-- "Most Districts said that residential construction and real estate activity continued to decline on balance. Many Districts, however, noted increased activity in some individual market locales or segments. Atlanta, Chicago, St. Louis, and Minneapolis said construction decreased. Boston and Kansas City said housing markets remained "soft" and "weak," respectively, while San Francisco indicated that residential markets were weak and had slowed further in some areas. New York said markets were mixed but stable. Two notable exceptions were the Cleveland and Richmond regions, which experienced slight increases in sales. Atlanta said home inventories remained high, as did Dallas (even after a slight decline in the recent period). Inventories increased in Kansas City, but they declined in New York, and contacts in Boston and Cleveland described the number of homes for sale as "normal" and "acceptable."

-- "Contacts generally reported ongoing input cost pressures, particularly for petroleum-related inputs, while prices at the retail level continued to increase at a moderate rate. Notable exceptions were the Richmond District, which reported faster rates of price increases as local businesses passed along higher input costs, and the Kansas City region, which experienced an easing in overall price pressures. Almost every region said that oil and gasoline prices were either rising, high, or "an issue."

June existing home sales drop sharply

The housing news just keeps on coming, and today is no exception. The National Association of Realtors just reported on June existing home sales, and this is what the data showed:

* Sales dropped 3.8% to a seasonally adjusted annual rate of 5.75 million from a revised 5.98 million SAAR in May (previously reported as 5.99 million). That was worse than economists' forecasts of a 5.86 million SAAR and it leaves sales at the lowest rate since November 2002 (5.73 million). June sales were down 11.4% from 6.49 million a year earlier. Sales fell in all regions, with the biggest decline in the Northeast (-7.3%) and the smallest in the South (-1.7%)

* For sale inventory came in at 4.196 million single-family homes, condos, and co-ops. That was down 4.2% from 4.378 million in May, and up 12.3% from 3.738 million in June 2006. On a months supply at current sales pace basis, inventory was 8.8 months, unchanged from a downwardly revised 8.8 months in May and up from 6.9 a year earlier. We have data going back further for the single-family only market. The months supply figure there was 8.7, the highest since June 1992.

* Median prices rose 3.3% to $230,100 in June from $222,700 in May. May's figure was previously reported as $223,700. Prices were actually up slightly, by 0.3%, from $229,300 in June 2007. That snapped a record 10-month string of year-over-year price declines.

So what's the story here? We still have a weak housing market. Sales are running at their lowest level in almost five years and inventories remain extremely high. The recent carnage in the mortgage finance industry should also make it harder for some home buyers to obtain loans. That will knock additional demand out of the market. And that's why I can't get too excited about the blip lower in home inventories and the slight rise in median prices.

In sum, buyers still have the upper hand and sellers can't afford to mess around. A lasting rebound isn't likely until the back half of 2008 at the earliest.

More earnings fallout from the mortgage mess

Late yesterday, private mortgage insurer Radian Group reported its latest earnings. Second-quarter profit plunged 86% from a year ago, while the company's provision for loan losses more than doubled to $174 million. The stock was down almost 16% through yesterday, and was trading poorly in the pre-market.

Meanwhile, Ambac Financial Group reported a 27% drop in second-quarter earnings. Ambac is a bond insurer -- when an issuer sells bonds, Ambac provides insurance to the bond buyers that they'll be made whole in the event of default. It may be forced to cover payments on securities if defaults rise, and it is taking losses on its own securities holdings. Mark-to-market losses on CDOs with subprime mortgage bonds in them cost it $56.9 million, according to Bloomberg. The stock was down 14.5% this year through yesterday and it too looks weak in the pre-market.

Last but not least, Japan's Nomura Holdings reported a loss of 31.2 billion yen ($258 million) on its U.S. subprime lending business. Nomura is a major buyer and securitizer of subprime mortgages. According to Bloomberg, CFO Masafumi Nakada said: "We kept reducing our position rapidly, but the market's deterioration was faster."

Bottom line: The "hits" just keep on coming.

Luminent and Countrywide shed light on just how cruddy conditions are in mortgage-land

Luminent Mortgage Capital is one of many mortgage investment firms and REITs that buy mortgage-backed securities, throwing off income from those portfolios. In a fantastic SEC filing yesterday, which you can obtain here, the company really went off about the problems in the mortgage industry. In fact, CEO S. Trezevant Moore Jr. went so far as to say "In my almost 30 years in the U.S. mortgage-backed securities market, I have never before seen the intensity of confusion, uncertainty and outright fear as right now."

Other noteworthy excerpts:

"I have experienced the Volcker recession of ‘79-‘81, the Oil Patch and New England corrections in the mid-to-late 80’s, California ’89 to ‘94, and significant bond market corrections in ‘87, ‘94 and ‘98. At none of these times has the distaste for mortgage and mortgage-related securities been as high as we see now."

and

"Many residential mortgage-backed securities are or will default because investors do not have the capacity or legal ability to actually review a reasonable sample of individual loans in a pool."

and

"In our view, the mortgage market is perhaps a little more dependent on analysis of loan characteristics without actually ever reviewing the loan. Investors often cannot or are unable to examine the accuracy of the data used to make investment decisions."

No sugarcoating there, to be sure. Of course, the official party line is that there's nothing to see here, that we should all just move along, etc.. Treasury Secretary Henry Paulson implied as much in a CNBC interview yesterday, saying that housing is "at or near the bottom" and that the subprime mortgage fallout is "containable."

But you have to wonder about the veracity of those comments. Certainly Countrywide Financial wouldn't agree. The giant mortgage lender slashed its forecast for full-year profit and, more importantly, warned that "softening home prices continue to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result."

A whopping 23.71% of the subprime loans in its servicing portfolio were delinquent in the June quarter, up from 15.33% a year earlier. More noteworthy: delinquency rates on PRIME home equity loans jumped to 4.56% from 1.77% a year ago, while delinquencies on conventional first mortgages rose to 3.35% from 2.05%. In other words, it's not just a subprime problem any more.

Credit tightening in action

This whole concept of "tighter lending standards" can seem a bit nebulous at times. You might be wondering what it means exactly. Well, here's an example of credit tightening in action: Wells Fargo is eliminating retail sales of 2/28 mortgages. 2/28s are so named because they feature a fixed rate and payment for 2 years, followed by adjustable rates and payments for the remaining 28.

They have been a staple product of the subprime industry for years. The typical model has been for someone to get a 2/28 mortgage, "repair" their credit by paying their bills on time during the 2-year fixed period, then refinance into a new loan (preferably, a prime quality one). But rising delinquencies across the board and tougher ratings agency attitudes toward subprime mortgage bonds have caused funding for these types of loans to start drying up.

New federal guidance also stresses that subprime lenders should qualify borrowers on fully indexed rates and payments (that is, the rates/payments they would have to pay AFTER the initial, subsidized period ends). That's another reason we're seeing lenders eliminate short-term subprime ARMs. Washington Mutual did so a few days ago.

Something stinks out there...

You can see it in the action in Treasuries. Bond prices are rising sharply, yields are falling sharply, despite ostensibly poor fundamental events, like Ben Bernanke's delivery of hawkish testimony on inflation.

You can see it in the dollar. It's been falling for a while on subprime spillover concerns. Now, the Dollar Index is plunging through its 2004 low, leaving its April 1995 low at 80.05 as the next level of support. Another index of the dollar's value -- the U.S. Trade Weighted Major Currency Index -- is at its lowest level since 1971, when the index was conceived.

You can see it in the financial stocks, which have been getting beaten with the ugly stick for weeks.

You can see it in the stock IPO and bond markets, which are seeing more postponed deals and poorly performing deals.

Is there something ugly lurking out there? Is this the wholesale repricing of risk we've all been afraid of, but somehow managed to keep avoiding? Unclear. But judging by the smell of napalm in the air, it could be. Time will tell.

Housing paper

If you haven't guessed already from the topics I cover in this blog, I've been following the mortgage and housing markets for some time ... and have grown increasingly concerned by some of the developments in those markets. So I've spent a lot of time trying to keep readers of this blog updated on all the twists, turns, and new developments.

Over the past few months, I've also been working on a background project -- a paper examining the causes and consequences of the housing and mortgage crisis, as well as some potential ways to fix the housing finance system, which appears to have broken down.

I don't pretend to have all the answers. I don't think anyone does. But clearly, regulators and policymakers are focused like a laser on these issues. Hopefully, the paper we've just published will help them navigate these difficult times. If you feel so inclined, you can read more here.

subprime-related headlines everywhere ...

There are numerous headlines flying about developments in the subprime market. It's incredibly tough to keep up with them. But here's a round up...

* Bernanke is getting rapped hard right now by a couple of members of Congress for the fact the Fed didn't do enough to regulate/control the mortgage lending market before it got completely out of control.

* CIT Group, an independent commercial finance company said it lost $127 million, or 70 cents a share, in the second quarter. The problem? CIT is a big subprime lender. It booked a large $495 million loss related to the write-down of $10.6 billion in home loan receivables. An analyst cited in the Bloomberg story notes that it's about a 7% haircut on the value of those assets. The company said it will quit the subprime lending business entirely, following a recent move by GE to dump its WMC mortgage business.

* The price of buying credit default swaps on bond insurance firms, such as MBIA and AMBAC Financial Group, is going up. The fear is that these guys have guaranteed the repayment of bonds backed by consumer loans and collateralized debt obligations, and if more of those bonds sour, it could cause earnings problems for the insurers.

Wild, wild times.

Mr. Bernanke goes to Congress

Ben Bernanke is testifying before the House Committee on Financial Services right now. His prepared comments have been released already. Some highlights ...

* Productivity growth appears to be slowing -- "The combination of moderate gains in output and solid advances in employment implies that recent increases in labor productivity have been modest by the standards of the past decade. The cooling of productivity growth in recent quarters is likely the result of cyclical or other temporary factors, but the underlying pace of productivity gains may also have slowed somewhat."

* The housing industry is still a mess -- "Over the past year, home sales and construction have slowed substantially and house prices have decelerated. Although a leveling-off of home sales in the second half of 2006 suggested some tentative stabilization of housing demand, sales have softened further this year, leading the number of unsold new homes in builders’ inventories to rise further relative to the pace of new home sales. Accordingly, construction of new homes has sunk further, with starts of new single-family houses thus far this year running 10 percent below the pace in the second half of last year.

"The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that--despite the recent increase--remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time."

* There has been some spillover in the credit markets from the subprime ills -- "However, conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans. In recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments. Credit spreads on lower-quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened. Even after their recent rise, however, credit spreads remain near the low end of their historical ranges, and financing activity in the bond and business loan markets has remained fairly brisk."

* Overall inflation is rising, but we're still mainly focusing on "core" increases -- "Sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months -- both unwelcome developments. As measured by changes in the price index for personal consumption expenditures (PCE inflation), inflation ran at an annual rate of 4.4 percent over the first five months of this year, a rate that, if maintained, would clearly be inconsistent with the objective of price stability. Because monetary policy works with a lag, however, policymakers must focus on the economic outlook. Food and energy prices tend to be quite volatile, so that, looking forward, core inflation (which excludes food and energy prices) may be a better gauge than overall inflation of underlying inflation trends. Core inflation has moderated slightly over the past few months, with core PCE inflation coming in at an annual rate of about 2 percent so far this year."

Lastly, Bernanke devotes an entire "special section" to possible regulatory responses to the mortgage problems. It's rather lengthy, so if you're interested, just click through to the testimony.

June housing starts bounce; permit issuance tanks

We just got our latest look at home construction activity in June. Here's what the numbers showed:

* Starts rose 2.3% to a seasonally adjusted annual rate of 1.467 million in June from a downwardly revised 1.434 million in May. That still left starts down slightly more than 19% from a year ago.

* By category, single family starts were off slightly (-0.2%), while multifamily starts were up a rather sharp 12.5%. Regionally, starts fell 2.4% in the Northeast and 3.7% in the Midwest. They rose 2.4% in the South and 9% in the West.

* Building permits really fell off a cliff, however (shown in the chart above). They dropped 7.5% to 1.406 million from 1.52 million in May. That leaves permits down about 25% YOY, and at their lowest level since June 1997 (1.402 million).

While housing starts rose slightly last month, building permits fell sharply. That's the most important bit of data we got today because it points to a lower level of future construction activity. And no wonder: We have the largest glut of new and existing homes on the market ever. If we're going to work those inventories down, we're going to have to see less new home construction and more realistic pricing in the existing home market.

The details on CPI

Lots of data hitting the tape this morning. Let me try to tackle the June Consumer Price Index first:

* The overall CPI rose 0.2% from May, slightly above the 0.1% rise that was expected. That puts the year-over-year increase at 2.7%.

* The "core" CPI -- which excludes food an energy -- gained 0.2%, in line with expectations. The YOY increase came in at 2.2%.

* Services inflation continues to rise at a fairly hefty pace -- o.3% on the month and 3.4% YOY. Ditto for ex-energy services. There weren't a ton of standout categories. Apparel prices were down fairly sharply (-0.6%), while tobacco prices were the upside leader among broader categories at +0.5%.

The bottom line: Inflation remains above the Fed's target zone (1%-2% on the core CPI). It will likely stay that way due to the weak dollar, some pass-through of rising commodity prices, and other forces.

How to turn $1.5 billion into virtually zilch -- in just over six months!

You too can apparently turn $1.5 billion in investments into virtually nothing ... in just over six months! All you have to do is invest in complex, structured, high-risk mortgage securities that are so opaque no one really knows what they're worth -- until they try to sell.

That seems to be what happened at those infamous mortgage hedge funds run by Bear Stearns, judging from multiple media reports this morning.

Here are some details from the New York Times ...

"Bear Stearns told clients in its two battered hedge funds late yesterday that their investments, worth an estimated $1.5 billion at the end of 2006, are almost entirely gone. In phone calls to anxious investors, Bear Stearns brokers reported yesterday that May and June had been devastating months for the portfolios.

"The more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June, investors were told. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, which used extensive borrowings and assumed more risk, has no investor capital left, the firm said."

Here are a few from the Wall Street Journal ...

"Investors in two troubled Bear Stearns Cos. hedge funds that made big bets on subprime mortgages have been practically wiped out, the Wall Street firm said yesterday, in more evidence of the turmoil in this corner of the bond market.

"Bear said one of its funds was worth nothing and another worth less than a 10th of its value from a few months ago after its subprime trades went bad, according to a letter Bear circulated and to people briefed by the firm. The Wall Street investment bank -- known for its bond-trading savvy -- has had to put up $1.6 billion in rescue financing."

Here's another excerpt from the same WSJ piece:

"The net value of assets in Bear's highly indebted fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund, is wiped out, according to people familiar with the matter, who were briefed on the contents of a late-afternoon call with brokers. The net value of assets in its other, larger, less-leveraged fund is roughly 9% of the value at the end of March, these people said. The net-asset value represents the value of an investor's holdings after debts have been paid.

"The funds invested in mortgage-backed securities and collateralized-debt obligations, which are bundles of bonds. The funds also made other bets in the debt markets through various derivative investments.

"In March, before their sharp losses, the enhanced-leverage fund had $638 million in investor money, while the other fund had $925 million."

And here is still more color from AP:

"Bear Stearns Cos. told clients Tuesday that a meltdown in the subprime mortgage market has made the assets from two of its flagship hedge funds almost worthless.

"Both funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default. The assets in one of the funds are essentially worthless, while another is worth 9 percent of its value at the end of April, according to a document obtained by The Associated Press."

Swan Dive, Take Two -- NAHB index plunges

Wow -- The National Association of Home Builders index plunged by 4 points in July. The 24 reading, down from 28 in June, was far worse than the 27 expected. It's also the third-lowest reading on record, and the worst since January 1991.

All three sub-indices fell. The present home sales index dropped to 24 from 29. The index measuring expectations for future sales fell to 34 from 39. And the index measuring buyer traffic slumped to 19 from 22.

It’s not like we needed any more evidence the housing market is in disarray. But that’s what we got today in the form of dismal builder confidence figures. The fact of the matter is, we have too much housing supply and not enough housing demand. New home builders will have to cut back on production more aggressively, and existing home sellers will have to get their prices right, in order for us to work off the large supply glut we’re presently saddled with.

ABX swan dive ...

Incidentally, the so-called "ABX indices" that everyone follows so closely these days are plunging. These are the indices that track the value of credit default swaps on high-risk mortgage bonds. A declining index value means that market players are growing more afraid of mortgage defaults and subprime bond price declines.

I especially like the comments I've been getting in my email box from a small firm that follows the bonds closely. One sample:

"ABX BBB- 07-1 45 middle ........ also markets are such that one could drive a mack truck through them ...... trew them ....... in my best brooklynese!!"

For more details, you can check out this item from Realmoney.com or this story from Reuters.

An early look at June home sales in South FL

Waiting for the "official" Florida Association of Realtors' figures on June existing home sales? Me, too. Until then, let me give you an early peek at sales here in South Florida. A local real estate brokerage, Illustrated Properties, posts data on for-sale inventory, sales, and prices a few days before the official figures come out. The data never lines up precisely, but the general trends are pretty similar.

Anyway, the June figures (available here) that were just posted look pretty awful -- like the May numbers a month earlier. According to IPRE ...

* Sales plunged 69% from a year earlier -- to 710 units in June 2007 from 2,294 in the same month of 2006. That was also down ever so slightly from the May 2007 reading of 720.

* For-sale inventory rose 11.9% YOY to 24,830 from 22,194 a year ago. That's down a few units from the cycle peak of 24,852 in May 2007. At the current sales pace, that's good for 35 months worth of inventory. No surprise, then, that ...

* Median home prices dropped 4.3% YOY to $292,000 from $305,000.

Still waiting on that recovery ...

Speaking of inflation ...

This morning, we got the first of three monthly reports on inflation -- import/export prices. The report showed ...

* Overall import prices rose 1% in June, more than the 0.7% forecast. The prior month's 0.9% rise was revised up to 1.1%. On a year-over-year basis, import prices were up 2.3%, the most since March (2.8%), though clearly down from the high single-digit growth rates in 2004 and 2005.

* "Core" import prices, or those excluding petroleum, were up 0.2% on the month (and 2.6% YOY). That was the fourth monthly gain in a row, but a smaller magnitude rise than the 0.5% increase seen in May. Strip out all fuels, and you see prices were up 0.2% (and 2% YOY).

* Also worth noting: The cost of Chinese imports has risen three out of the last four months -- 0.3% in June, 0.3% in May and 0.2% in March. The cost of imports from other Asian countries has been climbing too. Is this a case of "Be careful what you wish for" with regards to the Chinese yuan? In other words, will our demands for the Chinese to let their currency rise come back to bite us in the form of higher inflation? Time will tell.

After initially rallying right at 8:30 (because retail sales data for June came in weak), bonds have reversed course. Long Bond futures prices were recently down 3/32, while 10-year yields were recently up 1.5 basis points. I continue to believe Treasuries are vulnerable and that a rise in 10-year yields to 5.5% is likely in the next couple of months. We'll see.

Fed taking some hits for its "core" obsession

Every single one of us who inhabits the real world knows that overall inflation has been a problem. Our daily budgets reflect it. We see it every day we fill up our gas tanks ... pay school tuition ... buy groceries, and more. Yet the Federal Reserve has steadfastly focused on "core" inflation the past few years. Now, it seems to be taking some flack for that approach.

San Francisco Fed President Janet Yellen was on the firing line yesterday, with some relatively tough questioning after a speech in Alaska. She deflected it, saying: "The focus on core is that is seems like it is a better predictor of the underlying trends that will effect total inflation going forward, not because that is the objective of policy." But I don't remember seeing so much focus on this conundrum before.

Meanwhile, in a separate speech in London, Bank of England Chief Economist Charles Bean said that targeting core inflation alone leads to "a risk that the resulting persistent swings in actual inflation will lead to inflation expectations becoming less well-anchored."

I will grant that SHORT-TERM volatility in inflation should be ignored. It makes perfect sense to discount a 10% or 20% spike in oil or gas prices in a given month if a hurricane strikes a bunch of oil platforms or causes a bunch of refinery shutdowns. Ditto for a regional drought that might cause crop to surge in the short-term, driving food prices higher.

But can anyone seriously look at the charts of futures prices for wheat ... corn ... oil ... gas ... soybeans ... or even lean hogs and make a case the long-term trend isn't higher? What about the grocery store price tags on milk, eggs, or my personal favorite -- Diet Coke? Prices have clearly been climbing, and with money growth surging and interest rates being held flat, we risk "accommodating" and cementing these price increases, therefore driving inflation higher over the longer term.

RealtyTrac: Slight foreclosure dip in June

We got a blip of good news on the foreclosure radar this morning with the latest RealtyTrac foreclosure figures. Filings dipped 6.5% to 164,644 in June from 176,137 in May. However, they were still up 86.7% from a year ago and the trend, as you can see in this chart, is clearly higher.

Some of the highest filing tallies by state: 38,801 in California, 21,035 in Florida, 11,879 in Ohio, and 10,092 in Michigan. On a filings-per-household basis, the worst readings were in Nevada (1 for every 175 households), California (1 per 315), Colorado (1 per 317), and Arizona (1 per 383).

NAR cutting their sales forecast ... again

Just FYI, the National Association of Realtors is cutting their 2007 and 2008 home sales forecasts ... again. As I chronicled a little while ago in this post, the chipper folks at the NAR have been hard at work slashing their expectations.

The group's 2007 forecast peaked at 6.44 million units in February. It then dropped to 6.42 million in March, 6.34 million in April, 6.29 million in May, 6.18 million in June, and now, 6.11 million in this just-released outlook. 2008 sales are now expected to be 6.37 million. That forecast has been cut four months in a row.

The scary truth about the subprime bond market

There's a lot of ink being spilled today about the meltdown in the markets yesterday. Stocks, high-risk bonds, the dollar -- they all got shellacked on fears of spillover from the subprime mortgage mess. I couldn't possibly link to all of the stories out there, but I wanted to share this one from Bloomberg. You simply can't sum up how ridiculous things are in the subprime mortgage bond market right now better than the two reporters on this story did ...

"On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn't what they get.

"As delinquencies on home loans to people with poor or meager credit surged to a 10-year high this year, no one buying, selling or rating the bonds collateralized by these bad debts bothered to quantify the losses. Now the bubble is bursting and there is no agreement on how much money has vanished: $52 billion, according to an estimate from Zurich-based Credit Suisse Group earlier this week that followed a $90 billion assessment from Frankfurt-based Deutsche Bank AG.

"Even the world's second-largest company by market value must 'triangulate' the price of an asset-backed bond when it gets bids from traders, said James Palmieri, who helps oversee $197 billion in investments at General Electric Co.'s Stamford, Connecticut-based GE Asset Management Inc.

Then there's this quote a bit farther down:

"One subprime mortgage bond, Structured Asset Investment Loan trust 2006-3 M7, is valued at about 91 cents on the dollar to yield 9.5 percent, according to the securities unit of Charlotte, North Carolina-based Wachovia Corp. Merrill Lynch in New York puts the price of the same security at 67 cents to yield 18 percent."

It's followed up by an even more ... er ... encouraging couple of paragraphs:

"At least a third of hedge funds that invest in asset-backed bonds pick and choose values for their investment that help mask wide swings in performance, according to a survey of 1,000 funds worldwide by Paris-based Riskdata, a risk management firm for money managers.

"'If you have five different brokers you will get five different quotes, so if you don't have an objective valuation process you can choose the quote which for you is the most interesting,' said Olivier Le Marois, chief executive officer of Riskdata. 'There's no consensus on where the market price is.'"

Are you freaking kidding me? If that doesn't speak to how messed up things are in mortgage finance land right now, I don't what does. Nobody seems to know what their holdings are worth, where the market is headed, and just how bad things will get. But I can tell you this -- everyone ... everyone ... should have seen this coming, given the deterioration in the housing market over the past 18 months.

Ben's take on inflation

The text of Fed Chairman Ben Bernanke's speech in Cambridge, Massachusetts has been released. Most of the early part of the speech deals with how keeping inflation low promotes healthy economic growth. Nothing new there. Next, Bernanke tackled the topic of inflation expectations. He asks the following rhetorically:

"Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank's ability to achieve price stability. But what do we mean, precisely, by "the state of inflation expectations"? How should we measure inflation expectations, and how should we use that information for forecasting and controlling inflation?"

He then goes on to say that long-run expectations can vary depending on economic developments and the way monetary policy is conducted. He cites studies that "find that the sensitivity of inflation to activity indicators is lower today than in the past" and "that the long-run effect on inflation of 'supply shocks,' such as changes in the price of oil, also appears to be lower than in the past."

Then he gets into the fun part -- the part where he addresses food and energy prices and the implications for core inflation. Have a read ...

"Similar logic explains the finding that inflation is less responsive than it used to be to changes in oil prices and other supply shocks. Certainly, increases in energy prices affect overall inflation in the short run because energy products such as gasoline are part of the consumer's basket and because energy costs loom large in the production of some goods and services. However, a one-off change in energy prices can translate into persistent inflation only if it leads to higher expected inflation and a consequent 'wage-price spiral.' With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices. A related implication is that, if inflation expectations are well anchored, changes in energy (and food) prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy.

"Although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored. A number of studies confirm that observation. For example, Gürkaynak, Sack, and Swanson (2005) found that long-run inflation expectations, as measured by the difference in yields between nominal and inflation-indexed bonds, move in response to news about the economy, rather than remaining unaffected. Levin, Natalucci, and Piger (2004) have shown that some survey measures of inflation expectations in the United States respond to recent changes in the actual rate of inflation, which would not be the case if expectations were perfectly anchored. Models of the term structure of interest rates better fit the data under the assumption that both inflation expectations and beliefs about the central bank's reaction function are evolving (Kozicki and Tinsley, 2001; Rudebusch and Wu, 2003; Cogley, 2005)."

Bernanke then goes on to post a bunch of questions to the academic community, whose general gist is "Help us figure out which measures of inflation expectations are the best?" After that, he talks a bunch about how the Fed tries to forecast inflation over the near-term and long-term.

All in all, it's pretty wonkish stuff -- interesting if you're a monetary policy nut, not so much if you're a trader or investor because the comments don't really directly address the current environment. We'll have to see if anything exciting comes out of the Q&A.

Incidentally, markets are basically unchanged from where they were before the text was released. Bond futures are up in price, down in yield, due to credit quality concerns, especially in housing and mortgage land. Stocks are down. And the dollar continues to get beaten like a rented mule.

Dollar in the dumps...

I hope you're not planning to travel out of the U.S. anytime soon. The dollar is setting a 26-year low against the British pound as I write ... the euro is setting an all-time high against the buck (it came into existence at the beginning of 1999) ... the Australian dollar is right around an 18-year high ... the Chinese yuan is setting a post-float high ... and even the lowly yen is rallying sharply.

Maybe my post about risk from earlier today was on to something. Can't wait to see what Gentle Ben has to say in a couple hours.

More housing slump fallout ...

Incidentally, both D.R. Horton (the second-largest U.S. home builder, per Bloomberg) and Home Depot (the world's largest home improvement retailer) are on the tape today warning about ugly market conditions and the impact on orders and profits.

D.R. Horton said net orders plunged 40 year-over-year in the fiscal third quarter ended June 30. The cancellation rate came in at 38% (up from 32% in the fiscal second quarter and around 29% a year earlier). Chairman Donald Horton didn't have much positive to say, either, giving the following description of the current environment:

"Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging. We adjusted our sales prices as selling conditions deteriorated, and we continue to react quickly to market dynamics."

Meanwhile, Home Depot said "we expect the housing market to remain challenging for the rest of 2007 and into 2008."

Needless to say, these are even more signs of the "contained-ness" of the housing slowdown.

The return of risk, redux

On June 22, I pointed out that "several measures of liquidity and risk appetite appear to be flashing yellow." In short, market volatility measures were holding steady at elevated levels despite strong global stock markets. The Blackstone IPO (perhaps a bellwether for the private equity boom/bubble) was proving to be a flop. The yield curve was steepening ... the commercial real estate equities were continuing to struggle ... and the junk bond market was starting to choke on all the issuance of super high-risk debt.

Have things changed since then? Not really. If anything, conditions have continued to deteriorate. Indeed, the Wall Street Journal has a story this morning about the awful recent performance in the junk bond market (It's having its worst run since 2005). Here's an excerpt:

"Prices for so-called junk, or high-yield, bonds have fallen in recent weeks, partly thanks to rising yields on safer bonds, like Treasurys. Investors are also pulling back from riskier bonds like these amid worries about the mortgage market and troubles at two Bear Stearns Cos. hedge funds.

"Money managers are also shying away from the slew of new junk bonds coming to the market. Just yesterday, meat-processing company Swift & Co. had to withdraw its $600 million-junk bond offering, the fifth such deal to have soured in the past two weeks."

Meanwhile, Bloomberg just ran a story pointing out how corporate bond risk is rising the most in four months amid concerns about corporate earnings and housing. The piece mentions how the cost of buying debt default protection in the credit default swaps market is on the rise.

And that CBOE OEX Volatility Index, or VXO? It's still creeping upwards, with a series of higher lows as shown in the chart above. If there's one thing that can throw a wrench in my forecast of higher interest rates, it's some sort of financial blow up. Are these indicators suggesting one is on its way? Too early to say, but definitely worth watching.

Quiet day on the rate front ...

There's not a heck of a lot going on in bond land today (small bounce in prices, small dip in yields) ahead of Fed Chairman Ben Bernanke's speech tomorrow at the National Bureau of Economic Research in Cambridge, Massachusetts. That's set for 1 p.m. We'll just have to see if any "tape bombs" come out of the prepared statement or the Q&A period afterward. Meanwhile, here's a link to that CNBC spot if you didn't catch it this morning.

CNBC stint on Monday

Sorry I was out of pocket yesterday, blogwise. I had a lot of things to get wrapped up for the week. But clearly, Friday's decent employment data helped pressure bond prices lower and interest rates higher, as I was expecting. The key now is whether we can break to new price lows and yield highs in the Treasury market -- and hold them.

If you happen to be up early on Monday, I'll be giving my take on the latest bond market action on CNBC's Squawk Box at 6:20 EST. As a sneak peek, I think four general forces are working to drive interest rates higher:

1) Rising foreign interest rates -- The European Central Bank kept its benchmark rate at 4% a couple of days ago, but signaled another hike is coming later this year, probably in September or October. The Bank of England just raised interest rates for the fifth time in less than a year to 5.75%. And other central banks, such as those in New Zealand and Australia, have also been tightening rates. So have policymakers in high-growth countries like China and India.

2) Strong economic data around the world -- Speaking of high growth, retail sales are rising at the fastest pace in three years in China ... household incomes have doubled in Brazil over the past couple of years ... and India’s economy is growing faster than 9%. Meanwhile, unemployment rates in countries like Canada and Australia are the lowest they’ve been in more than three decades.

3) Elevated inflation concerns -- While core inflation, as measured by the Personal Consumption Expenditures index excluding food and energy, has dipped below the Fed’s 2% upper boundary, overall inflation is rising. I mean, let’s be honest: Food and oil prices haven’t been "volatile." They’ve been basically going in one direction – up – for the past few years. Heck, oil prices are at a 10-month high above $72 per barrel and climbing.

Meanwhile, average hourly earnings were up 3.9% from a year ago in June (vs. estimates of a 3.7% rise). And the 10-year TIPS spread, which is the difference between yields on nominal 10-year notes and inflation protected ones has been widening little by little. It was recently 241 basis points, below its peak last May of 274 but up from the 226 low in January.

4) The falling dollar – This is another marginal negative for bonds. First, it drives up the cost of imports from abroad, adding to inflation pressures. Second, it finally seems to be encouraging foreign governments to look for other places to stash their reserves rather than just plow all that money into U.S. debt (which loses value in local currency terms when the dollar slumps).

Indeed, you’re seeing countries like China and Russia setting up sovereign investment funds. Those funds invest a portion of accumulated reserves into assets other than Treasuries, reducing demand and driving interest rates higher.

My latest interest rate thoughts ...

This Tuesday at 11:18 A.M., I sent an email to some colleagues with a subject line of "bond bounce over?" Here are a couple of excerpts:

"The bonds are getting whacked hard today, with the long bond recently down 15/32. I believe we have seen the end of the counter-trend rally off the low from several weeks ago."

"On a yield basis, here is a chart of the 10-year note. That blue line represents a weekly downtrend dating all the way back to 1994. We broke above it, pulled back to "test" that breakout, and I believe we’re going to shoot higher from here."

"Look for 5.5% on the 10-year Note in the coming weeks. Then I’ll reassess."

I've included an updated version of the chart I referenced. So far, so good, with the bonds having another nasty day today (long bond futures prices were recently off 24/32).

What might change my mind about the short-term direction of rates? Nasty employment data tomorrow, for one thing. Another subprime-fueled hedge fund meltdown, for another. But I think that over the intermediate-term, we're likely to see bond yields rise and bond prices fall due to rising global interest rates, relatively strong global economic growth, and still-elevated inflation pressures. As always, we'll see ...

Happy Fourth of July!

No posts today for the holiday. I hope everyone is eating their fill of hot dogs and having a few frosty beverages of their choice. Enjoy!

May pending home sales fall sharply

The National Association of Realtors just released figures on pending home sales in May. This is a leading indicator of existing home sales, because the figures track contract signings rather than contract closings. The details:

* Pending home sales dropped 3.5% in May from April. That's the fourth decline in the last five months and much worse than the 0.5% gain economists polled by Bloomberg had forecast.

* From a year ago, the seasonally adjusted pending sales index dropped 13.3%. The 97.7 reading in May was the lowest since the month of 9/11.

* Sales fell in two out of four regions -- down 8.9% in the Midwest and 7.6% in the South. They rose 3.8% in the Northeast and 5.6% in the West.

Today's pending home sales figures provide no evidence whatsoever of a rebound in housing. Sales fell for the fourth time in the past five months, versus expectations for a small gain. In fact, we haven't seen sales activity this low since September 2001, the month of the 9/11 attacks. Unless and until we work down home inventories, we see mortgage rates fall sharply, or we see prices drop low enough to entice buyers, home sales will remain muted.

ABA figures confirm delinquencies on the rise

The American Bankers Association produces a quarterly report on delinquency trends for several types of loan products. They include credit cards, direct auto loans (loans made through banks) and indirect auto loans (loans obtained through car dealers), and home equity loans and lines of credit. The latest figures for Q1 2007 were just released. They showed:

* The composite delinquency rate (for all eight types of closed-end consumer loans) rose to 2.42% from 2.23% in Q4 2006 and 1.94% in Q1 2006. That's the worst reading in almost six years -- since Q2 2001 (2.51%).

* The delinquency rate on home equity loans popped up to 2.15% from 1.92% in Q4 2006 and 1.94% a year earlier. That's the highest rate since Q3 2005 (2.33%).

* The DQ rate on home equity lines of credit rose to 0.60% from 0.57% in Q4 2006 and 0.55% in Q1 2006. That's the highest since Q2 2003 (0.63%).

* Direct auto loan delinquencies ticked lower, as did credit card delinquencies. But indirect auto loans showed deterioration, with the DQ rate there rising to 2.73% from 2.57% in Q4 2006 and 2.04% in Q1 2006. That's the worst performance for that category since Q2 1997 (2.74%).

These figures confirm what we already know from federal delinquency figures, the FDIC's Quarterly Banking Profile, and the Mortgage Bankers Association's numbers -- credit quality is worsening. The housing slump is a key factor:

1) It has a direct impact on home equity loan performance. Slumping home values leave more second mortgage borrowers "upside down" -- owing more on their mortgages than their homes are worth. Meanwhile, falling home sales lead to more seasoning of home equity loans. In other words, more borrowers are forced to stay put, rather than sell and pay off their home equity loans. That increases the length of time those loans are outstanding, and that tends to drive the delinquency rate higher.

2) The housing slump also an indirect impact on the performance of other loans. A major use of home equity loans over the past several years has been consumer debt refinancing. Borrowers have rolled credit card and auto loan balances into their home equity lines of credit and home equity loans in order to reduce their interest rates and monthly payments. As home prices slump, fewer borrowers can take advantage of that payment-reducing maneuver. So consumer loan delinquencies are likely to rise, especially if the employment situation worsens.

Dollar looking sickly...

It's a holiday shortened week, so maybe we shouldn't read too much into it. But the dollar is really taking it on the chin today. The euro is up by almost a cent ... the British pound is breaking out to a new 26-year high of 2.0163-dollars-to-every-1-pound ... and high-flying currencies like the Aussie dollar and New Zealand dollar are really surging (up by more than a percent each). The Chinese yuan has also set a new high against the buck.

Even the lowly Japanese yen is tacking on some gains, as you can see in the chart above (in this spot currency chart, a move down indicates the yen is gaining in value against the dollar). We're clearly at an important technical level ... the question now is whether the market holds.

What's prompting the dollar beating? Tough to say. It's not as if today's U.S. economic data was weak -- the ISM manufacturing index came in at 56 in June, up from 55 a month earlier. Economists expected no change from May, per Bloomberg. It's interesting to note that the dollar got creamed in the thin markets surrounding the Thanksgiving 2006 holiday, too.