Late Night With The Greek - Sometimes Bad Gets Worse

Another day, another depressant... Tuesday night, we discovered Beazer Homes (BZH) was being investigated by four different government agencies. That's a good starter for an evening of nightmares! Well, we knew the witch hunt had begun, so we should have expected this. You see, the drunken excesses of the housing party sprouted lenders galore. Heck, even WalMart was hoping to start up a lending unit it could carve some space for within its stores. A couple more years of the housing blast and, who knows, maybe we would have seen S&Ls in churches, or even a bank on a plane! Everybody was lending, and now everybody wants out.

GM sold off a big stake of GMAC at just the right time, and now Morgan Stanley wants to spin off its Discovery Card unit. Despite rumors that New Century may be days from bankruptcy, investment banks are buying subprime assets at pennies on the dollar, and hedge funds are receiving warrants and steep interest rates for lines of credit, keeping many players afloat. Now Beazer is being investigated, and Herb Greenberg reported today that several other home builders bear that same investigation risk related to lending activity.

Last month, the January durable goods orders report shook the very foundation of the market, followed by the sharp revision lower of Q4 GDP. Today, January's durable goods figure was revised to an even deeper level of concern, while the February report also disappointed the market. Meanwhile, Ben Bernanke told politicians in Washington today that he had not removed the Fed's inflation bias, which was the illusory driver of the market's rise last week.

All this bad news is hard to ignore. I see too many market enthusiasts reaching for the record of historic long-term stock gains for comfort, but that does not do anybody any good who is watching equity disappear. We are not yet at the point of inflection, in my opinion, and as I suggested months ago, I would be underweight the financial sector. It seems clear to me that the lending mess is spreading, and it's only a matter of time before traditional lenders like Wachovia (WB), Washington Mutual (WM) and Indymac (NDE) begin to report more significant deterioration. At that point, consumer confidence does not seem likely to hold up, and consumer spending should take a step back. At the same time, inflation staves off the Fed from acting swiftly to rescue the marketplace. And all this is happening just as we prepare for war with one of the world's most important suppliers of oil. I respect Cramer, but I think he, like many of the people too close to the situation are victims of history this time around. Things don't always happen like they did in the past. The market is dynamic, and we have to recognize when fundamental factors are changing. Rising food prices is one of those dynamic changes unrelated to seasonal or cyclical factors, but directly related to long-term shifts in resource usage and demand.

I still like Russian energy firms here if you're looking for medium to long term ideas in the sector. The Russians are positioning themselves for a meaningful shift in supply sources that could result from conflict with Iran. It seems clear that the U.S. will attempt to render Iran impotent militarily as quickly as possible, but we believe Iran will cause some damage to Saudi, and/or Kuwaiti and Iraqi facilities, driving oil prices higher than most anticipate. Russian resources stand to benefit significantly. Putin has been actively working to secure new deals with China this week, and Bulgaria, Italy and Greece last week.

Tomorrow:

Further revision of Q4 GDP is planned for report Thursday, but no change is expected from the last revision downward to 2.2% growth. Richmond Fed President Jeffrey Lacker will address an evening audience on inflation and unemployment. Remember, he's the guy who was calling for the Fed to raise interest rates over the past year, so don't expect a burst of sunshine from Jeff.

Brocade (BRCD) is scheduled to meet with analysts on Thursday, and earnings reports are expected from Carmax, A.G. Edwards, Family Dollar Stores, Solectron Corp., Worthington Industries, Stride Rite Corp., and The Finish Line. Cramer recommended Brocade ahead of this meeting, anticipating a revision of guidance higher. Brocade gapped higher on Monday as a result, but has since drifted back to near where it closed on Friday. Best wishes and sweet dreams folks, and don't go naked here, it's too darn cold out there.

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