Phony mortgage default rates---The media and housing experts will trumpet how low the mortgage default rates are by historical standards. This is misleading. The refinancing boom has masked the true underlying trouble many borrowers are in. After all, when you refinance out of a loan in default, or sell a home with a mortgage in default, that defauted loan is removed from the statistics in favor of a new fresh up to date loan, and so on. This game of mortgage musical chairs will soon play itself out as climbing interest rates, slow down the mortgage origination process. When the music finally grinds to a halt, then people will actually have to keep their payments up to date with (here's a novel idea) "Their Own Money!!" Only then will we see historic high mortgage default rates.

Today, the NYSE had more 52 weeks lows than 52 week highs. I can't remember the last time this has happened. Gas prices are above $2 per gallon; 30 yr mortgage rates are at 6 months highs over 6% and Google has announced a $2.7 billion offering. All these factors weigh heavily on the market. The failure of the market to rally at the end of the month is further bad news. Today, fund managers who have to be invested were forced to hide in GE, while dumping all small cap and mid cap stocks.

Look out Below!!! We are heading into the mean season, the historically week period for stock prices (May to October). All the last minute IRA deposits have been sucked up by the funds. Where will the money come from for the new IPO's???? With interest rates trending up, oil prices trending up and an uncertain outcome of the Presidential election in November, the market is dazed and confused as it should be.

If you don't think the real estate market is not at the top and at the verge of a long term decline, just notice the popularity of Donald Trump. He is everywhere and the media profiles are so out there you would have to be in a cave not to notice. Does the media flock to Trump at the bottom of the real estate market? No! It all comes out at the top!!

Everything is rallying, the Dow and S&P are at 2 year highs, there were over 300 new highs on the NYSE and 2 new lows--MAT and KSS, 2 stocks you definitely do not want to own. Although some moron will go on CNBC soon and tell you what a great retail stock KSS is---Wall Street has been touting Kohls for years, never a negative thing said....What crap analysts are!

Its the last month of an up year, the first up year in three. Money managers want their bonuses. So December is playing out this way--The biggest winners of the year, are getting hammered with profit taking. Look at the Chinese stocks (CYD for example) also stocks like, SNDK, LEXR, CECO, UPOX are getting slammed while the losers and small stocks are rallying. Sort of the "January effect" in December this year. Sell the winners and pick up some dreck like AWE, AETC, for last few weeks of the year.

$32 Billion flowed into equity mutual funds in the past 15 days, the greatest increase since February 2000, one month prior to the all time high of the stock market. Flow of funds are always the largest at the end of the move. Be very, very careful.

The next big mania in stocks—China. In the next few years, hundreds if not thousands of new IPO’s will come to the market as Chinese ADR’s. At first, the supply of available companies will be small, causing the stocks to shoot straight up. Mutual funds that invest in China will become the hot funds. Chinese stocks will have internet like valuations as analysts try to justify the run-up using “new era” analysis.

Then sometime in late 2006 Time Magazine will declare some Chinese entrepreneur as its Person of the Year. Months later the bubble will burst when the greedy discover that the “emperor has no clothes”; that the valuations were based upon fuzzy Chinese accounting; that there really weren’t any earnings. Sound familiar? The more things change, the more they stay the same

The risk reward ratio for Eastman Kodak (EK) is now 6 to 1 in favor of those willing to go long. In the next 18-36 months there is 5 to 6 points risk on the downside, and the potential of up to 30 points or more on the upside. I believe this is a risk well taken. And the stock still pays a 2% dividend.

9000 on the Dow is the last important support area, if this level is breached on a closing basis, Look out below! Interest rate update---- the 10 yr. bond yield has gone to 4.5% since our last commentary in July when it was 4.17%. The rate trend has reversed from down to up. Obviously the rate has gone up too much too fast, but the on balance trend in interest rates is now up. Homebuyers beware.

We landed on S&P 965 yesterday! This is support. But we got there on just the third trading day of the month. Therefore, one can only conclude, there is no juice in this market. The players are at the beach and they have taken their money with them. Be very careful. You can cover some of your shorts here and nibble on the long side, but doing nothing is probably the best advice in the month of August.

Follow up on COCO- we never got our short off as the stock never did break down at 44. It is still on our short radar list, but we do not invent trades! We let the market come to us. Not trading is a decision too, just as buy and sell are.

The mortgage refinance boom is over. If you did not refinance your mortgage its too late. The housing and mortgage companies will start to roll over and die. Look out below! Since our lst post on this subject on June 21, the 10 T-Bill (which mortgage rates are based) has gone up over 1% from a low of 3.09 to over 4.17% today. This is a tremendous move in a one month period of time. People dont even realize this and they will be shocked when they find out they did not lock in the rate at the time of their application.

Back to the stock market correction---Key support on the S&P exists in the 965 to 975 area. The Nasdaq can fall to 1600. Once we are there it will be the moment of truth, ie. is this a pullback with a great buying opportunity, or is it the next leg of the bear market. We are watching this very closely and once the evidence points overwhelmingly to one side of this argument, we will let everyone know.

We are in a correction as we have previously pointed out. The S&P has come in to the 975 level. Because we are near the end of the month, now is a good time to cover some shorts for profit taking, in anticipation of a month ending rally.

Mortgage rates made 46 year lows last week, I believe that is the end of the low mortgage rate cycle for now. Stay away from all real estate related stocks, Homebuilders, Mortgage Lenders and Title Insurance Companies. Look to establish short positions in these sectors. The stock market correction/pullback/reversal is upon us. There may be end of the quarter strength but this is fake, and unsustainable. Look to sell into strength. There will be better prices ahead to buy. Dont turn profits into losses.

Nice article this weekend on security stocks in Barron's. Portfolio pick KROL was mentioned favorably.

The market failed miserably today to follow through. This suggests that there will be a pullback to price levels that are worth waiting for. Wait until the S&P gets back to the 965-970 support area. This is a good area to buy stocks and cover any shorts. This is a good area to be long for the end of the month, end of the quarter rally later this month.

The S&P Level was surpassed today on a closing basis; same for the Nasdaq, almost for the Dow but not quite. Friday the 13th will tell all. A strong Friday and the market will stay strong until the end of the month which is also the end of the quarter. At the end of the quarter, the funds mark up the stocks to pad their results.

We took a 20% profit in SNE, and a 40% profit in GLW. So our model portfolio now consists of Short COCO-to be initiated this week; Long KROL@23.75, current price $23.89-hold; Long AETC@$2, current price $2.20; Long LEXR@$6.50, current price $7.97-Hold. Everything else in cash on the sidelines waiting for the market to come to us.

We are adding a new short to our list COCO- Corinthian Colleges, an online educational service, a stellar performer that looks tired. Sell short below 44.