• I am doing little.

Mr. Market has rallied smartly from this morning's lows.

I am doing little.

I am preparing to leave early, so I wanted to once again wish everyone a great holiday.

• The U.K. market is underperforming the S&P 500.

For those in the business media who have opined that the U.S. represents the best house in a bad neighborhood, I wanted to pass on "Fast Money's" Steve Cortes's chart, which shows the underperformance of the U.K. market relative to the S&P 500.

I would conlcude that there is more value (relatively speaking) away from the U.S. despite the consensus view that the U.S. has superior prospects. 

• I want to wish everyone a very Happy Fourth of July!

Since today is a short one, I wanted to wish a very Happy Fourth of July to all my friends, subscribers, contributors, editors and management of TST.

And for your viewing pleasure, a little Chicago.

• More comments from the real estate maven.

Here are more cautionary comments on housing from real estate maven Mark Hanson this morning:

7-2 No Doc / NINJA refi's are back beginning July 1 (The "Streamline Modification Initiative")

There are 54 million mortgage's on single family houses in the US. And over 10 MILLION of them-- that should have been extinguished giving the homeowners the opportunity to de-lever, raise capital, and eventually become boomerang buyers-- have been "tampered" with (relevered in such a way they make legacy exotic loans look sane) under the guise of "helping homeowners" since 2009.  Keeping millions of homeowners trapped 50% underwater in their houses, paying 65 cents of every 'gross' earnings dollar out to debt -- of which the mortgage is the lions' share -- doesn't seem like 'help' to me...well, I suppose it's huge 'help' to the banks' balance sheets.  (Note, millions of mods are where the lions' share of the missing housing "inventory" went. They also are where all the "shadow inventory" went..."Shadow Inventory" now has to include loan mod volume, as the likelihood of redefault is so great.  Moreover, these millions of 'underwater, over-levered, renters of their own house' are no longer part of the macro housing demand pool; a structural deformity in the US housing market equation nobody respects).

People say "banks aren't lending".  That's incorrect.Banks have created hundreds of billions in "new-vintage, higher-leverage, riskier-than-Subprime/Alt-A loans" (aka: loan mods).    Mods for homeowners that haven't made a payment in 2 years and featuring 2% interest only payments, 40-year terms, principal 'forbearance' creating huge balloons at the end of the term, and arrearage capitalization are the norm. The gov't has basically created a new-vintage Pay Option ARM for bad credit borrowers...loans so exotic they would make Angelo Mozillo blush. But unlike in 2006 when there was five payment "options", now there is only one...the lowest possible payment for the longest term that has ever been placed on residential real estate in the history of US mortgage lending.

In fact, of the 6.5 Million+ mods/workouts that stuck (of the 10 million+ "tamperings") banks were responsible for 80% under their various "proprietary" loan mod programs.  By contrast, the gov't HAMP program was of little benefit in the grand scheme of legacy, distressed borrower "re-leveraging".

But these bank "proprietary" mods -- not really "mods"at all, rather refi's for people who can't otherwise refi -- enabled banks to avoid foreclosures, bring bank loss reserves as income, and preserve millions and millions of worthless portfolio HELOCs and Second liens that would have ripped huge holes in balance sheets if foreclosures were allowed to continue unabated.

An important reminder on HELOCS...beginning this year is a WAVE of HELOC hard-recasting (that peaks out in 2015/16) when between 12 and 15 million HELOCs will go from easy interest-only payments to hard-core fully amortizing loans that pay off in 10 to 15 years. This will increase the monthly payment on the typical $80k loan by 200% to 300% over a single month based on today's rates.

Bottom Line:There is something terribly wrong with a mortgage banking system in which a perfect credit borrower gets a 4.5%, 30-year fixed mortgage rate today...and the deepest, most probing proctology exam of their lives during the underwriting process.  And a delinquent, underwater, over-levered, renter in their own homeis rewarded through a 2% interest only loan with 65% average debt-to-income ratios...with no qualification or appraisal necessary;  just make 3 payments on time and you get a loan!

As an example of how pervasive new-era, higher-leverage, worse-than-Subprime lending" (i.e., mortgage mods) have become, there have been roughly 6.5 million permanent loan mods granted in the past few years...coming into 2007 there were only about 4 million Subprime loans in existence.  In short, a brand-new super-exotic loan bubble has blown under everybody's noses.

I could never be outright bullish a sector that promotes bad behavior in such an open and large scale way. We have seen this movie before from 2003 to 2007. How is giving terrible credits the cheapest and easiest money under the name "loan mod" any different than under the names "alt-a" and "subprime"?

Perhaps back in 2009, loan mods to undo the predatory nature of the "2/28 Subprime loan" was a good idea. But they have morphed into new-vintage, high-leverage, extremely exotic refis that anybody stands a strong chance of getting simply by skipping three or more mortgage payments.

Just think for a moment if mods never morphed into the abortion they are today...millions of borrowers would be well on the road to de-leveraging, raising capital, and buying again; there would be plenty of housing supply for first-time buyers whose purchase volume is down over 50% from 2010 and are now being aced out by new-era "investors" paying cash;  P/E firms would have plenty of people which to rent houses; and the housing sector would be well on it's way to a "durable" recovery instead of on the verge of a incredible volatility, which will lead to a "triple-dip" sooner than later...much like when the Homebuyer Tax Credit sunsetted in 2010.

Highlights of the new NO-DOC / NINJA Refi ("Streamlined Modification Initiative")

- Beginning July 1, loans guaranteed or owned by Fannie Mae and Freddie Mac -- that are over 90-days past due -- are eligible for high-leverage loan "mods" simply if the homeowner shows a willingness and ability to make three on-time trial payments. (After not making payments for years, I am sure most have saved up a few month "rent".  That's of course unless they all spent it on new Ford trucks, BMW's, and various high-end consumer goods and electronics)

- All eligible borrowers have to do is make three on-time trial payments, the FHFA said. Once those payments are made, the loan modification takes permanent effect.

- Previously required document collection practices and extensive evaluations are no longer required, giving servicers the ability to execute the trial periods faster.

- Proof of distress is no longer initially required

Bottom line:A brand new, super exotic mortgage loan bubble -- larger than the legacy Subprime bubble -- has blown under everybody's' noses under the guise of 'helping" homeowners. In fact, loan mods prevent borrower de-leveraging and turn them into Zombie debt-slave prisoner renters in their own home. I constantly harp on the structural deformities of the US housing market due to negative equity;  "effective" negative equity;  insufficient income/credit needed to get a mortgage loan;  and millions of loan mods that have significantly and permanently altered the supply/demand dynamics of the US housing market by "killing off" all these potential repeat buyers who historically have controlled the market.

This housing market will never have a chance of a "escape velocity" or a "durable" recovery with over 50% of all mortgage'd homeowners existing as underwater, over-levered, Zombie renters of their own house.  As such, if not for the never-ending QE and yield chase trade that kicked off in earnest in 2011 forcing into the housing market new-era buy and rent/flip "investors" we would still be in a housing market depression. In other words, based on the historic fundamentals that drive long-term housing market expansion -- that's ex the QE inspired PE firm investor "trade" -- conditions are more conducive to contraction than growth.

• The Fed has already said too much and has been too transparent.

The Fed could be jammed if the economic data continues to come in OK (even on the surface).

Oddly, a weak jobs report may be what the Fed is hoping for. With a strong number, how exactly can it do anything but taper and maintain any credibility?

The Fed has already said too much and has been too transparent.

Fed Chair Bernanke being "puzzled" by the interest rate spike because he placed more value in the stock of bonds held by the Fed then flow and momentum forces just shows how much of an academic he truly is. It is akin to a trader staring "puzzled" at his screens over the rise in Apple (AAPL) to $700, Tesla (TSLA) to $120, General Electric's (GE) crash below $7 bucks, Greece trading like a AAA credit, etc., and then running to the library to try to understand it from an academic perspective.

Again, the addiction to and dependence on low rates is unprecedented, because this low-rate regime has been unprecedented in the duration and magnitude of how easy money has been. Governments all over the world need rates way below historic levels to finance themselves, corporations need rates way below historic levels to keep margins at 60-year highs and profits strong, consumers need rates at historic lows to continue their spending, and housing needs rates at historic lows to continue to rebound.

Beware of talking heads evaluating 2.50% on 10-years against historical levels.

• More from Boockvar.

Is that all there is, is that all there is

If that's all there is my friends, then let's keep dancing

Let's break out the booze and have a ball

If that's all there is.

-- Peggy Lee, "Is That All There Is?"

More from Morgan Stanley's Peter Boockvar on the ecnomic data:

The ISM services index for June at 52.2 was weaker than expectations of 54.0, down from 53.7 in May and the weakest since February 2010. Business Activity softened to 51.7 from 56.5. Most relevant though for Friday's payroll report and the Fed, the Employment component rose to 54.7 from 50.1, a 4 month high. Employment though is a lagging indicator and of particular note, New Orders fell 5.2 pts to 50.8, the lowest since July '09. Backlogs held steady, rising .5 pt to 52.0 and just shy of the 6 month average. In contrast to the lift in export orders in Monday's ISM manufacturing report, export orders of services fell 2.5 pts to 47.5, matching the weakest since Aug '10. Prices Paid rose 1.4 pts to 52.5, a 3 month high. While the headline number reflected moderation, of the 18 industries surveyed, 14 did see growth but not by much as the ISM said this about respondents' comments, they "are mixed about business conditions depending upon the industry and company. The majority indicate that growth has been slow and incremental; however, it is still better year over year."

Bottom line, an economy that is growing less than 2% seems to match these comments in that the US economy is growing but in a below potential, mediocre fashion. Instead of a t-shirt reading, "my parents went to so and so and all I got was this lousy t-shirt," it should read "the Federal Reserve has printed $2.5T and all we got was this mediocre economy."

• At $17.57.

I am pressing my ProShares UltraShort Russell2000 (TWM) long at $17.57 now.

• Markets are starting to pull away from policy, and natural price discovery likely lies ahead.

It is my view that a growing number of Fed heads now believe that quantitative easing is either not working or is having little incremental beneficial impact on the domestic economy.

As much as the Fed might hate to admit it, the evidence is accumulating that the costs of QE are greater than its benefits.

Though the economic data is mixed, the voices within in the Fed are growing louder with respect to tapering QE.

That said:

• Many Fed members are now fearful that the damage of stopping QE could be greater than the damage of continuing QE even though it is a bad thing (especially compared to never having done it in first place). Ergo, they seem to have concluded that QE is a negative, but stopping QE now that it in place is a greater negative.
• Markets (bonds and stocks) reacted violently at the mere hint that tapering might begin, and it has likely spooked them (thus, the Fed fiesta that backtracked on Bernanke's comments).
• As an example, just look at the climb in mortgage rates on a hint of tapering and a loss of market "artificiality." (Note: The percentage rate rise is one of the largest increases in history over such a brief period of time.)
  
  

  Mortgage Rates

  Source: Bloomberg

  View Chart »View in New Window »

• Some are spooked about a similar reaction from the markets as occurred in 1987 when rates were raised, which would be terribly embarrassing for them (even though after that market crash, things moved steadily up and to the right).
• It is my view that the Fed and market participants have little clue about the degree to which the economy is addicted to low interest rates.
• Finally, it is increasingly clear that the Fed doesn't control the market; the market controls the Fed.

Bottom line: The Fed and the markets might now be stuck between a rock and a hard place. The Fed, in particular, has put itself in the worst possible box and has no idea what to do, which is why we have received all the garbled and inconsistent communication from its members.

For now, the markets continue to be artificial (though less so than a month ago), with limited discovery in the prices of many asset classes owing to the very visible hand of monetary policy. But, in the fullness of time (probably less than more), I see more natural discovery as policy changes or the markets rebel.

That hand of policy, I fear, is increasingly heavy, sloppy, arrogant, naive and academic. The hand might even be politicized.

So what do you do as a policymaker when what you are doing is really bad and stopping is really bad? 

A rock and a hard place, I tell ya, as it is likely that market turbulence lies ahead.

Err on the side of conservatism.

• Here is his take.

Morgan Stanley's Peter Boockvar eloquently and in a detailed manner parses today's economic data:

ADP said 188k private sector net jobs were created in June, 28k higher than expected and an improvement from the 134k that were added in May. It is the most since February and brings the year to date average to 163k but remains at a still punk rate historically speaking. In contrast to the drop below 50 in the ISM manufacturing index, ADP said 1k manufacturing jobs were added. Also of note, 21k construction jobs were created, the most since Jan with housing driving the gain. Small businesses (1-49 employees) added 84k of the 188k jobs and will likely very much appreciate the news today that the ACA will not impose penalties until 2015 instead of 2014 for those not covered. The overall service sector made up 161k of the 188k job gains.

Bottom line, the improvement in the private sector part of the labor market is encouraging but the rate of gains still remain only decent, not great. In terms of the market's response, Friday's Payroll will matter much more (even though it will get revised 3 more times) as the two surveys have shown plenty wide deviations in some months. As stated, ADP said the average ytd job gain is 163k vs the BLS that said its 194k for the 1st 5 months of 2013. With respect to the Fed, their new bar is around 200k and the BLS has us close to it. Friday's private sector estimate is currently 175k.  

Initial Jobless Claims totaled 343k, about in line with expectations of 345k vs 348k last week which was revised up by 2k. This leaves the 4 week average unchanged at 346k, just shy of the lowest since Feb '08. Delayed by a week, Continuing Claims fell by 54k and delayed by two weeks, Extended Benefits fell by 39k. Bottom line, whatever the exact pace at this point, the US labor market continues to add enough jobs per month that the Federal Reserve is finally asking itself whether full speed ahead with electronic money printing is proper policy. Unfortunately for them and us, the road has frozen over underneath them so any type of slowdown will still cause the car to skid. The Fed is stuck with QE and will continue in some form or fashion well into 2014.

Lastly, the Trade Deficit in May widened to $45B from $40.1B and above the estimate of $40.1B. Annualized, this may reduce Q2 GDP estimates by .3-.4 pp all else equal as exports fell .3% while imports gained 1.9% led by a rise in petro imports.

• Let's take a peek at overnight and early market action in a number of asset classes.

Oh, somewhere in this favored land the sun is shining bright;

The band is playing somewhere, and somewhere hearts are light,

And somewhere men are laughing, and somewhere children shout;

But there is no joy in Mudville - mighty Casey has struck out.

-- Ernest Lawrence Thayer, "Casey at the Bat"

There is little joy in Mudville, as many of the mighty global markets -- just like the New York Yankees and mighty Casey -- are striking out.

• S&P futures -9;
• Nikkei - (the June services PMI fell by 2.7 points);
• European markets -;
• euro -;
• crude +$1.60 (at $101.10, an emerging headwind);
• gold +$3; and
• the 10-year U.S. note yields 2.44% (down by 3 basis points).

Worth mentioning:

• I continue to be net short stocks -- SPDR S&P 500 ETF Trust (SPY) is threatening to breach $160 this a.m. -- and long bonds via iShares Barclays 20+ Year Treasury Bond Fund (TLT). (Note: With the 3-basis-point decline in the 10-year yield, TLT is trading over $111 this morning.)
• Yesterday's market action, up in the early going and down in the late going, resembled the prior's day loss of momentum. Again, the character of the market, despite the recent rise from a week ago Monday, seems to be changing.
• I would observe that the aforementioned rally got the believers out in the business media again bullish over the past few days. This is never a good sign!
• Speaking of media, CNBC's ratings plunge. This is in keeping with my thesis that the retail investor will not rotate out of bonds and into stocks given the weakening and screwflation of the middle class. Yield hounds will likely seek the higher recent yields in an asset class that is still considered safe relative to equities.
• The perma-bulls glommed on to the view, late in the day, that a delay in the implementation of certain provisions of the Affordable Care Act would buoy stocks today. Wrong -- at least based on the drop in futures.
• Trade like an Egyptian? While Egypt was yesterday's excuse du jour, deteriortating technicals (1624 resistance in the S&P), the Portugal train wreck and possibly more restrictive bank capital rules could have been the causes of afternoon market weakness. On the latter point, Barclays (BCS), Deutsche Bank (DB) and Credit Suisse (CS) had their ratings lowered in the face of the new capital rules and business headwinds.
• In "10 Risks We Face," I mentioned a number of troublesome parts of the world where there is social/political unrest (e.g., North Korea, Syria, Egypt, etc.). Add Portugal to my list, the government of which is splintering as the citizens rebel against austerity. (Portugal's 10-year Treasuries yielded 5.5% in late May and are currently yielding 7.8%). Egypt's conflict is raising oil prices to over $101 from just $93 two weeks ago.
• Higher energy prices are a new emerging market headwind. An all-time high in electricity prices was reached in the U.S. in May.
• My portfolio is structured (in net exposure and in terms of individual names such as the life insurance stocks) in the anticipation of slowing global growth and lower interest rates. In support of this positioning, the Empire ISM dropped from 54.4 to 47.0, the sharpest drop in over four years. This morning, mortgage applications and refinancings fell sharply.
• China's economic data continues to be troublesome and in support also of slowing global growth portfolio posture. China's June non-manufacturing index came in at 53.9 vs. 54.3 in May. The new orders sub-index was 50.5, the lowest level since November 2008. The current manufacturing reading is the lowest since September 2012 and is one of several metrics that show a slowing China economy. (It is also likely overstating China's growth.) More and more, observers are talking about decoupling -- China's market is -10% compared to S&P of +13% year-to-date. I don't buy it for a minute! No country is an island -- OK, so a lot are (geographically speaking), but you catch my (metaphorical) drift!
• The June Eurozone Composite PMI (48.7 vs. 48.9) and Eurozone Services PMI (48.3 vs. 48.6) both came roughly inline with expectations. German Services PMI (50.4 vs. 51.3) came in lighter than expected while French Services PMI was a touch better (47.2 vs. 46.5).
• Greece remains the weakest link in Europe.
• Auto stocks rallied on better monthly sales. But I would caution that June's better data was a function of increased incentives, cheap financing and robusttruck sales.
• Apple (AAPL) bounced for the second consecutive day. I regard this as a dead cat and would pare off positions on any further strength as my channel checks remain poor. An Apple/Time Warner (TWX) deal is closer at hand
• My new favorite, Altisource Residential (RESI), did well on Tuesday. I am a $17 or lower buyer.
• Microsoft (MSFT) is considering restructuring. 
• Pimco is being disintermediated. 
• The ECB and BOE meet tomorrow and are likely to stay on hold.
• The next BOJ decision is July 11.
• Watch out, cousin Sandy Koufax! Here comes Homer Bailey from the Cincinnati Reds.

In the media: Great segment on "Mad Money" with Paychex (PAYX) CEO -- job creation remains sluggish relative to past recoveries.

Expected economic data (consensus estimates in parentheses):

• ADP employment change (160,000);
• trade deficit ($40.1 billion);
• initial jobless claims (345,000), continuing claims (2.96 million); and
• ISM non-manufacturing (54.0).