Bad News, No Bears

Quite a day for new records, wouldn't you say? Only hours after Citigroup (NYSE: C  ) announced it would see earnings tank 60%, and the Institute of Supply Management announced that manufacturing growth had slowed, the markets hit new highs. Either the Drug Enforcement Agency is torching bales of confiscated Thai Stick upwind from Wall Street's trading desks, or everyone seems to believe that this bad news will bring about another rate cut.

Problem is, that looks less and less like it would matter. It's the housing, silly.

UBS (NYSE: UBS  ) is up more than 3% after announcing more than $3.4 billion in bad-mortgage write-offs, costly mistakes that will roll the bank into the red for the first time in nearly a decade. The FDIC actually shut down NetBank, and ran it into bankruptcy, because of its appalling level of mortgage defaults.

These are just the latest symptoms of a popping housing bubble, the collapse of which is sucking the wind out of what looks, in retrospect, like an economy built too much on the "greater fool" system of real estate. Homebuilders like Pulte Homes (NYSE: PHM  ) , KB Home (NYSE: KBH  ) , and D.R. Horton (NYSE: DHI  ) have reported miserable earnings and no end to the pain, but even these stocks are getting a reprieve.

If all is as it appears, and the lofty "growth" of the past few years was too dependent on house flipping, home building, and home equity withdrawals, there's not much hope for the longevity of the current party. Those soft home sales and bank-busting write-downs aren't a response to interest-rate problems -- they're a toppling house of cards, the result of unaffordable homes, bad lending, and the lack of a market for all that lousy real-estate-backed paper.