In what could be a a key ruling for those of us hoping to learn more about shady subprime lending practices, a bankruptcy judge has given New Century Financial until February 6 to turn over a report of an investigation into the firm's cash handling practices to bankruptcy monitors.

Michael Missal was appointed by judge Kevin Carey to look into the accounting mistakes and/or fraud that led the firm to file false financial statement with the SEC in 2005 and 2006. According to the AP, "That report has yet to be filed. Missal said that continued foot-dragging by the defunct lender, former leaders and accounting firm KPMG will hold it up until March."

However, he has filed the report on possible cash mishandling, but it has not been made public at the request of New Century.

The holiday season is upon us and that translates to shopping season. Generally speaking, I hate shopping and refrain from getting anywhere near a shopping mall or mingling with all the shop-o-holics. However, shopping for stocks is different and it is always the season for that.

Finding the best stock values for next year would be a great gift for everyone that is paying attention to my ramblings, that is, if I am able to maintain my track record. This mission was first shared in Serious Money: Hot stocks for a cool year -- finding 8 for 2008. The heart of the story, the possible stocks, are posted below again, because this is a running story. I have bolded the new info as the story builds and I examine things more closely. But before we get to that review I am adding two companies.

The first to be added, and a candidate that has a good chance to be included in the final eight is Newcastle Investment Corp (NYSE: NCT). For the detailed review read yesterday's story Chasing Value: Newcastle's 21.9% yield too good to be true?. I will summarize here by letting you know, I did what homework I could as well as check out NCT's recent conference call. This company has averaged an 8.8% yield over the last five years. However, today because the stock is now a third of it's recent price the yield has jumped to 21.9%. Newcastle is standing by this dividend. Actually I think they have to because REITS are required to pay out most of their profits and they have earned 23% over the last fiscal year.

The stock is down because the underlying value of the collateral has gone soft in some cases, but mostly they have fallen victim to the generally poor market for various classes of loan packages, be they Alt-A, sub-prime CDO's, or uncle Joe's handshake. That said, NCT's cash flow seems fine, it only has 10% of its portfolio in residential real estate and of that they claim to have a 60 day delinquency rate of less than 1%. NCT also expects $1 billion of loan repayments over the next year. The PEG ratio is 0.15 and they are trading at a book value of 0.74. At the conference call they claimed a book value after being marked-to-market of $15 to $16 a share. This is a strong value proposition.

As reported on Engadget yesterday, Microsoft Corp. (NASDAQ: MSFT) is set to launch a newer, slimmer Zune digital media player in November. It's adding two new products to the Zune ecosystem as well, both of which are based on flash memory instead of using hard drives. In essence, Microsoft is trying to catch up, once again, to Apple, Inc.'s (NASDAQ: AAPL) iPod lineup, the most recent of which was announced and subsequently launched about a month ago.

Microsoft's more fascinating products out of the new lineup are the slim, flash memory-based devices. These new Zunes will come in several colors and memory capacities, with a 4-gigabyte version selling for $150 and an 8-gigabyte version running at $200. These are the exact same price point Apple has on its new iPod nano products.

Microsoft is touting the term "Zune" as more than just about the player devices themselves, but is trying to market the brand in a way similar to the iTunes atmosphere most iPod owners use to download music, movies, TV shows, podcasts and other content. Microsoft is doing one thing different, though -- it's adding a "social network" concept to the Zune atmosphere and pushing that concept with built-in wireless internet capability on all new players. Also, the Redmond giant is relaxing some of the song-sharing restrictions that have hampered wireless networking capabilities in the first generation of Zune players released last year. The large question is this: will the Zune ever be able to compete with the iPod, on any level and at any price? Round two is about to begin.

Stock futures are higher in early morning trading indicating a similar start for stock markets as tensions with Iran are believed to be easing, automakers are due to report March sales and subprime mortgage market is still making headlines.

Oil prices eased today as the market believes tensions between Iran and the UK over the 15 captured sailors are easing despite Blair saying the next two days are "fairly critical." Iranian officials called for an end to "the language of force," also saying there's no need for the sailors to stand trial.

While traders will keep watching the geopolitical situation closely, they will also monitor throughout the day two other main subjects: auto and truck sales and the subprime mortgage.

Not a day after New Century Financial Corp. (NYSE: NEW) filed for bankruptcy affecting trade on many financial institution companies yesterday, accounting firm Grant Thornton resigned as auditor for two troubled subprime lenders Accredited Home Lenders Holding Co. (NASDAQ: LEND) and Fremont General Corp. (NYSE: FMT) because "they no longer meet our requirements for client acceptance," the auditor said Monday.
Moody's Investors Service plans to cut the credit ratings on 40 to 50 banks in Europe and North America after the current rating system has been criticized. I'm sure new rating on subprime lenders will further rattle the industry.
Last, H&R Block Inc. (NYSE: HRB) is expected to shortly announce the divestiture of its Option One Mortgage Corp. unit.

Before noon, usually, automakers are expected to report March sales. The Big Three sales are expected to decline with Ford Motor Co. (NYSE: F) possibly posting an 8% drop while Toyota Motor Corp. (NYSE: TM) reporting a 9% gain over last year. The other Japanese car makers are also expected to post gains.

Overseas, Asian stock markets closed higher and European markets are trading higher as well. The Financial Times reports that for the first time since World War I, European markets exceed the value of US markets.

Company news coming up next.

MAJOR PAPERS:

• The Wall Street Journal reported that New Century Financial Corporation (OTC: NEWC) is expected to announce as soon as today that it is filing for bankruptcy projection.
• The Wall Street Journal reported that EMI Group plc (OTC: EMIPY) will hold a special media event on Monday with Apple Inc's (NASDAQ: AAPL) CEO Steve Jobs as its special guest, fueling speculation that EMI will sell music without anti-piracy software.
• The Financial Times reported that the U.S. and South Korea said they had agreed on the terms of a landmark free trade deal which will boost trade by as much as $20B a year.
• The Financial Times reported that French stock market regulators are looking into unusual share price movements in France Telecom ADS (NYSE: FTE) and a few other CAC40 stocks, as there is concern that unknown forces could be profiting from false rumors and speculation in the stocks.

OTHER PAPERS:

• The U.K. Times has learned that GlaxoSmithKline plc ADR (NYSE: GSK) is in talks with the World Health Organization, or WHO, over a proposal for a subsidized mass avian flu vaccine for developing countries.

WEBSITES:

• According to an internal memo obtained by SUSE-IRC.org, Microsoft Corporation (NASDAQ: MSFT) is in talks to acquire Novell Inc (NASDAQ: NOVL).

New Century Financial Corporation (OTC: NEWC) is a stock to stay away from. However, looking into what is going on at this mortgage provider can teach investors how the industry works and possibly how to play an industry upturn when it occurs.

New Century is a subprime mortgage loan originator, meaning New Century underwrites mortgages that are provided to home buyers.

In 2006, New Century underwrote $60 billion in mortgages, a large number. To buy these mortgages and package them to be securitized, New Century needs large lines of credits from big banks. However, last week, their bankers withdrew their lines of credit, so they cannot underwrite any new mortgages. Which is fine as long as they can profitable sell the mortgages they still have to place.

However, there is one more catch. These subprime mortgages all have contracts which forces New Century to take back mortgages that go into early default. With short-term interest rates having shot up the past few years, more mortgages are going into early default and are being pushed back to New Century, creating a problem for this company.

New Century's creditors currently want $8.4 billion in cash back for loans provided due in part because of early prepayment defaults. This $8.4 billion loan is collateralized by $9.0 billion in mortgages. So there is serious collateral. However, traders are using the current tight liquidity conditions and concerns about higher early prepayment defaults to place New Century in a difficult liquidity situation.

But, at the end of day, there are real assets collateralizing these bank loans. The questions are how bad the early prepayment default rates are, how much and how quickly do the banks want their loans back and how much pressure traders will place on mortgage pricing in the market.

In the collapse of the subprime credit card and the subprime auto businesses, companies stayed afloat by large investors willing to put up a lot of cash to recapitalize the company. When this happened, investors who purchased the stocks of these companies post-recap made a lot of money.

Wait for these companies to complete large equity recaps as a sign to start looking at these stocks. Then there might be some money to be made without taking a lot of risk.

In the U.S. markets this morning, traders are faced with declines in Asia and Europe. Bloomberg reports that MSCI's Asia-Pacific Index fell 2.4%, its steepest slide since March 5. Japan's Nikkei 225 Stock Average lost 2.9%. In Europe, the Dow Jones Stoxx 600 Index retreated 2%, poised for its worst day since February 27 when the Dow fell 416 points. The Euro Stoxx 50, a measure for the 13 nations sharing the euro, slipped 1.8%.

U.S. futures suggest a down opening -- but what matters is where the U.S. markets close. I don't know what makes the market go up and down. I think those who control the most capital do but they're not talking. So the rest of us are left wondering what's going on. On February 27th, the declines around the world traced out a path that seems to be repeating itself again today:

• Yen strengthens relative to the dollar - Yesterday, the yen was up against the dollar as Japanese and other investors got concerned about a U.S. economic slowdown. This was partially responsible for the declines in Asia and Europe.
• Carry trade reverses - Carry trade refers to the practice of investors borrowing a low-yielding currency -- such as the yen -- to invest in higher-yielding currencies and assets. The reversal of this trade means that investors sell other positions to pay back their Yen-based loans.
• Treasury yields fall - A flight to safety causes investors to flee stocks and get into treasury bonds. For example, yesterday the 10-year Treasury note added 15/32, or $4.6875 for every $1,000 invested, to 101 1/32, yielding 4.495% Tuesday. The 30-year bond was up 17/32 to 101 15/32, yielding 4.658%.
• Stock markets fall - Unfortunately, fleeing the Yen carry trade and buying Treasuries means that money flows out of stocks around the world. And the outflows in the U.S. lead Asian and European investors to sell -- which scares U.S. investors. And the cycle of selling continues until someone influential is willing to catch the falling knife.

What to do?

Goldman Sachs Group Inc. (NYSE:GS) reported a 29% gain in first-quarter profit, handily beating analysts' forecasts and investors probably could care less. Wall Street is waiting on pins and needles to find out whether the largest securities firm escaped the black hole engulfing suprime lenders.

As Bloomberg News notes, Goldman Sachs is a lender to New Century Financial Corp. (NYSE:NEW), the suprime lender that can't pay its creditors. Shares of the Goldman have slumped 8.3% since February 20 amid concerns that the real estate market will fall because of higher interest rates resulting in a slowdown of the economy, Bloomberg said.

Not suprisingly, New Century shares were halted yesterday after plunging nearly 90% last week. Another subprime lender Accredited Home Lenders Co. (NASDAQ:LEND) plumetted 27% yesterday and plunged another 43% in pre-market trading.

Suprime lending is bound to come up over the next two weeks when Bear Stearns Cos. (NYSE:BSC), Lehman Brothers Holdings Inc. (NYSE:LEH) and Morgan Stanley (NYSE:MS) report earnings.

It's hard to believe that not so very long ago, Arthur Andersen was the accounting firm. But, of course, Enron destroyed that and the company has since gone bust.

But, even dead companies still need to fight legal battles. And today, Andersen agreed to shell-out $72.5 million to settle claims on the Enron debacle. In light of the loss of jobs, pensions and shareholder value, it's a pittance.

It's also an indication that Corporate America is still vulnerable to financial shenanigans. Despite new laws like Sarbanes-Oxley, there are still companies that try to push the envelope -- or even commit crimes.

It seems ironic that on the day that Andersen announces its settlement is also the day that New Century Financial Corp. (NYSE: NEW) had its stock halted. In fact, it looks like the company is facing the same type of liquidity crisis that Enron did.

Yes, it's a bit of déjà vu all over again.

So over the next few years, we can expect some tantalizing books on New Century and perhaps a movie.

As for learning lessons? I'm not sure about that.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Lennar Corp. (NYSE: LEN) opened at $48.25. So far today the stock has hit a low of $46.64 and a high of $48.25. As of 12:30 this afternoon, LEN is trading at $46.32, down $1.93 (-4.0%).

After hitting a one year high of $62.38 in April, the swiftly retreated down below $40. LEN has been fairly flat for most of the last 10 months, with support around $45. LEN could test that support after another warning from New Century Financial Corp. NYSE: NEW) about its financial woes early this morning is sending home-builders down today. CEO Donald Tomnitz of competitor DR Horton (NYSE: DHI) summed up the housing situation quite eloquently last week when he said, "I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year." He went on to say that home-builders aren't going to get any pricing leverage until buyers pick up the houses that are already crowding the market this year, something that will hopefully happen by 2008. These sentiments are obviously not helping the stocks in this struggling industry. The technical indicators for LEN have been bearish and steady while S&P gives the stock a worrisome 2 STARS (out of 5) sell rating.

For a bearish hedged play on this stock, I would consider a May bull-put credit spread above the $55 range. LEN hasn't been above $55 since last April except for a few days in January and has shown resistance around $49. This trade could be risky if the home-builders somehow manage a quick turnaround, but all indications are that the "bottom" of the housing market we saw over the winter was merely false hope.

Brent Archer is an options analyst and writer at Investors Observer (Free Subscription). DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about.

What is up is the theme of this week's merger talk, because there is lots of chatter, but no bold moves. Yet.


NEW CENTURY FINANCIAL CORPORATION (NYSE: NEW)

Down the tubes, and then what? With bankruptcy imminent, what next happens to the nation's second largest sub prime mortgage banker? Shares continue to fall today, recently at $3.18, a 69 cent fall, equal to almost 18%. Just two months ago the share price was over $30. The real estate investment trust isn't getting any help from lenders. Maybe reorganization is just what they need.

PALM INC (NASDAQ: PALM), DELL INC (NASDAQ: DELL)

Or should it be Dell, Palm? Either way, Palm is looking to sell, and Dell is looking to buy. Palm knows Apple Inc's (NASDAQ: AAPL) iPhone can really hit them with a number of body blows, hence, get out while the getting's good, or at least okay, seems to be the Palm plan. For Dell, they're looking at smart phones as a part of their consumer products future. And lord knows they have the cash to buy a Palm. It's a brand with international contacts and a retail distribution network. Let the bidding begin, say at $2B?

NOBLE DRILLING CORP (NYSE: NE)

A noble "no" to an LBO was sent out from high atop the corporate structure several weeks ago, but rumors keep a coming. Yes, they said they'd use their extra dough to buy their own stock, just like they did before, in 2006. And that's what they've been doing. Who knows, maybe there's nothing to it.


CLAIRE'S STORES INC (NYSE: CLE)

Private equity firm Apax seems to be in the lead to take the 3,000 stores-strong Claire's. Get this: Apax is said to be so anxious to get going that it's said they have new management "in waiting." Wow. Claire's has said it's exploring "strategic alternatives", including a sale. Goldman Sachs is helping. Must be serious stuff. By the way, same store sales were up but down recently. Up 1%, but 2.3% was expected. What do you think Apax feeds that management team in waiting, anyway?

ALLTEL CORPORATION (NYSE: AT)

Buy me, please. That's what the nation's fifth largest wireless operator (subscribers) has been saying. AT&T is kicking the tires, but because of antitrust and other issues, it may only be doing just that. Verizon Communications Inc (NYSE: VZ) may have a look-see, as well as private equity firms. Tepid seems to have been the response so far, but that can change quickly. Management says the rumors are nothing new. Is that a bad thing?

MOST NOTEWORTHY: EchoStar Communications Corp (DISH), PeopleSupport, Inc (PSPT), and Quicksilver, Inc (ZQK) were today's most notable downgrades:

• Credit Suisse downgraded EchoStar Communications Corp (NASDAQ: DISH) to Underperform from Neutral based on valuation and lower probability of an acquisition by AT&T (NYSE: T).

• PeopleSupport Inc (NASDAQ: PSPT) was downgraded to Market Perform from Outperform at both Piper Jaffray and Freidman Billings following disappointing Q4 earnings and guidance; JMP Securities cut PeopleSupport to Market Outperform from Strong Buy.

• Quicksilver (NYSE: ZQK) was downgraded by a host of firms: to Market Performer from Outperformer at Piper Jaffray, to Sector Performer from Outperformer at CIBC, to Hold from Buy at W.R. Hambrecht, to Neutral from Accumulate at Buckingham and to Sell from Hold at Wedbush.

OTHER DOWNGRADES:

• Freidman Billings downgraded Tercica, Inc (NASDAQ: TRCA) to Underperform from Market Perform on valuation.

• Prudential cut Cheesecake Factory Inc (NASDAQ: CAKE) to Underweight from Neutral citing soft industry sales trends which will impact Q1 and Q2 results.

• Raymond James downgraded Goldcorp Inc (NYSE: GG) to Outperform from Strong Buy.

• Lehman cut Sprint Nextel Corp (NYSE: S) to Equal-Weight from Overweight.

• UBS downgraded New Century Financial Corp (NYSE: NEW) to Reduce from Neutral.

• Stifel downgraded C.H. Robinson Worldwide, Inc (NASDAQ: CHRW) to Sell from Hold.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

There's been an important development in the subprime market since my post this morning. One of the formerly leading lights of the subprime mortgage market, New Century Financial (NYSE: NEW), lost a board member and its stock plunged 18% in the wake of the news.

This morning I pointed out that NEW's collapse was hurting hedge funds including David Einhorn, manager of $3 billion hedge fund Greenlight Capital, who fought his way onto New Century's board last March. Greenlight, which has in the past posted double-digit annual gains, is down about 2.5% on the year; its stake in New Century, valued at $109 million at the start of the year, has shrunk to $21 million. Einhorn's seat on New Century's board prohibited him from selling even as the lender warned that it would restate most of its 2006 earnings results and said federal prosecutors are investigating its accounting.

On today's STOP TRADING! segment on CNBC, Jim Cramer discussed the rumors making the rounds about New Century Financial Corp. (NYSE:NEW) potentially filing for Chapter 11 protection after an activist hedge fund adviser quit the board of directors. Shares were down 20% on more than 36 million shares. This has also spilled over into DJIA stocks.

Cramer said that this is a hangnail to the market and you shouldn't be selling the other unrelated stocks and sectors on this. He even said the hits that some companies took to Long Term Capital in the 1990's created a buying opportunity. Cramer has been saying that one of the sub-prime lenders will fail, but this is de-linked from the market.

On Camden Properties Trust (NYSE:CPT) Cramer sees better opportunities since REITs are up so much. He does like J.C. Penney Company, Inc. (NYSE:JCP) and he thinks it will see $84 tomorrow from $81 today.

Two providers of excess liquidity to the international and U.S. economy are going away.

The yen-carry trade, where an investor borrows at very low Japanese interest rates and invests the proceeds in higher yielding credit or equity instruments around the world, is unwinding.

The only way this trade works is if the investor does not hedge the currency, or against appreciation of the yen. If the investor hedges his yen position, the cost of the hedge means the investor will not make any money. Therefore, as the yen begins to appreciate, a vicious cycle begins to emerge: less and less yen-carry trades make money so more and more investors need to liquidate their position and convert their money back into yen to repay the loan. While predicted for years, it finally appears to be happening.

The second big area of excess liquidity also took a shot to the head yesterday. New Century Financial (NYSE: NEW), a subprime mortgage lender, collapsed over 70% as reports hit the news wires that it's financial backer was pulling the plug on the company. New Century closed at $4.65 yesterday, down from a 2005 high of around $65.

With two areas of excess liquidity coming to an end, this should reduce concerns of too much speculative money floating around the global economy. This means world's central bankers, especially in the U.S., can feel more comfortable about not raising rates anymore. This will bode well for the U.S. market once this correction is over.