"Right Now Things Are Starting To Come Unglued"

That's a quote from Charles Gradante of hedge-fund consultant Hennessee Group. The only question is how far this thing is going to spread -- to other funds, to underwriters and ratings agencies, to investment banks special charges. You know, how *CONTAINED this is.

The latest example of how well "contained" the sub-prime fall out is comes to us via a letter to hedge fund investors from Bear Stearns (BSC). From this communique, we learn that the two funds that have had everyone so worried are mostly worthless. The "better" fund is down 91%, while the "lower quality" fund is down 100%.

In the letter, Bear claims to have drawn down only $200 million of the $1.6 billion it put up, essentially to ensure an orderly liquidation of the market in the CDO derivatives the fund held. 

As we noted late Monday (WTF is going on in the ABX Markets?), the RMBS/CDO market, as shown in the ABX indexes, are reflecting that "orderly liquidation," as well as ongoing sub-prime mortgage risk. 14 of 15 ABX indexes declined to new lows Tuesday, according to Markit Group. I have little doubt that CDO traders knew the Bear Stearn's funds were near worthless, and were front-running the liquidation all this week.

We must note, not coincidentally, that one of the biggest sources of all this sub-prime junk, Southern California, saw home & condo sales tank 36% in June. That's the biggest decline in 14 years, according to DataQuick Information Systems. It is almost enough to make one ignore the abysmal Home Builders Index, now scraping new 16 year lows.   

After the NYSE close, Intel (INTC) defiled the parade of tech and capex bulls. Intel said demand for flash products is lower than expected, and it lowered capex to $4.9B from $5.5B. Q2 revenue declined 2% and operating income 19% from Q1. The tax rate was 29%: 31% was expected - but for that, it would have missed consensus forecasts. A JPMorgan analyst stated Tuesday morning, “Clearly business has bottomed for Intel.”  You know, kinda like housing has bottomed. So much for the coming capex boom.

~~~

Futures are reacting to the sub-prime and disappointing Intel report. 

_____________

* Every time I hear the word "Contained," I am reminded of that very amusing scene from "The Princess Bride:"   

[Vizzini has just cut the rope The Dread Pirate Roberts is climbing up]
Vizzini: HE DIDN'T FALL? INCONCEIVABLE.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.

They keep using that word "Contained." Someone get these folks a dictionary.

>

Sources:
Subprime Uncertainty Fans Out
Bear's Hedge Funds Are Basically Worthless;
More Bond Fire Sales
KATE KELLY , SERENA NG and MICHAEL HUDSON
WSJ< July 18, 2007; Page C1
http://online.wsj.com/article/SB118470713201469384.html

Moody's Says It Is Taking Hit
Ratings Firm Loses Business As Tougher CMBS Stance
Spurs Issuers to 'Rate Shop'
KEMBA J. DUNHAM
WSJ, July 18, 2007; Page B7
http://online.wsj.com/article/SB118471274304469543.html

Comments

[sliman:]

Barry
This sub prime story is EVERYWHERE. It is already baked into the market. You need to find another reason to be bearish.

2007 Jul 19 10:02 AM

[advocatusdi...:]

Harry, you a being a bit cavalier about baking here. It isn't whether its is baked in, but how much of it did they bake in that matters most. What Barry is implying, and I agree with him, is the cake might be in the oven with Bear-Stearn's baked in, but there is lot more sub-prime ingredient on the board the market is ignoring and sooner or later they are going to have to bake that in too. That's why he thinks they need to look up the definition of contains. I think they really mean "covered" not "contained".

2007 Jul 19 02:15 PM

[sliman:]

Daniel
It is mentioned on CNBC at least 10 times an hour. If the market falls it will be for a reason NOT mentioned over and over.

2007 Jul 19 03:36 PM

[Johnny Bitc...:]

Let's face it, Barry is just reading the news. Don't fool yourself into believing he's actually analyzing data.

Barry is to market chit-chat what Paris Hilton is to fashion: A self-obsessed self promoter providing an illusion to fools.

Most likely he is seeking to make up for poor risk-adjusted financial performance with advertising sales or paid chit-chat services offered through his website.

He gives the impression that his paid services are of higher value and usability than his prolific market chit-chat, but ya gotta pay to find out. Personally, I am not going to pay, but I would guess his paid chit-chat services are basically the self-indulgent chit chat and internet cut and paste dressed up as professional work.

I will admit there is some small probability that Ritholtz actually performs work when he isn't blowing hard, but so far the weight of the evidence is toward a whole lotta hot air backed up by little more than a whole lotta hot air.

But hey what do I know......maybe surfing the internet and rehashing news readily available in other forums is a valuable service.

The problem only occurs if you think Ritholtz is providing some kind of usable forward looking information........If Ritholtz found it on the internet chances are pretty good it's unusable for things that matter.

No offense to the guy, it's just that his self-congratulatory arrogance is annoying in light of the complete unusability of his ambiguous insinuations.

If readers really want something from this internet surfer, they ought to force his arrogant butt to follow each rambling insinuation with a specific identification of his related investment action which would earn alpha.

John.

2007 Jul 19 04:59 PM

[crojas:]

Despite the trolls, I do appreciate the writings.

2007 Jul 20 01:00 PM

[Sr. Pessimist:]

The professional investors are gonna eat it. We have the too-rich, the too-poor, the wealth makers, the money chasers, the brain washers, and the hypocrites.

The brain-washed too-poor went money-chasing. They put their SSN down for a half-million dollar houses. The money-chasers received their money, but just like most everybody else, didn't do their job. They were paycheck loan officers that had no interest in the business beyond the paychecks they were chasing. More money chasers lobby-bribed and money-pressured the hypocrites in Washington DC and their state hypocrites to look away, keep away, and back off while they called all those same too-poors "wealth-makers," using their own name, "collateralized debt obligation," and a process not even regulated by the hypocrites. The too-rich are also too-stupid. A buck is a buck to a too-rich, so they bet their life-blood on what they thought was more real bucks coming from wealth-makers, but instead were misled, and the presumed wealth-makers were just too-poors pretending to be wealth makers so they can go money-chasing.

Now it's time to go to church and listen to your brain-washers tell you you're all good boys and girls, despite what you do to each other when you're not in church. Open up the paper propaganda in the morning and talk about what the media brain-washers told you at work, so you can still sound like you're at least as smart as a parrot. Somebody else will take care of the big old-mess. Why not? After all, somebody always has.

2007 Jul 21 11:34 AM

[Sr. Pessimist:]

ps- To sell somebody's gotta buy.

2007 Jul 21 11:36 AM