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The Big Picture: Unglued

Barry Ritholtz is a bear:

The Big Picture | "Right now things are starting to come unglued": 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. 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... the RMBS/CDO market, as shown in the ABX indexes, are reflecting that "orderly liquidation," as well as ongoing Subprime mortgage risk. 14 of 15 ABX indexes declined to new lows yesterday, 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 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, they 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.