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“Right now things are starting to come unglued”

Posted By Barry Ritholtz On July 18, 2007 @ 7:26 am In Credit,Derivatives,Markets,Psychology,Real Estate | Comments Disabled

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 [1] 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 (WTF is going on in the ABX Markets? [2]), 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 [3]. 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.


Futures are reacting to the subprime and disappointing Intel report.  Today should be interesting, to say the least. 



* Every time I hear the word "Contained," I am reminded of that very amusing scene [4] from "The Princess Bride [5]:"   

[Vizzini has just cut the rope The Dread Pirate Roberts is climbing up]
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.


Subprime Uncertainty Fans Out [6]
Bear’s Hedge Funds Are Basically Worthless;
More Bond Fire Sales
WSJ< July 18, 2007; Page C1

Moody’s Says It Is Taking Hit [7]
Ratings Firm Loses Business As Tougher CMBS Stance
Spurs Issuers to ‘Rate Shop’
WSJ, July 18, 2007; Page B7

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2007/07/right-now-things-are-starting-to-come-unglued/

URLs in this post:

[1] letter to hedge fund investors: http://bigpicture.typepad.com/comments/files/Bear_Stearns_Co.pdf

[2] WTF is going on in the ABX Markets?: http://bigpicture.typepad.com/comments/2007/07/wtf-is-going-on.html

[3] Markit Group: http://www.markit.com/information/affiliations/abx.html

[4] scene: http://www.imdb.com/title/tt0093779/quotes

[5] The Princess Bride: http://www.amazon.com/exec/obidos/ASIN/B00005LOKQ/thebigpictu09-20

[6] Subprime Uncertainty Fans Out: http://online.wsj.com/article/SB118470713201469384.html

[7] Moody’s Says It Is Taking Hit: http://online.wsj.com/article/SB118471274304469543.html

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