• The deterioration in mortgage REITS has been extraordinary.

The carnage in the mortgage-backed securities market was vividly displayed in Hatteras' (HTS) earnings report today.

I have been reducing my Chimera (CIM) long at $3 (or better), and I plan to sell the balance of this position tomorrow. Counting dividends, I have broken even on this holding.

The fundamental deterioration in mortgage REIT book values has been extraordinary and swift, and I no longer have the patience to wait for Annaly (NLY) to acquire the company. I think Annaly itself may have enough on its plate, considering the mortgage-backed securities carnage.  

Thanks for reading my Diary, and enjoy your evening.

• How much to sell?

My mavens on the floor of the exchange see about $300 million to sell on the close.

Energy at $110 mllion and information technology at $70 million lead the sells.

Freeport-McMoRan Copper & Gold (FCX), Caterpillar (CAT) and JPMorgan Chase (JPM) each have about $15 million to buy, while Oracle (ORCL) has $55 million to sell, Chevron (CVX) has $35 milllion to sell and Home Depot (HD) has $25 million to sell.

• Run, don't walk, to read Jim Cramer's latest column.

In "Is This the Tipping Point?," Jim "El Capitan" Cramer (who has been as right as rain throughout the bull market) questions whether we have had too much of a good thing given the rise in interest rates.

It is a succinct column, and it is direct, as Jim always is.

You know where I stand!

Our corporations, consumers and even our government is addicted to low interest rates, and cold turkey could be painful.

Stay tuned.

• I am still using Bank of America as my market tell.

• Check this out.

Here is an interesting statistic: The Global Dow Index is +12.6% year-to-date, but the Global Dow ex-U.S. is +4.5% only.

• Realogy Chairman Richard Smith's bullish housing comments were wrong on several fronts.

Realogy (RLGY) Chairman Richard Smith just made the case on CNBC that affordability is great and at record levels that favor continued increases in home demand.

His comments were wrong on several fronts.

First, the traditional way of indexing affordability does not take into account changing mortgage credit standards.

Let me explain.

In the mid-2000s, a borrower could get a non-amortizing mortgage loan that paid interest only, was not documented and at 100% (or more) loan-to-value.

As a result of the overextension and rampant speculation in mortgage loans in the last cycle, credit standards today are dramatically different.

Higher home deposits and lower loan-to-equity values, full documentation and more conventional old-fashioned mortgage loans rule the day in 2013.

As a result, today it costs the same to carry a $350,000 house as it did six or seven years ago to carry a mortgage on a $550,000 house.

On top of this, higher mortgage rates (+125 basis points over the last few months) and climbing home prices have served to reduce affordability by almost 25% year-to-date.

• An competiton intensifies in auto lines.

Berkshire Hathaway's (BRK.B, Geico's parent) shares are now following the Travelers (TRV) news of intensifying competition in auto lines.

• Here is real estate maven Mark Hanson's take on today's housing report.

Today's housing report is being misinterpreted positively, in my view.

While the June reading was the best since May 2008, new-home sales were revised down by 17,000 in May and by 38,000 between March and May.

This means to this observer that the June data released this morning overstate the curent health of the U.S. housing market.

Not discussed was that home price increases are already moderating -- year-over-year new-home prices were +7.4% through June compared to +9.9% in May and +19% in April.

I expect a stalling in the housing recovery. (Note: New-home sales growth slowed in the second quarter from the first quarter (31,000) compared to +63,000 between the fourth quarter of last year and first quarter 2013.

Below is real estate maven Mark Hanson's take on today's housing report:

What a garbage report...we learned today that based on plunging new house prices and big sales volume revisions creating big retrospective "consensus misses" (celebrated as "beats" in previous months) that "June" sales volume was the outlier:

1) The"May" New Home Sales "beat" reported last month and subsequent sector stock party was bogus. Sales were revised from 476k to 459k, or 4% lower...this is now a big consensus miss.  And remember, in May rates were at record lows.   I say..."fool me once shame on you, fool me three times and I work for the sell side."

2)  Prices from April to June are down 11.5% at the median and 12.4% on average.  This is the largest 2 to 3 month prices paid/pricing power plunge since the great crash.  On the loss of the Homebuyer Tax Credit prices fell by half the amount. June prices MoM were down 5% and 4% respectively. Considering in the first half of June 10s averaged 2.15% (30 year rates about 4% to 4.25%) this immediate loss of purchasing and pricing power is perfectly correlated.

3)  And of course, all of the "June" MoM gains over last months newly discovered May MISS (in order to manufacture today's) beat came from the low low price, margin, volatile Southern region. The "South" made up 54% of all sales in June.  Note, if the June report showed the South "flat" like the other regions and the other regions would have been rounded DOWN instead of up -- due to how small New Home Sales volume really is -- this would have been a huge consensus miss as well. Point being, it doesn't take much on such a small absolute volume of sales to change a report from a huge miss to a huge beat...May is a perfect example.

Bottom line: Today we learned today that a) last months' May "great" New Home Sales report and consensus beat was all bogus;b)  In June, median and average prices continued to tumble as rates surged...the largest 2 month pricing power plunge since the great crash;  c)  all of the MoM gains came from the low price, low margin, volatile South.  All of this makes the today's "June" beat the outlier and sets up this series for an even larger revision lower when July New Home "Sales" are released next month.

Given all of this and the action in top sector names following today's report, ALL of the names we were negative on going into today's report (RLGY at the top of the list!) we are more negative on following the report.

Sidebar...Housing Starts: There remains tons of chatter on how "multi-family" caused the surprise drop in housing starts reported last month. Many are using this today as rationale for believing today's pumped up New Home Sales report.What's so funny about this is that for the past 2 years we have reported relentlessly that multi-family was driving overall starts through the roof.  Remember, multi-family has been surging and is the epitome' of "escape velocity".  On the way up nobody was talking about multi-family being the primary reason for the ramp to 1mm but on the way down it suddenly becomes important???

Anyway, after years of QE and PE firms driving demand and house prices through the roof acing out first-timer buyers; 6.5mm mortgage mods and new laws preventing foreclosures curtailing 1.5 years of the most in-demand supply; and~20mm locked-in homeowners unable to list their properties for sales for anything other than a short sale, why are New Home "Sales" still down ~60% from 2003 to 2007 levels while Existing Sales are down less than 30%?  It's called "Structural".

• Given the recent rise in real interest rates, I would be cautious on the price of gold ($1,333 an ounce) in here.

• Illustrated.

Below is a great chart from "Fast Money's" Steve Cortes on retail and housing.

• It's my new tell.

Bank of America (BAC) is my new market tell.

• Despite better housing data, Goldman Sachs maintains its second-quarter 2013 tracking of real GDP at +0.7%.

• The data were about in line with the consensus.

The number of contract signings for the purchase of new homes totaled 497,000 in June, 13,000 more than expected, but May was revised lower by 17,000, to 459,000. So, taken together, it was about in line with the consensus.

At 497,000, it is the most since May 2008 and comes even though the average 30-year mortgage rate was 4.18% in June vs. 3.67% in May and vs. 4.30% last night, according to Bankrate.com. Because the amount of homes for sale rose by just 2,000, months supply fell to 3.9 from 4.2, matching the lowest level since 2004. Prices rose 7.4% year over year, to $249,700, but fell 5% sequentially.

Bottom line: While new-home sales continue to improve, the average new-home sales per month since 1980 is 700,000, pointing to both the damage done to the industry over the past five years but also to the upside potential in coming years that I believe will be in more fits and starts rather than a straight line, as higher mortgage rates will have an influence amongst other factors (e.g., tighter lending standards, appeal again of renting) in a post-bubble world.

• It is likely a combination of the yield increase and rumors of a downgrade of Germany's sovereign debt.

The market selling is likely a combination of the yield increase (close to 2.6% on the 10-year now) coupled with rumors of a downgrade of Germany's sovereign debt.

The latter seems unlikey given relatively sturdy economic growth in Germany and the country's strong fiscal condition.

• Still.

I continue to press my Berkshire Hathaway (BRK.B) short based on Traveler's (TRV) new strategy of cutting auto insurance premium rates.

• I am further paring back this long position.

In light of the climb in the 10-year yield, to 2.60%, I am paring back my Chimera (CIM) further.

• My short exposure is now at the highest level since the market bottomed in May.

I am continuing to expand my short book.

If you are short (like me) and feel like throwing up in your mouth (like me), it is likely time to sell down your long book and, for the more aggressive, to get short.

My short exposure is now at the highest level since the market bottomed in May.

I might even throw out a ludicrous forecast today.

• Is this a signal that a September tapering will begin?

Anyone, besides me, notice the absence of a Fedfiesta and Fed talk over the last two weeks?

To me, this signals a September tapering will begin.

• The mortgage data released this morning are supportive of my view.

Housing, the straw that stirs the drink of the domestic economy, appears ripe to stall now.

The mortgage data released this morning are supportive of my view.

New purchase applications have weakened over the last month or so, and refinancings have collapsed.

Already, as mentioned earlier in the week, existing-home sales have begun to disappoint. The ISI homebuilders survey has weakened for the last two months. Finaly, a combination of higher home prices and rising mortgage rates is adversely impacting affordability.

The pause I see in housing is within the context of a likely multiyear recovery, but it will negatively impact nominal and real GDP in the second half.

As I wrote, the Fed's and the market's optimistic economic forecasts seem destined to be wrong.

Refinancings  dropped by -0.7% week over week last week, the lowest print in two years. The index has now dropped in 10 of the last 11 weeks. When refinancings decline, houshold cash flows are adversely impacted, and I continue to see a rocky retail sales outlook ahead. This, coupled with rising gasoline prices and a five-year low in the savings rate, should be significant headwinds to consensus growth forecasts over the next two quarters.

New mortgage applications declined by -2.1% last week, the weakest print since the middle of March. Applications are down in four of the last five weeks -- this signals a moderation in housing demand.

Slow nominal GDP growth will set the stage for a more challenging top and bottom line for most large U.S. corporations. (Note: Excluding financials and buybacks, secon-quarter 2013 EPS (year over year) should be only about +1%.)

• Let's take a peek at overnight and early-morning price action in some of the major asset classes.

The rundown:

• S&P futures +5;
• Nasdaq +24, as Apple (AAPL) moves in after-hours trading;
• Nikkei -;
• European markets +;
• crude flat;
• gold +$5; and
• 10-year U.S. note is creeping higher at 2.55%.

Worth mentioning:

• Mr. Market was narrowly range-bound on Tuesday.
• Yesterday, I added to shorts in Yahoo! (YHOO), along with the Loeb/Third Point sale of 40 million shares; Berkshire Hathaway (BRK.B), as Travelers (TRV) plans to cut auto insurance premium rates; and McDonald's (MCD), after disappointing results on Monday.
• After the close, Apple reported more or less in line results but guided under the Street for the next quarter. I wrote last night, "After going over the Apple report, I would be a $435-$445 seller on the post-earnings gap. All the challenges to growth remain, and reward/risk is probably about even at the current share price of $439. Limited upside/limited downside as far as the eyes can see, from my perch."
• Eurozone economies come off bottom. The July Flash manufacturing and service indices for the eurozone were released this morning. The manufacturing index came in at 50.1 vs. expectations of 49.1 and June of 48.8. This was the first reading above 50 in 24 months, and it signals stabilization in eurozone manufacturing. The service index was 49.9 in July vs. expectations of 48.7 and June of 48.2. The composite index of manufacturing and services was 50.4 in July vs. expectations of 49.1 and June of 48.7. The July reading was the first above 50 in 18 months. The components of the indices were also encouraging, with the forward-looking orders component strong, ditto for shipments. These data are consistent with real GDP of about +0.2%, slightly better than the consensus of +0.1%. European stocks are rallying. The one negative could be that the ECB might be reluctant to be more accommodative. This needs to be watched. Finally, I don't expect the data to have much of a response in the U.S., as it appears to have been discounted.
• China's economy weakens. The HSBC/Markit July Flash manufacturing index for China came in at 47.7 compared to consensus of 48.2 and June's reading of 48.2 -- the fourth consecutive monthly drop, placing the index at a near-one-year low and 4 points below the December 2012 print. On its release, the China stock market drifted -0.5% lower, and our futures ticked down only by 1 handle. So, it appears that a slowing is largely discounted.
• Subpar China growth expected. As I previously wrote, China's premier said that the floor on China's real GDP growth would be 7%. I suppose that when one is in a state-controlled economy where government data can be massaged, one can guarantee a floor to aggregate economic growth, but the July index coupled with others recently reported indicate that China's growth is slowing measurably. The new leadership is committed to financial sector stability, less property price inflation and less lending by banks, so it is unlikely that monetary policy will be eased to stimulate growth. Likewise, fiscal spending on infrastructure (where excess capacity exists) is not available to stimulate aggregate growth. As a result, China should continue to grow at a sub-trend rate -- possibly even below 6.25% at some point. This will restrain global economic growth.
• Global growth will likely disappoint. When combined, a eurozone recession, a U.S. economy growing at around +1.5% and emerging economies so dependent on China as a growth engine point to global GDP being likely to come in less than consensus. This should pressure corporate profits and restrain an increase in commodity prices, serving to subdue inflation and keep central banks in an accommodation mode.
• Fed Chief chatter.
• Easing of mortgage curbs is being weighed.
• The housing slowdown? In the U.S., a 10-basis-point drop in the average 30-year mortgage rate week over week to 4.58% was not enough to lift applications as refis fell 0.7%, down for the tenth week in the past 11 and to a two-year low. Purchases fell 2.1% to a four month low.
• A bull market in complacency, as investor sentiment as measured by Investors Intelligence remained bullish with a more-than-30-point spread between bulls and bears. Bulls fell to 51.5 from 52.1, but bears fell to 19.6 from 19.8.

In the press:

• The Wall Street Journal -- SAC to be indicted.
• New York Post -- Bogus government statistics.
• The New York Times -- The student loan debate; and the death of inflation.
• Financial Times -- Low inflation worries central bankers; and Detroit aftershocks/Meredith Whitney.

Economic and other catalysts today:

• Eurozone Flash PMI for July.
• U.S. Flash PMI for July (8:58 a.m. EDT, 52.6 estimated).
• U.S. new-home sales for June (10:00 a.m. EDT, 484,000 estimated).
• Analyst meetings -- Acacia Research (ACTG) and Campbell Soup (CPB).
• Europe to unveil new credit card fee proposal.
• Dell (DELL) shareholder meeting.
• Google (GOOG) is hosting a product event Wed Jul 24; the focus is expected to be on Android and Chrome (12:00 p.m. EDT).
• Obama economic address.
• Earnings before the open -- AmerisourceBergen (ABC), ARM Holdings (ARMH), Arrow Electronics (ARW), Allegheny Technologies (ATI), Boeing (BA), Caterpillar (CAT), Cullen/Frost Bankers (CFR), Daimler, Delta Air Lines (DAL), Dr Pepper Snapple (DPS), EMC Corporation (EMC), Ford (F), General Dynamics (GD), GlaxoSmithKline (GSK), US Airways (LCC), Lilly (LLY), Moody's (MCO), Motorola Solutions (MSI), The Nasdaq OMX Group (NDAQ), Northrop Grumman (NOC), New York Community Bancorp (NYCB), Owens Corning (OC), PepsiCo (PEP), Prologis (PLD), Realogy Holdings (RLGY), Raymond James Financial (RJF), Seagate Technology (STX), TE Connectivity (TEL), Thermo Fisher Scientific (TMO), T. Rowe Price (TROW), Tupperware Brands (TUP), Volvo, Wellpoint (WLP) and Wyndham Worldwide (WYN).
• Earnings after the close -- Assurant (AIZ), Akamai Technologies (AKAM), Applied Micro Circuits (AMCC), Ameriprise Financial (AMP), AvalonBay Communities (AVB), Baidu (BIDU), CA Incorporated (CA), Cheesecake Factory (CAKE), Crown Castle International (CCI), Cadence Design Systems (CDNS), Citrix Systems (CTXS), Equinix (EQIX), E*Trade Financial (ETFC), Facebook (FB), F5 Networks (FFIV), Ingram Micro (IM), Infinera (INFN), LSI Corporation (LSI), Newfield Exploration (NFX), PTC Incorporated (PMTC), Qualcomm (QCOM), Ryland (RYL), SL Green Realty (SLG), Teradyne (TER), Terex (TEX), Torchmark (TMK), TriQuint Semiconductor (TQNT), TripAdvisor (TRIP), Visa (V), Vale (VALE), Varian Medical Systems (VAR), Western Digital (WDC) and Willis Group Holdings (WSH).