Key News
   
• The rapid unraveling of the subprime-mortgage industry is stirring new concerns about the already weak housing market. A report released yesterday by Credit Suisse analyst Ivy Zelman forecast that credit tightening for financially stretched borrowers will lead to a 20% drop in new-home sales in 2007, to about 890,000, as buyers find it more difficult to borrow for homes. (WSJ)
• Key Reports (WSJ):
7:45a.m. ICSC Chain Store Sales. Previous: -0.4%.
8:30a.m. Feb Retail And Food Sales. Expected: +0.4%. Previous: Unch.
8:30a.m. Feb Retail And Food Sales, Ex-Autos. Expected: +0.4%. Previous: +0.3%.
8:55a.m. Redbook Retail Sales Index. Previous: -1.1%.
10:00a.m. Jan Business Inventories. Expected: +0.1%. Previous: Unch.
5:00p.m. ABC/Wash Post Consumer Conf. Previous: -1.

Quotable
"Weaseling out of things is important to learn. It's what separates us from the animals... except the weasel."

   Homer Simpson
   
FX Trading –  Contagion isn’t a four letter word, but it can be

“In the face of upheaval of the $1 trillion subprime market, the overseers of American finance seemed almost to stifle a yawn.  ‘Credit issues are there, but they are contained,’ said Treasury Secretary Hank Paulson, speaking to a Bloomberg reporter in Tokyo on Tuesday [last week]. ‘I don’t think it has, at this point, implications for the aggregate economy in terms of the ongoing expansion,’ testified Fed Chairman Bernanke before the Senate Banking Committee a couple of weeks earlier.  Through the third quarter, however, 22% of the last year’s mortgage originations were subprime,” writes Jim Grant, in his Interest Rate Observer.

And they didn’t think that little hiccup in Malaysia back in late 1990’s would have much of an impact on the rest of the Asian Tigers either, until it exposed all the soft underbelly of naked exposure and morphed into the Asian Financial Crisis. 

Policy makers and analysts say things.  But no one knows without the gift of hindsight how problems in credit markets will play out, especially now given all the potential linkage across the system through the magic of derivatives.  But one can say, with more than a degree of credibility that the setup conditions in the subprime market make it ripe for contagion.

‘Lou Ranieri, sort of the father of the mortgage bond market. In a recent interview, he warned: ‘This is the leading edge of the storm. . . . If you think this is bad, imagine what it's going to be like in the middle of the crisis.’ In his opinion, more than $100 billion of home loans are likely to default. (‘Just divide $100 billion by the average loan amount and you get a lot of people, a lot of families.’) He also expects to see some form of bailout at some point, because ‘foreclosures in those amounts are politically unacceptable.’”

Anyone interested in some Treasury bonds?

10-year T-Note Futures Weekly 1996-99:

So, if contagion does spread over our fair land, and the Fed rides in for the rescue and the funds race for safe haven and bond prices rally…the dollar is likely doomed on lower yield and economic slowdown…well, no certainty on that score either.  As you can see in the chart below, the dollar caught a significant safe haven bid during the last contagion…it can again. 

US $ Index Weekly 1996-99:

Stay tuned.  It may get very interesting before it’s over. 

Jack Crooks