The lethal combination of worsening sub-prime loans and a rising Japanese yen once again slammed global markets hard on March 13 and March 14.  Although the rise in delinquencies across all loans was a surprise for me, I still think higher quality real estate loans won't plunge to the same level as the sub-prime sector. The key for the American economy is jobs growth; if the unemployment rate continues to rise, then even higher quality loans will suffer from a higher rate of defaults and late payments.

In addition to bearish news on all loan categories, retail sales were also a disappointment. It's hard to imagine that consumers can continue to spend aggressively when home values are decreasing, or worse, when their house is about to be repossessed by the bank.

Despite all the negative news and the bearish tone of the market, I still believe this is a much-needed correction in values and nothing more. We've gone almost four years without a correction greater than 7.5% from the highs; corporate earnings are adjusting to a slower growth environment and a correction is normal.

It's hard for me to be outright bearish when long-term interest rates are 4.5% , inflation is low and the Fed likely to cut rates over the next several months. Make no mistake about it, central banks will flood the financial system with cheaper credit before the end of the year, especially if markets continue to decline. The Federal Reserve will have that window to cut lending rates because a softening economy implies cooling inflation, and that means central bank officials can cut interest rates.

The BIG question is whether the Fed is too late.

Over the last 12 months, an inverted yield curve (short rates yielding more than long rates) was a warning sign for the Fed. Rates should have been cut  earlier this year when the first signs of mortgage-backed stress was evident. Now, over 35 lenders have either gone bust or closed their doors because of soaring defaults.

If that isn't bad enough, a rallying Japanese yen makes matters worse for everyone. That's because the infamous yen carry-trade (tired of hearing about this, yet?) is coming undone every time the yen gains in value versus the dollar and euro. That applies more stress on the market, causing a virtual sell-off.

Again, this is a correction. A classic monetary squeeze is NOT occurring, which typically precedes a bear market for equities. Corporate earnings are adjusting to a slower growth environment, but will continue to expand at a healthy clip this year. Foreign economies remain strong and will outpace the United   States in 2007.  Should the mortgage market continue to unravel, I expect the Bernanke Fed to start cutting interest rates, which will help to put a floor on the market.  Also, as the Fed is well aware, cheaper credit will also encourage hedge funds and private equity funds, today's surrogate bankers, to buy busted mortgages, a boon for financing and stabilizing the market. 

Don't do any bargain-hunting for the moment; but at some point, we're going to see some of the best values since 2002. Hang in there.