14 March 2007

Why greed is necessary to economic cycles

Rattled investors respond to woes of housing sector

Stock markets plunged yesterday as the deepening subprime mortgage crisis and a disappointing US retail sales report magnified fears that US consumers may finally have hit the wall. In the latest sign of trouble for the shaky housing market, the Mortgage Bankers Association said delinquencies among subprime borrowers - those with rocky or no credit histories - climbed to 13.33% in the fourth quarter from 12.56% in the previous three months. The report, which also showed foreclosures at a record 0.54% of all homes, came on the heels of an anemic 0.1% increase in February retail sales - half the gain that was expected. Excluding sales of cars and gasoline, retail sales fell 0.3%, the biggest drop in nearly three years. “We saw mortgage delinquencies were up and on top of that retail sales were light. When you put it together, the market starts to wonder about the strength of the consumer,” said Jay Susskind, director of trading at Ryan Beck in Florham Park, NJ. “There's real concern over . . . how strong the housing market is going to come back, if at all, and how much more trouble is out there that Wall Street hasn't seen yet.” If yesterday's rout on stock markets is any indication, the answer may be plenty. The Dow Jones industrial average plummeted 242.66 points, or 2%, to 12,075.96 as all but one of its 30 members declined, underscoring the extent of investors' anxiety. With worries mounting about the staying power of the US economy, Canada's stock market also got hammered. The benchmark S&P/TSX composite index fell 255.55 points, or 2%, to 12,809.6. Chyanne Fickes, a portfolio manager with Stone Asset Management in Toronto thinks the US economy is probably a lot more vulnerable than people thought. She is less concerned about the Canadian economy, however, because mortgage lending - even of the subprime variety - is more conservative here. As well, Canada's strong resource sector, expanding trade with Asia and fiscal prudence - both on a government and personal level - should work in this country's favour, she said.
(Globe and Mail 070314)

A growing number of analysts and economists have been touting online that only the tip of the iceberg of the subprime mortgage debacle in the U.S. is visible today. Some predict this could get much, much worse, and possibly even trigger more economic woes later in 2007.

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