Stocks Fiddle as Subprime Burns

The catalyst for the day's debate on housing was London-based HSBC's announcement late Wednesday that it misjudged the creditworthiness of some of its subprime mortgage loans, and that it would have to increase by 20% the amount of capital it sets aside to cover loans that go sour. HSBC fell 2.6% on the day. The bigger loser Thursday was New Century Financial(NEW Quote), which fell 35.4% after saying it expects to tighten its lending standards and make fewer loans in 2007.

Washington Mutual(WM Quote) and Countrywide Financial(CFC Quote) both slid over 2% as well.

The homebuilders were also hurting Thursday as Toll Brothers(TOL Quote) announced a 19% drop in revenue and ballooning cancellations and write-downs. Toll fell 3%, while competitors Centex(CTX Quote), D.R. Horton(DHI Quote) and Pulte Homes(PHM Quote) slid over 2% on the day.

However, the housing slump didn't hit the retailers in January. According to Thomson Financial, 63% of retailers beat Wall Street's expectations for same-store sales growth.

Companies such as Federated(FD Quote), Limited Brands(LTD Quote) and Nordstrom(JWN Quote) surpassed expectations. Investors sold the news in many cases, as only Federated finished up 3.7%. Limited and Nordstrom fell 0.9% and 0.25%, respectively.

For now, the consumer is holding up even amid the subprime market's deterioration. But there is still a way to go before investors can feel assured that the question of spillover is behind them. The spring home selling season lies ahead, and exogenous factors such as oil prices and interest rates could suddenly stop cooperating. But one thing is for sure: Bernanke is paying attention to Main Street, and that means rate hikes are unlikely as long as the housing market continues to suffer.