Coming Week: Walking the Line

"There is not at this time a major systemic risk due to the subprime issue, nor should the problems in this corner of the mortgage universe spill over into the broader economy," writes Brusuelas. "Rather, we feel that an unwise policy response among regulators and the political class in Washington poses a far greater risk."

There is evidence of tightening lending standards by banks, presumably at the behest of the Fed and other regulators, which could hurt the economy. Of course, bears such as Doug Kass believe the subprime "fungus" will absolutely spread into the prime mortgage market, extend the housing downturn and ultimately cripple (or certainly crimp) the broader economy.

Given the presumed significance of the housing market on consumer sentiment and spending, bull and bear alike will certainly be paying close attention to Tuesday's existing-home and Wednesday's new-home sales reports.

Also, Tuesday's durable goods report and Wednesday's ISM Manufacturing Index will give fresh insight into the manufacturing sector, which has experienced a noticeable slowdown of late.

Speaking of slowdowns, Wednesday's preliminary fourth-quarter GDP report is expected to show growth of 2.3% vs. the 3.5% advance reading. The report "will take a bit of the bloom off of the roses that the Fed has tossed to the market recently," writes Brusuelas. "Given the fact that core inflation remains a bit sticky, even with the sub-trend growth that we expect to characterize the first half of 2007, we do not anticipate any Fed action for some time."

Lowered prospects for rate cuts help explain the market's dip last week. As detailed here, Wednesday's stronger-than-expected CPI report undermined, at least temporarily, the Fed's forecast for slowing core inflation. This Thursday brings the personal income report for January and the accompanying core personal consumption expenditures index. Given that the core PCE is presumably the Fed's preferred inflation indicator, the report could prove to be most critical in a week chock full of events with market-moving potential.

Notes, Notables & Fearless Predictions

Beyond the data, market players will tune in to speeches from Fed Governor Bies on Monday and Dallas Fed President Richard Fisher Tuesday. New York Fed President Timothy Geithner will speak on "Liquidity and Financial Markets" on Thursday.

Outside the retailers, earnings are expected from (among others) Brocade (BRCD), American International Group (AIG) and the recently engaged satellite radio outfits XM (XMSR) and Sirius (SIRI).

Finally, in Friday's podcast I discussed how the past few days have brought about considerable hand wringing, a situation similar to what presaged Ben Bernanke's Feb. 14 Congressional testimony and the subsequent rally. It's entirely possible that a similar (bullish) setup is happening here, but I do believe there's more weakness afoot as earnings season winds down and attention focuses on rising commodity prices and the Fed's precarious predicament.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting

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