Kass: Subprime's Siren Call

The mortgage market's new reality will serve to immediately (and adversely) affect housing turnover and reduce the demand for expenditures on many products. Exacerbating the decline in personal consumption expenditures will be the virtual disappearance of mortgage equity withdrawals, which have been the straw that has stirred the drink of consumption since 2000.

Spending on everything from appliances, furniture, flooring, roofing, paint, televisions, telephones and tools will suffer from the lower housing turnover and activity. The cessation of refinancing cashouts could have an even broader effect, constraining discretionary spending on restaurants, apparel, vacations, remodeling projects, automobiles and other durables.

With the demand for a broad array of consumer goods and services moderating, corporate profits are at risk -- and will quickly disappoint relative to expectations. Up until now, the service sector has remained healthy (even while housing and autos weakened), but even the buoyancy in services will be pressured and put to the test in the months to come. In the fullness of time, the rate of job growth will decelerate even more markedly than we have seen over the last several months as construction unemployment accelerates and the contagion permeates the broader job market.

More tepid top-line sales growth will weigh on corporate profit margins (one of the cornerstones to my bearish case for equities and valuations) as operating leverage will be difficult to come by. Unfortunately, all this will occur at the same time cost pressures remain high.