Kass: The Simple Math of Subprime's Slide

In summary, the general (and specious) notion that the subslime travesty and its concomitant impact on the extension of credit won't have an impact on the broader economy reminds me of another quote, weeks before the stock market crash of 1929 put the U.S. economy in to a Depression (with a capital D):

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
-- Paul Block (president of the Block newspaper chain), Nov. 15, 1929

From my perch, investing on the basis that the subslime carnage and exploding ARMs will not affect the consumer, the economy and our equity market is a risky proposition.

Here is the economic equation as I see it:

Restrained mortgage credit plus reset mortgage rates equals more money needed to finance homes and less money available to purchase goods equals a slowing economy.

The Next Down Leg Is Upon Us

Remember, today's weak new-home sales are before cancellations, which have been running over 20% for most publicly traded homebuilders. Moreover, new-home sales provide a better market feel for the residential housing market, as they are calculated upon signing of a contract, while existing-home sales are counted when a sale is closed.

Ergo, not only will new-home sales for February end up being weaker than stated today, but the state of housing is far worse than most realize (except the publicly traded homebuilders' managements who were ignored when they suggested the spring selling season was a bust thus far).

The inventory-to-sales ratio ratcheted up (from 7.3 months in January to 8.1 months) to the highest level since January 1991 (which was not a very good year!).

The next down leg in housing is upon us. Employment, consumer confidence and retail spending will be the next victims of housing's retreat.

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