From Bloomberg:

Five Signs That Subprime Infection Is Worsening: Mark Gilbert

The collapse in subprime mortgages doesn’t pose “any threat to the overall economy,” U.S. Treasury Secretary Henry Paulson said last week. He would, wouldn’t he? He’s hardly going to advocate we all stock up on tinned food and bottled water in our basements.

The tremors from the subprime debacle are vibrating throughout the interconnected web of modern global financial markets. Derivatives, corporate debt, loans and bank stocks are all getting trashed. Here are five reasons to expect the turmoil to worsen.

Don’t Bet on Helicopter Ben . . .

A week ago, traders in the futures and options markets were pricing the chances of December interest-rate cuts from the U.S. Federal Reserve at about 21 percent. Prices now suggest a 47 percent chance that Fed Chairman Ben Bernanke will sanction lower borrowing costs to rescue the mortgage market, based on July 26 closing levels.

The rapid turnaround in interest-rate expectations shows the financial community is far from convinced that the wider economy is immune from the woes afflicting particular pockets of the bond and credit markets.

Is Helicopter Ben, as he was dubbed early in his monetary- policy career, really going to fly over the global financial markets and shower investors with dollar bills in the form of cheaper money? Even a hint that the Fed might be planning a rescue would be a signal that the outlook is bleaker than officials have admitted so far.

That hasn’t prevented the iTraxx Crossover index, a barometer of creditworthiness for 50 European companies, from surging to as high as 440 basis points last week, up from about 260 basis points two weeks ago and a low for the year of 170 in February. The higher the index, the less confident investors are about the outlook for corporate bonds.

Once fear grips a leveraged market, the so-called credit fundamentals aren’t worth the paper you print your spreadsheets on. The yield on the benchmark 10-year U.S. Treasury note has declined to about 4.8 percent from as high as 5.3 percent seven weeks ago, as investors seek the warm, comforting embrace of the U.S. debt market.

“While the fundamentals, such as global growth and corporate balance sheets, are at their best for arguably decades, the technicals are as bad as we’ve ever known them and arguably the worst in the era of leveraged finance,” Jim Reid, a London- based credit strategist at Deutsche Bank AG, said in a research note last week. “Never has so much money been thrown at and been levered up in credit and never has there been such a liquid derivatives market to hedge risk.”

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4 Responses to Contained?

  1. pesche22 says:

    what a pimp.

  2. john says:

    American Home Mortgage is GOING DOWN Today. They have to get their second quarter numbers out, 6-30 by 8-8, when they went public they hired a big four firm and are SOX compliant. Falsification of the earnings statement coming up is punishable by up to 20 years in jail by the CEO adn CFO and a one to ten million dollar PERSONAL fine. They approved the dividend Friday and they pulled it back at 10pm Friday when the auditors start repricing their alt A loans and informed then they can’t afford to pay the Dividend. This will be the true story of ALT A collaspe when the “K” comes out, AHM watch the horror today.

  3. john says:

    “Subprimemania is spilling into the real economy,” said Jochen Felsenheimer, head of credit derivatives strategy at UniCredit SpA in Munich. “IKB’s statement was an end for those who believed this is a derivatives linked problem only.”

  4. john says:

    Analysts from JMP Securities, Lehman Brothers (NYSE:LEH PRN) (NYSE:LEH PRC) (NYSE:LEH PRG) (NYSE:LEH PRF) (NYSE:LEH PRD) (NYSE:GIZ) (NYSE:LEH) and RBC (NYSE:RY) Capital Markets downgraded American Home Mortgage Investment’s stock. The company’s stock plunged in premarket trading, but was halted by the New York Stock Exchange when the opening bell rang.

    Shares of Countrywide Financial Corp. (NYSE:CFC) , which last week reported a steep drop in second-quarter profit as bad credit ate $710 million out of the value of its portfolio, dipped $1.05, or 3.5 percent, to $28.86. The shares touched a three-year low of $28.25.

    Shares of IndyMac Bancorp (NYSE:IMB) also touched a multiyear low, at $20.36. In morning trading, the stock was down $1.63, or 7.1 percent, to $21.40.

    Shares of Impac Mortgage Holdings Inc. (NYSE:IMH PRB) (NYSE:IMH PRC) (NYSE:IMH) sank 33 cents, or 10 percent, to $2.96. The stock hit as low as $2.87, the cheapest trade since 2000.

    Shares of NovaStar Financial Inc. (NYSE:NFI PRC) (NYSE:NFI) dropped $2.26, or 13.9 percent, to $13.98.

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