Wake Up Call - Goldilocks Makes Cameo, But Subprime Drawing More Attention

Good Morning. U.S. equities have started higher today. Goldilocks looks to be making a cameo appearance in this week's trading flick, but we anticipate a significant rise in media coverage of the very interesting subprime situation. I mean how can Barron's, Businessweek and the others not focus attention on this topic with an FDIC cease and desist order and FBI warning being issued. We anticipate Friday may end the week on a positive note, but Monday could bring a reversal of gains as attention focuses on the mortgage and housing markets.

Asia:
Hang Seng Index -0.21%; Shanghai/Shenzhen 300 -0.62%; NIKKEI 225 +0.43%; BSE SENSEX 30 -1.26%; KRX 100 +0.03%; Ho Chi Minh +1.23%

U.K. & Europe:
DJ STOXX 50 Index +0.39%; FTSE 100 +0.32%; CAC 40 +0.16%; DAX +0.36%; Russian RTS Index +2.42%

KEY HEADLINE NEWS

• - Goldilocks showed up this morning, but the extent of her appearance is suspect. Nonfarm payrolls were reported 97,000 higher in February, compared to the 95,000 that was expected, according to a Bloomberg survey of economists. Unemployment decreased to 4.5%, from 4.6% in January. However, average hourly earnings increased 0.4%, versus the 0.3% expected. Year over year, wages were up 4.1%, a concerning figure in our view. The growth in jobs occurred despite a decrease of 62,000 jobs at construction companies, as growth in the service sector more than offset that decline. We believe some of this growth may be seasonal, driven by the tax reporting season, and the addition of seasonal employees to firms like H&R Block and other smaller tax accounting firms.
• - The nation's trade deficit narrowed by 3.8% in January, to $59.1 billion, despite a widening of the deficit with China. Overall, exports rose to a record high, while imports decreased. The consensus view compiled by Bloomberg showed an expectation for a measure of $59.8 billion.
• - Goldilocks' time on stage could be limited, as the mortgage lending market seems to take hits on an almost daily basis. This week alone, we have had the FDIC order Fremont General (FMT) to cease and desist its subprime mortgage lending due to a lack of proper risk consideration structure in place; then the FBI issues a warning on illegal lending practices; today New Century (NEW) is in the news again, as it announced that it would cease its acceptance of loan applications due to a lack of liquidity from its backers. Bloomberg reported this morning that CreditSights Inc. anticipates that defaults in the subprime mortgage market could add 500,000 homes to the inventory of residential real estate for sale. This week's news is nearly guaranteed to find headlines in weekly publishings from Barron's and Businessweek. These articles typically move markets and rightly so, we believe, especially in this case.
• - According to the RBC Cash Index, consumer confidence slipped to a three-month low of 92.3, down from 103 measured in early February. The service sector and consumer spending have been the mainstays of American economic strength in recent times. If the consumer starts to tighten his belt, it will provide just one more driver for credit risk spreads to widen. It also portends to impact corporate earnings. We will have to keep a close eye on this, and evaluate whether it was simply due to the recent weakness of the stock market, or if a greater force, such as housing weakness is impacting the consumer's view. The job market continues to provide support for consumer confidence.

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