This week, it's showdown time. While Clint Eastwood will not be on hand, we have some dastardly character actors for Wednesday's duel between the two baddest dudes in town. At high noon, or around 2:15 p.m. to be precise, the Federal Marshall, err, Fed Chairman Bernanke (The Good), will face off with inflation (The Bad). And hanging in the balance, the sweet Goldilocks economy (The Could Get Ugly).
The experts debated the risk of the subprime sector squeeze possibly spreading into other portions of the financial markets. On one side of the table, Hank Paulson argued how well the economy was holding up, while on the other side, Alan Greenspan warned that the reach of the sector should not be discounted. The fact remains that as ARMS offered to both subprime and higher rated borrowers are adjusted higher, the trend of rising defaults and foreclosures are likely to escalate, in our view. Besides that wider range risk, as these assets default, investors in related securitized assets and derivatives, including many hedge funds, may begin to report significant losses. And the risk to the housing market could worsen as well.
With credit tightening in the mortgage market, there is a two-pronged threat developing that could delay a housing recovery. The first is clear, as foreclosed upon homes return to market, adding to inventory, prices could weaken further. We previously reported that the incremental inventory impact here may amount to 500,000 homes or so, or about 1/12 of the recent annual sales rate. The second, less obvious factor, is that tightening credit that is arising from defaults, increased regulatory scrutiny and lender discrepancy threaten to slow the pace of new lending.
Clearly, all eyes will be on the Fed Chairman and the degree of threat he sees posed by lending issues and housing. Besides this, he must weigh the economic danger of inflation, as reported in last week's CPI and PPI data, and the weakness in manufacturing that was also seen.
On Monday, the U.N. Security Council will begin discussing its new draft of a stricter set of rules against Iran. Iran is actively lobbying the members of the council not involved in the drafting of the resolution, seeking help from the little guy nations, so to speak. Iran's leader, Mahmoud Ahmadinejad is playing the underdog card to the tee. He's formed a "Nonaligned Movement" and has traveled the globe befriending nations that individually are insignificant, but in aggregate could stand against the United States or at least have some impact upon it.
Mahmoud plans to be in Manhattan for the vote this week or for whenever the vote is scheduled. We can expect another dramatic speech, and it seems likely that Venezuela's attention seeking and getting Hugo Chavez, who last week interviewed with Barbara Walters, could try to make the trip as well. Even so, with economic growth in question, barring any significant military activity by Iran, we expect the direction of oil to be lower in the near term. The market will be closed in Venezuela on Monday, as will markets in Columbia and Indonesia. Continuing with international news, Canada will present its annual budget on Monday.
Starting off an important week for housing, the housing-market index will be reported for March, with a reading of 38 expected, versus 40 in February. Henry Paulson will catch another opportunity to cheer lead, when he addresses the Inter-American Development Bank meeting in Guatemala. Reporting earnings in the U.S., expect news from Omnova Solutions regarding its fiscal first quarter.
Tuesday will bring data on housing starts for February at 8:30 a.m. Bloomberg's consensus expects starts to reach an annual pace of 1.45 million, compared to 1.408 million in January. And let's not forget, the Federal Reserve begins its two-day meeting on interest rates. There is not much other important news scheduled for Tuesday, except a closely followed report from the Bank of Japan with its resulting decision on interest rates. Recall, the Bank of Japan recently raised rates a quarter percentage point to 0.5%, so we do not expect further action this week.
Reporting earnings, look for Oracle Corporation (NASDAQ:ORCL), Adobe Systems (NASDAQ:ADBE), Cintas Corp. (NASDAQ:CTAS), Commercial Metals Co. (NYSE:CMC), Factset Research Systems (NYSE:FDS), Chaparral Steel (CHAP), Progress Software (NASDAQ:PRGS), Superior Industries (NYSE:SUP) and Marcus Corp (NYSE:MCS).
Wednesday brings the conclusion of the Fed's meeting, as a result of which, it is expected by most to keep interest rates steady. The market's keen eye will be focused on the accompanying statement of the Fed, and comments about inflation, housing, the economy and where future action might be biased.
Markets in Japan will be closed for the start of spring. Reporting earnings in the U.S., expect reports from Morgan Stanley (NYSE:MS), Fedex (NYSE:FDX), Darden Restaurants (NYSE:DRI), Ross Stores (NASDAQ:ROST), Herman Miller (NASDAQ:MLHR), Clarcor (NYSE:CLC), Charming Shoppes (NASDAQ:CHRS), AAR Corp. (NYSE:AIR), Stein Mart (NASDAQ:SMRT) and Lindsay Corp (NYSE:LNN).
On Thursday morning, we should have news from the European Central Bank, as it meets but is not expected to act on interest rates this time around. At 10:00 a.m., February leading indicators are seen declining 0.4% by Bloomberg's consensus of economists. This compares with a 0.1% increase in January. Considering the pace of recent economic data, leading indicators could prove critical for the week's direction of equities, and we anticipate stocks to drift lower.
Richmond Fed Chief Jeffrey Lacker will address a very apropos credit market symposium, while Strategas Research Partners hosts a strategy, economics and financial services conference.
Housing poses a significant obstacle to the market this week, and important home builder, KB Home (NYSE:KBH), will lead the earnings calendar Thursday. Also reporting earnings, look for Nike (NYSE:NKE), General Mills (NYSE:GIS), Conagra Foods (NYSE:CAG), Jabil Circuit (NYSE:JBL), Williams-Sonoma (NYSE:WSM), Barnes & Noble (NYSE:BKS), Palm (PALM), 3Com (COMs), Scholastic (NASDAQ:SCHL), Borders Group (BGP), Cato Corp. (NYSE:CTR), Fred's (NASDAQ:FRED) and Cost Plus (NASDAQ:CPWM). Also, Automatic Data Processing (NASDAQ:ADP) will meet with analysts on Thursday.
On Friday, February existing home sales are scheduled for report at 10:00 a.m. The Bloomberg consensus view is for an annual pace of 6.3 million, versus 6.46 million in January. We expect housing to continue to "suck" quoting the words of a couple housing CEOs. They would know best.
Fed President Lacker is busy this week, as he will spend Friday participating in a panel on "Liquidity Risk in Credit Markets." Fed President Timothy Geithner will address the Richmond credit markets conference.
There's no earnings news planned for Friday, as far as we can see, but Take Two Interactive (NASDAQ:TTWO) will be in the spotlight, as an investor group including S.A.C. Capital and Oppenheimer Funds moves forward with plans to replace the board and acquire the firm.