Taking Into Account the 'More to Come' Scenario

Includes: DIA, QQQ, SPY
by: Bespoke Investment Group

This weekend's cover story of the WSJ ran an article describing how the increasing pace of mortgage resets in the first half of 2008 is likely to worsen the subprime mortgage crisis ("Rising Rates to Worsen Subprime Mess"). The article included the following graphic which highlights the increasing trend in mortgages approaching their reset dates.

While resets are poised to peak over the next six months, we would remind investors that while the typical reaction to the headline of the day would seem to indicate otherwise, markets by their nature are discounting mechanisms, and tend to price in future events, especially when these events are widely known and in constant discussion. As one example, we would point out the ABX indices tracking many of these mortgages are already trading at under 50 cents on the dollar.