Subprime resets

The bulk of the sub prime resets should be attempted by the end of May. Judging by the early data, the resets are not going well as defaults are moving higher and deliquencies rise. That is only half the problem. The lenders are under the pressure of not receiving any income, yet still being required to pay their financing costs. This will have profit implications in q3 and q4. In addition, there is a time delay from when a home goes into foreclosure and when it is taken over by the financing unit. Hence, homeowners are stiffing the banks. Nice.
The subprime resets tail off in q3 and q4, BUT option ARMS and alt-A resets start to accelerate in q1 2009 and accelerate all through the yr. That coupled with a Democratic President and Congress and Senate could spell significant trouble for the US financial markets. The US Treasury mkt is one to watch. The bearish economic news ahas not resulted in a rally in the Treasury mkt-plenty of bubble callers in US interest rates. IF UST start to back up significantly, that could be trouble for the eequity mkt since so mauch talk of fair value rests on FED model, ie a 4% 10 yr yield implying a 25 X multiple. That is ridiculous. According to the latest St Louis Fed release, Corporate Baa bonds have moved from 6.63 on Feb.1 to 7.01 on April 17. Using the equivalent calculation results in an implied multiple of 14.3X-that is more realistic. Of course the Fed has cut rates by 125 bps since that time, but that has only helped banks and not consumers as the lower interest rates have not filtered through.