FEAR is DRIVING THE MARKET.

When HSBC Europe's largest bank decided to come clean and set aside 35 bln. to rescue two funds that may be affected by the sub prime market, fear spread across all financial firms. The reason for the panic is the lack of transparency or disclosure that surrounds our financial institutions. The question really is: how much red ink related to sub prime holdings Citi Bank, JP Morgan Chase, Bank of America and others are keeping off their books?

Because we do not know and because they are not telling us, suddenly as it is usually the case, government debt becomes very attractive: the 10-year bond saw its yield drop to its lowest level since 2005. When the demand (price) for bonds increases, the yield decreases, The 10-year bond has replaced the 30-year bond in setting long-term interest rates, so its fluctuations impact fixed rates while ARMs and consumer debt and credit cards follow the prime rate.

This brings us to the fourth factor that I mentioned yesterday in "winning the mortgage battles": Interest Rates.
If the panic persists in the market and investors' appetite for safe government debt grows, mortgage interest will be even lower. This will be another reason why the Fed will not need to cut rates.

I maintain that there are not going to be any more rate cuts by the Fed this year; slow home sales and looming foreclosures are not the result of high interest rates but a shift away from creative financing, loose credit practices and sometimes greed. Fear is a bad motivator, it usually leads to emotional and hurtful decisions.
Write to John Palla at jpallaa@gmail.com