Investors continued to lose their appetite for risk last week. While losses have been confined mostly to subprime, investor caution became very evident in the high-yield corporate sector as DaimlerChrysler was forced to postpone its $12 billion auto loan deal, which involves the sale of Chrysler Group to Cerberus Capital Management. In addition, KKR's leveraged buyout of Alliance Boots was postponed as a result of the market turmoil. In his August Monthly Investment Letter, Pimco's Bill Gross said that the subprime crisis is not "isolated" and is proving contagious to other markets. "The sudden liquidity crisis in the high-yield debt market is just the latest sign that there is a connection," Gross said, adding that markets are linked and "ultimately their prices and yields [are linked] to the fate of the U.S. economy."

There was a lack of good news on the housing front as well. Last week, Countrywide Financial reported disappointing earnings - $0.81 EPS versus expectations of $0.93 EPS - related to the poor housing market. In addition, in the company's press release, its outlook for the second half of the year was somewhat bleak: "Management anticipates that the second half of 2007 will be increasingly challenging for the industry and Countrywide," the release said. "Absent a reduction in mortgage interest rates, production volumes are expected to fall and competitive pricing pressures are expected to increase. In addition, volatility in the secondary markets has increased significantly early in the third quarter and liquidity for mortgage securities has been reduced as a result."

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