We woke up this morning to such an event. The Wall Street Journal reported the following headline from the Associated Press: “LONDON -- Iranian naval vessels seized 15 British sailors(,) Marines who had boarded a ship suspected of smuggling cars in the Persian Gulf off the Iraqi coast on Friday, officials said.

“The British Navy personnel from the frigate HMS Cornwall were "engaged in routine boarding operations of merchant shipping in Iraqi territorial waters," and had completed a ship inspection when they were accosted by Iranian vessels, Britain's Defense Ministry said. The British government has demanded "the immediate and safe return of our people and equipment."

"We are urgently pursuing this matter with the Iranian authorities at the highest level and ... the Iranian ambassador has been summoned to the Foreign Office," the ministry said.

This event briefly impacted rates, and fuel prices. Rates went down as there was a flight to safety. Fuel prices went up some. The 10-year Treasury opened -.020% with the rate to 4.589%.

Crude prices went up some, with the NYMEX +.24 / +.39% to 61.93. Crude oil in New York jumped above $62 a barrel briefly after Iran seized 15 British naval personnel, raising the prospect of conflict in the Middle East.

Bloomberg reported: “The incident occurred in the Persian Gulf at about 10:30 a.m. Iraq time today, the U.K. Ministry of Defense said. Signs that the United Nations Security Council will impose new sanctions on Iran to suspend its nuclear program also bolstered prices. A draft that would freeze the assets of a bank and bar some exports from the country was formally introduced yesterday.

``Any time tension rises in the Persian Gulf you have to be concerned,'' said Tom Bentz, an oil broker with BNP Paribas Inc. in New York. ``Worries that Iran would take oil off the market because of the nuclear dispute have been pushing prices higher for a while now. We are in a world that can't afford to have any supply taken off the market.''

What appears to be surprising is the minimal impact this has had on stocks bonds and commodity markets. This has the potential to increase tensions in the Mid-East. At the same time, there is already much tension there. This exact situation happened previously. Again, in the WSJ, “In June 2004, six British marines and two sailors were seized by Iran in the Shatt al-Arab between Iran and Iraq. They were presented blindfolded on Iranian television and admitted entering Iranian waters illegally, then released unharmed after three days.’

At 09:00 the bond market received its second surprise of the day. Everyone, ourselves included, were expecting the Existing Home Sales number for February to be less than January’s 6.46m. February surprised us by coming in not only above the lower expectations, but above January sales.

Economists were expecting Existing Home Sales to be 6.26m to 6.35m. The National Association of Realtors reported that 6.69m seasonally adjusted homes were sold in February.

Given all the problems that are in the residential real estate market an improvement like this should have shot rates up high. The bond market is balancing this number with events in the Mid-East and keeping rates fairly flat. The 10-year Treasury is +.006% with the rate at 4.593%

SHORT-TERM OUTLOOK [23 March 2007]

Monday morning will see the Census Bureau of the Department of Commerce will follow up Friday’s Existing Home Sales report. The Census Bureau issues the New Home Sales report at 09:00cdt {14:00gmt}. Expectations are not out at this time, but if this is higher than expected it could drive rates up. We must be careful not to assume that New Home Sales will be in the same direction of Existing Home Sales. They are independent numbers.

All events next week will be dependent on the Iran British situation. If it intensifies, all bets are off. That will help rates for a few weeks. But it will not assist the price at the pump.

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com