All Things in Moderation

Vital Statistics:

S&P futures are flat this morning after yesterday’s furious rally on the back of the FOMC comments. Europe is playing catch-up. Bonds continue to sink as the market re-asses the probability of QEIII.  The 10 year has clearly fallen out of its 140-144 trading range, and it looks like 134 is the next stop. Mortgages are weaker as well.  As the 10 year sells off, it will be interesting to see if the Fed can hold up MBS.

The Fed left rates unchanged, but noted the recent economic strength and low inflation (since food and energy prices don’t matter). They re-affirmed their intention to maintain exceptionally low interest rates through late 2014. Operation Twist and the MBS re-investment will continue. People hoping for clues to QEIII didn’t get much except for a bland statement that the Fed will continue to review its securities holdings and adjust as necessary.

After the close yesterday, the Fed released the results of its stress-tests of the banking system. Citi, Suntrust, Ally and Metlife flunked.  The stress test was actually pretty tough – unemployment at 13%, a 50% crash in the stock market, and another 21% drop in house prices. 15 of the 19 banks examined would maintain capital ratios above regulatory minimums in that scenario. The detailed methodology is here.

This editorial from the NYT regarding Goldman reminds me of the way Michael Lewis described Salomon Brothers in Liar’s Poker.

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Vital Statistics:

Markets are a little stronger this morning on stronger German economic reports. US bond futures are down, while MBS are flat. Feb retail sales were in line with expectations, up 1.1%.

The National Mortgage Settlement will offer relief to underwater homeowners and those who were improperly foreclosed upon. Read the details about who will qualify here. The banks will get varying credit against the settlement based on the sort of principal forgiveness they do. They get full credit if they own the loan, and 45 cents if they service the loan. So the banks get credit against their settlement by passing losses to someone else? Why wouldn’t they pass off all of the settlement to investors in paper they service? Investors in MBS have to be seething right now.

CNBC has some data on the rental market and the purchase market, noting that prices are going in opposite directions in some localities. They note FHFA’s pilot program to turn REO properties into rentals. It will be interesting to see if the program works. My initial take on it was that FHFA was trying very hard to make the program uninteresting to pure financial investors.

The Fed will be releasing the latest stress-test results this week. Bloomberg notes that the Street is leaning negative, with the skew between puts and calls on the XLF the highest they have been since 2007. In plain English, that means that puts (or bets that the index will fall) are in more demand than calls (bets that the index will rise).

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Vital Statistics:

Markets are weaker this morning on the back of a disappointing report on Chinese exports and lower commodity prices. Oil is down a buck and a half, while bonds and mortgage backed securities are a touch higher.

Euro credit default swaps are higher this morning after ISDA declared the Greek exchange offer a “credit event.” The next event in Greece will be the auction on Mar 19, which will set the payout price for the bonds. Since most holders tendered their bonds, it will be a low volume event which opens the door for manipulation.

With the Greece resolution in place, market participants will begin to focus on the next problem child, widely believed to be Portugal. Portuguese yields are 13.7%. That said, EURIBOR / OIS (a measure of stress in the banking system) has been tightening steadily since the beginning of the year, and is trading at 54 basis points after peaking at 100 basis points in Dec.

Pacific Capital Bancorp is being bought by Mitsubishi UFJ Financial, which is the first bank deal in what seems like forever.

The king of data miners, Thomas (Flathead) Friedman has a column discussing the negative relationship between test scores and the percentage of GDP a country earns from natural resource extraction. In other words, if you don’t have a lot of natural resources (Taiwan, Japan), your students tend to do well, as opposed to, say, Saudi Arabia or Kuwait.  Columns like this always remind me of those “Vegas killer” betting systems you see advertised in fantasy football magazines in the late summer (always take the dog on Monday night, when the game is on artificial turf, and the NFC team won the Sunday night game…).  Correlation does not imply causation. Will our test scores go up if we stopped oil production in the US?  Of course not.

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