Morning Report

Vital Statistics

Last Change Percent
S&P Futures 1363.5 2.9 0.21%
Eurostoxx Index 2518.8 4.6 0.18%
Oil (WTI) 106.65 0.1 0.07%
LIBOR 0.4736 0.000 0.00%
US Dollar Index (DXY) 79.665 0.526 0.66%
10 Year Govt Bond Yield 2.04% 0.03%

Markets are rising this morning after Greece successfully completed its sovereign debt restructuring and the BLS released its jobs report. Over 95% of bondholders tendered after Greece said it would trigger a collective action clause compelling participation. This should pave the way for another 130 billion in aid. While the market clearly does not consider the crisis solved – the new bonds are trading at a 22% yield in the when-issued market – this should at least put Greece on the back burner for a while. The 10-year is down 6 ticks, while mortgages are flat.

The BLS released its February Employment Situation report at 8:30 this morning. Feb payrolls came in a bit higher than expected – 227k vs 210k expected. The unemployment rate was flat at 8.3% and in line with expectations. The labor force participation rate edged up slightly from its Jan lows. Earnings and hours were up a hair. Professional and Business services added the most jobs, along with health care. Government and construction were flat.

CoreLogic released its monthly Market Pulse yesterday (you need to register to get it, but it is free). They note the building economic strength and signs of improvement in the real estate market. They note that the recovery was initially driven by productivity-increasing capital investment, which allows companies to increase output without increasing hiring. Productivity growth is tapering off, which suggests that business has pretty much extracted all it can from existing employees and will need to start hiring to increase output.

The report notes that 25% of MSAs are now experiencing price increases. The ones that are lagging the most are the ones with clogged foreclosure pipelines – for the most part judicial foreclosure areas. Just more proof that politicians who want to slow foreclosures in the hopes that keeping supply off the market will stabilize prices are shooting themselves in the foot. Of course some politicians are incorrigible. To be fair, most of these measures are small-ball things that won’t change the dynamics of the housing market, but will allow the administration to say they are “doing something” about the housing crisis. For some reason, letting the market clear does not constitute “doing something.”

Do you look at Zillow to get an idea of what your house is worth? The Washington Post dissects the Z-estimate and its accuracy. Punch line: Neighborhoods with high turnover tend to have Z-estimates closer to actual sales prices than neighborhoods with lower turnover. While it can be a useful (and fun) number, take it with a grain of salt.

Syria – from Stratfor

 

Syria: What Prevents U.S. Military Involvement

March 7, 2012

 

 

Summary

 

The United States is not eager to launch an air campaign against the Syrian regime that would be similar to the NATO campaign in Libya even though numerous U.S. lawmakers have called for such a campaign. Not only did Libya not have the formidable air defense systems that Russia has provided to Syria, but Syria’s rebels have not been able to control large areas of territory. These factors would complicate any air campaign against the al Assad regime, but Washington’s reluctance to get involved militarily is based on the fear that it could slip into a much messier conflict than it did in Libya.

 

Analysis

 

Amid increasing calls from some U.S. lawmakers for an air campaign against the Syrian regime, the U.S. administration appears to be making a concerted effort to explain to the public why this is not a preferred course of action. Beyond the significant regional implications of such an action, Washington does not want to get involved in a conflict with Syria that likely would pose credible threats to U.S. air forces and risk involving ground forces as well.

 

The Rationale in Washington

 

When U.S. Central Command chief Gen. James Mattis briefed the U.S. Senate Armed Services Committee on Syria on March 6, his overarching message was that any military action in the country would not be easy. Mattis noted that the lack of any safe zones in Syria would mean deploying a significant number of ground troops to create such zones and warned that the United States believes the Syrian government possesses chemical and biological weapons. When asked about the possibility of imposing a no-fly zone in Syria, as NATO forces did in Libya, Mattis warned of the potential dangers posed by the advanced air defense systems Syria has received from Russia.

 

Mattis’ remarks were a subtle rebuttal to calls made in recent days by Sen. John McCain, one of the committee leaders, to launch airstrikes in Syria. On the same day as Mattis’ briefing, Foreign Policy published an article citing two anonymous Obama administration officials discussing what the White House is planning for the next phase in the Syrian conflict. One official referred to the same danger posed by Russian-supplied air defense systems, adding that a recent Russian shipment to Syria contained large amounts of advanced anti-aircraft missile systems, presumably intended to defend Syria should the conflict become international.

 

Washington seeks to dampen the expectation that it intends to do in Syria what it did in Libya. An air campaign is not on the horizon, and the United States is also hesitant to publicize any of its attempts to arm the opposition, though remarks from the officials cited by Foreign Policy seem to indicate that Washington is giving other countries (likely Saudi Arabia and Qatar) approval to do so. Public discussions of arming the opposition forces are, however, more for public relations to show that something is being done to assist an opposition under siege. If the United States were actively engaged in such activities, it would manage the operation covertly.

 

Syria’s Defenses Compared To Libya’s

 

The United States has a strategic interest in seeing the fall of the al Assad regime because of the effect it would have on Iran’s influence in the Levant. Aside from levying sanctions and a public acquiescence to other countries sending in weapons, Washington does not appear to be publicly doing much to hasten al Assad’s downfall. The United States is wary of entering the fray due to its fears that it would get dragged into a much messier conflict than those calling for an air campaign are anticipating. Pointing to the potential dangers posed by Syria’s air defense network is one way of discouraging calls for military intervention.

 

This is not to say that the Syrian Air Defense Command (ADC) is not formidable, especially in comparison to what NATO forces went up against in Libya. With an estimated 54,000 personnel, it is twice the size of former Libyan leader Moammar Gadhafi’s air force and air defense command combined at the start of the NATO campaign. Syria’s ADC consists of the 24th and 26th anti-aircraft divisions comprising thousands of anti-aircraft guns and more than 130 surface-to-air missile (SAM) batteries. The bulk of Syria’s ADC SAM weaponry is the SA-2, SA-3, SA-5, SA-6, and SA-8 SAM systems that were also operated by Gadhafi’s forces. However, the Syrians operate these systems in far greater numbers, have devoted significant resources to the maintenance and upgrade of these missile batteries and have also successfully deployed their SAM systems in a dense and overlapping layout that would complicate potential Suppression of Enemy Air Defenses operations.

 

Though also a Russian ally, Gadhafi did not have the more advanced Russian air defense systems that the al Assad regime possesses. For instance, Iran reportedly financed Syria’s acquisition of 50 SA-22 systems first delivered in 2007 — 10 of which allegedly ended up in Iranian hands. The Syrians are also thought to operate several SA-11 systems, which the Libyans did not have. Furthermore, reports emerged in November 2011 that the Russians upgraded numerous Syrian radar sites and transferred a number of advanced S-300 systems to Syria and that a Russian naval mission to Syria that month also served to transport several Russian missile technicians who were to assist the Syrians in operating the S-300s.

 

Syria’s defenses against an air campaign are not restricted to the ground. Its air force can contribute dozens of fighter aircraft and interceptors, the most advanced of which are the MiG-25 and MiG-29. But while the Syrian air force is both quantitatively and qualitatively superior to Gadhafi’s air force, which was just starting to re-equip and modernize itself after years of sanctions, it has neither played a meaningful role in managing the unrest in the country nor would it play a meaningful role in defending the country from an air campaign.

 

Perhaps the biggest difference between Libya and Syria is that the Syrian rebels have not yet been able to hold significant territory. This matters not just for their ability to have safe areas from which to launch attacks, but also for the air defense network’s ability to function properly. Air defense systems typically are designed to provide cover through overlapping areas of coverage. When eastern Libya fell into rebel hands early on during the revolution, that overlap was severely damaged, which in turn degraded the Gadhafi regime’s overall air defense network. The Syrians are not facing this difficulty.

 

A Feb. 28 CNN report said that the Pentagon had drawn up detailed plans for military action against the Syrian regime. The U.S. military indeed has updated its order of battle (orbat) for Syria in preparation for any contingency operations, and this work allegedly produced the best orbat the United States has had on Syria since 2001. However, contingency plans exist for numerous countries with which war is unlikely. The situation in Syria — whether through the loss of territory, massive defections from the regime or the loss of Russian support — will have to change before Washington implements any of the plans it has prepared.

 

 


Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1361.8 9.0 0.67%
Eurostoxx Index 2494.7 33.9 1.38%
Oil (WTI) 106.55 0.4 0.37%
LIBOR 0.4736 -0.001 -0.21%
US Dollar Index (DXY) 79.298 -0.414 -0.52%
10 Year Govt Bond Yield 1.99% 0.02%

Markets are stronger this morning a strong economic report out of Germany and optimism that Greece’s debt swap will go through without major problems. Markets are continuing yesterday’s rally that was sparked by QEIII hopes. Initial Jobless Claims were 362k.

I was at the JP Morgan Securitized Products conference all day yesterday. Congressman David Schweikert (R-AZ) spoke regarding the regulatory environment. It is an election year, so expect more initiatives out of the administration to provide relief. A couple takeaways from his talk:

  • LIberals agitating for wholesale principal reductions are just conducting election – year posturing. Everyone in Congress is getting phone calls from their state pension funds (who are large holders or MBS) begging them not to do it. Liberals acknowledge in private they would annihilate pension funds and would do great damage to the future housing finance system if they allowed large-scale principal forgiveness in GSE paper. Which makes FHFA Director Ed DeMarco a very convenient figure at this point and means he probably isn’t going anywhere.
  • The MERS headache is generating preliminary discussion of a global settlement fund (a la asbestos or tobacco) to settle all of the claims coming from the financial crisis. Probably a low-probability event, but it is out there.
The other takeaways from JPM speakers.  (For the ATiM folks, a lot of this is going to be really “inside baseball”)
  • Origination margins have spiked – originators are probably making 3-4 points on new loans (pre-expenses)
  • QEIII will not do much for housing. The Fed is pushing on a string at this point. Fund managers are at record overweight levels on MBS, which means the Fed could spend a lot of money and not move mortgage rates (or affect house prices) all that much.
  • The Fed thought it would be cute to institute new fail charges right ahead of QE, thus adding a short squeeze to the mix. Dealers are having a tough time getting paper to satisfy the appetite of the Fed and won’t short due to the fail charges. This is part of what is driving MBS spreads so tight.
  • Ally is scaling back the correspondent business, while Wells and Citi are getting more aggressive. Chase overshot in downsizing correspondent lending and plans to increase it this year.
  • House prices will fall another 3% this year and that should mark the bottom
  • The government is probably going to experiment with a “first loss” tranche in conforming paper. Expect this in the next 3 – 6 months. This would accomplish two things – first it would start the process of handing off mortgage financing to private capital and it would give a market-based indication of what it should charge for its guarantee (its G-fee). The G-fee is set on the basis of politics and funding needs (for example, it was just raised 50 bp for 10 years to pay for the 2 month payroll tax extension). It would be subordinated paper that absorbs the first 5%, making FHA more of a re-insurer. Concern is demand for the first loss tranche.  Banks would have to reserve 100% for it, so hedge funds would have to buy it. The concern is that they don’t have the capacity.
  • JPM estimates the shadow inventory to be about 5.5 million homes and net demand for housing is 1.25 million per year. Household formation has fallen off a cliff.
  • Basel III requirements for MSRs are extremely harsh (MSR value over 10% Tier 1 becomes a capital deduction) Expect MSRs to remain very cheap. Banks are contemplating cutting servicing fees to 12 basis points.
  • Fan and Fred will remain wards of the state. It would take $250 – 300 billion to capitalize them and they already owe Treasury $160 billion. That is basically the enterprise value of Exxon Mobil. You can’t raise that kind of capital in the private sector.
  • Once the economy picks up steam, the fiscal problems will become front and center. We are looking at about half a trillion of contraction in early 2013, with the expiration of the Bush tax cuts ($250B), the sequestration due to the failure of the debt supercommittee ($100B) and the expiration of the payroll tax cut ($120B). Don’t be surprised if we fall into a recession early next year.
  • Household balance sheets are improving, (DTI ratios are falling) but this has been 100% due to defaults. Debt service ratios are at multi-decade lows due to low interest rates.

Quick Administrative Note

Mich pointed something out to me a couple days ago of which everyone should be aware.  It seems that, for reasons unknown (perhaps user error), occasionally a comment will end up in the trash rather than on the site as intended.  I noticed this morning, for example, that a novahockey comment from yesterday is in the trash.  There doesn’t seem to be any reason for it to have been trashed (in fact, I agree with it wholeheartedly!) so I am guessing it got put there inadvertently.  If so, nova, you may want to go into the trashcan and reinstate it.  Similarly, Mich discovered several posts in there earlier in the week, including one of her own, that didn’t belong there.

Anyway, I just wanted to make everyone aware, and  perhaps it is sensible for everyone to occasionally check the trashcan from the dashboard to make sure nothing is getting mistakenly trashed.

NCAA tournament update

Good evening.  A quick word from your NCAA group commissioner.

Twelve teams have thus far earned automatic bids by virtue of either winning their conference tournament or finishing first in conferences without tournaments.  Of those twelve, only three –St. Mary’s, Creighton and Murray State– have a decent shot at making it to the round of 16.   But a first-round upset or two may be lurking.

I’ll publish the Yahoo! tournament ATiM group link Sunday afternoon before the brackets are announced so you can check out the site as soon as we learn who’s playing who.  On Monday I’ll provide links to some of the bracketologists’ prognostications, in case you want to absorb their words of wisdom.

Bracket tinkering will cease around 10:30am EDT next Thursday at the start of the first  ’round of 64′ game.

Faux Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1345.55 +2.19 +.16%
Eurostoxx Index 2453.34 +9.9 +.41%
Oil (WTI) 105.16 +.48 +.46%
LIBOR 0.4746 0.000 0.00%
US Dollar Index (DXY) 79.882 0.026 0.03%
10 Year Govt Bond Yield 1.957% -0.03%

Limited numbers out this morning. ADP employment, a precursor to the monthly employment data due out on Friday, came out on the screws (insider lingo for “as expected”) at +216K, with some minor upwards revision, +3k, to last months number. Non-farm productivity came in slightly higher than expected at .9%, and Unit Labor Costs significantly higher, at 2.8%, up from 1.2% from last week.

Greece remains a focus, as we wait for private bondholders to decide whether to accept the negotiated deal. The deadline to respond is tomorrow, but still no confirmation on when the results will be conveyed publicly. It will be interesting to see the implications for credit default swaps written on Greek debt if some of the bondholders are forced into the the agreement. Does this constitute a “credit event” triggering CDS payouts? ISDA (the International Swap Dealers Association) has said no, but also says that the situation is “evolving”. We shall see.

Equities are slightly up this morning across the globe, after yesterday’s drop down. Rates remain mostly stable after a significant rally yesterday, particularly in the longer end.

GM and Chrysler have announced plans to market LNG pickup trucks.  The current cost of NG per BTU is eight times cheaper than oil. – Mark 

Super Tuesday

How many of you are in a state that is voting today?  I am.  And you are welcome to call me old-fashioned (because I am officially old now), but I really like going to my neighborhood polling place to vote in person on election day.  It is such an honor to be able to vote that it almost brings a tear to my eye every time.  So I don’t do mail-in or early voting.

Today I voted much later in the day than usual due to scheduled appointments, and got there about 15 minutes before the polls closed (7:00pm CST).  I was the only voter there at the time, so I asked the poll workers if they had a good turnout today.  They said there had been 189 votes.  To put that in perspective, they also said 400-500 is “high” turnout for a presidential general election.  I don’t study that kind of thing, but subjectively that seems to me a pretty good turnout.  Of course, I don’t know how many were Rs and how many were Ds, so I have no idea what that number means (OK has closed primaries).   By the time I got home and turned on the TV, less than 10 minutes after the polls closed and with zero precincts reporting, CBS had already called OK for Santorum.  I found that interesting since I heard/saw local ads for Gingrich and for Romney, but none for Santorum.  OK has 40 or 43 R delegates, I’ve heard it both ways.

Anybody else in states voting today have a report or observation?

Crosby Cleared for Contact

Details here.

 

 

 

 

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1350.8 -13.6 -1.00%
Eurostoxx Index 2486.6 -43.3 -1.71%
Oil (WTI) 105.36 -1.4 -1.27%
LIBOR 0.4746 0.000 0.00%
US Dollar Index (DXY) 79.749 0.449 0.57%
10 Year Govt Bond Yield 1.96% -0.05%

Markets are lower on concerns about global economic weakness. The European economy contracted in the 4th quarter, and concerns are mounting regarding China. Bonds and mortgage backed securities are stronger this morning.

Did the S&P 500 just fail at resistance again?

Some 20% of Greece’s private creditors will participate in the debt swap. These are the large European banks – Commerzbank, BNP Paribas, and the big Greek banks. These decisions were undoubtedly heavily influenced by politics, so I am not sure that they are a representative sample of the private creditors.

Greek Finance Minister Evangelos Venizelos said in an interview yesterday that “This is the best offer. This is the best offer because this is the only, the only existing offer.” Note the lack of “best and final” language. If enough holders are reading that statement to mean that Greece is prepared to go forward with a better deal if this one fails, then the 75% participation rate might become an issue. The business press will probably focus on the possibility of a disorderly default and not on the public negotiation between Greece and its creditors, so we could be in for some rough sailing.

Obama will hold a news conference this morning and it is rumored that another mortgage relief plan will be revealed. The plan would allow FHA refis at a reduced fee – from 1.15% to .55%.

No economic data this morning. No MR tomorrow as I will be in the City all day.

Bits & Pieces (Monday Night Open Mic)

Is abundance our future? I tend to think so. Let’s see what you think.

—KW