All Things in Moderation

Vital Statistics:

Markets are weaker after Moody’s downgraded Spain to one notch over junk and initial jobless claims came in higher than expected. The chart suggests that the trend in initial jobless claims may be changing. The CPI remained muted. Bonds and MBS are slightly lower.

FHFA released its annual report to Congress on the state of the GSEs. The average 2011 mortgage in their portfolio is very high quality – Average LTV < 70%, Average FICO in the mid 70s. The worst stuff (the no-doc and IO loans are finally gone).  FHFA characterizes the GSEs as “stabilized” but not “sound.”  Fannie and Fred guarantee roughly $100 billion per month and account for 75% of every mortgage originated in 2011. They owe Treasury $187.5 billion.

The NAHB has listed 80 metro areas in their Improving Market Index for June. To be included in the index, the are must have shown improvements in housing permits, employment, and house prices for at least six consecutive months. This is a drop from May where 100 areas were in the index. Map.

The consensus seems to be that Jamie Dimon did well yesterday, by showing contrition where necessary, yet pushing back when he had to as well. The business press seems to believe the Senators went too easy on Dimon. 

In keeping with the “where is the inventory” thread I have been discussing the past few days, here is another: Private Equity has raised more than $6 billion to buy and rent foreclosed homes, yet have only deployed about $2 billion of it. Analysts are concerned that political pressure out of Washington is delaying the bulk sales. Maybe someone in Washington wants to goose the housing indices a little bit. He may end up being too clever by half – when the ducks are quacking, you gotta feed them or they go away…

Chart:  Initial Jobless Claims:

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Vital Statistics:

Markets are a touch higher this morning after yesterday’s sell-off. Federal Reserve Bank of Chicago President Charles Evans (who Jim Bianco called an uber-dove) said he supports more stimulus. The 10-year yield is back up to 1.61% and MBS are down about 1/4 of a point.

The National Federation of Independent Business Optimism Index ticked down in May. It came in at 94.4, vs 94.5 in the previous month, which is a historically low level. 51% of owners hired or tried to hire in the last three months and nearly 3/4 of those reported few or no qualified applicants for positions. The report has a pretty scathing indictment of Washington, with 22% of the respondents indicating taxes as the single most important problem. 20% reported poor sales, and 19% reported government red tape.

Excerpt from the report: “The Index did not go down by much, that’s the good news. The May reading is still at recession levels from an historical perspective, consistent with very anemic Gross Domestic Product (GDP) and employment growth. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health care costs, regulatory compliance costs, all of which are very uncertain, meaning that owners cannot make reliable estimates of what will happen to these factors. Most of this uncertainty is coming out of Washington, D.C. Owners can’t attach probabilities to outcomes or even decide which outcomes to consider.

The amount of political manipulation and evasion to guide the spending of billions of taxpayer dollars is disturbing to owners. Sixty (60) percent of those surveyed said now is a bad time to expand their businesses; one-in four of those owners cited political uncertainty as the main reason, second only to concerns about a weak economy. Investing in jobs or plant and equipment will remain at “maintenance” level until this is resolved.”

I would be surprised if this doesn’t become campaign fodder.

A study from the Federal Reserve regarding changes in US family finances has been getting a lot of discussion – the median net worth of families has dropped nearly 40% from 2007 to 2010, putting them back where they were in 1992. Most of this is housing-driven, though stocks, student loans, and a drop in incomes are playing a part too.  A generation’s worth of wealth creation has been destroyed in 3 years. Of course much of that wealth was illusory, but it does speak to why confidence has been so lousy – the reverse wealth effect. Hopefully housing is in fact bottoming, which will reverse this effect. 

The WSJ addresses in interesting question:  if the shadow inventory is so high, why is the inventory of homes actually for sale at normal levels?  It turns out (unsurprisingly) that negative equity is the reason, but also the influx of professional investors scooping up inventory in the hardest-hit areas.  It also explains why prices are rising the most at the bottom end of the market – they have the most negative equity, so supply is the most constrained.

Chart:  NFIB Small Business Optimism Index:

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Vital Statistics:

Markets are up this morning on a potential bail out for the Spanish banks, although the initial euphoria is wearing off. When I checked in last night, the S&P futures were up 16 points.  Now they are up 6. During the US financial crisis, the one sure-fire trade was to fade any rally brought on by some sort of government rescue. The S&P futures would spike up on news that the government was intervening somewhere, and then would sell off as people realize the intervention is no panacea. US bonds clearly aren’t buying it, with the 10 year unch’d. MBS are flat as well.

While equity markets have rallied on the Spanish bailout, Spanish bond yields have not. After trading up to 6%, Spanish government yields are now over 6.4%. As Bill Gross has noted, the Spanish bond market is rigged, as the Spanish banks are encouraged to buy up debt auctions to make the demand for Spanish debt look better than it really is. 

Are we there yet? That is the title of CoreLogic’s June MarketPulse report on housing. While noting that previous seasonal strength in 2010 and 2011 ended up fading into year-end, CoreLogic postulates that the green shoots we are seeing indicate the market has turned for good. The caveat:  housing won’t really turn until the job market is fixed. 

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