Morning Report – Housing starts break 1000 04/16/13

Vital Statistics:

 

 

 

Last

Change

Percent

S&P Futures 

1560.1

+17.6

+1.1%

Eurostoxx Index

2609.3

-15.0

-0.61%

Oil (WTI)

82.17

-.84

-0.78%

LIBOR

0.278

0.001

0.18%

US Dollar Index (DXY)

82.45

-0.302

-0.25%

10 Year Govt Bond Yield

1.71%

+0.03%

 

Current Coupon Ginnie Mae TBA

106.1

0.2

 

Current Coupon Fannie Mae TBA

104.06

-0.3

 

RPX Composite Real Estate Index

190.426

-0.4

 

BankRate 30 Year Fixed Rate Mortgage

3.51

 

 

 

Markets are bouncing back after yesterday’s rout. The indices were already weak before the bombings in Boston, so the selloff was not terror-related. Gold is bouncing back after getting absolutely pounded the last two days. Gold closed Thursday at $1565 an ounce and closed yesterday at $1361. Someone is getting carried out on right now. Bonds and MBS are taking a breather after the risk-off trades of the last few days.
 
In economic data this morning, the consumer price index fell in March by .2%. This has been due to falling gasoline prices. Ex food and energy, it rose .1%.  Still well below the Fed’s target inflation rate of 2%. 
 
Housing starts broke the 1 million barrier for the first time since the bubble burst. March housing starts came in at 1.036 million, well above the Street expectations of 930k. February was revised upward to 968k. Building permits were lower than expected at 902k, which may explain why the homebuilder ETF is only up small this morning.
 
Moody’s Chief economist Mark Zandi has been rumored to be the next head of the Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac. Zandi has been an outspoken supporter of principal modifications, which the current acting FHFA head Ed DeMarco has resisted. If DeMarco gets the boot, it will undoubtedly excite many on the Left, particularly Dr. Cowbell, who has been calling for DeMarco’s head for a while now. The politics of this is difficult – the prospect of mass principal cramdowns was the inspiration of Rick Santelli’s rant on the Floor of the Chicago Board of Trade which has been credited with launching the tea party. How will the the government prevent a stampede of strategic defaults?  Your guess is as good as mine. I guess this is Zandi’s reward for cheerleading mediocre economic data during the campaign. He may come to regret it.

Open Thread – 4/16/2013

Open Thread since MR is MIA.

Katrina vanden Heuvel has a good piece on whistleblowers.

http://www.washingtonpost.com/opinions/katrina-vanden-heuvel-dont-confuse-truth-tellers-with-traitors/2013/04/15/3c8e7016-a5e3-11e2-8302-3c7e0ea97057_story.html

I found the linked piece with the original My Lai articles interesting as well.

http://pierretristam.com/Bobst/library/wf-200.htm

Happy Tax Day 04/15/13

Stiglitz points out that our progressive tax system is far less than progressive in implementation, particularly at the very high end.

The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.

At least or marginal rates aren’t 95% anymore:

But that always seemed to be more honored in the breach. There were a whole lot more loopholes available in the 1950s. Imagine if consumer debt interest were still deductible. Elimination of that created the home equity loan boom. Talk about the law of unintended consequences.

Morning Report – Weak Retail Sales 04/12/13

Vital Statistics:

  Last Change Percent
S&P Futures  1580.1 -7.6 -0.48%
Eurostoxx Index 2639.3 -35.0 -1.31%
Oil (WTI) 91.94 -1.6 -1.68%
LIBOR 0.278 0.001 0.18%
US Dollar Index (DXY) 82.45 0.202 0.25%
10 Year Govt Bond Yield 1.74% -0.05%  
Current Coupon Ginnie Mae TBA 105.7 0.3  
Current Coupon Fannie Mae TBA 103.9 0.2  
RPX Composite Real Estate Index 190.4 -0.4  
BankRate 30 Year Fixed Rate Mortgage 3.57    

Markets are lower after disappointing retail sales data. JP Morgan and Wells Fargo reported numbers that beat on the headline, but both are down. Bonds and MBS are rallying, with the 10-year yield back below 1.74%.

Retail sales dropped in March by .4%, the most in 9 months. February was revised down. Apparel, furniture and Home improvement retailers reported gains. Electronics stores reported decreases. Given the lousy jobs report last Friday, it isn’t surprising that retail sales fell. Just crossing the tape:  Barclay’s has taken down Q1 GDP estimates to 2.8% from 3.2% as a result.

Wells Fargo reported record Q4 earnings, with mortgage originations of $109 billion, down from $125 billion in Q4. MSR valuations were lowered as increasing real estate prices affect prepayment assumptions (Their average MSR note rate is 4.69%). The pipeline is $74 billion, down from $81 billion at the end of Q4. 

The IMF is worrying that all of this easy money is going to inflate bubbles elsewhere. IMO, that train has already left the station. A commodity boom and easy money has created a real estate bubble in Canada that is even more expensive than ours was at the peak (median house price to median income ratio is above 5x, while ours peaked around 4.8x in 2006). We probably do have a bond bubble, however the Fed is running the show there and given that it is purchasing 70% of all Treasury issuance, can pretty much handle it has it pleases. 

Note: The MR will be spotty next week as I will be on the Left Coast

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Morning Report – FHA needs a bailout 04/11/13

Vital Statistics:

  Last Change Percent
S&P Futures  1583.0 0.3 0.02%
Eurostoxx Index 2664.1 2.5 0.09%
Oil (WTI) 94.28 -0.4 -0.38%
LIBOR 0.277 0.000 0.00%
US Dollar Index (DXY) 82.15 -0.387 -0.47%
10 Year Govt Bond Yield 1.79% -0.02%  
Current Coupon Ginnie Mae TBA 105.4 0.0  
Current Coupon Fannie Mae TBA 103.7 0.2  
RPX Composite Real Estate Index 190.8 0.5  
BankRate 30 Year Fixed Rate Mortgage 3.56    

Markets are flattish this morning after initial jobless claims came in lower than expected at 346k. They dropped 42k from last week, which spiked due to a seasonal adjustment related to the Easter holiday. Import prices fell half a percent on lower energy costs.Bonds and MBS are up.

Ever since the Bank of Japan announced its quantitative easing program, the market has been speculating that Japanese investors would enter the US market en masse and purchase Treasuries. There has been plenty of anecdotal evidence, but no real numbers to work with. Yesterday’s 10 year auction didn’t provide any either – the bid to cover ratio was 1.8 which was a little light. 

FHA might need a little more money from the government. They have $30 billion of cash on hand and insure $1.1 trillion in loans. The Administration is projecting they might need another billion. It looks like it was the reverse-mortgage business that hammered them.

One of the interesting things about the latest FOMC minutes is that the dispersion of opinion regarding the future of QE appears to be widening. Some wanted to end QE now, while others not only want to continue it, they want to increase it. Nonvoting hawk Charles Plosser said the Fed would be wise to begin unwinding its balance sheet now.

SIFMA lays into Obama’s proposed 2014 budget. It sounds like ETF investors could be in for a nasty surprise. They support the Administration’s proposal to create bonds for financing infrastructure spending, but pretty much pan everything else. The proposal is loaded with new taxes on capital Suffice it to say, if you are an investor, the administration is gunning for you.

Morning Report – FOMC minutes 04/10/13

Vital Statistics:

 

Last

Change

Percent

S&P Futures 

1567.7

4.5

0.29%

Eurostoxx Index

2630.1

35.0

1.35%

Oil (WTI)

93.64

-0.6

-0.59%

LIBOR

0.277

-0.001

-0.36%

US Dollar Index (DXY)

82.38

0.070

0.09%

10 Year Govt Bond Yield

1.77%

0.02%

 

Current Coupon Ginnie Mae TBA

107.1

1.2

 

Current Coupon Fannie Mae TBA

103.6

-0.1

 

RPX Composite Real Estate Index

190.1

0.0

 

BankRate 30 Year Fixed Rate Mortgage

3.57

   

 

Stock markets are higher this morning in anticipation of the Fed minutes which will be released this morning at 9:00 am (a change from their usual 2:00 pm time).  Market participants will focus on hints regarding the end of quantitative easing. Mortgage Applications rose 4.5% last week on the back of the BOJ-led rally in the bond market and MBS. Treasury will also be conducting a 10-year auction around 1:00 pm. It will be interesting to see if the bid / cover ratio is affected by events in Japan. Bonds and MBS are down small.

Earnings season kicked of on Tuesday with Alcoa reporting better than expected earnings, but weaker sales. Retailers Fastenal and Family Dollar are down this morning after missing. We will get JP Morgan and Wells Friday morning before the open.

The President plans to release a $3.77 trillion budget today. He is proposing $1.8 trillion in new spending (although to be fair, that is to replace the sequester). He is also instituting a AMT II on incomes over $1 million of 30%. He also proposes to cap IRAs at $3 million, end carried interest, and to raise taxes on tobacco. He will also propose changes to the way cost-of-living adjustments are calculated – aka Chained CPI – to Social Security. Given that taxes and spending both increase pretty dramatically, the plan is DOA in the house.

It turned out the Fed mistakenly released the minutes early. Still don’t have the actual link, but here are some of the particulars: Economy re-accelerating after Q4 slowdown. Private nonfarm payroll increased at a modest rate in January, but expanded more briskly in Feb. (We now know that March was a disaster). The Fed asked primary dealers about their expectations for when the Fed will start tightening (are they running the Fed according to polls now?) and the view seems to be Q114 for the end of QE and Q315 for the first increase in the Fed Funds Rate. They noted that there did not seem to be much of a pullback in the economy in response to the tax hikes that kicked in Jan 1. Opinions about QE were all over the place, with some wanting to end it now and others wanting to increase the pace of purchases.

Morning Report – Hedge funds betting on Fannie Mae 04/08/13

Vital Statistics:

  Last Change Percent
S&P Futures  1550.9 4.9 0.32%
Eurostoxx Index 2600.8 15.6 0.60%
Oil (WTI) 93.27 0.6 0.61%
LIBOR 0.279 0.000 0.00%
US Dollar Index (DXY) 82.61 0.111 0.13%
10 Year Govt Bond Yield 1.72% 0.01%  
Current Coupon Ginnie Mae TBA 106 0.1  
Current Coupon Fannie Mae TBA 104.3 0.0  
RPX Composite Real Estate Index 190.1 0.4  
BankRate 30 Year Fixed Rate Mortgage 3.54    

Markets are higher this morning on no real news. The Japanese Yen continues to fall, and is now approaching 100 yen to the dollar. The new program of quantitative easing in Japan is re-igniting the yen carry trade, except now the Japanese are borrowing yen to invest in US dollar assets. In case you missed it, Japan’s Nikkei 225 stock market index is up 52% since November. Incredible move. Japan’s QE program will mean incrementally lower rates on US long-dated Treasuries and MBS. Bonds and MBS are flat this morning.

Alcoa kicks off Q1 earnings season after the close today. We will get JP Morgan and Wells Fargo earnings on Thursday before the open.

Friday’s lousy jobs report probably means that any talk of ending QE this summer is probably over. After 3 consecutive economic slumps over the summer months, the Fed is going to stay aggressive. Chicago Fed President Charles Evans said “I’m going to have a lot more confidence if I begin to see indications that growth is well above trend and its going to be sustainable.” The Fed is going to be wary of reducing stimulus given that the fiscal policy has tightened a little bit.

Fannie Mae’s surprise profit has investors re-thinking the theory that they will be euthanized. Hedge funds are jumping into the preferred stock, which was issued in spring of 2008 as Fannie Mae was circling the drain before becoming nationalized. The 8.25% prefs have a $25 face value and were trading at $4.81 on Friday. All of this is predicated on the idea that Fannie Mae will be able to pay back the government. Once that happens, Fannie will restructure, and the bet is that there will be a place in the capital structure for the prefs. Risky bet, obviously, but big upside too.

Morning Report – Dismal Jobs Report 04/05/13

Vital Statistics:

  Last Change Percent
S&P Futures  1537.5 -17.0 -1.09%
Eurostoxx Index 2590.5 -30.9 -1.18%
Oil (WTI) 92.26 -1.0 -1.07%
LIBOR 0.279 -0.001 -0.36%
US Dollar Index (DXY) 82.43 -0.245 -0.30%
10 Year Govt Bond Yield 1.70% -0.06%  
Current Coupon Ginnie Mae TBA 105.8 0.5  
Current Coupon Fannie Mae TBA 104.4 0.4  
RPX Composite Real Estate Index 189.7 0.3  
BankRate 30 Year Fixed Rate Mortgage 3.59    

They’re beating the tape with the ugly stick after a dismal jobs report. The S&P 500 futures dropped from -4 to -16 on the report. The 10-year jumped on the news and is now yielding 1.7%.  It is hard to believe the 10 year was above 2% three weeks ago. MBS are rallying as well, but not as much as the 10-year. 

The March Employment Situation showed the economy added 88,000 jobs in March, well below the 190,000 estimate. February was revised upward to 268,000 from 236,000.  The unemployment rate ticked down to 7.6% from 7.7%, but that was due to a drop in the labor force participation rate, which dropped .2% from 63.5% to 63.3%. This means that the size of the labor pool dropped as more workers simply stopped looking for a job.  Long-term unemployed workers who are not actively looking for a job are not counted as part of the labor force. Wages were flat month-over-month and increased 2% year-over-year. 

The recent rally in bonds pours cold water on the “great rotation” theory –  the idea that 2013 would be the year when investors, particularly big institutional investors, change their target asset allocation and sell bonds to buy equities. So far, it seems like that investors are allocating money equally to both sectors – stock funds have taken in $79 billion while taxable bond funds have taken in $76 billion. Between the Bank of Japan’s QE program, which is driving funds to the US, the Fed’s QE program, and continued investor purchases of bonds, the expected 2013 bloodbath in the bond market may be held off for a while. Meanwhile, mortgage bankers are licking their chops thinking about another refi wave.  

Chart:  US Unemployment rate 1949-Present 

 

North Korea

From The Economist
Coping with North Korea
Korean roulette

Kim Jong Un has raised the stakes; it is time to get tougher with the nastiest regime on the planet

Apr 6th 2013 |From the print edition

EVEN by its own aggressive standards, North Korea’s actions over the past couple of weeks have been extraordinary. Kim Jong Un, the country’s young dictator, has threatened the United States with nuclear Armageddon, promising to rain missiles on mainland America and military bases in Hawaii and Guam; declared a “state of war” with South Korea; announced that he would restart a plutonium-producing reactor at its Yongbyon nuclear site, while enriching uranium to build more nuclear weapons; and barred South Korean managers from entering the Kaesong industrial complex, almost the only instance of North-South co-operation. All this comes after the regime set off a nuclear test, its third, in February. Tensions are the worst on the peninsula since 1994, when North Korea and America were a hair’s breadth from war.

The questions are what to make of all this, and how to respond. Neither is easy. The White House has tried to play down the aggression, talking of a “disconnect between rhetoric and action”, and some parts are pure bluster. The nuclear threat against mainland America is patently hollow: it will be years before the North has the technology to dispatch nuclear-tipped missiles. North Korea has yet to order a large-scale mobilisation of its 1.1m-strong army. Pyongyang, the capital, does not seem like a city that is about to go to war.

But there are also depressing reasons to take Mr Kim all too seriously. It does not take much to imagine the cycle of provocation and deterrence getting out of hand, especially if South Korea and the United States misjudge North Korea’s actions—or vice versa. And even without nuclear missiles, conflict on the crowded Korean peninsula would be savage. Decrepit North Korea would certainly be outgunned by South Korea and America. But nobody should doubt the cult-like commitment of the North’s armed forces. The human cost of war would be huge: 1.7m men serve in uniform on the peninsula, and North Korean artillery batteries are trained on the megalopolis of Seoul. American generals guess that a conflict could kill at least 1m, including thousands of Americans. Oh, and it would also be curtains for Asia’s thriving economy.

Moreover, Mr Kim heads a regime that cares nothing for its own brutalised people. Some 150,000-200,000 North Koreans—individuals and often whole families—rot as political prisoners in a vast gulag. Farmers are herded into collectives and forced into gruelling manual labour. Women trying to make a living by smuggling refugees across the border with China are shot if they do not know the right people to bribe.

In some ways the North is even scarier under its new ruler than it was under his father, who died in 2011. Early hopes that Mr Kim might prove a youthful agent of change seem entirely dashed by his nuclear explosion and boundless bombast. He is thought to have ordered the sinking of a South Korean naval corvette in 2010, with the deaths of 46 crewmen, and the shelling of a South Korean island later that year. Whereas Kim Jong Il was practised in the calibrated calculation of shaking down the outside world, his callow son has escalated tensions wildly. Nobody knows how to walk him back from the brink.

Doing so depends partly on Mr Kim’s motives. Perhaps aggression is a rite of passage to prove his leadership credentials to the country’s ancient generals. Perhaps he will shrewdly claim he has seen off the imperialist threat and back down. Perhaps he gets a thrill from orchestrating the chaos—as if he were playing a video game. Or, most worrying, perhaps he is out of his depth and therefore more prone to miscalculation.

Whenever Mr Kim’s father ratcheted up tensions, at least the pretence held that a bargain was to be had. In return for aid, oil or respect, North Korea would agree to discussions over dismantling its nuclear-weapons programme. The process was often a charade, but it kept the North engaged and it probably helped slow the development of nuclear weapons, as with the agreement to mothball the Yongbyon reactor in 2007. Now Mr Kim has declared that his nuclear capability is non-negotiable.

No prizes for backing off

What should the West do? In the long term, the best way to destabilise Mr Kim is from within. A new merchant class is emerging—the only prospering bit of the economy. The world must redouble its efforts to engage with these and other possible agents of change. This includes teaching more mid-ranking officials how societies work when they are organised around market economies and underpinned by laws; and funding defector radio stations beaming news back into the North.

That, though, is for the long term. The imperative now is to face down Mr Kim. After all, he has ruled out the only promise worth having (suspending his nuclear programme again). North Korea—and other rogue regimes and would-be nuclear proliferators, such as Iran—need to know that actions have consequences. That is why President Park Geun-hye of South Korea, in turn, was right to make it clear that sneak attacks will be met with a much firmer response than in 2010. America is right to move missile defences to Guam. When it sent two nuclear-capable B-2 bombers to fly over the peninsula it was a warning not only to North Korea, but also a gesture of support to the South. If Ms Park doubts American backing, she will be tempted to seek nuclear weapons herself.

Now more than ever, America needs to cajole China to press for change in its satellite. Apart from humanitarian aid to the North’s stunted people, all other commercial favours towards the regime should be stopped. Sick of Mr Kim and his family racket, China signed up to fresh UN financial sanctions against North Korea after the latest nuclear test. China has the capacity to choke the most iniquitous sources of the criminal regime’s cash. Yet its commitment to enforcing the sanctions seems half-hearted and it appears to have insisted that Shanghai accounts in two of its biggest banks, holding hundreds of millions of dollars on behalf of Mr Kim and his cronies, be excluded from the sanctions. Attempts at changing North Korean behaviour have so far patently failed. But then, as China shows, not everything has yet been tried.