All Things in Moderation

Vital Statistics:

Markets are giving back some Japan-led gains after Initial Jobless Claims spiked to 385k from 357k. This was the holiday-shortened Easter week, so there is a seasonality adjustment there.  On a non-seasonally adjusted basis, they fell. Bonds and MBS are rallying, with the 10 year yield down to 1.77%.

The Bank of Japan outlined more aggressive monetary actions last night with their own version of quantitative easing. This pushed the Nikkei 225 stock market index up 2%, and caused a sizeable drop in the yen.  This explains the rally in US bonds as Japanese investors flee for the “high yielding” US treasury market.  Don’t laugh – the Japanese 40 year bond (the 2’s of 52) yields 1.34%.  The US 10-year at 1.77%, in the context of a depreciating yen, is reviving the yen carry trade. The Yen Carry Trade is when Japanese investors borrow funds at yen rates and invest in high-yielding sovereign debt. They benefit from the pickup in yield and any favorable currency movements. With the high quality Euro sovereigns yielding even lower than the US, we are the only game in town. Punch line – this will put downward pressure on mortgage rates in the US, at least at the margin.

The CoreLogic Home Price Index increased 10.2% on a year-over-year basis in February, the highest increase since March of 2006.  It is the 12th consecutive monthly increase.  The gains were broad based, with 96% of their MSAs reporting gains.  California, Arizona, and Nevada all showed gains in the high teens.   They are forecasting a 2% month over month increase in March, or 12% year over year.

Chart:  CoreLogic Home Price Index 

Hank Paulson, George Bush’s Secretary of Treasury, says that Fannie Mae’s new profitability shouldn’t deter the government from establishing a new platform for mortgage finance. He mentioned the Washington Post article that says the Administration is pushing banks to make home loans to people with weaker credit. Nominated to take over as Treasury Secretary just as the housing bubble was peaking, he can be forgiven for being a little gun-shy on re-inflating the bubble.

San Francisco Fed President John Williams said he is hopeful that “the economy has shifted into high gear” and that the Fed could begin slowing the purchases of Treasuries and MBS this summer, with a full exit by the end of the year.

Finally, you can hear my latest interview on Capital Markets Today, where I discuss real estate pricing, politics, and the economy.

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Vital Statistics:

Markets are flat after a mixed ADP Employment report.  They forecast that the private sector added 158k jobs in March, below the 200k estimate.  February was revised upward, however to 237k. Mortgage Applications fell 4%.  Bonds and MBS are flat

The Obama administration is pushing banks to lend to borrowers with weaker credit, encouraging them to use FHA loans and to use more subjective judgment in determining whether to offer a loan. Of course the CFPB has already drawn a line in the sand with DTI. Housing officials are urging the Justice Department to provide assurances to banks that they will not face legal consequences if they comply and the borrowers subsequently default. Working against this initiative is that (a) the CFPB has drawn a bright line around the qualifying mortgage and (b) Ginnie Mae will flush an originator when they get 5% to 10% portfolio delinquencies. 

On the other hand, credit IS easing, especially for those who had short sales or foreclosures during the housing bust. Of the 7 million borrowers who had a foreclosure or a short sale, about 1 million are eligible for an FHA mortgage. Second, the return of the private label market (however small) will allow borrowers who don’t fit in the government bucket or the super high quality jumbo bucket to get financing.

Fannie Mae’s record profit has some questioning the future of the housing finance. According to the Administration’s White Paper, the intention seemed to be that the government would euthanize Fan and Fred and replace them with an entity that would act as a re-insurer. However, with more pressing issues facing the Administration, dealing with the GSEs has taken a back seat. In the interim, they are improving their balance sheets and have paid back nearly half of what they owe to the government. And with the stock approaching $1.00, the 4.6 billion shares owned by the government start to become significant. It will become harder to kill the company when the stock is worth some money.  That is obviously what the market has figured out, as the stock has tripled since Fannie announced they will be profitable nearly 3 weeks ago.

Chart:  Fannie Mae Stock Price:

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Vital Statistics:

Markets are higher after Europe returned from a 4 day weekend. Italian sovereign yields are dropping, which is easing concerns about the Cyprus situation. Later this morning, we will get the ISM New York, factory orders and vehicle sales. Bonds and MBS are down small.

Fannie Mae just reported the largest net income in company history.  Good thing they didn’t release this yesterday or nobody would have believed it. They reported net income of $17.2 billion for 2012 and $7.6 billion in the 4th quarter. The refi boom of 2012 has certainly helped them, along with a drop in delinquencies, increasing home prices, and higher sales of Fannie Mae-owned properties. They still owe Treasury $85 billion. Fannie Mae stock has rallied from 30 cents a share two weeks ago to 80 cents a share as of yesterday on reports they will be profitable. The stock is trading up a nickel on low volume pre-market. Every dime the stock increases is roughly half a billion dollars in the US government’s coffers.

The Consumer Financial Protection Bureau has a new one-stop shopping site for financial gripes. They do not verify the facts of the complaints, but they give the company a chance to respond before they put it on their site. If you had ever been mad at your bank and wanted to create a http://www.thiscompanysucks.com website, well, there ya go.

Mohammed El-Arian says that the Cyprus situation is not fixed, just temporarily stabilized. Even if it doesn’t become a systemic problem (read: spread to Italy and Spain) it still could create a systemic threat if enough peripheral countries have issues. The EU seems to be against an Iceland-style fix, where Cyprus leaves the EU and devalues its currency.

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Vital Statistics:

Markets are flat this morning as most European markets are closed for the Easter Holiday. We are kind on a lull period until next Monday when Alcoa kicks off earnings season. Bonds and MBS are down small.

The Markit U.S. Preliminary March Purchasing Managers Index rose to 54.9 from 54.3 in February, indicating that the economy is expanding at a faster rate.  Most indicators (new orders, employment, backlog) indicated the economy was expanding and accelerating. The Markit PMI is different than the more widely followed Institute of Supply Management Survey, which uses different weightings. 

NPR has a good backgrounder on how strength in housing feeds other sectors of the economy. Punch line:  the wealth effect, which was given up for dead in 2008 has returned. As home equity grows, people start spending again. 

The Feds are getting closer to Stevie Cohen. They have arrested Micheal Steinberg, one of Cohen’s senior lieutenants, who was implicated in insider trading in Nvidia and Dell. 

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