Morning Report – liquidity is drying up in the TBAs 7/19/13

Vital Statistics:

  Last Change Percent
S&P Futures  1679.7 -0.9 -0.05%
Eurostoxx Index 2716.0 -2.0 -0.07%
Oil (WTI) 109 1.0 0.90%
LIBOR 0.265 -0.002 -0.56%
US Dollar Index (DXY) 82.68 -0.140 -0.17%
10 Year Govt Bond Yield 2.52% -0.01%  
Current Coupon Ginnie Mae TBA 104.2 -0.2  
Current Coupon Fannie Mae TBA 103.9 0.0  
RPX Composite Real Estate Index 200.8 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.37    

 

Markets are weaker this morning after a mixed bag of earnings. GE beat, while Mr Softee missed by a country mile. There is no economic data this morning. Bonds and MBS are flat / down small.
 
Liquidity has been drying up in the TBA market, with bid / ask spreads increasing to 7 ticks on the higher coupons. Yesterday, just over $3.2 billion worth of TBA traded, which made it the second lowest volume day of 2013. What does this mean for you? Thin markets can be volatile. We will likely see more re-prices during the day, and aggregators will fade their bids to account for lousier execution on their hedges. 
 
Ever wonder how the government sets G-fees? Well, here ya go..
 
Wonkish piece, but sheds light on the labor force participation rate and why it isn’t coming back to previous levels. This has implications for the Fed, in that it won’t take much in the way of job growth to keep moving unemployment levels to where the Fed will start thinking about tightening. While the Fed pledges to use a holistic approach, we could be getting to 6.5% unemployment the hard way. Which means, don’t expect super robust recovery – the population is aging and that is a drag on growth and spending.

 

Morning Report – Day 2 of testimony 7/18/13

Vital Statistics:

  Last Change Percent
S&P Futures  1677.3 1.7 0.10%
Eurostoxx Index 2685.2 3.3 0.12%
Oil (WTI) 106.7 0.3 0.23%
LIBOR 0.266 0.000 0.00%
US Dollar Index (DXY) 82.87 0.160 0.19%
10 Year Govt Bond Yield 2.49% 0.00%  
Current Coupon Ginnie Mae TBA 104.6 4.8  
Current Coupon Fannie Mae TBA 104 0.3  
RPX Composite Real Estate Index 201.1 -0.5  
BankRate 30 Year Fixed Rate Mortgage 4.35    

Markets are flattish ahead of Day 2 of Ben Bernanke’s testimony. Initial Jobless Claims dropped back to 334k after spiking to 358k the weak before. Bonds and MBS are flat. In earnings, Intel and Ebay missed, while Morgan Stanley beat.

 

The Bernank goes in front of the Senate this morning at 10:30. Most of the newsworthy tidbits should have been released yesterday, but be aware – rates could get volatile. 
 
The Senate Banking Committee is expected to vote on Mel Watt to head FHFA. If he gets nominated, expect the government to start forgiving principal on underwater conforming loans and probably HARP 3.0. Watt is an affordable housing guy who will push for loan forgiveness and easier access to credit for low-income borrowers. Maybe the refi boom will have one last gasp.
 
Most of Bernanke’s testimony was old news, but there were some new revelations. The biggest one is that the Fed intends to roll over maturing MBS into new MBS even after QE ends. There was a fear that the Fed would sell their holdings. So that should put downward pressure on mortgage rates. Second, Bernanke said that as long as inflation is below their target rate, the Fed Funds rate is going nowhere. Finally, he mentioned de-leveraging as one of the main reasons why rates shot up so much. There has been a suspicion in the market that the carry trade was the real target. 

 

Morning Report – A softening on QE tapering? 7/17/13

Vital Statistics:

  Last Change Percent
S&P Futures  1677.5 6.3 0.38%
Eurostoxx Index 2685.7 20.0 0.75%
Oil (WTI) 106 0.0 -0.04%
LIBOR 0.266 0.000 0.00%
US Dollar Index (DXY) 82.5 -0.002 0.00%
10 Year Govt Bond Yield 2.47% -0.06%  
Current Coupon Ginnie Mae TBA 104.4 -1.1  
Current Coupon Fannie Mae TBA 104.2 0.4  
RPX Composite Real Estate Index 201.6 -0.9  
BankRate 30 Year Fixed Rate Mortgage 4.48    

 

Markets are higher this morning after good earnings out of Bank of America. Mortgage Applications fell 2.6% last week, a surprise given that rates fell. Bonds and MBS are up. The initial reaction to the prepared remarks is positive.
 
Today is Bernanke’s semiannual Humphrey-Hawkins testimony in front of Congress, which begins at 10:00. The first thing to note is that this can be market moving, so don’t be surprised if we get some volatility around rates. The burning questions concern the end of QE, although expect a lot of Congressional questions on banking regulation and Too Big To Fail. The prepared remarks are here.
 
The comment that seems to have everyone buying bonds is the statement that ending quantitative easing is “not on a preset course.” Remember that was what hit the markets so hard the last time Bernanke spoke in front of Congress – he implied that the Fed expects unemployment to fall to 7% by the end of the year, and if the economy performs as expected, they will begin tapering QE this year. This statement seems to be a softening of that stance. This has pushed the 10 year to 2.47%.
 
Housing starts came in at a disappointing 836,000 annual pace. Building Permits fell as well. When you look at the internals, it was multi-fam which drove the decrease. Single family starts dropped by 5k, while 5+ units fell from 322k to 236k. Multi-fam in the South took the biggest hit. May was revised upward. I wouldn’t read too much into this as far as purchase business goes – the weekly MBA purchase application index rose last week, and the homebuilders have been optimistic so far. Also note that homebuilder sentiment hit the highest levels since Jan 2006. 
 
The Senate reached a filibuster deal yesterday, and Richard Cordray was confirmed as head of the Consumer Financial Protection Bureau (CFPB). Republicans had been holding up the vote in an attempt to force changes to the agency – to make it a bipartisan committee vs a single head and to subject it to the normal Congressional appropriations process. Will it affect anything in our area? I am guessing not.

Morning Report – Affordability remains high 7/16/13

Vital Statistics:

  Last Change Percent
S&P Futures  1676.7 -0.8 -0.05%
Eurostoxx Index 2667.9 -18.8 -0.70%
Oil (WTI) 106.9 0.6 0.55%
LIBOR 0.266 -0.001 -0.52%
US Dollar Index (DXY) 82.74 -0.299 -0.36%
10 Year Govt Bond Yield 2.54% 0.00%  
Current Coupon Ginnie Mae TBA 104.2 -1.3  
Current Coupon Fannie Mae TBA 103.6 0.0  
RPX Composite Real Estate Index 202.5 -0.5  
BankRate 30 Year Fixed Rate Mortgage 4.45    
Markets are flattish after the consumer price index came in more or less in line with expectations and Goldman beat earnings estimates. Bonds and MBS are flat as we await the Bearded One tomorrow morning.
 
Re Bernanke’s testimony, the Washington Post is saying the Fed will be delaying debate over unwinding QE amid concerns over how the markets will react. One interesting concern, from Richmond Fed Jeffrey Lacker, is that the Fed will experience capital losses on its holdings of mortgage backed securities, and could find itself in a position where it makes no money (or even experiences losses), which will raise public and Congressional scrutiny. Want a proxy for the Fed’s balance sheet?  Take a gander at the chart of Agency Mortgage REIT American Capital (AGNC). They hold a levered portfolio of agency fixed and adjustable rate mortgage backed securities. The stock is down a third since rates started going up in early May.
 

 
Mortgage REITs like AGNC or Annaly (NLY)  are unloading mortgage-backed securities as rates increase. This is largely due to margin requirements, although interest rate hedging plays a part. As the value of their holdings drops, which is what is happening as rates increase, the banks that provide them leverage will demand more capital. The REITs can either raise capital in the private markets (which isn’t going to happen) or they can raise capital by selling their inventory. The thing to remember is that the margin clerk doesn’t care if the mortgage backed securities are overvalued or undervalued. The margin clerk will hit whatever bid is available if the company doesn’t sell the merchandise themselves. That is how you get these air pockets like we had on July 5, where the we set record highs on mortgage rates and the 10 year yields. As mortgage REITs de-lever, you can expect rate volatility. Floating in this environment can be a little hairy. 
 
CoreLogic’s latest Market Pulse makes the argument that in spite of the recent rise in house prices and rates, housing affordability is still elevated compared to historical numbers. They dismiss (as do I) the notion that we are back in a bubble or are even close to one. Bubbles are psychological events where everyone gets this idea that an asset price cannot fall. We will not experience another real estate bubble, although our great-grandkids might. Here is Corelogic’s chart on affordability:
 

 
Based on the weak retail sales numbers yesterday (headline +4% vs expectations of +.8%, ex-autos flat vs expectations of + .5%), a number of sell-side firms took down their 2Q GDP estimates a hair. We will get the preliminary estimate of 2Q GDP in a couple of weeks.
 
Freddie Mac’s mid-year update gives a forecast for the rest of 2013. Punch line: home price appreciation will slow, but remain positive, the labor market will continue the pace of the first half of the year, home sales up 2% and starts up 12% from the first half, and mortgage rates will continue to rise. Will the rise in mortgage rates stall the housing recovery? They anticipate it won’t, because affordability still remains high.

Morning Report – Earnings Season 7/15/13

Vital Statistics:

  Last Change Percent
S&P Futures  1674.0 3.7 0.22%
Eurostoxx Index 2680.7 5.8 0.22%
Oil (WTI) 105 -1.0 -0.92%
LIBOR 0.268 0.000 0.00%
US Dollar Index (DXY) 83.4 0.416 0.50%
10 Year Govt Bond Yield 2.63% 0.05%  
Current Coupon Ginnie Mae TBA 101.6 0.1  
Current Coupon Fannie Mae TBA 99.95 -0.4  
RPX Composite Real Estate Index 203 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.48    

 

Markets are higher on no real news. The NY Empire Manufacturing Survey came in higher than expected, while retail sales were weaker. Citi’s 2Q numbers beat estimates. Bonds and MBS are flattish.
 
Lots of data this week, punctuated by the Bernank’s testimony on Wed in front of the House Financial Services Committee. On Tues, we have the Consumer Price Index; now that QE4EVA is officially done with, inflation numbers are becoming relevant again. We will also get capacity utilization, industrial production, and homebuilder sentiment. Wednesday, we get housing starts and building permits, Thursday is Philly Fed, and Leading Economic Indicators. 
 
Last week’s rally in bonds was probably due to an overshoot on the jobs report after the 4th. We saw the average 30 year mortgage rate hit 4.64% on Friday, July 5 and the 10 year hit 2.74%. It looks like a lot of the Street took a 4 day weekend, so the market was illiquid and you had forced REIT selling in a thin market. While rates can certainly go higher, I would almost put an asterisk on those prices. I would be looking for a trading range in the 10 year of 2.45% – 2.65%. 
 
While earnings season officially started last week, it begins in earnest tomorrow. Heavyweights like Coca Cola, Goldman, American Express, IBM, Intel, Microsoft, Google, and GE will report this week. With the stock market at record highs, it is vulnerable to earnings disappointments. I would expect any sell-off in stocks to be bond bullish, but with the backdrop of ending QE, the effect may be modest.
 

DC Politics Corruption

The Post ran a profile about a local businessman/fundraiser, Jeffrey Thompson (who calls himself “The Governor”), who has been ensnared in a fundraising and/or abuse of power scandal. It relates to the recent mayoral campaign and contracts for Medicaid managed care plans. It’s a good look at a local corruption story. This, however, jumped out.

Once, during a fundraiser, Thompson held court at the Hay-Adams hotel, according to a political consultant who spoke on the condition of anonymity because of the ongoing federal investigation. “I walked in, and there was Jeff at the head of the table. Beautiful china. All of a sudden, ding, ding, ding,” the consultant said, hitting a plate with a knife to demonstrate. “He had on a top hat — I swear. He took it off and said, ‘Gentlemen.’ He passed the hat around, and people filled it with checks.”

I have to point out that is clearly a breach of etiquette. One’s top hat is checked upon entry to the establishment.

Full story

What We Are Talking About When We Talk About Trayvon Martin

cand130709

cand130710

The trial of George Zimmerman, a neighborhood vigilante who shot and killed Trayvon Martin, an unarmed black teenager who was walking back to his home after buying tea and Skittles at a convenience store, has gone to jury and there is no telling what the verdict will be. Most pundits and trial watchers feel the prosecution was less than convincing, particularly in proving that Zimmerman had intent or malice.

It seems that at any particular time we as a culture are following some Trial Of The Century or another. Part of this is the necessary consequence of having justice-themed news shows like Nancy Grace. The unquenchable maw of the newscycle demands fresh meat continuously. But Martin was not the photogenic blond victim that usually make the story line-up.

Kathleen Parker recently took a stab at why this trial in particular fascinates us.

The Zimmerman trial is riveting not because two men got in a scuffle and one of them died or because one was a teenager and the other an armed adult. It is that one was black, the supposed victim of a profiling vigilante, and the other white.

But that isn’t totally why the trial is news. It’s not that white guy shoots black punk, it’s what it took to get the case to be taken seriously. Most of the early outrage triggered by the descent of what some have called racebaiters was over how perfunctorily the initial investigation was. It wasn’t until the media storm started that the Barney Fife-ish Sanford Police Department took the case seriously. They knew who killed Trayvon Martin. They just didn’t think it was worth trying to send Zimmerman to jail over it. Arguably, second degree murder was publicity-driven over-reach, but Zimmerman didn’t even get charged with littering. The unknown hypothetical of whether it would have been treated differently if either party had been a different ethnicity is what set off the tinderbox.

As Juan Williams even-handedly puts it:

Liberal and conservative news TV and radio have played to the racial theme, too. The left, notably Rev. Al Sharpton, have made the case a crusade for racial justice. The right-wing media, especially talk radio, has responded by making Zimmerman a hero.

So what makes Zimmerman a hero to the right wing? That is a very complicated question. In part the trial is just as much about gun rights as it is about racial justice. This is the underdiscussed aspect of the left/right bifurcation on this trial. It comes down to the most loaded word in my typical formulation of the incident, ‘vigilante’. Just how culpable is Zimmerman for initiating the incident? He had a concealed carry permit and was within his rights to get out of his car and follow someone through open space despite the admonition of the emergency dispatcher not to. But there is always the fine line of having rights and the responsible exercise thereof.

Should Zimmerman have gotten out of the car in the first place? What did he mean by saying ‘Fucking punks. These assholes, they always get away’? Was it frustration over ineffective law enforcement in his neighborhood or was there racial animosity over ‘those’ people? Who struck the first blow? And does it matter?

Those biggest question the jury has to wrestle with seems to be: Was Zimmerman acting in self-defense? We will probably never know because Zimmerman has been verifiably less than truthful about that night. And the only other person who knows what happened is dead.

Weekend Open Thread—Religion………yikes

I’m very interested in religion and religious views, although I’d prefer to read what others have to say than share my own thoughts……….hah.  Seriously, religion has always been a highly personal thing for me and I don’t generally discuss my views.  In some ways it’s because they’re always evolving so what I say today I may not actually agree with tomorrow and I don’t like to be held to a standard of consistency.  Consistency isn’t something I’m well known for anyway, just ask Scott (that’s a joke btw).

I guess if I were to describe myself religiously it would be as an agnostic who enjoys attending church, but only very specific types of churches and each one for very different selfish reasons.  I also consider agnosticism as a true cop out but there I sit nonetheless.  I’m neither an atheist nor a Christian but I found this article on atheists, and agnostics to a lesser extent, enlightening if you will.

What kind of atheist are you anyway?  I think everyone will recognize me right away but I’m curious about the rest of you atheists.  Number six was my favorite but it’s not me.

6. Ritual Atheist/Agnostic. While you might think the anti-theist is the non-believer type that scares Christians the most, it turns out that it may very well be the Ritual Atheist/Agnostic. This group, making up 12.5 percent of atheists, doesn’t really believe in the supernatural, but they do believe in the community aspects of their religious tradition enough to continue participating. We’re not just talking about atheists who happen to have a Christmas tree, but who tend to align themselves with a religious tradition even while professing no belief. “Such participation may be related to an ethnic identity (e.g. Jewish),” explain researchers, “or the perceived utility of such practices in making the individual a better person.” The  Christian Post clearly found this group most alarming, titling their coverage of this study “Researchers: ‘Ritual’ Atheists and Agnostics Could Be Sitting Next to You in Church,” and giving the first few paragraphs over to concern that people in your very own congregation may not actually believe in your god. The atheism, it seems, might be coming from inside the house (of God).

Another subject that interests me, and one I’ve been reading an awful lot about lately especially in the context of politics, is ageism.  I don’t agree with everything in this piece but I did find it thought provoking.  As a ‘B Word’ boomer it’s always in the back of my mind of course that a lot of us are much worse off financially that we imagined we’d be (not me necessarily) and that we’ve become so reviled (hopefully that’s too strong of a word) by younger generations.  Republicans, and even some Democrats, are certainly using Hillary as an example of someone who is too old to run for President and it’s becoming pretty pervasive so I’m wondering who agrees.  I’m not a Hillary fan, and I’ve stated publicly that I hope she doesn’t run, but it’s only partially because I’d prefer to see someone younger run.

Anyway, I thought this showed a unique perspective on us boomers and you millennials as well.  For the rest of you……meh.  And true to form for my posts, there’s obviously something for everyone to hate in this piece.

It’s corruption, stupid. Like the majority of ’60s radicals, who came from liberal families, millennials feel betrayed by their parents’ generation. Instead of placing the blame on the doorsteps of K Street lobbyists, many see government as the problem.

“Government has obviously become a place where opportunistic people go to get rich,” said a 32-year-old Internet entrepreneur. “Most millennials know only Bill Clinton, who seemed kind of cool until it turned out he was a shill for corporations and the banking lobby, and Bush, who was unabashedly awful as we all know. Then there’s Obama, who seemed great until he turned out to be a lying, spying, bailer-out who gets all his advice from the same lobbyists he promised over and over ‘will not work in my White House.’ ”

That disenchantment is emerging in voting numbers. In 2008, Barack Obama won the 18-29 vote by 34 points. But in 2012, as disappointment with his performance rose, Obama’s edge among these voters dropped to 23 percent. The erosion of support wasn’t lost on Republicans. Like Latinos, the millennials are considered up for grabs in 2016.

Although the feeling of betrayal is understandable, there is something regressive and childlike about ascribing so much power to your parents. Viewing history through the lens of a generation has its limits. Idealists are always flawed, and every generation has its complement of hustlers, toadies and arrivistes. Historical forces larger than the individual determine winners and losers: in this case, globalization, technology, and America’s rise and fall as an imperial power.

And just for fun:

friend

obamacare

Morning Report – Fed Unemployment Forecast 7/12/13

Vital Statistics:

  Last Change Percent
S&P Futures  1669.4 -0.7 -0.04%
Eurostoxx Index 2686.9 5.6 0.21%
Oil (WTI) 105.5 0.6 0.55%
LIBOR 0.268 -0.001 -0.19%
US Dollar Index (DXY) 83.05 0.306 0.37%
10 Year Govt Bond Yield 2.55% -0.03%  
Current Coupon Ginnie Mae TBA 103.9 0.8  
Current Coupon Fannie Mae TBA 103.4 0.1  
RPX Composite Real Estate Index 203 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.52    

 

Markets are flat this morning after yesterday’s big rally and good earnings reports from JP Morgan and Wells Fargo were offset by a miss from UPS. Bonds and MBS are up small.
 
The Producer Price Index (a measure of inflation at the wholesale level) increased .8% in June, but that was primarily driven by high energy prices. The core came in at .2%. Both readings were ahead of expectations. At 10:00, we will get the preliminary University of Michigan Consumer Confidence Survey for July.
 
The thing that jumped out at me from the Fed Minutes was the downward revision in unemployment expectations. The Fed lowered the 2013 unemployment forecast from 7.4% to 7.25%, they took down 2014 from 6.85% to 6.65% and took down 2015 from 6.25% to 6%. Given that GDP was not revised materially upward leads me to believe that they believe the labor force participation rate will remain low, which could be a drag on the economy. The other thing is that the market has had the expectation that a hike in the Fed Funds rate is going to be a 2015 event. Given that the Fed has given a threshold number for raising the Fed Funds rate of 6.5%, we could be looking at a late 2014 / early 2015 tightening. 

Open Thread Wed. & Ben

I figure a change in subject is appropriate.  I think Brent is in and out again this week so I’ll put up my big economic news of the week.

Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed’s easy-money policy is still necessary, throwing cold water on fresh market expectations that the Fed’s stimulus would soon be ended.

Bernanke told an audience of economists in Cambridge, Massachusetts, that the jobs market remains too weak and inflation remains too low for comfort.

He also warned that the full impact of steep government spending cuts initiated in March was yet to be seen.

Together, the evidence underscored the need for the Fed to keep in place its highly accommodative monetary policy, he said.

“Both the employment side and the inflation side are saying that we need to be more accommodating,” he said, answering questions after a speech.

“Moreover, the other portion of macroeconomic policy, fiscal policy, is now actually quite restrictive…. Put that all together, I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.”

His comments came just hours after the release of the minutes from the June 18-19 meeting of the Fed’s policy board, the Federal Open Market Committee, which suggested the central bank would move more rapidly toward winding up its $85 billion a month stimulus program.