Morning Report – K-deals

Vital Statistics:

Last Change Percent
S&P Futures 1657.2 3.7 0.22%
Eurostoxx Index 2788.8 -14.6 -0.52%
Oil (WTI) 110.1 -0.4 -0.40%
LIBOR 0.256 -0.001 -0.20%
US Dollar Index (DXY) 81.99 -0.160 -0.19%
10 Year Govt Bond Yield 2.88% -0.05%
Current Coupon Ginnie Mae TBA 103 3.1
Current Coupon Fannie Mae TBA 102.8 0.3
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.6
Slow news day. Markets are higher this morning on no real news. Bonds and MBS are up.
Now that the jobs report is out of the way, the markets will fret about the upcoming FOMC meeting for the next week and a half. The consensus seems to be that the Fed will make at least a symbolic reduction in asset purchases, and it will probably be Treasuries not MBS.
Are K-deals the future of residential loan securitization? Would future securitizations involve subordinate and mezzanine tranches? Essentially, a pool of mortgages would be cut up into a senior guaranteed tranche, which would resemble what we already have now, with Ginnie or GSE MBS. There would be a two additional tranches – a subordinate tranche which would bear the first losses on the pool, and then a mezzanine tranche which would bear losses after the sub piece is wiped out.

Syria and an Open Thread

I’m no foreign policy expert and I’ve probably spent more time and effort protesting wars than really understanding the reasons justifying our involvement, or believing them.  I was just as shocked as anyone on 9/11 though and remember how revenge caused me to ignore my normal, anti-war, gut reaction that I’ve harbored since Vietnam.  I suspended my inclination to distrust our government in matters of foreign policy and kept an open mind regarding Iraq and Saddam Hussein and Bush’s case for invasion.  Colin Powel’s presentation went a long way towards keeping me, if not acquiescent, at least open-minded.

I remember going to a family gathering with a lot of conservatives in attendance and listening to them talk about a friend of a friend of a friend supposedly living in Iraq celebrating the end to Hussein’s reign and how women were going to be free and the warring religious sects were going to make peace………..or something like that.  I was pretty skeptical but kept my mouth shut, obviously hoping their enthusiasm was justified.  Not long after that we began to get wind of disturbing news regarding our justifications and our questionable treatment of prisoners.  Eventually, I joined the war protest movement locally.  I really did feel a level of betrayal that reminded me why my natural inclinations against aggressive and war-like solutions to international problems had been justified.  That’s not to say however, that we are never justified.  I couldn’t have been any happier when OBL got what he deserved.

Americans of all political stripes don’t like the idea that citizens are being killed or slaughtered by their country’s own government and so we are torn between wanting to punish someone for that and knowing that our interference may just make things worse.  Involving ourselves in another ME civil war seems like a recipe for disaster and I don’t support the strikes.  Having said that though I think we, as a country, should be looking at ways to make Assad pay for what he’s done, assuming he or his government are actually responsible.

Obama is planning to make his case this week to the American people and Congress but I’m not really impressed when I read this , he’s expecting us to believe air strikes are the only solution.  I read somewhere that the WH is responsible for releasing a tape showing the aftermath of a sarin attack,  I haven’t seen it yet but I’m sure it’s awful.

In his radio address, Obama said failing to respond to the attack would threaten U.S. national security by increasing the chance of future chemical attacks from the Syrian government, terrorist groups, or other nations. The United States said more than 1,400 people were killed, including hundreds of children.

“We are the United States of America. We cannot turn a blind eye to images like the ones we’ve seen out of Syria,” he said.

Why does our response automatically mean strikes against the Assad regime that may unleash a worse rebel faction associated with Al Qaeda or possibly even cause more harm to Syrian innocents.  It seems to me there are alternatives that we should be exploring first, assuming I’m not just being completely naive and none of these ideas will work.

1. Bring those guilty of atrocities to justice

2. Call for a United Nations embargo on arms, military supplies, and logistical support for both Damascus and opposition forces

3. The U.N. Security Council should hold an international peace conference

4. Offer aid and support to the nonviolent movements within Syria

5. Provide the humanitarian aid desperately needed by the millions of displaced people

6. Force the hand of Russia and China in the Security Council

I don’t really know how feasible all of this is but based upon the more detailed explanations of each suggestion in the piece at Common Dreams doesn’t it seem like we should at least try other options before just beating the war drums?  It seems to me there’s an awful lot at stake here, much more than our President’s reputation.  I mention that because I believe there are Democrats in the Senate and the House who are possibly supporting Obama simply because he’s their leader rather than listening to either their constituents or their conscience.

And I don’t know how many of you might have seen this piece but there’s an “unholy alliance” of sorts forming in Congress.  (semi-corked by JNC)

At a town hall meeting with tea party supporters, somebody had asked Yoho about a rumor. Was it true that he — a conservative veterinarian in his first term who loudly opposes any compromise with the White House — was working with Rep. Alan Grayson (D-Fla.), Congress’s leading liberal loudmouth?

“I wish I could tell you it wasn’t true,” Yoho recounted saying. “But it is true.” There were gasps, he said.

Yoho and Grayson are among a group of unlikely allies in Congress: liberal Democrats and libertarian Republicans, united by their opposition to a military strike against Syria.

The Democrats in the group have lost faith in war. The Republicans have lost faith (or never had it) in President Obama. In this case, — as Obama seeks approval for a limited kind of warmaking — their doubts aligned.

The result was an ad hoc coalition of Congress’s unwilling.

This group has become the core of a surprising backlash in the House. At least for now, it appears that more than half of representatives are ready to defy both a Republican speaker and a Democratic president, and vote against a military strike.

I signed their petition yesterday, for what it’s worth.

war

Today in History-September 6

1997 – At the funeral of Diana, Princess of Wales, Elton John—a man not given to understatement—gave a tear-jerking performance of “Candle in the Wind,” his 1973 Marilyn Monroe tribute rewritten in honor of the deceased princess.

It is safe to say that Westminster Abbey had never seen a performance quite like the one Elton John gave on this day in 1997. But then Westminster Abbey had never seen a royal funeral quite like Diana’s, what with her brother, Earl Spencer, openly criticizing the royal family for mistreating her while television cameras beamed a live feed to the hundreds of thousands of mourners gathered directly outside and the millions more watching on television around the world. But it was Elton John’s performance, seated alone at a grand piano, which stole the show.

1901 – President William McKinley is shaking hands at the Pan-American Exhibition in Buffalo, New York, when a 28-year-old anarchist named Leon Czolgosz approaches him and fires two shots into his chest. The president rose slightly on his toes before collapsing forward, saying “be careful how you tell my wife.”

Czolgosz moved over the president with the intent of firing a third shot, but was wrestled to the ground by McKinley’s bodyguards. McKinley, still conscious, told the guards not to hurt his assailant. Other presidential attendants rushed McKinley to the hospital where they found two bullet wounds: one bullet had superficially punctured his sternum and the other had dangerously entered his abdomen. He was rushed into surgery and seemed to be on the mend by September 12. Later that day, however, the president’s condition worsened rapidly and, on September 14, McKinley died from gangrene that had gone undetected in the internal wound. Vice President Theodore Roosevelt was immediately sworn in as president.

1781 – British Brigadier General Benedict Arnold, a former Patriot officer already infamous and much maligned for betraying the United States the previous year, adds to his notoriety by ordering his British command to burn New London, Connecticut.

The Continental Army had been using New London to store a large stash of military supplies, but only stationed Captain Adam Sharpley and a contingent of 24 Continental soldiers there to protect it. General Arnold’s British soldiers, with help from the area’s Loyalists, quickly overwhelmed Captain Sharpley and the Continentals, who had no other option but to retreat and leave New London and the military supplies unguarded.

After looting the town, Arnold ordered his British soldiers to set fire to every building, causing the equivalent of more than $500,000 in damages. Benedict Arnold was already despised throughout the colonies for his attempt to sell the Patriot fort at West Point, New York, to the British in 1780 for a bribe of £20,000. The burning of New London sealed his reputation as a public enemy and his name became a synonym in common American parlance for “traitor.”

Morning Report – Jobs day

Vital Statistics:

Last Change Percent
S&P Futures 1659.7 6.7 0.41%
Eurostoxx Index 2779.6 5.4 0.19%
Oil (WTI) 109.1 0.7 0.66%
LIBOR 0.256 -0.002 -0.66%
US Dollar Index (DXY) 82.13 -0.499 -0.60%
10 Year Govt Bond Yield 2.89% -0.10%
Current Coupon Ginnie Mae TBA 103 0.7
Current Coupon Fannie Mae TBA 102.6 1.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.67
Stocks and bonds are higher after a disappointing jobs report. Bond investors were clearly leaning short in a big way going into the report. The 10 year was trading above 3% before the report, but has moved back down to 2.89%
The jobs report was relatively weak, although the headline unemployment number dropped to 7.3% from 7.4%. Payrolls increased 169k, lower than the 180k the Street was looking for. The prior two months were revised down by a total of 74k. The unemployment rate dropped from 7.4% to 7.3%, while the labor force participation rate dropped to 63.2% from 63.4%. For those keeping score at home, the last time the labor force participation rate was that low, “Miss You” by the Rolling Stones was the #1 song on the hit parade. Weekly earnings rose .2% while weekly hours ticked up by 6 minutes. Overall, a disappointing report.
Where does this report leave us with tapering QE? Since the default path is to start tapering, and some of the other reports are showing strength, I would expect the Fed to make at least a symbolic decrease in purchases, probably in Treasuries and not MBS.

Today in History–September 5

1972 – Just before midnight, amidst the backdrop of the twentieth Olympic games, 9 Israeli Olympic athletes are massacred on the tarmac at the Munich airport after a botched rescue attempt turns into a firefight between their Palestinian captors and German security forces. The athletes, most of them members of the Israeli wrestling team, had been taken hostage (2 others were killed) by members of the terrorist organization Black September after the terrorists had sneaked into the Olympic Village and stormed the Israeli apartment complex in the early morning hours. After an initial demand for the release of some 230 prisoners held in Israeli prisons, a day of negotiations is played out in front of a worldwide television audience of millions. Eventually the attackers request a plane to take them to Cairo, a request ostensibly granted by German authorities, who prepare to ambush the attackers after transporting them to an air base in helicopters. The plan, to the extent there really was one, goes drastically awry when security forces posing as airplane attendants take it upon themselves to abort the mission, thus tipping off the terrorists to the trap. In the ensuing firefight, the terrorists turn their fire on the bound hostages in the helicopter, and then toss a grenade into it, incinerating anyone who was still alive.

1836 – Sam Houston is elected as the first president of the Republic of Texas. A year earlier Houston had been appointed to be a military commander of the Texas army during the nascent movement to establish Texas independence from Mexico. Under Houston’s leadership the Texas army had recovered from a disastrous defeat at the Alamo in early 1836, and had gone on to defeat the Mexican army, capturing its general Santa Anna in the process. Santa Anna was subsequently forced to sign an armistice granting Texas its independence. Houston actually gets elected as Texas’ president twice, serving from 1836-1838, and then again from 1841-1844. He would go on to serve as a Senator in the US congress after helping Texas gain admission as state in the US in 1845.
houston

1774 – In response to the passage of the Coercive Acts, more locally known as the Intolerable Acts, 56 delegates representing 12 of the 13 colonies (Georgia was unrepresented) gather in Philadelphia for the first ever session of the Continental Congress. It is the first formal act of unified opposition to British rule among the American colonies. The delegates, who will draft a declaration of rights and grievances to be sent to the King, include Patrick Henry, John Adams, and George Washington.
continetnal congress


Title added by Michi

Morning Report – Deeply underwater homes down 14.5% year over year 09/05/13

Vital Statistics:

Last Change Percent
S&P Futures 1655.4 2.0 0.12%
Eurostoxx Index 2764.4 6.1 0.22%
Oil (WTI) 107.8 0.6 0.56%
LIBOR 0.258 -0.001 -0.35%
US Dollar Index (DXY) 82.18 0.012 0.01%
10 Year Govt Bond Yield 2.92% 0.03%
Current Coupon Ginnie Mae TBA 103.1 -0.5
Current Coupon Fannie Mae TBA 102 -0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.56
Markets are higher this morning after the ADP jobs report predicted 176 private sector jobs were created in August and initial jobless claims came in at 323k. Productivity was higher, while unit labor costs fell. Bonds and MBS are down small.
RealtyTrac is reporting that 10.7 million homeowners are deeply underwater (LTV > 125%), which represents 23% of properties with a mortgage. This number is down from 12.5 million (or 28%) a year ago. Another 8.3 million are in the 90 – 110 LTV range, and if real estate prices continue their recent appreciation, this could bring the supply / demand dynamics back into equilibrium as these homes gain equity and become available for sale. Lack of inventory has been a problem in the market and has been distorting some of the repeat-sales indices as professionals and cash buyers compete for the few homes that are available. Needless to say, this is welcome news for originators as it would boost purchase activity as refis dry up.
Washington Post has a quick and dirty on what a Summers Fed would look like. Punch line: not a lot different than a Bernanke Fed, at least as far as policy is concerned. So far, it looks like Summers is Obama’s first choice.
Yesterday’s Fed Beige Book didn’t have much new to say. Eight districts reported moderate growth while 5 reported modest growth. Residential real estate activity increased moderately, while lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Hiring and wages increased modestly.

Today in history – September 4

1972 – US swimmer Mark Spitz helps his team win the medley relay in a record setting time, thus winning his 7th gold medal at the Munich Olympic games, setting a record that would last for 40 years. Spitz also set new world records in each of the other 6 events in which he won the gold. His tally of 7 golds will remain a record until 2012 when Michael Phelps took home 8 at the Beijing Olympics.
http://www.youtube.com/watch?v=moHuIWnqLxE

1957 – The Edsel, the first new car brand to be introduced by one of the Big 3 motor companies in 20 years, and perhaps the most infamous flop in car manufacturing history, is presented to the public by the Ford Motor Company. Veiled in secrecy, Ford had hyped the new car with a marketing campaign that showed only the hood ornament and promised simply “The Edsel is coming.” But when it was finally unveiled, the public was not impressed. Coming amidst a changing economic landscape, the car was too big and too expensive, and had a myriad of technical problems, including a hood ornament that tended to fly off on the highway. After only 3 years, and a loss of $250 million, the Edsel division folded.
edsel

1886 – The Indian wars of the American southwest effectively come to an end when Geronimo, the last remaining warrior chief to organize resistance to US forces, surrenders. Geronimo is sent to reservations first in Florida and then in Louisiana, finally ending up in Oklahoma, where he converted to Christianity, became a successful farmer, and even participated in Theodore Roosevelt’s inaugural parade.
geronimo

Morning Report – House prices within 18% of peak 09/04/13

Vital Statistics:

Last Change Percent
S&P Futures 1637.0 -2.1 -0.13%
Eurostoxx Index 2727.4 -25.9 -0.94%
Oil (WTI) 107.8 -0.8 -0.73%
LIBOR 0.259 -0.001 -0.19%
US Dollar Index (DXY) 82.29 -0.073 -0.09%
10 Year Govt Bond Yield 2.86% 0.00%
Current Coupon Ginnie Mae TBA 103.6 0.0
Current Coupon Fannie Mae TBA 102.8 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.54
Should be a slow day with not much economic data and the Jewish holiday. Mortgage applications rose 1.3% last week. bonds and MBS are flat
Construction spending rose .6% last month and is up 5.2% year over year. Residential construction is up .6% month over month and 17.2% year-over-year. We are definitely seeing signs of life in the homebuilding sector, although the first time homebuyer is getting a bit of sticker shock from the higher rates. Pulte noted on their 2Q conference call that buyers at the lower price points (read the first time homebuyer) are backing away a bit. Toll Brothers (which is in the McMansion business) reported that the luxury homebuyer is unfazed by higher rates.
CoreLogic reported that home prices increased 12.4% year over year and and now within 18% of their April 2006 peak. Every state reported a year-over-year increase in prices if you exclude distressed sales. While they predict that August’s increase will be similar to July’s, they anticipate the appreciation to stall as seasonal demand wanes and people start to feel the effects of higher rates. As usual, the hardest hit states are reporting the strongest recoveries.
Yesterday’s ISM report showed strength in manufacturing. While manufacturing isn’t the driver of the economy that it used to be, it still matters quite a lot. The reading of 55.7 corresponds to a GDP growth rate of over 4%. Unfortunately, while manufacturing output is up quite a bit, manufacturing employment is not. Auto sales are up around the 16MM range, which is approaching pre-crisis levels. The average US car is around 11 years old, so we are due for a upgrade cycle. That will be bullish for the economy.

Today in history – September 3

2004 – A three-day hostage crisis in a school in the town of Beslan, Russia comes to a violent end when a gun battle between Russian security forces and the hostage takers erupts following an explosion. Three days earlier Chechen terrorists had surrounded and then taken over the school, holding some 1,200 children, parents and teachers, who had been celebrating the first day of school, in the school gym. The gym was then rigged with explosives as the terrorists demanded a Russian troop withdrawal from Chechnya. On the third day of the siege, an explosion in the gym, which witnesses later say was accidentally set off, sparks a firefight between the terrorists and security forces. By the time it is over, 31 of the 32 terrorists are dead, along with 331 of the hostages, including 186 children.

1783 – America is officially recognized as an independent nation with the signing of the Treaty of Paris, formally ending the American Revolution. The last major battle of the Revolution had ended two years previously with the surrender of British General Cornwallis to French and American troops, but final peach negotiations had continued throughout 1782 and 1783. The final agreement granted America its independence as well as granting all lands from Florida to the Great Lakes and between the Atlantic and the Mississippi to the US, essentially doubling its size.

Morning Report – it is all about Friday’s jobs report 09/03/13

Vital Statistics:

Last Change Percent
S&P Futures 1645.9 14.6 0.89%
Eurostoxx Index 2766.1 -8.0 -0.29%
Oil (WTI) 107.2 -0.4 -0.38%
LIBOR 0.26 0.000 0.00%
US Dollar Index (DXY) 82.34 0.256 0.31%
10 Year Govt Bond Yield 2.84% 0.05%
Current Coupon Ginnie Mae TBA 104.1 0.0
Current Coupon Fannie Mae TBA 102.8 -0.4
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.47
Markets are stronger after a return from the long Labor Day weekend. While a short week, we will have all sorts of important data, with Friday’s jobs report the most important. Risk-on feel, as stock index futures are rallying and bonds / MBS are getting hit.
Friday’s jobs report will probably answer the September vs December question. If it is strong, the next questions will concern the actual amount and distribution of the cuts. The consensus seems to be that the Fed will reduce purchases by $10 billion a month. Will that be all Treasures, a mix of Treasuries and MBS, or all MBS? While I don’t think there is any chance the Fed will choose to do all MBS, there is a chance they could do all Treasuries. And that would be mortgage-rate positive.
Is the Syrian situation market-moving? It has the potential to be market-moving if it spreads to other countries in the Middle East, but on its own, probably not. Any sort of strike by the US will be limited and no one envisions sending troops in. The only real worry is if it drives oil higher, and that will affect Asia more than us.
The MBA Independent Mortgage Banker Report showed average profit per loan decreased to $1,528 (75 bp) in the second quarter from $1,772 (86 bp) in the first quarter. While overall volume was flat, per-loan production costs continue to rise, and we are seeing pricing pressures.
The jumbo market so far seems to be immune to rising rates.