Morning Report – FOMC data dump 12/19/13

Vital Statistics:

 

Last Change Percent
S&P Futures  1796.3 -8.4 -0.47%
Eurostoxx Index 3015.9 40.8 1.37%
Oil (WTI) 97.6 -0.2 -0.20%
LIBOR 0.246 0.001 0.31%
US Dollar Index (DXY) 80.65 0.542 0.68%
10 Year Govt Bond Yield 2.94% 0.05%
Current Coupon Ginnie Mae TBA 104 0.0
Current Coupon Fannie Mae TBA 102.7 -0.4
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.46

 

Stocks and bonds are lower this morning as the market digests the latest from the FOMC. MBS are off as well. Initial Jobless Claims rose to 379k. Later on this morning we will get existing home sales.

The Federal Reserve ended their Federal Open Market Committee meeting, and decided to taper. They will reduce purchases of Treasuries by $5 billion a month and purchases of mortgage-backed securities by $5 billion a month, which will mean the Fed will continue to build its balance sheet by $75 billion a month instead of by $85 billion a month. Tapering will begin in January. This was Ben Bernanke’s final FOMC meeting as Chairman before the torch is passed to the “dream team” of Janet Yellen and Stanley Fischer. Bernanke’s final press conference was no victory lap, but the press was respectful.

Bonds initially sold off on the news, with the 10 year trading above 2.92. Then bonds rallied, and the yield dropped to 2.82%, and then finally bonds sold off with the yield ending the day at 2.89%. Stocks loved the report, with the S&P 500 rallying 33 handles to close the day at a record high. Mortgage Backed Securities were off by almost half a point.

Steve Liesman of CNBC asked if this is now something we can expect every meeting, and it seems to be the case that they will reduce asset purchases by something like $10 billion every meeting from now. Bernanke mentioned all of the caveats about being data dependent, but it looks like this will be a constant until the Fed is no longer purchasing assets. The Fed will continue to reinvest maturing proceeds back into asset purchases. Ben Bernanke stressed that the Fed’s balance sheet is still growing, however it just isn’t growing as fast as it was. Bernanke was asked if that meant the Fed would likely still be conducting asset purchases in mid 2014 (as was previous guidance) and he said QE would probably end in late 2014.

The Fed changed the language regarding how long rates would remain close to zero. Previously, the Fed had guided an unemployment target of 6.5% as the level they would start raising interest rates. That language was changed to “The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” That language was what the stock market focused on, and probably accounts for the rally.

Finally, the Fed took down their projections for 2014 inflation and unemployment, and kept GDP the same.

Laugher of the converence – Ben Bernanke claiming that except for 2009, fiscal policy has been “extremely tight.” Reality check: Since obama took over, government spending has averaged around 24% of GDP, the highest since Truman. The biggest post WWII deficits as a percentage of GDP are (in order) 2009, 2010, 2011, 1946, 2012, 1983, 2013. Fiscal policy is about as tight as monetary policy right now. Calling the current fiscal environment “tight” makes about as much sense as calling a Triple Whopper Value Meal with satisfries and a diet coke “healthy.”

After Lennar’s good numbers, KB Home missed their quarter. Earnings and Revenues came in well below expectations. Cancellation rates were 36% and average selling prices increased 11%. The stock is down half a buck pre-open.

Ellie Mae’s Origination Insight Report is out for November. Refi percentage increased for the first time in a year, but that could be a seasonal phenomenon. FHA was 20% of all loans, while conventional was 69%. Days to close dropped to 42. Average FICO dropped to 729, average LTV was 81 and average DTI was 25/38.

I will be on Louis Amaya’s Capital Markets Today show at 10:00 am PST to discuss the FOMC meeting.

21 Responses

  1. Holy cow!

    First!!!

    Like

  2. So I’ve been looking at my 401(k) distribution lately, and I feel confident that I know what I’m doing–and am happy with my choices–with everything except the bonds part of the distribution. If I post a list of the bonds choices I’ve got, would one of you experts be willing to give me some idea of what might meet my desires? They give me around a dozen different funds to invest in, and to me they all look the same.

    Like

  3. Damn!

    Well, I’ll just leave this.

    Like

  4. “Carl”–I think President Putin is angling for a Peace Prize.

    Like

  5. I’d be happy to take a look, but I would be wary of bond funds in general right now.

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  6. Thanks, Brent! That (wary of bond funds) is pretty much what I was thinking, also, and I don’t have much distributed that way, but it’s the mix of bonds within each fund that has me bamboozled. I’ll post a list of the choices in a bit.

    Like

  7. Here are my choices. I’ve got them sitting at 13% of my portfolio right now:

    CREF Bond Market

    CREF Inflation-Linked Bond

    Western Asset Core Plus Bond Portfolio

    TIAA-CREF High-Yield Fund – Institutional Class

    TIAA-CREF Bond Plus Fund – Institutional Class

    TIAA-CREF Short-Term Bond Fund – Institutional Class

    Vanguard Total Bond Market Index Institutional Share Class

    Vanguard Inflation Protected Securities – Institutional

    Vanguard Short Term Investment Grade Fund Admiral Class Shar

    Vanguard Short Term Treasury Fund Admiral Class Shares

    Vanguard Intermediate Term Investment Grade Fund Admiral

    Vanguard GNMA Fund Admiral Class

    Vanguard High Yield Corporate Fund Admiral Class

    I’m hoping that, just based on your institutional knowledge, you can throw out 10 or so of them as not worth my time right off the bat.

    Like

  8. I’d be embarrassed to *only* be called an “extremist”. If I didn’t get the “Revolutionary” label them I’d feel I was doing it wrong

    Like

  9. I would stay away from TIPS and HY – The CPI doesn’t really account for inflation very well, and HY debt is overpriced right now.

    I would sit in a short term government fund right now and wait for the Fed to start raising rates and see how things look. The Fed will probably be able to reduce its footprint on the economy just fine, but you never know. There is a lot of artificial support in the bond market right now.

    Like

  10. Hypocrit?

    Throughout his professional life, Sarraj was a fierce proponent of resistance to the “Israeli Occupation” and vigorously promoted boycotts of Israel. But when his health failed, Sarraj sought medical care in Israel. He died at Hadassah Hospital in Jerusalem, where he had been receiving treatment for more than a month.

    Read more at: http://www.jewishpress.com/news/gaza-bds-advocate-dead-sought-israeli-medical-care-at-the-end/2013/12/19/

    Like

  11. Thanks for the advice, Brent!

    Like

  12. interview link: http://www.blogtalkradio.com/capitalmarketstoday/2013/12/19/fed-tapers-stimulus–analysis-and-impact

    I talk about why I have never been more bullish on the US economy

    Like

  13. Let me sneak a guess – energy production factors into your assessment.

    Like

  14. energy and homebuilding

    Like

  15. BitCoins and legalized pot?

    Like

  16. Uhhh, so I’m having a Gay Panic *and* a freak out over an increasingly non-white electorate because of a picture of a lily-white Hipster-Douchebag in a onesie?

    For them, Pajama Boy is yet another emblem of an increasingly non-white electorate, a young population that believes in a stronger welfare state, gender equality and LGBT rights.

    http://www.msnbc.com/msnbc/conservatives-freak-over-pajama-boy

    Like

  17. Serwer’s response was completely predictable…

    Like

  18. BitCoins and legalized pot?

    Don’t know about legalized pot, but Bitcoins are tanking right now.

    Like

  19. Isn’t there some equal protection arguments here?

    Like

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