Morning Report – Another sign of a credit market top 9/11/14

Markets are higher this morning on on real news. Bonds and MBS are rallying.

Initial Jobless Claims came in at 315k, a little higher than street expectations, but still a good number.

The President talked about ISIS last night. It was a declaration of war. Or something. Here are the takeaways.

The Fannie Mae National Housing Survey is out – average home price expectations continue to fall as consumers temper their bullishness on home price appreciation. People still have a dour view on the economy but it is improving slightly. That said, it looks like incomes took a bit of a hit in August.

Bill Gross of PIMCO has been raising cash in his Total Return Fund, selling Treasuries and developed sovereigns. Mortgages as a percent stayed flat at 20%.

Twitter is doing a new convertible bond which are convertible into stock or cash at Twitter’s election. This is rare – usually the choice is the bondholder’s not the issuer’s, at least on senior unsecured paper. This isn’t a convertible pref issue. It will be interesting to see the pricing on this – essentially the holder will be short a put on Twitter stock. If Twitter’s stock craters, Twitter gets to essentially sell stock at current levels. If Twitter stock continues to rally, they can either pay cash, or sell Twitter stock in the market at higher prices, redeem the bonds and pocket the difference between the sales price and the conversion price. The bigger point is that bond issues are getting more and more lopsided in favor of the borrower, and that is a classic market top signal. Investors are reaching for yield and taking risks they are not getting adequately compensated for. Paper like this can go no-bid in a hurry. IMO, the stock market is assuming that the Fed can start raising rates without anyone blowing up. Historically that hasn’t happened.

Foreclosure activity picked up in August, according to RealtyTrac. Activity picked up in the big judicial states like New York, New Jersey, and Connecticut.

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