All Things in Moderation

Stocks are lower this morning on no real news. Bonds and MBS are down as European bonds continue to sell off.

European bonds have been selling off as fast money gets caught on the wrong side of the boat. This is pushing up Treasury yields, which should be moving down based on some of the economic data lately.

There is a lot of economic data this morning. Initial Jobless Claims fell to 262,000, the lowest reading in 15 years. The ISM Milwaukee index fell to 48.08. The Bloomberg Consumer Comfort Index fell to 44.7 and the Chicago Purchasing Manager Index rose to 52.3.

The Employment Cost Index rose .7% in Q1. Wages and Salaries increased .7%, while benefits increased .6%. On an annualized basis, wages and salaries were up 2.6%, while benefits were up 2.7%. This is a big jump from the fourth quarter reading of 2.1%, and the average over the past few years of around 2%. One data point does not make a trend, but economically this is encouraging – wage growth has been a long time coming.

Personal Income was flat in March, however compensation was up .2%. Personal spending rose to 0.4%, and the savings rate dipped slightly to 5.3%. The savings rate has been trending upward however, as people use some of the added income to pay off debt. The increase in spending is an encouraging data point.

Inflation remains low, using the Fed’s preferred inflation measure, personal consumption expenditures. On a year-over-year basis, the core number is up 1.3%, well below their 2% target. Given the weak Q1 GDP number and the weak inflation numbers, I find it hard to imagine the Fed moving in June.

The FOMC statement was pretty bland, and we didn’t see much of a reaction. The slowdown was attributed largely to “transitory factors.” On rate hikes: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” Given unemployment is back at normal levels, they are probably looking at wage growth as their key metric.

The Bernank is now an advisor to PIMCO, as well as Citadel. Bond managers will be like: “Hey Ben, can you take Janet’s temperature on a June rate hike?”

Household formation increased at an annual rate of 1.5 million in Q1, even as the homeownership rate dipped. This is good news for landlords, however it isn’t spilling over to residential construction yet, with housing starts still mired about 70% of normalcy.

Markets are subject to some push-pull this morning with stronger data out of Europe and weaker data out of the US. Bonds and MBS are down.

Bonds are getting roughed up this morning after Germany reported inflation that was higher than expected. The German Bund is trading at 26.3 basis points, up 10 basis points this morning. This has pulled US Treasuries lower. Note the Fed rate decision is scheduled for 2:00 PM EST.

Stocks on the other hand are dealing with a huge miss on GDP. The advance estimate came in at +0.2% for the first quarter. The Street was already expecting weakness due to the weather, however the number still missed the +1.0% street estimate by a wide margin. Consumption growth fell to 1.9% from 4.4% in the fourth quarter. Investment fell from 3.7% to 2.0%. Government spending improved from -1.9% to -.7%, although that was driven by decreases in defense and increases in non-defense spending. Finally, the trade balance decreased a little.

This number is going to be subject to two more revisions, and I would expect this number to be revised upward. Most economic data do not suggest that growth ground to a halt in Q1, just that it slowed down from Q4’s +2.2%. I suspect this will seal the deal that the first rate hike will be in September, not June.

Mortgage Applications fell 2.3% last week, as purchases were flat and refis fell 3.7%.

Pending Home Sales rose 1.1% in March, more or less in line with estimates.

Financial professionals can expect more invective thrown their way. Bernie Sanders (I-VT) is throwing his hat in the ring. Sanders, a socialist, will run on the Democratic ticket and try and pull Hillary to the left.

Markets are flattish this morning as the FOMC begins their meeting. Bonds and MBS are down.

Consumer Confidence slipped in April, to 95.2 from 101.3. Consumers’ appraisal of current-day conditions continued to soften. Those saying business conditions are “good” edged down from 26.7 percent to 26.5 percent. However, those claiming business conditions are “bad” also decreased from 19.4 percent to 18.2 percent. Consumers were less favorable in their assessment of the job market. Those stating jobs are “plentiful” declined from 21.0 percent to 19.1 percent, while those claiming jobs are “hard to get” rose from 25.5 percent to 26.4 percent. The current reading is just about the historical average.

The FOMC meeting begins today. This is should be the last meeting where rate hikes are off the table. Given the weak first quarter, and subsequent economic weakness, the consensus has shifted markedly from a June hike to a September hike. As an aside, we will get the advance estimate for Q1 GDP tomorrow, and the consensus is that the economy grew at 1%. Granted, some of that is weather-driven, but there is no question the economy has slowed dramatically from the Q214-Q315 pace of 4.6%-5.0%. The jobs report next week will be huge.

Home Prices increased .93% month-over-month and 5.03% year over year, according to Case-Shiller. Overall, prices are about 10% below their 2006 peaks, however some hot markets like Denver and San Francisco have surpassed that peak already. Price inflation is being driven by a lack of supply, not wage growth, which means that prices will probably flatline once new home construction kicks into gear or until wages start increasing. We will get a good read on wages this Thursday, with personal income and personal spending.

The homeownership rate fell to 63.7% in Q115, from 64% in the fourth quarter of 2015. Pretty much all of the increase that started with the Clinton Administration’s homeownership initiatives in the mid 90s have been given back.

Markets are higher on no real news. bonds and MBS are down small.

Not much in data this morning. The Markit PMI numbers fell slightly in April from March. I think we can officially scrap “the weather did it” excuse for weak numbers.

The FOMC meets this week, and this will be the last meeting where rate hikes are not on the table. It won’t contain any new forecasts and it won’t have a press release. It should be a nonevent.

This week contains some important economic data (especially for the Fed). We will get the advance estimate for Q1 GDP, Personal Income and Personal Spending, and the PCE deflator (the Fed’s preferred measure of inflation). Note that the first Friday of the month is this week, but the government is delaying the jobs report until next week. The GDP report is going to be weak – the Street forecast is +1.0% – however personal income could move the bond market if we start seeing wage inflation. The PCE deflator will be important on the other side – if inflation remains well below the Fed’s target they have an excuse not to move. Finally, we get construction spending and the Case-Shiller index.

The battle between Quicken and the DOJ is heating up. Quicken CEO Dan Gilbert spoke truth to power on Friday: “This is what happens when you dare to stand up for justice and the truth to the Department of Justice,” Gilbert said on a conference call Friday evening with the Free Press. “This was an attempt to embarrass us and continue to pressure us to write enormous size checks to settle (allegations) to make them go away, and to admit things that did not occur.” The industry is rooting for Quicken on this one – believing the government is systematically making mountains over immaterial clerical error molehills in order to squeeze more 8 and 9 digit settlements out of the industry. Of course, then the government scratches its head wondering why credit is tight, especially at the lower FICO scores. Is it time to start pushing the housing recovery forecast out to 2017? I hope not. At least one economist thinks 2015 is going to be good.

Markets are higher this morning on good earnings out of US companies. Bonds and MBS are up small.

Durable Goods rose 4% in March, however if you strip away transportation, they fell .2%. February was revised downward. Capital Goods orders (a proxy for business capital expenditures) fell .5% and February was revised down to -2.2%. We have seen a slew of disappointing data this quarter – Merrill Lynch is now forecasting Q1 GDP growth of 1.5%.

Comcast has officially pulled the plug on its merger with Time Warner Cable. Washington hated this deal from Day 1, and it became apparent this week that neither the FCC nor the DOJ was going to wave this through.

Yesterday was a monumental day (of sorts) for stocks. The Nasdaq finally eclipsed its high from March 2000. Back then the mentality was to buy quality stocks, don’t worry about the price, just hold out for the long term. For a trip down memory lane, remember the “four horsemen” of tech – the supposedly bulletproof stocks according to Jim Cramer were INTC, DELL, MSFT, and CSCO. Where are they now? Intel is down 57% from the peak, Dell was taken private in 2013 at $13.75, a 77% discount to its 2000 peak, If you were in Mr. Softee, you would be up 10% over 15 years, and almost all of your return would have beeen via the 2.7% dividend. Finally, you would have been much better off in the “other Cisco” – food service company Sysco (SYY) – than you would have been in CSCO, which is down 60% from its peak. No, Virginia, you cannot simply “buy good companies whatever the price, and expect to make money over the long term.”

That era’s madness was perfectly encapsulated in the stock split beeper – a pager that would go off when a company announced a stock split. Cause nothing creates value like a stock split.

In many ways, the four horsemen of tech were similar to the Nifty Fifty of the 1970s – one decision stocks like Avon and Polaroid. They worked until they didn’t. In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical.

In other words, don’t worry about a bubble in the NASDAQ. People realize that stocks are just an asset that can go up or down – there is nothing special about them. Without that mentality of investors, you aren’t going to have a bubble. Bonds on the other hand…

The NAHB is forecasting 2015 will be “slow and steady” for housing and 2016 will be the breakout year. The pent up demand of the first time homebuyer will be the catalyst, but we have been waiting for a long time for that.

Stocks are lower on overseas economic weakness. Bonds and MBS are flattish.

Initial Jobless Claims came in at 295, a little higher than expected. The Bloomberg Consumer Comfort index slipped to 45.4 from 46.6.

New Home Sales dropped to an annualized pace of 481k in March, from 543k in February. This was a big miss – the Street was at 515k.

We heard from homebuilder D.R. Horton yesterday. They beat expectations, but the margin and revenue guidance was on the light side, so the stock was sold off. D.R. Horton is very exposed to Texas and has yet to see any evidence of an slowdown in that economy. Horton was encouraged by the demand and is seeing strong growth in its Express brand, which is targeted at the first time homebuyer. The downside is that the margins in Express are lower.

Pulte reported this morning, and missed expectations. Revenues were light, however orders were up 6% and ASPs were up 2% to 323k. The company noted at strong start to the spring selling season, and characterized the housing recovery as “sustained but slow.”

Interesting stuff on the state of part-time workers. US part-time employment is reaching historical norms and that indicates the slack in the labor market is going away. Interestingly they polled workers who put in 30 hours a week or less. Of those people, a third were happy with their hours or wanted to work less. Only 23% wanted a traditional 40 hour a week job. Of those working more than 30 hours, about a quarter wanted to work less. Punch line: as the slack is taken up, wages are going to have to go up. Which means the Fed is more likely to mover sooner rather than later.

The Clinton Foundation is under the microscope right now, and the New York Times has a piece about how the State Department approved a Russian nuclear deal after a big donation to the Clinton Foundation. WaPo has a piece on the foundation and Bill Clinton’s speaking fees. There is supposedly a tell-all book coming out on the Clinton Foundation as well. Whatever comes out of it, the Democratic Party is all-in on Hillary and will dismiss any revelations as partisan poo-flinging regardless of the merits.

Stocks are up this morning as struggling Greek banks get a bit more breathing room. Bonds and MBS are down.

Mortgage Applications rose 2.3% last week, according to the MBA. Purchases were up 5% while refis were up .6% and accounted for 56% of all loans.

Existing Home Sales rebounded to 5.19 million in March, according to the National Association of Realtors. Inventory remains tight at roughly 4.6 months (6 months is considered “balanced”). The median home price was 212,100, which is 7.6% higher than a year ago. The first time homebuyer was 30% of all sales, which is starting to inch up. More inventory and more construction is needed to see these numbers improve. Cash sales as a percent dropped to 24% as professional investors exit and “real” buyers return.

The FHFA Home Price increased .7% in February, well above the .5% expectation. On a year-over-year basis, prices were up 5.4% and we are now within 3% of peak levels, which puts it roughly at January 2006 levels. If you take a look at the geographic returns, the West Coast is slowing down from its torrid pace in 2014, however it is still strong. The bright spot seems to be the turnaround in the Northeast, where home price appreciation is finally higher than the national average. For a long time, Southern California and New England have been polar opposites, with a red-hot market out west and an ice cold market in New England. The big Northeast judicial states appear to be finally cleaning out the inventory of foreclosed homes, which has been weighing on the market.

Stocks are higher this morning as earnings come in better than expected. Bonds and MBS are up.

Housing advocates are urging the government to investigate and intervene in communications between MBS holders and servicers. They claim that MBS investors (read Wall Street Sharpies) are urging servicers to forego modifications and to pursue “unnecessary foreclosures.” Surprisingly, they hold up Ocwen as pillar of servicing virtue. Of course Ocwen is fighting for its life and will do anything it possibly can to make the government happy.

New simpler mortgage disclosure forms are coming August 1, and they could slow closings as professionals learn to navigate the new system.

M&A activity is picking up, with an interesting situation in the pharma sector. Mylan, who last week launched a hostile bid for Perrigo, now faces an unsolicited bid from Teva. A combination of low interest rates and high stock prices make growth by acquisition an attractive strategy. Teva’s biggest drug faces generic competition so they need to replace that revenue. Mylan / Teva is going to face antitrust scrutiny. This situation looks like a fun one for the arbs.

While ZIRP is helping to drive M&A activity, the unintended consequence is that insurers and pension funds are getting hammered as they cannot earn enough on their assets to cover their estimated liabilities. There are two ways out of the box: either assume it away with rosy estimates of asset return and liability inflation, or take a lot more risk. This is part of the reason why the Fed wants to get rates up to a more normal level. I suspect they fear we are going to have to bail out the state pension funds and / or insurance companies.

High end real estate has replaced gold as the go-to asset for storing wealth. Real Estate and contemporary art are the new store of value of choice for foreign investors. Gold, which used to have that role, cannot get out of its own way. Why? Blame the financial crisis, where gold sold off just like every other asset in a situation tailor-made for it. If gold was unable to rally in that sort of crisis, what good is it? Note that high end real estate in places like London, New York, and Vancouver are owned largely by Chinese investors, and China has its own issues, as even state-owned companies are now defaulting on their debt. As their real estate bubble bursts, it will be interesting to see if they liquidate overseas property. Generally in a crisis, you sell what you can, not necessarily what you want to.

Markets are higher this morning on overseas strength. Bonds and MBS are flattish.

This week doesn’t have any data which will move the bond market, but we do have some important numbers nonetheless. On Wednesday, we will get existing home sales and the FHFA House Price Index. On Thursday, we will get New Home Sales. Finally, we will get earnings from Pulte an D.R. Horton. Hopefully their comments will help reconcile the strong builder sentiment with the lousy housing starts numbers.

Note that Pulte is saying that the housing market remains strong, despite the “volatile” numbers. They see high single digit growth in housing. M&A is hot: buy building product stocks.

The Chicago Fed National Activity Index fell to -.42 in March, giving further ammo to the argument that the deceleration that started in January and February was not simply weather driven. The 3 month moving average, which is a more stable, indicates that the economy is operating below its historical trend.

William Dudley is speaking at the Bloomberg Americas Monetary Summit this morning. His main points – the Fed will be data-dependent (boilerplate), and the Fed is cognizant of the risks or liftoff on emerging markets. Even if rates do go up, monetary policy will still be easy. That said, ECB and BOJ easing does make credit conditions more supportive. The stock market is blithely assuming that the economy will handle rate hikes as easily as it handled the end of QE and is therefore vulnerable, IMO.

The Fannie Mae and Freddie Mac guarantee fee review is finished, and it looks like not much is going to change. The 25 basis point adverse delivery fee is gone, but there are new fees imposed, so it looks to be more or less a wash. Borrowers with lower credit are going to pay slightly less, while high bal, investment properties, and cash out refis will become slightly more expensive.

Jon Corzine (of MF Global fame) is considering starting a hedge fund. Proving you can get away with anything in this country if you are politically connected.