Morning Report: Stocks and bonds telling a different story?3/3/17

Vital Statistics:

Last Change
S&P Futures 2379.0 -3.0
Eurostoxx Index 374.5 -1.1
Oil (WTI) 52.8 0.2
US dollar index 91.8
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 101.72
Current Coupon Ginnie Mae TBA 103.15
30 Year Fixed Rate Mortgage 4.09

Stocks are still taking a breather after a nice run. Bonds and MBS are down.

The focus today will be all of the Fed-speak, with Janet Yellen and Stanley Fischer speaking around lunchtime. The Fed enters their quiet period ahead of the March FOMC meeting tomorrow. The markets have gone from pricing a March hike as a 30% chance to an almost certainty over the past several weeks.

The ISM Non-Manufacturing index improved in January, as business activity and new orders (especially exports) led the charge. Employment ticked up slightly. The reading of 57.6 was the highest since October 2015.

Ben Carson was confirmed as the new HUD Secretary yesterday on a 58-41 vote. HUD probably won’t have a lot to do with GSE reform, as that is largely a Treasury function. Ben Carson is a neurosurgeon by trade, and his public record on housing was limited to an editorial criticizing Obama’s enforcement of the Fair Housing Act. During his hearing, however he praised the Fair Housing Act as an important piece of legislation. The safety of public housing is a priority for him, and he plans to increase HUD’s efforts to eliminate lead paint, mold, etc from public housing. He wants to continue to advance HUD’s mission of financing low income / credit / first time homebuyers while introducing private capital and protecting taxpayers.

Snap priced its IPO yesterday, where it had a 44% gain on the first day of trading. Many IPOs lately have not seen a big pop on day 1, so this is a bit of an anomaly. The lack of big gains from IPOs represents the drop in commission revenue and the balance of power between issuers and the buy side (a big jump in price on the first day means that the IPO was underpriced and the issuer is leaving money on the table). In the past, the banks were more worried about keeping the big mutual funds happy since they were a steady source of commission revenue, while issuers would typically do a deal and then go away for a while. Nowadays, commissions are basically nothing, so banks are more concerned with keeping issuers happy than they are with keeping, say Fidelity happy. When I started in the business, commissions were 5 cents a share, and bid-ask spreads were an eighth. Today, commissions are less than half a penny a share and bid-ask spreads are 1/10 of a cent on big liquid stocks.

As a general rule, when the stock price is telling you one thing and the bonds are telling you another, go with what the bonds are telling you. We are seeing a bit of that right now with stocks and bonds – as stocks are off to the races on the reflation trade, bonds have been in a range post-election. Bonds are saying either (a) fiscal stimulus is not going to happen or (b) fiscal stimulus isn’t going to work. That is certainly a fair take, and I do think rates have gotten a bit ahead of themselves. On the other hand, interest rates have been so heavily manipulated by central banks over the past decade, that the signal-to-noise ratio is lower than normal. Ultimately this is a criticism of monetary policy has gotten short shrift in the public debate: that interest rates are an important signal that the economy uses to allocate capital. When central banks manipulate rates to help goose the economy, those signals are distorted, and the typical effect is a bubble. Keynes and Hayek explain it to you here.

One of Donald Trump’s plans is to increase defense spending. The proposed increase is anywhere from $20 billion to $54 billion, from the current $582 billion level (or 3.1% of GDP). Here is a chart of defense spending over the past century as a percent of GDP in order to put current levels into perspective:


Solid tips for doing your taxes this year.

41 Responses

  1. Yet another string of “hate crimes” turn out to be a hoaxes by lefties who want to make Trump look bad…

    I suspect i will be waiting a long time for all of those who got the vapors over Trump’s “sometimes it is the reverse” comments to admit they were wrong…


    • It’s less about Trump than the ex.

      “According to the FBI, this was all designed to act out some personal vendetta against an old girlfriend who was Jewish – the Jews were only involved insofar as they could be used as a tool against her.”

      The real point here is the extent that these sort of incidents are hyped up by the media and then become the bandwagon for which the real nut jobs decide to hitch their ride to.

      Sort of like satanic cults in the 1980’s, and school shootings since Columbine.


  2. Interesting read.

    “A key Republican explains why he wants to reinvent taxes, not just cut them
    House Ways and Means Committee Chair Kevin Brady on taking the hard road on reform.
    Updated by Jim Tankersley
    Mar 3, 2017, 7:30am EST”

    NoVA, what odds do you give him on getting this through?


  3. Yeah, bitches!

    Again, what have he Ruskies done differently in regards to American Presidential elections compared to every other cycle going back to, say, 1920?


  4. Like

    • what bothers me is that the government is becoming a partisan animal in of itself, trying to throw elections and resisting any politicians who want to restrict its power.

      The bureaucracy has to be accountable to both progressive presidents and conservative presidents.


  5. Hard to argue.

    Nevertheless, whether done inside or outside the FISA process, it would be a scandal of Watergate dimension if a presidential administration sought to conduct, or did conduct, national-security surveillance against the presidential candidate of the opposition party. Unless there was some powerful evidence that the candidate was actually acting as an agent of a foreign power, such activity would amount to a pretextual use of national-security power for political purposes. That is the kind of abuse that led to Richard Nixon’s resignation in lieu of impeachment.

    I’m enjoying this, how can one not?


  6. Pearl-clutching at the NYT over the status of obama’s “midnight regulations”


    • Brent:

      From the NYT:

      Wall Street banks like Goldman Sachs and JPMorgan Chase will not be punished, at least for now, for not collecting extra money from customers to cover potential losses from certain kinds of high-risk trades that helped unleash the 2008 financial crisis.

      It really is hard to overstate how dishonest that sentence is. But even worse than the dishonesty is the implicit ignorance. The 2008 financial crisis was a liquidity crisis that was in part caused by the existence of the very type of collateral requirements the (mythical) absence of which the NYT is lamenting.




        • Mark:

          I hate this kind of non-reporting. Note the passive voice used to make virtually every accusation.

          Mr Oronov is reported to have set up a secret meeting between Donald Trump’s personal lawyer Michael Cohen…

          “Is reported”….by who?

          …and Russian officials where a “peace plan” is said to have been hatched to give Russian President Vladimir Putin control of the Crimea.

          “Is said”…by who?

          Mr Cohen is understood to have an extensive network of personal and business relationships in the Ukranian-American community…

          “Is understood”…by who?

          The “peace plan” meeting brought together Mr Artemenko, Mr Cohen and Felix Sater, an American-Russian long-time business associate of Mr Trump who is reported to have ties to the Russian mafia.

          “Is reported”….by who?

          Details of this meeting are believed to have ended up on the desk of Michael Flynn…

          “Are believed”…by who?

          Some or all of this may actually be true, but all that the Independent is actually reporting is anonymous rumor and speculation.


        • POTUS cannot order taps. Of course, the heads of law enforcement and intelligence agencies have the ability to do this although they are supposed to go through FISA Court.

          Can this POTUS get a confidential review of FISA warrants?

          What if someone else in Trump Tower was the target of a FISA warrant?

          I like the Economist take: whatever the truth here, it sucks. My own view is that Trump is just deflecting from the Russian contact story, until something more plausible has legs.

          The conspiracy view posed by the left end of the blogs is that DJT agreed to pull out the anti-
          Russia plank on Ukraine at the RNatnlConvention and did so in consideration for Russian disclosure of “embarrassing” HRC and D emails.

          Assuming the conspiracy is untrue, it remains true that DJT’s guys pulled the tough plank on Russia. DJT had claimed non-involvement. Now the two operatives say it was DJT’s stated idea.
          So half the conspiracy theory now has a basis, which, DJT would certainly want to deflect. “Look over there, so to speak.

          So now every thread of Russian involvement in election propaganda and every thread of DJT’s kindnesses to Putin will be pushed, pulled, woven, and sniffed. Will there be truth at the end or fiction?

          Who knows.

          The link dump was to try to keep a running score on threads to be sniffed.


        • And this comports with my personal view of Trump, the lying cheating conman, failed casino operator, TV personality, and blowhard –

          “We have as president a man who is erratic, vindictive, volatile, obsessive, a chronic liar, and prone to believe in conspiracy theories,” said conservative commentator Peter Wehner, who was the top policy strategist in George W. Bush’s White House. “And you can count on the fact that there will be more to come, since when people like Donald Trump gain power they become less, not more, restrained.”

          Which doesn’t make him a conspirator, of course. Assholery is not a crime.


        • The conspiracy view posed by the left end of the blogs is that DJT agreed to pull out the anti-
          Russia plank on Ukraine at the RNatnlConvention and did so in consideration for Russian disclosure of “embarrassing” HRC and D emails.

          Because platform planks are so important and meaningful, the Ruskies would do anything to modify a party platform!

          They really believe this? Really?

          Nobody is that dumb are they?

          Course, Obama was elected twice, so…


        • Yeah the spokesman really needs to be called out on this:

          “Second, the business about never ordering surveillance against American citizens is nonsense. Obama had American citizens killed in drone operations. Obviously, that was not done in the U.S. or through the FISA process; it was done overseas, under the president’s commander-in-chief and statutory authority during wartime. But the notion that Obama would never have an American subject to surveillance is absurd.”


        • jnc:

          Yeah the spokesman really needs to be called out on this:

          I agree it is a point worth making, although I also think that, like the Sessions testimony, in context the statement isn’t as deceptive as it is being made to seem. The fact that what was done was not done either in the US or through the FISA process seems to me to distinguish it enough from the case at hand so as not to be an obvious attempt to deceive anyone.


        • And like with Sessions, that only applies if you assume he’s operating in good faith, and not trying to parse the answers to mislead.


        • jnc:

          And like with Sessions, that only applies if you assume he’s operating in good faith, and not trying to parse the answers to mislead.

          For me whether or not either was operating in good faith is what I am trying to decide, not what I am assuming up front. Certainly if one assumes either good faith or bad faith, then the decision of how to assess their statements is already made. I don’t presume either good faith or bad faith, but rather I try to assess which seems most plausible to me given the situation at hand.


Be kind, show respect, and all will be right with the world.

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