Morning Report: Tax reform passes 12/4/17

Vital Statistics:

Last Change
S&P Futures 2657.5 13.5
Eurostoxx Index 388.0 4.0
Oil (WTI) 57.8 -0.6
US dollar index 86.7 0.3
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.625
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning after tax reform passes in the Senate. Bonds and MBS are flat.

This week should be pretty quiet with the exception of the jobs report on Friday. We are in the quiet period ahead of the FOMC meeting next week, so we won’t be getting any Fed-speak.

Tax reform passed over the weekend in the Senate. Now comes the reconciliation between the House and Senate versions. The winners in this bill? Banks, as they generally have fewer deductions and end up paying the high statutory rate. The corporate AMT remains at 20%. The losers? Health insurance companies that will see the healthier and younger eschew health insurance because the mandate is gone. Note however that the penalty for not carrying insurance under Obamacare was pretty small to begin with – so it probably won’t make that big of a difference when all is said and done.

One potential wrinkle in the tax reform bill seems to have been fixed, and that is the treatment of mortgage servicing rights. The tax bill would have made mortgage servicing rights taxable upon creation, which would have been negative for smaller independent mortgage originators. It looks like there was an amendment to eliminate this. Like many things in the tax bill, it will take some time to digest what the provisions were.

Note that while the stock market has cheered tax reform, bonds and currencies are largely ignoring it. Good news for originators who don’t need higher rates. It is early days, however.

Stocks on Friday had a swoon mid-day on an ABC report that Mike Flynn was directed to make contact with the Russians. This was supposedly the smoking gun in the Trump – Russia collusion story. It turns out that Flynn was told to make contact after the election, which is what you would expect to see from an incoming administration in transition. The reporter from ABC was suspended for the story, although it certainly gave stock investors heartburn for a day.

One columnist is a bear on the builders after tax reform. FWIW, I think that the absolute dearth of inventory will dominate any secondary effects from the tax bill. He notes that household formation did lag for the Millennial generation, and that student loan debt is an issue. That said, the financial difference between renting and buying is still very favorable towards buying given that interest rates are low and rental inflation is high. Second, the economy is accelerating (the Atlanta Fed just took up its estimate for Q4 GDP to 3.5%) and wage inflation seems to be coming back. The article does make a good point: that the homebuilding business is highly cyclical – and during booms P/E ratios will compress. That said, we haven’t had a homebuilding boom in 12 years, which is a long, long time.

14 Responses

  1. This is should prove interesting.

    “Venezuela wants to solve its economic crisis with an imaginary new currency
    But experts are doubtful that its plan to dodge US sanctions with a cryptocurrency is workable.
    Updated by Zeeshan Aleem
    Dec 4, 2017, 2:30pm EST”


  2. Worth noting. I think progressives are going to be in for a rude awaking as more of the litigation against Trump’s executive actions actually gets to the SCOTUS.

    “Supreme Court allows full Trump travel ban to take effect
    By Lydia Wheeler – 12/04/17 04:19 PM EST ”


  3. This may prove interesting.

    It will make the PPACA drafting errors look trivial in comparison.


  4. Cryptocurrency update. Buzzword of the day: ICO.

    A parody, but not by much.

    “Can A 16 Year Old Math Genius And Semi-Naked Women Sell The First Ever ICO Tranche
    by Tyler Durden
    Dec 4, 2017 4:31 PM

    In a nutshell: We’re going to take a position in each ICO, then wrap those up into their own ICO and then you can buy tranches of that ICO depending on your “risk tolerance” i.e. how strong a person you are.

    Basically, it’s all a question of how RICH YOU WANT TO BECOME. The bottom tranche is so safe[1] that you can basically put your entire life savings in and earn a fat return.”


    • I love that Artie Fufkin’s involved. Last we saw of Artie he was demanding an ass kicking for fucking up the promotion of a Spinal Tap concert.

      Also, this footnote made me laugh.

      [1] According to the Reddit thread who will be providing the ratings for each tranche


  5. You’re either with us or against us…


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