Morning Report: Is tapering behind the sell-off?

Vital Statistics:


Last Change
S&P futures 2651 -12
Eurostoxx index 356.08 -1.82
Oil (WTI) 52.76 -0.93
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.62%


Stocks are lower this morning on no real news. Bonds and MBS are down.


We have a temporary reprieve of the government shutdown, with agencies to -re-open until Feb 15. This will allow Congress more time to work on some sort of deal on border security. Trump is willing to shut down the government again, or use emergency powers to secure funding. Note that Trump said over the weekend he is skeptical that Congress will come up with anything he would be willing to sign.


With the government shutdown over, we should start getting economic data again. We will have a big week for data, with GDP on Wednesday and the jobs report on Friday. Not sure what is going to happen with the missed data from the shutdown.


The FOMC meets Tuesday and Wednesday, however no change in the Fed Funds rate is expected. Jerome Powell will hold a press conference after the meeting, which is unusual for January meeting. The Fed Funds futures are pricing in only a 1% chance of a hike, so the press conference will be about something else – probably balance sheet runoff and the idea that the Fed’s balance sheet will probably end up closer to current levels than it will be to pre-crisis levels.


Note there has been some criticism that the Fed’s balance sheet reduction is behind the sell-off in the market. They believe that the Fed’s reduction in Treasury purchases, combined with higher borrowing amounts is causing rates to rise and that is spooking investors. The idea is that government borrowing is crowding out other investments by soaking up all of that excess liquidity in the market. The Fed isn’t buying that argument: “It’s hard to fathom the [Fed] balance sheet is having some dramatic effect,” Minneapolis Fed President Neel Kashkari said in a Jan. 17 interview. FWIW, if Fed buying was the catalyst for the sell-off, we should be seeing a steepening of the yield curve (in other words higher long term rates). In fact, we are seeing the opposite. IMO, the biggest reason for the sell off has been the re-introduction of money market instruments to the investment menu. For the past 10 years, they have paid nothing and therefore money market investors have been forced to invest in stocks and longer term bonds. Now that short term rates are rising again that money is returning to its natural home, which means some selling in the stock and bond markets as the trade is unwound.


D.R. Horton reported fourth quarter net income increased 52% YOY, although that was partially driven by a tax charge in Q4 last year. Orders were up 3% in units and flat on a dollar basis. Donald Horton, Chairman of the Board said: “Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across our markets, and economic fundamentals and financing availability remain solid. We are pleased with our product offerings and positioning for the upcoming spring selling season, and we will adjust to future changes in market conditions as necessary.”

18 Responses

  1. I see that #learn to code is now verboten.

    FWIW, I have a journalism degree and figured out 6 months after graduation that it wasn’t an industry that had a viable future. So I embarked on a career path that lead to lobbying.

    So don’t learn to code. learn to lobby.


    • isn’t it only verboten for boys?


      • probably.

        question re: loans for you.
        who is doing major renovation refis ..
        basically, i want to borrow against the completed value of a major renovation. is that even possible? I’ve got about 30% equity in the place, but it was built in the 50s, and doesn’t have a master suite, a dedicated office, or fallout shelter. you know, the necessities.


        • sure. you can do a 203k FHA loan, or a Fannie Mae Homestyle loan. If you aren’t going over 80% LTV, you probably will be better off with a homestyle since you won’t need MI.


        • so that means i can borrow 80% of the completed value, which needs to pay off the existing loan and cost of the renovation?


        • yes. they use “as completed” to calculate the V part of loan to value, and I think all they are doing is adding the reno loan amount to the appraised value to come up with that.

          so if your home is worth 100k and you owe 70k on your loan, and borrow 15k to renovate, you new loan amount is 85k and new house value is $115k.
          so you should be going up to a 74% LTV.


        • very helpful — thanks

          we’ve been kicking tires and staying in the area and moving into a bigger place. but $1 million for a place that needs some work just sucks.

          or — we can add to ours if we can make the math work.


        • Sure, no prob

          New conforming limits are 725k in high cost areas, so you’ll need to come in under that.


        • Is it weird that I paid off my house in 2017 and have no mortgage at all any more?


        • depends on the opportunity cost of that asset. Do you think you can beat home price appreciation in another asset?


        • Not based on my portfolio earnings over the last twelve months.

          Mostly I just like the additional cash flow and not being in debt at all.


        • I think it’s a smart move.
          that would be the other option on the table.
          pay it off before the 9-year-old goes to college.


        • I did find out when I went to buy a new car that my credit rating was impacted from not carrying enough debt.


        • really?
          your score dropped some because you paid off your mortgage. that makes sense.


        • Yeah. What they really want to see is:

          1. High Income
          2. The ability to service large amounts of debt over time.


  2. Jacobin isn’t wrong about this:

    “The Democrats Are Climate Deniers

    By Branko Marcetic

    If the Democrats really believed the science on climate change, they’d be offering far more radical proposals. We have to make them.”

    I’d substitute “their own rhetoric” for “the science”, but the point is the same.


    • Maybe it is because the Democrats realize that the carbon is coming from India and China and they are going to do what they are going to do, regardless of how much hectoring West Coast liberals direct towards them.

      And it isn’t worth losing power for drastic measures that will be ineffective anyway…


    • Loved this bit:

      The Democratic chairman of the House Energy and Commerce Committee recently said that while the US “should take a look at” going carbon-free or carbon-neutral by 2030, it “may not be technologically or politically feasible.”

      Does this sound like a party that genuinely believes in the “existential threat” of climate change?

      They must believe that we would be powered 100% off of solar and wind if only we could get those stooges from Exxon out of the way.


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