All Things in Moderation

Vital Statistics:

Stocks are down big this morning as we continue the volatile markets. Bonds are getting slammed, where the US Treasury is following the carnage in Europe.

Volatility begets volatility, and that is what we are seeing. Oil is now at a 17 year low. The ironic thing is that gasoline prices will be ridiculously low for the summer driving season, but there will be nowhere to go. European bonds are selling off due to fears that the Italian economy is going to be so bad that they will need a bailout from Germany. The German Bund has picked up 50 basis points in yield, going from -78 basis points on Friday to -28 today. The US Treasury is being pulled along for the ride.

Washington is putting together a panoply of measures to try and support the economy while everyone hunkers down at home. It looks like the government is going to give everyone $1,000 in a couple of weeks to get people through this tough time. Multiple industries will probably get some sort of help, with hospitality and airlines at the front of the line. As oil falls, the frackers will be soon behind, and I suspect the mall REITs will be next. Companies are suspending stock buybacks left and right, which may explain some of the sogginess in the stock market.

Homebuilder sentiment fell in March to 72, which is still strong. I have heard that construction activity has been suspended in the Bay Area, and I saw that Loan Depot has ceased accepting loans from all of the counties surrounding San Francisco.

Housing starts came in at 1.6 million again in February. Building Permits were 1.45 million. February was probably too early to be affected by Coronavirus, so March will be a better tell.

Mortgage applications fell 8% last week as purchases fell 1% and refis fell 10%. Between margin calls and a lack of investor appetite for refis, mortgage rates backed up last week. Don’t forget that mortgage backed security investors detest volatility in the bond market. It makes hedging their portfolios more expensive, and the prepay option (which an MBS investor is short) more valuable.

Despite the moves by the Fed in the markets, the mortgage REITs continue to get slammed. I suspect this is a “shoot first, ask questions later” mentality on the part of investors, but some of these stocks are looking crazy cheap, trading at half of book value and some with dividend yields of 20% + (one of which declared its normal dividend yesterday) Watch the REITs, because their appetite for paper flows through to mortgage rates.

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