All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	3,895	-57.75
Oil (WTI)	70.35	-0.91
10 year government bond yield		3.49%
30 year fixed rate mortgage		6.62%

Stocks are lower this morning as investors fret over problems at Credit Suisse. Bonds and MBS are up.

Some encouraging news on inflation: The Producer Price Index fell 0.1% MOM and 4.6% YOY. Interestingly, 80% of the drop was due to a 36% decline in the price of eggs. The index for final demand after stripping out food and energy rose 0.2% MOM and 4% YOY. The Consumer Price Index is more important than the PPI, but it demonstrates that commodity prices are falling.

Yesterday, Credit Suisse announced in its financial filings that it has identified “material weaknesses” in its reporting and financial controls. Credit default swaps on the company are approaching 1200 basis points on one-year senior debt.

Top Credit Suisse shareholder and Saudi National Bank Chairman Ammar Al Khudairy was asked by Bloomberg if he was willing to put in additional cash into the company, he said: “The answer is absolutely not, for many reasons outside the simplest reason which is regulatory and statutory.” 

The stock is down 29% in Swiss trading and is trading at a record low.

Chris Whalen had a great piece on the issues in the banking sector. His argument is that the issues in the banking system stem directly from quantitative easing. The problem is that these extremely low coupon mortgage backed securities become illiquid and hard to hedge when interest rates start to rise. Who wants a 2.5% Ginnie? I found this part good:

“It seems that SVB management anticipated a recession on the heels of last year’s tech meltdown,” notes a veteran fund manager and long-time reader of The IRA. “Not only was new biz going into hibernation but the credit quality of the SIVB loan book was going to be in jeopardy as were the potentially juicy returns of their warrant book and other holdco assets.”

He continues: “So, in anticipation of recession and the consequently assumed Fed pivot, they decided to proactively make a very large, long duration Treasury/MBS bet, figuring they’d hit the ball out of the park on that play which would more than offset the ensuing pain in the loan book, warrants, etc.”

This was nothing more than an outsized interest rate bet. The bank was doubling down on its MBS position as it went more and more underwater in hopes of making back the losses. It was entirely human (albeit bad) trading instincts.

Ken Griffin’s hedge fund Citadel has taken a 5.4% stake in Western Alliance, and UBS has initiated the stock with a buy this morning with a price target of $85. The company has proactively taken steps to improve its liquidity position and UBS thinks fears of contagion are overdone.

Retail sales fell 0.4% in February, driven by decreases in autos and gasoline prices. Excluding these items, retail sales were flat.

Mortgage applications increased 6.5% last week as purchases rose 7% and refis increased 5%. “Treasury yields declined late last week, as market concerns over bank closures and the potential for broader ripple effects triggered a flight to safety in Treasury bonds. This decline pushed mortgage rates for all loan types lower, with the 30-year fixed rate decreasing to 6.71 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Home-purchase applications increased for the second straight week but remained almost 40 percent below last year’s pace. While lower rates should buoy housing demand, the financial market volatility may cause buyers to pause their decisions.”

The Mortgage Credit Availability Index fell in February. “Mortgage credit availability decreased to its lowest level since January 2013 with all loan types seeing declines in availability over the month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The conforming subindex decreased 4.3 percent to its lowest level in the survey, which goes back to 2011. This decline was driven by the ongoing trend of shrinking industry capacity as mortgage rates stayed significantly higher than a year ago. Additionally, in this volatile rate environment and potentially weakening economy, there was also a reduction in refinance programs offered for low credit score and high-LTV borrowers.” 

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