All Things in Moderation

Stocks are higher this morning in spite of another down 7% day in China overnight. Bonds and MBS are flat

House prices continue to rise, according to the FHFA House Price Index and Case-Shiller. The FHFA House Price index rose 0.5% MOM, while Case-Shiller rose .94%. The Case-Shiller index is up 5.83% YOY. The FHFA House Price Index has recouped all its post-bubble losses.

In other economic data, the Richmond Fed Index slipped while consumer confidence increased.

The Fed starts their 2 day FOMC meeting today. The decision is expected tomorrow at 2:00 PM EST.

Homebuilder D.R. Horton reported earnings yesterday and met Street expectations. Orders increased 9% in units and 12% in value. Backlog is up 15% at 10,665 homes. The company is “Well-positioned” for spring selling season, FY 2016, given backlog, “positive sales trends” in Jan., “robust” lot supply, inventory of homes available for sale according to Donald R. Horton, chairman of DHI. Their new brand for first time homebuyers – Horton Express – accounted for 22% of sales last quarter.

D.R Horton said that the Houston market was softening as oil continues to fall. State-by-state employment figures show that the collapse in oil prices is now being felt in the fracking states.

Foreign money helped prop up the ultra-luxury sector of the real estate market and now they pulling back. Prices are stagnating and homes are not moving. Blame the stock sell-off in China, and the oil price collapse which is hurting Middle Eastern and Russian investors.

Not much data this morning, although we do get some important real estate data this week with the FHFA House Price Index and Case-Shiller on Tuesday, new home sales on Wednesday, and pending home sales on Thursday. We will also get the first estimate of fourth quarter GDP on Friday, with the consensus estimate at 0.8%. While this is a dramatic slowdown from the third quarter, a recession in the US is probably not in the cards (Bank of America is handicapping a 20% chance of a recession next year). Remember the old market saw: stocks have predicted 12 of the last 5 recessions..

Stocks are higher this morning as global markets rallied overnight. Bonds and MBS are lower.

Generally a risk-on feel to the market, as stocks and commodities are rallying. Oil is back above $31 a barrel.

The Chicago Fed National Activity Index improved to -.22 from -.36 last month, while the Index of Leading Economic Indicators fell 0.2%.

Existing Home Sales rose 14.7% in December to 5.46 million. November’s numbers were depressed by TRID, and it looks like much of those sales got bumped to December. This makes 2015 the best year for existing home sales since 2006. The median home price increased 7.6% to $224,100. Housing inventory continues to fall, and the 1.79 million homes for sale represents only a 3.8 month supply (6 – 6.5 months’ worth constitutes a balanced market). First time homebuyers accounted for 32% of all sales, while all-cash transactions fell to 24%.

The first time homebuyer is returning to the market, as FHA origination increases. After the FHFA cut FHA insurance premiums, we saw an increase in FHA origination.

Things might run a little slow today as the Federal Government workers will leave at noon to get home before Snowmageddon II hits DC. Fannie Mae pricing will be the most affected.

As Ted Cruz and Donald Trump dominate the headlines and the polls, the big Wall Street donors are relatively sanguine.

Stocks are up this morning as ECB President Mario Draghi hinted at further easing in March. Bonds and MBS are up small.

ECB President Mario Draghi said that downside risks to the economy have increased and the ECB could possibly reconsider its policy stance in March. The ECB did leave rates unchanged this month.

Stocks got pummeled yesterday with the Dow down 566 points in early afternoon. Markets then turned around on no real news and rallied into the close to cut the losses for the day. The 10 year got down to 1.94%.

The carnage in the markets is largely a result of how leveraged the entire system is. In many cases, people are selling to cover margin calls. Margin selling begets margin selling, which is why markets are so skittish these days.

Initial Jobless Claims rose to 293k from 283k yesterday. This is the highest level in 6 months. The Philthy Fed Index improved from -10.2 to -3.5.

We are starting to see more announcements about job cuts. Johnson and Johnson is cutting 3,000 and Barclay’s is letting 1,200 go as it pulls out of Asian markets.

TRID rules are increasing the time it takes for a closing by 5 days, according to the National Association of Realtors. We could see the effect of that tomorrow when they report existing home sales. November’s numbers were depressed, so people will be looking for a rebound in December.

Another down day in stocks as global indices hit bear market levels. Yes, Virginia that is a 1-handle on the 10 year…

Housing starts fell in December from 1.17 million to 1.15 million, missing the 1.2 million Street estimate. Building permits fell from 1.28 million to 1.23 million, topping the 1.2 million estimate. Single-fam permits hit the highest level in 8 years. I sound like a broken record, but the economy isn’t going to hit the next level until housing construction returns to normalcy, about 1.5 million units per year. The plus side of this is that the housing deficit continues to grow, which means the rebound (when it happens) will be stronger and longer. Confidence and credit remain the issues at the moment.

Mortgage Applications rose 9% last week as refis rose 18.7% and purchases fell 1.6%. With the 10 year trading below 2% again, there should be refinance opportunities. With the 10 year yield falling and the Fed Fund rate increasing, the strategy to pitch is to swap out of an ARM (which is pegged to short term rates) and into a 30 year fixed.

Inflation remains under control, as the consumer price index fell 0.1% in December. Ex-food and energy it increased 0.1%.

The dramatic sell-off in the markets has taken down rate hike expectations out of the Fed. You can see this in the 2 year bond yield, which has fallen 25 basis points since late December. This forecast was borne out in the latest Bank of America survey on the economic outlook. A month ago, 40% of fund managers expected no more than 2 rate hikes in 2016. Now that number is closer to 50%.

Earnings season is upon us, and the first companies to report are out of the banking sector. The main theme: a withdrawal from mortgage banking. The only big bank to report an increase in mortgage banking? Wells. Jamie Dimon said on JP Morgan’s conference call that the banks remain under assault. And politicians in DC continue to scratch their heads and wonder why the economy remains tepid.  Refer to housing starts above.

Markets are higher this morning as oil rebounds a little. Bonds and MBS are up.

Mortgage Applications rose 21% last week as purchases rose 18% and refis rose 24%.

New regulations may require banks to raise up to $550 billion in the bond market by 2019. The bonds will be part of a package that are designed to prevent another 2008 from happening. They will be senior unsecured debt that converts to equity when a bank becomes insolvent. The new regs are open for comment and the ABA is working hard to lower the amount. I have trouble imagining the type of investor that would buy half a trillion of this stuff.

China’s troubles are further evidence that whenever a country appears to have “cracked the code” for seemingly perpetual growth, a real estate bubble is usually the culprit. And it always ends badly.

Larry Summers is warning the Fed that the global economy cannot withstand 4 rate hikes this year. The bond market rally is saying the same thing. Since the Fed hiked rates on Dec 16, the 10 year bond yield has fallen 20 basis points.

Boston Fed Chairman Rosengren is also warning about further growth and the effect that overseas weakness will have on the US economy.

The US is starting to require title companies to identify the people who pay cash for properties in NYC and Miami.

The NFIB Small Business Optimism Index rose from 94.8 to 95.2 last month. We see big positive numbers on plans to increase employment and capital expenditures. Earnings trends are down, however. Note that confidence is still depressed however.

Job openings continue remain at 16 year highs, according to the JOLTs jobs report.

The IBD / TIPP economic optimism index inched up as well last month

Junk bond spreads are widening as troubles continue in the energy patch. According to one prognosticator, the current risk premium for high yield debt is implying a 44% chance of a recession next year. Note the Fed seemed to be pretty sanguine about HY in the FOMC minutes.

China’s economic slowdown is having repercussions all over the global economy. The US is probably the most insulated, but it is wreaking havoc in South America and Asia.