All Things in Moderation

Markets are flattish after Germany rejected a loan extension request from Greece. Bonds and MBS are flattish as well.

Initial Jobless Claims fell to 283k last week, which is a good number given the drop in oil prices. Eventually layoffs will start in the energy patch.

The Bloomberg Consumer Comfort Index rose to 44.6 last week, while the Philly Fed fell and the Index of Leading Economic Indicators ticked down from .5% to .2%.

WalMart reported Q4 earnings that beat analyst expectations. The biggest news out of it, is that WMT is increasing starting wages to $9.00 / hour in April and by Feb next year, all current associates will be making at least $10 an hour, If this is due to market pressures, then that is great news for the economy. If it was due to political pressure (though no one is taking credit so far) then it tells you less. The raise will be part of a larger program to streamline scheduling and other operational issues, and should cost about 20 cents a share over the next year.

The minutes of the Jan FOMC meeting were considered more dovish than expected. Bonds rallied hard on the announcement, as it appears some members are beginning to get cold feet about raising rates this June. Janet Yellen and Ben Bernanke are students of the Great Depression and are probably going to err on the side of waiting too long versus tightening too early.

Freddie Mac took down its numbers for Q1 GDP to 2.5% from 3%, raised 2015 origination forecasts to $1.3 trillion from $1.2 trillion, cut the forecast 30 year fixed rate mortgage rate to 3.9% from 4.2% and is predicting 3.9% home price appreciation. Forecasts for home sales (5.6 million) and housing starts (1.18 million) are unchanged. Affordability is still a tale of two Americas, with the NYC / DC / South Florida / West Coast being unaffordable, and the rest of the country being affordable.

Stocks are lower this morning as Greek talks break down. Bonds and MBS are up small.

The Empire Manufacturing Index fell in Feb and came in slightly light. There is almost certainly some weather-related noise in that report.

The NAHB Housing Market Index fell to 55 in February from 57 in January. The index increased in the Northeast and fell in the Midwest. The South and West were more or less unchanged.

We have a lot of data this week with housing starts tomorrow, industrial production / capacity utilization, and finally the FOMC minutes. The minutes should be the big event for the week. The focus will be on handicapping a June rate hike.

Speaking of rate hikes, wage inflation continues to be the missing piece of the puzzle for the economy. That said, Big Labor is waking up, with refinery strikes and a longshoreman’s strike on the West Coast. Strike activity is still well below where it was in the 70s and 80s, but it could be the start of wage inflation.

One in three FHA borrowers could save money by refinancing today. Of course many will find the savings to small to make it worthwhile, but the drop in annual MIP is a big deal. Certainly MBS investors think so as Ginnie Mae TBAs continue to underperform Fannie Mae TBAs.

Finally, I appeared on Capital Markets Today and did a deep dive into the economy and housing. You can listen to the podcast here.

Markets are higher this morning on optimism of a deal in Greece and encouraging economic data out of Germany. The Greek 10 year yield is down almost 100 basis points this morning and is approaching 9%. The market has a risk-on feel with stocks up and bonds / MBS down.

Import prices fell 2.8% MOM and 8% YOY. Consumer sentiment fell from 98.1 to 93.7.

Bloomberg has a good piece on Mel Watt and the issues surrounding principal mods for Fan and Fred loans. The biggest question remains: how can you help underwater homeowners without triggering a wave of strategic defaults? 85% – 90% of people whose mortgage is underwater are current on their payments. The last thing you want to do is encourage them to stop paying in order to get a principal mod. Luckily, time has been doing the heavy lifting here, as the number of homes with negative equity has fallen from 31% in 2012 to just about 17% today. Second, many of those homes are not Fan and Fred loans in the first place, and FHFA is only looking at cutting principal on Fan and Fred loans that it owns. The FHFA Home Price Index, which tracks the prices of homes with a conforming mortgage is within 5% of the peak.

Bob Shiller warns of a bond bubble. He is probably right, although it could last some time. Interest rate cycles are long: the current cycle began in 1981 or so. Note that in the 1950s, the bond market crashed and the generation that lost their shirts in the stock market crash of 1929 ended up blowing up in levered flattening trades. Persistently low interest rates can wreak all sorts of havoc, especially with pension funds and insurance companies. They have a return bogey they must meet, and the actuarial tables couldn’t care less that interest rates are zero. Note that Dr. Cowbell is copacetic with all of this. Note that the 4 most dangerous words in investing are: This Time Is Different.

Bill Ackman sees the common stock of Fannie Mae and Freddie Mac as “the best trade in capital markets” He is betting that Congress will eventually stop taking all of Fannie’s profits and allow them to recapitalize in private markets. The thing is, this is a litigation lottery ticket. It is either worth a lot, or worth nothing. If it actually had access to its profits – it doesn’t – all p/l goes to Treasury – it would have a P/E of 1. FWIW, the Administration is bound and determined to see that Fannie Mae common shareholders do not see a dime. But administrations could change, and Congress may decide that housing reform is simply too tough and we go back to the old F&F.

How bad are things in the energy patch? We have another arctic blast hitting the Eastern part of the country and natural gas cannot get out of its own way.  Kind of amazing, really.

Markets are higher this morning on news of a cease-fire in Ukraine. Bonds and MBS are up.

Greek bonds are rallying with bonds globally. Unusual, as a rally in Greek debt has been triggering the risk-on trade lately.

Retail Sales disappointed in January. The headline number fell .8%, however falling gas prices were a big contributor (gas is measured in dollars, not gallons). However, the control group, which strips out volatile segments like autos, gas, and building materials only rose .1%, versus Street expectations of .4%. The strength appears to be in autos and food service. Bad weather in the Northeast may have played a role in the number, however.

Business Inventories rose .1% and the Bloomberg Consumer Comfort Index fell to 44.3.

Initial Jobless Claims rose to 304k last week. This is going to be a number to watch – falling energy prices are triggering layoffs in the energy patch. Interestingly, part of the reason why labor has been so tight in construction was due to workers moving from the construction sector to the energy sector after the housing bust. As energy prices fall and construction begins to ramp up, this could be good news for the housing sector and especially the homebuilders. The builders have been frustrated by an inability to find skilled labor, and a reversal of the migration from construction to the energy sector should help them.

Julian Castro appeared before the House Financial Services Committee yesterday. His prepared remarks are here. He was there to defend the cut in mortgage insurance and to rah-rah everything the Administration has done to get housing (and the economy) moving. It was basically a defense of an activist government role in the housing market.

Markets are higher this morning as the Greek government offered a compromise on the bailout. Bonds and MBS are down worldwide, with the US 10 year yield flirting with a 2 handle.

Greek 10 year bond yields are down 68 basis points as the Greek government and international creditors hammer out a deal.  This is fueling a risk-on trade as stocks rise / bonds fall.

The NFIB Small Business Optimism Survey fell to 97.9 from 100.4 in January. Expectations were for a  101. The IBD / TIPP Economic Optimism Index fell in February from 51.1 to 47.5. Job Openings topped 5 million according to the JOLTS survey.

Consumers are feeling a little better about the housing market, according to the Fannie Mae National Housing Survey. Expectations of home price appreciation rose to 2.5% from 2.3% a month ago, and almost half of respondents thing prices will go up in the next year. Americans are still negative on the economy, but less so, with 49% believing we are on the wrong track and 44% believing we are on the right track.

Foreclosure Completions fell to 39,000 in December, a 4.9% drop month-over-month and a 13.7% drop year-over-year, according to CoreLogic. Current foreclosure inventory is 552k homes, a decrease of 34.3% from a year ago. New Jersey and New York continue to lead the US with the highest percentage of foreclosures.