All Things in Moderation

Markets are flattish amidst a couple of big transactions – Applied Materials is buying Tokyo Electron (yes a Japanese company is being bought by an American firm) and there is a possibility of an “IPO” for Chrysler as Fiat and the UAW pension fund debate the value of the company. Bonds continue their post FOMC rally.

We have a couple real estate indices this morning – Case-Shiller increased 12.4% YOY, pretty much in line with forecasts, while the FHFA House Price Index increased 1.0% MOM. The FHFA index is more of a central tendency index because it focuses on homes with conforming mortgages attached to it – in other words, it ignores the jumbo space and cash transaction which are often distressed sales.

We have earnings from a couple of homebuilders today: Lennar (LEN) and KB Home (KBH). Orders dropped 9% on a unit basis, but increased 7% on a dollar basis. Their cancellation rate was 33%.  Revenues increased 29% and average selling prices rose 22% to 299k. KB’s increase in ASPs is due to a strategic shift on their part. The stock is down small premarket. Lennar reported ASPs of 291k, with new orders up 14% on a unit basis and 32% on a dollar basis. Cancellation rate was 18%. The stock is up 1.5% preopen.

Jeffrey Metzger, CEO of KB Home said “The fundamentals of the current housing recovery are firmly in place, supported by low inventory levels, an improving economy, and positive demographic trends. Given these factors, we believe that the recent slower pace of recovery caused by an uptick in mortgage interest rates is a temporary effect and we expect to see steady upward demand for housing as consumers adjust to both higher rates and pricing.”

Stuart Miller, CEO of Lennar said: “We continue to see long-term fundamental demand in the housing market driven by the significant shortfall of new single family and multi family homes built over the last five years. While there may be bumps along the road that may impact the short-term pace of the recovery, the long-term outlook for our business remains extremely bright.”

Markets are lower as they start to worry about the machinations over the debt ceiling and the continuing resolution. Bonds and MBS are more or less flat.

We will have lots of relevant data this week, with Case-Shiller and the FHFA Home Price Index on Tuesday, Lennar and KB Home earnings on Tuesday as well, and the third revision to 2Q GDP on Thursday. Note the Fed took down 2013 GDP projections by 30 basis points in its economic forecast, so maybe they know the revision is going to be bad. The Street is at 2.6%. Don’t forget Q1 GDP started at something like 2.5% and was revised downward to 1.1%.

The tea party wing of the Republican Party is demanding that obamacare be delayed or de-funded as a condition to raising the debt ceiling. Needless to say, this is going nowhere in a Democratically controlled Senate and won’t be signed by the author either. The continuing resolution will be the first hurdle, and Republicans do have something to protect in that it keeps sequestration-level spending in place. The debt ceiling is a messier affair, but Republican leadership is dead-set against defaulting on the debt, so this will get passed one way or the other, but it may cost Boehner his speakership if he passes an increase in the debt ceiling by relying on Democratic votes.

The FHFA is trying to figure out why eligible borrowers are not taking advantage of HARP. There seems to be this perception that you have to be delinquent to take advantage of it, which is false. LO’s take note.

Slow news day. Markets are taking a breather after a tumultuous week. There are no economic data this morning, and bonds / MBS are flat.

Federal Reserve Bank of St. Louis President James Bullard told Bloomberg TV that Wednesday’s decision not to slow bond buying was a “close call” and and a “small” tapering is possible next month. Given that there is no press conference scheduled after the Oct Fed meeting and no economic forecasts, this is a bit of a surprise. That said, if the Fed is in fact contemplating moving at the next meeting, then this rally in bonds will probably prove to be very short-lived. LOs, is you have customers on the fence, get ’em locked.

Wells is out with a bearish call on the S&P 500. Their end of year call on the S&P? 1440, down 16% from here. The thesis:  the market growth has been all multiple expansion and earnings are going to disappoint. Gina Adams is trying to become the next Elaine Gazarelli.

Speaking of earnings, we are now in the “oh crap” season, where companies who are going to miss their quarterly estimates begin to fess up. Earnings season officially starts in 3 weeks with Alcoa on 10/8. Last Wed, Oracle took advantage of the FOMC distractions to announce they were going to miss.

Warren Buffett called the Fed the “greatest hedge fund in history.” It is generating 80 and 90 billion a year in revenue for the US government.  I bet Ben is thinking “hey, can I get 2 and 20?”

Markets are higher this morning after yesterday’s furious rally on the Fed’s decision to keep asset purchases in place. The 10 year had a trading range of over 30 basis points in yield yesterday. Initial Jobless Claims increased to 309,000. Bonds and MBS are up small.

The FOMC statement was obviously a surprise, and it is clear from the reaction in the markets that a LOT of people were leaning short heading into the announcement. What does that mean for rates going forward? The markets will now begin to fret about the December meeting, which isn’t going to be bond bullish. I think if you are considering locking right now, you do it. 2.7% seems to be resistance on the 10 year, and we could be looking at a 2.7% – 3.0% trading range. At these levels, take the money and run.

The Fed’s decision certainly provides support for the theory that the Fed was really targeting leverage with its announcement last Spring. The economic data has never supported a reduction of stimulus, and the Fed has been consistently too high with its economic forecasts. The thing is, they can’t un-ring the bell – so people are not going to be piling into levered curve flattening trades. REITs have significantly de-leveraged. Mission Accomplished.

The Fed took down its forecasts again, with the 2013 GDP range now 2.0% – 2.3% from 2.3% – 2.6% in June. Unemployment’s forecast ticked down as well, from a range of 7.2% – 7.3% to 7.1% to 7.3%. Ben Bernanke was asked in the press conference about the labor force participation rate and how it seemed to be driving unemployment. Bernanke acknowledged that there is more to the labor picture than simply the headline unemployment number, and also stressed that these are guideposts, not thresholds. In other words, if unemployment gets to their 7% target, but it is due to the wrong reasons (a drop in the participation rate), then the Fed may decide to remain accomodative.

The beatdown goes on… Wells Fargo is cutting 1,800 jobs in its mortgage unit, in addition to the 3,000 announced earlier this year.

Markets are flattish ahead of the FOMC meeting this afternoon. The announcement is expected around 2:00pm, so don’t try and lock anything around that time period. Bonds and MBS are down small.

Mortgage applications rose 11.2% last week, which was a big increase after a depressed short Labor Day week. The refi index jumped 18% as rates ticked down a little. The purchase index was up 2.5%.

Housing starts and building permits came in lower than expected, with housing starts at an annualized 891k and permits at an annualized 918k. SFR continued to increase while multi-fam dipped. Sub – 1 million levels in housing starts is still a highly depressed level. After touching 1 million units in March, activity has been slowing. You can see from the chart we have been underbuilding for a long time. I guess you won’t see a major increase in starts until the first time homebuyer returns to the market and that is going to be jobs-driven. In related news, the National Association of Homebuilder Confidence Index was flat last month, but still at post-crisis highs. The builders are also noting that momentum seems to have stalled for the moment.

Certainly the Fed is noticing the drop-off in housing sector activity as rates have risen. This will probably make them want to maintain current purchases of MBS and cause them to lower Treasury purchases only. The consensus seems to be the “tiny taper” scenario, where the Fed cuts Treasury purchases by $10 billion a month starting in October.

The SEC is going to force companies to disclose the ratio of CEO pay to the median pay of employees at the firm. Glad to see the SEC is on class warfare beat – much more important than, say, doing something about high frequency trading  /sarc.

Markets are flattish as we head into Day 1 of the FOMC meeting. We should get the actual announcement tomorrow around 2:15 pm. Bonds and MBS are rallying as the market continues to digest the fact that Summers won’t be the next Fed Chairman.

The Consumer Price Index came in at .1% month-over-month, below expectations, and frankly below what the Fed would like to see. As long as (a) there are no bubbles and (b) there is no inflation, the Fed will likely try and err on the side of accommodation.

That said, I believe this reprieve we have been given in rates will be short-lived. Don’t lose the forest for the trees – rates are going up, and if you have any borrowers who have been on the fence or who were floating, now is a good time to lock.

The California Association of Realtors reported that increasing mortgage rates are starting to bite as activity slipped 2%. Prices are still increasing though, as the median home price hit $441k, the highest since Dec 2007. Inventory is improving in the sub 750k bucket, although month’s supply is still extremely low at just about 3 months.

Markets are flattish on no real news. Bonds and MBS are up small. Liquidity should be light due to the Jewish holiday. Today is the last big data day before the FOMC meeting.

Mohammed El-Arian of PIMCO says the Fed is tapering to head off excessive risk taking. PIMCO is forecasting a “taper-lite” announcement of $10 billion in Treasuries, which would mean the Fed will continue to purchase MBS at its current rate. Given that foreigners have been net sellers of MBS and REITs have been de-leveraging (in other words, they have been net sellers too), it makes you wonder where the replacement for the Fed’s buying will come from. What does that mean for your average mortgage banker? If TBAs are weak (bond prices falling), then mortgage rates will be higher.

Twitter announced its IPO in 140 characters or less:  “We confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.” Note that roughly half of the characters are legal disclaimer. Some things never change.

The Producer Price Index came in flat ex food and energy, showing that there is no inflation at the wholesale level. Inflation has been figuring into the Fed’s calculus for a while now, primarily on the downside. They desperately want to create a little inflation. 3% inflation and 3% wage growth feels a lot better to the average American than no inflation and no wage growth does.

Retail sales came in lower than expected, .2% on the headline number, and the same for the control group. Looks like back-to-school sales were disappointing, which bodes ill for the holiday shopping season. Since consumption is roughly 70% of the US economy, it doesn’t bode will for the 2H recovery we are supposed to be seeing according to Fed forecasts.

It will be Summers, at least according to the Nikkei newspaper. Supposedly this will be announced next week sometime. Summers would mean a quicker withdrawal of quantitative easing and a more vocal support of fiscal measures to stimulate the economy. The knives are out for Summers on the Left.

Markets are flat this morning on no real news. Initial Jobless Claims printed below 300,000 for the first time since May 2007 on a technical glitch. Bonds and MBS are up small.

CFPB Chairman Richard Cordray spoke to a conference of mortgage lenders yesterday and told them that the new QM rules will give responsible lenders an advantage. One of the things he pointed out was that the CFPB intended to level the playing field between banks and non-banks (the banks are more highly regulated). Cordray stressed that the QM rules were intended to provide legal protection for lenders:  “You should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation,” he said.

Now that Richmond, CA has decided to go the eminent domain route, the court challenges begin. Blackrock, PIMCO, and other bondholders have asked a federal judge to halt the city’s plans to force bondholders to sell their mortgages at a discount to appraised value to a hedge fund that will modify and refinance the borrowers. The city will have to run the table on court challenges.

As the refi boom ends, banks are laying off people in their mortgage operations. J.P. Morgan is laying off 2,000, Bank of America is cutting 2,100 jobs, Wells has let 3,000 go… the list goes on. That said, while the MBA mortgage applications index fell by 13.5% last week, the purchase index fell by only 2.6%. As home price appreciation gives people equity in their homes, purchase transactions will undoubtedly increase as people can finally move. Existing home sales are just approaching historical norms of 5.5 million / year, but the difference is that 60% of these sales are cash, as estimated by Goldman Sachs. Pre-bubble, cash sales were about 20% of all sales. So, in the past, you were looking at an average 5.5 million run rate, with 80% non-cash (i.e. a mortgage), which meant roughly 4.4 million purchase mortgages a year. So far in 2013 we have averaged a 5 million run rate and with only 40% involving a mortgage, you are looking at 2 million purchase mortgages a year. In other words, purchase finance activity has to more than double just to reach normalcy. So while housing has recovered according to the home price indices and the sales volume indices, we are still in nuclear winter for the mortgage banking business. Negative equity is undoubtedly driving a lot of this, and as prices rise, this phenomenon will reverse.

	Last	Change	Percent
S&P Futures	1681.2	-1.2	-0.07%
Eurostoxx Index	2858.5	7.1	0.25%
Oil (WTI)	107.6	0.2	0.18%
LIBOR	0.254	-0.002	-0.59%
US Dollar Index (DXY)	81.76	-0.059	-0.07%
10 Year Govt Bond Yield	2.94%	-0.03%
Current Coupon Ginnie Mae TBA	103.3	1.0
Current Coupon Fannie Mae TBA	102.5	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.58

Markets are flattish on no real news. Bonds and MBS are up small, which means that Syria wasn’t figuring in anyone’s market analysis.

Credit isn’t tight for everyone – Verizon just did a $49 billion bond offering at the 10 year + 225. Low interest rates – get ’em while they last. The issue is looking 2x oversubscrbed.

Negative equity took a dive in Q2, according to CoreLogic, with 2.5 million homes dropping below the 100% LTV mark. 7.1 million homes (or 14.5% of homes with a mortgage) still have negative equity. The average LTV of all homes with a mortgage is 62.5. They caution that the recent home price appreciation may not continue at the rapid pace we have been seeing over the past year.

Mortgage applications fell 13.5% last week, primarily due to the Labor Day holiday. Refis were down 20%, while purchases were down 2.6%.

Richmond CA has voted to go the eminent domain route. They intend to use the threat of eminent domain as a club to force lenders to sell the underlying loans at a deep discount to the city. SIFMA has already said that any locality that uses eminent domain will find loans originated in that locality to be ineligible for TBA trading, which makes them more or less unsecuritizable. The mayor is a Green Party Wall Street basher, so this could get interesting. For the hedge fund to be able to make money on this trade, they have to be able to buy the mortgages at a discount to appraised value, which will undoubtedly be a non-starter for the banks.