All Things in Moderation

Vital Statistics:

Markets are higher this morning after a slew of good earnings reports and a positive reading on German confidence. Vik Pandit has stepped down as CEO of Citigroup.  The Consumer Price Index (which officially does not matter anymore) came in as expected. Bonds and MBS are down.

Yet another article complaining that mortgage rates aren’t dropping enough in response to QE. At least this one mentions the increase in G-fees, though it implies that it is a minor reason. 

One way of handling the TBTF issue that is being bandied about is to place a cap on bank balance sheets as a percent of GDP. Ohio Democrat Sherrod Brown introduced a bill to cap liabilities at 2% of GDP which went nowhere (JPM has liabilities of 8% of GDP).  But now a Federal Reserve Governor has mentioned the idea as well.  He doesn’t mention a specific number though. 

The first time homebuyer may be coming back.

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Markets are higher this morning on lower Chinese inflation.  Part of the recent strength (it seems like almost every day, the S&P futures are up 5 points pre-open) is being driven by the steady drop in Euro sovereign yields. Italy is trading below 5% and post-re-org Greek debt is trading at 17.5% after reaching 30% in late spring. Whether the crisis is over, or merely taking a breather is anyone’s guess. Of course there is the possibility of a hard landing in the emerging markets looming on the horizon.

On the economic news front, retail sales came in at 1.1%, and look even better when you strip out autos and gasoline. Maybe there was something to that University of Michigan consumer confidence number last Friday. It certainly bodes well for a good holiday season for the retailers. On the other hand, the NY Fed’s Empire Manufacturing Survey continued to decline.

Citigroup reported better than expected earnings, though it appears one-time items drove the results.  The Street is still refusing to give much credit to Citi’s turnaround – book value is $63.59 a share and the stock is trading at 35.25, up about a half.

The NY Times has another article discussing the problems with appraisals. Given that the real estate market has been slow for so many years, finding enough non-distressed comps is proving to be a problem.  Sellers who think they are lowballing their prices find that appraisals are coming in well below their offers.  Appraisers counter that they don’t set the market – they reflect it, and blaming appraisers for a lousy housing market is like blaming the weatherman for lousy weather.

Bob Schiller and Rick Santelli discuss ZIRP and housing. Santelli, no fan of ZIRP calls it “money for nothing” and believes that the message it sends (that the Fed is really worried about the next few years) is putting a damper on the animal spirits. Plus, as Schiller has pointed out, there isn’t a lot of evidence that mortgage rates explain house prices. 

Mark Zandi believes that the deleveraging process is largely over. Certainly debt service payments relative to income are at the lowest level in 20 years, courtesy of low interest rates.  Debt however, is not, although it is off the highs of 2007.

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Vital Statistics 

Stocks are higher this morning after positive earnings out of JP Morgan and Wells Fargo. Mortgage banking drove revenues and profits. The Producer Price Index came in higher than expected, although it was lower ex-food and energy.  Bonds and MBS are flattish.

Was the debate last night market moving?  Of course not.  Best headline to sum it up:  GOP and Dems agree: Our guy won.

It turns out yesterday’s unexpectedly large drops in unemployment claims was due to a large state mistakenly reporting its claims.  

Frank Blake of the Home Despot sees a full blown housing recovery as a year or two away. He points to customer attitudes – do homeowners consider a home improvement as an investment to be recouped when the house is sold, or simply an expense.  I would agree – considering a granite countertop an “investment” is definitely bull-market thinking.

What is the role of the CFPB?  It was sold as an agency dedicated to more transparency and ensuring consumers are fully informed when making financial decisions.  But to the people that work there, the mission is to force financial service providers to give consumers a better deal. The Mortgage Bankers Association warns of unintended consequences.

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Markets are firmer after a surprisingly low initial jobless claims report. Initial Jobless claims fell to 339k, which is below the average over the past 45 years and more or less consistent with normal non-recessionary economies. Bonds and MBS are down on the report.

At the Council on Foreign Relations yesterday, Jamie Dimon revealed the background to the Bear Stearns deal:  “We did them [the government] a favor.  We were asked to do it and we did it at great risk to ourselves.”  Many on Wall Street suspected the flurry of merger activity at the height of the financial crisis – JPM / Bear & Wamu, Bank of America / Countrywide and Merrill, and Wells / Wachovia were a series of shotgun weddings ordered by the government.  Now we have someone explicitly saying that it was.  You would think that would be news, especially since the government is suing JPM for stuff that Bear did prior to the merger.  Or that fact would be interesting to people who bemoan TBTF. To the Washington Post, they discuss Dimon’s comments with the snarky headline “The Financial Gospel according to JP Morgan Chase CEO.” without mentioning the Bear issue, where they focus on the London Whale. If WaPo is truly representative of the Washington mindset, I guess that article speaks volumes about the disconnect between Wall Street and Washington.

California led the nation into the housing bust; now it is leading the nation out of it. Strength on the coast is steadily moving inland.  The Northeast was one of the last to go into crisis, and is still lagging, although rents are up 10% in Manhattan.

Are distressed sales artificially lowering comps, which feeds into appraisal problems with home sales?  The NAR thinks so. Given that you have to use comparable sales, appraisals will lag the market, almost by definition.  This has caused problems on 35% of sales.

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Markets are flattish after Alcoa cut its forecast for global aluminum demand in its earnings release.  Earnings were better than expected, but the forecast is weighing on the stock, which is down a couple of percent pre-open. Analysts are predicting a 2% drop in Q3 earnings for the S&P 500.  Mortgage applications fell. Bonds and MBS are down small.

Corelogic reported a 10% decline in shadow inventory down to 2.3 million units in July. This represents six month’s supply.  Geographically, Florida, California, Illinois, New York, and New Jersey account for 45% of all distressed properties. Currently, the flow of properties into shadow inventory is more or less equal to outflows. Remember that shadow inventory does not count properties currently listed on MLSs so it isn’t a full picture of housing inventory.

The government is going after Wells for reckless lending on FHA loans. Prosecutors say the bank claimed over 100,000 loans were FHA compliant when it knew they were not. Wells notes that its FHA delinquency rates are half the industry average. Meanwhile, revenues are up 37%  for mortgage bankers and Wells is the biggest.  The government giveth, the government taketh away…

Issuers of MBS are going to be watching the outcome of the lawsuit against Flagstar closely.  Judge Rakoff is no friend of the securities industry…

FHFA has released its new strategic plan for the mortgage market. Housing advocates will dislike two portions of this – first the fact that there remains no interest in principal reductions, and second, that FHA remains interested in varying guarantee fees by state.  Which means that judicial states will have higher mortgage rates than non-judicial states. They also intend to review the servicing compensation model.

Fannie Mae has a touchy-feely survey of attitudes about homeownership and the economy.

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Markets are slightly higher this morning in spite of the fact that the IMF cut its global growth forecast. Alcoa kicks off earnings season after the close tonight.  S&P expects earnings to drop by 2% this quarter. Bonds are down slightly while MBS are up.

The National Federation of Independent Businesses reported small business optimism dropped slightly in September.  Overall, the mood is one of “uncertainty” and the outlook remains glum.  Topping the list of concerns was the rising cost of health care insurance, followed by economic conditions, energy costs, and taxes & regulation. Access to credit is not an issue anymore. 

FBR banking analyst Paul Miller says its time to start falling in love with mortgage banks again. Of course virtually all of the publicly traded mortgage banks went under during the crisis. He makes an aggressive interest rate forecast – mortgage rates dropping to 3% over the next quarter or two.  As a result, he sees the refi boom lasting until late 2013. Ben Bernake’s Refi Nation continues…

The battle over last Friday’s surprising payroll continues with a novel angle:  the payroll employment survey numbers were too low. Needless to say, the interpretation of the jobs report has fallen along partisan lines, with those who doubt the numbers being compared to the black helicopter crowd.  Jack Welch opened up a hornet’s nest with that tweet calling B.S. on the B.L.S. Is there an election coming up or something?

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Stocks are lower this morning on no real news. There is no economic data this morning and the bond market is closed for Columbus Day. Alcoa kicks off the earnings season tomorrow.

Treasury and HUD released their monthly Housing Scorecard, which shows that the number of underwater homeowners fell from 12.1 million in Q411 to 10.8 million in Q212.  The report doesn’t really delve into what caused the drop – was driven by home appreciation, or was it driven by foreclosures and short sales? Most of the report focuses on the Administration’s efforts regarding aid to distressed borrowers. 

Bob Schiller has an interesting article on the psychology of the housing market during the bubble years and now. He makes an interesting observation – “In 2004, there was little about the economic climate that would explain why a housing peak should be coming soon.  The world was widely believed to be slowly emerging from the early-2000s recession, which had been associated with the bursting of the stock market bubble of the 1990s.  The stock market was just starting to recover.  It seemed a time of healing.”  The real estate market will surely recover, and while we are breathing a sigh of relief, some other bubble may be forming.  That is the problem when you have a Federal Reserve which keeps trying to put the wealth-effect genie back in the bottle.

The latest “selling you the Brooklyn Bridge” scam – advertising REO as rentals.  Pretty brazen stuff.

Commercial real estate pricing has almost returned to its 2007 peak.

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Vital Statistics:

Markets are higher this morning after a surprisingly good employment report. Stock index futures initially jumped on the number and now have given back the gains. Bonds are down a point and MBS are down 6 ticks on the number.

The unemployment rate dropped to 7.8% from 8.1% in September and total nonfarm payrolls rose by 114k.    The Street was expecting an 8.1% rate.  U6 (the underemployment rate) didn’t change at 14.7%.  873k people became employed in September and the participation rate ticked up to 63.6% from a 30 year low of 63.5%.  It looks like the job gains were largely part time, as that sector increased 582k.  Average weekly hours ticked up to 34.5, and earnings increased .3%.  This report does seem at odds with other economic reports showing the economy is slowing.  It certainly makes you wonder what the Fed was looking at when it announced QEIII.

In response to the numbers, Jack Welch tweeted: “Unbelievable jobs numbers…these Chicago guys will do anything… can’t debate so changes numbers.”  Unsurprisingly the left blogosphere is swarming.  That said, Jack (We always beat by a penny) Welch should be the last person throwing stones about massaging the data.  Given that BLS magically found half a million jobs in the sofa cushions, which allows Obama to claim that the economy has reclaimed all the jobs it lost since he took office, we are going to see some predictable partisan doubt on the economic numbers coming out of Washington.

The minutes from the 9/13 FOMC meeting didn’t have anything groundbreaking in it. Some of the regional presidents are doubting how much of an effect further QE can really have.  Certainly there is nothing in the minutes that suggests that the Fed is seeing more strength in the labor market; if anything they note decreases in hiring plans.

Larry Fink of Blackrock told Maria Bartiromo that “we are about a year away from a full rebound in American housing.”  He is worried about the fiscal cliff:  “The fiscal cliff is probably the biggest problem facing us.  We are already seeing a slowdown in the U.S. economy.  I know many CEOs who are sitting with large sums of cash.  If the government comes up with a comprehensive plan to handle it, we would see a huge rally.”

FHFA has a new white paper out for comment regarding a new infrastructure for the secondary mortgage market.  It envisions a platform that could be used by multiple issuers – which could be laying the groundwork for an MBS exchange where issuers can sell new issues electronically instead of over-the-counter.  

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Markets are higher this morning after the ECB held rates steady. Generally speaking, the path of least resistance has been up in the equity markets since QEIII.  Bonds and MBS are down small.

Initial Jobless claims came in at 367k, better than expected, but higher from last week’s revised 363k.  Later this afternoon, we will get the minutes of the FOMC meeting which should make interesting reading. 

Lender Processing Services Mortgage Monitor showed delinquencies have dropped almost 50% from peak, while foreclosures remain at their highs.  Which means foreclosures should start dropping in the future. The states with the highest remaining foreclosures are NY, NJ, and HI.

Challenger and Gray reported that planned layoffs are the lowest in 12 years as government downsizing appears to be at an end. While this is a good sign, it doesn’t necessarily mean hiring is about to pick up as headwinds from Europe and Asia, as well as political uncertainty in the US are keeping companies from making any major expansion or hiring moves. They cite a Business Roundtable survey which found that only 30% of CEOs expected to increase capital spending or add more workers.  Those numbers are down from the mid 40s in Q1.  So while layoffs are back at pre-recession levels, hiring is not.

The debate last night was not market moving, but Romney’s performance should put an end to the pundits declaring the race over already.  At the margin, a Romney win would be bond bearish, and possibly stock market bearish since Ben Bernanke would not be re-appointed.  I was happy to hear Romney mention the lack of guidance as to what constitutes a qualified mortgage. 

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Markets are flattish after ADP says US companies added 162,000 jobs in September.  This was better than expectations.  August was revised downward from 201k to 189k.  Mortgage applications rose 16.6% as rates fell.  Bonds and MBS are down small.

Corelogic reported home prices increased 4.6% in August 2012 compared to August 2011.  This was the biggest percentage increase in prices since 2006. All but 6 states reported price gains. They are forecasting a 5% increase for Sep. 

While we fret about Europe, the other problem lies across the Pacific – the bursting of the Chinese real estate bubble. The Chinese appear to be at the final phase of the bubble, where the government is hoping that prices simply stagnate for a decade while economic growth and incomes catch up. Unfortunately, experience tells us once bubbles become inflated they take on a life of their own.  That said, the Chinese are savers, and have a cushion that US and European households do not. 

The Washington Post tries to game the election for the markets.  Bottom line:  the evidence is mixed, so don’t try and trade it.  Of course pundits from each political persuasion will try and claim that they are better for the markets. The article ignores the most important consideration (IMO) – An Obama win means the Fed will continue its policy of aggressive quantitative easing.  A Romney win means a new Federal Reserve Chairman, and presumably less aggressive measures.  So at the margin, an Obama win is bond bullish (or neutral), while a Romney win is bond bearish.  I would say that would apply to the stock market as well, at least in the short term.  Longer term, the economy will benefit more from less manipulation of interest rates than more.  ZIRP is creating imbalances that will create problems down the road.

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