All Things in Moderation

Vital Statistics:

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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Vital Statistics:

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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Vital Statistics:

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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Vital Statistics:

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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Vital Statistics:

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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Vital Statistics:

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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Vital Statistics:

Markets are higher this morning on speculation Spain is preparing to ask the ECB to purchase its debt. The stock market definitely feels like the path of least resistance is up, though it could be the calm before the storm – Alcoa kicks off earnings season next week. Notable earnings warnings so far include Caterpillar and FedEx.  Bonds and MBS are down / flat.

Yesterday’s ISM Purchasing Managers Report was reasonably constructive.  The headline number of 51.1 means that the economy should expand at roughly 3% or so, at least according to historical trends.  Production and backlog were the weak spot, while employment and prices were areas of strength.

The Washington Post has an article which shows what the Fed is up against: Even though interest rates are at rock bottom levels, savings deposits continue to increase. Risk aversion and the desire to replenish lost savings are behind the phenomenon.  Even though the stock market has rallied, the lack of volume indicates that retail investors are not putting money to work there.  Aside from the risk appetite considerations, it also demonstrates why consumption remains weak. 

You know who loves this situation?  Corporate America.  As if on cue, I just received an email saying WellPoint is issuing $1.5 billion of senior unsecured 30 year convertible bonds tomorrow with a price talk of 2.5% – 3% coupon, 20% – 25% premium.  To put that in perspective, the 30 year government bond is at 2.8% and WLP pays a 1.9% dividend. Old time convertible arbs are shaking their collective heads at that one.

Finally, Bill Gross on budgetary crystal meth and the ring of fire.

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Vital Statistics:

Stock index futures are higher as we kick off the 4th quarter.  There are no major headlines or economic data this morning. Later this week, we will get the FOMC minutes from the last meeting, and Friday’s jobs report will have market moving potential. Bonds and MBS are up.

Will the fiscal cliff affect housing in any way?  Perhaps.  One provision in the expiring tax cuts is the 2007 Mortgage Forgiveness Debt Relief Act and Debt Cancellation which made the debt forgiveness in short sales non-taxable.  Typically debt forgiveness is considered taxable income.  If this provision goes away, short sales and mods with principal forgiveness may grind to a halt.

Meanwhile, HUD secretary Shaun Donovan was defending the mortgage interest deduction on the Sunday morning talk circuit over the weekend.

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Vital Statistics:

Markets are weaker on no real news.  Personal Income came in weaker than expected and personal spending was in line with estimates. The .5% increase in spending was driven by a .4% increase in prices. Bonds are up about half a point and MBS are up 1/4.

On the back of the puzzling statistic showing a 17% increase in new home prices, BLS is now saying an additional 453k jobs were added in 2011, bringing the hiring estimate up from 1.9 million to 2.3 million. Is the obama administration playing jiggery-pokery with the economic data?  Well, that is one way to fix the economy.

Amidst all of the usual theories about the cause of the financial crisis (Glass-Steagall, nefarious bankers, Fannie and Fred) we have another – flaws in democracy itself.  He does sound a bit like Thomas (Flathead) Friedman in that he envies more authoritarian societies that are able to push through policies without much opposition.

Is QEIII going to do much for the real estate market? According to Thomas Flexner, global head of real estate at Citi, it won’t “do very much at all.”  Blame tight lending standards. Also, as g-fees increase that will offset part of the lower interest rate effect.

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