All Things in Moderation

Vital Statistics:

Markets are flat after the long weekend with no major news pre-open.  We will get ISM and Construction spending at 10:00 am. Moody’s cut the outlook of the EU to negative. Bonds and MBS are down a few ticks. 

As we head into fall, remember that most of Europe takes August off and therefore no real decisions get made. Part of the complacency in the US markets has been driven by a lack of bad news out of Europe.  Nothing has changed since mid-summer, so I would expect Europe to take the forefront again (along with the election).  WaPo has a depressing piece on the state of the young in Spain, Italy, and Greece. And there is a small matter of a slow motion bank run in Spain, in spite of another rescue. Welcome back.

A paper presented at Jackson Hole last week is generating some discussion, in that it gives ammo to advocates of further quantitative easing.  It also recommends the Fed issue guidance for rates based on nominal GDP, not a timeframe (late 2014). FWIW, PIMCO CEO Mohammed El-Arian believes the Fed is signalling more activism. The sidestory is that a President Romney will replace Ben Bernake with someone more hawkish. A Romney win could be bond bearish.  How that would affect equities is anyone’s guess.

In spite of the gloom, Roger Altman makes the case that the economy will surprise on the upside. Housing and energy will lead the rebound. From 1980 to 2005, housing accounted for 4.5% of GDP.  This year, it is projected to be 2.4%.  As I have been pointing out, we have underbuilt by about 200k units for the past 10 years (even ignoring population growth).  There is pent-up demand and eventually it will be released in spite of the current economic gloom – even in hard times, people still get married, have kids, and move out of their parent’s homes. This will affect demand at the starter home level, which has been the part of the market that has been lagging. This  will enable the move-up trade that will start impacting mid-price homes. The high end (especially in the NYC metro area) probably has further to fall.

A new book details the bipartisan trainwreck that was Fannie Mae and looks at the options going forward.

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Markets are shrugging off a lousy NAPM Milwaukee report ahead of The Bernank’s speech, which is scheduled for 10:00am EST.  Given this is the last day of the month before a long weekend, there will probably be a flurry of activity during the speech and then the Street will be on the LIE by noon. Bonds and MBS are down slightly

While the general feeling is that Bernake will not say anything earth-shattering (he prefers to announce policy during FOMC statements) people are looking for clues regarding further QE.  Numerous sources have indicated that trading desks are long bonds going into the speech, so there is room for disappointment, or a “buy the rumor, sell the fact” reaction. The next FOMC meeting is in 3 weeks, and that should be the end of anything major out of the Fed until after the election.

Jim Grant has an op-ed in today’s Washington Post discussing the gold standard. FWIW I think the latest political re-consideration of the gold standard is more of a political attempt to keep Libertarians in the tent. He does make a good point that the dual mandate is probably asking the Fed to do too much.  As he puts it: “Positively out of bounds for the chariman of the Federal Reserve is the admission that he is in the wrong line of work.  The institution he leads was created to conduct a central banking business. But Congress and he have steered it into the central planning business. In so doing, the Fed has exchanged a job it could do for one it can’t.” And let’s be honest – the Fed sets prices (interest rates) the same way the Communist Bureaus of the USSR used to set the price of gasoline.

As I was driving into work this morning, Meredith Whitney and James Bullard (St Louis Fed Head) were debating ZIRP. Bullard made a comment (and I am paraphrasing) “Some people think the Fed kept interest rates too low for too long in the early 00s – that’s been sort of an ongoing debate.  The people who disagree would point to the fact that inflation didn’t shoot up. The problem with the policy came in other ways with the financial crisis which no one could see coming. I do worry about people reaching for yield and taking too much risk”  No mention of the housing bubble.  No mention of the stock market bubble.  And Bullard is a supposed inflation hawk.  The Fed thinks it has nothing to do with creating asset bubbles. 

Stephen Roach (ex-Morgan Stanley, now at Yale) makes this exact point when he says that Bernake should not be re-appointed. Meredith Whitney (same link as above) made the point that ZIRP has made it extremely difficult for banks to make money in their traditional business (lending) so they are taking more proprietary bets (either directly or indirectly through over / underweighting different asset classes).  Not to mention that it is annihilating pension funds (the next crisis on the horizon) and retirees are cutting back consumption because of meager earnings on their assets. Contrary to the belief in Washington, there are unintended consequences that are working against what they want to achieve (more lending, more spending, less risk). ZIRP is not “free.” 

If Romney wins, it is possible we could get a break from the Greenspan / Bernake Fed, which may well be the final nail in the 30 year Treasury Bull Market’s coffin. If that happens, in a couple of years, the financial press will learn another buzzword they don’t understand – convexity risk. Which some mortgage REITs aren’t hedging.

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Markets are lower after ho-hum economic data in the US and disappointing data overseas. Bonds and MBS are up slightly. Tonight we will get Mitt Romney’s speech at the Republican Convention and then all eyes turn to Bernake’s speech in Jackson Hole.

Personal Income and Spending both rose in July, with income coming in at .3% and spending coming in at .4%. The spending number was the strongest number since last winter, but was little below street expectations. The retailers will report BTS comps a week from today, and that will give us a more granular look at spending patterns. Initial Jobless Claims were 374k last week, more or less in line with the latest readings. 

Tomorrow, Ben Bernake will give a speech in Jackson Hole. The Street will be looking for clues to further stimulus, and they will probably be disappointed as politics are now center stage and the Fed wants to appear independent. Mitt Romney has been skeptical of the Fed’s reflation efforts and has already said he would replace Ben Bernake if he wins. Which means you should watch the polling numbers as a Romney win should be bond bearish at the margin. Especially if the Europeans find a way to muddle through.

The national settlement over foreclosure abuses is 6 months old, and the settlement monitor has released his first report. Total consumer relief has been $10.6 billion, of which the lion’s share has been short sales. At first glance, it appears the banks are over halfway there on delivering the $20 billion in relief, but that $10.6 billion will be haircut as there are different weights for different outcomes. 

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Markets are flattish-to-down as a positive Case-Schiller reading offsets disappointing economic data out of Japan and Spain. Bonds and MBS are up slightly.

The S&P / Case-Schiller index came in at 142.2 vs expectations of 141.3. The national composite was up 1.2% YOY and up 6.9% vs Q1.

The real estate market is recovering, but where are home prices still getting hit?  Fairfield County, CT, where prices have declined 13% YOY, especially in Greenwich and New Canaan. This of course is due to Wall Street compensation dropping like a stone over the past 5 years and the realization that it may be a while before it comes back. As the article points out, while the events in Europe are an abstraction to most people, they do affect jobs in the financial services industry. Given the fact that entitlement spending is going to crowd out a lot of discretionary spending (especially on defense), it makes me wonder if one of the last high-flying real estate markets – Washington DC – is next.

The WSJ has a fluff piece on Paul Singer, who has been raising a lot of money for Mitt Romney. It repeats the rumor that he might be given a place in a potential Romney administration. However, he originally backed Chris Christie and has been very vocal in pushing for gay marriage so that could be an issue.

Chart:  S&P / Case-Schiller House Price Index:

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Vital Statistics

Markets are higher this morning on no real news as we head into one of the slowest weeks of the year. The Fed Heads will meet in Jackson Hole this week, although analysts aren’t expecting much in the way of new policy announcements. That said, the article does suggest the Street is leaning heavily towards additional stimulus, so the risk is to the downside in MBS and Treasuries. There doesn’t appear to be any market-moving economic data this week. Oil is moving higher in response to Issac. Bonds and MBS are up slightly.

One of the longest merger kabuki dances ended today, as Hertz finally gets an agreed deal with Dollar. I believe Hertz’s initial bear hug letter was released in 2007 or 2008.

The first read on Back-To-School looks negative. Teen Apparel Retailers may end up missing their comp expectations next Thursday. Some of the names in this space have been flying lately – AEO, GPS, URBN, HOTT, so they may be vulnerable to a disappointment. For those that are more risk averse, you can always short Abercrumble as the stock cannot get out of its own way.

The Republican National Convention is this week and I don’t expect it to matter to the markets one bit. They had to shorten it a day due to Issac.  Greg Valierre of Potomac Research said that 98% of his Wall Street clients are voting for Romney.

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Markets are off after a disappointing durable goods report. Between the durable goods report and the cap good report, it showed companies pulled back from making capital investment in July. This put a bid under bonds and the 10 year is now pushing 1.6% after topping 1.8% earlier this week.  MBS are up 1/4 of a point as well.

Why does the economic recover not feel like a recovery? One big reason is that incomes are still falling – in fact they have fallen more since the recovery began than they did during the recession. Given the move in the median house price, the median house price to median income ratio has spiked to 3.7x, implying housing is overvalued. FWIW, I am skeptical of NAR’s median house price numbers, which supposedly rose 22% to 189.6 from 154.6 in Jan. Perhaps the lack of distressed sales has caused the median price to shoot up.

Bill Gross said this morning that QEIII is “almost a done deal.” No update on the status of the cult of equities’ demise, though.

Republicans want to study the implications of returning to the gold standard. This is undoubtedly aimed at libertarians who like Ron Paul and may vote for Gary Johnson.  Needless to say, the Nobel Krug Man does not approve.

Chart:  Median income:

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Initial Jobless Claims came in at 372k, a little higher than expected and pretty much in line with the latest trend of 375k / week.  New Home Sales increased to 372k in July

The FHFA Home Price Index increased 3% YOY and .7% MOM. This report only focuses on conforming mortgages, which makes it a more stable index than Case-Schiller or RPX.

The FOMC minutes noted that economic conditions have decelerated from earlier this year and discussed the possibility of another round of quantitative easing.  This drove the 10 year yield from 1.8% to 1.7%. MBS rallied as well.  My view has been that we are getting too close to the election – the Fed wants to appear non-political and definitely does not want to influence elections.  However this morning, St Louis Fed President James Bullard characterized the minutes as “stale,” noting that some of the data lately indicates the economy is getting stronger again.

CBO is forecasting 2.25% economic growth for the rest of the year and unemployment above 8%.  If Taxmageddon is not averted, CBO projects a recession with real GDP declining .5% from Q412 to Q413 and unemployment rising to 9%. If all the tax hikes and spending cuts are held off indefinitely, their projection is pretty much where the economy is now – 1.7% GDP growth with 8% unemployment. So the goalposts are (a) very modest recession vs (b) very modest recovery. Which means interest rates aren’t going anywhere. 

Chart:  FHFA House Price Index

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Stocks are lower this morning on no real news. Dell missed.  Existing Home Sales are scheduled to be released at 10:00 am EST. The minutes of the last FOMC meeting are scheduled for 2:00pm EST. Bonds are up a half a point and MBS are flat.

Mortgage Applications fell 7.4% last week as refis slowed.

Greece needs some breathing room to pay its debts.

FHFA has revised their short sale guidelines to allow homeowners who are current on their mortgage (and have an eligible hardship) to sell their home in a short sale. Importantly, job relocation qualifies, which should help people who are stuck with underwater homes in places with no jobs to leave. Second Lien holders will be given $6,000 to expedite a short sale.

Toll Brothers reported better than expected earnings, with a 41% increase in revenues, 59% increase in backlog, and 66% increase in contract signings.  Toll is in the McMansion business, so it isn’t necessarily representative of the whole market, but it is another positive data point, especially for the jumbo part of the space.  The stock is up a few percent pre-open.

Fannie Mae’s economic outlook for the rest of the year is generally gloomy, although it does predict that housing activity will be a net positive to GDP for the first time since 2005.

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Markets are stronger this morning on no real news. There are very no meaningful economic releases this week, except for perhaps the FOMC minutes which come out tomorrow.  The lack of news out of Europe has led to a benign environment for equities, which means that the 10-year continues its sell-off.  MBS are down 6 ticks as well.

HUD is doing another auction of distressed single family loans – $1.7 billion. These are loans primarily in Phoenix, Chicago, Tampa, and Newark. Given the amount of money that’s being raised for distressed real estate, HUD should be shoveling this stuff out the door.  When the ducks are quacking, you gotta feed ’em.

Dick Bove of Rochdale Securities points out that the government’s regulation of the banks is creating an opportunity for the shadow banking system – the firms who operate outside of the banking system (that would be us, for example). While he does worry about this laying the groundwork for the next crisis, in the meantime winners will emerge in the disarray. Take a look at the charts of Nationstar Mortgage (NSM), Impac (IMH), and Redwood Trust (RWT).  These stocks have been screaming. This is actually a very bullish sign for real estate – since the crisis began, the market has been dominated by Ginnie / Fannie loans. A bottom in real estate is the single most important factor to turn things around. The private label securitization market is the second.

The era of frothiness is over (at least according to the Economist).  What is interesting is that real estate is the cheapest relative to incomes in Japan, followed by Germany and the US.  The Canadian real estate bubble still has yet to burst. It will be interesting to see how their banking system handles it.

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