Morning Report

Posted on February 6, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1334.9 -4.2 -0.31%
Eurostoxx Index 2498.6 -16.6 -0.66%
Oil (WTI) 96.93 -0.9 -0.93%
LIBOR 0.5233 -0.004 -0.71%
US Dollar Index (DXY) 79.432 0.490 0.62%
10 Year Govt Bond Yield 1.92% 0.00%

Slow news day today.  Stock futures are lower in spite of the fact that the Giants won last night.  No, I don’t buy that theory.  Or this one.  Or, for that matter this one.  The last one will cause anyone who believes in weak-form market efficiency to tear their hair out.

It looks like a foreclosure deal is getting closer.  25 billion will be the price tag.  Of course Ally is owned by the government, so in some sense, this is an informal mortgage relief plan from the federal government using taxpayer funds.  I have to imagine that this will be earnings-neutral as the banks will simply apply the principal reductions to loans they have already written down.  Who knows where banks are actually marking these things, but a home equity loan on an underwater house is basically worthless.

Can we officially say that Super Bowl halftime shows have jumped the shark?

Lost in the European issue is the fact that Denmark is having a credit crunch after their real estate bubble burst in 2007.  This will be interesting to watch because a lot of policy wonks and academics respect the Danish system of mortgage banking and some have suggested the Danish system as a model for a post Fan and Fred world.

Filed under: Uncategorized | 16 Comments »

Morning Report

Posted on February 3, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1334.5 11.8 0.89%
Eurostoxx Index 2498.3 20.2 0.81%
Oil (WTI) 96.86 0.5 0.52%
LIBOR 0.527 -0.004 -0.68%
US Dollar Index (DXY) 79.144 0.166 0.21%
10 Year Govt Bond Yield 1.90% 0.08%

Stocks are jumping on the payroll numbers. Nonfarm payrolls increased 243k vs 140k expectations and the unemployment rate dropped from 8.5% to 8.3%.  The payroll estimates were 100k lower, so it is a substantial surprise. The good weather played a part in the number.  206,000 workers were unable to work due to bad weather, which 224,000 below the average for January. The SPUs jumped 12 points on the number.  Bonds got clobbered, with the 10 year futures contract dropping  2 handles. The dollar rallied.

I had expected unemployment to stay steady or increase as the long-term unemployed re-enter the labor force.  These numbers seem to imply the recently laid-off are finding jobs and the long-term unemployed still aren’t looking.  The labor force participation rate has been steadily declining over the past 6 months, falling from 64.2% to 63.7%.

This report makes the bearish tone of the FOMC report even stranger. Given that the Fed’s view of the economy seemed at odds with the general economic indicators coming out of the government and the tone of business, I guess QEIII is coming whether you like it or not.  The Fed is almost paying you to borrow money. Refinance your mortgage.  When inflation returns you will look back at that 3.75% 30 year mortgage as the best financial decision you ever made.

Edit:

For those interested in where the financial markets see real estate pricing, Radar Logic (RPX) futures began trading yesterday on the CBOE Futures Exchange.  The Radar Logic index measures the price of real estate nationally using a complicated algorithm (much different than Case-Schiller).  The index number represents the price per square foot.  The following chart shows where the market is predicting real estate prices 5 years out.  Note:  the jagged behavior is due to the fact that Radar Logic does not seasonally adjust their data and the summer season is stronger than winter.

Chart:  RPX Index futures curve:

It looks like someone put up a calendar spread today (buying March ’13,  selling Sep ’15).

 

Filed under: Uncategorized | 95 Comments »

Morning Report

Posted on February 2, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1321.7 1.9 0.14%
Eurostoxx Index 2474.0 3.2 0.13%
Oil (WTI) 96.59 -1.0 -1.04%
LIBOR 0.5306 -0.007 -1.21%
US Dollar Index (DXY) 79.078 0.216 0.27%
10 Year Govt Bond Yield 1.83% 0.00%

Stocks are flat this morning, with a lot of data.  Productivity was up .7% and unit labor costs were up 1.2% for the 4th quarter.  Productivity was below expectations and costs were above.  Initial jobless claims were 367K vs 371K expected.  Continuing claims were slower than expected as well.  Stocks rebounded modestly on the numbers.

Corelogic reported its December Home Price Index and full year 2011. Home prices fell 4.7% nationally during 2011.  The worst states were Illinois, Nevada, Georgia, Ohio, and Minnesota.  Montana, Vermont, South Dakota, Nebraska, and NY reported the highest increases.

Today is the first Thursday of the month, which means retailers are reporting same-store sales. The winners so far appear to be Gap and Kohls.  Ann Taylor and Abercrombie and Fitch (Abercrumble) are bringing up the rear.

Facebook filed its registration statement last night. I have only skimmed the document, but a few things stand out.  First, there are two classes of stock – the B shares which have 10 votes per share and the A shares which have 1. Facebook is selling 5 billion of the A shares.  They did 3.7 billion in revenue in 2011 and have roughly 62% EBITDA margins.  Given the $100 billion price tag, this works out to 27x sales and 45x EBITDA.  Revenues are roughly doubling per year. It will no doubt make zero sense on any sort of reasonable valuation metric, but iconic companies like Apple and Google always trade rich.

Pulte Homes reported earnings this moring.  They are echoing the sentiment of the other homebuilders – noting reasons for optimism regarding profits, and a “growing sense of optimism” about the housing market in general. 4Q earnings were light, though.

Filed under: Earnings Announcements, Economic data | Tagged: | 29 Comments »

Morning Report

Posted on February 1, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1315.7 7.5 0.57%
Eurostoxx Index 2457.8 41.1 1.70%
Oil (WTI) 98.79 0.3 0.31%
LIBOR 0.5371 -0.005 -0.97%
US Dollar Index (DXY) 78.801 -0.477 -0.60%
10 Year Govt Bond Yield 1.80% 0.01%

Markets are rallying this morning on no real news.  Portuguese yields are again lower and have retraced the big spike from Monday. Amazon.com stunk up the joint last night with a miss on the top line and disappointing guidance.

In economic data, mortgage applications were down in January.  The ADP report suggests 170k jobs were added in January.  The bulk of the jobs were added in small business and services.  The January number was lower than expected.  December was also revised downward from 325k to 292k.  The takeaway is that the labor market is improving, albeit slowly.

The rumors are true:  Obama plans to do a no-questions-asked refi program for anyone who is current in their mortgage.  The program will be financed with a fee on banks with $50 billion in assets. The details have yet to be released, but the fee is probably going to act as a poison pill.  As I have said before, the flaw in the plan is the originator.  By definition, underwater loans are non-conforming (i.e. in contravention of FHA lending standards) and the government has the right to force the originator to buy it back.  Originators are not going to take that put-back risk for no compensation, especially when there are plenty of good quality mortgages to underwrite.  At any rate, banks are especially stingy with their warehouse lines these days, so originators are unable to make as many loans as they would like.  Nobody is going to tie up precious warehouse capacity with non-conforming loans that can end up back in their lap.

It raises the question whether Obama understands this problem.  My sense is that he does – that is why the poison pill bank fee was put in.  This is just so much political theater – a chance to make an election year point.  “See, I wanted to lower your mortgage payment, but those 1% bankster defending, do-nothing Republicans wouldn’t let me.”

Obama did roll out a pilot program on REO-to-rentals.  FHA will sell foreclosed properties in bulk sales to investors who will turn them into rentals.  It is an interesting idea.  The rub will be pricing and scalability. The Cleveland Fed has already weighed in on the idea for its area and admitted it probably won’t work in the Rust Belt, where population loss is driving up vacancy rates and properties are spread out.  This plan could work in dense places like South Florida and Las Vegas perhaps.  Pricing will be problem as well.  Currently, foreclosures are trading around 85% of Broker Price Opinion.  Professional investors are probably going to need larger discounts to generate the returns necessary to attract capital.  Since the government isn’t going to allow Wall Street Wiseguys to flip this stuff, they will require a multi-year holding period.  No pension fund or endowment is going to tie up capital for 3 years at a high single-digit rate of return.

Filed under: Morning Report | 38 Comments »

Morning Report

Posted on January 31, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1315.7 6.8 0.52%
Eurostoxx Index 2434 29.330 1.22%
Oil (WTI) 101.03 2.250 2.28%
LIBOR 0.5424 -0.005 -0.82%
US Dollar Index (DXY) 78.888 -0.237 -0.30%
10 Year Govt Bond Yield 1.85% 0.01%

Markets are stronger this morning on progress in Europe. The Portuguese long bond is up a point and the Euro is strengthening.  In earnings, Exxon missed, Eli Lilly beat.  People are waiting anxiously to see the red herring for Facebook’s IPO.  Certainly the other social media stocks have not been shooting the lights out, but leaders always trade rich to also-rans.  Watching Linked-In or Groupon may not turn out to be the best comp.

The employment cost index came in at .4%, in line with expectations. Case-Schiller was also released this morning, with a 70 basis point decline MOM and 3.67% decline YOY.  This puts the index back to April 2003 levels.  Case-Schiller is a very lagged indicator and this number covers the 3 month average ending in November, so it is a snapshot of how the real estate market looked last fall.  Anecdotally, I am hearing things are improving in my neck of the woods, NYC metro.

Chart:  Case-Schiller

Another sign that the inventory of foreclosed homes is moving – the professional investor is getting involved.  Bloomberg has a story this morning on how private equity is getting involved in the Administration’s REO-to-Rental program.   These funds are looking at spending billions.  Still, the absolute numbers are staggering.  “About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016” according to Morgan Stanley.

$1 trillion in distressed sales.  Wow.

Filed under: Uncategorized | 115 Comments »

Morning Report

Posted on January 30, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1303 -9.5 -0.72%
Eurostoxx Index 2412.9 -23.710 -0.97%
Oil (WTI) 99.02 -0.540 -0.54%
LIBOR 0.5469 -0.004 -0.77%
US Dollar Index (DXY) 79.32 0.484 0.61%
10 Year Govt Bond Yield 1.83% -0.06%

Stock index futures are lower this morning as Europe becomes the focus again.  The Germans have proposed creating a commissioner with veto power over Greek budgetary decisions as a condition for aid.  Greek Financial Minister Evangelos Venizolos rejected the idea.  Portugese spreads are 180 basis points wider this morning as well.

Merger Monday is back with a couple of deals – The Gores Group (a West Coast private equity group) is buying Pep Boys.  Swiss engineering giant ABB is buying Thomas and Betts.  Eastman Chemical bid for Solutia on Friday.  Merger activity seems to be picking up, another sign that the economy is gathering strength.

Personal income came in at .5% for December, slightly higher than the .4% estimate.  Spending however was flat, lower than the .1% estimate.  The spending number may be explained by the marked strength in spending in 2010.  Spending started to gather momentum from Q310 – Q111 before falling off as the European crisis began to coalesce.  So the weakness may simply be a tough comp problem.

The earnings parade continues this week with McKesson, ADM, Exxon, Eli Lilly, UPS, Amazon.com, Pulte, and Dow as the major players releasing Q4 results.

Filed under: Morning Report | 86 Comments »

Morning Report

Posted on January 27, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1308.3 -7 -0.53%
Eurostoxx Index 2435.3 -25.060 -1.02%
Oil (WTI) 99.35 -0.350 -0.35%
LIBOR 0.5511 -0.002 -0.36%
US Dollar Index (DXY) 79.356 -0.041 -0.05%
10 Year Govt Bond Yield 1.92% -0.01%

Markets are weaker on a lower-than expected GDP report.  4Q GDP came in at 2.8% vs street expectations of 3%.  Consumption and prices were lower than expected as well.  No major news out of Europe.  EURIBOR  / OIS continues to fall – it is now at 77.5 basis points.  Remember, 20 bps is more or less post-crisis “normalcy”  Pre-crisis normalcy was closer to 7 bps. Note the flat line before mid-2007 and then the spike in 2008.  People forget that the crisis began a year before Lehman.  Looking back, I remember the crisis began when the banks were stuck with a hung bridge on the Boots LBO.  Should have sold everything that day.

Chart:  EURIBOR / OIS

The WSJ has an editorial today on the Fed, which I believe nails it.  It notes the disconnect between obama’s view of the economy and the FOMC’s view.  But, the quote that says it all is this:

“One problem with all of this was pointed out yesterday by Kevin Warsh, who as a Fed governor sat on the FOMC until early last year. Speaking at Stanford, Mr. Warsh said that “exceptionally accommodative monetary policy” has its uses in a crisis or recession. But the Fed’s “recent policy activism—measures that go beyond a central bank’s capacity or traditional remit—threatens to forestall recovery and harms long-term growth.”

That’s a useful warning for markets to hear. Consider that Mr. Bernanke’s transparent goal is to drive down long-term interest rates to reduce mortgage rates to reflate the housing bubble. But intervening so directly to keep rates artificially low has made the bond market useless as a price signal or indicator of risk across the larger economy.”

As others (John / Banned) have noted, low interest rates are not “free.” They are the equivalent of sticking a penny in the fuse box.  They may make the immediate problem go away, but they mask the underlying issues, and set yourself up for a major fire later.

In earnings this am, Ford missed and DR Horton beat.  D.R. Horton is cautiously optimistic about Spring.

Filed under: Earnings Announcements, Economic data, Economy, Federal Reserve, Financial Crisis | 92 Comments »

Morning Report

Posted on January 26, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1326.3 6.1 0.46%
Eurostoxx Index 2455.9 34.730 1.43%
Oil (WTI) 100.68 1.280 1.29%
LIBOR 0.5531 -0.004 -0.63%
US Dollar Index (DXY) 79.148 -0.328 -0.41%
10 Year Govt Bond Yield 1.96% -0.03%

Futures are higher this morning on strength in Europe and the Fed’s comments.  To be honest, I found yesterday’s language in the FOMC statement to be equity-bearish. They committed to lower interest rates until late 2014, took down GDP estimates, and made scant mention of the recent signs of an accelerating economy.  The Fed looks at economic indicators that are not made public, so we can’t know exactly what they are seeing.  Perhaps their models are telling them that these recent strong data points have been spurious.

I like to listen to conference calls from companies reporting earnings.  And while it is tough to quantify and model body language, it does give a view of the economy going forward.  Apple’s report certainly speaks of a stronger consumer.  The homebuilders have been increasing backlog and activity. United Rentals reported last night a 27% increase in revenues in Q4 and a utilization rate of 69% for FY11, a company record.  While you can object that URI’s numbers are coming from a weak base, you can’t dispute the direction.

One thing is for sure, the Fed wants you out of Treasuries.  They are giving you a good bid to exit the long end of the curve.  They are telling you (through an explicit inflation target) that they intend for you to make a 0% real rate of return on the 10 year bond.  They are paying you nothing to sit in short term paper.  The Fed wants you buying real estate.  They want you buying stocks.  There is an old saw in the market – “don’t fight the fed.” And that may explain yesterday’s equity rally as much as anything.  Heard on the Street this morning this morning interpreted the statement as “We won’t raise rates until the economy is really going.”  And supposedly that gave equity investors a little comfort to put more money to work.

I guess it is time to figure out where the next bubble is going to be.  6 years of rock-bottom interest rates should be a good base for one.  Farmland. Commodities.  You could make the argument that long term govvies are in bubble territory already.  If we start seeing levered Treasury strategy ETFs and structured notes, you’ll know we have crossed the rubicon.

In economic data this morning, durable goods orders were higher than expected at 3%.  Initial Jobless Claims came in at 377k.  EURIBOR / OIS continues to tighten, down to 78.5 basis points.  20 basis points could be considered “normalcy” in the European banking sector.  Still, it has come in over 21 basis points in 6 weeks.

Filed under: Earnings Announcements, Economic data, Economy, Federal Reserve | 130 Comments »

FOMC Minutes

Posted on January 25, 2012 by Brent Nyitray

Statement

Economic Projections

Longer Run Policy Considerations

Big Picture:  The Fed is on hold until late 2014. Previously they anticipated low interest rates through mid-2013.   Inflation target is 2%.  The Fed will continue to re-roll its investments into mortgage backed debt.  Operation Twist will continue.

In this new age of transparency, the Fed is giving investors more of a look at their thinking.

More granular stuff:  The Fed has taken down its forecast for GDP growth in 2012 and 2013.  In November, they projected 2.5% – 2.9% GDP growth for 2012 and 3.0% to 3.5% for 2013.  They now expect 2.2% to 2.7% growth for 2012 and 2.8% to 3.2% for 2013.  So, while the general tenor of most observers seems to be more optimistic, the Fed is going in the opposite direction.

However, they took down their unemployment estimates from November, so that is a positive.  What is interesting is that they stated the “normal rate of unemployment” range was 5.2% to 6.0%.  Which means that once unemployment gets in the mid 5-s, the Fed will start tightening. At least that is how I interpret it.  Don’t expect to see long-term unemployment rates similar to the ones Clinton (5.19%) and Bush (5.27%) enjoyed.  6 is the new 5. The Fed is at least paying lip service to the idea of preventing future bubbles.

The Fed introduced an inflation target of 2%.  Note the 10 year is yielding 2%.  Get the message?  Nope, the 10 year rallied hard on the announcement.  Stocks also rallied.

Filed under: Uncategorized | Tagged: | 36 Comments »

Morning Report

Posted on January 25, 2012 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1307.6 -3.8 -0.29%
Eurostoxx Index 2412.5 -19.590 -0.81%
Oil (WTI) 98.35 -0.600 -0.61%
LIBOR 0.5566 -0.003 -0.45%
US Dollar Index (DXY) 80.226 0.428 0.54%
10 Year Govt Bond Yield 2.05% -0.01%

Markets are mixed this morning, with the broader indices lower following Europe, and the Nasdaq up on Apple’s earnings.  AAPL is up about 8% pre-market.  Conoco Philips also reported good earnings this morning.   United Rentals reports after the close, which should provide another data point as to the state of the construction industry.  Construction /  Housing has been the achilles heel of this recovery, and if that sector is turning around, the economy could finally be on its way.

I didn’t watch the SOTU last night (I always just read speeches), but it doesn’t sound like there was anything market-moving in it.  Natural Gas is up a little, presumably on the lack of a production target.  The US dollar is stronger this morning and bonds are up 1/3 of a point, presumably on Europe, not necessarily the SOTU.

Perhaps the timing of the robo-signing settlement was not a co-incidence. In the speech last night, Obama laid out a plan for refinancing underwater mortgages.  The fine print will not be available for some time, and it will require Congressional approval.  I have noted in the past that you have to get the originators on board with this plan, and put-back risk is the big hurdle.  Put back risk means the government can decide after the fact that a mortgage violated underwriting standards and can force the originator to buy it back.  Re-financing underwater homes will by definition violate underwriting standards.  The government can tell originators that it will allow underwriting violations for this program, but there is nothing preventing a future administration from changing the rules.  An originator makes exactly the same profit on a 80% LTV loan as they do on a 120% LTV loan.  So why would originators take the additional political risk when the returns are exactly the same?   They won’t.

The FOMC rate decision will be released this afternoon.  I don’t think anyone expects a change in policy, but people will be interested in seeing if the the Fed takes note of the early signs of a turnaround.

Filed under: Earnings Announcements, Economic data, Economy, housing, Morning Report, stock market | Tagged: | 67 Comments »

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