Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1363.6 3.9 0.29%
Eurostoxx Index 2532.8 -17.4 -0.68%
Oil (WTI) 105.04 1.8 1.74%
LIBOR 0.4926 -0.001 -0.10%
US Dollar Index (DXY) 79.145 0.005 0.01%
10 Year Govt Bond Yield 2.03% 0.03%

We have a deal in Greece. Bondholders had to take a slightly bigger haircut – 53% vs 50% already agreed to. The $170 billion will be more than enough for Greece to meet its payment at the end of March. The Eurostoxx index is down slightly on the news – another case of “buy the rumor, sell the fact.”

Are we out of the woods with Greece?  No. Greece intends to hold elections in the next few months, and there is nothing preventing a new government from undoing all of the austerity measures imposed for this deal.

The Chicago Fed released its National Activity Index this morning. It came in at .22, which indicates the economy is growing faster than its historical trend.  An index value of zero means the economy is growing at its historical trend.  Employment and Production were large positive components, while Consumption and Housing were negative components. December was revised higher as well.

The Home Despot reported better than expected earnings this morning, which should be another positive indicator for housing and the economy. Macy’s also reported a strong holiday selling season.

Economic data on tap this week:  Existing Home Sales on Wed, Initial Jobless Claims on Thurs, New Home Sales on Fri.

Morning Report

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.

Morning Report

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.


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.

Morning Report

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.

Morning Report

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.

Morning Report

Vital Statistics:
Last Change Percent
S&P Futures 1311 0.2 0.02%
Eurostoxx Index 2442.2 15.200 0.63%
Oil (WTI) 98.97 0.640 0.65%
LIBOR 0.5601 -0.001 -0.18%
US Dollar Index (DXY) 79.746 -0.410 -0.51%
10 Year Govt Bond Yield 2.06% 0.04%
Congrats to the Pats and G-Men.
Markets are slightly higher this morning as Greek bondholders have made their best and final offer to the EU and IMF. Much of Asia was closed overnight in observance of the Lunar New Year.
Even Krugman is figuring out the economy is improving. He notes that housing has been a drag on the economy, but six years into the bust, it is becoming less and less of a drag as the excesses have been largely worked off. If housing becomes a positive, it could finally set the stage for the virtuous economic cycle we have been waiting for.
Of course Krugman takes shots at Obama for “giving into Republican demands that he slash spending” and at Bernake for giving in to Republican demands that it tighten money, positing that we wouldn’t be on the slow road to recovery if we had simply listened to him. He also goes on to slay the Bush dragon and the ECB dragon as well. The Fed tightened? Obama slashed spending? Whatever, Paul. I used to like Krugman when he was just an economist, now he is more of left wing Larry Kudlow.
Earnings Season continues this week with a ton of reports. The biggest names will be Apple, Boeing, and McDonalds, but there are a lot of industrials and energy names reporting as well. In economic data, we have the FOMC decision this week (will be interesting to see if the recent economic strength is noted in the statement). Durable Goods and Leading Economic indicators will be good data points this week.

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1308.1 -2.3 -0.18%
Eurostoxx Index 2427.4 -7.670 -0.31%
Oil (WTI) 99.96 -0.430 -0.43%
LIBOR 0.5611 0.000 -0.02%
US Dollar Index (DXY) 80.3 0.244 0.30%
10 Year Govt Bond Yield 1.99% 0.02%
Futures are down slightly this morning on weakness in Europe and a lackluster earnings report from GE and Google. GE’s Earnings were a penny better (surprise, surprise) but revenues came in light due to weakness in Europe and the finance business. Google stunk up the joint with a miss on the top line and the bottom line. It is down 8% pre-market.
Sorry I wasn’t around yesterday, though I see some people filled in for me.  I was at the CSFB Securitized Products conference yesterday in the city. Congressman David Schweikert (Vice Chairman of te House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises) spoke regarding the regulatory environment. A few takeways from the conference:
1) CSFB expects housing to decline 5%-7% this year and that *should* mark the bottom.
2) The government wants to introduce private capital into the mortgage market, but at the same time is trying to drive it away. The SEC is looking at changing the treatment of mortgage REITs which would drain, not add, private capital.
3) To get Fannie Mae capitalized to a reasonable level that would allow it to re-float would take a quarter of a trillion dollars. Nobody has a clue where that much money can be raised in the private sector. Which means Fannie and Fred will continue to be wards of the state.
4) The government is really interested in REOs to rentals. The problem is scalability.
5) 60% of underwater homeowners are current on their mortgages. Any sort of mass refinancing / mass principal cramdown for delinquent borrowers will also contain a massive moral hazard problem. Also, different treatment – the homeowner with a FHA loan gets relief, while the guy who’s mortgage went the private label route gets nothing.
6) There are a few leaders in Washington who get it, but most don’t. The appetite is still for slowing the foreclosure pipeline (in spite of volumes of evidence that it doesn’t do a thing to slow price depreciation – in fact it makes it worse).
7) Democrats want mass principal cramdowns and refis in spite of the fact that it would be an economic drag. It is simply a 1:1 transfer of wealth from investors to borrowers, so there is no multiplier effect, and the additional regulatory risk would drive mortgage rates higher. CSFB has conducted studies showing it is the affordability of the mortgage payment that matters, not the borrower’s equity position.
8) Question of the day: “Congressman, has anyone in Washington thought about just letting the markets clear?”  (The only thing that brought out laughter from the audience all day)
One observation I would make is that we want first time homebuyers, not necessarily hedge funds, to be buying up the excess supply. Yet closing times and down payment requirements for short sales drive many first time homebuyers away. I don’t know if it is because of regulatory reasons. If it is, Washington and the states should figure out a way to streamline the process.
In economic data, existing home sales comes out at 10:00.
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