All Things in Moderation

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

The upcoming week is relatively data-light, with inflation data as the only potential market-moving numbers.

Janet Yellen said that if Congress passes the stimulus bill, the economy will return to full employment by 2022. “There’s absolutely no reason why we should suffer through a long slow recovery,” Yellen said during an interview on CNN’s “State of the Union.” “I would expect that if this package is passed that we would get back to full employment next year.” These comments have bond yields rising. The Fed’s December projection has unemployment falling to 4.2%, so I guess you could call that full employment.

FWIW, I guess this is conceivable, but something like one third of small businesses have failed during this pandemic. I don’t know that we have seen anything like that since the Great Depression, and I suspect it will take longer than a year or two to repair that damage. Most of these small business failures were retail, bars and restaurants. Their failures are then transmitted upwards to their commercial real estate landlords. But, remember Yellen is no longer a civilian, she is part of the Biden Administration, so she is talking her political book. It is part of the job description, and you should take her pronouncements with a grain of salt.

The pandemic has hit the hotel sector hard, so hard that many buildings can be bought at deep discounts and then re-purposed into affordable housing. “Apartments around here, you might pay $120,000 a door, and we can purchase these hotels probably $30,000 to $40,000 a door, and maybe put $10,000 a door into the renovations.”

Democrats are mulling a $15,000 tax credit for first time homebuyers in an attempt to mitigate the affordability crisis caused by soaring home values. The fly in the ointment is the left wants to raise the tax rate on long-term capital gains. Since Democrats are going to use the reconciliation process to push through the stimulus bill (thus passing it without Republican votes) it might not matter, but it also does not allow for any D defections.

Ultimately the issue in the housing market is one of supply, not demand. Adding a tax credit will probably just push prices higher. More homebuilding is the need, not housing subsidies. But that is a harder issue since zoning is a local issue, and there are major internecine wars there with the Democrats. Building in the suburbs will be easier, but single family builders are still struggling with high input prices (lumber especially) and a shortage of skilled construction labor.

Merger mania in the mortgage space. Guaranteed Rate just bought Owning Corp, a direct-to-consumer lender in California. Note that Guaranteed Rate just bought Stearns lending as well, so the big players are bulking up for what might be the mother of all price wars down the line.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

The January jobs report showed that the economy added 49,000 jobs. The unemployment rate came in at 6.3%, while average hourly earnings increased 5.4% YOY. The increase in wages is certainly good news, however there still might be COVID noise in those numbers. The labor force participation rate slipped 0.1% to 61.4%.

Corelogic agreed to a buyout deal after a long sales process. The company is being bough by Stone Point Capital. Stone Point also owns Home Point.

United Wholesale reported origination of $54.7 billion in the fourth quarter, which was an increase of 71% compared to the fourth quarter of 2019. Gain on sale margin increased to 305 basis points.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down small.

Initial Jobless Claims fell to 779,000 last week. While the numbers are going in the right direction, we are still super-elevated, and above the days of the Great Recession.

Announced job cuts rose to 79,552 in January, according to outplacement firm Challenger, Gray and Christmas. “While cuts were higher than average last month, we are seeing a leveling off of announcements, which may bode well for recovery in the coming months. Companies may be reassessing their staffing levels and waiting on the impact of the relief bill before making any additional workforce decisions,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Productivity fell 4.8% in the fourth quarter as output increased 5.3% and hours worked increased 10.7%. Unit labor costs increased 6.8% driven by a 1.7% increase in compensation and the 4.8% decline in productivity. Unit Labor Costs have been rising steadily for the past year, although I wonder if COVID is introducing some statistical noise here. Note that manufacturing productivity is up, so this is a service sector phenomenon.

Janet Yellen has summoned regulators to discuss stock market volatility and the Gamestop phenomenon. This is similar to the pools that were operating 100 years ago, except the floor traders aren’t in on it any more (since they don’t exist). If you read Reminiscences of a Stock Operator you will read about a similar phenomenon. By the way, IMO Reminiscences is THE treatise on momentum trading (though he didn’t call it that).

I am not sure what regulators can do about this situation. Ultimately, you don’t have big, controllable institutions behind it, and the market-maker adult supervision of the markets disappeared a long time ago. NYSE floor specialists don’t control the flow any more, and NASDAQ market-makers have been eliminated as trading commissions are so low that it doesn’t make sense to take risk any more. The Gamestop situation may simply be nothing more than the unintended consequence of lowering transaction costs to the floor.

Zillow has a report out on suburban versus urban housing markets. The punch line:

• Suburban homes sold faster than urban homes by the end of 2020, but home value growth, sales volume and Zillow web traffic in urban areas has kept pace with or exceeded levels in suburban areas.
• Urban home value growth outperformed the suburbs in much of the Midwest, where homes are typically less expensive near city centers. In some of the most-expensive markets, including New York and San Francisco, urban housing demand softened relative to the surrounding suburbs. 
• Urban rent growth fell behind growth in the suburbs in 2020, but Zillow expects urban rents to quickly recover as the pandemic subsides.

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Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

The ADP Employment Report said that 174,000 jobs were created in January, which was above expectations. While the typical categories of professional services and healthcare added jobs, leisure and hospitality added 35,000 positions as well, which are desperately needed. “The labor market continues its slow recovery amid COVID-19 headwinds,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Although job losses were previously concentrated among small and midsized businesses, we are now seeing signs of the prolonged impact of the pandemic on large companies as well.”

Mortgage applications increased by 8.1% last week, according to the MBA. Refis increased by 10% while purchases were more or less flat. “After increasing for three consecutive weeks, the 30-year fixed mortgage rate dropped 3 basis points to 2.92 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates.”

The homeownership rate increased 0.7% year-over-year to 65.8%, however it slipped compared to the third quarter of 2020. Rental vacancy rates were more or less unchanged at 6.4%. The huge jump in the homeownership rate during the second and third quarters is strange, and I am not sure what caused that.

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Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

The number of loans in forbearance was unchanged at 5.38%, according to the MBA. “While new forbearance requests dropped slightly, the rate of exits from forbearance was at the slowest pace since MBA began tracking exit data last summer,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Overall, the forbearance numbers have been little changed over the past few months. Homeowners still in forbearance are likely facing ongoing challenges with lost jobs, lost income and other impacts from the pandemic.”

The CFPB is going after servicers who they claim gave borrowers “inaccurate and incomplete information” about forbearance. The agency alleges that some servicers continued to collect late fees and sent notices about the loan being past due.

Home prices increased 9.2% in December, according to CoreLogic. “Two record lows are fueling home price gains: for-sale inventory and mortgage rates. Prospective sellers with flexible timetables have opted to delay listing their home until the pandemic fades or they are vaccinated. We can expect more inventory to come available in the second half of the year, leading to slowing in price growth toward year-end.” Inventory is 24% lower on average compared to 2019.

The Congressional Budget Office sees a rapid economic recovery in 2021, with GDP growth around 3.7%. Unemployment is expected to fall to 5.3% this year and return to 4% between sometime in the 2024-2025 timeframe. This is a change from their expectation over the summer that the pandemic would lop about $7.9 trillion off of GDP over the next decade. The CBO attributes this change of heart to the vaccine, but I don’t think that is what is going on. There is a persistent partisan bias to Fed projections as well as CBO projections. The Fed consistently overshot GDP projections during the Obama admin and then consistently undershot GDP projections during Trump. The CBO’s change of heart is just more of the same. It is just partisan wishful thinking. The elephant in the room is still the government-engineered sovereign debt bubble, and nobody has a clue how that ends.

The manufacturing economy continued to recover in January, according to the ISM Survey. The persistent message in the survey is shortages. Every commodity is in short supply, while skilled labor is hard to find. We saw similar sentiments expressed by logistics REIT Prologis in its fourth quarter earnings call. It says that inventory to sales ratios are at record lows, and the COVID-19 pandemic highlighted the risks of operating with too little inventory. The big question regarding these shortages concerns inflation. I think most people are seeing inflation at the supermarket, and we will see what is happening with wage growth this Friday. Is this increase in inflationary pressures nothing more than a temporary COVID-19 related phenomenon or something more permanent?

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are flat.

The upcoming week will have some important economic data at the back end, with the jobs report, the ISM numbers, and productivity. We will also have a lot of Fed-speak.

Mortgage Servicers are going to be a target for the CFPB. In an email to staff, the new acting director laid out the priorities for the CFPB and intends to reverse the changes that Mick Mulvaney made. The email laid out the various issues that it found last year

• Mortgage servicers gave consumers incomplete and inaccurate information about CARES Act forbearances, failed to process forbearance requests, and collected and assessed late fees despite having approved forbearances.
• Servicers withdrew money even though consumers were in deferment.
• One student loan servicer denied thousands of forbearance extensions because the loan holder never responded.
• Companies across markets misreported accounts to credit bureaus and violated CARES Act amendments that added protections to the Fair Credit Reporting Act.
• Some banks set off stimulus payments and unemployment insurance benefits in order to cover bank fees and other debts.
• Examiners found that the widely used policy of banks only taking PPP applications from pre-existing customers may have a disproportionate negative impact on minority-owned businesses.

There will be a big focus on fair lending as well. The agency is going to rescind the letters put out by Mick Mulvaney and reverse all the changes me made. The CFPB is going to return to the bad old days of regulation by enforcement action. Be prepared.

I expect the net result of this will be a decrease in mortgage credit at the low end of the FICO curve. VA IRRRLs are going to decrease, and I think banks will continue to avoid FHA like the plague. Bottom line, the regulators will look at the amount of money the industry made last year and they want a cut. Keep your heads down.

The G-Stonk (Gamestop, for those not familiar) saga seems to be winding up, although I think they aren’t squeezing hedge funds any more. While Robinhood is no longer accepting buy orders, this only mirrors what the institutions have done. Prime Brokers are demanding 100% margin on the long side and 300% margin on the short side. Margin calls are rough sledding on the long side, but on the short side they are 1000% worse. When you are short, your position size increases the more wrong you are, and the amount of margin your prime broker requires increases exponentially. And since the prime broker has to cover the losses if the hedge fund defaults, they aren’t going to let the position get out of hand. I suspect the hedgies are long gone, and this is nothing more than a game of greater fool with a bunch of Redditors. Why Gamestop has not taken advantage of this to do a secondary share offering and retire debt is beyond me.

Supposedly, the next target is silver. I think these folks are about to find out that the futures exchanges have a completely different set of rules than stock exchanges, with position limits, trading limits, and variance margin. Not only that, the silver market has seen this movie before.

What to make of all of this? IMO, this is nothing more than “fin de bull market” behavior. When bull markets get long in the tooth, they get harder and harder to trade, as the crappiest stocks tend to rally the most, while pockets of value are ignored.

For those that are old enough to remember, in the late 1990s, you would find ads for stock split beepers in the back of Barron’s. These were pagers which would send an alert that a stock split had been announced, and to get in the name. Stock splits are not value-enhancing events; they increase the shares outstanding, and the stock price generally falls in proportion. Instead of owning 100 shares of a $20 stock, you now own 200 shares of a $10 stock. Does it make the company worth more? Of course not. But, in the late 90s, a stock split, or a company changing its name from Zapata to Zap.com could get a stock moving.

I remember monitoring the IRC chatrooms to see if the daytraders were moving a name I was involved in. Most of the time it was garbage names that did a moon-shot and then fell back to earth. This is no different. This feels like late nineties silliness, when CNBC replaced ESPN in the barber shops, and retail investors poured money into garbage names like CMGI and Ask Jeeves.

This is end result of “too much money chasing too few investments” courtesy of the Fed. The drop-dead date is when the Fed takes the punch bowl away, which is probably a year away at least. That said, it could easily end sooner. One of the best investors of all time is George Soros, and he made the most money in these situations, not fading the crowd, but riding along with it. If you are a buy-and hold investor, don’t try and time it; just keep doing what you are doing.

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

The Fed made no changes to monetary policy in its January meeting. The Fed will continue to increase the size of its balance sheet until “substantial further progress” has been made towards the Fed’s price and employment goals. They included the language that inflation must exceed 2% and be on track to exceed that number for some time. This is a signal to the markets that the Fed is not going to pre-emptively raise rates once we start getting inflationary signals.

The other thing to keep in mind is that the Fed has apparently learned from the 2013 “taper tantrum” and will not move as fast as they did back then. I suspect the Fed will gradually reduce the amount of MBS and Treasuries they buy, from, say $80 billion a month to $60 billion, and work their way down. Then they will re-invest maturing principal back into the MBS market. The punch line is that the economy has suffered a tremendous shock, and the Fed is going to go slow. This means rates are goin nowhere for a while. I think fears of a big increase in rates in the back half of 2021 are probably overblown. While there is definitely some inflation out there (food and housing) the Fed is going to ignore it until the unemployment rate is around 4%.

Fourth quarter GDP came in at 4%, a touch below expectations. Personal Consumption Expenditures rose 2.5%, again below expectations. You can see just how dramatically COVID-19 hit the economy by comparing the size of the Q2 and Q3 spikes compared to historical growth rates. For the fully year 2020, GDP decreased 3.5%.

Initial Jobless Claims fell to 847k last week. We were sitting around 200k per week pre-COVID, so we still have a lot of wood to chop to get back to normalcy.

New Home Sales rose to a seasonally adjusted annual rate of 842,000 in December, according to Census. This is up 1.6% from November, and 15% above December 2019 numbers. The median sales price rose 8% to $356K.

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Vital Statistics:

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

The FOMC decision will be released at 2:00 pm today. I don’t think there will be anything market-moving in the language, but just be aware.

Mortgage applications fell 4.1% last week as purchases fell 5% and refis fell 4%. “In a sign that borrowers are increasingly more sensitive to higher rates, large declines in government purchase applications and refinance applications pulled overall activity lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index has now declined for two straight weeks, but is still 83 percent higher than last year. Purchase applications also decreased last week, but the impressive trend of year-over-year growth since the second half of 2020 has continued in early 2021. Activity was up 16 percent from a year ago, and the average purchase loan amount hit another record high of $395,200.”

The 10 year bond sold off after the results of the Georgia Senate runoff. I suspect it might have been overdone, and given Schumer’s talk of a stimulus not happening until March (Congress has bigger fish to fry, apparently), bond yields will probably work their way lower.

Durable Goods orders rose 0.2% in December, well below expectations. However, if you strip out transportation, it rose 0.7%. Core capital goods (a proxy for business capital expenditures) rose 0.6%

The FHA extended its foreclosure moratorium until March 31.

Homebuilder D.R. Horton reported fourth quarter earnings which rose 84% on a year-over-year basis. Sales were up 56% in units and 62% in dollar value to $6.4 billion. COVID-19 has increased demand for single family residences, and the work-from-home option has increased the viability of distant exurbs. The US economy should be buoyed by housing construction, although the big question is whether it will be enough to offset the devastation of small business from government-imposed COVID lockdowns.

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Vital Statistics:

Stocks are slightly higher on no real news. Bonds and MBS are up small.

The FOMC begins its two-day meeting today. The announcement is scheduled for 2:00 pm tomorrow.

Chuck Schumer said that negotiations for the stimulus may take a while. He is aiming for mid-March, when extended unemployment begins to run out. Meanwhile, the priority seems to be impeaching a guy who is no longer in office.

With stimulus looking further away, and Schumer signaling that negotiations should be tough, I wouldn’t be surprised to see bond yields drift lower. Bond markets are a global phenomenon, and while the US bond yield has been drifting upward, the German Bund (which is a proxy for Europe) has been stuck in a very narrow band around -0.54%.

Home prices rose 11% in November, according to the FHFA House Price Index. “House prices have risen by at least one percent for six consecutive months,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The acceleration has been slowing but annual gains now outpace the prior housing boom. Current conditions can be explained by fundamentals, including low rates and tight housing supply, which have been intensified by the pandemic.”

The Case-Shiller Home price index reported a smaller nationwide gain of about 9%. The difference is explained by the indices. FHFA only looks at loans which are guaranteed by the US government, so it excludes jumbos and distressed. Affordable homes are in the most demand, and that is where we are seeing the biggest price increases.

The FHFA announced that it will limit cash window purchases for mortgage banks to $1.5 billion per year in order to ensure that smaller banks continue to get access.

The letter agreements codify FHFA conservatorship directives that require the GSEs to purchase loans for cash consideration, and to operate this cash window with non-discriminatory pricing. Additionally, to ensure that the cash window is for the benefit of community lenders, each GSE will limit volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters.

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Vital Statistics:

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are up.

We have a big week of data coming up, along with the FOMC meeting. In terms of data, we will get home prices tomorrow, the FOMC decision on Wednesday, fourth quarter GDP on Thursday, and personal incomes / spending on Friday. The Fed meeting should be uneventful given Jerome Powell’s “now is not the time” language, referring to scaling back bond purchases.

Existing Home Sales rose 0.7% in December to a seasonally-adjusted annual rate of 5.64 million, according to the National Association of Realtors. This is the fastest pace since 2006. “Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic,” said Lawrence Yun, NAR’s chief economist. “What’s even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market.” I think Yun is right there – all signs point to an exceptionally strong Spring Selling Season, which is right around the corner. FWIW, NAR sees mortgage rates hovering around 3% in 2021, which is low enough for the refinance party to continue.

Total inventory fell to 1.07 million units, which is a 23% drop from a year ago, and represents under a two month supply of homes. This is the lowest amount since 1982, when NAR first started compiling these statistics. Tight inventory means higher prices, and the median home price was up 13% YOY to $309,800. With home prices rising affordability remains a concern, and I think the Fed is going to take that into account and hold down rates as long as it can.

Housing starts are rising, which should help alleviate the shortage, however it will take a couple years at least to get back to some semblance of balance. Housing construction should be great for the economy, and we could be looking at some strong performance between the stimulus and housing once the COVID crisis is out of the way. That said, one in three small businesses have shut over the past year, and that will be a drag.

The mortgage IPOs keep coming. United Wholesale completed its merger with a SPAC, and now Home Point is filing to go public. Loan Depot is another candidate.

The regulatory state is mulling whether to extend the Community Reinvestment Act to non-banks.

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