All Things in Moderation

Vital Statistics:

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Vital Statistics:

Slow news day.

Equity futures are lower on the back of Friday’s lousy employment report. Bonds and MBS are rallying, with the 10-year again flirting with a 2% yield. European markets are closed for the Easter holiday, so volumes will be light.

Friday’s employment report showed an increase in 120,000 private sector jobs and a drop in the unemployment rate to 8.2%. The reason for the drop in unemployment was due to a drop in the labor force participation rate, which has fallen from 64% to 63.8% since December. These are the 99-ers who have exhausted their unemployment benefits and no longer count as part of the labor force.

Alcoa kicks off Q1 reporting season tomorrow after the close.

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Vital Statistics:

Almost all markets are closed today except for the USD fixed income market, so all Vital Statistics numbers are actually from yesterday’s close, except for the the 10y treasury yield.

Labor statistics came out this morning at 8:30. Change in non-farm payrolls came in at a very disappointing 120k (205k expected) with only a minor revision upward for last month, up 13k to 240k. Manufacturing jobs were up 37k, higher than expected (20k), and the unemployment rate fell again to 8.2% from last month’s 8.3%. But overall the numbers were very disappointing, which was reflected in the reaction of the only market open for trading.

Interesting price action on the treasuries right before today’s employment data came out. After closing yesterday at a yield of around 2.17%, the 10yr note hit 2.24% about 2 minutes before the numbers were released, and then with the disappointing employment data, the market rallied tremendously, and is now at 2.05%. The markets are somewhat illiquid with Europe on holiday and even a lot of the US market taking Good Friday off, so that can explain some of the large movement. Not a lot of people around to cover the large amount of buying after the number. But still the market seems to be hoping for, and betting on, some form of QE III, despite the minutes from last month’s Fed meeting ostensibly quelling that possibilty.

Futures markets close in about 5 minutes (11:15 EST) and the bonds will close by 1pm. So the day is pretty much over now. Europe is closed on Monday as well, so it will be interesting to see how the Euroean markets react on Tuesday to the violent move in US after a 4 day layoff. But Sunday night in Asia and then Monday morning should give us some idea if this rally is a bit overdone or if the market really is intent on seeing sub 2.00% yields again on the 10yr.

Happy Easter and Happy Passover to all who celebrate those things. To the rest…it’s looking like golfing weather is finally here.

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Vital Statistics:

Markets are continuing their sell-off that started after the Fed released the minutes of their last FOMC meeting. The message:  The economy has to weaken for the Fed to consider another round of quantitative easing. Ironically, the FOMC statement noted more strength in the economy, but the markets are selling off.

A lousy Spanish bond auction has people wringing their hands over Europe again. Euro sovereign spreads are wider across the board, and Greek spreads continue to widen. Post restructuring, the Greek 10 year yield bottomed at 18% two weeks ago. It is now 22%. The ECB also kept rates unchanged at their meeting today and forecast the eurozone economy will shrink .3% this year. The ECB is in a pickle as inflation is becoming a risk in Germany while deflation is a risk in the South.

ADP released their March National Employment Report, suggesting nonfarm private employment increased by 209,000 in March. After declining for 4 years, we are seeing modest growth in construction and finance.

Steven Davidoff (The Deal Professor) lambastes the JOBS act. The punch line: Decimalization could explain why small IPOs are lagging as much as inability to access VC funds. Essentially, Congress is clueless about the financial markets (true) and legislates to the political winds (true). The reason why this bill got pushed through is so that Washington can have the appearance of “doing something” about jobs in the US. The unintended consequence is that it makes it easier for a dodgy company to raise capital, and if we have a couple of Sino Forests on our hands, multiples could contract across the market.

The WSJ has a story discussing how much credit has tightened. Loans closed in February had an average FICO of 750 and LTC of 76%. The average denied loan had a FICO of 699 and LTV of 83. 699.  83.  Denied. They go on to say that even as credit conditions ease in the greater economy, credit conditions in residential mortgages are still getting tighter. Of course, this is one of the side effects of abnormally low interest rates – as a lender, you are almost guaranteed to lose money lending for 30 years at 3.75%. Unintended consequences rear their ugly head again.

Is your local savings bank becoming a credit union? If it is, perhaps it is due to the new regulatory environment. As the OTS gives way to the OCC, many smaller banks are opting to become credit unions or state regulated.

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Vital Statistics:

Equity markets are slightly lower this morning on no major news. Bonds are up half a point and MBS are up about 1/4 of a point. After spiking to 2.38%, the 10 year bond has been slowly rallying, with yields back to 2.16%.

Regulators are trying to figure out how to apply some of the terms of the landmark $25 billion settlement to other financial firms. Iowa AG Patrick Madigan fires a shot across the bow of servicers: “Loan servicing has been a mess for the past four of rive years. Reforming that industry is very important and very challenging.” He goes on further to say that it isn’t only the servicer / borrower relationship that he is focused on, it is also the servicer / MBS investor. Of course this helps explain why you can’t give away MSRs right now. Regulators are going after another 8 banks – SunTrust, US Bancorp, PNC, EverBank, GOldman, OneWest, MetLife, and HSBC.

The $25 billion settlement included a foreclosure moratorium which kept a lot of property off the market. They are about to be released, and RealtyTrac estimates that prices could drop as much as 10 percent. Moody’s estimates sales of REO will probably rise 25% this year. A lot of these properties could be 100% losses. Interesting statistic from the Federal Reserve Bank of Cleveland:  Foreclosures held less than a year lose about 35%.  After two years, the loss is close to 60%.

The NYT has yet another piece on institutional investors buying REOs and turning them into rentals.

The markets will be looking to the release of the FOMC meeting minutes for more clues into QEIII and what replaces Operation Twist. They should be released around 2:00 – 2:15 EST.

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Vital Statistics:

Stocks are flattish this morning on no real news in the US. Bonds and mortgages are up slightly. Construction Spending and ISM reports are out at 10:00 this morning. There was some disappointing economic data out of Europe – Eurozone unemployment was 10.8%, which suggests Europe is in a recession. France, Germany, and Italy Purchasing Managers Indices all came in below 50, indicating manufacturing conditions are in a decline. The Japanese Tankan survey was disappointing as well.

The Washington Post had a long article about rentals over the weekend. Big investors are using proprietary algos to analyze and manage rental properties. Oaktree, Carrington, Starwood, Apollo, and Zell are getting into this business. Private equity fund Waypoint reported a return of 8% to 9% in Q4 buying foreclosed properties and renting them. Interesting. RTWT.

Bill Gross’s Total Return Fund gained 2.83% in Q1, outperforming the benchmark by 2 percentage points on an aggressive bet on mortgages. He increased the mortgage exposures from 38% in September to 52% at the end of February. This is a bet on either (a) QEIII or (b) The fed replacing Operation Twist with a more aggressive stance on mortgage purchases. In other words, mortgage rates have been pushed lower by two big behemoths – PIMCO and the Fed – aggressively buying mortgage backed securities. If the Fed doesn’t provide an exit for Bill (either by not doing QEIII or not replacing Operation Twist with a mortgage support program), then mortgage rates could back up in a hurry. Something for lock desks to think about..

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Vital Statistics:

Markets are higher this morning on no major news except for the increase in the European firewall. There is probably an element of end-of-the-quarter window dressing to it as well.

Personal Income came in +.2%, lower than expectations, while Personal Spending increased .8% higher than expectations. Inflation data came in as expected. Overall, no reaction in the futures. Chicago Purchasing Manager, Michigan confidence, NAPM, and some revisions are coming out later this morning.

The NYT notes that Moody’s may lower the credit ratings for B of A, Citigroup, and Morgan Stanley in mid-May. The side effect of this downgrade would be to kill their derivatives businesses, as the lower rating will force them to put up much more collateral against their derivatives books, and force many large buy-side clients to trade elsewhere. This could be the impetus to turn Citi and B of A back into plain old commercial  banks.

Goldman is raising money for a new fund to buy distressed home loan bonds without government backing. The documents state this is a bet on improving fundamentals in U.S. housing. The story also goes on to say that Goldman bid on mortgage bonds from AIG in a Feb 8 auction, and decided to hold the merchandise instead of selling it. Most of these bonds are trading in the 50s. Non-agency MBS have done well this year as credit conditions have eased – enough that some funds are paring their bets.

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Vital Statistics:

Markets are weaker as S&P warns that Greece may have to restructure its debt again and a disappointing report from H&M. Best Buy reported better-than-expected earnings this morning and will close 50 stores.

The third revision to 4Q GDP was released this morning, unchanged from the 2nd revision at 3%.  Initial Jobless claims were slightly higher than expected at 359,000. Bloomberg Consumer Comfort and Kansas City Fed come out later this morning.

Bill Gross of PIMCO told Bloomberg that the Fed will probably concentrate on supporting MBS once Operation Twist ends in June. He referred to a “sterilized twist” where the Fed would buy current coupon MBS and simultaneously repo out the Treasuries. This would cause MBS spreads to tighten. So even if the sell off in Treasuries continues, mortgage rate may not rise as rapidly.

Bloomberg had a good interview with FHFA Acting Director Ed DeMarco regarding principal forgiveness on underwater homeowners. It certainly does not appear that a mass taxpayer-funded principal forgiveness, (or cramdown for investors) is in the cards. FHFA prefers to mod interest and term first in order to make an affordable payment. If they cut the principal and the house increases in value, the borrower gets all of the benefit. If they don’t cut the principal, then taxpayers share in that upside. Ed has been a pinata to the Left who want mass cramdowns.

American borrowers fear the Repo Man over everyone else, at least according to a TransUnion survey cited in the Washington Post. It used to be that the mortgage payment was the first priority, but with foreclosure pipelines so elongated, the car loan now takes priority.

Dealbook has been the go-to place for all things MF Global. Yesterday, regulators held a hearing with several top executives of MF, who took the Fifth. The CFO has apparently offered a proffer statement, which means he is negotiating to talk.

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Vital Statistics:

Markets are flattish after Durable Goods orders, which came in below expectations. February Durable Goods came in at 2.2% vs 3% expectations. Bonds and mortgages are off slightly. June 10-year bond futures are trading at 138 after bouncing off a low of 135-05 last week. Mortgage applications also fell 2.7% for the week ending Mar 23 as the backup in mortgage rates hurt refinancings.

The American Bankers Association released its Real Estate Lending Survey yesterday. The survey of 185 respondents, of which the vast majority are small community banks, said that lending conditions at the end of 2011 are about the same as they were at the end of 2010, with regulatory uncertainty as the main concern. The average delinquency rate fell slightly over 2011.

Is Mark Zandi becoming the Abby Joseph Cohen of real estate and the economy? Seems so. The Washington Post locates a pocket of optimism in real estate, citing Zandi and some Northern Virginia Realtor. Washington DC real estate inhabits a world of its own, so I don’t think it necessarily applies nationwide.

Redwood Trust did another jumbo securitization yesterday, more evidence that the private label market is returning.

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