All Things in Moderation

Vital Statistics:

Markets are a little stronger this morning on stronger German economic reports. US bond futures are down, while MBS are flat. Feb retail sales were in line with expectations, up 1.1%.

The National Mortgage Settlement will offer relief to underwater homeowners and those who were improperly foreclosed upon. Read the details about who will qualify here. The banks will get varying credit against the settlement based on the sort of principal forgiveness they do. They get full credit if they own the loan, and 45 cents if they service the loan. So the banks get credit against their settlement by passing losses to someone else? Why wouldn’t they pass off all of the settlement to investors in paper they service? Investors in MBS have to be seething right now.

CNBC has some data on the rental market and the purchase market, noting that prices are going in opposite directions in some localities. They note FHFA’s pilot program to turn REO properties into rentals. It will be interesting to see if the program works. My initial take on it was that FHFA was trying very hard to make the program uninteresting to pure financial investors.

The Fed will be releasing the latest stress-test results this week. Bloomberg notes that the Street is leaning negative, with the skew between puts and calls on the XLF the highest they have been since 2007. In plain English, that means that puts (or bets that the index will fall) are in more demand than calls (bets that the index will rise).

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Vital Statistics:

Markets are weaker this morning on the back of a disappointing report on Chinese exports and lower commodity prices. Oil is down a buck and a half, while bonds and mortgage backed securities are a touch higher.

Euro credit default swaps are higher this morning after ISDA declared the Greek exchange offer a “credit event.” The next event in Greece will be the auction on Mar 19, which will set the payout price for the bonds. Since most holders tendered their bonds, it will be a low volume event which opens the door for manipulation.

With the Greece resolution in place, market participants will begin to focus on the next problem child, widely believed to be Portugal. Portuguese yields are 13.7%. That said, EURIBOR / OIS (a measure of stress in the banking system) has been tightening steadily since the beginning of the year, and is trading at 54 basis points after peaking at 100 basis points in Dec.

Pacific Capital Bancorp is being bought by Mitsubishi UFJ Financial, which is the first bank deal in what seems like forever.

The king of data miners, Thomas (Flathead) Friedman has a column discussing the negative relationship between test scores and the percentage of GDP a country earns from natural resource extraction. In other words, if you don’t have a lot of natural resources (Taiwan, Japan), your students tend to do well, as opposed to, say, Saudi Arabia or Kuwait.  Columns like this always remind me of those “Vegas killer” betting systems you see advertised in fantasy football magazines in the late summer (always take the dog on Monday night, when the game is on artificial turf, and the NFC team won the Sunday night game…).  Correlation does not imply causation. Will our test scores go up if we stopped oil production in the US?  Of course not.

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Vital Statistics:

Limited numbers out this morning. ADP employment, a precursor to the monthly employment data due out on Friday, came out on the screws (insider lingo for “as expected”) at +216K, with some minor upwards revision, +3k, to last months number. Non-farm productivity came in slightly higher than expected at .9%, and Unit Labor Costs significantly higher, at 2.8%, up from 1.2% from last week.

Greece remains a focus, as we wait for private bondholders to decide whether to accept the negotiated deal. The deadline to respond is tomorrow, but still no confirmation on when the results will be conveyed publicly. It will be interesting to see the implications for credit default swaps written on Greek debt if some of the bondholders are forced into the the agreement. Does this constitute a “credit event” triggering CDS payouts? ISDA (the International Swap Dealers Association) has said no, but also says that the situation is “evolving”. We shall see.

Equities are slightly up this morning across the globe, after yesterday’s drop down. Rates remain mostly stable after a significant rally yesterday, particularly in the longer end.

GM and Chrysler have announced plans to market LNG pickup trucks.  The current cost of NG per BTU is eight times cheaper than oil. – Mark 

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Vital Statistics:

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.

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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.

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