Morning Report: Commodities continue to fall 12/8/15

Posted on December 8, 2015 by Brent Nyitray

Stocks are lower this morning as commodity prices continue their downward spiral off of weak economic news out of China. Bonds and MBS are up.

Job openings fell in October to 5.4 million from 5.5 million. Note that payrolls increased by a lot in October (almost 300k), so that drop makes some sense.

The NFIB Small Business Optimism Index fell to 94.8 from 96.1 last month. Small business wants to hire and expand, but is finding it difficult to hire qualified workers. Small business also intends to increase capital expenditures, which have been deferred since the Great Recession.

The IBD/TIPP Economic Optimism index increased in December to 47.2 from 45.5. As a general rule, the indices tend to inverse gasoline price indices. When gas prices fall, people are generally more upbeat.

Oil continues its downward spiral. If you look at the chart below, you can see how oil has traded since 2007. We are approaching the 2008 lows in oil right now. Note that oil has its own dynamic, particularly with Iran, who will be adding about 3.8 million barrels of oil per day. The problems in the oil patch are creating problems for the banks, as oil is trading at 37 bucks a barrel and it costs something like $40 – $45 to get it out of the ground.

The story is more than oil, however. Commodities are down across the board, from the softs like coffee to the industrial metals like copper. This is the canary in the coal mine for global demand. The ISM data indicates manufacturing is going through a soft spot, if not a recession. If you look at the Commodity Research Bureau commodity index, you can see we are well below the lows of 2008 and are approaching the lows of 2002.

So if global demand is falling, and inflation is nonexistent, why is the Fed going to raise rates next week? At the end of the day, the Fed has more or less painted itself in a corner, and will have to move for credibility’s sake. They have telegraphed this move so much that they have to follow through. The punch line is that the Fed may hike the Fed Funds rate next week and mortgage rates might not move much, if at all.

In spite of all the carnage in the commodity markets, there is one that is holding up better than most: lumber. And that speaks to future demand for construction. Note that in last Friday’s jobs report, construction employment increased again. Next year could be the beginning of the return of housing construction, hopefully.

Speaking of homebuilders, McMansion builder Toll Brothers reported earnings this morning, and beat on the top line while missing on the bottom line. Net signed contracts increased 29% in dollars and 12% in units. ASPs increased 4.4% to $790k.

Foreclosures continue to fall, according to CoreLogic. Completed foreclosures fell 27% YOY to 27k in October. There are 463,000 homes in some state of foreclosure, which is the lowest level since November 2007.

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Morning Report: Larry Summers urges the Fed to go slow in hiking rates 12/7/15

Posted on December 7, 2015 by Brent Nyitray

Stocks are lower as oil continues to drop. Bonds and MBS are down small.

The week after the jobs report tends to be data-light and this week is no exception. The highlight will be retail sales on Friday. Other than that, expect markets to be dull as traders position for the FOMC meeting next week.

The Labor Market Conditions Index fell to 0.5 from 2.2 in November, according to the Fed. This index is a meta-index of 19 different variables.

The latest Black Knight Mortgage Monitor is out, and they take a look at the high LTV loan universe. FHA has become the go-to high LTV loan product, and they high LTV loans account for 77% of FHA / VA origination. Fannie and Freddie did about 1% in high LTV loans. Home Price appreciation continued in September, with their proprietary home price index up 5.5% on a year-over-year basis.

Larry Summers makes the case that the Fed should go slow with raising interest rates. His main point: that the “neutral interest rate” has been declining and will continue to decline due to the changing allocation of savings versus consumption tilts more towards savings. (More savings = more demand for bonds, which pushes bond yields lower). Of course this argument focuses primarily on the baby boomers, who are retiring and ignores the millennials, which are bigger and will enter the workforce (and spend) over the next decade or so. He makes another point: some of the economic indicators are pointing towards a slowdown, and we don’t want to have monetary policy acting as a drag on an economy that is already weakening. FWIW, I think the body language out of the Fed is that they will take it slow, and I cannot see how an extra 25 or 50 basis points on the Fed Funds rate is going to be that material of a drag on the US economy. In reality, a sub-1% Fed Fund rate is still incredibly accomodative.

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College Football Playoffs and the remaining good bowl games

Posted on December 6, 2015 by markinaustin

Such interesting possibilities.  Stoopes and the Land Thieves are 3-0 against ‘Bama, and Austin native Baker Mayfield is lighting it up at QB for the Sooners.  However, Brent Venables, who for a decade under Stoopes was the defensive guru of the Big 12, is now at Clemson.  Stoopes dumped Venables so that he could hire his brother, Mike Stoopes, who had been fired from his HC job.  Mike is a downgrade from Venables.

Michigan State was consistently the best coached defense in the nation under Dantonio and Narduzzi, but Narduzzi is now deservedly a HC on his own.  Nevertheless, MSU has not forgotten how to defend.  Twist for the ‘Bama – MSU game is that Saban used to coach at MSU.

Could ‘Bama grind out a victory against any of the other three?  All of the other three are better than every team that ‘Bama faced, but there are many truly NFL capable studs in the Tide’s lineup. Crucially, I would rate all three of the other starting QBs in the playoffs well ahead of ‘Bama’s Jake Coker.

Could MSU score enough to beat OU or Clemson?  Could either Clemson or OU  score four TDs against the MSU or ‘Bama defenses?

The Playoff Schedule:

No. 1 Clemson faces No. 4 Oklahoma on Dec. 31 in the Orange Bowl.

No. 2 Alabama will face No. 3 Michigan State on Dec. 31 in Jerry World, the Cowboys’ stadium, mislabeled the something Cotton Bowl.

For OU, Arlington TX would have been a home game, so it was a sure thing that OU would be ranked #4, although that ranking is certainly “reasonable”, regardless.

While I would not predict the results of a game between 19 YOs without inside information on injuries, grades, drinking habits, and girl friends, I will guess that styles will produce more TDs in the Arlington game, and that the final will provide a true contrast.  Here is a statistical model, taken without benefit of the “model information” I consider crucial:

Each Team’s Chances Of Winning The College Football Playoff

In the other Bowl games of note, the truly outstanding teams that fell short of the Playoffs will be butting heads.  TCU and ND had so many injuries that they were not the same teams by midseason as they were in early September.  They remained very tough squads, and if they heal before their bowl games, they will be as good to watch as the playoff teams.

Stanford, Ohio State, Iowa, Florida State, UNC, Okie Lite, and Baylor (if it has its first or second string QB back), are all highly competitive teams.  In fact, there was no single dominant team this year, and I am not inclined to believe that Clemson’s record set it apart.   I find ACC competition suspect, below the top three teams.  By contrast, the very competitive PAC has some good multi-loss teams, as does the western half of the SEC.

Only one non-power conference team is worth a mention: Houston.  Not having played even a fruit blender schedule there is no comparable way to measure them.  They do have talent and are very well coached by Herman, however, who was previously OC at tOSU.

So these are the best of the remaining bowl games, but remember when there is nothing on the line, either team may show up or not, depending in part on how much they want to party over Winter Break:

Dec 29
Citrus Bowl NKA as something else
UNC v. Baylor (but one of BU’s two best QBs must return for this or it will not be worth watching)

Dec 31
Peach Bowl
FSU vs UH (classic who wants to be there game)

Jan. 1 –

Fiesta Bowl
Notre Dame vs. Ohio State (injuries for ND and no incentive for tOSU?)
Rose Bowl Game
Stanford v. Iowa (Stanford has a great RB who will set many records)
Sugar Bowl
Oklahoma State vs. Ole Miss

Jan 2 –
Alamo Bowl
Oregon vs. TCU (another injury bowl – but these are exciting teams)

Jan 11 – National Title Game from Glendale, AZ

FWIW, do not bet on these games.  19 YOs, girlfriends, drinking, injuries, passing finals, arrests in New Orleans…you cannot know the outcome.  That is why we watch.

And – GOOD LUCK to Michigan State!

 

 

 

Filed under: Football, fun stuff, Open Thread | 7 Comments »

Jobs report in line; December tightening a go 12/4/15

Posted on December 4, 2015 by Brent Nyitray

Stocks are lower after the jobs report came in as expected, which puts the Fed on track for their first tightening in 9 years in a couple of weeks. Bonds and MBS are up small.

Jobs report data dump:

  • Nonfarm payrolls + 211k vs. 200k expected
  • Unemployment rate 5%, in line with expectations
  • Average Hourly Earnings +0.2% MOM / +2.3% YOY in line
  • Underemployment rate 9.9% vs 9.7% expectations
  • Labor Force Participation rate 62.5% vs. 62.4% expected

The general take on the jobs report is that it is good enough to give the Fed comfort to raise rates in two weeks. Digging in deeper, the increase in jobs were in construction (+46k), professional services (+28k), health care (+24k), restaurants (+23k) and retail (+31k). Mining and IT lost jobs.

Homebuilder Hovnanian reported numbers this morning, Revenues were flat compared to last year, while margins fell as deliveries fell 2% in units. The dollar value of net contracts increased 29%, which bodes well for next year. Backlog is up 30%.

Uber is now valued at $65 billion, which makes it about the 80th biggest company in the S&P 500, and gives it about the same market cap as Danaher. The bubble of the day is in these pre-IPO companies. By the time they actually go public, they are typically overvalued.

Negative equity fell from 16.9% a year ago to 13.4% last quarter, according to Zillow. A normal number is closer to 5%. They have a cool interactive map where you can search by county to see what percentage is underwater.

We are beginning to see some softness at the super-high end of the US residential real estate market. Some of this is undoubtedly driven by foreign demand.

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Morning Report: ECB disappoints, sending bond yields higher 12/3/15

Posted on December 3, 2015 by Brent Nyitray

Stocks are flat after the ECB cut rates again and promised more stimulus. Bonds and MBS are down.

ECB President Mario Draghi announced more quantitative easing and a cut in rates. They maintained their main rate at 0.05% and cut the deposit rate to -.3%. Apparently it wasn’t enough as bond yields are up worldwide.

Janet Yellen will be speaking in front of Congress starting at 10:00 am.

The ISM Non-Manufacturing Index fell from 59.1 to 55.9 in November, coming in well below expectations. Note the ISM Manufacturing Index also missed estimates and came in below 50, which indicates deceleration in the manufacturing sector. The employment sub-index fell, and some business owners are blaming Obamacare for higher costs.

Factory Orders rose 1.5%, a bit better than expectations, while durable goods orders were revised downward to 2.9%. Capital Goods Orders ex-defense and aircraft (a proxy for business capital expenditures) rose 1.3%.

Job cut announcements fell 13.9% to 31,000, according to outplacement firm Challenger, Gray and Christmas. This is the lowest level in over a year.

Initial Jobless Claims rose 9k to 269k. Initial Jobless Claims are still at multi-decade lows, which is amazing when you take into account population growth.

The Bloomberg Consumer Comfort index fell again last week to the lowest level in a year. Consumers are becoming more pessimistic about the economy, with 31% having a positive view and 69% having a negative view. FWIW, November same store sales are coming in this morning from the retailers, and they look to be disappointing.

Bill Gross’s latest investment outlook is out. He is advising clients to gradually de-risk their portfolios during 2016. His thesis is that years of QE have essentially hollowed out real economies as it allows zombie corporations to continue to exist and it punishes savers and insurance companies / pension funds. Of course he is talking his own book to some extent. There is no doubt that the fear of the unintended long-term consequences of ZIRP and QE are coming into play with the Fed’s plan to raise interest rates in the US.

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Morning Report: ADP jobs report comes in stronger than expected 12/2/15

Posted on December 2, 2015 by Brent Nyitray

Markets are flat this morning as labor costs rise. Bonds and MBS are down.

Janet Yellen will be speaking at noon today.

Mortgage applications fell 0.2% last week as purchases rose 7.7% and refis fell 6%. Not bad considering last week had the Thanksgiving holiday.

The ADP employment change came in at 217k, beating Street expectations of 190k. The prior month was revised upward. The forecast for Friday’s payroll number is 200k. If we get a similar payroll number on Friday, a rate hike in two weeks will be looking like a sure thing.

Productivity increased 2.2% in the third quarter and unit labor costs rose to 1.8%. Productivity growth has been slow, and employers are having to add people. We saw something similar in the ISM report yesterday. Employment was the bright spot in an otherwise disappointing report.

The ISM New York Index fell to 60.7 from 65.8.

While auto sales didn’t meet their lofty targets yesterday, they were the best in 14 years. Volkswagen’s US sales dropped 25% however in the wake of the emissions scandal. It looked like sales accelerated through the month as well.

Home prices rose 1.0% month-over-month in October and are up 6.8% year-over-year, according to CoreLogic. They are forecasting prices to rise 5.2% next year.

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Morning Report: Construction rises, manufacturing contracts 12/1/15

Posted on December 1, 2015 by Brent Nyitray
Stocks are higher this morning on economic strength out of Asia. Bonds and MBS are down.
Construction spending rose 1.0% in October. This is up 13% year over year. Residential construction rose 16.8% year over year, however the growth appears to be in multi-family construction, not SFR.
The ISM Manufacturing Index fell to 48.6 from 50.1 last month. A reading below 50 indicates that the manufacturing economy is generally contracting. This is the biggest decline since June of 2009. Inventory build is a problem, which has also been confirmed in the inventory to sales ratio. In fact, third quarter GDP was revised upward based on inventory build, however that inventory build essentially “borrows” growth from the following quarter. A reading of 48.6 would generally correspond to a GDP growth rate of about 1.7%.
Chart: ISM Manufacturing:

The weakness in manufacturing is a dollar issue, as commodity based companies and exporters are feeling the pinch. Since the US is the only economy contemplating tightening (while everyone else is deciding how much additional stimulus to put out), the dollar strength looks to continue.
Chart: US dollar index:

Vehicle sales are coming in this morning, and it looks like GM, Fiat-Chrysler, and Ford have missed their market forecasts. Most were reporting growth of about 3%. Auto loans are the new subprime.
Loews CEO and famed investor James Tisch said the Fed is “woefully behind the curve in waiting to raise rates. It should have been done years ago.” He is one of the people that is making the argument that raising rates could be positive for the economy as it will eliminate some of the misallocated capital (especially in the energy patch) and remove the penalty on savers.
Silicon Valley is attempting to disrupt the mortgage industry with a new model of non-QM, stated income loans where human interaction with the borrower is kept to a minimum. The Millennial generation generally prefers to interact with technology instead of a human. These firms are making huge investments in technology (in fact at one firm 7 or the 12 employees are IT people). They are also taking regulatory risks that many in the industry are unwilling to take. One CEO said: “There isn’t a banker out there that doesn’t look at me and shake his head and say, ‘You don’t know what you’re doing…But we’re doing it.”  They are also making a bet that the private label market will return at some point early next year. Interestingly, LOs are compensated on “customer satisfaction” and not commission.
Speaking of disruption, Morgan Stanley is laying off about a quarter of its fixed income trading team. Last year was a lousy year for fixed income trading in general, and the fee income just hasn’t been there. While the Fed has basically spoon fed rate expectations to the market, the exit of market makers will probably make the markets more volatile. Don’t forget, traders are generally young, and the majority of the ones who are left have never seen a tightening cycle before.
While Black Friday looks to have been a disappointment, initial indications suggest Cyber Monday went a little better.

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Morning Report: Pending Home Sales edge up 11/30/15

Posted on November 30, 2015 by Brent Nyitray

Stocks are higher as market participants return from the Thanksgiving holiday. Bonds and MBS are flat.

The highlight of this week will be the jobs report on Friday. This will be the last jobs report before the December FOMC meeting. The Fed Funds futures are pricing in a 75% chance of a tightening.

The European Central Bank meets this week, which should add even more noise to interest rates later this week.

Pending Home Sales rose 0.2% in October and are up 2.1% year-over-year. Tight inventory and rising prices are crimping sales. Pending Home Sales rose the most in the Northeast, where we haven’t been seeing the torrid price appreciation we have been seeing on the West Coast.

The ISM Milwaukee manufacturing index fell to 45.3 from 46.7 last month. The Chicago Purchasing Manager index fell from 56.2 to 48.7. Again, we are seeing the stronger dollar affect manufacturing. Inventory build is a problem, and was the driver of the upward revision in Q3 GDP. We could be setting ourselves up for a letdown in Q4.

Technical issues could keep a lid on long-term yields, which should be good for mortgage rates. Due to a shrinking budget deficit, funding needs for the government are falling, and regulatory requirements have increased demand for shorter-term Treasury bills instead of longer-term bonds. Treasury bond issuance is expected to fall 33% next year to $400 billion. Some analysts are forecasting a 50% drop. This means we could be looking at a scenario where short term rates increase and longer term rates go nowhere.

As home prices rise, affordability is declining. The median house price to median income ratio is around 4.6x, which is closing in on its bubble high of almost 5x, and well above its historical range of 3.2x – 3.6x. What is driving the increase in house prices? Restricted supply has been an issue, as housing starts have been anemic since the bust. Another issue has been foreign demand, especially from China. There are a couple of things going on here. First, Chinese demand is partially driven by a desire to have dollar denominated assets, and second US policy regarding immigration. If a Chinese investor funds a development which creates US jobs, they get a green card. Chinese money which levitated prices on the West Coast is now moving inland, funding McMansion communities outside suburbs of Dallas and Chicago. Since Chinese buyers are cash-rich, they don’t need a mortgage and are winning bidding wars by offering cash.

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Thanksgiving 2015

Posted on November 26, 2015 by Michigoose

Happy Thanksgiving Day to all of you! May your plates and portfolios be full, and may we all have peace and hope.

 

 

And, of course, may all the correct teams win this weekend!

Filed under: Open Thread, Thanksgiving | 11 Comments »

Happy Thanksgiving

Posted on November 26, 2015 by ScottC

Happy Thanksgiving everyone. Don’t eat too much.  That is all.

Filed under: Thanksgiving | 4 Comments »

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