All Things in Moderation

Stocks are higher after an okay jobs report. Bonds and MBS are rallying

 

Nonfarm payrolls rose 192k in March, slightly behind the 200k estimate. February was revised upward to 197k from 175k. The ADP Jobs report was spot on, for once with their estimate of 191k. The unemployment rate was unchd at 6.7% and the labor force participation rate rose to 63.2%. Average hourly earnings were flat, while average weekly hours increased to 34.5. So overall, it is an okay jobs report, nothing great, but nothing terrible either. Par for the course these days. 

 

Separately, outplacement firm Challenger, Gray, and Christmas reported that announced job cuts fell 30% in March, making the first quarter the lowest in announced job cuts in 20 years. Announced job cuts are dropping, and the ISM reports show employment plans are increasing. 

 

Smallish homebuilder Beazer Homes gave an update yesterday. Orders are down 9%, while backlog is down 2%. Orders on the West Coast dropped 16%. It appears prices simply moved to far too fast out there. 

 

James Lockhart, former regulator for Fan and Fred says the stocks are worthless. At this point, they are litigation lottery tickets. 

Markets are flattish after initial jobless claims jumped to 326k. Bonds and MBS are up small.

Challenger and Gray reported that announced jobs cuts are down 30% from a year ago. Most businesses seem to be picking up, and the financial industry has already downsized for the brave new no refi world.

The consensus seems to be that the Fed starts hiking rates in late 2015. What could delay it? Well, another recession here, which doesn’t seem to be in the cards. Or, a China implosion, and it looks like the smart money (Soros, Chanos etc) are betting on one. China has been growing so fast for so long, that it pretty much seems inevitable. It seems like periods of rapid growth foment real estate bubbles and a mountain of debt, which seem to culminate in a violent crash (called the Minsky Moment). We had one in the 1930s after a period of rapid growth post WWI, Japan had theirs in 1989 after a great two-decade run in the 70s and 80s, and China has had an incredible run since Mao Zedong’s death.

If China has their Minsky moment, what will be the fallout? The biggest one, IMO, will be a collapse of commodity prices. Second, China will try and export their way out of the collapse. Finally, they may end up dumping their properties in the US and Canada. We could see some pricing pressures at the high end of the market (remember in crises, you sell what you can, not necessarily what you want to). None of this would be inflationary, in fact China will be exporting deflation. This will give the Fed conniptions as they hope the US economy strengthens enough to reach escape velocity from a global deflationary spiral. In other words, if China hits the wall, the Fed will be very reticent to raise rates.

There were 43,000 completed foreclosures in Feb 2014, down 15% year over year, according to CoreLogic. The foreclosure inventory is down to 752k homes down 35% from a year ago. The judicial states (primarily FL, NY, and NJ) still have the biggest foreclosure percentages.

Markets are flattish this morning on no real news. Bonds and MBS are down.

Mortgage Applications fell 1.2% last week. Purchases were up slightly, but refis fell.

The ADP Employment Change is forecasting 191k nonfarm payrolls this Friday. This has not been a very accurate predictor as of late, so take it with a grain of salt. Estimates are all over the board, with some as low as 100k and some as high as 275k. A lot of it will be due to weather, and the big question will be whether we had some pent-up hiring demand that got caught up in March.

Ellie Mae’s Encompass system went down for 24 hours yesterday. Apparently it was some sort of malicious attack. Things seem to be back on track, though. Lots of originators were unable to close loans yesterday. Imagine if it had happened a day earlier – end of the month and end of the quarter.

Markets are higher after some decent economic data out of Europe. Bonds and MBS are down small.

The ISM Manufacturing Index rose to 53.7 from 53.2. While new orders rose slightly, the production index jumped from 48.2 to 55.9. The snippets from various business owners seem to agree that the first quarter is looking good, and that things are accelerating. If you annualize out the March reading of 53.7, it would correspond to a GDP growth rate of 3.5%. Of course manufacturing isn’t the entire economy, but it shows that there is at least one part that is working. Senator Barbara Boxer noted the nascent manufacturing boom and said that the U.S. needs to ensure an adequate supply of affordable energy in order to entice companies to re-locate production back to the U.S. “While everyone would like to see alternative energy companies prosper, we have to recognize that coal and natural gas will remain the mainstay of U.S. energy and we are shooting ourselves in the foot if we raise fossil fuel prices in order to encourage more green energy.”

February construction data is out, and it looks like it rose .1% month-over-month from January and is up 8.7% year-over-year. Private construction is up 13% year-over year, while public construction was flat. Residential construction was up 13.5%. Nobel Laureate Paul Krugman noted in his blog that private construction seems to be doing just fine and there is no need to push up public construction as it would only add to inflationary pressures.

Domestic vehicle sales are out today, with both Ford and Chrysler noting a bounce mid-March. GM was unable to release their March sales numbers due to a computer problem. Separately, GM CEO Mary Barra will be testifying before the House at 2:00 pm today regarding the recall issue. Representative Henry Waxman said that “The botched roll-out of the Affordable Care Act shows that mistakes will happen and perhaps the government should have a little humility before it second-guesses everything a company does.”

House prices rose 12.2% in February, according to CoreLogic. House Prices remain just under 17% lower than their peak in April 2006. Price Appreciation has been driven by limited inventory, and CoreLogic expects prices to moderate over the coming year as increases in home equity releases pent-up supply. That said, there is still the small matter of the first time homebuyer who remains MIA. Separately, Janet Yellen mused that the Fed may have kept rates too low too long which could have been a contributing factor to the real estate bubble. “It may be time to take a second look at the dual mandate” she said.

We are beginning earnings season next week and it looks like weather will be the excuse du jour over why companies missed their earnings targets. GM, McDonalds, and FedEx already warned, blaming the weather. Amazon.com CEO Jeff Bezos reaffirmed the company’s commitment to margin expansion over revenue growth at a recent Morgan Stanley retail conference. “You can’t make it up on volume” he reportedly said.

Feels like a little end-of-quarter window dressing as the SPUs are up 11 points on no real news. (No, a strong ISM Milwaukee report doesn’t count). Bonds are getting hit as well. 

 

The ISM Milwaukee report jumped from 48.6 in February to 56 in March. New Orders and production rose 19 points. Could this be a weather-related rebound? Perhaps. However, note that we are starting to see other data points (Kansas City Fed) showing that the Midwest may be waking up. 

 

Lots of important data this week, starting with the ISM and construction spending tomorrow. Then on Friday we get the jobs report. The Street is at 200k nonfarm payrolls, and an unemployment rate of 6.6%. Given the “six months” number thrown out by Janet Yellen, we could start to see the jobs reports begin to matter again for bonds, where a strong reports will be very bearish.

 

Following on that theme, investors pulled $10.3 billion out of bond ETFs in March, the biggest liquidation since December 2010. If the economy is in fact picking up some steam, then the bond market is about to become a very treacherous place. 

Stock markets in the US are following overseas markets higher. Bonds and MBS are flat

 

Personal Income and Personal Spending rose .3% month over month in February. January’s spending number was revised down. The core personal consumption expenditure growth rate was 1.1% annualized, showing inflation remains tame and gives the Fed leeway to keep interest rates low. For all the talk about “six months” and “considerable time” don’t forget that this Fed takes the dual mandate seriously and believes inflation can be too low. If inflation remains around 1%, they will want to pursue policies to push it closer to 2%. The Fed has been trying to create inflation for six years and the numbers remain stubbornly low. 

 

Note that in response to recent data, Barclays has trimmed its estimate for Q1 GDP to 2% from 2.4%. 

 

The latest CoreLogic Market Pulse is out, with a couple of good articles. First, it discusses how housing affordability differs between first time homebuyers and buyers with an existing home. Affordability has been declining, but it has been declining more for first time homebuyers, which may partially explain why the first time homebuyer remains on the sidelines. Until they return to the market, we are going to have this sort of abnormal market, IMO. 

 

Foreclosure inventory is down 31% nationally from a year ago to about 837,000 homes. or about 2.1% of all homes with a mortgage. In states like California, professional investors snapped up the foreclosure inventory and at this point supply is constrained and prices are rising. Not so in the Northeast, where very little progress has been made on the foreclosure inventory, and unsurprisingly prices have barely budged. 

Markets are lower after yesterday’s sell off. Bonds and MBS are down small. Initial Jobless claims came in at 311k, lower than expected.

The final revision to fourth quarter GDP is in – 2.6%. The advance estimate was +3.2%. Personal consumption was up 3.3%, which is a good number. The price index came in at 1.6%, which is still below the target level for the Fed.

Mortgage banking profits hit a low in Q4. Average per-loan profits fell from $743 in Q3 to $150 in Q4, according to the MBA. This is the lowest level since the MBA began tracking this in 2008.  Loan production expenses increased to $6.959 from $6,368 in the quarter. Loan production expenses are an “all-in” number that includes commissions, overhead, etc. Personnel expenses per loan averaged $4,385 in Q4 vs $4,130 in Q3. Average production volume was $367 million in Q4, down from $391 million in Q3. Secondary marketing income increased by 4 bps. Finally, the productivity rate was 2.0 loans per production employee per month, a decline from 2.5 loans in the third quarter. Lower volume + increased compliance costs = lower profits. And this is in Q4, before all the new rules kicked in.

Is the distressed REO-to-rental trade getting played out? According to RealtyTrac, we have reached a state of stasis in the distressed real estate arena, with a dwindling supply of homes, institutional investors beginning to balk at the higher prices, a lack of supply of new construction, and an MIA first time homebuyer. All cash sales were 43% of all U.S. residential sales in February. The historical number is closer to 20%. There is an incredible amount of pent-up demand for the first time homebuyer once the economy recovers. That dip in household formation was due to a lousy economy, not fertility rates 25-30 years ago.

Pending Home Sales dropped .8% month-over-month and 10.2% year-over-year. I’m sure weather played a role in this drop, but it confirms what RealtyTrac is saying above.

Maxine Waters has proposed a bill to wind down the GSEs and replace it with a system that regulates the mortgage industry like a public utility, where a co-op of lenders would issue MBS guaranteed by the government. I wonder if that would also mean that the government would dictate how much a lender is permitted to make on a loan. She would reduce the private sector’s first loss risk to 5% from 10%, and lower the required down payment to 5% (3.5% for first time homebuyers). Naturally, this is a bill the left is going to love because it ensure that “underserved” constituencies continue to be subsidized by other borrowers. This bill has a less than zero chance of ever becoming law, so it is basically just a political marker and nothing more.

Markets are higher this morning in spite of a kind of weak durable goods number. The headline number was better than expectations, but once you strip out air and defense, they actually fell. The market seems to be handing out weather-related “get out of jail free” cards like candy these days. Bonds and MBS are flattish.

 

Mortgage Applications fell 3.5% last week. Purchases rose 2.8% while refis fell 7.7%. Rates rose 6 basis points which explains the drop. Refis dropped to 53.8% of all loans.

 

The buy and mod business remains robust, at least in NY, one of the most lender-unfriendly states out there. DQs loans in Northeast judicial states like NY and NJ trade for 60% of BPO, as opposed to California, where it is closer to 80%. Maybe this is what it takes to move the logjam of foreclosed properties in New York. 

 

Party like its 1999:  Candy Crush is worth $7 billion. Guess all of those annoying facebook push ads must be worth something.

 

US futures are following European markets higher. Bonds and MBS are down.

 

Some economic data this morning: New home sales fell 3.3% in Feb to an annualized 440k. Consumer Confidence increased from 78.3 to 82.3, while the Richmond Fed Manufacturing Index fell a point to -7. I suspect weather played a role in the new home sales and Richmond Fed numbers.

 

The FHFA house Price Index rose .5% in January, a little lower than expected. Case-Shiller rose 13.24% YOY, slightly below expectations. The Black Knight (formerly known as Lender Processing Services) home price index was flat in Jan, but up 8% year over year. They have home prices within 14% of the June 2006 peak. Note that in the Black Knight survey, the Northeastern states (NY, NJ) are starting to wake up.

 

 

Charles Plosser was surprised by the market’s reaction to the FOMC statement. Punchline: We should be talking about economic conditions, not timelines. FWIW, I was surprised as well. 6 months after the end of tapering (which will presumably happen at the Dec FOMC meeting) puts you at the June FOMC meeting. Since most forecasts have the Fed funds rate increasing sometime in 2015, an early forecast of a June 15 hike doesn’t seem all that surprising. A lot can happen in 15 months. Plosser would like to see the Fed Funds rate over 2% for 2015 and over 3% for 2016. 

 

The American Enterprise Institute has weighed in on Johnson-Crapo (the replacement for the GSEs). Part of the issue is that the affordable housing mandates don’t disappear, but are moved underground, to be administered by the FMIC. The difference is that it won’t be funded by HUD, it will be funded by a tax on banks, which will ultimately get passed on to borrowers. Others have pointed out that while Johnson Crapo might have issues with the left, it is going to have big issues with the right. FWIW, Dick Bove comes out in defense of the GSEs