Morning Report – The Week Ahead 3/24/14

Vital Statistics:

 

Last Change Percent
S&P Futures 1861.9 4.9 0.26%
Eurostoxx Index 3080.6 -15.9 -0.51%
Oil (WTI) 100.2 0.7 0.69%
LIBOR 0.235 0.002 0.97%
US Dollar Index (DXY) 80.26 0.154 0.19%
10 Year Govt Bond Yield 2.78% 0.03%
Current Coupon Ginnie Mae TBA 104.8 -0.2
Current Coupon Fannie Mae TBA 103.7 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.39

 

Markets are higher this morning after some good manufacturing data out of Europe and the US. Bonds and MBS are down.
The Chicago Fed National Activity Index rebounded in February to a better-than-expected.14 after a downward-revised -.45 in January. The Markit US Manufacturing PMI came in light.
We have quite a bit of data this week, with the FHFA Home Price Index, Case-Shiller, and new home sales. On Wed, we get durable goods, Thursday, we get GDP and Personal Income / Spending.
Small cap stocks are back to bubble valuations.

War and Peace

Reprinted for educational purposes only.

Shootings involving combat veterans raise questions of police training

By Ciara O’Rourke and Jeremy Schwartz – American-Statesman Staff

Gene Vela was supposed to graduate in May with a master’s degree in global policy studies. It would have been a milestone for Vela, who was among the first U.S. Marines involved in the initial invasion of Iraq.

Vela, 30, battled post-traumatic stress disorder in the Marines and after leaving the military, and his struggles have included run-ins with Austin policefor driving while intoxicated, among other interactions.

More recently, though, he seemed to be forging a new life. Last year, he was a summer intern in Washington for U.S. Rep. Joaquin Castro and he was named Senate Representative of the Year for his work on the Senate of College Councils at the University of Texas, in part for helping create a veteran liaison program there. In September, he spoke at a law enforcement summit on the challenges veterans face when they return from war.

But on Nov. 10, 2013, the night before Veterans Day, Austin police and paramedics were dispatched to Vela’s apartment in Central Austin after a friend concerned about his well-being called police. Within half an hour, police had fired at Vela after they say he aimed a gun at them. Then the graduate student was bound for jail on a charge of aggravated assault against a public servant, with a wound on his shoulder where a bullet grazed him above a tattoo bearing the words “U.S. Marine Corps.”

The incident wasn’t the only time in recent months that a standoff between police and combat veterans in Central Texas has ended in bloodshed.

Between December 2012 and December 2013, there were at least four such shootings in the region, including three in the last six months of 2013. A fifth shooting incident involved a young Army veteran who apparently didn’t deploy to war, according to personnel records.

An American-Statesman analysis of data obtained from nearly two dozen local law enforcement agencies shows that, since 2003, nearly 10 percent of subjects in Central Texas shooting incidents involving police were military veterans or active-duty service members. While actual numbers are low, the outcome is often tragic.

Of the four most recent shootings involving combat veterans who had served in Iraq or Afghanistan, two recently returned Fort Hood soldiers were shot and killed by police in separate incidents; a third – Vela – was wounded; and a fourth was unhurt in a shootout with Fredericksburg police. In at least three of the cases, the shootings were preceded by attempts at police negotiations.

The incidents also turned deadly for police: a Killeen police officer was fatally shot in one of them.

The shootings, experts and advocates say, highlight the need for more specialized law enforcement training in navigating encounters with veterans in crisis.

Few law enforcement agencies in Central Texas provide their officers with such specialized training, which experts say can save lives – both of officers and veterans – and funnel troubled veterans into getting mental health help instead of into jail or prison, where studies show their symptoms often grow worse.

State and local officials are hoping to remedy that with a new training program in the final stages of development and which officials hope will eventually help law enforcement agencies statewide.

The Veterans Tactical Response Program, which is being developed by the Texas Health and Human Services Commission, the Department of Veterans Affairs and the Austin Police Department, is built around the idea that law enforcement officers can take specific approaches to defuse life-threatening situations involving combat veterans.

Experts say that combat veterans can respond differently to police interactions than civilians, both because of their military experience and their risk of traumatic brain injury and post-traumatic stress disorder, which affects an estimated 20 percent of combat veterans. And, if armed, experts say veterans are often far better trained than civilians in how to use their weapons.

Experts say law enforcement officers might be in a unique position to gain the trust of veterans in crisis.

“By relating to them as equals and as servants of the greater good who might not always be understood and appreciated, police officers and negotiators have a better chance than almost anyone to earn a veteran’s trust and to de-escalate situations that potentially may become dangerous,” FBI researchers said in a recent bulletin.

An increasing number of police officers are military veterans; about 37 percent of Austin police have served in the military.

The Texas program was a response to what officials called a “marked increase” in incidents involving combat veterans, ranging from domestic disturbances to suicides. But hard data on veteran-involved police standoffs is hard to come by, as is even basic information about veteran contacts with law enforcement and the justice system.

In 2011, however, the FBI revealed that between 1995 and 2009, 6 percent of all incidents in its internal database of hostage and barricade incidents involved a veteran or active-duty military member. The agency wouldn’t release more recent information.

Of 106 subjects involved in police-related shootings in Central Texas since 2003 — according to data provided by nearly two dozen local agencies in Travis, Hays, Williamson and Bell counties — nearly 10 percent were identified as veterans or active-duty members by the personnel offices of the Army, Marine Corps, Air Force and Navy. The area, sitting between Killeen’s massive Fort Hood and the half-dozen military installations in San Antonio, has one of the highest concentrations of veterans in the state.

The numbers are relatively low, especially before 2013: just six incidents between 2007 and 2012. And initial research suggests that nationwide, Iraq and Afghanistan vets are ending up in jail or prison at lower rates than veterans of previous conflicts.

A 2012 study in the Journal of Consulting and Clinical Psychology found that 9 percent of Iraq and Afghanistan era veterans reported having been arrested since returning home, though that rate reached 23 percent among veterans with PTSD and frequent anger symptoms.

Frustrated by the inability to get a clear picture of how many veterans have entered the justice system, the Legislature last year passed a law requiring the Texas Department of Criminal Justice to track the number of inmates who are veterans using state and federal databases. The current system of self-reporting is notoriously unreliable because many veterans fail to identify as such, experts say.

“Without the ability to confirm veteran status, TDCJ is unable to effectively offer PTSD-tailored mental health services to the individuals who would benefit from it,” said Jorge Renaud, policy analyst with the Texas Criminal Justice Coalition, a policy research group advocating for criminal justice reform.

Many who train law enforcement on interacting with veterans in crisis say they walk a fine line between advocating for the training and feeding into stereotypes of combat veterans as ticking time bombs.

Officer Troy Schouest, who heads the Veterans Tactical Response Program for the Austin Police Department, said he opposes tracking violent incidents involving veterans. “I don’t want to create a false stigma, or single any one group out,” he said. “I don’t want people to think veteran is a dirty word.”

Star Lara, who trains California law enforcement agencies for the nonprofit group Swords to Plowshares, said she likewise tries to disabuse officers of that notion. “We never want someone to leave the training thinking that all veterans are (messed) up,” she said. “But oftentimes if it’s a law enforcement interaction … They are going to meet the veteran on a very bad day.”

Gene Vela’s encounters with Austin police began soon after he moved to the city, about three years after he left the military, where he worked as an armored vehicle crewman. In 2005, he received an other than honorable discharge, after nearly four years of service, for underage drinking, breaking curfew and using disrespectful language toward a sergeant, according to his attorney, Skip Davis. The discharge, which Davis said stemmed from untreated PTSD, complicated efforts to get VA treatment and benefits, some close to him say.

In one of his encounters with police, Vela told officers he was “getting his shotgun ready” after they asked him to open his door, according to a prosecutor’s motion to raise bond in a 2009 burglary case.

The next month, officers were dispatched to Vela’s apartment after he called 911 and said he wanted to go to a psychiatric emergency service clinic, according to the motion. When Vela opened the door to speak to police, it says, he threatened to shoot one of the officers. He was convicted of making a terroristic threat against a public servant.

The court document also details multiple instances in which prosecutors suggest Vela should have received an evaluation from a mental health officer or seen someone from the Austin Police Department’s crisis intervention team but didn’t.

In recent years, though, Vela appears to have thrived at the University of Texas, where he was well-known and well-liked at the LBJ School of Public Affairs. Davis said that Vela supports his daughter and sends money home to his mother. He was on track to start treatment for PTSD when police went to his apartment in November.

On Nov. 10, police say, Vela didn’t answer the door when officers knocked, but he pointed a laser-equipped handgun at officers through a window. When officer Adrien Chopin shot at Vela from the street, the window broke, and Vela retreated farther back into his apartment, according to police. Officers then heard “the distinct sound of a rifle or pistol being loaded,” according to an arrest affidavit, and then a gunshot. Police have said Vela returned to the window and again pointed a gun at officers, something Davis disputes. Chopin and officer Leo Cardenas fired, hitting Vela.

Davis said Vela was sound asleep when he was “brusquely awakened” by a dispatcher calling and someone banging at his front door. “He was groggy and disoriented,” Davis said. “He had no idea who was at his door.”

During the standoff, according to records, an officer said he heard Vela say, “Come kill me” and “Help me.”

The incident happened just a couple of weeks after some officers on the department’s negotiation and critical incident teams had participated in a trial run of the Veteran Tactical Response program training.

But hostage negotiators didn’t arrive at Vela’s apartment until after he was shot, according to police. A few days after the shooting, the department’s training liaison for the program said he still hadn’t heard about the incident and it’s unclear if any of the officers responding that night had received the training. An Austin police spokeswoman said officials couldn’t answer questions about the incident because of the ongoing investigation.

While Vela’s military and criminal history was known by some officers within the department, the arrest affidavit in connection with the case indicates responding officers didn’t know Vela’s name until after the first shot was fired.

Officer Troy Schouest, Austin’s police liaison for the Veterans Tactical Response program, said the goal is to train everyone in the department so that officers can try to defuse crisis situations until a negotiator arrives. More officers from the department’s critical incident team, as well as officers from Lakeway Police Department, are scheduled to take the class in April, he said. Once the VA finishes vetting the program and officially signs off, “we can finally offer it to everyone on a continuous basis,” Schouest said. “We are going to schedule it as a stand-alone class and as part of a new communication series we have under development.”

Vela’s court case now pits prosecutors, who have said Vela is a threat to the public, against Davis, who says Vela should be receiving in-patient PTSD therapy instead of sitting in jail on $700,000 bail.

Had Vela been given a lower bail, Davis said, “Gene would have finally gotten his ‘war demons’ under control and returned to UT to finish up the one semester he had remaining to graduate.”

While most agencies give their officers crisis intervention training, which includes lessons on how to deal with subjects in the midst of a mental health crisis, experts say veteran-specific training consists of a unique set of approaches that are different than those used with civilians.

“(Combat veterans) must not be put into situations where they will be forced to act in a way that proves their personal courage,” researchers concluded in a 2011 FBI Law Enforcement Bulletin. “They want to be treated with respect, and they have little tolerance for half-truths and disingenuous talk.”

Training typically includes helping officers identify a subject as a veteran, both by looking for clues such as military-style tattoos or armed forces bumper stickers, and by having dispatchers routinely ask 911 callers about veteran status.

Barking orders, sudden movements or loud noises can all worsen the situation.

“The normal tactical response is flashbangs (grenades), hit the house,” Schouest said. “But if you’re dealing with a veteran in crisis and you start with flashbangs before negotiating, we could escalate the crisis, push them further in.”

The Texas program includes training on military culture and education around issues related to traumatic brain injury, which military leaders have called the signature wound of the Iraq and Afghanistan wars.

Since 2003, nearly 260,000 service members have been diagnosed with traumatic brain injury, which is caused by concussive blasts, according to the Defense and Veterans Brain Injury Center. Injuries to the frontal lobe, especially, can reduce impulse control and cause outbursts of anger, experts say.

Bettie Beckworth, who is spearheading the Veterans Tactical Response Program for the state Health and Human Services agency, said that a veteran suffering from traumatic brain injury might also have trouble responding quickly to an officer’s questions. “(Police) may think they are resisting, but they need to slow down with their questions,” she said. “They can’t see the injury so people don’t understand why they are acting like that.”

Several police agencies surveyed by the American-Statesman said they would welcome such training, though it’s not clear when it will be widely available. Once the state’s training materials are finalized, officials hope to persuade the Texas Commission on Law Enforcement to adopt it as part of its statewide training.

“We want to make sure it’s available to departments all across the state,” Beckworth said. “The goal at this point is to ensure that not only do we train the special tactical teams, but offer training for patrol officers.”

Training experts in Texas and throughout the country are also eager to introduce the training to law enforcement academies, in hopes that it will become more institutionalized.

Bureau of Alcohol, Tobacco and Firearms negotiators have begun to use the strategies after contacting officials with the Texas training program. Peter Bukiri, a violent crime reduction strategist with the bureau, said the Veterans Tactical Response Program has helped negotiators and members of federal SWAT teams execute high-risk warrants.

Bukiri, whose law enforcement career spans 40 years, said he saw similar incidents after the Vietnam War, before such training existed. “We’ve always dealt with it, but it was really shoot-from-the-hip stuff,” he said. “(The Veterans Tactical Response Program) explains it in detail, what you’re dealing with. … I’d like to see the trainings almost become mandatory. This is the future.”


Victor Valdez

Military service: A former Fredericksburg High School student, Valdez entered the Marine Corps in March 2009 and a year later deployed to Afghanistan with the 3rd Battalion, 5th Marine Regiment, which suffered the most casualties of any Marine unit in the Afghan war. Over nine months, 25 Marines in the unit were killed and nearly 20 percent of the unit’s troops — 184 Marines — were wounded.

Incident: Valdez left the Marines in March 2013. Nine months later, on Dec. 18, Valdez went to a Valero gas station and ordered the two clerks to leave before he emptied the cash register, according to court records and a city official. Fredericksburg police reached Valdez by phone and tried to negotiate with him, according to an affidavit.

After an hour and a half, the affidavit says, Valdez approached the front of the store and began shooting through the windows at police. The officers shot at, but didn’t hit Valdez, who was cut by broken glass.

Outcome: He was indicted on two counts of aggravated robbery and 12 counts of aggravated assault with a deadly weapon on a public servant and is in the Gillespie County Jail with bail set at $490,000.

Training: Brian Haley, a patrol lieutenant with the Fredericksburg department, said officers receive crisis intervention training that’s required by the state but not training specific to veterans.

Getting help

Active-duty service members and volunteers in crisis can call the Military crisis line: 1-800-273-8255, press 1, or go to veteranscrisisline.net to chat with Department of Veterans Affairs responders.

Gene Vela

Military service: Joined the Marine Corps in December 2001, operating and maintaining assault vehicles and weapons systems. Deployed to Iraq in 2002 as part of the initial invasion force.

Diagnosed with PTSD, Vela struggled after returning home and had several run-ins with police. But he was also supporting his daughter, earned a bachelor’s degree and was pursuing a postgraduate degree at the University of Texas’ LBJ School of Public Affairs.

Incident: On Nov. 10, Austin police received a distress call from a friend of Vela, and officers arrived at his second-floor apartment near UT. After officers said Vela pointed a gun with a laser sight them, Vela was shot in the shoulder by an officer.

Outcome: He’s in the Travis County Jail on charges including aggravated assault against a public servant.

Training: The Austin Police Department is the first in the state to be trained as part the Department of Health and Human Services Commission’s Veterans Tactical Response Program. While some officers have participated in an early training class, it’s unclear if any of those officers were summoned to Vela’s apartment.

Dustin Cole

Military service: Pfc. Dustin Billy Cole, of Talihina, Okla., joined the Army in October 2008 and had two deployments to Afghanistan, where he was a combat engineer.

Incident: In July 2013, five months after he returned from his second deployment, Cole’s neighbors at his Killeen apartment complex called police saying a man with a gun was threatening residents at the pool. A SWAT team arrived shortly before midnight and attempted to negotiate with Cole, who had gone into his apartment.

At one point, it appeared police were able to talk Cole into surrendering; he came to his front door with his hands up, according to police. But when officers tried to arrest him, Cole went back into his apartment, picked up an assault rifle and fired on officers, killing Robert Hornsby and wounding Juan Obregon. Officers returned fire, killing Cole.

Outcome: Cole was buried in Pushmataha County, Okla. Officer Hornsby, a father of two, was mourned by hundreds at a public service in Killeen.

Training: Killeen police say they have used two professional services to provide specific training to officers on dealing with military subjects with PTSD. It’s unclear if the responding officers had taken part in that training.

Kelly Bangle

Military service: Staff Sgt. Kelly Bangle, of Arizona, joined the Army in 2003, serving as a signals intelligence officer. He deployed to Afghanistan in 2006 and to Iraq in 2011. He was among the last U.S. soldiers to leave Iraq.

Incident: On Dec. 14, 2012, Fort Hood police were called to a suspicious vehicle near the post’s Kouma Lake at around 3 a.m. While approaching the vehicle, officers received gunfire, according to Fort Hood officials. They returned fire, killing Bangle.

Outcome: Bangle, a father of three, was buried in Cochise County, Ariz.

Training: The two Department of the Army police officers on the scene had received broader crisis intervention training, but not combat veteran-specific training.

Local training

Specialized training remains rare in communities surrounding Fort Hood, which for much of the last decade has sent more soldiers to war than any other U.S. military installation.

Between December 2012 and July 2013, two active-duty soldiers recently returned from the war zone were shot and killed in shootouts with police. Staff Sgt. Kelly David Bangle was killed by civilian Fort Hood police after he fired on them from his car in the pre-dawn hours of Dec. 14, 2012; seven months later, Pfc. Dustin Cole was shot and killed in a shootout with Killeen Police Department SWAT team members, who were called out to his off-post apartment complex by concerned neighbors.

Killeen Assistant Police Chief Michael Click said that while he couldn’t comment on the Cole shooting because of ongoing legal proceedings, SWAT team members and negotiators have undergone some special instruction in working with combat veterans.

Police departments in Temple, Belton and Harker Heights conduct broader trainings, though officials say their officers are well educated on the issue.

“The majority of our members are prior military and consequently we have a cultural awareness of the issues,” said Harker Heights Chief Mike Gentry. “But this has not resulted in a specific training curriculum.”

At Fort Hood, where most Department of the Army police officers are also combat veterans, officials report similar dynamics.

“We do not tailor the training for handling combat veterans in crisis, just training on people in crisis,” Fort Hood officials said in a statement.

Digging deeper

Jeremy Schwartz has covered military and veterans issues for the American-Statesman since 2009. After a spate of police shootings involving veterans, Schwartz sought to quantify such incidents and examine the causes, effects and solutions.

Getting help

Active-duty service members and volunteers in crisis can call the Military crisis line: 1-800-273-8255, press 1, or go to veteranscrisisline.net to chat with Department of Veterans Affairs responders.

Gene Vela

Military service: Joined the Marine Corps in December 2001, operating and maintaining assault vehicles and weapons systems. Deployed to Iraq in 2002 as part of the initial invasion force.

Diagnosed with PTSD, Vela struggled after returning home and had several run-ins with police. But he was also supporting his daughter, earned a bachelor’s degree and was pursuing a postgraduate degree at the University of Texas’ LBJ School of Public Affairs.

Incident: On Nov. 10, Austin police received a distress call from a friend of Vela, and officers arrived at his second-floor apartment near UT. After officers said Vela pointed a gun with a laser sight them, Vela was shot in the shoulder by an officer.

Outcome: He’s in the Travis County Jail on charges including aggravated assault against a public servant.

Training: The Austin Police Department is the first in the state to be trained as part the Department of Health and Human Services Commission’s Veterans Tactical Response Program. While some officers have participated in an early training class, it’s unclear if any of those officers were summoned to Vela’s apartment.

Dustin Cole

Military service: Pfc. Dustin Billy Cole, of Talihina, Okla., joined the Army in October 2008 and had two deployments to Afghanistan, where he was a combat engineer.

Incident: In July 2013, five months after he returned from his second deployment, Cole’s neighbors at his Killeen apartment complex called police saying a man with a gun was threatening residents at the pool. A SWAT team arrived shortly before midnight and attempted to negotiate with Cole, who had gone into his apartment.

At one point, it appeared police were able to talk Cole into surrendering; he came to his front door with his hands up, according to police. But when officers tried to arrest him, Cole went back into his apartment, picked up an assault rifle and fired on officers, killing Robert Hornsby and wounding Juan Obregon. Officers returned fire, killing Cole.

Outcome: Cole was buried in Pushmataha County, Okla. Officer Hornsby, a father of two, was mourned by hundreds at a public service in Killeen.

Training: Killeen police say they have used two professional services to provide specific training to officers on dealing with military subjects with PTSD. It’s unclear if the responding officers had taken part in that training.

Kelly Bangle

Military service: Staff Sgt. Kelly Bangle, of Arizona, joined the Army in 2003, serving as a signals intelligence officer. He deployed to Afghanistan in 2006 and to Iraq in 2011. He was among the last U.S. soldiers to leave Iraq.

Incident: On Dec. 14, 2012, Fort Hood police were called to a suspicious vehicle near the post’s Kouma Lake at around 3 a.m. While approaching the vehicle, officers received gunfire, according to Fort Hood officials. They returned fire, killing Bangle.

Outcome: Bangle, a father of three, was buried in Cochise County, Ariz.

Training: The two Department of the Army police officers on the scene had received broader crisis intervention training, but not combat veteran-specific training.

Local training

Specialized training remains rare in communities surrounding Fort Hood, which for much of the last decade has sent more soldiers to war than any other U.S. military installation.

Between December 2012 and July 2013, two active-duty soldiers recently returned from the war zone were shot and killed in shootouts with police. Staff Sgt. Kelly David Bangle was killed by civilian Fort Hood police after he fired on them from his car in the pre-dawn hours of Dec. 14, 2012; seven months later, Pfc. Dustin Cole was shot and killed in a shootout with Killeen Police Department SWAT team members, who were called out to his off-post apartment complex by concerned neighbors.

Killeen Assistant Police Chief Michael Click said that while he couldn’t comment on the Cole shooting because of ongoing legal proceedings, SWAT team members and negotiators have undergone some special instruction in working with combat veterans.

Police departments in Temple, Belton and Harker Heights conduct broader trainings, though officials say their officers are well educated on the issue.

“The majority of our members are prior military and consequently we have a cultural awareness of the issues,” said Harker Heights Chief Mike Gentry. “But this has not resulted in a specific training curriculum.”

At Fort Hood, where most Department of the Army police officers are also combat veterans, officials report similar dynamics.

“We do not tailor the training for handling combat veterans in crisis, just training on people in crisis,” Fort Hood officials said in a statement.

Digging deeper

Jeremy Schwartz has covered military and veterans issues for the American-Statesman since 2009. After a spate of police shootings involving veterans, Schwartz sought to quantify such incidents and examine the causes, effects and solutions.

Morning Report – Risk spreads back to bubble levels 3/21/14

Vital Statistics:

Last Change Percent
S&P Futures 1869.8 3.7 0.20%
Eurostoxx Index 3093.3 4.4 0.14%
Oil (WTI) 99.25 0.3 0.35%
LIBOR 0.233 -0.001 -0.32%
US Dollar Index (DXY) 80.17 -0.023 -0.03%
10 Year Govt Bond Yield 2.78% 0.01%
Current Coupon Ginnie Mae TBA 104.8 0.0
Current Coupon Fannie Mae TBA 103.6 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.42
Markets are up small on no real news. Bonds and MBS are down small. There is no economic data this morning.
KB Home sold $400 million of 5 year senior notes at 4.75%. The proceeds are going to be used to acquire land. I think we can expect to see more bond issuance as companies take advantage of low rates and tight spreads. Bond investors are paying up for paper at the moment, as spreads are about as tight as they have ever been. This means that (a) the bond market is vulnerable to shocks and (b) we could experience some turbulence as rates start rising. Look at the chart below – high yield spreads are back at bubble levels.

Existing home sales fell yesterday, as professional investors begin to balk at high prices. According to RealtyTrac, institutional investors bought 44,087 properties in Q4, down from a peak of 60,648 in the second quarter of last year. As the labor market improves, we should see a return to a more normal level of cash vs mortgage buyers.

Morning Report – A considerable time 3/20/14

Vital Statistics:

Last Change Percent
S&P Futures 1848.1 -4.1 -0.22%
Eurostoxx Index 3053.4 -22.9 -0.75%
Oil (WTI) 99.67 -0.7 -0.70%
LIBOR 0.234 0.000 -0.11%
US Dollar Index (DXY) 80.26 0.268 0.34%
10 Year Govt Bond Yield 2.78% 0.01%
Current Coupon Ginnie Mae TBA 104.7 0.0
Current Coupon Fannie Mae TBA 103.6 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.36
Markets are lower after yesterday’s FOMC meeting sent rates higher and stock lower. Initial Jobless Claims came in at 320k, lower than expected, but higher than last week.
In other economic indicators, the Philly Fed Business outlook rebounded in March, and the index of leading economic indicators rose. Existing Home sales were virtually flat at 4.6 million units. The median home price rose to $189,000, a 9% increase year-over-year. The NAR notes that most of the price appreciation is at the higher price points – the lower price points (sub $250k) are actually falling. In fact, most of the price appreciation is in the $1 million + bucket.
Stocks and bonds sold off on the FOMC statement as investors re-calibrated their estimates as to when rates will begin to rise. The 10 year bond sold off about 6 basis points, but the real action was in the 2 year where rates jumped from 34.7 basis points to close at 42 basis points. In the press conference, Yellen threw out the (probably offhand) comment that “a considerable time” could mean “six months” and that was the catalyst for the bond market sell-off. You can read some of the parsing here. As expected, the Fed cut asset purchases by $10 billion a month. They also got rid of the 6.5% unemployment target and went to more qualitative guidance, as expected.
The Fed released their latest economic forecasts – unemployment and GDP were lowered, while inflation was increased. The forecast for when rates would rise shortened a bit, while the expected rate increased. We will have to wait for the minutes to get a better read on what is behind that.
Homebuilder Lennar is up a couple of percent pre-open after reporting first quarter numbers that beat expectations. Orders increased 10% in units and 25% in dollar value. ASPs rose 18%. and gross margins increased 300 bps. This was the highest first quarter margin in the company’s history. The company felt it was still a little too early to predict the strength of the spring selling season, but hopefully they will give some color on the 11:00 am EST conference call. The big question will be whether they can still push through price increases or have we reached the point where it is depressing traffic.

Morning Report – China’s bubble bursting? 3/19/14

Vital Statistics:

 

  Last Change Percent
S&P Futures  1866.7 2.9 0.16%
Eurostoxx Index 3084.8 11.0 0.36%
Oil (WTI) 100.3 0.5 0.55%
LIBOR 0.234 -0.001 -0.43%
US Dollar Index (DXY) 79.43 0.019 0.02%
10 Year Govt Bond Yield 2.69% 0.02%  
Current Coupon Ginnie Mae TBA 105.4 -0.1  
Current Coupon Fannie Mae TBA 104.3 -0.1  
RPX Composite Real Estate Index 200.7 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.31    

 

Markets are up small on no real news. Bonds and MBS are flat. Mortgage Applications fell 1.2% last week. Later on today we will get the FOMC rate decision. Expect to see another 10 billion reduction in asset purchases and a change in the language regarding the threshold for raising rates. The Fed is expected to de-emphasize a single number (6.5% unemployment) and move to a more holistic threshold. Right now, the futures are forecasting that the first rate hike will be in Q4 next year. Watch to see if that forecast changes after the meeting
 
Housing starts came in about as expected at 907k. January was revised upward from 808k to 909k. We are still running at pretty much depressed levels. Weather undoubtedly played a part, as starts in the Northeast fell pretty dramatically. Building Permits increased to just over 1 million, but most of the growth was multi-fam, not single fam.
 
KB Home reported better-than-expected first quarter numbers. Revenues rose 11%,while orders grew 18% and backlog increased 21%. Deliveries were down about 3% in units, and average selling prices rose 12%. Part of the increase in ASPs is due to a strategic change in KB’s business so you might not be able to draw many conclusions from that number. Gross margins continue to expand, and their 17.7% margins are the highest since 2006. No comments about traffic in the PR, maybe they will address the Spring selling season at the 11:30 EST conference call.
 
In a development that could impact rates here, a big Chinese developer has gone belly up and cannot repay $600 million in loans. We have known for some time that China has an epic real estate bubble and that it may finally be bursting. We are seeing a big drop off in commercial building sales, and that combined with a a historic investment rate topping 20% spells trouble. House price to income ratios in China are over 11. In Shanghai and Beijing that number is 23. To put that number in perspective, in Japan’s bubble in the 80s, the ratio topped out at 15 times income. In the US, it got to about 5x. Fast growing economies have these episodes (we did in the 1930s, Japan did in the 1990s, and China is having theirs now). 
 
What will be the spillover when it bursts? The biggest one will be economic – a burgeoning Chinese middle class had been a big component of global demand growth, and that will undoubtedly get depressed. This could be the catalyst that bursts the Canadian real estate bubble, as Chinese money is behind a lot of that as well. The biggest question will be what effect it has on rates in the US. Will Chinese investors dump Treasuries and MBS (remember, in crises, you sell what you can, not necessarily what you want to) or will there be a massive flight to safety which means rates go lower? My gut tells me that rates go lower because commodity price inflation is about to get slammed and China will attempt to export its way out of the predicament. This means even lower inflation in the US. That is something that will worry the Fed. 

Morning Report – Lots of housing data this week 3/17/14

Vital Statistics:

Last Change Percent
S&P Futures 1841.7 8.8 0.48%
Eurostoxx Index 3027.9 23.3 0.77%
Oil (WTI) 98.14 -0.8 -0.76%
LIBOR 0.234 0.000 -0.17%
US Dollar Index (DXY) 79.45 0.000 0.00%
10 Year Govt Bond Yield 2.66% 0.01%
Current Coupon Ginnie Mae TBA 105.8 -0.1
Current Coupon Fannie Mae TBA 104.4 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.28
Markets are higher this morning on no real news. Bonds and MBS are down on the risk-on trade.
We have lots of housing data this week, starting with the NAHB sentiment numbers later today, housing starts and building permits tomorrow, and existing home sales on Friday. We will also have earnings announcements from Lennar and KB Home. The big things I will be listening for in the earnings announcements will be (a) color on the traffic for the Spring Selling Season, and (b) how much of an increase in ASPs (average selling prices). I think we may be at the point where buyers are balking at higher prices and that means that builders will have to sell more units to move the needle on the top line. This means more sales, and stronger economic growth. A return to normalcy in home construction has been one of the last pieces of the puzzle in this economic recovery.
95.5% of Crimeans want to join Russia, according to a vote. This referendum certainly ups the ante in the volatile Ukranian situation. The White House has insisted the referendum was illegal and would not be accepted. The EU is meeting today to discuss sanctions.
Some manufacturing economic data this morning:  Industrial Production rose .6%, much higher than expected. Manufacturing Production rose .8%, and capacity utilization ticked up to 78.8%. The New York Fed Empire State Manufacturing Survey showed manufacturing is improving, albeit slowly, in the New York State region. All good numbers – the Industrial Production numbers are subject to variations based on the weather and mining (think fracking), but the manufacturing number is strong too. Definitely positive data.
Here is the draft of the bipartisan Senate Housing Finance Reform Bill. Fannie and Fred go away and the Federal Mortgage Insurance Corporation is established. Private capital will take the first 10% loss on MBS and then FMIC bears the rest. The HUD affordable housing goals go away, but we still will be in the social engineering business, except it will be lenders paying for it with a 10 basis point fee on all origination. Of course this will simply get passed on to borrowers. The FMIC will get to dole out the funds.

Weekend Thread!

Where is the plane? Malayan PM now saying it flew for 7 hours.

http://abcnews.go.com/m/story?id=22922961

Morning Report – Happy Pi Day 3/14/14

Vital Statistics:

Last Change Percent
S&P Futures 1838.4 -1.3 -0.07%
Eurostoxx Index 3068.2 2.8 0.09%
Oil (WTI) 98.16 0.2 0.17%
LIBOR 0.233 -0.001 -0.32%
US Dollar Index (DXY) 79.38 -0.228 -0.29%
10 Year Govt Bond Yield 2.74% 0.01%
Current Coupon Ginnie Mae TBA 105.6 0.0
Current Coupon Fannie Mae TBA 104.1 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.34
Markets are flattish after the Producer Price Index came in lower than expected. Bonds and MBS are up.
A paper out of Estonia is reporting that a Russian invasion of Ukraine is imminent.
Inflation remains muted at the wholesale level, with the Producer Price Index coming in at -.1% month-over-month and .9% on a year-over-year basis. While the Fed prefers to look at the PCE (Personal Consumption Expenditures) when measuring inflation, the other measures do get consideration. This shows inflation well below the Fed’s comfort zone, which is another reason why they are backing off that 6.5% unemployment target. The last thing the Fed needs is a bond market sell-off when we get to that threshold.
Foreclosure activity decreased 10% in February, to the lowest level in more than 7 years, according to RealtyTrac. They mention the issue of zombie foreclosures, where a vacant house in the foreclosure process sits for a long period of time and is not maintained. This is a natural for the 203k business. The average is 20% zombie foreclosures, however in some cities it is closer to 33%. The biggest states: Florida, Illinois, New York, New Jersey, and Ohio.

Morning Report – More on GSE reform 3/13/14

Vital Statistics:

Last Change Percent
S&P Futures 1871.8 4.1 0.22%
Eurostoxx Index 3068.2 2.8 0.09%
Oil (WTI) 98.16 0.2 0.17%
LIBOR 0.233 -0.001 -0.32%
US Dollar Index (DXY) 79.38 -0.228 -0.29%
10 Year Govt Bond Yield 2.74% 0.01%
Current Coupon Ginnie Mae TBA 105.6 -0.2
Current Coupon Fannie Mae TBA 104.1 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.34
Markets are up this morning after some decent economic news. Bonds and MBS are down.
Retail Sales increased .3% in February, which was better than the .2% estimate. January was revised downward. Blame the weather. Initial Jobless Claims came in at 315k, lower than expected, and import prices rose .9%.
We are still waiting for more clarity on the Johnson-Crapo bill which will eliminate the GSEs. Cantor Fitzgerald made a great point, though – Fan and Fred are huge MBS dealers, and what happens to the TBA market when they go away? The GSEs are the backbone of the TBA market, and if they go away, how will the market function? Liquidity risk is real, and if liquidity dries up in a market that will get priced in. If investors lower their bids for mortgage backed securities to take this into account, it means higher mortgage rates. As it stands, the GSEs are still probably going nowhere as they are shoveling money to Treasury and the “protect the taxpayer / lower the government footprint” crowd will probably fight the affordable housing advocates to a draw.
Speaking of politics, it looks like the individual mandate in obamacare has been pruned again. Now if you lost your insurance and consider the plans under obamacare to be unaffordable, you are excused from having to purchase insurance. Given that the Administration imagined we would greet obamacare with a chorus of hosannas, it is interesting to watch them try and reduce the footprint of the bill ahead of the midterm elections. Immigration reform is also on the back burner as the right cannot reconcile the pro-business / pro-immigration wing with the party base who wants less immigration. The left is pushing this hard because it senses an opportunity to split the Republican party, but Republicans aren’t really playing along because immigration reform simply isn’t a high priority item for them to begin with.
CoreLogic has an interesting piece on whether home prices are undervalued or overvalued relative to incomes. In their view, home prices overshot on the upside, overshot on the downside and are likely to remain undervalued until income growth picks up.

What I find interesting is that when I look at median income to median house price, I see that we have bounced back out of the range again. Historically, the median income to median house price ratio was in the range of 3.2 – 3.5x. Right now, the median house price (according to NAR) is 188,900, and median income is about $51k, which puts the ratio at 3.7x. In all honesty, I take that number with a grain of salt because the existing home sale repeat methodology method overemphasized prices in hot markets. This means that home prices may be soaring in California, and if most of the transactions are in California, the index will reflect that. If there are few transactions in the rest of the country, the index will de-emphasize them. So until the markets really clear, especially in the judicial states, the ratio may be somewhat misleading.

Morning Report – Preparing for life after Fan and Fred 3/12/14

Vital Statistics:

Last Change Percent
S&P Futures 1860.0 -5.2 -0.28%
Eurostoxx Index 3052.9 -39.6 -1.28%
Oil (WTI) 98.3 -1.7 -1.73%
LIBOR 0.234 0.001 0.34%
US Dollar Index (DXY) 79.66 -0.073 -0.09%
10 Year Govt Bond Yield 2.74% -0.03%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 104 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.35
Markets are weaker this morning on no real news, except for general concerns about overseas economic growth. Bonds and MBS are up
Mortgage Applications fell 2.1% last week as purchases fell .5% and refis fell 3.1%. Mortgage rates rose five bps last week, according to the MBA. Refi activity dropped to 56.7% of all mortgages.
The Senate Banking Committee released the broad outlines of a plan that revamp the nation’s housing finance system and they plan on releasing more details in the coming days. The biggest change is that the government moves into a re-insurance role with private capital bearing the first 10% severity risk. It also eliminates the affordable housing mandates out of Fannie and Fred, but requires a fund paid for with industry fees that would go toward ensuring affordable housing. The government’s continued presence would maintain the 30 year fixed rate mortgage, which Americans consider their birthright.
The government’s big problem is that Fannie and Fred had historically undercharged for their insurance product. In order to attract (or “crowd in”) private capital, they have to price as if they have no government backing or subsidy. Ex FHFA Chairman Ed DeMarco raised g-fees, which Mel Watt has put on hold. If they charge too little for insurance, you won’t see private capital enter the market, and if they charge too much, the industry and affordable housing advocates begin to complain. The government really has to walk a fine line with this.
The stocks of Fannie and Fred got clobbered yesterday, and are down big pre-market. That said, Fannie Mae still sports a  $23 billion market cap, which IMO is a hefty price for what is simply a litigation lottery ticket at this point.
Bill Gross has been scaling out of MBS. The PIMCO Total Return Fund cut its holdings of MBS from 36% to 29%. Bill has also been shortening duration, taking the fund’s effective duration from 5.1 years to 4.7 years. This means Bill is piling into shorter-dated, lower return bonds, which is a bet you would make if you think interest rates are going up faster / quicker than the market consensus. Bill has been making bullish statements in the press on bonds, so this is yet one more instance of Bill talking his book. Don’t pay attention to what Bill says, watch what he does.
The Fed is close to ditching its 6.5% unemployment threshold for considering a rate rise and will substitute less granular language in its FOMC statement next week. This is interesting because Yellen had come out very much in favor of more communication out of the Fed, not less. The problem of course is that the unemployment rate has been falling, but the jobs market is still weaker than the headline numbers suggest. They want to de-emphasize the 6.5% numerical target and embrace a more holistic view of the labor market that includes the labor force participation rate, underemployment rate, etc – factors that can’t be captured if you simply focus on the unemployment rate.