Morning Report – Taper Day 09/18/13

Vital Statistics:

Last Change Percent
S&P Futures 1698.8 0.5 0.03%
Eurostoxx Index 2907.4 16.4 0.57%
Oil (WTI) 105.8 0.4 0.39%
LIBOR 0.252 0.001 0.20%
US Dollar Index (DXY) 81.14 0.001 0.00%
10 Year Govt Bond Yield 2.86% 0.01%
Current Coupon Ginnie Mae TBA 103.7 0.0
Current Coupon Fannie Mae TBA 102.8 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.48
Markets are flattish ahead of the FOMC meeting this afternoon. The announcement is expected around 2:00pm, so don’t try and lock anything around that time period. Bonds and MBS are down small.
Mortgage applications rose 11.2% last week, which was a big increase after a depressed short Labor Day week. The refi index jumped 18% as rates ticked down a little. The purchase index was up 2.5%.
Housing starts and building permits came in lower than expected, with housing starts at an annualized 891k and permits at an annualized 918k. SFR continued to increase while multi-fam dipped. Sub – 1 million levels in housing starts is still a highly depressed level. After touching 1 million units in March, activity has been slowing. You can see from the chart we have been underbuilding for a long time. I guess you won’t see a major increase in starts until the first time homebuyer returns to the market and that is going to be jobs-driven. In related news, the National Association of Homebuilder Confidence Index was flat last month, but still at post-crisis highs. The builders are also noting that momentum seems to have stalled for the moment.

Certainly the Fed is noticing the drop-off in housing sector activity as rates have risen. This will probably make them want to maintain current purchases of MBS and cause them to lower Treasury purchases only. The consensus seems to be the “tiny taper” scenario, where the Fed cuts Treasury purchases by $10 billion a month starting in October.
The SEC is going to force companies to disclose the ratio of CEO pay to the median pay of employees at the firm. Glad to see the SEC is on class warfare beat – much more important than, say, doing something about high frequency trading  /sarc.

Morning Report – Inventory still tight in CA 09/17/13

Vital Statistics:

Last Change Percent
S&P Futures 1692.1 0.9 0.05%
Eurostoxx Index 2888.0 -6.7 -0.23%
Oil (WTI) 105.9 -0.7 -0.64%
LIBOR 0.252 0.000 0.04%
US Dollar Index (DXY) 81.15 -0.146 -0.18%
10 Year Govt Bond Yield 2.83% -0.03%
Current Coupon Ginnie Mae TBA 104.1 0.1
Current Coupon Fannie Mae TBA 103.1 0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.53
Markets are flattish as we head into Day 1 of the FOMC meeting. We should get the actual announcement tomorrow around 2:15 pm. Bonds and MBS are rallying as the market continues to digest the fact that Summers won’t be the next Fed Chairman.
The Consumer Price Index came in at .1% month-over-month, below expectations, and frankly below what the Fed would like to see. As long as (a) there are no bubbles and (b) there is no inflation, the Fed will likely try and err on the side of accommodation.
That said, I believe this reprieve we have been given in rates will be short-lived. Don’t lose the forest for the trees – rates are going up, and if you have any borrowers who have been on the fence or who were floating, now is a good time to lock.
The California Association of Realtors reported that increasing mortgage rates are starting to bite as activity slipped 2%. Prices are still increasing though, as the median home price hit $441k, the highest since Dec 2007. Inventory is improving in the sub 750k bucket, although month’s supply is still extremely low at just about 3 months.

Morning Report – Larry Summers is out, ushering in the third term of Alan Greenspan 09/16/13

Vital Statistics

 

Last Change Percent
S&P Futures  1688.6 3.7 0.22%
Eurostoxx Index 2893.2 26.1 0.91%
Oil (WTI) 106.2 -2.0 -1.86%
LIBOR 0.252 -0.002 -0.81%
US Dollar Index (DXY) 81 -0.449 -0.55%
10 Year Govt Bond Yield 2.79% -0.10%  
Current Coupon Ginnie Mae TBA 103.8 0.0
Current Coupon Fannie Mae TBA 103.3 0.7
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.57

 

Markets are higher after Larry Summers withdrew his name from consideration for the Fed Chairmanship. Bonds and MBS are rallying hard, with the 10 year yield down 10 basis points.
 
Janet Yellen is a Greenspan clone, as is Bernanke. Summers would have ended QE a bit earlier than Yellen would have. I have to say I am skeptical of the 10 year here at 2.79%. If you wanted to refi and missed the boat, the market just let you back in. I would take advantage of it, because the secular story on bonds is unchanged. LO’s should go back and contact their borrowers who are on the fence and let them know they just got a gift that won’t last forever.
 
Does this change what the Fed will do on Tuesday and Wed?  Probably not. The consensus seems to be a taper of $10 billion a month, which will be Treasuries and not MBS. 
 
We have some industrial numbers today, with the Empire State Manufacturing Index, Industrial Production, Capacity Utilization, and Manufacturing Production. Later this week, we will get housing starts, building permits, and existing home sales. All important data for us.
 
The CFPB made some changes to the QM rule.  Here is a summary.

 

50 Years Ago Today – September 15

I came across this story this morning and thought it was worth reminding all of us how far we’ve traveled in fifty years.

On this day fifty years ago, a box of dynamite rigged to a timer exploded beneath a stairway at the 16th Street Baptist Church in Birmingham, Ala., just as a group of African-American children were heading inside to prepare for Sunday morning services. Four girls were killed, more than a score more were wounded, and the South’s long intransigence against equality for African-Americans took yet another deadly turn.

That bloody summer of 1963—which McWhorter detailed in her 2001 book, “Carry Me Home: Birmingham, Alabama: The Climactic Battle of the Civil Rights Revolution”—was a pivotal experience for the nation, and helped pushed the 1964 Civil Rights Act into law. But it also was only part of a long arc of the troubled history of race relations in the country. At The Atlantic, Andrew Cohen writes of white Birmingham lawyer Charles Morgan Jr., who, a day after the bombing, issued an eloquent plea for white Alabamans to shoulder the blame for the region’s heinous acts of racism. Morgan’s speech included a challenge to his fellow white citizens who kept asking, “Who did this?”

“Who is guilty? A moderate mayor elected to change things in Birmingham and who moves so slowly and looks elsewhere for leadership? A business community which shrugs its shoulders and looks to the police or perhaps somewhere else for leadership? A newspaper which has tried so hard of late, yet finds it necessary to lecture Negroes every time a Negro home is bombed? A governor who offers a reward but mentions not his own failure to preserve either segregation or law and order? And what of those lawyers and politicians who counsel people as to what the law is not, when they know full well what the law is?

Those four little Negro girls were human beings. They had lived their fourteen years in a leaderless city: a city where no one accepts responsibility, where everybody wants to blame somebody else. A city with a reward fund which grew like Topsy as a sort of sacrificial offering, a balm for the conscience of the “good people,” whose ready answer is for those “right wing extremists” to shut up. People who absolve themselves of guilt. The liberal lawyer who told me this morning, “Me? I’m not guilty!” he then proceeding to discuss the guilt of the other lawyers, the one who told the people that the Supreme Court did not properly interpret the law. And that’s the way it is with the Southern liberals. They condemn those with whom they disagree for speaking while they sit in fearful silence.”

Morgan eventually was hounded out of town by death threats.

With its large African-American congregation, the 16th Street Baptist Church served as a meeting place for civil rights leaders like Martin Luther King Jr., who once called Birmingham a “symbol of hardcore resistance to integration.” Alabama’s governor, George Wallace, made preserving racial segregation one of the central goals of his administration, and Birmingham had one of the most violent and lawless chapters of the Ku Klux Klan.

The church bombing was the third in Birmingham in 11 days after a federal order came down to integrate Alabama’s school system. Fifteen sticks of dynamite were planted in the church basement, underneath what turned out to be the girls’ restroom. The bomb detonated at 10:19 a.m., killing Cynthia Wesley, Carole Robertson and Addie Mae Collins–all 14 years old–and 11-year-old Denise McNair. Immediately after the blast, church members wandered dazed and bloodied, covered with white powder and broken stained glass, before starting to dig in the rubble to search for survivors. More than 20 other members of the congregation were injured in the blast.

Today in history – September 13

2011 – A motley crew of political junkies and refugees from other blogs join forces to create All Things in Moderation, “a place where political discussion and debate can take place in the absence of the kind of unproductive vitriol that has come to characterize much of blog commentary these days.” The significance of this on the world outside their little bubble is highly questionable, but since this post is inside that bubble, it remains worth noting.

1971 – A four day riot in Attica prison in New York, during which prisoners held employees hostage and took over portions of the prison, ends abruptly when police open fire on the prisoners, killing 29 inmates and 10 hostages. Four days earlier, an inmate attack on a guard had grown into a full-fledged riot and inmate take-over. Three days of negotiations ensue, with prisoners demanding improved living conditions. When negotiations fail, Governor Nelson Rockefellar authorizes the police to re-take the prison by force. Lawsuits surrounding the event will carry on for decades, with New York State being ordered by a federal judge to pay $8 million in damages to sruviving inmates in 2000, and in 2005 the state finally settles with the families of those employees who were killed, for at total of $12 million.

1814 – As the British bombard Fort McHenry from the waters of the Chesapeake Bay, American Francis Scott Key pens The Defense of Fort McHenry, a poem that will eventually be set to music, renamed The Star Spangled Banner, and go on to become the US national anthem. Key had gone to Baltimore in order to negotiate the release of a friend of his who had been captured by the British. Brought aboard a British ship, Key secures the release of his friend, but is prevented from going ashore until the British finish their attack on Fort McHenry. Key was inspired to write his poem when, after an all night barrage, he awoke in the morning to the sight of the Stars and Stripes still flying over the fort. The Star Spangled Banner is now heard virtually daily in sports stadiums throughout the nation.

Morning Report – retail sales weak 09/13/13

Vital Statistics:

Last Change Percent
S&P Futures 1684.9 -3.9 -0.23%
Eurostoxx Index 2858.6 -3.5 -0.12%
Oil (WTI) 107.6 -1.0 -0.89%
LIBOR 0.254 -0.001 -0.20%
US Dollar Index (DXY) 81.46 -0.030 -0.04%
10 Year Govt Bond Yield 2.88% -0.03%
Current Coupon Ginnie Mae TBA 103.7 0.0
Current Coupon Fannie Mae TBA 102.6 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.55
Markets are flattish on no real news. Bonds and MBS are up small. Liquidity should be light due to the Jewish holiday. Today is the last big data day before the FOMC meeting.
Mohammed El-Arian of PIMCO says the Fed is tapering to head off excessive risk taking. PIMCO is forecasting a “taper-lite” announcement of $10 billion in Treasuries, which would mean the Fed will continue to purchase MBS at its current rate. Given that foreigners have been net sellers of MBS and REITs have been de-leveraging (in other words, they have been net sellers too), it makes you wonder where the replacement for the Fed’s buying will come from. What does that mean for your average mortgage banker? If TBAs are weak (bond prices falling), then mortgage rates will be higher.
Twitter announced its IPO in 140 characters or less:  “We confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.” Note that roughly half of the characters are legal disclaimer. Some things never change.
The Producer Price Index came in flat ex food and energy, showing that there is no inflation at the wholesale level. Inflation has been figuring into the Fed’s calculus for a while now, primarily on the downside. They desperately want to create a little inflation. 3% inflation and 3% wage growth feels a lot better to the average American than no inflation and no wage growth does.
Retail sales came in lower than expected, .2% on the headline number, and the same for the control group. Looks like back-to-school sales were disappointing, which bodes ill for the holiday shopping season. Since consumption is roughly 70% of the US economy, it doesn’t bode will for the 2H recovery we are supposed to be seeing according to Fed forecasts.
It will be Summers, at least according to the Nikkei newspaper. Supposedly this will be announced next week sometime. Summers would mean a quicker withdrawal of quantitative easing and a more vocal support of fiscal measures to stimulate the economy. The knives are out for Summers on the Left.

Two Years and Still Hanging On…Barely

Happy birthday, ATiM. Hard to imagine, but yes, it was 2 years ago today that our long lost colleague Kevin Willis put up the first ever ATiM post. In many respects it has been a long haul. Too much of a haul for some as, truth be told, we are currently a much diminished operation from last year. We operate now on what is basically a skeleton crew, with barely a comment on some days. Unfortunately I think the future of ATiM is much in doubt. But still, a special thanks to Brent for his daily efforts in the Morning Post, and thanks also to everyone else who continues to find the time in their busy schedules to contribute, and the fortitude to tolerate both the thoughts of those they disagree with and the rough and tumble that it sometimes produces. I wish there were more of us, but those who remain are a solid crew. Thanks.

Here’s to another year….I hope.

Politically Correct Bedtime Stories–The Three Little Pigs

Once there were three little pigs who lived together in mutual respect and in harmony with their environment. Using materials that were indigenous to the area, they each built a beautiful house. One pig built a house of straw, one a house of sticks, and one a house of dung, clay, and creeper vines shaped into bricks and baked in a small kiln. When they were finished, the pigs were satisfied with their work and settled back to live in peace and self-determination (NB: Sounds positively Libertarian, doesn’t it?)

But their idyll was soon shattered. One day, along came a big, bad wolf with expansionist ideas. He saw the pigs and grew very hungry, in both a physical and an ideological sense. When the pigs saw the wolf, they ran into the house of straw. The wolf ran up to the house and banged on the door, shouting, “Little pigs, little pigs, let me in!”

The pigs shouted back, “Your gunboat tactics hold no fear for pigs defending their homes and culture.”

Bu the wolf wasn’t to be denied what he thought was his manifest destiny. So he huffed and puffed and blew down the house of straw. The frightened pigs ran to the house of sticks, with the wolf in hot pursuit. Where the house of straw had stood, other wolves bought up the land and started a banana plantation.

At the house of sticks, the wolf again banged on the door and shouted “little pigs, little pigs, let me in!”

The pigs shouted back, “Go to hell, you carnivorous, imperialistic oppressor!”

At this, the wolf chuckled condescendingly. He thought to himself: “They are so childlike in their ways. It will be a shame to see them go, but progress cannot be stopped.”

So the wolf huffed and puffed and blew down the house of sticks. The pigs ran to the house of bricks, with the wolf close at their heels. Where the house of sticks had stood, other wolves built a time-share condo resort complex for vacationing wolves, with each unit a fiberglass reconstruction of the house of sticks, as well as native curio shops, snorkeling, and dolphin shows.

At the house of bricks, the wolf again banged on the door and shouted, “Little pigs, little pigs, let me in!”

This time in response, the pigs sang songs of solidarity and wrote letters of protest to the United Nations.

By now the wolf was getting angry at the pigs’ refusal to see the situation from the carnivore’s point of view. So he huffed and puffed, and huffed and puffed, then grabbed his chest and fell over dead from a massive heart attack brought on from eating too many fatty foods.

The three little pigs rejoiced that justice had triumphed and did a little dance around the corpse of the wolf. Their next step was to liberate their home land. They gathered together a band of other pigs who had been forced off their lands. This new brigade of porcinistas attacked the resort complex with machine guns and rocket launchers and slaughtered the cruel wolf oppressors, sending a clear signal to the rest of the hemisphere not to meddle in their internal affairs. Then the pigs set up a model socialist democracy with free education, universal health care, and affordable housing for everyone.

Please note: The wolf in this story was a metaphorical construct. No actual wolves were harmed in the writing of the story.


From Politically Correct Bedtime Stories © 1994 by James Finn Garner

Morning Report – Richard Cordray speaks to mortgage bankers 09/12/13

Vital Statistics:

Last Change Percent
S&P Futures 1688.5 -0.3 -0.02%
Eurostoxx Index 2863.1 -0.3 -0.01%
Oil (WTI) 108.4 0.8 0.78%
LIBOR 0.254 0.000 0.00%
US Dollar Index (DXY) 81.64 0.126 0.15%
10 Year Govt Bond Yield 2.89% -0.03%
Current Coupon Ginnie Mae TBA 103.8 0.1
Current Coupon Fannie Mae TBA 102.5 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.56
Markets are flat this morning on no real news. Initial Jobless Claims printed below 300,000 for the first time since May 2007 on a technical glitch. Bonds and MBS are up small.
CFPB Chairman Richard Cordray spoke to a conference of mortgage lenders yesterday and told them that the new QM rules will give responsible lenders an advantage. One of the things he pointed out was that the CFPB intended to level the playing field between banks and non-banks (the banks are more highly regulated). Cordray stressed that the QM rules were intended to provide legal protection for lenders:  “You should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation,” he said.
Now that Richmond, CA has decided to go the eminent domain route, the court challenges begin. Blackrock, PIMCO, and other bondholders have asked a federal judge to halt the city’s plans to force bondholders to sell their mortgages at a discount to appraised value to a hedge fund that will modify and refinance the borrowers. The city will have to run the table on court challenges.
As the refi boom ends, banks are laying off people in their mortgage operations. J.P. Morgan is laying off 2,000, Bank of America is cutting 2,100 jobs, Wells has let 3,000 go… the list goes on. That said, while the MBA mortgage applications index fell by 13.5% last week, the purchase index fell by only 2.6%. As home price appreciation gives people equity in their homes, purchase transactions will undoubtedly increase as people can finally move. Existing home sales are just approaching historical norms of 5.5 million / year, but the difference is that 60% of these sales are cash, as estimated by Goldman Sachs. Pre-bubble, cash sales were about 20% of all sales. So, in the past, you were looking at an average 5.5 million run rate, with 80% non-cash (i.e. a mortgage), which meant roughly 4.4 million purchase mortgages a year. So far in 2013 we have averaged a 5 million run rate and with only 40% involving a mortgage, you are looking at 2 million purchase mortgages a year. In other words, purchase finance activity has to more than double just to reach normalcy. So while housing has recovered according to the home price indices and the sales volume indices, we are still in nuclear winter for the mortgage banking business. Negative equity is undoubtedly driving a lot of this, and as prices rise, this phenomenon will reverse.

Politically Correct Bedtime Stories–The Emperor’s New Clothes

Far away, in a time long past, there lived a traveling tailor who found himself in an unfamiliar country. Now, tailors who move from place to place normally keep to themselves and are careful not to overstep the bounds of local decency. This tailor, though, was overly gregarious and decorum-impaired, and soon he was at a local inn, abusing alcohol, invading the personal space of the female employees, and telling unenlightened stories about tinkers, dung-gatherers, and other trades people.

The innkeeper complained to the police, who grabbed the tailor and dragged him in front of the emperor. As you might expect, a lifetime of belief in the absolute legitimacy of the monarchy and in the inherent superiority of males had turned the emperor into a vain and wisdom-challenged tyrant. The tailor noticed these traits and decided to use them to his advantage.

The emperor asked, “Do you have any last request before I banish you from my domain forever?”

The tailor replied, “Only that your majesty allow me the honor of crafting a new royal wardrobe. For I have brought with me a special fabric that is so rare and fine that it can be seen only by certain people—the type of people you’d want to have in your realm—people who are politically correct, morally righteous, intellectually astute, culturally tolerant, and who don’t smoke, drink, laugh at sexist jokes, watch too much television, listen to country music, or barbecue.”

After a moment’s thought, the emperor agreed to this request. He was flattered by the fascist and testosterone-heavy idea that the empire and its inhabitants existed only to make him look good. It would be like having a trophy wife and multiplying that feeling by 100,000.

Of course, no such rarefied fabric existed. Years of living outside the bounds of normal society had forced the tailor to develop his own moral code that obliged him to swindle and embarrass the emperor in the name of independent craftspeople everywhere. So, as he diligently labored, he was able to convince the emperor that he was cutting and sewing pieces of fabric that, in the strictest objective sense of reality, didn’t exist.

When the tailor announced that he was finished, the emperor looked at his new robes in the mirror. As he stood there, naked as the day he was born, one could see how years of exploiting the peasantry had turned his body into an ugly mass of puffy white flesh. The emperor, of course, saw this too, but pretended that he could see the beautiful, politically correct robes. To show off his new splendor, he ordered a parade to be held the next day.

On the following morning, his subjects lined the streets for the big parade. Word had spread about the emperor’s new clothes that only enlightened people with healthy lifestyles could see, and everyone was determined to be more right-minded than his or her neighbor.

The parade began with great hoopla. As the emperor marched his pale, bloated, patriarchal carcass down the street, everyone loudly oohed and ahed at his beautiful new clothes. All except one small boy, who shouted:

“The emperor is naked!”

The parade stopped. The emperor paused. A hush fell over the crowd, until one quick-thinking peasant shouted:

“No, he isn’t. The emperor is merely endorsing a clothing-optional lifestyle!”

A cheer went up from the crowd, and the throngs stripped off their clothes and danced in the sun, as Nature had intended. The country was clothing-optional from that day forward, and the tailor, deprived of any livelihood, packed up his needle and thread and was never heard from again.


Being a clothing optional person myself, I find this one particularly amusing.