All Things in Moderation

Vital Statistics:

Markets are higher this morning after good earnings from Halliburton and a miss by Caterpillar. CAT’s miss was mainly due to a mining slowdown. Bonds and MBS are down small.

Earnings season really begins in earnest this week with heavyweights like Apple and Google reporting. On the real estate front, we will get NVR today, Pennymac tomorrow, ARM Agency REITS Capstead and Hatteras on Wed, Pulte on Thursday and D.R. Horton on Friday. It will be interesting to see what the pipeline looks like for the homebuilders, as the housing starts number last week indicated single family residences were falling while multi-fam was rising. 

The week ahead is relatively data-light, although we have the FHFA House Price Index on Tuesday. The FHFA House Price index covers homes with conforming mortgages, so it tends to be more of a central tendency index which strips out the noise of distressed sales / cash-only buyers, and the valuation extremes. CA prices supposedly rose 8.3% in March, supposedly. And no, that number is not annualized. On Friday, we will get the first estimate of Q1 GDP. The street is forecasting a 3.1% rise after a weak Q4.

Americans are starting to pick up on the increase in real estate prices, as 51% think that prices will increase and 34% predict prices will stay the same. The West is the most bullish, and the Midwest is the least. About 1/3 of the respondents are underwater.

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Markets are weaker this morning after some disappointing economic data. Initial Jobless Claims camea at 352k, slightly higher than expectations and the prior week was revised upward. Philly Fed and Leading Economic Indicators were also disappointing.  Bond and MBS are up.

Freddie Mac released their April Economic and Housing Outlook yesterday which does a decent job of going over the latest and greatest economic statistics. They are predicting that GDP will come in at +3% for Q1, dip to +1.3% for Q2 and then rebound into the mid 2s for the final half of the year. For 2013, they are predicting growth above 3%. They believe that construction employment will drive the recovery. Of the 5.5 million jobs lost since bust, 2.2 million (or 40%) were in construction. Since then we have added only 330k construction jobs. If you count the half a million jobs lost in financial services, real-estate related jobs accounted for 50% of the jobs lost in the Great Recession.

The Fed’s Beige Book survey contains the words “moderate” and “modest” a lot. The Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City districts were growing at a “moderate” pace, while Boston, Philadelphia, Atlanta, Chicago, and San Francisco noted “modest” growth. Increases in auto and residential construction were offset by cuts in defense-related weakness. The labor markets were generally unchanged, although the Fed noted wage pressures in IT, construction, and engineering.

Minneapolis Fed Head Kocherlakota says that low interest rates will probably generate signs of financial instability, but it is a necessary evil. He noted that QE has helped the housing market and said it would be nice if they could do even more along those lines.

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Stocks are declining again as Bank of America stunk up the joint with an earnings miss. MBA mortgage applications increased Commodities are still coming in. Bonds and MBS are up

Bank of America’s miss was largely due to lower mortgage banking income and declining gains on the sale of debt securities. They funded $25 billion in mortgages and home equity loans in Q1, up 11% from Q4 and up 56% from a year ago. In spite of the increase in loans originated, margins fell such that core production revenue was $815 million, down from $928 million a year earlier. Delinquencies fell. Headcount fell by 4,378 during the quarter. Separately, they agreed to a $500 million settlement to end a class action lawsuit over Countrywide MBS.

Is the economy headed for a spring swoon? Indicators are starting to point down, and earnings season has not been the blockbuster that the street was expecting. Another year of “sell in May and go away?”

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Stiglitz points out that our progressive tax system is far less than progressive in implementation, particularly at the very high end.

The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.

At least or marginal rates aren’t 95% anymore:

But that always seemed to be more honored in the breach. There were a whole lot more loopholes available in the 1950s. Imagine if consumer debt interest were still deductible. Elimination of that created the home equity loan boom. Talk about the law of unintended consequences.

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Markets are lower after disappointing retail sales data. JP Morgan and Wells Fargo reported numbers that beat on the headline, but both are down. Bonds and MBS are rallying, with the 10-year yield back below 1.74%.

Retail sales dropped in March by .4%, the most in 9 months. February was revised down. Apparel, furniture and Home improvement retailers reported gains. Electronics stores reported decreases. Given the lousy jobs report last Friday, it isn’t surprising that retail sales fell. Just crossing the tape:  Barclay’s has taken down Q1 GDP estimates to 2.8% from 3.2% as a result.

Wells Fargo reported record Q4 earnings, with mortgage originations of $109 billion, down from $125 billion in Q4. MSR valuations were lowered as increasing real estate prices affect prepayment assumptions (Their average MSR note rate is 4.69%). The pipeline is $74 billion, down from $81 billion at the end of Q4. 

The IMF is worrying that all of this easy money is going to inflate bubbles elsewhere. IMO, that train has already left the station. A commodity boom and easy money has created a real estate bubble in Canada that is even more expensive than ours was at the peak (median house price to median income ratio is above 5x, while ours peaked around 4.8x in 2006). We probably do have a bond bubble, however the Fed is running the show there and given that it is purchasing 70% of all Treasury issuance, can pretty much handle it has it pleases. 

Note: The MR will be spotty next week as I will be on the Left Coast

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Markets are flattish this morning after initial jobless claims came in lower than expected at 346k. They dropped 42k from last week, which spiked due to a seasonal adjustment related to the Easter holiday. Import prices fell half a percent on lower energy costs.Bonds and MBS are up.

Ever since the Bank of Japan announced its quantitative easing program, the market has been speculating that Japanese investors would enter the US market en masse and purchase Treasuries. There has been plenty of anecdotal evidence, but no real numbers to work with. Yesterday’s 10 year auction didn’t provide any either – the bid to cover ratio was 1.8 which was a little light. 

FHA might need a little more money from the government. They have $30 billion of cash on hand and insure $1.1 trillion in loans. The Administration is projecting they might need another billion. It looks like it was the reverse-mortgage business that hammered them.

One of the interesting things about the latest FOMC minutes is that the dispersion of opinion regarding the future of QE appears to be widening. Some wanted to end QE now, while others not only want to continue it, they want to increase it. Nonvoting hawk Charles Plosser said the Fed would be wise to begin unwinding its balance sheet now.

SIFMA lays into Obama’s proposed 2014 budget. It sounds like ETF investors could be in for a nasty surprise. They support the Administration’s proposal to create bonds for financing infrastructure spending, but pretty much pan everything else. The proposal is loaded with new taxes on capital Suffice it to say, if you are an investor, the administration is gunning for you.

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Stock markets are higher this morning in anticipation of the Fed minutes which will be released this morning at 9:00 am (a change from their usual 2:00 pm time).  Market participants will focus on hints regarding the end of quantitative easing. Mortgage Applications rose 4.5% last week on the back of the BOJ-led rally in the bond market and MBS. Treasury will also be conducting a 10-year auction around 1:00 pm. It will be interesting to see if the bid / cover ratio is affected by events in Japan. Bonds and MBS are down small.

Earnings season kicked of on Tuesday with Alcoa reporting better than expected earnings, but weaker sales. Retailers Fastenal and Family Dollar are down this morning after missing. We will get JP Morgan and Wells Friday morning before the open.

The President plans to release a $3.77 trillion budget today. He is proposing $1.8 trillion in new spending (although to be fair, that is to replace the sequester). He is also instituting a AMT II on incomes over $1 million of 30%. He also proposes to cap IRAs at $3 million, end carried interest, and to raise taxes on tobacco. He will also propose changes to the way cost-of-living adjustments are calculated – aka Chained CPI – to Social Security. Given that taxes and spending both increase pretty dramatically, the plan is DOA in the house.

It turned out the Fed mistakenly released the minutes early. Still don’t have the actual link, but here are some of the particulars: Economy re-accelerating after Q4 slowdown. Private nonfarm payroll increased at a modest rate in January, but expanded more briskly in Feb. (We now know that March was a disaster). The Fed asked primary dealers about their expectations for when the Fed will start tightening (are they running the Fed according to polls now?) and the view seems to be Q114 for the end of QE and Q315 for the first increase in the Fed Funds Rate. They noted that there did not seem to be much of a pullback in the economy in response to the tax hikes that kicked in Jan 1. Opinions about QE were all over the place, with some wanting to end it now and others wanting to increase the pace of purchases.

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