All Things in Moderation

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Markets are weaker this morning after the World Bank cut its global growth forecast.  Goldman and JP Morgan both reported better than expected earnings. Mortgage applications rose 15% last week and the CPI showed that inflation remains under control. Industrial production rose .3% and capacity utilization rose to 78.8%.  Bonds and MBS are up.

The National Association  Homebuilders Confidence index held at 47 in January, the highest level since April of 2006. A reading of 50 represents the point where builders view conditions as neutral. Conditions improved in all areas of the country, with the West performing the best, while the Midwest and Northeast performing the worst. This is the second sentiment report that has the “what a difference a year makes” theme.

The CoreLogic Home Price Index rose 7.4% YOY in Nov 2012. This is the largest gain since May of 2006.   Excluding distressed sales, home price increased nationally by 6.7%.  December’s gain is forecast to be down .5% MOM (reflecting the typical seasonal pattern) and will be up 8.4% YOY. Mark Fleming, the Chief Economist made a point about QM – “that the recently released Qualified Mortgage rules issued by the CFPB are not expected to significantly restrict credit availability relative to today.”  I am sure Cordray is breathing a sigh of relief on that one… the point of the QM rule was to expand credit.  

Bank of America is intent on growing the mortgage business again after a hasty retreat in 2011. Of course this meant they missed the mother of all refinancing booms. They exited the wholesale business and basically ceded the market leader position to Wells Fargo. It also signals that they believe the worst is behind them with respect to Countrywide. 

It is looking more and more like Republicans will not force a showdown on the debt ceiling (though “clean” debt ceiling increases have been rare in the past).  The polls aren’t with them and the politics aren’t there. Republicans will probably save spending cut demands for the sequester and the continuing resolution.

It looks like the case against Stevie Cohen has hit a wall.

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Futures are deteriorating on fears that Congress won’t find a way to raise the debt ceiling. Fitch ratings said that it would put the US credit rating under review for a downgrade if there is a delay in raising the debt ceiling. The Bernank weighed in on the debt ceiling at the University of Michigan yesterday. The producer price index showed inflation remains under control at the wholesale level and Dec retail sales were better than expected.  Bonds and MBS are up.

The Empire State Manufacturing Survey indicated that conditions for New York State manufacturers continued to decline at a modest pace. Roughly 20% of businesses surveyed expected to increase payroll, while the same number expect to decrease payroll. Capital Expenditures dropped again to its lowest level since 2009. That said, the outlook for 2013 remained mildly positive.

Lennar reported a profit of 56 cents a share for the 4th quarter and FY12 EPS of $3.11 a share.  Revenues were up 42% in Q4, and backlog was up 32%. Margins also increased.  The CEO noted that the housing recovery seemed to accelerate in Q4 as low mortgage rates, affordable home prices, lower foreclosures and a compelling rent vs own comparison drove the recovery.  

The CoreLogic Market Pulse showed that 2012 was better than expected for the housing market. They raise a good point though, that 2012 had no major economic shocks – no Japanese tsunami, no debt ceiling debate / downgrades, no major blow-ups of big financial entities. They characterize 2012 as “a year in recovery, but not one in which the country has actually recovered.”  They foresee further recovery next year, but note that supply has been constrained as many move-up buyers have been underwater.  As prices rise, those properties will be put back on the market. As the economy recovers, the first-time homebuyer will become in a better position to purchase these properties, which will provide the increased demand to meet the increased supply. 

The debt ceiling debate has been getting more confrontational, with the President using hostage-taking metaphors during his speech yesterday. Sen Pat Toomey (R-PA) has introduced a bill to avert default by requiring Treasury to prioritize payments (with interest, SS, and active duty military pay taking precedence) and allowing them to borrow just enough to cover those expenses if revenues aren’t enough. My personal belief is that Republicans know the politics aren’t there for a debt ceiling standoff, but they will accept the full sequestration cuts. The sequestration cuts were designed to never happen – the cuts were supposed to be unpalatable to both sides.  Much to the surprise of Democrats, Republicans are more comfortable with cutting defense than they thought, which means that the roughly $109 billion of spending in 2013 will get left on the cutting room floor. 

To put the sequestration into perspective:  the 2012 budget was $3.729 trillion.  The 2013 budget is $3.803 trillion.  The increase is roughly $74 billion.  In other words, the actual cut to government spending is $109 billion – $74 billion or about $35 billion.  $35 billion is 22 basis points of GDP. We are currently spending 24% of GDP, while the highest taxes as a percent of GDP have ever gotten in a touch over 20%, primarily during the equity bubble when capital gains tax receipts were huge. To get spending down to where we are able to balance the budget under the best of conditions, we would need to lop off $567B from 2012, or about 4% of GDP.  Republicans would be wise to give Obama what he wants on the debt ceiling and then force the Administration to explain why cutting spending by 22 basis points of GDP is somehow intolerable. Of course, the Administration has already telegraphed how it will fight this battle (terrorists will run wild, pollution will increase, airplane accidents will happen, we won’t be able to deal with natural disasters) so Republicans will be well advised to separate out the necessary functions of the government (basic safety net, FAA, FBI, FDA, etc) from the “nice-to-haves” like foreign aid to places like Egypt, agricultural subsidies, green energy subsidies, etc.

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Markets are down small after disappointing iPhone data out of Apple. There is no economic data this morning, although the Bernank speaks at the University of Michigan after the close. This week will be heavy with bank earnings, with US Bancorp, JP Morgan, Goldman, Bank of America all reporting 4Q / full year.  Wed and Thurs are the most interesting economically, with Housing starts and Capacity utilization / Industrial Production.  Bonds are up 1/2 a point while MBS are up small.

David Blitzer of S&P discusses the outlook for housing in 2013. He thinks (a) housing is going to be an outsized contributor to GDP next year and (b) shadow inventory fears are overblown.

Different industry groups weigh in on the QM from the CFPB:

• The MBA notes that cap on points is moronic when you are comparing different note rates
• The Center for Responsible Lending complains that prime mortgages are protected under QM
• The National Association of Federal Credit unions loves the special dispensation for them

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Markets are flattish after Wells Fargo’s earnings beat expectations and import prices showed that inflation remains contained. Bonds and MBS are up small.

Richard Cordray of the CFPB laid out the outlines of what will be considered a qualified mortgage at a presentation in Baltimore yesterday.  Big picture, he believes that lenders were too loose with credit in the past, but now they are too tight.  The Rule will be called Reg Z, or the Ability-to Repay and Qualified Mortgage Standards under the Truth in Lending Act.  These rules are intended to both protect consumers and increase access to credit. The highlights are

• A cap in points and fees
• No exotic (IO, increasing principal, 30 year + maturity, balloon) loans
• DTI < 43%.  Period.  (In other words, nothing on FICO or down payments)
• DTI ratios must be calculated on the expected long term payment, not teaser rates on ARMs.
• Provides immunity from homeowner lawsuits under the QM rules for prime loans.  Rebuttable presumption for subprime.
• Safe harbor is only for homeowner lawsuits under QM rules, all other rules still apply
• Rules will take effect 1/10/14 and will be phased in over a period of years
• Community banks / credit unions, and low income lenders will have relaxed standards

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Markets are higher this morning after positive news out of Ford and Nokia.  Initial Jobless Claims increased 4k to 371k, higher than the 365k estimate.  The ECB left rates steady and predicted a gradual recovery for the Eurozone this year.  Bonds and MBS are down.

WaPo has a write-up of the new QM rules expected to be released today by Richard Cordray in Baltimore.  You can watch the speech here. Expected changes:  Upfront fees will be capped at 3%, though exceptions will be made for loans under 100k, and IO mortgages will be banned.  Ability to repay will be based not on the teaser rate, but on the expected rate later on.   DTI ratios must be below 43%.  The rules will be phased in over the next 7 years. The CFPB estimates that 75% of the mortgages issued in 2011 would have met the standards. If the banks follow these rules, they will be protected from many homeowner lawsuits, but not necessarily buy-back risk. Jumbos will probably the area most affected by the new rules. MND has the gory details here.

What does the appointment of Jack Lew as Treasury Secretary mean?  That the Administration will be focusing its energy on budget battles going forward. He is not considered (at least by the Left) to be the sort of guy that will be addressing unemployment, or pushing for Keynsian stimulus. As such, he probably isn’t going to be tremendously dollar-negative, although in an era of competitive devaluations, it is hard to be a dollar bear anyway. The tight relationship between the Fed and Treasury will end. He is probably going to be a tough negotiator for the WH’s budget priorities – higher taxes on the rich no no non-defense spending cuts. He also has an unusual signature, (OoooooO) which will be gracing your dollar bills soon enough. 

Acccording to NAR, 2012 will go down as a record year for housing affordability. The index came in at 198.2, which means the median borrower had 198% of the minimum income required to purchase the median price existing family home, assuming 20% down and 25% of income going to P&I payments. Tight credit standards remain the sticking point.

Thinking outside the box:  Instead of paying the unemployed, pay their employers to keep them on. Through the work-sharing plan, employees get a shortened work week, with unemployment benefits partially compensating them for lost wages. 

The hits keep coming:  Morgan Stanley is laying off 1,600 workers.

Battle Royale:  Ackman vs Loeb in Herbalife.

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Markets are lower this morning as we kick off 4Q earnings season. Alcoa officially begins the parade after the close. Bonds and MBS are up small. 

The NFIB Small Business Survey for January ticked up slightly in December after falling off a cliff in November.  The current level of 88 is a recession-level reading.  Capital Spending is still in maintenance mode. Employment growth is flat. Housing, energy, and autos (the average age of a car is over 10 years) look to be the drivers of growth in 2013. But, overall, it was a glum report.

Chart:  NFIB Small Business Optimism:

The National Association of Home Builders Improving Market Index rose to 242 (out of 361 MSAs total) in January from 201 in December. This strength during a seasonally weak period bodes well for the summer selling season and confirms our view that housing bottomed about a year ago. Rentals are still booming as rents increased 3.8% YOY last quarter.  The vacancy rate dropped to 8%.

Could the East Coast get a break in gasoline prices?  Currently, the East Coast refineries use North Sea Brent crude oil, which trades at a premium to West Texas Intermediate, which is the source for West. Burlington Northern will boost crude oil shipments by 40% this year (primarily Bakken shale oil), and is looking to ship east to supply refineries on the Eastern Seaboard.  As coal shipments decline, oil is taking their place. Since railroads have more flexibility than pipelines, the continental US energy market will become more equalized.  Good news for the East Coast.

A new study shows that we may hit the debt ceiling sooner than expected, around Valentine’s Day (how romantic). Obama has said that the debt ceiling is non-negotiable. My sense is that Republicans will cede the debt ceiling point and use the sequestration or the expiration of the government’s operating budget to push through spending cuts.  As a plan B, the trillion dollar coin is still being bandied about, particularly by the Krug Man and Greg Sargent (who talks to NYPD hostage negotiators, instead of economists, apparently).

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Markets are slightly lower this morning after last week’s big rally.  This week looks to be relatively light data-wise.  4Q earnings season kicks off tomorrow with Alcoa announcing after the close. Bonds are up small after last week’s sell-off and MBS are flat. 

Basel has relaxed some of the requirements for the liquidity coverage ratio, and delayed the implementation in response to requests from the ECB. The ECB feared that the new requirements would lead to a credit crunch and would require banks to be over-invested in sovereign debt. Now banks will be allowed to count corporate debt, residential MBS, and even equities as liquid assets.  While MBS and bond price behavior is dominated by the Fed and QE, the net effect will push banks to hold MBS and sell Treasuries, so you should be aware that the 10-year could sell off and MBS could rally. 

On the other side of the coin, last week’s sell off in bonds and MBS has fueled fears that the housing recovery may stall as rates rise. Much of the boom in prices last year was in areas hit hard by distressed sales, as professional investors snapped up properties in places like Phoenix, Las Vegas and Detroit.  The 20% price increases there have probably run their course.  Rising rates would certainly end the refi boom that banks have feasted on for the past year, meaning originators will have to go back to the ground game of building relationships with realtors and focusing on purchase activity.

The worst merger in history continues to plague BOA.  They agreed to pay Fannie Mae $3.6 billion to settle repurchase claims and to repurchase another $6.75 billion of bad mortgages. Worst merger since Steve Case sold Ted Turner a bill of goods just as the internet bubble was bursting. Separately, Nationstar purchased a $215 billion servicing portfolio from BOA as well. Half is GSE / Govvie and half is private label. They paid $1.3 billion.

Republicans have declared tax increases off the table for the upcoming negotiations on the debt ceiling and the sequestration. Obama has already said that cutting spending has to go “hand-in-hand with tax law changes so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.” My guess is that he is talking about carried interest and oil “subsidies” and not about further increases in marginal tax rates or further limiting the mortgage interest deduction. Oh, and we need a clever name for the upcoming negotiations on the sequestration and debt ceiling. 

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