All Things in Moderation

Vital Statistics:

Markets are weaker on a weaker this morning ahead of the EU summit in Brussels. Euro sovereign yields continue to drop, which means the benign backdrop to the markets continues.  Earnings reports continue to exceed expectations, though the bar is set very low this quarter. Bonds and MBS are slightly higher. 

It turns out that last week’s dramatic drop in initial jobless claims was due to technical problems with seasonal adjustments in one state, as reported by CNBC.  Initial Jobless Claims increased to 388k from a revised 342k last week.

The Leading Economic Indicators had a big jump, up from -.4 to + .6,  We still seem to be oscillating around 0, with a positive reading followed by a negative one. This is indicative of a slow growth trend. 

Similarly, the Philly Fed Business Outlook Survey noted that conditions in the manufacturing sector remain weak. Labor conditions dropped as 22% of all firms reported decreases in employment and 11% reported increases. The average workweek dropped as well.  In terms of the mix of employees, more firms decreased the number of full-time employees and increased the number of temp workers. 

Prepare for a battle over the fiscal cliff. No tax hikes on the wealthy, no deal. Of course Obama has said that before.

The WSJ discusses yesterday’s big housing starts number. As the inventory of foreclosures declines and underwater sellers sense a turnaround in pricing, more and more buyers are looking to new construction.  Foreclosures as a percent of sales dropped to 14% in September, and are down from 50% a couple of years ago.

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Vital Statistics:

Markets are higher after a strong report on housing starts. The banks reported good numbers while the techs disappointed. Mortgage applications fell, while building permits came in well above expectations.  Signs of strength in housing are pushing yields higher on Treasuries and MBS

Housing starts were 872k in September a rise of 15% MOM and 35% YOY.  Proportionally, multi-family had the biggest increase, which speaks to the strength in the rental market. While this level is a 4 year high, it still is just about the same level as the nadirs following the 82-82 and 91-92 recessions.  So we have a long way to go to get back to “normalcy” which is around 1.5 million, but things seem to be picking up in the housing sector, which has been a major drag on the economy.

Will investors do the heavy lifting of shrinking the TBTF banks? Given languishing stock prices and large discounts to book value, shareholders will be pressuring the banks to exit marginal businesses and either sell them or spin them off to shareholders. For example, Citi’s investment banking division is about the size of Goldman Sachs. Goldman trades at an 11 multiple, while Morgan Stanley trades at a 30 multiple. It would make sense for Citi, which trades at a 9.7 P/E to spin off the investment bank, which should unlock shareholder value.  Maybe they could resurrect the old Salomon Brothers.

The WSJ was out with a story last night which said the CFPB is considering giving lenders safe harbor if they originate a qualified mortgage.  It sounds like this safe harbor wouldn’t insulate the banks from buyback risk, but it would insulate them from lawsuits and penalties from the government. If there isn’t any protection from buyback risk, I am not sure how much this would end up mattering in the end.

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Vital Statistics:

Markets are higher this morning after a slew of good earnings reports and a positive reading on German confidence. Vik Pandit has stepped down as CEO of Citigroup.  The Consumer Price Index (which officially does not matter anymore) came in as expected. Bonds and MBS are down.

Yet another article complaining that mortgage rates aren’t dropping enough in response to QE. At least this one mentions the increase in G-fees, though it implies that it is a minor reason. 

One way of handling the TBTF issue that is being bandied about is to place a cap on bank balance sheets as a percent of GDP. Ohio Democrat Sherrod Brown introduced a bill to cap liabilities at 2% of GDP which went nowhere (JPM has liabilities of 8% of GDP).  But now a Federal Reserve Governor has mentioned the idea as well.  He doesn’t mention a specific number though. 

The first time homebuyer may be coming back.

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Vital Statistics 

Markets are higher this morning on lower Chinese inflation.  Part of the recent strength (it seems like almost every day, the S&P futures are up 5 points pre-open) is being driven by the steady drop in Euro sovereign yields. Italy is trading below 5% and post-re-org Greek debt is trading at 17.5% after reaching 30% in late spring. Whether the crisis is over, or merely taking a breather is anyone’s guess. Of course there is the possibility of a hard landing in the emerging markets looming on the horizon.

On the economic news front, retail sales came in at 1.1%, and look even better when you strip out autos and gasoline. Maybe there was something to that University of Michigan consumer confidence number last Friday. It certainly bodes well for a good holiday season for the retailers. On the other hand, the NY Fed’s Empire Manufacturing Survey continued to decline.

Citigroup reported better than expected earnings, though it appears one-time items drove the results.  The Street is still refusing to give much credit to Citi’s turnaround – book value is $63.59 a share and the stock is trading at 35.25, up about a half.

The NY Times has another article discussing the problems with appraisals. Given that the real estate market has been slow for so many years, finding enough non-distressed comps is proving to be a problem.  Sellers who think they are lowballing their prices find that appraisals are coming in well below their offers.  Appraisers counter that they don’t set the market – they reflect it, and blaming appraisers for a lousy housing market is like blaming the weatherman for lousy weather.

Bob Schiller and Rick Santelli discuss ZIRP and housing. Santelli, no fan of ZIRP calls it “money for nothing” and believes that the message it sends (that the Fed is really worried about the next few years) is putting a damper on the animal spirits. Plus, as Schiller has pointed out, there isn’t a lot of evidence that mortgage rates explain house prices. 

Mark Zandi believes that the deleveraging process is largely over. Certainly debt service payments relative to income are at the lowest level in 20 years, courtesy of low interest rates.  Debt however, is not, although it is off the highs of 2007.

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