All Things in Moderation

Vital Statistics:

Markets are down slightly on no some disappointing economic data out of China. Treasury plans to sell $18 billion worth of shares in AIG. Bonds are down 1/2 a point, while MBS are flat.

In spite of the disappointing Chinese data, the Street is heavily long commodities. Chart:  GSCI Index:

Italian Prime Minister Mario Monti told CNBC over the weekend that he does not expect Italy to participate in the ECB’s bond buying program, at least initially.  Remember, the individual states have to request the ECB to purchase their debt. 

JP Morgan is out this morning with a note saying they expect the FOMC to extend the low rate guidance through 2015, and initiate a small asset purchase program (maybe $300b) primarily focused on MBS. The FOMC decision is scheduled to be released Thursday at 12:30 est.

The NAR is reporting that housing affordability continues to increase in spite of the fact that prices are up 9.4% YOY.  Decreasing mortgage rates are able to offset the price increases. 

SIFMA and others have provided a formal response to FHFA regarding the Eminent Domain issue in San Bernardino.  They provide a helpful table lining out the trade and who makes / loses money. Basically the winners are the hedge fund behind this and the borrower.  The table doesn’t break out what the state gets, but presumably they will get something out of this as well.  The lender gets slammed.

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Vital Statistics:

Markets are giving back earlier gains after a disappointing jobs report. Bonds and MBS are rallying on the number. The markets should be selling off on the lousy jobs report, but perhaps they are reacting to the possibility of more QE. Don’t fight the Fed, as they say.

Nonfarm payrolls increased by only 96k, a surprisingly weak number given yesterday’s ADP number which showed an increase of 200k. The Street was expecting 130k. June and July payrolls were revised down by 20k each. The unemployment rate fell to 8.1% from 8.3% due to a drop in the labor force participation rate, which now stands at 63.5%, the lowest level since the 81-82 recession.

Lawrence Yun has an interesting post showing how low mortgage rates are over the past 40 years. Unfortunately, it is mainly the professionals who are able to take advantage of these rates – the first time homebuyer is largely shut out.

Chart:  30 year fixed rate mortgage:

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Vital Statistics:

Markets are higher this morning after the ECB maintained rates and the ADP Employment Change came in better than expected.  The ADP number came in at 201k, which suggests the street estimates for nonfarm payrolls is too low. Initial Jobless claims were 365k, better than expected.  Bonds are down a point, and MBS are down about 10 ticks.

Mario Draghi is discussing the ECB bond purchase program right now. It seems consistent with what had been leaked earlier – unlimited, fully sterilized purchases. It appears the plan requires that the governments need need to formally ask the ECB to conduct purchases of their debt. So, if there are strings attached that Spain or Italy do not like, nothing may happen at all.

Bob Woodward’s new book, The Price of Politics, gives insight into how the Obama Administration’s White House worked (or didn’t). It does not paint a rosy picture of the Obama White House.

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Vital Statistics: 

Stock index futures are lower after the ECB released its blueprint for unlimited bond purchases and FedEx warned. A positive surprise in productivity was offset by higher unit labor costs. Bonds and MBS are flat.

The ECB has declined to put a cap on yields and will sterilize bond purchases to prevent inflation. The plan will also focus on short term government debt with maturities up to 3 years. Bill Gross must have gotten the advance word, as he tweeted yesterday “Draghi appears willing to write 2-3 year “checks” to peripherals. Very relationary.  Buy gold, TIPS, real assets.”  The Bundesbank is anticipated to be the only objection. 

The CoreLogic Home Price Index grew at 3.8% and the early indication for August is + 4.6%.  Excluding distressed sales, August is expected to come in + 6%. While they anticipate a seasonal slowdown in the growth rate, they are forecasting a gain for the full year 2012. 

Toll Brothers just priced a convertible bond issue.  $250MM, 20 year senior debt, 50 basis point coupon, 50% premium. Japanese coupon, American premium.  Old school convertible arbs are shaking their heads at that one. Credit Crunch?  What Credit Crunch? Arbs better hope the company never institutes a dividend because that bond will get smoked.

Ally is auctioning off 4 billion of subprime loans.  There has been a lot of money raised for distressed mortgage purchases in the last year, and Nationstar, Fortress, and Berkshire Hathaway are some of the high profile bidders. GMAC expects to emerge from Chapter 11 sometime in Q113.

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Vital Statistics:

Markets are flat after the long weekend with no major news pre-open.  We will get ISM and Construction spending at 10:00 am. Moody’s cut the outlook of the EU to negative. Bonds and MBS are down a few ticks. 

As we head into fall, remember that most of Europe takes August off and therefore no real decisions get made. Part of the complacency in the US markets has been driven by a lack of bad news out of Europe.  Nothing has changed since mid-summer, so I would expect Europe to take the forefront again (along with the election).  WaPo has a depressing piece on the state of the young in Spain, Italy, and Greece. And there is a small matter of a slow motion bank run in Spain, in spite of another rescue. Welcome back.

A paper presented at Jackson Hole last week is generating some discussion, in that it gives ammo to advocates of further quantitative easing.  It also recommends the Fed issue guidance for rates based on nominal GDP, not a timeframe (late 2014). FWIW, PIMCO CEO Mohammed El-Arian believes the Fed is signalling more activism. The sidestory is that a President Romney will replace Ben Bernake with someone more hawkish. A Romney win could be bond bearish.  How that would affect equities is anyone’s guess.

In spite of the gloom, Roger Altman makes the case that the economy will surprise on the upside. Housing and energy will lead the rebound. From 1980 to 2005, housing accounted for 4.5% of GDP.  This year, it is projected to be 2.4%.  As I have been pointing out, we have underbuilt by about 200k units for the past 10 years (even ignoring population growth).  There is pent-up demand and eventually it will be released in spite of the current economic gloom – even in hard times, people still get married, have kids, and move out of their parent’s homes. This will affect demand at the starter home level, which has been the part of the market that has been lagging. This  will enable the move-up trade that will start impacting mid-price homes. The high end (especially in the NYC metro area) probably has further to fall.

A new book details the bipartisan trainwreck that was Fannie Mae and looks at the options going forward.

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