All Things in Moderation

Vital Statistics:

Markets are flat this morning on a lack of news. Bonds and MBS continue to retrace their large move downward after the FOMC statement. New Home Sales are due at 10:00 am.

Radar Logic released their Monthly Housing Report yesterday, noting that price declines are slowing, but we are not at a bottom. Distressed sales declined 21.8%, although the settlement between the State AGs and the 5 big banks means that foreclosures are going to pick up again. Interestingly, while Radar Logic has the opinion that housing has yet to bottom, the Radar Logic futures indicate that real estate will stay flat in 2012 and 2013 and then start increasing. The RPX futures are very illiquid, so take what they say with a grain of salt, but still…

Bank of America is launching a pilot program for distressed homeowners, where they follow a Deed In Lieu process to turn over the title to the bank and then rent at sub-market rates for up to 3 years. Bank of America would then sell the properties to outside investors. Speaking of which, we should be hearing the results of the FHFA’s REO-to-Rental program soon. In my opinion, the government made it very difficult for investors to take a look, (you have to pay $250,000 just to find out basic information) which I found surprising.

In the “because I said so” category, Ben Bernake said the Fed’s easy monetary policy after the stock market bubble burst wasn’t responsible for the housing bubble.

As I noted yesterday, the homebuilders have quietly put in a huge rally since last fall. (Note to the business press:  there are more stocks in the US than Apple) Is the move over?  Perhaps.  KB Homes reported disappointing Q1 earnings and the stock is down 14% pre-open.

Etch-a-Sketch-gate was actually market-moving, believe it or not. Yesterday, shares of little Ohio Art (NASDAQ – OART) more than doubled on the prospect that Democrats will be buying Etch-a-Sketches en masse as props for upcoming election. The stock trades by appointment and has a miniscule market cap ($8.6 million), but there you go.

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Vital Statistics:

World equity markets are weaker after disappointing economic data from China and Europe. Initial Jobless Claims came in at 348k, more or less in line with expectations. The FHFA House Price Index and Leading Indicators come out at 10:00.  The FHFA is a narrower index than Case-Schiller or RPX in that they only focus on conforming mortgages.

How is the deleveraging of the consumer going?  Actually pretty well, according to one measure. Moody’s notes that the delinquency rate on credit cards reached 4.02% in Feb, the lowest rate since August of 2007. That number is even more impressive when you consider the seasonal factors – Feb is usually a bad month for credit card delinquencies.

One thing the consumer does not need is higher gasoline prices. While oil prices have continued to rally, crack spreads are pushing 10 year highs. Crack Spreads are the price differential between crude oil and the refined product. WTI 321 Crack Spreads are at $32 a barrel, pretty much erasing the decline from last year. Apparently a large chunk of US east coast refining capacity is going to be taken off line this summer, causing a shortage of gasoline on the East Coast.  For further details and analysis, click here. While people bemoan the lack of refining capacity, people forget that refining is in general a lousy business. Sunoco is looking to sell its Philadelphia refinery and will close it if they can’t find a buyer.  Sunoco got only $400 million for the sale of its Toledo OH refinery last year. So look for higher gas prices for the summer driving season.

For those keeping score at home, the XHB (Homebuilder ETF) has been on a tear since early October, gaining 77%.  Is the stock market signalling something the economic indicators have yet to reflect? For the record, I noted the the change in tone on KB Homes 3Q conference call which seemed to predict that life for the homebuilders was improving.  Also, someone made a punchy bet last Oct that paid off well.

Is an arcane rule change from the Fed influencing mortgage rates?  The Fed has changed the rules for failure to deliver in MBS transactions, adding a charge in addition to the interest a seller must pay on a fail. With interest rates so low, sellers had the incentive to short MBS instead of delivering from inventory. This rule change will force dealers to hold more inventory, which the Fed ultimately hopes will drive up prices.

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Vital Statistics:

World equity markets are higher this morning ahead of existing home sales data at 10:00am. Bonds are rallying as well, with the 10 year futures up 11 ticks, retracing some of the pounding it has taken over the last week.

Unsurprisingly, the Mortgage Bankers Association index of mortgage applications was down for the prior week, with refis down big. The average rate on a 30 year fixed rate loan was 4.19%.

The Federal Reserve released its financial statements for 2011 yesterday. Total assets were 2.92 trillion at the end of 2011, an increase of almost 500 billion. Total capital is 53.8B, and they distributed 77.4 billion to the US Treasury. They currently hold 895B worth of MBS, which is down 13% from last year.  So it appears they are not fully re-investing P&I payments.  Maiden Lane has been nearly cut in half and is down to 36B, when you include capitalized interest and all the other variable interest entities.

Speaking the the Fed, the WaPo has an article asking the question if Bernake is aggressive enough regarding unemployment. Naturally the inflation doves think he isn’t. Would QEIII lop a percentage point off of the unemployment rate? It is hard to make an argument that it would. A real market-clearing bottom in housing would do more to get the economy moving than more games from the Fed.

How would the major European banks have fared under the Fed’s stress-tests?  They would have passed, according to analysts at Barclay’s. Surprising result, unless they explicitly did not model another sovereign default.

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