Morning Report - On the Waterfront Edition

Vital Statistics:

	Last	Change	Percent
S&P Futures	1401.8	-8.9	-0.63%
Eurostoxx Index	2633.2	-26.8	-1.01%
Oil (WTI)	91.01	0.1	0.15%
LIBOR	0.308	-0.003	-0.96%
US Dollar Index (DXY)	79.81	0.188	0.24%
10 Year Govt Bond Yield	1.70%	-0.03%
RPX Composite Real Estate Index	192.3	0.0

Stock index futures are lower on pessimism about a budget deal. Obama will meet with Congressional leaders today to see if they can hammer out a deal. The House will meet on Sunday night. The same story remains - stocks are worried about going over the cliff, while the bond market seems skeptical.  For a laugh, check out Rick Santelli's rant about the way the markets are handicapping it.

One other possible headwind for the economy in Q1 - a longshoreman's strike that would close cargo ports on the Eastern Seaboard and the Gulf Coast. This would not only limit raw material supplies to US factories, it would also push many logistics workers, truck drivers, etc on to the unemployment rolls. Some economists estimate that a strike could cost the US economy $1 billion a day. Will Obama risk alienating his labor base to intervene?  Fun fact:  the average compensation for a longshoreman in $124k.

Yesterday's consumer confidence numbers took a step downward, and seem to back up reports that this year's holiday sales were weak.The outlook for business conditions and labor markets fell.

Chart:  Conference Board Consumer Confidence:

In spite of the pessimism over the fiscal cliff, luxury homes priced over $1 million are making a comeback. Sales have risen by 9% for the first 9 months of 2012.  Strong foreign demand has been driving up prices in Manhattan and the Hamptons. In terms of foreclosures over $1 million, the NYC suburbs hold 4 out of the top 10 zip codes, with New Canaan taking the lead.  This is still the wreckage from the bust, where lots of $1 million a year guys lost their jobs in 2007 and haven't worked since.

Morning Report - The Mod Squad

Vital Statistics:

	Last	Change	Percent
S&P Futures	1416.2	2.7	0.19%
Eurostoxx Index	2665.1	16.6	0.62%
Oil (WTI)	91.18	0.2	0.22%
LIBOR	0.311	0.001	0.32%
US Dollar Index (DXY)	79.44	-0.182	-0.23%
10 Year Govt Bond Yield	1.77%	0.01%
RPX Composite Real Estate Index	192.3	0.5

Markets are quiet again as desks are understaffed both in Europe and the US. Initial Jobless Claims fell to 350k, back to the bottom end of our 350k - 390k range. Bonds and MBS are down small and continue to dismiss the possibility of a cliff-induced recession.

President Obama heads back to Washington to try and craft a deal to avert the fiscal cliff. The WH seems to have backed off its proposal to increase taxes at 400k and has moved back to 250k. It is looking more and more like we will go over the cliff on Jan 1 and then pass some sort of tax cut package soon thereafter.  Treasury informed Congress that we will hit the debt limit on Monday, but they can play some games to keep the government funded through Feb.

Of course, once we climb the fiscal cliff, we will go right into the battle of the debt ceiling. Moody's has already fired a shot across the bow, saying that they expect the government to raise the limit, but they may downgrade the U.S.'s credit rating unless we get a decrease in the debt / GDP ratio.

Yesterday's WSJ report on possible new initiatives to mitigate the effects of the housing bust have already been met with skepticism. The first plan involved allowing deeply underwater non-agency loans to refi into Fan and Fred loans.  James Pethokousis of the American Enterprise Institute points out that allowing the GSEs to refi underwater non-agency mortgages is a non-starter with virtually all Republicans and many Democrats as it shifts risk from the private sector to the public sector.  Plus, you have to get the originators on board, and they won't make 125%+ LTV loans without some sort of safe harbor against buyback risk.

A second plan would further expand HAMP, by changing the definition of "in danger of imminent default" to include anyone who is has a LTV over 125%, even if they are current on their mortgage. Such a move would not require Congressional approval. The American Securitization Forum is against the idea, given that these loans are worth their weight in gold.  They are current, have above-market coupons, and have virtually no chance of being prepaid for years. If enacted, investors would take an income hit (although Treasury would pay them the coupon difference for 5 years), and would see a capital loss as well. My sense is that ASF's argument will be met with very little sympathy in the Administration, although state and federal pension funds will be quietly making the same argument as well. Still another hurdle would be servicers, who would have to buy off on the idea that modding a current loan is somehow good for the investor.

Morning Report - Case-Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1422.7	2.9	0.20%
Eurostoxx Index	2648.5	-2.6	-0.10%
Oil (WTI)	89.09	0.5	0.54%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.66	-0.015	-0.02%
10 Year Govt Bond Yield	1.78%	0.00%
RPX Composite Real Estate Index	191.8	0.1

Markets are quiet this morning, as most of Europe is shut for Boxing Day. Bonds and MBS are flat.

Not much is happening on the fiscal cliff front, although Obama plans to cut his vacation short and return to Washington to try and hammer out a deal. Chances of any sort of grand bargain are virtually nil; all that could be accomplished at this point is some sort of fig leaf. In spite of the political and economic uncertainty, and the early indications of a weak Christmas, the bond market still refuses to price in the possibility of a recession.

The S&P / Case-Schiller index of home values came in at  145.93 for the month of October, up 4.3% year-over-year and up 66 basis points month-over-month. The hardest-hit MSAs continued to show the biggest gains, with prices up 22% in Phoenix and 10% in Detroit. The Northeast MSAs (Boston and NY) are showing the smallest increases.

Chart:  S&P / Case-Schiller:

The Obama administration is considering expanding its mortgage-refinancing program to include underwater borrowers with non government loans.  Such a move would require legislation to change Fannie and Fred's charters and would also involve a bump in the guarantee fee to price in the additional risk. It will also require the blessing of FHFA, which has indicated general support for the program.  Finally, it will require some sort of immunity from buy-back risk in order to get originators on board.

A new study confirms what many have thought about high-frequency trading:  It is highly profitable and adds no value to the system as a whole. Aggressive, liquidity-taking high frequency trading (in other words, front-running) does the best. The profitability of HFT seems to be persistent - new entrants are less likely to be profitable and are more likely to exit. Speed matters above all, and that is why James Simons is so consistently profitable.

Morning Report - Merry Christmas.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1421.8	-4.1	-0.3%
Eurostoxx Index	2648.3	-3.0	-0.15%
Oil (WTI)	88.38	-0.28	-0.31%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.46	0.156	0.15%
10 Year Govt Bond Yield	1.77%	+0.04%
RPX Composite Real Estate Index	191.8	-0.1

Markets are quiet this morning as most shops have skeleton crews on the desk.  Stock and Bond markets will be open until 1:00 pm.  There is no economic data this morning. Bonds are down while MBS are flat.

The fact that bonds have not rallied in the face of the machinations of the fiscal cliff has me scratching my head. Mohammed El Arian of PIMCO believes a recession is now more likely. If we enter a recession, we could be looking at a 1.25% 10-year.  We broke 1.4% in late July. Yet here we sit at 1.77%.  Liquidity is typically low this time of year, so you can't read too much into it, but unless we get a deal on the cliff soon, we could be looking at a big rally in Treasuries come January.

With the collapse of Boehner's Plan B, all attention turns to the Senate which hopes to devise some sort of band aid to prevent the worst of the fiscal cliff. In particular, Mitch McConnell has been more of an observer than a participant as negotiations have centered on the WH and House. Apparently Joe Biden has better luck dealing with the Minority Leader than Obama, and has earned the reputation as the "McConnell Whisperer." Democrats are urging Boehner to re-enter negotiations with a bipartisan bill. Ironically, by rejecting Boehner's Plan B, Tea Party Republicans in the House have lost their seat at the table.

Lender Processing Services is out with their first look at November delinquency numbers. Delinquencies are up sequentially, while foreclosures are down.

The Fed is disappointed that mortgage rates are not responding to the Fed's MBS purchase program. At least the story mentions the reason - increases in guarantee fees. Most stories about this (The Washington Post is absolutely terrible on this) don't mention the fee increase. Even the WSJ does it, by mentioning "higher fees charged by Fan and Fred" in a generic fashion, as is they are inconsequential.  People don't understand how much G-fees matter. There is the perception in Washington that lenders are simply pocketing the difference when in reality their costs have increased. The media has glommed onto the idea that the financial industry is inherently crooked and there is no disabusing them of that.

Merry Christmas to all.

Morning Report - Over the cliff we go

Vital Statistics:

	Last	Change	Percent
S&P Futures	1418.4	-22.2	-1.54%
Eurostoxx Index	2645.3	-13.0	-0.49%
Oil (WTI)	89.04	-1.1	-1.21%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.38	0.116	0.15%
10 Year Govt Bond Yield	1.75%	-0.04%
RPX Composite Real Estate Index	191.8	-0.1

Stock index futures are getting crushed this morning after House Speaker John Boehner postponed a vote for Plan B, which would have raised taxes on millionaires, after he couldn't get enough Republican votes.  He has scheduled a press conference for 10:00 am. This is probably the final nail in the coffin for a deal before the end of the year.  It also could mean Speaker Cantor.

So, what are the options now on the fiscal cliff?  John Boehner could continue to work with the President on a deal that can garner bipartisan support in the House.  Second, the House could pass the Senate bill, with Republicans voting "present." Finally (and probably the most likely outcome) is that we go over the cliff and immediately pass tax cuts in the new year. It goes without saying that all of this is dependent on the world not ending today.

On the economic data front, Personal Income and Spending came in better than expected.  Durable Goods were higher than expected and the Chicago Fed National Activity Index rebounded. Of course none of that matters right now. Bonds are up a point, while MBS are up 1/4. In view of what is happening in Washington, I wouldn't want to be short bonds right now.

Morning Report: Merger mania on Wall Street

Vital Statistics:

	Last	Change	Percent
S&P Futures	1430.2	-2.9	-0.20%
Eurostoxx Index	2654.9	0.2	0.01%
Oil (WTI)	89.7	-0.3	-0.31%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.12	-0.145	-0.18%
10 Year Govt Bond Yield	1.78%	-0.03%
RPX Composite Real Estate Index	191.8	-0.1

Markets are slightly lower after a slew of economic data this morning.  3Q GDP was revised upward to 3.1%.  Initial Jobless Claims came in at 361k. Consumption rose 1.6%.  The November Index of Leading Economic Indicators fell .2%.  Bonds and MBS are flat.

The FHFA House Price Index rose a half of a percent in October.  Sep was revised downward.  Prices are up 5.6% YOY and the index is 15.7% below its peak in April 2007.  We are more or less back to Summer of 2004 levels.

The Intercontinental Exchange (ICE) has agreed to buy NYSE Euronext for $8.2 billion.  It shows just how much the importance of trading equities has fallen.  Who would have thought a 12 year old scrappy upstart from Atlanta would end up buying the New York Stock Exchange, Paris Bourse, and the Amsterdam Exchange?  The floor of the New York Stock Exchange is more or less just a museum these days.  Separately, Knight Capital Group, the Nasdaq market-maker which lost $460 million on a computer glitch earlier this year, agreed to a deal with Getco, the Chicago-based leader in high frequency trading.

On the fiscal cliff front, the House plans to vote on a measure that increases taxes on millionaires.  Obama has already threatened to veto it. The current bid / ask spread is 400 - 1000, meaning that Obama wants the threshold for higher taxes to start at 400k, while Boehner wants it to start at 1 million. Bloomberg has a good backgrounder on the relationship between Obama and Boehner.

KB Home announced their 4th quarter and full year earnings this morning.  Deliveries were up 6% and average selling prices increased 10% sequentially and 23% year-over-year. Backlog is up 35% and that potential revenue would be the highest since Q407. Larger homes were the driver, which accounts for the jump in ASPs.

Morning Report - Fannie Mae's Economic and Housing forecast for 2013

Vital Statistics:

	Last	Change	Percent
S&P Futures	1445.2	4.1	0.28%
Eurostoxx Index	2659.8	16.3	0.62%
Oil (WTI)	88.4	0.5	0.53%
LIBOR	0.31	0.001	0.32%
US Dollar Index (DXY)	79.04	-0.319	-0.40%
10 Year Govt Bond Yield	1.82%	0.00%
RPX Composite Real Estate Index	191.9	0.2

Markets are higher this morning on optimism over the fiscal cliff.  John Boehner introduced a Plan B yesterday in case bipartisan talks fail, but markets / observers still seem optimistic that a deal can get done. Bonds and MBS are flat

Housing starts came in at an annualized 861k pace in November, somewhat below expectations.  This is undoubtedly a Sandy-influenced number.  Building Permits came in at 899k, above expectations. This is the strongest 3 months in four years. The NAHB Builder Confidence Index rose in Dec. Overall, the housing sector has turned the corner and is now an engine for growth, not a drag.

Fannie Mae is out with their Economic and Housing Outlook for 2013.  Here is their forecast for 2013:

• GDP +2.2%
• Unemployment 7.5%
• 10 year bond yield: 1.7%
• Housing starts:  949k
• House Price appreciation:  + 1.7%
• 30 year fixed rate mortgage 3.4%
• Purchase originations + 15%
• Refinances: - 29%

I am surprised at their forecast for a drop in refis given that they think rates will stay low.

Peter Eavis of the NY Times discusses the state of play with the qualified mortgage.  Consumer advocates are pushing for a broad definition of a qualified mortgage in order to increase credit availability, but they are are reluctant to give banks any legal protection. The big banks are saying that they won't relax credit standards unless they are given some protection. Consumer advocates point out that that a shield will still presume the banks have met the standards, and merely allows the consumer to rebut that presumption, which means the lender has the upper hand to begin with.

Given the focus on the election and the fiscal cliff, fears of a European implosion seem to have fallen by the wayside.  The markets seem relatively sanguine about the prospect of a Euro debt crisis as sovereign yields have fallen since early Summer. Here is a chart of the Greek 10-year bond yield, post-re-org:

Actually, it isn't just Greece - all of the PIIGS are flying. All things considered this is a huge accomplishment.  Time should have named Mario Draghi Person of the Year instead of Barack Obama.

Morning Report - Reaching across the fiscal abyss

Vital Statistics:

	Last	Change	Percent
S&P Futures	1431.2	4.2	0.29%
Eurostoxx Index	2637.4	9.4	0.36%
Oil (WTI)	87.76	0.6	0.64%
LIBOR	0.309	0.000	0.00%
US Dollar Index (DXY)	79.49	-0.077	-0.10%
10 Year Govt Bond Yield	1.78%	0.01%
RPX Composite Real Estate Index	191.7	0.1

Markets are higher this morning on optimism for a deal on the fiscal cliff. The President made some tax concessions to move closer to Speaker Boehner's position. The current account deficit increased more than expected to 107.5B.  Bonds continue to sell off, although it looks like the 10-year yield is bumping up against resistance. Certainly the announcement of QE4EVA was a case of "buy the rumor, sell the fact."  FWIW, that is my gut feeling about stocks and the fiscal cliff as well.

Both sides are coming closer on a deal to avoid the fiscal cliff.  Obama has lowered his revenue target to $1.2 trillion from $1.4 trillion and moved up the threshold for higher taxes to $400k from $250k.  $1.22 trillion will be cut in spending, from a variety of areas. The second biggest component of "savings" would be interest saved on debt that isn't going to be issued. Only in DC, would that count. It would also raise the debt ceiling enough to cover two years and the 2014 midterms.  On capital gains, the top tax rate would be 20%. Raising the medicare eligibility age from 65 to 67 seems to be off the table.  The sequester will be replaced by another sequester.  Extended unemployment benefits would continue.  One other surprising tidbit - the President wants to replace the expiring payroll tax cut with other stimulus measures such as infrastructure spending.  Which means everyone's taxes are going up, not just the rich.

The FHA plans to sell 40,000 non-performing loans over the next year to help improve its finances, which would make them the biggest seller of distressed paper, according to Louis Amaya of National Asset Direct.  One interesting wrinkle is that it is a back-door way to achieve principal mods.  Acting FHFA Chairman Ed DeMarco has steadfastly refused to allow FHA to reduce principal when modifying delinquent loans.  However, if they sell the loans, the investor is free to make whatever modification makes sense.  Under a U.S. Treasury program, investors can be reimbursed as much as 63 cents on the dollar for principal forgiveness.  Steve Schwartzman of Blackstone said they are "loading the boat." with delinquent loans, both for rentals and a macro bet on a housing recovery.

At 10:00 am, we will get the National Association of Homebulder's Housing Market Index.  This is a sentiment indicator of the homebuilders, which has been skyrocketing since housing bottomed earlier this year. According to Trulia, the Millenials are planning to ditch the rentals to buy a house in the next two years. As I have stated in other posts, household formation numbers have been highly depressed during the last 5 years, not because of demographics, but because of the economy. That represents a lot of pent-up demand that will be unleashed as the economy recovers.

Chris Whalen of Carrington discusses how the lending environment has changed and how the "regulatory arbitrage" favors the smaller independent lenders.  The downside is that mortgages will remain tough to get courtesy of the CFPB, especially in judicial states with high value properties.

Fun useless link of the day - put your own house in a snow globe.  h/t Rob Chrisman.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1414.9	5.7	0.40%
Eurostoxx Index	2622.9	-7.6	-0.29%
Oil (WTI)	86.67	-0.1	-0.07%
LIBOR	0.309	0.001	0.32%
US Dollar Index (DXY)	79.58	-0.001	0.00%
10 Year Govt Bond Yield	1.72%	0.02%
RPX Composite Real Estate Index	191.6	0.4

Markets are higher this morning after Japan elected Shinzo Abe, who has advocated further fiscal and monetary stimulus.  The Empire Manufacturing Survey showed manufacturing in NY state contracted more than expected. Bonds are down and MBS are down small.

The negotiations on the fiscal cliff continue. The President has tied any discussions on entitlement cuts to increasing taxes on the rich and an increase in the debt ceiling.  Boehner has proposed a millionaire's surtax and an increase in the debt ceiling. Of course, Boehner can strike a deal with the President, but that doesn't mean he can deliver the votes in the House.

Barry Ritholz has MBIA's presentation on Countrywide's fraud.

Samuelson discusses the Fed's targeting of both unemployment and inflation and lays out some of the unintended consequences.

Morning Report: Hotel California Monetary Policy

Vital Statistics:

	Last	Change	Percent
S&P Futures	1412.1	0.1	0.01%
Eurostoxx Index	2628.7	1.1	0.04%
Oil (WTI)	86.4	0.5	0.59%
LIBOR	0.308	0.000	0.00%
US Dollar Index (DXY)	79.91	-0.023	-0.03%
10 Year Govt Bond Yield	1.71%	-0.02%
RPX Composite Real Estate Index	191.6	0.4

Stock index futures are flat after a benign CPI report.  Of course the Fed explicitly told us that until unemployment drops below 6.5%, they do not care what inflation does. Industrial Production rebounded in November, and Capacity Utilization rose. Bonds and MBS are up small.

Markit's flash Purchasing Manager's Index is generally upbeat and shows US manufacturing rebounding in December after reaching post-crisis lows in Aug and Sep. There has been some concern that Q4's GDP numbers have been goosed by an inventory build, which means we are borrowing growth from next quarter.  FWIW, the report does not bear that out as it shows inventories are falling. The report notes employment is picking up in the manufacturing sector as well.

CoreLogic's December Market Pulse is reasonably optimistic on housing.  Punch Line:  Residential Real Estate is finally contributing to economic growth instead of being a drag. While residential real estate is not a massive driver of the economy, it usually is the first to recover after a recession and makes its largest contributions early in the economic cycle. It is the piece of the puzzle that allows us to shift from first to second gear.

The Man With A Tan - Angelo Mozilo has no regrets about how he ran Countrywide and only agreed to a $67.5 million settlement to protect his children.  (BTW, it looks like Bank of America paid the lion's share of that) You can read his entire deposition here.

Great perspective on the history of banking from my favorite financial author, Jim Grant. "You can have the fear of God or the socialization of risk, but you cannot have both."

Interview with Dallas Fed President Richard Fisher on the Fed's "Hotel California" monetary policy.  He lays out the argument that the problem with the economy is not monetary policy, it is regulatory uncertainty out of Washington. He also notes that we are reaching the point of diminishing returns.

Morning Report - QE4EVA

Vital Statistics:

	Last	Change	Percent
S&P Futures	1427.7	0.5	0.04%
Eurostoxx Index	2625.6	-4.8	-0.18%
Oil (WTI)	86.29	-0.5	-0.55%
LIBOR	0.308	-0.002	-0.48%
US Dollar Index (DXY)	79.87	0.058	0.07%
10 Year Govt Bond Yield	1.71%	0.01%
RPX Composite Real Estate Index	191.3	0.5

Markets are flat after a mixed bag of economic data.  Retail sales increased .3% in November vs an expectation of .5%.  Initial Jobless claims fell to 343k and were well below the 369k expectation. The Producer Price Index showed inflation running lower than anticipated. The Bloomberg Consumer Comfort Index fell.  Bonds are down a few ticks and MBS are flat.

As expected, the Fed announced a Treasury buying program in its FOMC statement. $45 billion per month, until unemployment drops below 6.5% and inflation stays below 2.5%.  Bernake was careful not to characterize the 6.5% unemployment rate as NAIRU - or the non- accelerating inflation rate of unemployment. They took down their GDP projections from September, with their 2013 GDP forecast falling to a range of 2.3 - 3.0 from a range of 2.5 - 3.0.  They also took down unemployment as well, to a range of 7.3% to 7.7% from a range of 7.6% - 7.9%.  Inflation forecasts were lowered as well. Here is a video of the press conference.  Bonds reacted negatively to the announcement.  Biggest takeaway - the Fed has the pedal to the metal and they are writing the book as they go along.

Looks like no progress so far on the fiscal cliff. A recent poll shows overwhelming support for increasing taxes on the rich.  Business execs have been lobbying for a deal. Liberals are fighting spending cuts. Bernake mentioned in his press conference that the Fed does not have the ability to offset the negative effects to the economy if we go over.

A delay in BofA's jumbo deal shows just how hard it is to bring private capital back into the mortgage market. Private Label Securitizations were $3.5 billion this year, versus $1 trillion in 2006. Blame Dodd-Frank's proposed "skin in the game" rules, which combined with accounting and other requirements would require banks to hold capital against all of the underlying loans.

Transunion is forecasting mortgage delinquency rates to fall to 5.06% at the end of 2013 from 5.32% today. RealtyTrac reported foreclosure starts are at a 71 month low.

From the Department of Irony:  it turns out that the government's exit from GM hinges on the success of its newly-unveiled full size Silverado pickup.  I could have sworn I heard many in Washington claim that the reason GM hit the wall was because they were making these huge vehicles that "nobody wants."

Morning Report - 12^3 edition

Vital Statistics:

	Last	Change	Percent
S&P Futures	1433.3	1.8	0.13%
Eurostoxx Index	2629.5	5.4	0.21%
Oil (WTI)	86.35	0.6	0.65%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.95	-0.116	-0.14%
10 Year Govt Bond Yield	1.66%	0.00%
RPX Composite Real Estate Index	191.1	0.4

Markets are up slightly this morning ahead of the FOMC statement this afternoon. Mortgage Applications were up 6.2% last week. Right to Work was passed in Michigan. Bonds and MBS are flat.

The FOMC statement is due out at 12:30, and at 2:15, the Bernank begins his press conference. Things to look for:  New Treasury purchase plan to replace Operation Twist, 2013 GDP forecast, any comments on its outlook for housing. The WaPo speculates that the Fed will shift more buying to Treasuries than mortgages, and it looks like Bill Gross concurs, as he is lightening up his MBS position.

Looks like FHFA Acting Director will be out of a job soon. This will undoubtedly pave the way for a mass principal forgiveness / underwater refis on Fannie and Freddie loans. Mortgage-Backed securities will be vulnerable to news of more interventionist policies out of FHFA, so beware as you could have Treasury pricing and MBS pricing diverge.

While individual tax rates are going up as part of the fiscal cliff, corporate tax rates may be going down. Obama earlier this year proposed lowering the corporate tax rate to 28% from its current 35%.  The lower rates would be offset by eliminating some deductions and the net revenue would be the same. I would argue that we are at the point on the Laffer Curve where lowering rates would actually raise revenues as it would eliminate some of the transfer-pricing games companies play to declare as much income as possible overseas. The poster child of these transfer pricing games is GE, which paid no US income taxes in 2010. Or Google, which shifted $9.8 billion in revenues to a Bermuda shell company, which allowed it to avoid paying roughly $2 billion in taxes.

Dodd-Frank implementation could stall for a while after Mary Schapiro steps down as Chairman of the SEC, leaving the commission deadlocked with 2 democrats and 2 republicans.  Politically divisive issues like prop trading and restrictions on executive pay will have to wait until a fifth commissioner is nominated and confirmed.  Fun fact:  The SEC has finalized just 32 of the 95 rules that the 2010 law required.

The Fed has been quietly telling the big banks:  No more mergers. Banks that hold 10% of US deposits are already capped in size, but now it looks like the biggest banks just below that threshold are now prohibited from growing by acquisition. Fed Governor Dan Tarullo gave a speech which discusses the TBTF problem and examines various alternatives (re-instate Glass Steagall, capping non-deposit liabilities, etc.)

Morning Report - NFIB Small Business Pessimism Survey

Vital Statistics:

	Last	Change	Percent
S&P Futures	1423.2	3.0	0.21%
Eurostoxx Index	2615.1	19.1	0.73%
Oil (WTI)	85.78	0.2	0.26%
LIBOR	0.31	-0.001	-0.32%
US Dollar Index (DXY)	80.09	-0.236	-0.29%
10 Year Govt Bond Yield	1.65%	0.03%
RPX Composite Real Estate Index	190.8	0.3

Markets are higher this morning on optimism for a deal on the fiscal cliff and a better-than-expected report on German investor confidence. The US government exited its AIG position. UBS will begin charging clients for deposits in swiss francs. Bonds and MBS are down.

The NFIB Small Business Survey fell off a cliff in November to 87.5. The survey blames the election, not Sandy. If people though uncertainty over the election was the cause of the nascent slowdown, this survey shows that it wasn't.  Of course there is a correlation and causation effect happening here:  Does uncertainty cause a lousy economy, or does a lousy economy increase the risk that politicians will do something stupid?

Chart:  NFIB Small Business Optimism:

Part of the reason for falling optimism is falling profits.  One claim constantly thrown out is "Profits are at record levels, why aren't people hiring?"  Maybe it is because they are not, at least not in the small business arena.  This is even more profound when you consider that taxes are going up.  Small business should be pushing as many expenses as possible to next year in order to minimize their 2013 tax bite, which means that profits should be increasing now as their expenses are deferred.  Which means that underlying business profitability may in fact be lower.  

Chart:  NFIB Small Business Earnings:

Note that Bill Dunkelberg is a free-market sort of guy, so the language of his survey will reflect his political leanings.  That said, the numbers are what the numbers are. 

Ezra Klein of WaPo sums up where things really stand in the fiscal cliff negotiations.  The White House needs (a) an increase in tax rates for the rich, (b) a long-term solution to the debt ceiling, and (c) an extension of unemployment insurance. Republicans need something on the entitlement front - either an increase in the medicare eligibility age or a change in inflation calculations for Social Security.

The change in inflation calculation involves a going to a "chained CPI." One of the historical criticisms of the Consumer Price Index is that it fails to take into account the substitution effect, which means that as relative prices increase, consumers substitute cheaper goods for higher priced goods.  In other words, if the price of beef rises, consumers substitute chicken for beef. Since the CPI is based on a static basket of goods, it fails to take into account the fact that the basket of goods changes as relative prices change, which means that it overstates inflation.  The chained CPI is an attempt to correct for this.

Today begins the two-day meeting of the FOMC. The Street is expecting that the Fed will announce an open-ended Treasury Purchase program, which could push its balance sheet to almost $4 trillion. The estimate is that the latest round of QE will add $500B in Treasuries to $620B in mortgage backed securities.  It will be interesting to see if the Fed notes its frustration that consumer borrowing rates are not falling in lockstep with mortgage backed securities.  It would be even more interesting if there was some acknowledgement of G-fee increases, which explain the reason why.

Morning Report - Does uncertainty drive the economy or vice versa?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1414.5	-1.5	-0.11%
Eurostoxx Index	2578.6	-22.8	-0.88%
Oil (WTI)	86.63	0.7	0.81%
LIBOR	0.311	0.001	0.32%
US Dollar Index (DXY)	80.35	-0.062	-0.08%
10 Year Govt Bond Yield	1.61%	-0.01%
RPX Composite Real Estate Index	190.5	-0.4

Louis and I did a podcast on the fiscal cliff and the economy.  You can listen to it here.

Markets are mixed this morning as optimism on the fiscal cliff is overshadowed by European events.  Mario Monti is resigning, creating an opening for Silvio Berlusconi to return.  Italian bond yields are up 31 basis points to 4.83%.  Japan is officially in a recession again (its third in the last four years) as 3Q GDP shrank at a 3.5% annualized rate. Bonds and MBS are up small.

Generally, we have a data-light week coming up, with inflation numbers dominating.  The FOMC rate decision is Dec 12.

The details of a deal on the cliff are taking shape.  On the revenue side, either a "split the difference" between the current top rate and 39.6%, or a redefinition of what is considered "rich," to 375k - 500k. Entitlement cuts will be part of the package.  Ezra Klein reported Friday that the deal will probably be an increase in the top rate to 37% and an increase of the Medicare eligibility age to 67. Both sides seem to be inching closer together, and we'll see if Boehner can pull his caucus together when they meet on Wed.

Ever since the financial crisis began, "uncertainty" has become the buzzword thrown out to explain why the economy continues to limp along. Two professors from Chicago and Stanford tested the hypothesis that uncertainty is driving the economy by regressing economic variables against the number of times the word "uncertainty" was mentioned in the press.  They found a statistical relationship between the two, and estimate that the upturn in uncertainty caused a 16% drop in private investment and 2.3 million jobs. Of course there is a big risk of confusing correlation and causation.  Does uncertainty cause a bad economy, or does a bad economy increase the risk that government will do something (either good or bad) in an attempt to fix the economy?

New lawsuits continue to be filed against the banks for the sins of the subprime crisis. Some in the banking industry fear the cost could reach $300 billion. Investors are now suing the trust banks for failing to police issuers.  This is a new front, as the trust banks merely hold the securities and collect / disburse payments for a nominal fee.  Servicers, are you next?

Interview with Capital Markets Today

Interview where I discuss the fiscal cliff, the economy, and real estate.  This will become a regular feature.

Morning Report - Jobs Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1418.5	5.5	0.39%
Eurostoxx Index	2593.6	-9.8	-0.38%
Oil (WTI)	86.71	0.5	0.52%
LIBOR	0.31	-0.001	-0.32%
US Dollar Index (DXY)	80.48	0.225	0.28%
10 Year Govt Bond Yield	1.62%	0.03%
RPX Composite Real Estate Index	190.9	-0.1

Markets are higher after a better-than expected jobs report.  Nonfarm payrolls increased by 146k in November vs an expectation of 85k.  October was revised down from 171k to 138k.  The unemployment rate dropped from 7.9% to 7.7%, but this was driven by a drop in the labor force participation rate from 63.8% to 63.6%. Surprisingly, Sandy didn't appear to have much of an impact on the numbers. Still the headline numbers look good, and that is driving the index futures higher.  Feels like the Street was leaning short going into the numbers.  Bonds are down a point and MBS are down 7 ticks.

Small Business Hiring Plans hit post-recession low. Hiring plans are as low as they were in late 2008.  Resolution of the election "uncertainty" doesn't seem to be having an effect, at least not yet.  We'll see if resolving the fiscal cliff changes anything; my guess is that it won't.

The National Association of Homebuilders added 76 MSAs to their Improving Markets Index. The recent housing strength is spreading across the country. They note that "overly tight mortgage lending standards" are the one thing that is holding back progress.

HUD Secretary Shaun Donovan told the Senate Banking Committee that FHA is committed to selling at least 10,000 distressed loans per quarter over the next year, and it will raise the annual insurance premium paid by borrowers by 10 basis points.

If the Fed adds another Treasury-buying program to compensate for the end of Operation Twist, they will almost certainly have to re-write their exit plan.  The sheer size of the numbers (estimates are that the Fed will have to sell $2 - $3 trillion worth of assets over several years.  If the Fed attempts to dump mortgage backed securities en-masse, it will exacerbate the increase in borrowing rates that will already be taking place.

Morning Report - Challenger and Gray Job Cuts

Vital Statistics:

	Last	Change	Percent
S&P Futures	1407.0	-1.3	-0.09%
Eurostoxx Index	2598.5	6.4	0.25%
Oil (WTI)	87.52	-0.4	-0.41%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.76	-0.015	-0.02%
10 Year Govt Bond Yield	1.58%	-0.01%
RPX Composite Real Estate Index	191	-0.2

Markets are flattish this morning as Washington continues to grind to some sort of agreement on the fiscal cliff.  Initial Jobless Claims fell to 370k. The ECB kept rates at .75% and cut their 2013 GDP forecast to a range of -.9% to .3%.  S&P lowered Greece's bond rating to "selective default."  Bonds are up 1/4 while MBS are flat.

FHFA Acting Chairman Ed DeMarco will be speaking at SIFMA at 1:00 pm. HUD Secretary Shaun Donovan will head to the Hill today to talk about the sorry state of the FHA.

More Republicans are showing openness to increasing rates on the rich in exchange for entitlement spending cuts. So far, the President has shown little interest in cutting any spending aside from defense.  One possibility under discussion involves splitting the difference between 35% and 39.6% on the top rate. That would allow both parties to claim victory.

Challenger and Gray reported job cuts increased 34% in November to 57,000.  This was the second-highest month of the year.  About a third of the announcements come from the Hostess bankruptcy.  Of course December already has 11,000 cuts in the bag as well, courtesy of Citi.  Wall Street has shed 300,000 jobs in the last two years, and more are on the way if revenues don't start increasing.

The NY Department of Financial Services has ordered Ocwen to hire a monitor to ensure compliance with its agreement with the state. The state found instances where Ocwen did not provide a single point of contact to borrowers and did not send a 90-day notice before instituting foreclosure proceedings.

Is the overseas cheap labor arbitrage coming to an end?  Apple announced that it will bring some production back to the US from China. It is a nominal amount - $100 million - and it might just be a symbolic move after the Foxconn PR disaster. The compay has $121B of cash on its balance sheet.

Citi is now advising clients against putting money with Stevie Cohen. SAC spin-off Diamondback is shutting down.

Morning Report - ADP and NEWCO spelled backwards

Vital Statistics:

	Last	Change	Percent
S&P Futures	1408.4	2.9	0.21%
Eurostoxx Index	2598.9	8.1	0.31%
Oil (WTI)	88.63	0.1	0.15%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.79	0.142	0.18%
10 Year Govt Bond Yield	1.60%	-0.01%
RPX Composite Real Estate Index	191.2	0.3

Markets are higher this morning after China eased investment restrictions on banks and announced measures to promote urban development. Chinese GDP has slowed from close to 9% to 7.5% over the last 9 months. While 7.5% GDP growth sounds impressive, it is back in late '08-early '09 levels. Productivity rose 2.9% in Q3, while unit labor costs fell 1.9%.  Bonds and MBS are flattish.

ADP reported a 118k increase in US nonfarm private sector employment for the month of November. This report was obviously driven by Hurricane Sandy. The biggest gains were in construction and utilities, while manufacturing fell. A blip upward in construction and temp workers for storm clean-up and a drop in manufacturing as plants with no power laid off employees.   October was revised downward.  Mark Zandi estimates that the hurricane depressed employment by 86k.

Edit:  Immediately after hitting "post"  Citi announces it will cut 11,000 jobs.

Chart:  ADP change in non-farm payrolls:

Obama has drawn a line in the sand:  No increase in top rates for incomes over 250k, no deal. He expressed openness to cutting top rates next year in the context of broad tax reform.

Servicers beware:  Not only do you have to fear the CFPB, the state regulators are getting involved.  New York State is refusing to approve Ocwen's purchase of Homeward and the servicing unit of ResCap unless the company agrees to bring in a monitor from NY State which would oversee operations for two years and recommend changes in business practices.  In all of my years of analyzing mergers and the regulatory process, I have never seen anything like this.  Ocwen goes on to point out that they have "not received from any regulator at the federal or state level or any level any findings or evidence we have wrongfully foreclosed on any borrower."  This is unprecedented.

The Fed is expected to announce a new round of Treasury buying after Operation Twist ends at the end of the year. US GDP is expected to slow as uncertainty over the fiscal cliff has weighed on capital expenditures and hiring.  ML / BOA is forecasting 1% GDP growth in Q4 and Q1.