Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1362.1	-9.8	-0.71%
Eurostoxx Index	2258.5	-44.0	-1.91%
Oil (WTI)	90.8	-1.9	-2.01%
LIBOR	0.452	-0.001	-0.22%
US Dollar Index (DXY)	83.29	0.408	0.49%
10 Year Govt Bond Yield	1.46%	-0.05%
RPX Composite Real Estate Index	184.8	0.0

Equity markets are weaker this morning in spite of a deal to rescue the Spanish banks and decent earnings reports out of Google and GE.  There is no economic data to speak of.  Bonds are up a point and MBS are up as well.

Bloomberg has a good article discussing the state of the mortgage industry and how much capacity has been drained from it. "Efforts by Obama and Bernake to help homeowners get cheaper loans and spur the economy have been slowed by lack of staff at lenders and less competition." Fears of buyback risk are also making lenders more cautious.

SIFMA (which oversees the To-Be-Announced mortgage securities) weighs in on the eminent domain issue. They are instituting a policy that would exclude municipalities that institute eminent domain claims on mortgages from the TBA market.  Without getting into the gory details, the TBA market is the way newly originated mortgages get packaged into Fannie / Freddie / Ginnie mortgage backed securities. Punch line:  It will be very difficult to get a mortgage in San Bernardino because the lender will have a tougher time disposing of the loan.  I am surprised at how little interest the press has shown regarding this issue.

No MR for the next week - I will be on vacation.

Morning Report

Vital Statistics:

Markets are generally higher this morning on hopes of further stimulus measures and some decent earnings reports out of Ebay and IBM.  Morgan Stanley missed. Spain raised 3 billion euros but paid dearly for it. Bonds are down almost a point and MBS are down a tick or two.

Initial Jobless Claims for the week of 7/14 came in at 386k, more in line with typical readings. Last week's low 350k print was revised upwards, but still looks like a statistical fluke. Separately, it looks like another round of job cuts is on the way in the banking sector.

In other economic data, existing home sales fell by 5.4% month-on-month to an annualized pace of 4.37MM units.  The Street was expecting 4.62MM. The Leading Economic Indicators index posted a negative number in June, the second negative number in 3 months.

The Philly Fed survey reported weak business conditions. Ominously, they reported declines in employment and shorter work hours.

FHA is conducting another mass distressed loan sale. Buyers will not be permitted to initiate foreclosure proceedings for 6 months. The loans are concentrated in hard hit areas like Phoenix, Tampa, Chicago, and Newark.

The Fed is considering another measure to ease up credit - allowing banks to borrow from the Fed at even lower interest rates provided the money is used to lend, not buy Treasuries. The Fed is really scraping the bottom of the barrel at this point - I guess the next step would be to allow the banks to repo the water cooler and office furniture.

Chart:  Initial Jobless Claims:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1354.8	-3.7	-0.27%
Eurostoxx Index	2257.6	6.9	0.31%
Oil (WTI)	88.99	-0.2	-0.26%
LIBOR	0.455	0.000	0.00%
US Dollar Index (DXY)	83.24	0.210	0.25%
10 Year Govt Bond Yield	1.48%	-0.03%
RPX Composite Real Estate Index	184.5	0.4

Markets are a little weaker on no real news. A slew of banks reported earnings this morning, and most were  better than expected. Bond yields are back below 1.5% and MBS are up slightly. The Bernank's testimony continues today.

Housing starts came in at 760k in June, an increase from a revised 711k in May. While most other sectors in the economy are decelerating, the housing construction sector is accelerating. That said, housing starts are a long way from normalcy. Sentiment in the homebuilders has been improving as well, with the NAHB Builder Confidence Index rising smartly in July.

Housing Starts:

NAHB Housing Index

On the heels of San Bernardino's eminent domain proposal, Georgetown Professor of Law Adam Levitin lays out another avenue to deal with underwater equity - "quasi-voluntary" principal reductions. In his paper Clearing the Mortgage Market Through Principal Reduction, he makes the case that negative equity is the reason why the housing market hasn't bottomed and we need a policy response to it. The solution - make the banks an offer they can't refuse:  Either reduce the principal on your underwater mortgages to home value or we'll take away your ability to deal with the GSEs or FHA.  Since this more or less is a "reduce principal or get out of the business" it isn't much of a choice.  While he mentions that there could be political consequences of these various actions (he looks at involuntary takings as well), he never mentions the possibility that lenders may in fact decide to adjust their risk calculations accordingly, thus drying up credit even more. What good is a new re-negotiated mortgage to the system if the existing homeowner can only sell to cash buyers or buyers that put up 40%?  Amazingly, he doesn't consider the knock-on effects to lender behavior at all. He assumes that things will just continue as before and lenders will write off this intervention as a necessary "one-off" that is really good for them and good for the country. If that is an indication of how liberal policy makers in general think - that the private sector will not react to their policy changes - that explains a lot.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1352.3	4.9	0.36%
Eurostoxx Index	2266.2	14.3	0.63%
Oil (WTI)	88.68	0.3	0.28%
LIBOR	0.455	0.000	0.00%
US Dollar Index (DXY)	83.12	0.021	0.03%
10 Year Govt Bond Yield	1.49%	0.02%
RPX Composite Real Estate Index	184.2	0.1

Markets are firmer this morning on an earnings "beat" out of Goldman. I put "beat" in quotation marks because the report was actually lousy as revenues are at a 7 year low. Expectations are way low going into this earnings season.  As we approach August, the European newsflow should grind to a halt. Bonds are down a half a point, and MBS are down a tick or two. The Bernank is testifying in front of Congress at 10:00 this am. Expect a lot of newly-minted LIBOR experts to opine on the subject.

The CPI came in flat for June on falling energy prices. That is about to be offset by increased food prices as corn approaches $8.00 a bushel due to drought conditions in the Midwest. Industrial Production rose, while capacity utilization fell.

Bill Gross is warning of a recession "when measured by employment, retail sales, investment, and corporate profits." Investment banks are taking down their economic forecasts in a large steps - Jan Hatzius of Goldman took his 2Q estimate to 1.1% from 1.3%, while Deutsche Bank's Joe LaVorgna took down his forecast to 1% from 1.4%. These estimates would put the economy firmly in the "stall speed" range.

The WSJ notes that asking prices are rising as supply decreases. Asking prices are up 2.7%, while the number of homes listed for sale is down 19.4% from a year ago. Banks are holding back foreclosures from the market, and are often times finding bids on the courthouse steps from professional investors looking for rental properties. Median age has been falling as well.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1346.3	-5.4	-0.40%
Eurostoxx Index	2246.9	-12.2	-0.54%
Oil (WTI)	86.57	-0.5	-0.61%
LIBOR	0.455	0.000	0.00%
US Dollar Index (DXY)	83.63	0.285	0.34%
10 Year Govt Bond Yield	1.46%	-0.03%
RPX Composite Real Estate Index	184.1	0.3

RIP Barton Biggs

Markets are weaker this morning on disappointing retail sales data. June retail sales fell 50 basis points in June while the Street was expecting a 20 basis point rise. The 10-year continues to grind higher,with the yield now at 1.46%.  Mortgage backed securities are up small. A lot of market heavyweights report earnings this week with Johnny John, Coca-Cola, Intel, Honeywell, Yum, Amex, Ebay, IBM, and Google, among others.

Citigroup beat analyst expectations with a $1.00 per share second quarter earnings report. Revenues were weaker than expected. Book Value increased to $62.21.  The stock is up about 2.5% pre-open.

The NY Fed's Empire State Manufacturing Survey showed an uptick in July. Manufacturer Optimism remains on the positive side, but is lower than earlier this year. Input Prices fell.

Reuters has a dour outlook on the housing market, suggesting we may be in for a lost decade with house prices.  They cite the usual litany of problems with the housing market - immobile underwater homeowners, heavy debt burdens, a lousy job market - but they ignore how fundamentally cheap housing is right now. And that is why prices are stabilizing - eventually a market gets so cheap it cannot be ignored.  And that has happened in housing.

Taxmageddon:  The game of chicken is on.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1331.8	2.6	0.20%
Eurostoxx Index	2234.7	6.7	0.30%
Oil (WTI)	86.72	0.6	0.74%
LIBOR	0.455	0.000	0.00%
US Dollar Index (DXY)	83.66	-0.002	0.00%
10 Year Govt Bond Yield	1.48%	0.01%
RPX Composite Real Estate Index	183.8	0.2

Happy Friday the 13th.  Markets are slightly higher this morning on no real news. The Producer Price Index showed inflation is being contained.  Bonds and MBS are down slightly.

JP Morgan and Wells Fargo announced earnings this morning. JPM is going to restate Q1 earnings, and is laying the groundwork for claiming the huge prop loss was a rogue trader problem. Good luck with that one, Jamie. Wells announced a settlement with the regulators over redlining and announced it is exiting the wholesale mortgage business. Last one out, please shut off the lights.

Rep. David Schweikert weighs in on San Bernardino's Eminent Domain proposal. He makes the point that whatever intrepid capital has waded back into the mortgage market will probably flee if the government starts seizing underwater mortgages.  No kidding. I am surprised President Obama has not seized upon this opportunity to establish his capitalist bona-fides. It could be his "Sister Soulja" moment.

Documents suggest that Tim Geithner was aware of the LIBOR-rigging scandal in 2007 and tried to do something about it.

CoreLogic reported that 11.4 million homes were in negative equity in Q1, down from 12.1 million in Q411. Negative Equity and near-negative equity (< 5%) accounted for 29% of all residential properties with a mortgage.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1327.5	-8.8	-0.66%
Eurostoxx Index	2230.1	-16.1	-0.72%
Oil (WTI)	84.73	-1.1	-1.26%
LIBOR	0.455	-0.001	-0.22%
US Dollar Index (DXY)	83.75	0.185	0.22%
10 Year Govt Bond Yield	1.49%	-0.02%
RPX Composite Real Estate Index	183.8	0.2

Markets are lower this morning on global slowdown fears. There was no real catalyst for the sell-off, just general malaise. The 10-year is yielding below 1.5% and MBS are up a couple of ticks.

Initial Jobless claims came in lower than expected, at 350k vs 372k. The Labor Department noted that the typical temporary seasonal factory shutdowns haven't happened this year as the automakers fulfill demand and replenish inventories. A Labor Department spokesman refers to it as a "distortion", so don't read too much into the number.

There was nothing really earth-shattering in the minutes from the last FOMC meeting released yesterday. People looking for more aggressive action out of the Fed were disappointed. Operation Twist will continue through the end of the year, and the Fed will take further action if the economy deteriorates. The minutes did discuss Taxmageddon and also noted that defense contractors were already laying off people if the sequestration spending cuts kick in.  Surprisingly, they mentioned the Facebook fiasco as well.

RealtyTrac reported that foreclosure activity increased 9% sequentially in May, but is still down 4% on an annual basis. Pre-foreclosure sales are rising as banks focus more on short sales. Pre-foreclosure home sales have an average $27,000 price than the average bank-owned home. Since distressed sales are still driving the market, this could account for some of the increases we are seeing in the overall home price indices. Another interesting tidbit:  Judicial states posted a 26% year-over-year increase in overall foreclosure activity, while non-judicial states posted a 20% decrease.

The House Committee on Financial Services held a hearing yesterday on Dodd-Frank, mortgages, and the CFPB. It was a mix of industry groups and consumer advocates.  The fault lines appeared at the definition of a qualified mortgage, where industry groups wanted bright lines and safe harbor provisions while consumer advocates disagreed.

Finally, Paul Krugman isn't too happy with CNBC.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1337.7	2.2	0.16%
Eurostoxx Index	2246.3	4.4	0.20%
Oil (WTI)	84.94	1.0	1.23%
LIBOR	0.456	-0.002	-0.33%
US Dollar Index (DXY)	83.24	-0.161	-0.19%
10 Year Govt Bond Yield	1.51%	0.01%
RPX Composite Real Estate Index	183.7	0.1

Markets are rebounding after yesterday's bloodbath. Market participants await the minutes of the FOMC meeting later this afternoon and will look for more granularity regarding the economic outlook for 2H and the possibility for further quantitative easing. Bonds are down 1/4 point while MBS are flat.

On the way into work, Bloomberg had a depressing interview with TCW strategist Komal Sri-Kumar. He is predicting a recession in 2H, driven by Europe, political uncertainty over the election, and fears of taxmageddon. His forecast is a 15% to 20% drop in the S&P 500 and a 10-year bond yield of 1.25%.

Earnings season has started out as a mixed bag.  Alcoa beat estimates, while Applied Materials, Advanced Micro and Cummins missed. Later this week we have some financials with JPM, Wells, and Citi reporting.  The season gets into full gear next week.

CNBC points out that the overall increase in house prices has been driven by dynamics in the distressed market that make the growth somewhat artificial. The demand has been coming from the most fickle of investors - pros and the first time homebuyer - and one characteristic of these transactions is they are one-sided - investors and first time homebuyers aren't selling one home to buy another, they are just buying. This effect, along with the fact that the banks are dragging their feet releasing inventory into the market, is driving price increases at the low end which is masking weakness in the non-distressed end. FWIW, I believe housing is fundamentally cheap and pent-up demand is building, however housing cycles are very long and markets can remain fundamentally cheap or expensive for a very long time.

San Bernardino County (the ones taking an expansive view of eminent domain) has filed for BK.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1351.5	2.3	0.17%
Eurostoxx Index	2253.9	26.0	1.17%
Oil (WTI)	85.39	-0.6	-0.70%
LIBOR	0.458	0.000	0.00%
US Dollar Index (DXY)	83.18	0.023	0.03%
10 Year Govt Bond Yield	1.52%	0.01%
RPX Composite Real Estate Index	183.6	0.3

Markets are slightly higher this morning on moves by European Finance Minsters to lend to Spanish banks and a positive surprise in UK factory output.  Alcoa reported better than expected sales and profits last night. Bonds are down a couple ticks.

The National Federation of Independent Businesses reported a 3 point drop in their Small Business Optimism Index in June. The only bright spot in the report is that small businesses expect credit conditions to continue to improve, but all other components were down. On the employment front, 9% of firms added 2.6 workers, while 12% cut employment by 2.8 workers.  The rest were unchd.  Punch line:  The economy slowed, but so far it doesn't appear that we are headed into a recession.  Political uncertainty remains at historic highs. Note the SC decision on obamacare was not reflected in this report.

Fannie Mae's National Housing Survey reports that consumer optimism in the housing sector continues to improve, even in the face of weakness in other areas. But is the optimism being artificially driven by tight inventories which is primarily due to negative equity?

The Consumer Financial Protection Bureau has put out a 2000 page phonebook on how to address high cost mortgages.  It plans to ban balloon payments and prepayment penalties. Of course, prepayment penalties merely make the cost of the embedded prepayment option explicit, as opposed to being hidden in the interest rate. This would be the equivalent of the SEC decreeing that all mutual funds must be no-load. They also cut the size of permissible late payments and an assortment of other things. By ending balloon payments, the CFPB is effectively ending the hard money mortgage market, leaving those that can't qualify for a normal mortgage unable to borrow.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1347.7	-4.1	-0.30%
Eurostoxx Index	2232.2	-3.3	-0.15%
Oil (WTI)	84.93	0.5	0.57%
LIBOR	0.458	0.000	0.00%
US Dollar Index (DXY)	83.21	-0.169	-0.20%
10 Year Govt Bond Yield	1.52%	-0.03%
RPX Composite Real Estate Index	183.3	0.5

Markets are down slightly as we kick off earnings season and Spanish yields top 7%. European finance ministers will meet in Brussels this morning, although no one expects much out of it. Bonds are up about half a point, while MBS are up a quarter.

Earnings season starts tonight with Alcoa's report. While the Street is somewhat pessimistic about Q2 numbers, I would point out that we coasted through the pre-announcement season with few misses.  The Street is estimating the S&P 500 will earn $25.23 this quarter, vs $24.06 last quarter and $25.16 a year ago. So for all intents and purposes the Street is looking at flat YOY earnings.

A couple positive data points with the markets:  we have couple big mergers this morning as well as some IPO filings.

In an attempt to ease the credit crunch, the Federal Government is looking at how to address the problem of overlays - which is the layering of more stringent credit standards than the agencies require on Fannie, Freddie, and FHA loans. The government is keeping quiet about what potential remedies they are examining. Originators would love to see some sort of safe-harbor provision for lending which will lower or eliminate putback risk, which is the risk that the government will force an originator to buy back a loan after the fact if becomes non-performing.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1351.7	-9.7	-0.71%
Eurostoxx Index	2254.1	-30.9	-1.35%
Oil (WTI)	84.68	-2.5	-2.91%
LIBOR	0.458	-0.002	-0.44%
US Dollar Index (DXY)	83.06	0.246	0.30%
10 Year Govt Bond Yield	1.56%	-0.03%
RPX Composite Real Estate Index	183.3	0.5

Jobs Friday.  Basically a crummy report - Nonfarm payrolls increased by 80k, less than economists forecast.  The unemployment rate remained at 8.2% and the labor force participation rate remained at a depressed 63.8%.  The only bright spot was that weekly hours ticked up, as did hourly earnings.  But otherwise, it was a disappointing report.

S&P futures are selling off on the number, and bonds are rallying.  MBS are up about 1/4 of a point.  Markets should be dull going into the weekend as a lot of players took the week off and the rest of the Street should be escaping the heat by heading out the the East end. Alcoa kicks off the earnings season on Monday.  Analysts have taken estimates way down across the Street.

In the "you can't make this up" category, San Bernardino County is considering using eminent domain to seize underwater mortgages from banks.  The WSJ explains:

"For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000.  If a judge agreed,t he program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount.  Then, they could offer to help the homeowner refinance into a new $125,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% equity."

The program would only be available for loans that are current (or fully paid up). So the investor (a bank, pension fund, whatever) would probably be carrying the loan at par and would take the hit when the city takes the mortgage away.  So the investor would lose the difference between the mortgage amount and the discounted bid to the property value ($300,000 - $120,000 = a $180,000 loss), while the VC firm (Mortgage Resolution Partners) would make the difference between the new 97.5% mortgage amount and the amount they bought the mortgage for (in this case $145,000 - $120,000 = a $25,000 gain).  Supposedly the VC firm and the city would split the profit.

There is no way the investor can be treated fairly here.  The only way this works is if the partner can buy the mortgage at a discount to the appraised value of the property. Otherwise they can't make a profit.

Needless to say, the Left is cheering this on. It is theft, if you ask me.  And people are scratching their heads wondering why it is so hard to get credit these days. If San Bernardino goes through with this and gets away with it, good luck getting a mortgage with a LTV over 60% anymore.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1369.9	1.9	0.14%
Eurostoxx Index	2316.5	4.0	0.17%
Oil (WTI)	87.89	0.2	0.26%
LIBOR	0.46	0.000	0.00%
US Dollar Index (DXY)	82.66	0.877	1.07%
10 Year Govt Bond Yield	1.62%	-0.01%
RPX Composite Real Estate Index	182.8	0.3

Markets are up slightly on moves by the ECB and some encouraging economic news on the jobs front. Overnight, the ECB lowered interest rates to 75 basis points and cut the deposit rate to zero. Bonds and MBS are up slighlty.

The ADP employment change report reported 176k new jobs were added in June, which is much higher than the 100k estimate economists were forecasting. The official non-farm payroll data will be released tomorrow. Initial Jobless claims dropped last week, falling from 388k to 374k.

Today is the first Thursday of the month, and that means retailers are reporting same store sales.  So far, most retailers are missing estimates.

Finally, Heard on the Street discusses how the housing market is finally a bright spot in the economy, though its size relative to GDP has shrunk tremendously.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1358.2	0.6	0.04%
Eurostoxx Index	2309.4	17.3	0.75%
Oil (WTI)	85.75	2.0	2.39%
LIBOR	0.461	0.000	0.00%
US Dollar Index (DXY)	81.93	0.057	0.07%
10 Year Govt Bond Yield	1.59%	0.00%
RPX Composite Real Estate Index	182.8	0.3

Markets are flat ahead of the 4th of July on a holiday-shortened day.  Bonds will close at 1:00 pm, and stocks will close at 2:00. There is very little economic data this morning.  We have the jobs report later this week and then earnings season kicks off with Alcoa on Monday.

Bob Diamond is out at Barclay's after political pressure from the LIBOR pricing scandal forced him to resign. He will be in front of Parliament tomorrow to address questions regarding the scandal and is prepared to fight back with claims the regulators knew what was going on and didn't object for fear the banking system would be further destabilized if the markets knew the truth.  Needless to say, the politicians are shocked to find gambling in this establishment.

The Federal Reserve Bank of San Francisco has an interesting paper on housing bubbles. Needless to say, they let the Fed off the hook, and continue with the standard academic "angels dancing on the head of a pin" argument about how to identify a bubble. But that isn't the most interesting part of the paper. Most people know that Scandinavia experienced a massive housing bubble in the late 80s.  When it burst, many banks failed, and Sweden effectively nationalized its banking system.

However, in contrast to the Japanese experience, house prices in Norway had a V-shaped rebound and have subsequently passed their old peak by 130%. This has caused the household debt to income ratio to increase to 210%.  By way of comparison, that ratio peaked at 130% in 2007 here. If oil prices collapse and that bubble bursts, Norway will undoubtedly hit the wall. It will be interesting to see how that government reacts.  But the more interesting observation is how you can have a second bubble so soon after one bursts.

The US government is pulling out all the stops trying to put the air back into the housing bubble.  Most people assume they will fail. Norway shows that it is possible they may be able to pull it off. 

Right now, all the pundits and talking heads are discussing how smart the Scandinavians have been with their "smart regulation." and how we should emulate them. Similarly, everyone loved the US model in the late 90s and everyone thought the Japanese had cracked the code in the 80s.  Often times, the countries that are the flavor of the day just happen to be in the glory days of a bubble that will eventually burst. That prosperity is never permanent. 

Have a happy 4th of July.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1355.4	-1.0	-0.07%
Eurostoxx Index	2280.3	15.5	0.69%
Oil (WTI)	83.5	-1.5	-1.72%
LIBOR	0.461	0.000	0.00%
US Dollar Index (DXY)	81.88	0.253	0.31%
10 Year Govt Bond Yield	1.59%	-0.06%
RPX Composite Real Estate Index	182.8	0.3

Markets are flattish after Friday's furious rally and some disappointing economic data. Expect low volume this week as the 4th falls on a Wed. There are no major European events on the calendar this week. Bonds and currencies should close early tomorrow. The 10-year is up about point and a half and MBS are up slightly.

In another bullish sign for the real estate market, we have been seeing someone establishing a long position in the RPX futures market.

Merger Monday is back, as we have $15 billion in new deals this morning. Bristol-Myers is buying Amylin and Linde is buying Lincare. Dell has won the bidding war for Quest Software.

The ISM PMI showed contraction in the manufacturing sector - the first such reading since July of 09 - as new orders collapsed. Economists missed the number big-time, as the index came in at 49.7 vs expectations of 52. The drop in commodities prices dropped the prices paid index to 37 from 47.5.

The Markit PMI shows that manufacturing is not accelerating as the economy expands. The index fell to 52.5 from 54 in May. Remember that 50 is more or less the "zero point" and numbers below indicate a contraction in business conditions. In other words, the latest reading indicates conditions are getting better, but just barely. Weakness in Europe is being offset by stronger domestic demand.