Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1406.8	9.7	0.69%
Eurostoxx Index	2438.5	34.7	1.44%
Oil (WTI)	95.29	0.7	0.71%
LIBOR	0.418	-0.003	-0.59%
US Dollar Index (DXY)	81.21	-0.486	-0.59%
10 Year Govt Bond Yield	1.65%	0.02%
RPX Composite Real Estate Index	192.1	-1.0

Markets are shrugging off a lousy NAPM Milwaukee report ahead of The Bernank's speech, which is scheduled for 10:00am EST.  Given this is the last day of the month before a long weekend, there will probably be a flurry of activity during the speech and then the Street will be on the LIE by noon. Bonds and MBS are down slightly

While the general feeling is that Bernake will not say anything earth-shattering (he prefers to announce policy during FOMC statements) people are looking for clues regarding further QE.  Numerous sources have indicated that trading desks are long bonds going into the speech, so there is room for disappointment, or a "buy the rumor, sell the fact" reaction. The next FOMC meeting is in 3 weeks, and that should be the end of anything major out of the Fed until after the election.

Jim Grant has an op-ed in today's Washington Post discussing the gold standard. FWIW I think the latest political re-consideration of the gold standard is more of a political attempt to keep Libertarians in the tent. He does make a good point that the dual mandate is probably asking the Fed to do too much.  As he puts it: "Positively out of bounds for the chariman of the Federal Reserve is the admission that he is in the wrong line of work.  The institution he leads was created to conduct a central banking business. But Congress and he have steered it into the central planning business. In so doing, the Fed has exchanged a job it could do for one it can't." And let's be honest - the Fed sets prices (interest rates) the same way the Communist Bureaus of the USSR used to set the price of gasoline.

As I was driving into work this morning, Meredith Whitney and James Bullard (St Louis Fed Head) were debating ZIRP. Bullard made a comment (and I am paraphrasing) "Some people think the Fed kept interest rates too low for too long in the early 00s - that's been sort of an ongoing debate.  The people who disagree would point to the fact that inflation didn't shoot up. The problem with the policy came in other ways with the financial crisis which no one could see coming. I do worry about people reaching for yield and taking too much risk"  No mention of the housing bubble.  No mention of the stock market bubble.  And Bullard is a supposed inflation hawk.  The Fed thinks it has nothing to do with creating asset bubbles.

Stephen Roach (ex-Morgan Stanley, now at Yale) makes this exact point when he says that Bernake should not be re-appointed. Meredith Whitney (same link as above) made the point that ZIRP has made it extremely difficult for banks to make money in their traditional business (lending) so they are taking more proprietary bets (either directly or indirectly through over / underweighting different asset classes).  Not to mention that it is annihilating pension funds (the next crisis on the horizon) and retirees are cutting back consumption because of meager earnings on their assets. Contrary to the belief in Washington, there are unintended consequences that are working against what they want to achieve (more lending, more spending, less risk). ZIRP is not "free."

If Romney wins, it is possible we could get a break from the Greenspan / Bernake Fed, which may well be the final nail in the 30 year Treasury Bull Market's coffin. If that happens, in a couple of years, the financial press will learn another buzzword they don't understand - convexity risk. Which some mortgage REITs aren't hedging.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1402.6	-4.6	-0.33%
Eurostoxx Index	2422.6	-11.7	-0.48%
Oil (WTI)	95.45	0.0	-0.04%
LIBOR	0.421	-0.001	-0.24%
US Dollar Index (DXY)	81.45	-0.104	-0.13%
10 Year Govt Bond Yield	1.63%	-0.02%
RPX Composite Real Estate Index	192.1	-0.8

Markets are lower after ho-hum economic data in the US and disappointing data overseas. Bonds and MBS are up slightly. Tonight we will get Mitt Romney's speech at the Republican Convention and then all eyes turn to Bernake's speech in Jackson Hole.

Personal Income and Spending both rose in July, with income coming in at .3% and spending coming in at .4%. The spending number was the strongest number since last winter, but was little below street expectations. The retailers will report BTS comps a week from today, and that will give us a more granular look at spending patterns. Initial Jobless Claims were 374k last week, more or less in line with the latest readings.

Tomorrow, Ben Bernake will give a speech in Jackson Hole. The Street will be looking for clues to further stimulus, and they will probably be disappointed as politics are now center stage and the Fed wants to appear independent. Mitt Romney has been skeptical of the Fed's reflation efforts and has already said he would replace Ben Bernake if he wins. Which means you should watch the polling numbers as a Romney win should be bond bearish at the margin. Especially if the Europeans find a way to muddle through.

The national settlement over foreclosure abuses is 6 months old, and the settlement monitor has released his first report. Total consumer relief has been $10.6 billion, of which the lion's share has been short sales. At first glance, it appears the banks are over halfway there on delivering the $20 billion in relief, but that $10.6 billion will be haircut as there are different weights for different outcomes.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1410.4	2.6	0.18%
Eurostoxx Index	2432.9	-9.2	-0.38%
Oil (WTI)	95.95	-0.4	-0.39%
LIBOR	0.422	-0.001	-0.24%
US Dollar Index (DXY)	81.45	0.082	0.10%
10 Year Govt Bond Yield	1.65%	0.02%
RPX Composite Real Estate Index	192.1	-0.4

Markets are flattish after 2Q GDP was revised upwards and Mario Draghi defended the ECB's bond buying program. Pending Home Sales increased 15% YOY in July, another sign of life in the residential real esate market. Bonds and MBS are down slightly.

Second Quarter US GDP was revised upwards to 1.7% from the initial 1.5% estimate as consumer spending was a bit higher than initially thought. The  upward revision was expected so there was no reaction in the index futures. Growth 2% or lower will probably not be enough to lower the unemployment rate

One of the reasons for the increase in house prices has been the lack of distressed sales. CoreLogic's latest foreclosure report bears this out, as foreclosures dropped 24% in June from a year ago, which is the lowest level since 2007. That said, the pipeline remains at 1.4 million homes and REO sales have declined while foreclosures have continued.

Fed-Bashing was one of the themes at the Republican National Convention. Certainly a part of that is driven by the desire to keep Libertarians in the tent in the fear that Gary Johnson could pull a Ralph Nader and peel off enough Republican votes to deliver the election to Obama. Bob Corker wrote an op-ed in the FT criticizing the dual mandate. He does make a good point that bond prices should be important signals to the economy, but that signalling process is broken because of Fed manipulation.

My gripe with the dual mandate has always been that it encourages bubbles - as long as inflation (as measured by the CPI) is behaving, the Fed must keep the pedal to the metal. Economists have accepted the fact that too much money chasing too few goods is a bad thing, but somehow think too much money chasing too few assets is okay.  Since the dual mandate was enacted in 1978, we have had the following bubbles (or mini-bubbles):

• Gold and oil in the early 80s
• Junk bonds in the mid / late 80s
• Emerging Market Debt in the early 90s
• Stock Market bubble in the late 90s
• Residential Real Estate bubble mid 00s

Given that the consequences of getting it wrong are assymetric, maybe it is time to reconsider the dual mandate.  Of course a change in the dual mandate has zero chance of being enacted, but I would like to see the discussion move from theory (market signalling) to practice (the housing bubble).  Of course we can always show people this awesome video.  While it isn't necessarily all about monetary policy, it does show the perils of a hyperactive Fed.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1405.6	-2.7	-0.19%
Eurostoxx Index	2436.4	-25.4	-1.03%
Oil (WTI)	96.04	0.6	0.60%
LIBOR	0.423	-0.002	-0.49%
US Dollar Index (DXY)	81.46	-0.196	-0.24%
10 Year Govt Bond Yield	1.64%	-0.02%
RPX Composite Real Estate Index	192.3	0.2

Markets are flattish-to-down as a positive Case-Schiller reading offsets disappointing economic data out of Japan and Span. Bonds and MBS are up slightly.

The S&P / Case-Schiller index came in at 142.2 vs expectations of 141.3. The national composite was up 1.2% YOY and up 6.9% vs Q1.

The real estate market is recovering, but where are home prices still getting hit?  Fairfield County, CT, where prices have declined 13% YOY, especially in Greenwich and New Canaan. This of course is due to Wall Street compensation dropping like a stone over the past 5 years and the realization that it may be a while before it comes back. As the article points out, while the events in Europe are an abstraction to most people, they do affect jobs in the financial services industry. Given the fact that entitlement spending is going to crowd out a lot of discretionary spending (especially on defense), it makes me wonder if one of the last high-flying real estate markets - Washington DC - is next.

The WSJ has a fluff piece on Paul Singer, who has been raising a lot of money for Mitt Romney. It repeats the rumor that he might be given a place in a potential Romney administration. However, he originally backed Chris Christie and has been very vocal in pushing for gay marriage so that could be an issue.

Chart:  S&P / Case-Schiller House Price Index:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1413.8	4.0	0.28%
Eurostoxx Index	2442.3	8.0	0.33%
Oil (WTI)	97.07	0.9	0.96%
LIBOR	0.425	-0.002	-0.47%
US Dollar Index (DXY)	81.55	-0.044	-0.05%
10 Year Govt Bond Yield	1.67%	-0.02%
RPX Composite Real Estate Index	192.1	0.0

Markets are higher this morning on no real news as we head into one of the slowest weeks of the year. The Fed Heads will meet in Jackson Hole this week, although analysts aren't expecting much in the way of new policy announcements. That said, the article does suggest the Street is leaning heavily towards additional stimulus, so the risk is to the downside in MBS and Treasuries. There doesn't appear to be any market-moving economic data this week. Oil is moving higher in response to Issac. Bonds and MBS are up slightly.

One of the longest merger kabuki dances ended today, as Hertz finally gets an agreed deal with Dollar. I believe Hertz's initial bear hug letter was released in 2007 or 2008.

The first read on Back-To-School looks negative. Teen Apparel Retailers may end up missing their comp expectations next Thursday. Some of the names in this space have been flying lately - AEO, GPS, URBN, HOTT, so they may be vulnerable to a disappointment. For those that are more risk averse, you can always short Abercrumble as the stock cannot get out of its own way.

The Republican National Convention is this week and I don't expect it to matter to the markets one bit. They had to shorten it a day due to Issac.  Greg Valierre of Potomac Research said that 98% of his Wall Street clients are voting for Romney.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1395.9	-4.1	-0.29%
Eurostoxx Index	2417.7	-11.4	-0.47%
Oil (WTI)	95.89	-0.4	-0.39%
LIBOR	0.425	-0.002	-0.47%
US Dollar Index (DXY)	81.56	0.205	0.25%
10 Year Govt Bond Yield	1.63%	-0.04%
RPX Composite Real Estate Index	192.1	0.1

Markets are off after a disappointing durable goods report. Between the durable goods report and the cap good report, it showed companies pulled back from making capital investment in July. This put a bid under bonds and the 10 year is now pushing 1.6% after topping 1.8% earlier this week.  MBS are up 1/4 of a point as well.

Why does the economic recover not feel like a recovery? One big reason is that incomes are still falling - in fact they have fallen more since the recovery began than they did during the recession. Given the move in the median house price, the median house price to median income ratio has spiked to 3.7x, implying housing is overvalued. FWIW, I am skeptical of NAR's median house price numbers, which supposedly rose 22% to 189.6 from 154.6 in Jan. Perhaps the lack of distressed sales has caused the median price to shoot up.

Bill Gross said this morning that QEIII is "almost a done deal." No update on the status of the cult of equities' demise, though.

Republicans want to study the implications of returning to the gold standard. This is undoubtedly aimed at libertarians who like Ron Paul and may vote for Gary Johnson.  Needless to say, the Nobel Krug Man does not approve.

Chart:  Median income:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1409.8	-2.5	-0.18%
Eurostoxx Index	2436.2	-16.6	-0.68%
Oil (WTI)	97.49	0.2	0.24%
LIBOR	0.427	-0.004	-0.91%
US Dollar Index (DXY)	81.34	-0.143	-0.18%
10 Year Govt Bond Yield	1.70%	0.00%
RPX Composite Real Estate Index	192	0.0

Initial Jobless Claims came in at 372k, a little higher than expected and pretty much in line with the latest trend of 375k / week.  New Home Sales increased to 372k in July

The FHFA Home Price Index increased 3% YOY and .7% MOM. This report only focuses on conforming mortgages, which makes it a more stable index than Case-Schiller or RPX.

The FOMC minutes noted that economic conditions have decelerated from earlier this year and discussed the possibility of another round of quantitative easing.  This drove the 10 year yield from 1.8% to 1.7%. MBS rallied as well.  My view has been that we are getting too close to the election - the Fed wants to appear non-political and definitely does not want to influence elections.  However this morning, St Louis Fed President James Bullard characterized the minutes as "stale," noting that some of the data lately indicates the economy is getting stronger again.

CBO is forecasting 2.25% economic growth for the rest of the year and unemployment above 8%.  If Taxmageddon is not averted, CBO projects a recession with real GDP declining .5% from Q412 to Q413 and unemployment rising to 9%. If all the tax hikes and spending cuts are held off indefinitely, their projection is pretty much where the economy is now - 1.7% GDP growth with 8% unemployment. So the goalposts are (a) very modest recession vs (b) very modest recovery. Which means interest rates aren't going anywhere.

Chart:  FHFA House Price Index

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1409.1	-3.4	-0.24%
Eurostoxx Index	2469.1	-21.2	-0.85%
Oil (WTI)	96.73	-0.1	-0.11%
LIBOR	0.431	-0.003	-0.63%
US Dollar Index (DXY)	82.02	0.108	0.13%
10 Year Govt Bond Yield	1.77%	-0.02%
RPX Composite Real Estate Index	192	0.2

Stocks are lower this morning on no real news. Dell missed.  Existing Home Sales are scheduled to be released at 10:00 am EST. The minutes of the last FOMC meeting are scheduled for 2:00pm EST. Bonds are up a half a point and MBS are flat.

Mortgage Applications fell 7.4% last week as refis slowed.

Greece needs some breathing room to pay its debts.

FHFA has revised their short sale guidelines to allow homeowners who are current on their mortgage (and have an eligible hardship) to sell their home in a short sale. Importantly, job relocation qualifies, which should help people who are stuck with underwater homes in places with no jobs to leave. Second Lien holders will be given $6,000 to expedite a short sale.

Toll Brothers reported better than expected earnings, with a 41% increase in revenues, 59% increase in backlog, and 66% increase in contract signings.  Toll is in the McMansion business, so it isn't necessarily representative of the whole market, but it is another positive data point, especially for the jumbo part of the space.  The stock is up a few percent pre-open.

Fannie Mae's economic outlook for the rest of the year is generally gloomy, although it does predict that housing activity will be a net positive to GDP for the first time since 2005.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1419.6	4.9	0.35%
Eurostoxx Index	2477.1	10.8	0.44%
Oil (WTI)	97.13	1.2	1.21%
LIBOR	0.434	0.000	0.00%
US Dollar Index (DXY)	82.03	-0.422	-0.51%
10 Year Govt Bond Yield	1.84%	0.03%
RPX Composite Real Estate Index	191.8	0.4

Markets are stronger this morning on no real news. There are very no meaningful economic releases this week, except for perhaps the FOMC minutes which come out tomorrow.  The lack of news out of Europe has led to a benign environment for equities, which means that the 10-year continues its sell-off.  MBS are down 6 ticks as well.

HUD is doing another auction of distressed single family loans - $1.7 billion. These are loans primarily in Phoenix, Chicago, Tampa, and Newark. Given the amount of money that's being raised for distressed real estate, HUD should be shoveling this stuff out the door.  When the ducks are quacking, you gotta feed 'em.

Dick Bove of Rochdale Securities points out that the government's regulation of the banks is creating an opportunity for the shadow banking system - the firms who operate outside of the banking system (that would be us, for example). While he does worry about this laying the groundwork for the next crisis, in the meantime winners will emerge in the disarray. Take a look at the charts of Nationstar Mortgage (NSM), Impac (IMH), and Redwood Trust (RWT).  These stocks have been screaming. This is actually a very bullish sign for real estate - since the crisis began, the market has been dominated by Ginnie / Fannie loans. A bottom in real estate is the single most important factor to turn things around. The private label securitization market is the second.

The era of frothiness is over (at least according to the Economist).  What is interesting is that real estate is the cheapest relative to incomes in Japan, followed by Germany and the US.  The Canadian real estate bubble still has yet to burst. It will be interesting to see how their banking system handles it.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1412.7	-2.5	-0.18%
Eurostoxx Index	2468.5	-3.1	-0.12%
Oil (WTI)	95.73	-0.3	-0.29%
LIBOR	0.434	-0.001	-0.23%
US Dollar Index (DXY)	82.64	0.040	0.05%
10 Year Govt Bond Yield	1.82%	0.01%
RPX Composite Real Estate Index	191.8	0.4

Markets are weaker this morning on no real news.  The next two weeks should be pretty quiet as August winds down. There are no real market-moving economic releases this week, except possibly the FOMC minutes, which will be released Wednesday afternoon. Bonds and MBS are flat.

The Chicago Fed National Activity index improved slightly in July to -.13, but is still below zero, meaning the economy is growing below trend. June was revised downward. The plus is that the index is still above -.7, the level that starts indicating a recession.

Has Mario Draghi picked up Hank Paulson's bazooka?  The Bundesbank and the ECB are reacting to a Der Spiegel story which says the ECB is looking to "cap" sovereign interest rates.  Which means they have to be willing to buy any and all government bonds at a set price. The ECB has characterized the article as "misleading." Paging Mr. Soros...

The latest in the San Bernardino Eminent Domain saga.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1407.1	3.6	0.26%
Eurostoxx Index	2429.5	-0.9	-0.04%
Oil (WTI)	94.65	0.3	0.34%
LIBOR	0.434	-0.001	-0.23%
US Dollar Index (DXY)	82.72	0.077	0.09%
10 Year Govt Bond Yield	1.81%	-0.01%
RPX Composite Real Estate Index	190.4	0.3

Stocks are ticking higher this morning in spite of earnings misses by Wal Mart and Sears and some disappointing housing data. Bonds are more or less flat, while MBS are up a tick or two.

Weekly Initial Jobless Claims came in at 366k, more or less in line with expectations and recent history. Housing starts were disappointing at 746k, but an upside surprise in building permits offset that. Housing starts are recovering, but we are still running at half our historical rate, and have averaged a couple hundred units below average over the last 10 years.

Looks like Corzine is going to skate..

The backup in yields over the last few weeks has been dramatic (a range of 50 basis points or so). How have mortgages fared?  Actually, MBS have held up better than long bonds over the past month or so.  Since they underperformed on the the way up, they are outperforming on the way down.  Here is a chart of both securities indexed over the past month:  Note: These are NOT bond prices, they are indices.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1399.7	-1.9	-0.14%
Eurostoxx Index	2425.9	-6.4	-0.26%
Oil (WTI)	92.93	-0.5	-0.54%
LIBOR	0.435	-0.002	-0.46%
US Dollar Index (DXY)	82.68	0.199	0.24%
10 Year Govt Bond Yield	1.76%	0.02%
RPX Composite Real Estate Index	190.4	0.3

Another ho-hum market day with a lot of economic data, but not much action. The CPI showed inflation remains in check, and we had a mixed bag of industrial reports - with positive industrial production and capacity utilization numbers offset by a disappointing Empire State Manufacturing Survey. The bond market continues to sell off and the 10-year bond futures appear to have fallen below the 147 - 153 range they have been stuck in since late May. MBS are down 4 or 5 ticks.

Funds are releasing their 13-Fs right now, which is the list of their holdings. One filing that is always popular is Berkshire Hathaway's because a lot of investors like the idea of piggybacking Warren's trades, and also changes can give insight into what Warren is thinking.  In the latest filing, he reduced his exposure to defensive names, like Proctor and Gamble, Kraft, and Johnny John. He increased his holding in Wells and initiated stakes in a couple names in the energy sector - National Oilwell Varco and Phillips 66. It is hard to read much into the report - net equity exposure dropped, but they seem to be taking a more constructive posture towards the economy.

If you are a property seller, Taxmageddon may have some nasty surprises for you. Theoretically, this should pull some sales from 2013 back into 2012. Which means that Fall could be a little better, while the Spring selling season could be a little weaker.

Finally, the National Association of Homebuilders Confidence Index increased in August as the hot rental market is brightening the spirits of the homebuilders. While absolute levels are still depressed relative to historical standards, the rebound has been swift.

Chart:  NAHB Market Index:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1408.3	5.7	0.41%
Eurostoxx Index	2423.9	7.9	0.33%
Oil (WTI)	93.39	0.7	0.71%
LIBOR	0.437	0.002	0.46%
US Dollar Index (DXY)	82.35	-0.088	-0.11%
10 Year Govt Bond Yield	1.71%	0.04%
RPX Composite Real Estate Index	190.1	0.4

Stocks are up this morning on good retail sales data. Retail Sales increased .8% last month vs an expected increase of .3%. The Despot also reported BTE earnings. The Producer Price Index increased .3%, higher than expectations. Inflation readings don't matter these days - the only real economic numbers that matter are employment-related. Bonds are off a point and MBS are down about 1/4 of a point.

The National Federation of Independent Businesses reported another decrease in its Small Business Optimism Index, which has been in recession levels since late 2006. About the only positive takeaway from the report is that the credit crunch that started in 2007 is more or less over. 93% of all owners reported that all their credit needs were met or that they were not interested in borrowing. Overall, any growth experienced in the economy has been due to population growth, so the economy is more or less stagnant.

While the NFIB cites a relatively benign credit environment for small businesses, the NY Fed sees continued obstacles to obtaining credit, but notes that there are encouraging signs for the future.

Will Paul Ryan merely rubber-stamp whatever the Street wants? (as is alleged by the obama administration)
Probably not. He won't be as hostile to the Street as obama is, but he is in favor of some sort of Glass-Steagall type regulation. He also dislikes the Resolution Authority which allows the government to take control of failing institutions and wind them down, which he views as cementing TBTF.

Interesting article from the NY Times on the effect technology has had on trading costs and speed. Since 2000, the cost of trading a share in / out with commissions has fallen from 7.6 cents a share to 3.8.  The length of time it takes to execute a trade on the NYSE has dropped from 3.2 seconds to 48 milliseconds. Pretty amazing, really. The article goes on to say that we have probably reached the point of diminishing returns for investments in trading technologies.  I would point out that the bond market has a long way to go.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1400.9	-1.5	-0.11%
Eurostoxx Index	2435.3	12.1	0.50%
Oil (WTI)	93.51	0.6	0.69%
LIBOR	0.435	-0.003	-0.57%
US Dollar Index (DXY)	82.31	-0.244	-0.30%
10 Year Govt Bond Yield	1.66%	0.00%
RPX Composite Real Estate Index	189.6	0.5

The dog days of summer typically bring markets with no real news and no real motion. Today is one of those days. The equity futures are flat, and bonds / MBS are more or less flat as well.

The big news of the weekend was the choice of Ryan for VP.  Is this market-moving?  Not in the least.

Joseph Stiglitz and Mark Zandi are endorsing Senator Jeff Merkley's plan to establish a trust to buy underwater, but performing, mortgages and refinance them. Of course there are large questions unanswered: At what price will these mortgages be bought?  And who will do the refinancing? If the plan envisions private lenders refinancing underwater mortgages, how does the government propose to deal with put-back risk?

Here is another idea:  Collateral Substitution. If you want to move, you can substitute a house of equal or higher value for the collateral. Suppose you live in a rust-belt city, with limited job prospects and you want to move to North Dakota, where the energy jobs are.  You would be able to sell your current home without having to repay the loan, and then use the proceeds to buy a new home in ND.

Of course, if housing has already bottomed, then perhaps the correct thing to do is absolutely nothing and let the market recover on its own.

We haven't talked about Facebook for a while. Suffice it to say that the stock didn't live up to the pre-IPO hype. Starting Thursday, the lockups start expiring, which means pre-IPO investors and employees who were restricted will now be able to sell.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1394.3	-6.3	-0.45%
Eurostoxx Index	2418.2	-18.8	-0.77%
Oil (WTI)	91.79	-1.6	-1.68%
LIBOR	0.437	-0.001	-0.11%
US Dollar Index (DXY)	82.8	0.157	0.19%
10 Year Govt Bond Yield	1.63%	-0.06%
RPX Composite Real Estate Index	189.1	0.1

Stocks are taking a breather this morning after a 6-day rally. Chinese and French economic data showed that their respective economies are slowing. Import prices fell 3.2%. Bonds are up 27 ticks and MBS are up about a quarter of a point.

The USDA cut its corn production forecast 17% due to the drought, while corn has  rallied 63% in the last two months. Since corn is also used for feed and is a big input into other foods, price increases will flow through to other foods as well. So if you were wondering why you are spending so much more on groceries (which is our 2nd biggest expenditure after shelter) now you know why. Gas isn't the only commodity that can influence consumer behavior.

The debate going on regarding house prices centers on this:  Bull Case:  Housing has never been more affordable, prices appear to have bottomed and are increasing.  Bear Case:  Price Increases are due to constricted supply and once the shadow inventory hits the market back down we go.  Freddie Mac Chief Economist Frank Nothaft examines the issue in the latest Freddie Mac US Economic and Housing Market Outlook.  His conclusion is that the shadow inventory is still there, but it has been dramatically reduced. I tend to agree, although there isn't really a standard definition of "shadow inventory."  Certainly the red-hot rental market is attracting professional investors, while boomerang college grads are crimping supply. As a trader, my take is that after 6 years, whatever inventory is left is largely in strong hands. I don't see a capitulation trade happening. I do find his economic forecasts to be way aggressive, though.  He is predicting 2.5% GDP growth through the end of the year, with 2.8% in Q113 and 3.2% in Q213 and mortgage rates gradually ticking up to 4.2% by the end of 2013.  Mortgage origination volumes are set to fall as the refinancing boom runs its course. You can click on the table below to increase the size.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1400.5	2.3	0.16%
Eurostoxx Index	2427.8	-4.5	-0.19%
Oil (WTI)	93.89	0.5	0.58%
LIBOR	0.438	0.001	0.17%
US Dollar Index (DXY)	82.69	0.293	0.36%
10 Year Govt Bond Yield	1.72%	0.07%
RPX Composite Real Estate Index	189.1	0.1

Markets are grinding higher on no real news.  FWIW, the markets seem to be getting back into "risk-on" mode, with the latest rally in the stock market and the sell-off in the 10 year. After breaking 1.40, a few weeks ago, the 10-year is now over 1.72%.  MBS are down about 1/4 of a point.

Mortgage delinquencies fell to 7.58%, slightly higher than the street 7.4% estimate. Foreclosures edged down to 4.27%.

The eminent domain issue is becoming bigger as FHFA weighs in. To recap, San Bernardino has proposed to use eminent domain to seize performing underwater mortgages from investors. They would pay the investors a "fair price" - presumably lower than the value of the property - and write down the principal of the mortgage to the market value of the house. SIFMA (who oversees a critical part of the securitization market) warned San Bernardino that if they followed this path that newly-mortgages originated in that area would be ineligible for inclusion into TBA pools, which would make it extremely difficult to get a mortgage there. California Lieutenant Governor Gavin Newsom fired back, telling the organization to "cease making threats to the local officials of San Bernardino County."  Now FHFA has stepped in with a notice expressing "significant concerns" regarding the proposal, which is really more or less theft. Unless the county backs off, this could become to big to ignore, making it an explosive issue (for Democrats, at least) going into the election.

Hey, Fannie made some money. They note that improving home prices, better efficiency in managing REO, and a continued decline in delinquency rates were able to overcome the drain from their legacy book of subprime mortgages bought during the bubble years.

Initial Jobless claims came in at 361k, slightly lower than the 370k street estimate. Initial Jobless claims have fallen back to historical norms. Chart:  Initial Jobless Claims 1967-Present

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1391.7	-5.3	-0.38%
Eurostoxx Index	2418.3	-21.9	-0.90%
Oil (WTI)	93.16	-0.5	-0.54%
LIBOR	0.437	-0.001	-0.25%
US Dollar Index (DXY)	82.46	0.247	0.30%
10 Year Govt Bond Yield	1.62%	-0.01%
RPX Composite Real Estate Index	188.8	0.3

Markets are weaker this morning on disappointing economic data out of Europe and earnings misses from Disney, McDonalds, and Priceline. Euro sovereign yields are generally lower and the yield on the German two-year remained negative for the 24th consecutive day. US bond yields are slightly lower, and MBS are up a few ticks.

We have had dueling Fedspeak recently, with the head of FRB Boston advocating further QE yesterday and Dallas Fed Head Fisher claiming the Fed has done its job and no more needs to be done. IMO, the Sep and October meetings will be too close to the election to expect much, if anything in the way of policy changes. The Fed is very sensitive to appearing to act politically and usually sits on its hands in the last few months before an election (2008 notwithstanding).

In economic data, mortgage applications dropped 1.8% last week.  Productivity was a little better than expected, and unit labor costs increased markedly, with a big upward revision in Q1.  Declining profitability and increasing unit labor costs are not a recipe for increased hiring in the near term.

Is the ECB's version of QE actually increasing the risk of a crisis in Spain and Italy? It may in fact be doing so. By announcing a plan to buy short-term debt from Spain and Italy, it is encouraging these countries to issue more short term paper, which increases their roll-over risk. (Roll-over risk is what happens when you aren't able to refinance maturing short-term debt).

Corelogic reported a 2.5% annual increase in home prices during the month of June.  Ex-distressed sales, prices increased 3.2%. They are calling the bottom:  "At the halfway point, 2012 is increasingly looking like the year that the residential housing market may have turned the corner. While first-half gains have given way to second-half declines in the past three years, we see encouraging signs that modest price gains are supportable across the country in the second half of 2012." It is true that some of the recent home appreciation has been due to seasonal factors. but there seem to be other factors at work too - most notably a red-hot rental market. FWIW, Radar Logic (which manages the RPX index) thinks it is all a head fake.

Yet another positive data point for housing - North American rail carloads of lumber increased 10% this year as housing construction rebounds. Housing starts are still way below historical averages and have been there since the end of 2006, so a rebound in starts is nothing to get too excited about. But every little bit helps.

Texas Instruments just issued 7 year paper at 1.65%. After tax, that cost is 1.24%. TXN's dividend yield is 2.33%.  Is there an arbitrage here?  Is that what is getting the stock market excited?  Food for thought...

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1398.0	8.1	0.58%
Eurostoxx Index	2435.4	36.1	1.50%
Oil (WTI)	92.66	0.5	0.50%
LIBOR	0.438	-0.001	-0.23%
US Dollar Index (DXY)	82.13	-0.140	-0.17%
10 Year Govt Bond Yield	1.62%	0.06%
RPX Composite Real Estate Index	188.8	0.3

Stocks are higher this morning on hopes for further stimulus measures out of the ECB after a disappointing factory orders report in Germany. Spanish bond yields continue their descent from their late July highs. The 10-year is down a point and MBS are down about 1/4 of a point.

FHFA Acting Chairman Ed DeMarco has responded to Congress regarding principal reductions on Fannie and Freddie loans. His reasons for resisting principal reductions are largely due to strategic defaults. In other words, he is afraid that people who are current on their mortgage and can afford the payment will stop paying in order to get a principal reduction.  According to the FHFA study under the most favorable model-based assumptions, it would take anywhere from 3,000 to 19,000 strategic defaults to turn the program into a net loss for taxpayers. Will this satisfy DeMarco's #1 critic? Alas, probably not.

The National Association of Home Builders has released their improving market index, which showed 80 MSAs were characterized as improving (about 25%).  "With nearly one quarter of all U.S. metros currently designated as improving housing markets, there is growing recognition among consumers that now is an opportune time to consider a home purchase"  Of course they are talking their own book, but still it is another positive data point. They do note that the tight lending environment is acting as a drag on activity.

I generally don't get too political, but the weakest Romney attack award goes to .... Bloomberg with this lame story about the Seat Pagine LBO. For starters, tax evasion is a national sport in the Mediterranean countries, and to think the Italians would be miffed that Bain used an Luxembourg-based entity to minimize taxes is ridiculous.  Second, the consortium was correct to recognize that the internet was about to destroy the value of the yellow pages and a sale, especially when media valuations were sky-high in the late 90s, was the right thing to do.  The fact that (a) the Italian government sold before the bubble was inflated and (b) Telecom Italia was in empire-building mode in the dying days of the internet bubble is neither Bain nor Romney's fault. My favorite line was "Bain got wind of the public action through the Italian unit of Bain & Co..."  How sinister sounding - like Romney got a clandestine call saying "Blue Horseshoe loves Annacott Steel." It was a public auction, part of a long-term announced plan by the Italian government to sell state assets in order to get their debt levels down for EU integration. I guess I "got wind" of tomorrow's 10-year Treasury note auction from today's Journal too.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1391.8	2.8	0.20%
Eurostoxx Index	2387.0	14.5	0.61%
Oil (WTI)	91.27	-0.1	-0.14%
LIBOR	0.439	-0.001	-0.11%
US Dollar Index (DXY)	82.35	-0.024	-0.03%
10 Year Govt Bond Yield	1.55%	-0.02%
RPX Composite Real Estate Index	188.1	0.7

Markets are slightly higher this morning on a deal to rescue Knight Capital. There are very few economic releases this week, and Europe should be quiet as we get into August. Bonds are up half a point, while MBS are up a few ticks.

As some lenders exit the correspondent business, others enter. While Bank of America and GMAC are leaving or scaling back, Redwood Trust is applying for Fan and Fred approval in order to increase their focus from just jumbo loans. Redwood Trust is the main issuer of MBS without a government guarantee.

Knight Capital received a $400MM rescue from Getco LLC. Interestingly, the rescue was put together by Knight's customers who fear too much concentration in market makers. While the trading error that caused it will undoubtedly draw regulatory scrutiny to high-frequency trading. Maxine Waters is already looking to hold hearings on it. Wonder if they will look to the unintended consequences of Reg NMS, which basically destroyed the business model of traditional market-making. HFT is what is left. If investors don't want to pay commissions or bid / ask spreads, they will probably have to accept the volatility that goes along with computerized trading.