Morning Report: S&P swings back

Vital Statistics:

	Last	Change	Percent
S&P Futures	1513.0	-0.1	-0.01%
Eurostoxx Index	2631.2	8.6	0.33%
Oil (WTI)	97.59	0.6	0.58%
LIBOR	0.292	-0.001	-0.34%
US Dollar Index (DXY)	80.28	-0.031	-0.04%
10 Year Govt Bond Yield	1.97%	0.00%
RPX Composite Real Estate Index	193.2	-0.1

Markets are flattish as the G-7 countries promise not to target currency rates with economic policies. Barclay's is cutting 3,700 jobs. The President gives his state of the union address tonight, and it will focus on the economy and job creation.  Bonds and MBS are flat.

The National Association of Realtors reported that the median price of an existing home rose 10% in Q411 to 178,900 from 162,600 in Q411. That puts the median house price to median income ratio roughly at 3.53x, which is towards the top of its historic 3.15 - 3.55x range. This begs the question:  Is housing overvalued?  Perhaps, but wages have gone nowhere for 6 years.  Perhaps this time, wages catch up.

Chart:  Median House Price to Median Income Ratio:

The National Federation of Independent Businesses released its Small Business Optimism survey, and while it increased, it was still a dismal reading. On the plus side, more small business owners are hiring than firing. Capital Expenditures are increasing, although they are still in maintenance mode. Overall, the report suggests that sentiment is improving, albeit from very low levels.

McGraw Hill (owner of Standard and Poors) comes out swinging against the DOJ in their latest earnings release. They point out that the US cherry-picked a few emails, and that alone is only evidence of an atmosphere of "vigorous debate" but not wrongdoing.  They note that they were downgrading CDOs with 2006 vintage RMBS a year and a half before Lehman failed (which actually co-incides with the beginning of the financial crisis, IMO).  I remember the credit markets beginning to freeze in the summer of 2007, which was being called a "buyers strike."  Finally, they note that virtually everyone missed the housing bubble, and the fact that their actions proved to be insufficient in hindsight does not prove intentional misconduct at S&P.

The state of Nevada is taking steps to reduce shadow inventory by buying distressed pools of mortgages and working them out to reduce principal.  They will purchase homes at 70% of appraised value and re-work the loan or foreclose and re-sell the property.  It will be administered by a non-profit entity. It will be funded with receipts from the National Mortgage Settlement. Once the loan has been seasoned as a re-performer, it will be sold back into the market and the money recycled.