Morning Report - Small Business "Optimism" Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.6	-16.5	-1.00%
Eurostoxx Index	2661.6	-57.8	-2.13%
Oil (WTI)	94.47	-1.3	-1.36%
LIBOR	0.272	-0.002	-0.69%
US Dollar Index (DXY)	81.46	-0.186	-0.23%
10 Year Govt Bond Yield	2.26%	0.05%
Current Coupon Ginnie Mae TBA	101.2	-0.2
Current Coupon Fannie Mae TBA	99.55	-0.5
RPX Composite Real Estate Index	203	0.6
BankRate 30 Year Fixed Rate Mortgage	4.06

Markets are lower after the Bank of Japan left policy unchanged. Bonds and MBS are heavy again, with the 10 year yielding 2.26%

Part of the issue with the weakness in the bond and MBS market is convexity-related hedging. Convexity hedging is coming out of the mortgage REITs primarily, but also anyone who holds mortgages as an investment and hedges the interest rate risk. The "inside baseball" explanation of what is going on: Mortgage REITs are finding that as rates increase, the duration of their mortgage backed securities increases. This means they have to either sell MBS or Treasuries to rebalance their hedge." The punch line: selling begets more selling. And that is partly why the 10 year and MBS cannot get out of their own way.

The NFIB Small Business Optimism report ticked up to 94.4 in June, the highest level in a year, and the second highest reading since the recession started in 2007. That is the good news. The bad news? The number is still very weak, and only slightly higher than the post-recession average.  The biggest headaches for small business?  Taxes, Government regulations / red tape, and poor sales. In that order. The elephant in the room is obamacare. The report highlights one of the big disconnects happening right now, with the S&P 500 near record levels. The big multinationals are doing fine, but small business is barely growing with population. Since small business is half of the economy, it explains why we can have record levels in the S&P 500 and "meh" economic growth.If multinational profits correspond to 4% GDP growth, and the small business sector profits correspond to 0% GDP growth, you get 2% growth as an average number. 

Traders are well aware of the "fat finger" phenomenon. This happens when you are entering an order and accidentally hit two keys at once, turning an order to buy 100,000 shares into an order to buy 1,200,000 shares. Well, we have a fat head error. And no, I am not talking about the one where a guy ordered a Tom Brady Fathead poster for his office and got Tebow instead. 

Remember eminent domain? It's baaaack. Or at least advocates have some new ammunition - a paper by Cornell law professor Robert Hockett. He argues that municipalities should, in partnership with investors, "condemn" underwater mortgage notes, pay mortgagees "fair value" and systematically write down principal. Of course any municipality that pursues this will effectively be cutting their citizens off from Fannie Mae / Freddie Mac / Ginnie Mae loans.