Morning Report - Big drop in consumer confidence

Vital Statistics:

	Last	Change	Percent
S&P Futures	1973.2	3.7	0.19%
Eurostoxx Index	3219.3	32.4	1.02%
Oil (WTI)	94.75	0.2	0.19%
LIBOR	0.233	-0.001	-0.21%
US Dollar Index (DXY)	86.05	0.458	0.54%
10 Year Govt Bond Yield	2.51%	0.03%
Current Coupon Ginnie Mae TBA	106.1	-0.1
Current Coupon Fannie Mae TBA	105.3	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.11

Markets are higher this morning on no real news. Bonds and MBS are down.

House Prices fell .5% month over month, the third consecutive monthly decline according to Case-Shiller. On a year-over-year basis, they are still up 6.75%. 

Consumer confidence dropped markedly in in September, according to the Conference Board. It fell from an upward-revised 93.4 to 86. The present situation index fell from 93.9 to 89.4 and the Expectations index fell from 93.1 to 83.7.

The ISM Milwaukee Index came in at 63.18, better than the street expectations of 61. The Chicago Purchasing Manager Index came in at 60.5, below expectations as well. 

Dallas Fed President Richard Fisher would raise rates in the Spring of next year instead of waiting until the summer. Regardless, it is looking like the first rate hike will be at the June 2015 FOMC meeting, provided things continue on the same economic course. Note that the Fed Funds Futures are predicting the Fed will be less aggressive than advertised in the dot graphs. 

Note that inflationary pressures are moderating courtesy of a bear market in commodities, driven by a stronger dollar and slower Chinese growth. The PCE Price Index (the preferred inflation measure for the Fed) rose by only 1.5% last month, which is well below the Fed's target.

Speaking of commodities, the US is set to become the world's largest producer of liquid petroleum, passing Saudi Arabia for the first time since 1991. Cheap energy is going to be the basis for the next big boom in the US as manufacturing relocates back to the U.S.

A new paper from Brookings says the Fed and the Treasury should coordinate policies more. 

Employment has crawled back to peak levels in parts of the country, but 29 out of 50 states are still below that level. The states hit the hardest in the real estate bust - Nevada, Arizona, and Florida - are furthest from peak levels. 

Morning Report - Busy week ahead

Vital Statistics

	Last	Change	Percent
S&P Futures	1957.9	-18.0	-0.91%
Eurostoxx Index	3193.5	-26.1	-0.81%
Oil (WTI)	93.2	-0.3	-0.36%
LIBOR	0.233	-0.001	-0.21%
US Dollar Index (DXY)	85.5	-0.142	-0.17%
10 Year Govt Bond Yield	2.48%	-0.05%
Current Coupon Ginnie Mae TBA	106.1	0.0
Current Coupon Fannie Mae TBA	105.5	0.1
BankRate 30 Year Fixed Rate Mortgage	4.14

Stocks are lower this morning on the demonstrations in Hong Kong. Bonds and MBS are up.

This is a big week data-wise. We will get the ISM report, construction spending, Case-Shiller, and then the jobs report on Friday. Given that bonds again seem to be driven by overseas events, I think the jobs report will probably be a non-event for the bond market unless it is exceptionally strong or exceptionally weak. 

Pending Home Sales fell 1% in August after rising 3.2% in July. The West was up 2.6%, while the rest of the US was down. 

Bill Gross is out at PIMCO and has joined Janus Capital. This follows record outflows at the flagship Total Return Fund, which Gross ran. PIMCO anticipates another $10 billion will leave on the news.

Personal Incomes rose .3% in August, while Personal spending rose .5%. The PCE Core rate (the inflation measure the Fed prefers to use) rose 1.5% year-over-year, below their 2% target rate. 

Freddie Mac's Chief Economist told the New England Mortgage Banking Conference that 2015 could be the best year for home sales since 2007. They are forecasting mortgage rates to be around 5% by the end of 2015. 

Morning Report - Could fair lending laws be getting a review?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1986.3	-4.7	-0.24%
Eurostoxx Index	3251.1	7.1	0.22%
Oil (WTI)	93.31	0.5	0.55%
LIBOR	0.234	-0.002	-0.64%
US Dollar Index (DXY)	85.37	0.328	0.39%
10 Year Govt Bond Yield	2.53%	-0.03%
Current Coupon Ginnie Mae TBA	105.9	0.1
Current Coupon Fannie Mae TBA	105.3	0.1
BankRate 30 Year Fixed Rate Mortgage	4.12

Markets are lower this morning on no real news. Bonds and MBS are up.

Initial Jobless Claims came in below 300k again, which is a number associated with booming economic times. People that have jobs aren't losing them, however the long term unemployed continue to sit on the sidelines.

Durable Goods orders fell 18.2% in August after rising 22.5% in July. They normally aren't that volatile. Transportation orders tend to be lumpy and that explains the huge jumps. Ex-transportation, they rose .7%.

Almost a million homes regained positive equity in the second quarter, according to Corelogic. The share of mortgaged homes with negative equity fell to 10.7% compared to 12.7% in the first quarter and 14.9% last year. Negative equity percent peaked around 25% in 2009. This should help increase existing home sales and home supply as more and more people become able to move, which should be an incremental positive for the mortgage banking business. 

Fair lending laws might be getting a review at the Supreme Court level. For decades, bankers could be found guilty of discrimination even if they did not intend to discriminate. Lending patterns could be enough to prove discrimination. Now, this could be headed to the Supreme Court after Texas officials ruled the disparate impact standard is too loose. The Roberts Court overturned provisions of the Voting Rights Act, and advocates on both sides suspect that the majority will rule for the narrower standard. If that happens, then life could get a lot easier for mortgage bankers, who are caught between the QM and the fair lending laws. 

Morning Report - New Home Sales hit post-bubble highs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1975.2	2.9	0.15%
Eurostoxx Index	3222.1	16.2	0.50%
Oil (WTI)	91.66	0.1	0.11%
LIBOR	0.236	0.003	1.07%
US Dollar Index (DXY)	84.78	0.119	0.14%
10 Year Govt Bond Yield	2.53%	0.00%
Current Coupon Ginnie Mae TBA	106	0.0
Current Coupon Fannie Mae TBA	105.3	0.0
BankRate 30 Year Fixed Rate Mortgage	4.18

Markets are higher this morning as Europe rallies. Bonds and MBS are down small.

Mortgage Applications fell 4.1% last week. Purchases dropped .3% while refis fell 7%. After ignoring the rally in bonds all summer, mortgage rates are increasing as bond yields increase. It seemed like the 30 year fixed rate mortgage was stuck at 4.25%, even as the 10 year yield approached 2.3%. Now that rates are increasing, mortgage rates are increasing in lockstep. Note that MBA has the average 30 year fixed rate mortgage at 4.39%, while Bankrate has it at 4.18%. 

New Home Sales increased to 504k, the highest level since May of 2008. That said, half a million is still well below "normalcy" of 800k or so, or even the peak in 2005 at 1.4 million. Again, further evidence of just how much housing has been absent from this recovery, and also how much pent-up demand we have. 

Chart: New Home Sales 1990 - Present

Homebuilder KB Home missed earnings expectations in a big way, with eps coming in at $0.28 vs expectations of $0.41 and revenues of $589 million vs expectations of $646 million. Revenues increased 7% driven by a 9% increase in ASPs and 2% drop in orders. ASPs were up 21% (!) on the West Coast. KB's mortgage banking JV with Nationstar began during the quarter. Gross margins continue to improve. The company noted an "appreciable uptick" in traffic levels which they saw as "strong evidence of the pent-up demand for new housing." The stock is down about a buck and a half pre-open.

Soon after Jack Lew and Obama released their new plans on corporate inversions and declared companies that pursue such strategies "unpatriotic," that old triangulator Bill Clinton refused to go there and instead talked about tax inversion. I guess Bill will be floating all of Hill's trial balloons, and acting as Obama's back-seat driver for the rest his term. Obama's gotta love that. FWIW, the Street doesn't seem to be taking this too seriously - Burger King (which is in the process of buying Tim Horton) said that it will continue to with its merger regardless, as did Medtronic. The COV / MDT spread didn't even move. 

The biggest foreign buyer of U.S. real estate is Canada, but who do you think is #2? Hint: It isn't China. It is Norway. For those that don't know, Norway (which has a population smaller than NYC) has a real estate bubble that has defied gravity for years. Foreign purchases of US real estate assets tends to accompany bubbles in their home countries, and China, Canada, and Norway all are in the midst of real estate bubbles. While this probably affects commercial more than resi, I could see some pressure at the high end as these bubbles burst. 

Chart: Norwegian Home Prices

Lending to minorities is at a 14 year low. I guess buyback risk has gotten everyone so spooked, they aren't interested in doing FHA and low income lending, except as needed to keep their fair lending numbers in the acceptable range. Anyway, lenders should expect some sort of response from the Administration, and fair lending enforcement is probably going to be stepped up. 

Morning Report - existing home sales down, gettable business up

Vital Statistics:

	Last	Change	Percent
S&P Futures	1981.0	-5.3	-0.27%
Eurostoxx Index	3211.1	-46.4	-1.42%
Oil (WTI)	91.44	0.6	0.63%
LIBOR	0.233	0.000	0.00%
US Dollar Index (DXY)	84.51	-0.247	-0.29%
10 Year Govt Bond Yield	2.55%	-0.01%
Current Coupon Ginnie Mae TBA	105.9	0.1
Current Coupon Fannie Mae TBA	105.2	0.1
BankRate 30 Year Fixed Rate Mortgage	4.17

Markets are down on no real news. Bonds and MBS are up.

Home Prices increased .1% on a seasonally adjusted basis in July, according to the FHFA. On a year-over-year basis, prices are up 4.4% and the index is 6.4% below its April 2007 peak. 

I wanted to mention something from yesterday's existing home sales report. All cash sales have dropped to 23% of all purchases, down from nearly 29% a month ago. It seems like professional investors are not chasing properties at these levels, which is opening the door for more traditional homebuyers. In terms of how this affects mortgage bankers, consider this - as cash percentages drop, that means the number of sales with a mortgage is increasing. So even though existing home sales fell from 5.14 million to 5.05 million from July to August, the number of homes with a mortgage (in other words, gettable business) actually increased about 6.5%. 

The White House has taken action on corporate inversions, not by banning them, but by trying to make them less financially attractive. The rules are not finalized, so it is too early to say whether the Administration's plans are even legal. Corporate tax reform is needed, and the left will have to trade lower rates for closing loopholes. This is an attempt to steal a freebie. Also, the administration is hoping that by bringing that point up, Republicans can be branded as "pro-corporate deserters." Corporate Inversion arb spreads are wider this morning. 

Goldman is calling for a 4% 10 year bond yield within the next year as QE ends and the Fed starts hiking rates. Lately, the correlation between Treasuries and mortgages has broken down, so it is unclear how much mortgage rates will rise as a result. 

Citi is out with a note discussing what happens to corporate bond yields when rates start increasing. Historically, rate increases have been a benign event, however we are in uncharted waters here, and Citi is advising caution. 

Note that the Fed is about to get significantly more dovish as two hawks - Philly Fed President Charles Plosser and Richard Fisher, Dallas Fed President retire. They weren't going to be voting members next year at any rate, however the Fed is losing some important hawkish voices. The Fed could now be running the risk of groupthink. 

Morning Report - Cash real estate transactions lowest since December 2009

Vital Statistics:

	Last	Change	Percent
S&P Futures	1997.0	-6.8	-0.34%
Eurostoxx Index	3266.5	-6.8	-0.21%
Oil (WTI)	92.14	-0.3	-0.29%
LIBOR	0.233	0.000	0.00%
US Dollar Index (DXY)	84.67	-0.063	-0.07%
10 Year Govt Bond Yield	2.56%	-0.01%
Current Coupon Ginnie Mae TBA	105.9	0.1
Current Coupon Fannie Mae TBA	105.2	0.1
BankRate 30 Year Fixed Rate Mortgage	4.23

Markets are higher this morning on no real news. Bonds and MBS are up.

Merger Monday continues apace, with a few big deals - Merck Kga is buying chemical giant Sigma-Aldrich, and Siemens agreed to buy Dresser-Rand. 

Existing Home Sales came in at 5.05 million units, according to NAR. This is a 5.3% drop year-over-year. The median house price increased to $219,800 which is up 4.8%. All cash sales dropped to 23% of all transactions in August and represents the lowest share since December 2009. So, there is at least some good news for mortgage bankers. It looks like investors are stepping away from the market, which should pave the way for the first time homebuyer, who has been shut out due to bidding wars and the advantages of a cash buyer. 

The Alibaba IPO went swimmingly, with $25 billion worth of stock being sold and the stock trading up 38% on the first day. The company now sports a valuation of $231 billion, which puts it in the same territory as JP Morgan and Chevron. Note that Chevron throws off about 10 times the EBITDA that BABA does. 

The Chicago Fed National Activity Index slipped in August to -.21, We saw from the industrial production data that the auto sector had a huge July followed by a weak August. 

Kansas' state unemployment rate came in at 4.9%, well below the national average. For those who haven't been following closely, Kansas has been quite the ideological football lately. The left has been assiduously trying to paint Kansas's tax cut package as a dismal failure. Of course the idea was to attract companies to relocate to Kansas and that won't happen overnight. Needless to say, there is an election coming up, and control of the Senate may hinge on Kansas. 

We all know the housing sector continues to punch below its weight. One reason is student loan debt, which has the effect of depressing home sales by 8%, according to a new paper. That equates to about $83 billion in lost activity. We have discussed before the misconceptions regarding how to qualify for a mortgage. Separately, FHA loans fell 19% compared to a year ago as bankers pull away following an avalanche of lawsuits and buybacks. In fact, JP Morgan CEO Jamie Dimon said on his second quarter earnings conference call that the bank is wondering whether to be in the FHA business at all. Housing advocates are pushing for more low-income lending and are vexed that the banks are making less loans. now. 

Morning Report - Did QE inhibit lending?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2010.7	6.1	0.30%
Eurostoxx Index	3273.2	1.9	0.06%
Oil (WTI)	92.65	-0.4	-0.45%
LIBOR	0.234	0.000	-0.13%
US Dollar Index (DXY)	84.56	0.233	0.28%
10 Year Govt Bond Yield	2.60%	-0.01%
Current Coupon Ginnie Mae TBA	105.8	0.1
Current Coupon Fannie Mae TBA	105	0.1
BankRate 30 Year Fixed Rate Mortgage	4.22

Markets are higher this morning on no real news. Bonds and MBS are up small.

Not a lot to talk about this morning - Alibaba raises almost $22 billion in its IPO, and the Scots reject independence.

The Index of leading economic indicators came in at .2% for August, a drop from the upward-revised 1.1% in July and Street expectations of .4%.

Did QE actually inhibit lending? David Kelly, chief global strategist at JP Morgan has an interesting theory - that QE pushed rates so low, that it didn't make sense for banks to lend money at such low levels. He also mentions the Administration's war on the financial sector, which probably has more to do with it. But he has a point - when the government meddles too much with interest rates, you are going to have unintended consequences. 

Morning Report - FOMC data dump

Vital Statistics:

	Last	Change	Percent
S&P Futures	1999.4	5.7	0.29%
Eurostoxx Index	3264.6	27.1	0.84%
Oil (WTI)	94.72	0.3	0.32%
LIBOR	0.234	0.000	-0.09%
US Dollar Index (DXY)	84.55	0.206	0.24%
10 Year Govt Bond Yield	2.63%	0.01%
Current Coupon Ginnie Mae TBA	105.7	-0.1
Current Coupon Fannie Mae TBA	104.8	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.21

Markets are higher after yesterday's FOMC statement was still reasonably dovish. Bonds and MBS are down small. 

Initial Jobless Claims dropped to 280,000, an extraordinarily low number that is associated with boom times like 1999 and 2005.

Housing starts were disappointing, coming in at 956k, a sizeable drop from the upward-revised 1.11 million in July. The drop was almost all in the multi-fam segment, which tends to be extremely volatile. Building Permits fell as well.

The FOMC statement kept language stating that the Fed Funds target rate should remain at current levels for "a considerable time" after QE ends. The Fed noted there remains "significant under-utilization" of labor resources. That said, the FOMC raised their Fed Funds forecast for 2015 by 1/4 and 2016 by 3/8, according to the dot graph in the projection materials. The Fed took down their unemployment and GDP forecasts for this year and next year as well. On the subject of QE, it should end this year and for the time being, the Fed will continue to re-invest maturing proceeds. They do not intend to sell their MBS portfolio. At the margin, this means lower mortgage rates going forward. Bonds sold off on the statement (probably due to the dot graph), and stocks rallied as the Fed's posture will remain dovish for the near and intermediate future. 

Note that the "significant under-utilization" language is at odds with what the Staff economists believe is going on in the labor market. The Staff Economists discussed the idea that those who are long-term unemployed may turn out to be effectively retired, and if that is the case, then there is less slack in the labor market than previously thought. The Great Recession has put a lot of men in their prime earning years on the sidelines. 

I appeared on Louis Amaya's Capital Markets Today show and discussed the FOMC statement and the economy. You can hear the interview here.

Morning Report - Waiting on the Fed

Vital Statistics:

	Last	Change	Percent
S&P Futures	1991.9	0.4	0.02%
Eurostoxx Index	3237.4	15.7	0.49%
Oil (WTI)	94.68	-0.2	-0.21%
LIBOR	0.235	0.000	0.00%
US Dollar Index (DXY)	84.01	-0.061	-0.07%
10 Year Govt Bond Yield	2.57%	-0.02%
Current Coupon Ginnie Mae TBA	105.8	-0.1
Current Coupon Fannie Mae TBA	105	0.1
BankRate 30 Year Fixed Rate Mortgage	4.2

Markets are flat this morning as we await the Fed's decision at 2:00 pm. Bonds and MBS are up.

The FOMC decision should be out by 2:00 pm EST. I suspect any surprises will be in the press conference, not the actual release. 

The NAHB Homebuilder Sentiment Index rose to a post-bubble high. 

Mortgage Applications rebounded 7.9% last week after printing the lowest level since 2001 in the prior holiday-shortened week. Purchases rose 4.8%, while refis increased 10.3%. Interestingly, MBA is reporting the average 30 year fixed rate mortgage rate increased to 4.36% after having been stuck in a 4.25% - 4.30% range all summer. Mortgage rates didn't really follow bond yields lower ahead of the ECB announcement, but now they are heading higher along with bonds. This could be evidence of (a) capacity having been wrung out of the system, or (b) bankers making loans that they wouldn't have made a year ago, which carry higher rates. 

Inflation at the consumer level remains muted. The consumer price index fell .2% in August as gas prices decreased. Ex-food and energy, it was flat. Certainly not seeing much evidence of inflation.

Lennar reported good numbers, with a 23% jump in new orders, a 29% increase in backlog, Average Selling Prices rose 14% to $332,000. Lennar was one of the few companies that reported increases in deliveries - most had been showing drops in deliveries offset by an increase in ASPs. The stock is up a couple of bucks pre-open.

Good news for builders like Lennar, Pulte, and D.R. Horton who have exposure to the entry-level buyer - the Millennial generation is moving out of Mom and Dad's basement. This has all sorts of implications for the housing market - they will be the demand for rentals and also for starter homes. We have underbuilt since the bust and demand is starting to come back. Of course we have a long way to go to get to normalcy, but at least we are headed in the right direction. Note the Wells survey from yesterday - many might actually be interested in buying, but they believe (wrongly) that a 20% downpayment and perfect credit is mandatory to get a loan. Education about FHA loans is key. 

HUD secretary Julian Castro spoke at the Bipartisan Policy Center 2014 Housing Summit. Here are his prepared remarks. Obviously access to credit is a big concern on the part of HUD, and they are trying to address it by clarifying rules and regulation and putting them in a single resource - the Single Family Handbook, which will address loan defects and how serious they are. Second, they are rolling out a program designed to counsel first time homebuyers, rewarding them with a MI break if they go through the program. I do wonder how much improved access we are going to get with the barrage of lawsuits continuing. 

Morning Report - Still lots of misconceptions about getting a mortgage

Vital Statistics:

	Last	Change	Percent
S&P Futures	1971.6	-4.5	-0.23%
Eurostoxx Index	3216.4	-15.3	-0.47%
Oil (WTI)	93.21	0.3	0.31%
LIBOR	0.235	0.001	0.21%
US Dollar Index (DXY)	84.22	-0.040	-0.05%
10 Year Govt Bond Yield	2.57%	-0.02%
Current Coupon Ginnie Mae TBA	106.3	0.0
Current Coupon Fannie Mae TBA	105	0.1
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are lower on no real news. Bonds and MBS are up small. Today starts the FOMC meeting. 

Inflation at the wholesale level remains under control, with the Producer Price Index coming in flat for the month of August. Ex food and energy, it was up .1% (or 1.8% annualized). Inflation is still below the Fed's target. 

Wells Fargo conducted a survey about homebuying attitudes, and there are some major misconceptions out there. 30% believe only individuals with high incomes can obtain a mortgage. 64% believe they must have a "very good" credit score to buy a home. 44% believe a 20% down payment is a requirement. People really do not know about FHA lending. 

CALPERS (the California Public Employees Retirement System) - the biggest US pension fund, is redeeming its hedge fund investments. High costs and low transparency are the stated reason, but another reason is underperformance. Average public pension gains from hedge funds were 3.6% over the past 3 years, vs 10.6% in stocks and 5.7% from bonds. 

What is holding up the stock market these days? Buybacks. Interesting stat: companies in Q2 spent 31% of their cash flow on buybacks. This is having an outsized effect as volumes dry up. In Q2, stock market volume averaged just over 6 billion shares a day, the lowest level in 7 years. 

Morning Report - big week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1977.0	0.3	0.02%
Eurostoxx Index	3234.5	-0.5	-0.02%
Oil (WTI)	91.51	-0.8	-0.82%
LIBOR	0.235	0.001	0.21%
US Dollar Index (DXY)	84.35	0.107	0.13%
10 Year Govt Bond Yield	2.60%	-0.02%
Current Coupon Ginnie Mae TBA	106.2	0.1
Current Coupon Fannie Mae TBA	104.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.19

Markets are flat this morning ahead of a big week for data and events. Bonds and MBS are down.

Industrial Production fell .1% in August, while capacity utilization dropped by 30 basis points to 78.8%. It looks like the notoriously volatile motor vehicle sector accounted for the decline. The previous month had a big increase in motor vehicles, which it looks like we gave back in August. 

The Empire Manufacturing Survey came in at 27.5, a multi-year high.

This week we will have the FOMC meeting, with the decision on Wed afternoon. This meeting will include new projections and also should include a press conference. The Street will be focusing on any changes in the rate projections from the voting members (note that the mix of voting members will turn much more dovish at the beginning of 2015). 

One of the interesting features of mortgage rates this summer has been the decoupling from long-term bonds. As rates fell during the summer, mortgage rates stayed stuck at the 4.25% range. Now that bonds are selling off, mortgage rates are still relatively constant. Look at the graph below. The top line is the 30 year fixed rate mortgage according to Bankrate, and the lower line is the 10 year bond yield. The correlation has completely broken down.

Morning Report - Banks are holding their jumbos

Vital Statistics:

	Last	Change	Percent
S&P Futures	1988.2	-0.8	-0.04%
Eurostoxx Index	3233.5	-4.3	-0.13%
Oil (WTI)	92.92	0.1	0.10%
LIBOR	0.235	0.000	0.00%
US Dollar Index (DXY)	84.24	-0.061	-0.07%
10 Year Govt Bond Yield	2.59%	0.04%
Current Coupon Ginnie Mae TBA	106.1	-0.2
Current Coupon Fannie Mae TBA	104.9	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.16

Markets are flat as we close out a dull week. Bonds and MBS are down amidst a global bond sell-off. 

Retail Sales increased .6% in August. Ex autos and gas, they increased .4%. July's numbers were revised upwards.

Import prices fell .9% in August, driven by a drop in oil prices. Ex food and fuels, import prices were flat. 

The preliminary September reading for the University of Michigan Consumer Sentiment indicator showed an increase and hit the high for the past year. 

The jumbo securitization market is pretty much dormant, except for the occasional Redwood Trust deal. Only 2.3% of all jumbos originated in the first half of 2014 have been securitized. At the peak of the housing bubble, almost half of all jumbos were securitized. Banks are instead choosing to hold them on their balance sheet. Banks are subsidizing the jumbo mortgage rate in order to bring in the wealthy client and then offer all other sorts of banking services, including the lucrative wealth management business. 

Another article about the lowering of the speed limit for the economy. Federal Reserve economists do not expect the labor force participation rate to increased meaningfully as the labor market improves. They argue that the number of people who aren't working, but would work if conditions were better are relatively small. The upshot is that this paper bolsters the hawk case at the Fed and is ammo for those who want to start raising rates. Not sure dove Yellen will play along, and the voting members will take a dovish turn next year as hawks like Plosser lose their vote.

Morning Report - Another sign of a credit market top

Vital Statistics:

	Last	Change	Percent
S&P Futures	1987.1	5.3	0.27%
Eurostoxx Index	3225.6	-18.6	-0.57%
Oil (WTI)	90.83	-0.8	-0.92%
LIBOR	0.235	0.001	0.43%
US Dollar Index (DXY)	84.13	-0.150	-0.18%
10 Year Govt Bond Yield	2.51%	-0.03%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	105.3	0.1
BankRate 30 Year Fixed Rate Mortgage	4.16

Markets are higher this morning on on real news. Bonds and MBS are rallying.

Initial Jobless Claims came in at 315k, a little higher than street expectations, but still a good number. 

The President talked about ISIS last night. It was a declaration of war. Or something. Here are the takeaways.

The Fannie Mae National Housing Survey is out - average home price expectations continue to fall as consumers temper their bullishness on home price appreciation. People still have a dour view on the economy but it is improving slightly. That said, it looks like incomes took a bit of a hit in August. 

Bill Gross of PIMCO has been raising cash in his Total Return Fund, selling Treasuries and developed sovereigns. Mortgages as a percent stayed flat at 20%. 

Twitter is doing a new convertible bond which are convertible into stock or cash at Twitter's election. This is rare - usually the choice is the bondholder's not the issuer's, at least on senior unsecured paper. This isn't a convertible pref issue. It will be interesting to see the pricing on this - essentially the holder will be short a put on Twitter stock. If Twitter's stock craters, Twitter gets to essentially sell stock at current levels. If Twitter stock continues to rally, they can either pay cash, or sell Twitter stock in the market at higher prices, redeem the bonds and pocket the difference between the sales price and the conversion price. The bigger point is that bond issues are getting more and more lopsided in favor of the borrower, and that is a classic market top signal. Investors are reaching for yield and taking risks they are not getting adequately compensated for. Paper like this can go no-bid in a hurry. IMO, the stock market is assuming that the Fed can start raising rates without anyone blowing up. Historically that hasn't happened. 

Foreclosure activity picked up in August, according to RealtyTrac. Activity picked up in the big judicial states like New York, New Jersey, and Connecticut. 

Morning Report - Mortgage Applications at a 14 year low

Vital Statistics:

	Last	Change	Percent
S&P Futures	1987.8	-1.9	-0.10%
Eurostoxx Index	3244.0	-1.4	-0.04%
Oil (WTI)	92.27	-0.5	-0.52%
LIBOR	0.234	0.001	0.56%
US Dollar Index (DXY)	84.33	0.056	0.07%
10 Year Govt Bond Yield	2.53%	0.03%
Current Coupon Ginnie Mae TBA	106.3	-0.2
Current Coupon Fannie Mae TBA	105.2	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Stocks are lower this morning on no real news. Bonds and MBS are down as European bonds sell off. 

Mortgage Applications fell 7.2% last week as we had the Labor Day holiday and rates backed up. Purchases fell 2.6% while refis fell 10.7%. Refis accounted for 55.4% of all loans. The refi index just hit its lows for the year, even though rates have fallen almost 50 basis points. This effect is called prepayment burnout, and it is due to the fact that anyone that has been able to refinance already has. The driver of refis going forward will be home price appreciation, not rates. 

Note that the overall mortgage application index is hitting lows not seen since 2000. 

On the plus side, all-cash transactions are down to a six year low.  Cash sales fell to 33% of total home sales in June, down from 36.3% a year ago. 

Rep Maxine Waters (D-CA) is introducing legislation to change what goes on credit reports. One fix being considered is eliminating medial debt, which accounts for more than half of all unpaid debt in collection, from credit scores. Other changes would remove settled debts, remove black marks after 4 years instead of 7, and remove student debt defaults if the loan performs for a set period thereafter. The idea is to open access to credit.

Think fast food workers are irreplaceable? Think again. McDonalds is expanding a test concept allowing people to order via a tablet. This makes a good juxtaposition to the "living wage" strikes and legislation being considered. 

Unintended consequence of ZIRP, number 1,234,567 - LBO funds are ratcheting up the leverage to boost returns. Not only that, but credit quality and covenants have been declining in these deals. The S&P 500, sitting at record levels, is assigning a 100% probability that the Fed can stick the landing and start raising interest rates without anyone blowing up. As we saw when the Fed started raising rates in 1994, 1999, and 2004, bad things tend to happen (Orange County in 94, the end of the stock market bubble, the end of the real estate bubble). If I was fully invested in the market, I would begin to finish my drink, find my coat, and watch the door.  

Morning Report - Job openings remain at highs not seen since 2001.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1999.6	-1.0	-0.05%
Eurostoxx Index	3255.9	-11.7	-0.36%
Oil (WTI)	93.56	0.9	0.97%
LIBOR	0.232	-0.001	-0.34%
US Dollar Index (DXY)	84.37	0.135	0.16%
10 Year Govt Bond Yield	2.50%	0.03%
Current Coupon Ginnie Mae TBA	106.5	-0.1
Current Coupon Fannie Mae TBA	105.8	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.2

Stocks are flat on no real news. Bonds continue their post-ECB retreat.

Consumer credit increased 9.7% year over year in July, according to the Fed. Note this does not include mortgages. Revolving debt increased 7.4%, while non-revolving debt increased 10.6%. 

Job openings remained steady at 4.7 million in July, which is the highest level since 2001. So why does the labor market stink? People don't have the skills employers demand.

Small business optimism increased by .4 in August to reach 96.1, the second highest reading since October 2007. Expectations are still glum, however as the majority of small business owners think conditions will be worse in six months. NFIB owners increased employment by an average of 0.02 workers (basically flat), however it was the eleventh positive month in a row. Earnings trends improved 1 point to -17. This statistic shows the stark contrast between the big S&P 500 names (which have a lot of international exposure) versus Main Street Small Business. Reading the report, you wouldn't guess the S&P 500 is at record highs.

Consumers continue to temper their expectations for home price appreciation, according to the Fannie Mae National Housing Survey. Consumers expect an average 12 month appreciation of 2.1% going forward. 42% of respondents thing house prices will increase, 45% expect them to stay the same, and 9% expect them to fall. 23% said their household income was significantly higher than it was a year ago (a drop from 28% last month), while 15% said their income was significantly lower than it was a year ago (an increase from 12% last month). So regardless of what the consumer sentiment surveys say, things are not necessarily getting better for the average homeowner. 

Mohammed El-Arian explains what is going on with US yields vis a vis European yields. Yields could rise in US Treasuries as f/x rates adjust to persistent European economic weakness. 

The Fed is contemplating capital requirements that will be even tougher than Basel. At the margin, this would mean less mortgage lending by the big banks like Wells and JP Morgan.

Morning Report - Slow data week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	2002.4	-3.6	-0.18%
Eurostoxx Index	3258.4	-16.9	-0.52%
Oil (WTI)	92.17	-1.1	-1.20%
LIBOR	0.232	-0.001	-0.34%
US Dollar Index (DXY)	83.91	0.172	0.21%
10 Year Govt Bond Yield	2.43%	-0.03%
Current Coupon Ginnie Mae TBA	106.7	0.1
Current Coupon Fannie Mae TBA	105.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.24

Slow news day. The week following the jobs report always has a dearth of data, so there isn't much on the economic front to talk about.

We will get consumer credit out of the Fed sometime this afternoon.

Why is credit so tight for first time homebuyers and people with low FICOs? Ask Washington. It seems like the authorities are now forcing buybacks and fines over relatively minor errors, and as a result, lenders are refusing to extend credit to low-income / low FICO borrowers. Of course the Administration continues to exhort the industry to loosen standards at the same time it announces record settlements. 

A majority of primary dealers see the first rate hike in the second quarter of 2015. The median forecast for the Fed Funds rate at the end of 2015 is 1% and 2.5% for the end of 2016. 

Hawk Charles Plosser says that keeping rates near zero until the Fed's goals are achieved is a risky strategy.

Morning Report - lousy jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1994.3	-3.5	-0.18%
Eurostoxx Index	3277.2	-0.1	0.00%
Oil (WTI)	94.33	-0.1	-0.13%
LIBOR	0.234	0.001	0.43%
US Dollar Index (DXY)	83.68	-0.145	-0.17%
10 Year Govt Bond Yield	2.41%	-0.04%
Current Coupon Ginnie Mae TBA	106.8	0.2
Current Coupon Fannie Mae TBA	106	0.2
BankRate 30 Year Fixed Rate Mortgage	4.2

Markets are lower after a lousy jobs report. Bonds and MBS are up.

The jobs report came in surprisingly weak. Payrolls increased 142k in August, while the Street was expecting to see 230k. The two-month revision was -28k. Unemployment ticked down to 6.1%, however the labor force participation rate dropped back to its lows at 62.8%. Average Hourly Earnings rose .2% and the workweek was flat at 34.5 hours. Overall, a very disappointing report that doesn't really comport with some of the other data we have been seeing (like the ISM which has been super strong). I wouldn't be surprised to see this report revised upward (for the record, August reports are notorious for big revisions), but for the moment, there it is. 

Demographically, it looks like the biggest growth was in the 25-35 year old cohort, which is what we need to see in order to bring back the first time homebuyer. Interestingly we saw a bit of growth in the 55+ age bracket. 

Minneapolis Fed President Kocherlakota believes the Fed should be doing more, not less to stimulate the economy. He says that "interest rates are not low enough....Given where we are with inflation, I think that it's challenging to know why we are removing stimulus from the economy at the rate that we are." Note that the makeup of the Fed changes every year, and two hawkish voting members - Plosser and Fisher are being replaced by doves Evans and Lockhart. This  will mean one lone hawk, four neutral, and five doves. 

Mortgage credit tightened slightly in August, according to the MBA. Credit did ease for 203k loans and construction loans, but overall credit dipped, particularly on the government side.