Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1394.8	-3.7	-0.26%
Eurostoxx Index	2318.5	-25.6	-1.09%
Oil (WTI)	104.2	-0.8	-0.71%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	78.91	0.199	0.25%
10 Year Govt Bond Yield	1.91%	-0.02%
RPX Composite Real Estate Index	173	-0.4

World equity markets are down slightly this morning as Spain officially entered a recession, although the GDP report was better than expected. Merger Monday is back, with a deal in the energy space (Sunoco) and the healthcare space (Gen-Probe). Bonds and MBS are up small.

Personal income came in at +.4%, and personal consumption came in at +.3%.  The Personal Consumption Expenditure (PCE) indices indicate inflation is well under control. The National Association of Purchasing Managers - Milwaukee showed business conditions are improving slightly overall for companies in the Northern Midwest.

No, they didn't just do a reverse split. Barnes and Noble has doubled this morning on a strategic deal with Microsoft. The new company (NewCo - clever name) will involve the digital and College businesses of B&N and involve a Nook application for Windows 8. This looks like the culmination of B&N's strategic alternative review announced earlier this year.

Tomorrow (May 1) is New Year's Eve for the Left. Expect disruptions in the City and overseas.

No M.R. tomorrow as I will be traveling. Wed and Thurs MRs will be late.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1397.6	0.8	0.06%
Eurostoxx Index	2339.0	16.3	0.70%
Oil (WTI)	104.3	-0.2	-0.20%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	78.87	-0.046	-0.06%
10 Year Govt Bond Yield	1.92%	-0.02%
RPX Composite Real Estate Index	173.4	0.1

Markets are generally flat this morning after the release of Q1 GDP, which came in light. The economy expanded at a 2.2% annual rate in Q1 vs expectations of 2.5% and lower than the 3% number in Q4. This more or less confirms the slowdown we have been seeing in other data as well. Yesterday, initial jobless claims came in at 388k.

Yesterday, the National Association of Realtors released their March Pending Home Sales Index, which is a forward-looking index of housing activity based on contract signings. The first quarter's activity was the highest in five years. Supply and demand are becoming more balanced.  It will be interesting to see whether the banks start letting more REO go to meet the increased demand of if they continue to drip out inventory gradually.

Bill Gross continues to bet that Operation Twist continues as a mortgage play. Further, he believes that QEIII is a possibility, especially if the employment numbers weaken. Interestingly, he is also looking at this trade as a volatility bet - if you are long mortgages, you are short bond volatility - and is betting that the 10 year has more or less found its level for the next couple of years.

A pet peeve of mine is this whole idea that the repeal of Glass-Steagall somehow caused the financial crisis. It turns out that Tim Geithner agrees with me that GS didn't play a material role. No other country in the world (EU, Japan, UK, Canada) separates commercial and investment banking, or even draws a distinction between the two for that matter. Glass-Steagall was instituted because investment banks were stuffing their sister commercial banks with poorly underwritten bonds after the market crashed in 1929. If the investment bank couldn't sell the paper to public at par (or close to it), they sold it to their captive banks who bought it at par and marked it there until bank runs exposed the fact that these bonds were worthless. The investment banks did the same thing with the insurance companies, which is why insurance companies were included. The point of G-S was to prevent this sort of thing and to ensure that these transactions would be arm's length.

The financial crisis didn't occur because JP Morgan was selling suspect bonds to Chase at the end of a gun barrel. Or Citi selling worthless paper to Travelers for that matter. The cause of the financial crisis was a deflating real estate bubble, which hit banks with large derivatives exposure (Bank of America and Citi) as well as small community banks that were in the very ordinary business of making mortgages, car loans, and business loans. It turns out that the smaller banks are the ones who can't repay TARP. If we didn't have a real estate bubble, we wouldn't be having this conversation.Why did we have a real estate bubble?  There were a lot of contributing factors, but the biggest was the Fed and a psychological belief on the part of the public that real estate was a one-way bet.

People forget the reason why we repealed Glass-Steagall in the first place. The main reason was that the big international investment banks like UBS and Deutsche Bank were able to undercut the US investment banks because they were able to borrow at zero, while Goldman and Merrill had to fund their balance sheets at LIBOR. "Wall Street" was turning into Nomura, Barclay's, Credit Suisse, and ING. Second, there were a couple of commercial banks who had become hybrids - JP Morgan and Bankers Trust - with Citi and Bank of America close behind. Glass-Steagall was becoming irrelevant anyway and the repeal was more or less an acknowledgment what had already happened.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1378.8	8.7	0.63%
Eurostoxx Index	2319.8	35.8	1.57%
Oil (WTI)	104.4	0.8	0.77%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.16	-0.068	-0.09%
10 Year Govt Bond Yield	1.99%	0.01%
RPX Composite Real Estate Index	173.5	-0.3

Markets are higher this morning on Apple's earnings. Hard to believe a half-a-trillion dollar company could move up 10% in a day, but there you go. Bonds and MBS are lower as we await the FOMC decision this afternoon. No one anticipates a change in policy, but the market will focus on clues about QEIII.

Speaking of the Fed, Krugman has some advice for Ben Bernake. Hint:  He's not doing enough.

Durable Goods orders fell 4.2% YOY in March, the biggest drop in 3 years. Ex transportation, they fell 1.1%. This was far below expectations. There was also a marked buildup in inventories in the last 6 months, which portends a manufacturing slowdown. There has been nothing in the economic data in the last couple of months that indicates the economy is accelerating - everything points to a deceleration. This is mainly due to overseas weakness. The UK is officially in recession, while Europe and China are slowing.

Mortgage applications fell last week after a huge jump the week before. The 10-year spent all of last week below 2%, so maybe the refi activity is starting to dry up - meaning everyone who can refi at 3.75% has already done so.

Lender Processing Services has released its first look for March foreclosures and delinquencies. The total US loan delinquency rate is just over 7%, which is down almost 9% YOY. The number of properties in foreclosure totaled 2.06MM, the number 90D+ was 1.6MM and 30D+ was 3.5MM, for a total of 5.6MM delinquent. The full report will be released on May 1.

FWIW, Mark Zandi thinks the bottom in real estate is in. Bob Schiller isn't so sure.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1366.0	3.3	0.24%
Eurostoxx Index	2262.5	17.6	0.79%
Oil (WTI)	103.5	0.4	0.36%
LIBOR	0.466	0.000	0.04%
US Dollar Index (DXY)	79.32	-0.104	-0.13%
10 Year Govt Bond Yield	1.95%	0.02%
RPX Composite Real Estate Index	173.8	0.4

World equity markets are recovering slightly after yesterday's sell-off on the back of a couple of good bond sales out of Spain and the Netherlands. The Netherlands is another potential worry spot, as Prime Minister Rutte's ruling coalition collapsed over austerity disagreements. Bonds and MBS are down slightly.

The S&P / Case-Schiller index fell to new post-bubble lows, with the index dropping 3.5% YOY. Five of the 20 MSAs showed increases - Detroit, Denver, Miami, Minneapolis, and Phoenix. Remember, Case-Schiller is a very lagged index, as the number reflects the market in December '11 - February '12. We are seeing the correlation between different MSAs break down, which should be good news for the homebuilders. Overall punch line of the report: Prices are still falling, albeit at a slower rate.

Shelia Bair warns of a bond bubble in the US. She raises an interesting question - Are we Europe?  Or Japan? She thinks we are Europe. I think we are Japan, personally.

United Technologies, 3M, and AT&T all reported better than expected earnings. Former highflyer Netflix is down 15% on future growth worries despite a better than expected quarter. Apple reports after the close.

Lawrence Yun of the National Association of Realtors weighs in on the future of Fan and Fred. Punch line:  Privatizing Fan and Fred in the 1970s created an untenable situation, where management took risks to maximize shareholder return with an implicit government backstop. This was an untenable situation, and almost guaranteed to end badly. It did. The question is what to do now. If you fully privatize Fan and Fred, you can expect volatility in mortgage rates and occasional market freezes. Say goodbye to the low-cost 30 year fixed rate mortgage, a uniquely American product that we almost consider our birthright. Pre-privatization, Fan and Fred performed a boring job very well. Perhaps it is time to make it official and fully nationalize them.

Chart:  S&P / Case-Schiller 20-city index:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1360.7	-14.5	-1.05%
Eurostoxx Index	2254.9	-56.4	-2.44%
Oil (WTI)	102.8	-1.1	-1.07%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.52	0.321	0.41%
10 Year Govt Bond Yield	1.92%	-0.04%
RPX Composite Real Estate Index	173.4	0.5

Kind of a soggy tape this morning to go along with our soggy weekend in the Northeast. Political woes in Europe seem to be the main culprit. A split in the Netherlands over austerity measures is causing Dutch credit default swaps to richen. Purchasing Manager Indices in France, Germany, and the Netherlands all came in below expectations. While there have been some worries over Spanish banks, EURIBOR / OIS (a measure of stress in the banking system) is still falling after peaking in early December. So at least one indicator is telling us these fears are overblown.

In the US, stock index futures are down about a percent and bonds are stronger. Bonds have had a remarkable turnaround in the last month, as the 10-year bond futures broke down and fell out of their range in mid-March, only to rally again on euro fears. The contract is now challenging resistance at 144. Incredible turnaround. MBS are up small.

In US earnings, Chevron and Kellogg both disappointed. So far, earnings have been strong overall. Homebuilder DR Horton reported better than expected sales, the question will be whether this was weather-related.

Merger Monday is back, with a couple big deals in the pharma space and a couple of old British titans - Vodafone and Cable and Wireless - are partying like it is 1999.

Speaking of Prince's apocalyptic party song, a venerable investment bank from that era is re-launching. Smith Barney manager Frank Campanale is bringing back E.F. Hutton. Given that E.F. Hutton is a recognizable name and was not involved in the financial crisis, it makes some sense to resurrect it. One possible way to break up the big banks would be to have them spin out their non-commercial banking units - Citi could spin Smith Barney and Travelers, Chase and JP Morgan could split again, and you would basically re-establish the money center bank. Maybe the foreign banks could get involved, with Credit Suisse spinning out First Boston and DLJ, UBS spinning out PaineWebber, and Deutsche Bank spinning Bankers Trust.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1374.5	-3.8	-0.28%
Eurostoxx Index	2312.0	-15.8	-0.68%
Oil (WTI)	102.1	-0.6	-0.58%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.54	-0.002	0.00%
10 Year Govt Bond Yield	1.95%	-0.03%
RPX Composite Real Estate Index	172.8	0.6

Markets are flattish after a successful Spanish bond auction and generally good earnings reports from a slew of companies. Bank of America and Ebay were standounts. Spanish bond yields are starting to increase and the Spanish equity market (The IBEX) is under pressure. US Treasuries and MBS are flat to up.

US Leading economic indicators fell. The Philly Fed Business Outlook Survey noted regional manufacturing activity expanded modestly in April, but fell slightly from the previous month. Both indicators seem to imply the economy is still expanding, but not as rapidly as a few months ago. Existing home sales fell to 4.48 million.

The press is pointing out the strong demand for the Spanish bond auction. As Bill Gross mentioned, banks are buying all of the excess supply in the Spanish bond auctions, which he views as artificial demand. The interesting question is that sovereign bonds are treated as riskless assets for bank capital requirements. If it turns out they are not riskless... Investors are noticing, and bidding up credit default swaps for Spanish banks.

Initial Jobless claims came in at 386k, ahead of the 370k expected. Last week was revised upwards. Interestingly, when I re-ran the data series, the government had revised virtually every week up from the beginning of the year. Not sure what is going on there..

A University of Chicago economist gives a theoretical explanation why principal reductions are better for borrowers than interest rate mods which merely lower the payment. In effect, mods which target a percent of income (usually 31%) end up penalizing workers as they earn more - in effect they can be hit (in theory) with a 100%+ marginal tax rate. Not sure I buy the idea that this is influencing behavior, but it is an interesting take on payment vs principal mods.

The National Association of Home Builders weighs in on tax policy, urging Congress to increase certainty (read: extend the Bush tax cuts) into the tax code. As the economy slows, Washington will come under increasing pressure to push the 2013 tax hikes further into the future.

Do the government's inflation numbers seem to not jibe with your actual bills? One explanation is the change in methodology over the years. Someone went to the trouble of recalculating inflation using the older methodology, and unsurprisingly, it is higher. The government disagrees.

Chart: Initial Jobless Claims:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1381.5	-2.1	-0.15%
Eurostoxx Index	2331.1	-35.9	-1.52%
Oil (WTI)	104.3	0.1	0.06%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.78	0.307	0.39%
10 Year Govt Bond Yield	1.99%	-0.01%
RPX Composite Real Estate Index	172.2	-0.2

Equity markets are slightly weaker this morning on a disappointing earnings report from Intel. IBM and Yahoo also reported last night. Abbott Labs and Halliburton beat estimates this morning. Spanish bond yields are lower. Bonds and MBS are slightly higher. No economic data this morning.

Part of the reason for the strong market rally yesterday was a strong Spanish bond auction. Many have noted that the Spanish banks have been large buyers of Spanish government debt. Bill Gross called the market "artificially controlled" on CNBC, and he doesn't trust it. Bloomberg notes the bad debt exposure for Spanish banks, and the possibility for the government to take on contingent liabilities. Spain has the 12th largest GDP in the world (Greece is something like 35th), so don't think a crisis would be a repeat of last fall.

Housing advocates are worried that a President Romney will take aim at HUD. Of course HUD could remain as the alphabet soup of government housing agencies get re-organized. For all intents and purposes, the US mortgage market is nationalized, and while the GSEs may go away in name, their function will be handled by some other entity. It would take roughly 500 billion to fully capitalize the GSEs and that kind of money can't be raised in the private sector.

US Bancorp is noting that demand for credit is increasing. CEO Richard Davis told CNBC yesterday that mortgage demand was the highest in the bank's history. The Minneapolis-based bank had reported better than expected numbers earlier that morning. So, this is one positive data point to throw in the mix of negative ones we have been seeing lately.

Ever done a quick fix on your home with the intention of doing a full repair later, but never got around to it? Here are some good ones (note the uses of hockey pucks)

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1370.2	6.3	0.46%
Eurostoxx Index	2334.3	33.1	1.44%
Oil (WTI)	103.8	0.9	0.85%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.54	-0.018	-0.02%
10 Year Govt Bond Yield	1.99%	0.01%
RPX Composite Real Estate Index	172.3	0.3

Markets are higher this morning on a better than expected German investor confidence data and a decline in Spanish bond yields. Bonds and MBS are lower. After falling out ifs narrow 140 -144 trading range, June 10 year bond futures are back in it again, driving mortgage rates back to February levels.

Johnny John reported better than expected numbers, as did Goldman, who also bumped up their dividend. Ex-highflyer First Solar is cutting 30% of its workforce.

Housing starts missed estimates by a wide margin, falling sharply from 694k in February to 654k in March. Remember, 1.5 million is more or less "normalcy," and having starts heading downwards for two months in a row this late in an expansion is not a good sign. Optimists will point to the unexpected increase in permits. Nevertheless, forward-looking economic indicators are starting to turn down, indicating the economy is slowing. Remember, the Bush tax cuts expire Jan 1, and that will provide a large fiscal drag. Business (and the markets) are going to start handicapping the possibility of an early 2013 recession, which should mean a slowing economy this summer and into the fall.

Industrial Production was flat in March, vs a .3% increase. Capacity utilization ticked down .1% to 78.6%, still below the historic 80% average. This shows there is still a lot of slack in the economy, which bodes well for the inflation numbers.

The rental market continues to outshine the purchase market, according to Zillow. The rent index increased 2% YOY in February, while the Zillow home value index dropped 4.5%. The huge backlog of foreclosures remains a wet blanket on the home value index, while ex-homeowners are driving rental prices higher. Localities like Chicago and Philadelphia showed huge divergences.

As if Spain didn't have enough headaches, Argentina is expropriating Repsol's 51% stake in YPF. Latin America has been one of the bright spots for Spanish banks, so if money starts fleeing the area, it will put further pressure on the Spanish economy. Granted, Brazil and commodity prices are going to be the main factor, but forced nationalization tends to make emerging markets investors nervous.

Are you trading gasoline futures? If so, the Obama administration is taking aim at you. Worried that high prices at the pump may endanger his re-election campaign, the administration has announced a series of measures aimed at reducing speculation in the gasoline futures market. The most significant measure would allow the CFTC to increase margin requirements (never mind that the exchanges can do this already..)

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1369.5	4.5	0.33%
Eurostoxx Index	2298.9	7.3	0.32%
Oil (WTI)	102.7	-0.1	-0.12%
LIBOR	0.466	-0.001	-0.11%
US Dollar Index (DXY)	80.09	0.206	0.26%
10 Year Govt Bond Yield	1.98%	-0.01%
RPX Composite Real Estate Index	172	0.8

Equity futures are rising this morning on better than expected retail sales data. Citi missed earnings estimates and traded down a couple of bucks early, but has recovered as people digest the internals of the earnings report.

Empire Manufacturing came in lower than expected on weakness in China and Europe. While still positive, the pace of expansion has slowed. The forward-looking indicators continue to weaken, which is something to keep an eye on.

Spanish credit default swaps continue to increase in price, and have passed their high from last November during the Greek crisis. 10 year CDS for Spain are trading at 476 basis points. Spain's GDP is the 12th largest in the world, so any default there will not be as tame as Greece. Their banks are much more household names - Banco Santander has the same market cap as Goldman. Paul Krugman is nonplussed.

11 state AGs sent a letter to Acting FHFA Ed DeMarco urging him to allow principal reductions on Fannie and Fred loans.

Earnings season gets in full swing this week.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1377.7	-8.2	-0.59%
Eurostoxx Index	2316.8	-35.4	-1.51%
Oil (WTI)	103.1	-0.5	-0.49%
LIBOR	0.466	-0.001	-0.11%
US Dollar Index (DXY)	79.53	0.249	0.31%
10 Year Govt Bond Yield	2.01%	-0.04%
RPX Composite Real Estate Index	171.3	0.3

Markets are weaker this morning after a disappointing GDP report out of China. The Consumer Price Index showed prices increasing 2.7%, which was more or less in line with expectations. Stocks and bonds didn't react much to the data. Google, JP Morgan, and Wells Fargo all reported better than expected earnings and are flat to slightly down pre-market.

JP Morgan reported better than expected earnings this morning. The highlight has been the mortgage origination which contributed $1.6 billion in revenue, an increase of 80% from Q111. Servicing revenue dropped 5% and the entire activity broke even. A Bloomberg story on Morgan's earnings cites a Friedman Billings analyst who thinks Q2 will be the best quarter for the mortgage business in a long time.

Christine Lagarde (head of the IMF) urged the US government to pursue a policy of principal reduction in mortgage debt. As I have discussed in prior posts, that probably isn't going to happen, at least with respect to conforming loans. Still, I don't rule out some sort of mortgage relief given that this is an election year.

Google is trying a new wrinkle in corporate governance. As part of their earnings release last night, they announced a stock split. Sort of. Google has two classes of shares - the supervoting shares held by the founders, and the reduced vote shares that currently trade. They are introducing a third share which will be nonvoting. Google shareholders will get as a dividend 1 share of nonvoting stock. The new stock will be used for employee equity-based compensation and other corporate uses, which means Google can issue stock without diluting Sergey and Larry's control over the company.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1365.9	1.9	0.14%
Eurostoxx Index	2318.7	-22.7	-0.97%
Oil (WTI)	102.8	0.1	0.06%
LIBOR	0.467	-0.002	-0.43%
US Dollar Index (DXY)	79.57	-0.230	-0.29%
10 Year Govt Bond Yield	2.02%	-0.02%
RPX Composite Real Estate Index	171	0.2

Equity markets are generally flat after early strength was given back on disappointing economic data. Bonds have reversed earlier declines and MBS are up as well.

The PPI showed that wholesale price inflation remains broadly in check, although the core numbers (ex-food and energy) were slightly higher than expected, running at 2.9%. Initial Jobless Claims were much higher than expected, 380k vs 355k. The trade deficit was lower than expected due to a drop in imports. Futures sold off on the numbers. Some of the other indicators (NAPM, ISM) have been coming in weak as well, signalling the economy might be headed for a slowdown.

The market may be picking up on the sheer amount of fiscal tightening that is scheduled to begin on Jan 1, as the Bush tax cuts expire and the budget cuts from the debt ceiling debates kick in. Of course, no one really wants this to happen, but it is an election year, and they will take effect if nothing happens to stop it. So the market is probably going to start handicapping this a little.

Bill Gross continues to cut Treasuries and buy MBS. This is basically a bet that the Fed will continue Operation Twist in a different way after it expires in June - by trying to influence mortgage rates directly by buying current coupon MBS and repoing short.

RealtyTrac released its US Foreclosure Market Report for Q1, noting that foreclosure activity was the lowest since Q407. Activity dropped in the non-judicial states and increased in the judicial ones. Foreclosure starts have been ticking up, and everyone expects a wave of foreclosures to hit the market as the shadow inventory gets liquidated.

Janet Yellen said that the Fed may have to maintain ultra-low interest rates even beyond 2014. Yellen is one of the more dovish members of the FOMC, and her statements stand in contrast to other members who are noting pricing pressures.

In earnings, Google and Nationstar report after the close. JP Morgan and Wells Fargo report Friday before the open.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1367.0	9.9	0.73%
Eurostoxx Index	2353.9	32.4	1.39%
Oil (WTI)	101.25	0.2	0.23%
LIBOR	0.4687	-0.001	-0.11%
US Dollar Index (DXY)	79.641	-0.219	-0.27%
10 Year Govt Bond Yield	2.03%	0.04%
RPX Composite Real Estate Index	170.77	0.2

Equity markets are firmer as the sell-off takes a breather and investors digest Alcoa's numbers. Spanish yields are lower as well. Italy sold 11 billion euros of T-bills at 2.84% vs 1.405% a month ago. Bonds are a touch weaker and MBS are flat. Mortgage applications were down 2.4% last week.

As Spain becomes the latest worry, the natural question becomes "Who holds the old maid?" Not the Japanese, who cut their exposures to all but the highest Euro credit last year.

The CFPB has put out proposed rules for servicers aimed at improving transparency and accountability. Certainly the tone of the piece (putting "service" back into servicing and "preventing runarounds") suggests the government is going to regulate servicers more closely, and partially explains why you can't give away MSRs these days.

Everyone is trying to read the tea leaves on Acting FHFA Director Ed DeMarco's comments regarding principal forgiveness for conforming loans. Some saw a change in tone. Others did not. The problem with principal forgiveness is that someone has to eat the losses. There certainly does not appear to be the political appetite to pass losses on underwater homes to taxpayers, and members of Congress realize their state pension funds (not to mention their own!) would get slammed if the losses were passed to them. Neither option is particularly appetizing to politicians on either side of the aisle. So, Ed DeMarco remains a very convenient guy in Washington, allowing the Left to fulminate over his obstinate refusal to budge on principal reductions, safe in the knowledge that they won't have to face the consequences of what they advocate.

Are lenders moving back out on the risk curve? Seems like it, at least as far as credit cards and auto loans are concerned. Aside from a few hard money lenders, we aren't seeing this in the mortgage business yet, as it remains impossible to securitize this sort of paper.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1377.0	2.1	0.15%
Eurostoxx Index	2359.4	-33.1	-1.38%
Oil (WTI)	102.05	-0.4	-0.40%
LIBOR	0.4692	0.000	0.00%
US Dollar Index (DXY)	79.863	0.130	0.16%
10 Year Govt Bond Yield	2.05%	0.00%
RPX Composite Real Estate Index	170.57	0.0

Markets are generally weaker as Europe plays catch-up with the US markets. US bonds and MBS are flat. Spanish yields are 17 basis points higher on no major economic news. An unexpected drop in imports pushed the Chinese trade balance into a surplus and is flashing warning signs about Chinese domestic demand.

With Greece temporarily off the front pages, all eyes turn to Spain. The new Spanish government is determined to implement austerity measures and reduce the budget deficit by almost 2/3 in 2013. Spain had a massive property bubble, which has weakened their banking system considerably. The banks are thought to be marking their real estate portfolios and mortgage bonds at unrealistic levels.

One powerful method of clearing the excess housing inventory is the short sale, and often times it is a lengthy, painful process as banks and other creditors drag their feet, hoping for better prices. Senator Sherrod Brown (D-OH) has introduced legislation to force banks to make a decision within 75 days of a request from a homeowner.

Bloomberg has been tracking a story about J.P. Morgan's massive credit default swap positions in their Treasury department, which is raising questions about Dodd-Frank and proprietary trading versus hedging. The trader, Bruno Iksil, has been selling protection on an index of investment-grade bonds (Markit CDX North America Investment Grade Series 9) and is thought to have sold $100 billion worth of protection on the index. This is the trade that blew up AIG and I cannot imagine what it possibly could be hedging. As a bank, JP Morgan generally makes loans so it makes money if US corporations generally do well, and poorly when US corporations don't do well. Selling protection is the exact same bet. The article goes on to speculate that this may be part of a spread trade, but even then a spread trade is a speculative position, not a hedge. Anyway, regulators and politicians seem to be lining up against this trade, and if JP Morgan is forced out, they will undoubtedly pay dearly to exit.

Chart: Spanish 10-year government bond yields

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1374.7	-15.5	-1.11%
Eurostoxx Index	2392.5	-5.9	-0.25%
Oil (WTI)	101.65	-1.7	-1.61%
LIBOR	0.4692	0.000	0.00%
US Dollar Index (DXY)	79.92	0.034	0.04%
10 Year Govt Bond Yield	2.03%	-0.02%
RPX Composite Real Estate Index	170.61	-0.1

Slow news day.

Equity futures are lower on the back of Friday's lousy employment report. Bonds and MBS are rallying, with the 10-year again flirting with t a 2% yield. European markets are closed for the Easter holiday, so volumes will be light.

Friday's employment report showed an increase of 120,000 private sector jobs and a drop in the unemployment rate to 8.2%. The reason for the drop in unemployment was due to a drop in the labor force participation rate, which has fallen from 64% to 63.8% since December. These are the 99-ers who have exhausted their unemplyment benefits and no longer count as part of the labor force.

Alcoa kicks off Q1 earnings season tomorrow after the close

Mourning Report

RIP Jim (Guv'nor) Marshall - the man who made heavy guitar sound so awesome

Vital Statistics:

	Last	Change	Percent
S&P Futures	1388.0	-5.2	-0.37%
Eurostoxx Index	2373.3	-25.1	-1.05%
Oil (WTI)	101.66	0.2	0.19%
LIBOR	0.4692	0.000	0.00%
US Dollar Index (DXY)	80.046	0.268	0.34%
10 Year Govt Bond Yield	2.16%	-0.06%
RPX Composite Real Estate Index	170.92	0.3

Markets are continuing the sell-off that began when the Fed hinted that QEIII isn't going to happen. Bonds are up over a point and MBS are up half a point. Euro sovereign yields are wider again, and you are starting to see bids in bank credit default swaps, particularly in some of the traditional European ne'er do wells - Dexia and Intesa SanPaolo. Spain is the new one to watch.

Today is the first Thursday of the month, which means retailers are reporting same store sales for March. Generally, they appear to be strong, particularly in department stores and Men's / Women's apparel. Discounters and Teen Apparel were weaker with some exceptions (Zumiez and Target). Overall, the numbers look good and a few took up Q1 earnings estimates. The "yes. but..." is that March had some unseasonably warm weather, and that undoubtedly helped get people out of the house and into the stores.

Initial Jobless Claims came in at 357k. Continuing Claims were 3,338k.

REO asset managers may want to watch this developing situation - allegations of discrimination regarding the maintenance and upkeep of homes in minority neighborhoods. The National Fair Housing Alliance put out a report alleging that REO properties in predominantly minority neighborhoods lack "for sale" signs, have boarded-up windows, and trash, as opposed to REO in white neighborhoods. This study was put out with a grant from HUD and will undoubtedly be fodder for a lawsuit.

The US is far behind on reforming the country's housing finance system, Geithner said at a speech at the Chicago Economic Club. The reality is that our current housing finance system is more or less nationalized and we are far from being in the position to have private capital carry the load.

The Census Bureau released a study discussing the changes in growth patterns since 2010. Interestingly, of the 50 fastest-growing metro areas over the last decade, only 24 were still in the top fifty since the 2010 census. Unsurprisingly, the areas most affected by the real estate boom fell out (Las Vegas, Palm Coast FL) fell out of the top 50 and it appears some of the energy-centric areas (TX, ND) are entering.