Morning Report - New Government Refi Programs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1494.0	-1.3	-0.09%
Eurostoxx Index	2710.9	-21.2	-0.78%
Oil (WTI)	97.69	-0.2	-0.26%
LIBOR	0.298	-0.001	-0.17%
US Dollar Index (DXY)	79.31	0.026	0.03%
10 Year Govt Bond Yield	1.97%	-0.02%
RPX Composite Real Estate Index	193.3	0.2

Markets are down small as the earnings reports continue to stream in.  Economic bellwether UPS missed analyst estimates. Initial Jobless Claims came in at 368k.  Incomes and spending rose.  Bonds and MBS are continuing to rally after the FOMC statement yesterday.

The FOMC statement broke little new ground with the exception that they may have walked back their plan to end QE this year.  Recall from the minutes of the Dec meeting, the consensus seemed to be that purchases of Treasuries and MBS would end sometime in 2013, probably towards the end of the year. That was unexpected and caused a sell-off in bonds.  Yesterday, they said that if the outlook for the labor market does not improve substantially, they will continue to purchase Treasury and agency MBS.  That caused a rally in bonds yesterday.  Aside from that, the minutes contained nothing new.

As the sequestration approaches, defense contractors are relatively sanguine. Typical corporate optimism or do they know something the rest of us don't?  Regarding the sequestration the latest amount for spending reduction is $85 billion.  The requested increase in spending from 2012 to 2013 is $74 billion.  So we are really talking about flat YOY spending (it really is a drop of $9 billion in the context of a $15.8 trillion economy).  The most likely outcome is that the sequester happens and no one notices.

Another underwater refi program is in the works, which would allow underwater borrowers in private label securitizations to refi into a government loan.  Another pilot program would have Treasury buy mortgages out of private label pools and mod the rates.  A backup plan would have Treasury cut the rates and pass on the difference between the old and new rate to the investor for 5 years.  If Washington comes up with a robust plan, the refi boom (which was thought to be over) could still have some legs.

Opposition to Obamacare is coming from an unlikely source:  unions.

Morning Report - Negative Q4 GDP?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1502.2	-2.9	-0.19%
Eurostoxx Index	2741.1	-8.1	-0.30%
Oil (WTI)	97.63	0.1	0.06%
LIBOR	0.299	-0.002	-0.67%
US Dollar Index (DXY)	79.42	-0.142	-0.18%
10 Year Govt Bond Yield	1.99%	0.00%
RPX Composite Real Estate Index	193.1	-0.3

Markets are lower on a surprisingly weak 4Q GDP number, which showed the economy contracted by .1%.    The ADP employment change report showed the economy added 192k jobs in January.  Mortgage Applications fell 8% last week.  Later today, we will get the FOMC rate decision. The 10 year, which was above 2% earlier is back down below.  MBS are up small.

The Q4 GDP number was surprisingly weak (the Street was at + 1.1%) and will undoubtedly be revised upward as it does not jive with the other data points out there.  Certainly the earnings reports we are seeing out of Corporate America do not indicate a recession.  This is the "advance" report (the first of three) and is based on incomplete data.  The next estimate will be released at the end of Feb.

NAR has a good piece on the home ownership rate and household formation. The latest homeownership rate of 65.3% is the lowest since 1996.  Renters have been increasing.  They estimate that household formation broke out of its doldrums in 2012 and will be close to normalcy - around 1.1 million.  Note that this represents pent-up demand for housing as the Great Recession drove the low numbers, not demographics.  Of course some of these new households will go to rentals, but many will start purchasing starter homes, and they are the key to get transactions flowing again. This would also help ease the burden on the sandwich generation.

Chart:  Household Formation:

Looks like the sequester is going to happen, though the recent GDP report may give lawmakers a push to do something about it.

When the FOMC statement is released, people will be focusing on the end of QE. Aside from the effect on interest rates, there is also the question about the size of the Fed's balance sheet.  A recent paper projects the Fed's balance sheet to start contracting in 2015, with a return to a more normal size in early 2018.  The Fed has been highly profitable during QE, since its own buying influences prices and makes its holdings of MBS and Treasuries more valuable. But what happens when they begin to sell?  The Fed may in fact lose money over the next few years, which will undoubtedly bring a political angle into the future role of the Fed.  Whoever succeeds Ben Bernake will, like Paul Volcker, preside over a Fed that will be unpopular, to say the least.

Morning Report - The secular bear

Vital Statistics:

	Last	Change	Percent
S&P Futures	1492.9	-4.2	-0.28%
Eurostoxx Index	2736.0	-8.5	-0.31%
Oil (WTI)	96.55	0.1	0.11%
LIBOR	0.301	-0.001	-0.33%
US Dollar Index (DXY)	79.8	0.023	0.03%
10 Year Govt Bond Yield	1.96%	-0.01%
RPX Composite Real Estate Index	193.4	0.8

Stock index futures are weaker as the Fed kicks off its January FOMC meeting. The markets will be parsing the press release looking for clues regarding the end of QE, specifically the timing and the economic variables that influence the decision. Today is a very heavy earnings day, with Danaher, Ford, EMC, International Paper, and Pfizer reporting. Bonds and MBS are up a tick or two.

The S&P Case-Schiller index of home values rose 5.5% YOY and .6% MOM in the month of November.   The hardest hit areas (Phoenix, Detroit, Las Vegas) showed the biggest YOY increases (Phoenix was up 23%!), while the New York declined 1.2%

DR Horton reported a 39% increase in revenues and a 26% jump in homes closed from a year ago.  Orders were up 39% and backlog was up 62%. Like the other homebuilders, DHI is reporting general strength in their housing markets.  There was a shift towards larger houses as well, as the dollar increase in the value of homes built increased 60%, while the number of units increased 39%.  They are looking forward to the spring selling season with optimism.  The stock is up about 4% pre-open.

Is the "risk on" trade we have been waiting for since 2007 finally on?  Trim Tabs is reporting that last month was a record month for inflows for stock mutual funds and ETFs - the last time we had inflows of this magnitude was the winter of 2000, right as the tech bubble was bursting.  Time to be cautious or time to break out the champagne?  Reason for optimism:  There are no, repeat no, signs of overheating in the economy.  If anything there is a tremendous amount of pent-up demand.  That is not recessionary, and should therefore be bullish for stocks.  Reason for pessimism:  Interest rates are going up. The great secular bull market in bonds that began with Paul Volcker's tightening in 1981 is ending. The end of QE will mean long-term rates will rise, and short-term rates will soon follow. Also, we are in a secular bear market for stocks, and those rare animals typically last a lot longer than 12 years.

This secular bear market in stocks resembles the bear market of the 1970s. with stocks trading in a large range that oscillates over a period of years, while going nowhere.  To put the 1970s in perspective, the Dow Jones Industrial Average was at roughly the same place when I graduated from high school as it was when I was born.

Chart:  Dow Jones Industrial Average 1965 - 1983:

Compare to the S&P 500 since 2000:

Similar oscillating pattern, with higher highs, and lower lows. If you believe in charts, they suggest a further run to eclipse the previous high and then a swoon lower. So, you might have another 8% - 10% left before the market heads back down again.

Of course we have one other secular bear market to look at:  the granddaddy of them all:

23 years of a secular bear - it took until 1953 to recover the losses from the 1929 crash.  Some stock market darlings - Radio Corporation of America (aka RCA) never regained its peak from the 1920s. The economic backdrop of deleveraging has a lot more in common with the Depression bear than the 1970s bear which was driven by commodity price shocks and inflation.

Of course as Wall Street loves to say, past performance is not indicative of future performance, and charts are just that - representations of history that may or may not be relevant. The market may not follow either pattern.  But, remember the great secular bull market in stocks from 1983 - 2000 was accompanied by a secular bull market in bonds that began at roughly the same time.  That will not be the case this time around.

Morning Report - new Fannie Mae DIL program

Vital Statistics:

	Last	Change	Percent
S&P Futures	1497.4	1.7	0.11%
Eurostoxx Index	2747.9	3.7	0.13%
Oil (WTI)	96.17	0.3	0.30%
LIBOR	0.302	0.001	0.33%
US Dollar Index (DXY)	79.84	0.092	0.12%
10 Year Govt Bond Yield	1.96%	0.02%
RPX Composite Real Estate Index	192.6	0.0

Markets are slightly higher this morning after a strong earnings report from Caterpillar and strong durable goods numbers. Bonds continue their swoon, with the 10 year approaching 2%. Is the "risk on" trade we have been waiting for since 2008 finally at hand?  MBS are down as well.

Fannie Mae is offering deed-in-lieu options for underwater borrowers who are current on their mortgage and have experienced some sort of hardship like illness, job change, or other problems.  It effectively allows these homeowners to "toss the keys to the bank" and walk away from their underwater property with the underwater portion of their mortgage debt forgiven. The program does not address mortgages, so a second-lien holder could prevent a homeowner from walking away.

The Federal Appeals Court has rejected Obama's recess appointments, specifically his appointments to the NLRB and the CFPB. Cordray's appointment to head the CFPB was an interim appointment, and he will have to go through the process for his 5-year term.  Will it change anything for people in the industry?  Probably not.

Since we have kicked the debt ceiling can down the road for a few months, the next item is the sequestration - which is all of the automatic spending cuts that kick in.  Half will be in defense, and half will be in non-defense discretionary spending. Paul Ryan was on Meet the Press and said that he expects the sequestration cuts will happen.  Agencies are bracing for the cuts to happen as well.

Looks like the eminent domain idea is officially dead, at least in California.

Morning Report - Radar Logic's Outlook

Vital Statistics:

	Last	Change	Percent
S&P Futures	1496.5	4.7	0.32%
Eurostoxx Index	2741.8	18.8	0.69%
Oil (WTI)	96.22	0.3	0.28%
LIBOR	0.301	0.000	0.00%
US Dollar Index (DXY)	79.73	-0.217	-0.27%
10 Year Govt Bond Yield	1.91%	0.07%
RPX Composite Real Estate Index	192.5	0.4

US stock index futures are higher this morning on the back of a sell-off in bond futures. The sell-off began around 4:00 am, and I don't see any single economic story in Europe that would explain it. German confidence was higher than expected, and the Euro banks plan on paying off the ECB loans earlier than expected.  Could be a big asset allocation switch, but why do you do it at the opening of Europe?  Strange. The 10-year now yields 1.91%, and is flirting with resistance around the 1.91 - 1.92 level. MBS are weaker this morning as well.

The theme of Radar Logic's November 2012 monthly report is:  It is still too early to call a housing recovery.   Radar Logic has consistently been more bearish on the outlook for housing than Case-Schiller or the government.  In their view, the strength in 2012 was due more to easy comparables from a lousy 2011 than any true organic growth. The typical seasonal drop in prices this year has been much lower than in the past. In addition, the increase in house prices has been driven more by a drop in distressed sales than an increase in the value of individual properties. Finally, they note that housing demand has been driven primarily by institutional investors, who's demand may be temporary.

Chart:  Radar Logic 20 City Composite:

Another monetary milestone:  The Fed's balance sheet breaks the $3 trillion barrier.

Its baaaack... The San Bernardino Eminent Domain debate returns with a public meeting.  The eminent domain route is fraught with legal roadblocks and will probably not work.  Yet Mortgage Resolution Partners is committed to covering the legal costs and would be willing to take the case to the Supreme Court. The payoff for them if it works is decent, but I don't see how their limited partners are willing to accept this risk / reward.

Is the "D" the new Phoenix?  Yes, house prices have gotten demolished, but the population of Detroit has been shrinking since the 1950s.  Completely opposite of the Southwest. I guess a $500 house is a $500 house and any investment becomes attractive if it gets cheap enough.

Will Jack Lew's tenure at Citi cause problems for his nomination to Treasury Secretary?  Richard Cordray will undoubtedly have some opposition in the Senate.  I have not heard much in the way of opposition to Mary Jo White for SEC.

Carl Icahn has entered the Herbalife fray.  Let's just say there is no love lost between Carl and Ackman.

Morning Report - Orders increase 54% at KB Homes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1488.5	-1.8	-0.12%
Eurostoxx Index	2706.9	-1.4	-0.05%
Oil (WTI)	95.96	0.7	0.77%
LIBOR	0.301	-0.001	-0.17%
US Dollar Index (DXY)	80	0.083	0.10%
10 Year Govt Bond Yield	1.83%	0.01%
RPX Composite Real Estate Index	192.1	-0.1

Markets are lower after Apple stunk up the joint.  Initial Jobless Claims came in at 330k.  The Markit PMI came in at 56.1.  Bristol Myers and 3M beat expectations. Bonds and MBS are down small.

The IMF forecast world economic growth of 3.5% for 2013.  The US is forecast to grow 2%, with growth accelerating in 2H. The Euro area is expected to contract by .2%.

KB Homes reported that preliminary quarter-to-date net orders increased 54%.  Separately, they announced they are forming a home-loan company for its buyers with Nationstar. Concurrently, they are doing a $100MM secondary and a $200MM convertible bond issue priced at 1.375s up 50.

Obama is expected to name Mary Jo White as the new head of the SEC. A former prosecutor, she is expected to signal the importance of holding Wall Street accountable.

Bob Schiller is still cautious on housing.

The renovation boom continues.  As inventory remains small, many homeowners are choosing to upgrade current homes as opposed to buying new ones.  Are 203ks the next big thing?

Morning Report - FHFA House Price Index

Vital Statistics:

	Last	Change	Percent
S&P Futures	1487.3	-2.1	-0.14%
Eurostoxx Index	2711.0	-5.7	-0.21%
Oil (WTI)	96.78	0.1	0.10%
LIBOR	0.301	-0.001	-0.33%
US Dollar Index (DXY)	79.76	-0.117	-0.15%
10 Year Govt Bond Yield	1.83%	-0.02%
RPX Composite Real Estate Index	192.2	-0.6

Markets are slightly lower this morning in spite of good earnings reports out of IBM and Google.  After the close, we get Apple's 4Q as well.  Mortgage Applications were up last week. Later on we will get the IMF world economic outlook.

The House will vote today to suspend enforcement of the debt limit through mid-May, in order to put pressure on the Democratically controlled Senate to pass a budget and to relieve the pressure on the debt ceiling crisis. Obama says he will go along with it. Which means the next subject will be the sequestration cuts.

The FHFA House Price Index rose .6% in November.  On a YOY basis, prices are up 5.6%.  The FHFA index only looks at conforming mortgages, which is more stable than the broader indices.  Prices are back to August of 2004 levels.

Is the roughly $1.7 trillion of foreign earnings stashed offshore by US companies something that is kept out of the US economy?  Turns out that a lot of it is in offshore accounts, invested in US dollar assets like Treasuries and MBS, which undermines the argument that all of this foreign cash could be circulated in the US economy if we changed the tax laws.  That said, this money is not available for expansion in the US or for distributions to shareholders.

The NAHB expects the housing upturn that started last year to pick up momentum, in spite of headwinds coming out of tight mortgage lending and potential tax changes. Using 2000-2003 as a baseline, the single-family market was running at 44% of normal production.  The NAHB forecasts 949k total housing starts in 2013.  From 1959 through 2002, 1.5 million units a year was considered "normal"

Jamie Dimon had some words for regulators at Davos. Suffice it to say that bankers loved it, and the chattering classes / political classes did not. If obama's inauguration speech was a full-throated defense of activist government, Dimon's speech was a defense of the private sector.

Morning Report - S&P earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1477.5	-1.4	-0.09%
Eurostoxx Index	2715.3	-11.3	-0.42%
Oil (WTI)	95.48	-0.1	-0.08%
LIBOR	0.302	0.000	0.00%
US Dollar Index (DXY)	79.92	-0.116	-0.14%
10 Year Govt Bond Yield	1.86%	0.02%
RPX Composite Real Estate Index	192.8	1.0

Markets are flattish on no real news.  Japan has announced a 2% inflation target, similar to what the Fed has been doing, in an attempt to weaken the yen.  The World Economic Forum meets in Davos this week. For once, there isn't a major crisis to deal with.  We don't have a lot of economic data this week, with the exception of leading economic indicators on the 24th.  Bonds are down half a point and MBS are down a tick or two.

We have decent earnings reports this morning from DuPont, Travelers, Johnny John, and Freeport.  This is one of the heaviest weeks for earnings reports, and erstwhile market darling Apple reports tomorrow after the close.

The WSJ is predicting that companies will increase share buy-backs this year as companies try and figure out what to do with excess cash. This will buoy the S&P 500 and mask the effect of flat earnings. Many strategists believe that US companies have pretty much wrung out all of the excess costs they can and any further earnings growth will have to come from revenue growth.  And if you can't get revenue growth, how do you show increasing EPS?  You guessed it - buybacks.

Is the financial system finally back on its feet?  We will see if Silver Lake is able to obtain financing for its planned $24 billion LBO of Dell. This is one of the side effects of the Fed's QE efforts - in an era of rock-bottom interest rates, pension funds and insurance companies are starving for yield, which makes the splashy LBO possible again.

The Chicago Fed National Activity Index came in +.02 in December, down from +.27 in November. The 3 month moving average is still negative, indicating economic activity is below its historical trend.

The House will vote on a 4-month extension of the debt ceiling, which seems to take the default issue off the table.  All eyes will then turn to the sequestration cuts and the continuing resolution.

The CFPB has released a summary of the new broker / LO loan comp rules.  LO comp may not be based on any of the transaction's terms of conditions. In other words, the interest rate does not matter, and LOs cannot be comped for steering a borrower to purchase title insurance from an affiliate. Pricing concessions are out as well.

Finally, as a child of the 70s, I note with sadness the passing of Atari.

Interview with Capital Markets Today

Latest interview covering the debt ceiling, sequestration cuts, the fiscal cliff, QM rules, Jack Lew, Fexit, and 2013 economic forecasts.

http://tobtr.com/s/4257903

Morning Report - Housing Starts and bank earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1471.6	6.0	0.41%
Eurostoxx Index	2710.7	8.2	0.30%
Oil (WTI)	94.8	0.6	0.59%
LIBOR	0.302	-0.001	-0.33%
US Dollar Index (DXY)	79.61	-0.198	-0.25%
10 Year Govt Bond Yield	1.87%	0.05%
RPX Composite Real Estate Index	191.7	0.3

Markets are higher after a good housing starts number and lower than expected unemployment claims. Bank of America and Citi both reported lower than expected 4Q earnings. Bonds and MBS are down.

Housing starts took a big jump upward in December, to an annualized pace of 954k, an annualized increase of over 100k. This is the highest level since June 2008. Multi-family starts accounted for about a third of the increase.  Building Permits increased at a 1.8% MOM and 29% YOY.  Remember, we have historically started 1.5 million units per year, and our 954k annual number basically represents the low points of all recessions since 1957 up to the post-bubble recession.

Chart:  Housing Starts

The CFPB is releasing new rules for servicers today.  It essentially eliminates the practice of "dual tracking" where a servicer works to mod a loan and simultaneously initiates foreclosure proceedings in case the mod doesn't work out or the borrower fails to pay.  That might have the unintended consequence of less mods and more foreclosures.  Foreclosures cannot be initiated until the account is more than 120 days delinquent. This rule pre-empts state law, so timelines will get extended in non-judicial states. Servicers with less than 5,000 loans will be exempt.

Speaking of unintended consequences, the Fed is now worried about bubbles in farmland and junk bonds, the direct result of QE. Unwinding QE (it needs a name - Fed Exit - Fexit?) will be a touchy deal.  The buzzword for Fexit will be "convexity risk" Think Orange County in 1994 on steroids.  Not only will MBS bids fade because of interest rate volatility, they will also have to contend with the Fed dumping paper in an effort to shrink its balance sheet.  A 2014 recession is a distinct possibility.

What it took to get a mortgage in 2012, according to Ellie Mae:  748 FICO, 23/34 DTI, 21% down.  Average interest rate 3.9%, average time to close, 48 days, 62% were refis.

Morning Report - What a difference a year makes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1462.4	-2.8	-0.19%
Eurostoxx Index	2688.7	-12.9	-0.48%
Oil (WTI)	93.32	0.0	0.04%
LIBOR	0.303	0.000	0.00%
US Dollar Index (DXY)	79.86	0.085	0.11%
10 Year Govt Bond Yield	1.80%	-0.03%
RPX Composite Real Estate Index	191.7	0.3

Markets are weaker this morning after the World Bank cut its global growth forecast.  Goldman and JP Morgan both reported better than expected earnings. Mortgage applications rose 15% last week and the CPI showed that inflation remains under control. Industrial production rose .3% and capacity utilization rose to 78.8%.  Bonds and MBS are up.

The National Association  Homebuilders Confidence index held at 47 in January, the highest level since April of 2006. A reading of 50 represents the point where builders view conditions as neutral. Conditions improved in all areas of the country, with the West performing the best, while the Midwest and Northeast performing the worst. This is the second sentiment report that has the "what a difference a year makes" theme.

The CoreLogic Home Price Index rose 7.4% YOY in Nov 2012. This is the largest gain since May of 2006.   Excluding distressed sales, home price increased nationally by 6.7%.  December's gain is forecast to be down .5% MOM (reflecting the typical seasonal pattern) and will be up 8.4% YOY. Mark Fleming, the Chief Economist made a point about QM - "that the recently released Qualified Mortgage rules issued by the CFPB are not expected to significantly restrict credit availability relative to today."  I am sure Cordray is breathing a sigh of relief on that one... the point of the QM rule was to expand credit.

Bank of America is intent on growing the mortgage business again after a hasty retreat in 2011. Of course this meant they missed the mother of all refinancing booms. They exited the wholesale business and basically ceded the market leader position to Wells Fargo. It also signals that they believe the worst is behind them with respect to Countrywide.

It is looking more and more like Republicans will not force a showdown on the debt ceiling (though "clean" debt ceiling increases have been rare in the past).  The polls aren't with them and the politics aren't there. Republicans will probably save spending cut demands for the sequester and the continuing resolution.

It looks like the case against Stevie Cohen has hit a wall.

Morning Report - The Debt Ceiling Dance

Vital Statistics:

	Last	Change	Percent
S&P Futures	1457.5	-6.8	-0.46%
Eurostoxx Index	2701.4	-13.7	-0.51%
Oil (WTI)	93.67	-0.5	-0.50%
LIBOR	0.303	-0.001	-0.33%
US Dollar Index (DXY)	79.65	0.158	0.20%
10 Year Govt Bond Yield	1.82%	-0.02%
RPX Composite Real Estate Index	191.9	0.0

Futures are deteriorating on fears that Congress won't find a way to raise the debt ceiling. Fitch ratings said that it would put the US credit rating under review for a downgrade if there is a delay in raising the debt ceiling. The Bernank weighed in on the debt ceiling at the University of Michigan yesterday. The producer price index showed inflation remains under control at the wholesale level and Dec retail sales were better than expected.  Bonds and MBS are up.

The Empire State Manufacturing Survey indicated that conditions for New York State manufacturers continued to decline at a modest pace. Roughly 20% of businesses surveyed expected to increase payroll, while the same number expect to decrease payroll. Capital Expenditures dropped again to its lowest level since 2009. That said, the outlook for 2013 remained mildly positive.

Lennar reported a profit of 56 cents a share for the 4th quarter and FY12 EPS of $3.11 a share.  Revenues were up 42% in Q4, and backlog was up 32%. Margins also increased.  The CEO noted that the housing recovery seemed to accelerate in Q4 as low mortgage rates, affordable home prices, lower foreclosures and a compelling rent vs own comparison drove the recovery.

The CoreLogic Market Pulse showed that 2012 was better than expected for the housing market. They raise a good point though, that 2012 had no major economic shocks - no Japanese tsunami, no debt ceiling debate / downgrades, no major blow-ups of big financial entities. They characterize 2012 as "a year in recovery, but not one in which the country has actually recovered."  They foresee further recovery next year, but note that supply has been constrained as many move-up buyers have been underwater.  As prices rise, those properties will be put back on the market. As the economy recovers, the first-time homebuyer will become in a better position to purchase these properties, which will provide the increased demand to meet the increased supply.

The debt ceiling debate has been getting more confrontational, with the President using hostage-taking metaphors during his speech yesterday. Sen Pat Toomey (R-PA) has introduced a bill to avert default by requiring Treasury to prioritize payments (with interest, SS, and active duty military pay taking precedence) and allowing them to borrow just enough to cover those expenses if revenues aren't enough. My personal belief is that Republicans know the politics aren't there for a debt ceiling standoff, but they will accept the full sequestration cuts. The sequestration cuts were designed to never happen - the cuts were supposed to be unpalatable to both sides.  Much to the surprise of Democrats, Republicans are more comfortable with cutting defense than they thought, which means that the roughly $109 billion of spending in 2013 will get left on the cutting room floor.

To put the sequestration into perspective:  the 2012 budget was $3.729 trillion.  The 2013 budget is $3.803 trillion.  The increase is roughly $74 billion.  In other words, the actual cut to government spending is $109 billion - $74 billion or about $35 billion.  $35 billion is 22 basis points of GDP. We are currently spending 24% of GDP, while the highest taxes as a percent of GDP have ever gotten in a touch over 20%, primarily during the equity bubble when capital gains tax receipts were huge. To get spending down to where we are able to balance the budget under the best of conditions, we would need to lop off $567B from 2012, or about 4% of GDP.  Republicans would be wise to give Obama what he wants on the debt ceiling and then force the Administration to explain why cutting spending by 22 basis points of GDP is somehow intolerable. Of course, the Administration has already telegraphed how it will fight this battle (terrorists will run wild, pollution will increase, airplane accidents will happen, we won't be able to deal with natural disasters) so Republicans will be well advised to separate out the necessary functions of the government (basic safety net, FAA, FBI, FDA, etc) from the "nice-to-haves" like foreign aid to places like Egypt, agricultural subsidies, green energy subsidies, etc.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1466.5	-0.7	-0.05%
Eurostoxx Index	2720.1	2.3	0.08%
Oil (WTI)	93.97	0.4	0.44%
LIBOR	0.304	0.000	0.00%
US Dollar Index (DXY)	79.6	0.041	0.05%
10 Year Govt Bond Yield	1.84%	-0.02%
RPX Composite Real Estate Index	191.9	0.4

Markets are down small after disappointing iPhone data out of Apple. There is no economic data this morning, although the Bernank speaks at the University of Michigan after the close. This week will be heavy with bank earnings, with US Bancorp, JP Morgan, Goldman, Bank of America all reporting 4Q / full year.  Wed and Thurs are the most interesting economically, with Housing starts and Capacity utilization / Industrial Production.  Bonds are up 1/2 a point while MBS are up small.

David Blitzer of S&P discusses the outlook for housing in 2013. He thinks (a) housing is going to be an outsized contributor to GDP next year and (b) shadow inventory fears are overblown.

Different industry groups weigh in on the QM from the CFPB:

• The MBA notes that cap on points is moronic when you are comparing different note rates
• The Center for Responsible Lending complains that prime mortgages are protected under QM
• The National Association of Federal Credit unions loves the special dispensation for them

Morning Report - Notes from the CFPB conference

Vital Statistics:

	Last	Change	Percent
S&P Futures	1467.5	0.4	0.03%
Eurostoxx Index	2713.3	5.1	0.19%
Oil (WTI)	93.31	-0.5	-0.54%
LIBOR	0.304	-0.001	-0.33%
US Dollar Index (DXY)	79.6	-0.140	-0.18%
10 Year Govt Bond Yield	1.89%	0.00%
RPX Composite Real Estate Index	191.6	-0.1

Markets are flattish after Wells Fargo's earnings beat expectations and import prices showed that inflation remains contained. Bonds and MBS are up small.

Richard Cordray of the CFPB laid out the outlines of what will be considered a qualified mortgage at a presentation in Baltimore yesterday.  Big picture, he believes that lenders were too loose with credit in the past, but now they are too tight.  The Rule will be called Reg Z, or the Ability-to Repay and Qualified Mortgage Standards under the Truth in Lending Act.  These rules are intended to both protect consumers and increase access to credit. The highlights are

• A cap in points and fees
• No exotic (IO, increasing principal, 30 year + maturity, balloon) loans
• DTI < 43%.  Period.  (In other words, nothing on FICO or down payments)
• DTI ratios must be calculated on the expected long term payment, not teaser rates on ARMs.
• Provides immunity from homeowner lawsuits under the QM rules for prime loans.  Rebuttable presumption for subprime.
• Safe harbor is only for homeowner lawsuits under QM rules, all other rules still apply
• Rules will take effect 1/10/14 and will be phased in over a period of years
• Community banks / credit unions, and low income lenders will have relaxed standards

There were several housing advocates, consumer advocates, etc on the panel.  For the most part, they lauded the agency, but thought the QM rules were too skewed in favor of the financial industry. They also feared that it would restrict CRA lending. On the other hand, SIFMA praised the rule. The most eye-opening comment came from Cordray himself, when he said that he believed that we would not have had a financial crisis if these "ability to repay" rules would have been in effect before.  Really.  Of course the term "housing bubble" was not uttered during the entire discussion. 

Will it increase lending? My sense is that unless the GSEs and FHA agree to insulate lenders from buy-back risk if they follow the QM rules, it will not in any meaningful way.

Well Fargo's earnings release beat expectations on the top line, but net interest margins were disappointing. Particulars regarding mortgage banking:

• Originations fell from $139B in Q3 to $125B in Q4, reflecting the normal seasonal decline. Originations were up 4% YOY.
• Pipeline at quarter end was $81 billion, down 16% QOQ and up 13% YOY.
• Net interest margin declined from 3.89% to 3.56% YOY.  Q3 NIM was 3.66%
• Total delinquency and foreclosure rate was 7.04% down from 7.96% in Q3
• They continue to wind down the legacy Wachovia assets.  The "Pick a Pay" loan portfolio has a UPB of $63.8 billion and is being marked at $58.3 billion, or at 91%.  Note, the UPB is ex-writedowns already taken.

Morning Report - QM Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1464.7	8.9	0.61%
Eurostoxx Index	2712.4	6.0	0.22%
Oil (WTI)	94.4	1.3	1.40%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.35	-0.206	-0.26%
10 Year Govt Bond Yield	1.90%	0.04%
RPX Composite Real Estate Index	191.7	-0.3

Markets are higher this morning after positive news out of Ford and Nokia.  Initial Jobless Claims increased 4k to 371k, higher than the 365k estimate.  The ECB left rates steady and predicted a gradual recovery for the Eurozone this year.  Bonds and MBS are down.

WaPo has a write-up of the new QM rules expected to be released today by Richard Cordray in Baltimore.  You can watch the speech here. Expected changes:  Upfront fees will be capped at 3%, though exceptions will be made for loans under 100k, and IO mortgages will be banned.  Ability to repay will be based not on the teaser rate, but on the expected rate later on.   DTI ratios must be below 43%.  The rules will be phased in over the next 7 years. The CFPB estimates that 75% of the mortgages issued in 2011 would have met the standards. If the banks follow these rules, they will be protected from many homeowner lawsuits, but not necessarily buy-back risk. Jumbos will probably the area most affected by the new rules. MND has the gory details here.

What does the appointment of Jack Lew as Treasury Secretary mean?  That the Administration will be focusing its energy on budget battles going forward. He is not considered (at least by the Left) to be the sort of guy that will be addressing unemployment, or pushing for Keynsian stimulus. As such, he probably isn't going to be tremendously dollar-negative, although in an era of competitive devaluations, it is hard to be a dollar bear anyway. The tight relationship between the Fed and Treasury will end. He is probably going to be a tough negotiator for the WH's budget priorities - higher taxes on the rich no no non-defense spending cuts. He also has an unusual signature, (OoooooO) which will be gracing your dollar bills soon enough.

Acccording to NAR, 2012 will go down as a record year for housing affordability. The index came in at 198.2, which means the median borrower had 198% of the minimum income required to purchase the median price existing family home, assuming 20% down and 25% of income going to P&I payments. Tight credit standards remain the sticking point.

Thinking outside the box:  Instead of paying the unemployed, pay their employers to keep them on. Through the work-sharing plan, employees get a shortened work week, with unemployment benefits partially compensating them for lost wages.

The hits keep coming:  Morgan Stanley is laying off 1,600 workers.

Battle Royale:  Ackman vs Loeb in Herbalife.

Morning Report - Settlements, Settlements

Vital Statistics:

	Last	Change	Percent
S&P Futures	1454.2	1.9	0.13%
Eurostoxx Index	2697.2	5.8	0.21%
Oil (WTI)	93.08	-0.1	-0.08%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.53	0.180	0.22%
10 Year Govt Bond Yield	1.86%	-0.01%
RPX Composite Real Estate Index	192	-0.2

Markets are firmer this morning after Alcoa kicked off earnings season with better than expected revenues. Mortgage applications rose 11.7% in the first week of Jan.  The Japanese yen continues its slide that started with the elections last month, which means the entire planet is now playing the currency devaluation game. Bonds and MBS are up small.

Crossing the tape right now:  Looks like it is official - Jack Lew will be nominated as the next Treasury Secretary.

Blackstone has been accelerating its rental strategy, buying $2.5 billion or 16,000 homes last year.  In the 4th quarter alone, they bought $1.5 billion worth on homes.  Their plan is to turn residential properties into a new  $1.5 trillion institutional asset class. J.P. Morgan estimates that the market could total 12 million homes and be double the institutional multi-fam market.  Blackstone is concentrating on the 9 hardest-hit cities - places like Phoenix and Miami.  Scalability will be the key determinant here. Still, it is an interesting idea, and is another reason why the rebound in house prices could be stronger than people are forecasting.  

Another settlement seems to be in the works - Goldman, HSBC, Ally, and Morgan Stanley are close to reaching a $1.5 billion settlement with the Feds for alleged servicing sins. For consumer activists and lawyers, these settlements are never enough.

Marketwatch is reporting that we will finally get the new QM rules this week. It is expected that implementation could take up to a year.  The ABA has said that "Banks are not likely to operate outside the legal guarantees offered by the qualified mortgage protections, meaning that the safe harbor rules will largely determine the scope of all future mortgage lending."  The CFPB is expected to finalized rules on servicing, LO comp and appraisals by Jan 21.

Tony Crescenzi of PIMCO asserts there is no bubble in bonds. Between demographics and the Fed, he believes we will not see a collapse in the bond market. Needless to say, PIMCO has a habit of talking its book, so take what he says with a grain of salt. But he may in fact be correct that the baby boom's investing habits will mirror the ones of the jazz age generation which lost everything in the Great Depression.  

Morning Report - NFIB Pessimism

Vital Statistics:

	Last	Change	Percent
S&P Futures	1454.8	-1.0	-0.07%
Eurostoxx Index	2703.9	8.4	0.31%
Oil (WTI)	93.5	0.3	0.33%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.37	0.113	0.14%
10 Year Govt Bond Yield	1.89%	-0.01%
RPX Composite Real Estate Index	192.2	-0.2

Markets are lower this morning as we kick off 4Q earnings season. Alcoa officially begins the parade after the close. Bonds and MBS are up small.

The NFIB Small Business Survey for January ticked up slightly in December after falling off a cliff in November.  The current level of 88 is a recession-level reading.  Capital Spending is still in maintenance mode. Employment growth is flat. Housing, energy, and autos (the average age of a car is over 10 years) look to be the drivers of growth in 2013. But, overall, it was a glum report.

Chart:  NFIB Small Business Optimism:

The National Association of Home Builders Improving Market Index rose to 242 (out of 361 MSAs total) in January from 201 in December. This strength during a seasonally weak period bodes well for the summer selling season and confirms our view that housing bottomed about a year ago. Rentals are still booming as rents increased 3.8% YOY last quarter.  The vacancy rate dropped to 8%.

Could the East Coast get a break in gasoline prices?  Currently, the East Coast refineries use North Sea Brent crude oil, which trades at a premium to West Texas Intermediate, which is the source for West. Burlington Northern will boost crude oil shipments by 40% this year (primarily Bakken shale oil), and is looking to ship east to supply refineries on the Eastern Seaboard.  As coal shipments decline, oil is taking their place. Since railroads have more flexibility than pipelines, the continental US energy market will become more equalized.  Good news for the East Coast.

A new study shows that we may hit the debt ceiling sooner than expected, around Valentine's Day (how romantic). Obama has said that the debt ceiling is non-negotiable. My sense is that Republicans will cede the debt ceiling point and use the sequestration or the expiration of the government's operating budget to push through spending cuts.  As a plan B, the trillion dollar coin is still being bandied about, particularly by the Krug Man and Greg Sargent (who talks to NYPD hostage negotiators, instead of economists, apparently).

Morning Report - Basel III

Vital Statistics:

	Last	Change	Percent
S&P Futures	1455.6	-2.1	-0.14%
Eurostoxx Index	2697.9	-11.4	-0.42%
Oil (WTI)	92.64	-0.5	-0.48%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.56	0.061	0.08%
10 Year Govt Bond Yield	1.90%	0.00%
RPX Composite Real Estate Index	192.4	0.3

Markets are slightly lower this morning after last week's big rally.  This week looks to be relatively light data-wise.  4Q earnings season kicks off tomorrow with Alcoa announcing after the close. Bonds are up small after last week's sell-off and MBS are flat.

Basel has relaxed some of the requirements for the liquidity coverage ratio, and delayed the implementation in response to requests from the ECB. The ECB feared that the new requirements would lead to a credit crunch and would require banks to be over-invested in sovereign debt. Now banks will be allowed to count corporate debt, residential MBS, and even equities as liquid assets.  While MBS and bond price behavior is dominated by the Fed and QE, the net effect will push banks to hold MBS and sell Treasuries, so you should be aware that the 10-year could sell off and MBS could rally.

On the other side of the coin, last week's sell off in bonds and MBS has fueled fears that the housing recovery may stall as rates rise. Much of the boom in prices last year was in areas hit hard by distressed sales, as professional investors snapped up properties in places like Phoenix, Las Vegas and Detroit.  The 20% price increases there have probably run their course.  Rising rates would certainly end the refi boom that banks have feasted on for the past year, meaning originators will have to go back to the ground game of building relationships with realtors and focusing on purchase activity.

The worst merger in history continues to plague BOA.  They agreed to pay Fannie Mae $3.6 billion to settle repurchase claims and to repurchase another $6.75 billion of bad mortgages. Worst merger since Steve Case sold Ted Turner a bill of goods just as the internet bubble was bursting. Separately, Nationstar purchased a $215 billion servicing portfolio from BOA as well. Half is GSE / Govvie and half is private label. They paid $1.3 billion.

Republicans have declared tax increases off the table for the upcoming negotiations on the debt ceiling and the sequestration. Obama has already said that cutting spending has to go "hand-in-hand with tax law changes so that the wealthiest corporations and individuals can't take advantage of loopholes and deductions that aren't available to most Americans." My guess is that he is talking about carried interest and oil "subsidies" and not about further increases in marginal tax rates or further limiting the mortgage interest deduction. Oh, and we need a clever name for the upcoming negotiations on the sequestration and debt ceiling.