Morning Report - Undiversified Bond Investment?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1558.1	1.3	0.08%
Eurostoxx Index	2633.5	21.0	0.80%
Oil (WTI)	96.39	-0.2	-0.20%
LIBOR	0.283	-0.001	-0.35%
US Dollar Index (DXY)	83.07	-0.148	-0.18%
10 Year Govt Bond Yield	1.85%	0.01%
RPX Composite Real Estate Index	190.5	-0.3

Markets are flattish on the last trading day of the quarter. 4Q GDP was revised upward from + .1% to + .4%. Personal consumption was revised downward as well.  Initial Jobless Claims rose last week to 357k. Bonds and MBS are flat.

The bond markets close at 1:00 pm EST today. Expect very little action today as traders will probably flatten positions ahead of quarter end.

The Office of Comptroller of the Currency has released the 4Q mortgage performance metrics. 89.4% of all mortgages are current, up from 88.6% last year. Delinquencies and foreclosures are down as the pipeline gets cleared and real estate prices start rebounding. More and more servicers are turning to mods as opposed to foreclosure initiations. The recidivism rate on these mods is around 17%.

The Private Label Securitization market is returning faster than people thought. Prior to this year, the only deals were the occasional Redwood Trust jumbo deal.  JP Morgan recently announced a deal, and now Springleaf plans a $1 billion subprime deal. The palette of products originators can offer is expanding in a big way.

FHFA has made mods easier to do on delinquent mortgages - anyone who is more than 90 days delinquent is automatically eligible for a loan mod. Borrowers do not have to show a financial hardship any more. This will only apply to Fan and Fred loans, and mods will be rate / term, not principal reductions. So this begs the question:  Why won't everyone stop paying their mortgage in order to get a mod?  FHFA said they would use existing "screening measures to prevent strategic defaulters."  Whatever that means.

Is your house an undiversified bond investment? Was house price appreciation driven by falling interest rates? And does that mean that when rates start rising house prices will fall again? I would point out that interest rates aren't the only factors affecting home prices - population growth, incomes, the availability of credit, and even global capital flows play a role. He does have a point, which is that a rapid rise in home prices like we saw from the early 90's to 2007 is unlikely to be repeated given that we won't have the tailwind of falling interest rates to increase affordability. That said, low interest rates can last a long time - from the end of WWI to the mid 60's, short-term rates were 5% or lower. From 1932 to the mid 50's, short term rates were under 2.5%.  I would also point out that real estate prices increased during the 1970s, even as short term rates moved up to 15%.

Morning Report - Are we in a real estate bubble?

Vital Statistics

	Last	Change	Percent
S&P Futures	1550.7	-6.5	-0.42%
Eurostoxx Index	2597.6	-43.6	-1.65%
Oil (WTI)	95.95	-0.4	-0.40%
LIBOR	0.284	0.000	0.00%
US Dollar Index (DXY)	83.21	0.328	0.40%
10 Year Govt Bond Yield	1.86%	-0.05%
RPX Composite Real Estate Index	190.8	-0.2

Markets are lower this morning as Euro sovereign yields widen on the Cyprus situation. Mortgage applications rose 7.7% last week. This is the last full trading day of the week (Thurs is a half day), so volume should start to dry up as traders square their books for quarter-end and leave for the long weekend.  Bonds and MBS are up on the flight to safety trade.

We will have some Fed-speak today with Rosengren of Boston, Pianalto of Cleveland, and Kocherlakota speaking at various events during lunch. Hints about QE could move MBS, so watch your locks.

Consumer confidence fell in March to 57.9 from 61.4 a month earlier. The report blames Washington for the decrease. You certainly wouldn't guess it from watching the stock market indices.  It will be interesting to see how the spending numbers shake out.

New Home sales fell 4.6% MOM in February, but were up 12.3 YOY to a seasonally adjusted annual rate of 411,000 units. The median sales price was $246,800, an increase of 3% YOY. There definitely seems to be a bifurcation of the market, where existing homes are rising at a high single digit rate, yet the new home market is experiencing more modest price increases. Investor activity is probably driving the difference, as professional investors are purchasing distressed property for rentals, while new home sales are driven by actual homeowners. Volume is picking up, with the  sales in Feb up 13% from last summer.

Bob Schiller pointed out that the latest housing data should be approached with caution. He points out that markets like Phoenix and Las Vegas are "frothy" and says that the recovery may even be a bubble. FWIW, I disagree that we are in another bubble - bubbles are psychological phenomenons that start with the view that "this time is different" and that the asset in question can only go up. That was the view of residential real estate in 2006.  It isn't now. Our grandkids may experience another real estate bubble, but we won't. Schiller believes that it will take 40 years for home prices to rise to pre-2007 levels. Yes, that is an eye-opening forecast, but he is talking about inflation-adjusted numbers.

The government wants to impose a surcharge (through higher capital requirements) for the too big to fail banks. This will undoubtedly be another impetus for the big banks to break up voluntarily.

Morning Report - Case-Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.2	3.3	0.21%
Eurostoxx Index	2637.9	-11.4	-0.43%
Oil (WTI)	95.58	0.8	0.81%
LIBOR	0.284	0.001	0.18%
US Dollar Index (DXY)	82.87	0.039	0.05%
10 Year Govt Bond Yield	1.93%	0.01%
RPX Composite Real Estate Index	191	0.2

Markets are higher this morning after a positive durable goods report, which showed orders increased 5.7% in Feb. January was revised higher.  Bonds and MBS are down small.

The S&P / Case-Schiller index of home values increased 8.1% YOY , better than the 7.9% estimate. The month on month index rose as well.  For the first time since the housing bust, we have not seen a seasonal drop in house prices.  The New York MSA finally reported positive returns. House prices are back to their Autumn 2003 levels.

CoreLogic reported that shadow inventory (the number of homes that are seriously delinquent, in foreclosure, or REO, but not listed on the MLS) is down 28% from its peak three years ago when it stood at  3 million units. The current 2.2 MM units is down 18% from last year and represents 9 month supply.FL, NY, CA, NJ, and IL account for half of the shadow inventory. 

The Cyprus rescue, while small in actual dollar terms, may have reverberations all across the euro zone. Under the rescue plan, senior Cypriot bond holders will take haircuts and uninsured depositors will be wiped out. This sets a precedent - that all stakeholders can be targeted - which will probably cause even bigger outflows the next time another Euro country gets in trouble. Given that Cyprus instituted capital controls so that investors can't take money out means that the exit door will be very narrow the next time someone gets in trouble.

Morning Report - Blackstone vs the first time home buyer

Vital Statistics:

	Last	Change	Percent
S&P Futures	1557.4	5.4	0.35%
Eurostoxx Index	2711.9	30.2	1.13%
Oil (WTI)	94.42	0.7	0.76%
LIBOR	0.283	-0.002	-0.53%
US Dollar Index (DXY)	82.52	0.147	0.18%
10 Year Govt Bond Yield	1.96%	0.04%
RPX Composite Real Estate Index	190.7	-0.5

Markets are higher after Cyprus agreed to shut its second-largest bank in exchange for a 10 billion euro bailout. Of course Russian money will flee the country, and Russian banking was the only thing keeping that economy afloat. So, I am sure we will be revisiting this issue in the near future. Bonds and MBS are down on the "risk-on" trade.

This is a short week, so expect activity to wind down as traders square their books for quarter end, and many take Thursday off.  In economic data, we have durable goods, new home sales, and Case-Schiller tomorrow. We will get the final revision to 4Q GDP on Thursday.

The Chicago Fed National Activity Index came in at +44 in February from -.49 in January.  This is a broad-based index that focuses on 85 different indicators of economic activity. Since the individual monthly indices can be volatile, you want to focus on the 3 month moving average, which has been above zero (absolute historical trend) for the past 4 months. The main takeaway from the index is that we are performing slightly above trend, and that inflation is well-contained.

The Wall Street Journal has an article this morning talking about how professional investors are impacting the real estate market. In hot markets like Orange County, professional investors make up about 22% of all sales. During the bubble years, they were about 10%.  They are having the effect of taking affordable housing off the market. This has had the added effect of improving the quality of neighborhoods as they have taken the abandoned homes off the market and maintaining them. Blackstone has bought $3.5 billion worth of homes so far and is buying more than $100 million a week. Of course the loser in all of this is the first time homebuyer, who already has to deal with a lousy job market and a tight credit market, and now faces bidding wars for a starter home from firms like Colony and Blackstone. These investors may find that being in the rental business is a lot harder than it looks and could turn net sellers are rental yields fall and home prices increase. 

Morning Report - Phoenix Phannie

Vital Statistics:

	Last	Change	Percent
S&P Futures	1542.1	3.0	0.19%
Eurostoxx Index	2683.9	-0.1	0.00%
Oil (WTI)	92.88	0.4	0.47%
LIBOR	0.285	0.001	0.18%
US Dollar Index (DXY)	82.58	-0.164	-0.20%
10 Year Govt Bond Yield	1.92%	0.01%
RPX Composite Real Estate Index	191.2	-0.6

Markets are higher this morning after luxury retailer Tiffany reported better than expected earnings, and Cyprus moves towards a resolution. There are no economic releases this morning. Bonds and MBS are up small.

Existing Home sales rose.8% to a seasonally adjusted annual rate of 4.98MM, a 10% annual increase, according to the National Association of Realtors. Some stats from the release:

• The median house price rose 11.6% to $173,600
• Distressed sales accounted for 25% of all sales
• Professional investors purchased 22% of all homes
• The first time homebuyer accounted for 30%
• Short sale haircuts were 15%, while foreclosure haircuts were 18%
• Time on market fell 24% to 74 days
• Cash-only transactions were 1/3 of all transactions.

Chart:  Existing Home Sales.  Approaching normalcy:

One feature of the financials lately has been the resurrection of many stocks given up for dead.  The first one was Impac, which is up 5-fold since August of last year. Then came Radian. Well, guess who is back? Fannie Mae (FNMA), who is up 3-fold since last week when it delayed filing its 10-K and said it expects to post a profit. Also, the "Jumpstart GSE Reform Act" was introduced at the same time, which would require Congressional approval for the government to unload its Fannie Stock. I am hearing that there is action in the Fannie prefs as well. Yes, it is up on volume, too - 94MM shares traded yesterday.

You are seeing the same action in Freddie Mac stock as well - FMCC.

Morning Report - FOMC statement

Vital Statistics:

	Last	Change	Percent
S&P Futures	1549.2	0.1	0.01%
Eurostoxx Index	2687.4	-21.5	-0.79%
Oil (WTI)	93.4	-0.1	-0.11%
LIBOR	0.284	0.000	0.00%
US Dollar Index (DXY)	82.77	-0.014	-0.02%
10 Year Govt Bond Yield	1.95%	-0.01%
RPX Composite Real Estate Index	191.8	-0.5

Markets are flat this morning after Oracle's miss.  Initial Jobless Claims came in at 336k, more or less in line with last week. The Markit PMI came in a little better than expected. Bonds and MBS are up small.

Nothing earth-shattering came out of the FOMC statement or the press conference yesterday. In the projections section, they have taken down the GDP estimate for 2013 slightly, moving the top end of the range from 3.0% to 2.8%.  They also have decreased 2013 unemployment estimate a little, taking the range midpoint from 7.55% to 7.4%.  Whether that is being driven down by a pessimistic labor force participation rate or optimistic hiring plans is unclear. Overall, it was a "steady as she goes" sort of statement. People who want to compare this statement with the previous one can do so here. Bernake's body language suggested that he isn't interested in staying on after his term expires in Jan 2014. Early favorite to replace The Bernank:  Geithner. Janet Yellen and Larry Summers are the other names mentioned.

The FHFA House Price Index increased .6% in January, just missing the +.7% estimate. New England fell .7%, while the Pacific division rose 1.6%.  The index focuses solely on houses purchased with conforming loans, so in some ways, it is more of a "central tendency" index in that distressed and jumbos are excluded.

Chart:  FHFA House Price Index:

Ellie Mae's Origination Insight Report showed that the purchases increased from 27% to 32% of all originations as interest rates backed up last month.  FHA increased its share to 20% while conventional fell to 71%.  Days to close fell from 54 days to 50, and it appears that credit is starting to ease up a bit as the average FICO fell from 749 to 745. Pull-through increased to 56.8% from 55% in January.

Signs of life in the private label market:  JP Morgan is marketing a $616MM prime RMBS offering, its first post-crisis deal.  Everbank is marketing a $308.4MM offering. I don't see anything on EDGAR yet, so I'll try and get a flavor of what they are selling and pass it on.

The Senate passed a continuing resolution to keep the government funded through the end of its fiscal year. The House is expected to vote on it today. Some of the sharp edges of the sequestration were filed down in the process. No one is expecting a government shutdown. On to the debt ceiling in August.

Market darling Lululemon has a transparency issue.  No not that kind..

Morning Report - Detroit is the best market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1548.9	6.7	0.43%
Eurostoxx Index	2705.4	33.5	1.25%
Oil (WTI)	92.95	0.8	0.86%
LIBOR	0.284	0.002	0.71%
US Dollar Index (DXY)	82.73	-0.264	-0.32%
10 Year Govt Bond Yield	1.94%	0.03%
RPX Composite Real Estate Index	192.3	-0.3

S&P futures are rallying after Cyprus rejected a bank deposit tax designed to help keep it in the euro. Investors are betting that the ECB will continue to support the country's banking system. Given the "risk on" feel, bonds and MBS are down.

Mortgage applications fell 7.1% last week. Fedex missed and guided down. Fedex can usually be taken to be an economic bellwether, but this miss was due more to overseas problems and pricing pressures. I would not take this news to mean that Fedex is forecasting a deceleration in the economy. 

The Fed will release the FOMC decision today around 2:00pm. Nobody expects any major policy changes; the focus will be on when QE ends. Economists are predicting the Fed will start withdrawing from the market  in Q4. It probably won't be an abrupt withdrawal - they will slow the pace of purchases and re-evaluate at the next meeting. The Bernank will hold a press conference today at 2:30. 

Homebuilder Toll Brothers CEO Douglas Yearley said on Bloomberg TV that there is "no inventory on the market" and the company feels "really good" about Spring. Detroit (yes, Detroit) is their best market in the Midwest. NoVa, DC remain strong (so no sequestration fears panning out). He sees orders up 49% this spring. 

Sen Bob Corker (R-TN) is hoping to see the GSEs have a technocrat, not a politician in charge of the agencies. The WH has been considering Rep Mel Watt (D-NC) to lead FHFA. The current left vs right battle in this issue centers around principal reduction mods for Fan and Fred loans. Ed DeMarco, the current head of FHFA, has been resisting calls to reduce principal for Fan and Fred loans. The main reason - the fear that principal mods could trigger a wave of delinquencies as the "not-so-needy" figure out they can reduce their mortgage balance by simply refusing to make their payments. Second, Republicans rightly point out that the GSEs have been used as a tool of social policy and that there have been some unintended consequences. The job of the FHFA director is to look out for the taxpayers, not conduct social engineering, and if nominated, Rep Watt faces a tough road to confirmation. There is very little consensus between Democrats and Republicans over what the replacement for the GSEs should look like.

Abby Joseph Fink?  Blackrock CEO Laurence Fink is predicting a 20% rise in the stock market this year. He also says that Cyprus is a "$10 billion issue" that is more of a symbolic than real economic issue. 

Morning Report - Why are homebuilders blue?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.2	3.4	0.22%
Eurostoxx Index	2696.2	-9.3	-0.34%
Oil (WTI)	93.9	0.2	0.17%
LIBOR	0.282	0.002	0.71%
US Dollar Index (DXY)	82.66	-0.032	-0.04%
10 Year Govt Bond Yield	1.94%	-0.02%
RPX Composite Real Estate Index	192.6	-0.2

Markets are firmer this morning in spite of the continuing problems in Cyprus. The FOMC meeting starts today, with the rate decision expected tomorrow. The market will be focusing on the Fed's body language regarding the strength of the recovery and the end of QE.  Bonds and MBS are up on the flight to quality trade.

Housing starts climbed to a 917,000 annual rate in February. Muti-fam starts continue to be in the 36% - 37% range as builders feed the red-hot rental market. Housing starts are still running at about 60% of historic levels (about 1.5MM units) going back to the late 50s. For the past 10 years, we have averaged 1.3 million units a year, which includes the meat of the housing bubble and the bust. We have been underbuilding for some time now.

The fact that we have underbuilt for so long partially explains why the rental market is so hot. This demand was masked for quite some time due to the recession as household formation numbers plummeted. 

Many would-be first time homebuyers graduated college and returned to their parents' house after an unsuccessful job search.  Others moved in with roommates to minimize costs. That drop in household formations does not represent a demographic shift, it represents a temporary economic phenomenon.  It also means there is a lot of pent-up demand that is going to be released as the economy recovers. While a lot of that will go into rentals, the first time homebuyer (creditors willing of course) is about to return to the housing market and that will allow the move-up buyer to sell. This has been one of the biggest sticking points for the market - a lack of first-time homebuyers.

So, with this economic backdrop, why did the homebuilders report a drop in confidence last month?  The National Association of Home Builders / Wells Fargo Housing Market Index of builder sentiment had been on a tear since early 2012 as the homebuilders began sticking their heads above the parapet. The problem is not demand for new homes; it is problems in the the supply chain, along with rising costs for materials and labor. In an earlier post, I talked about how the shortage of construction workers was making lives difficult for homebuilders. This is reflected in the builder sentiment survey. They also mention the gripe everyone else is making - appraisals - and a tough credit market for borrowers who don't fit in the GSE / GNMA box.

Bottom line: if you have made a bit of dosh trading the homeboys or the XHB, it might be time to start ringing the register....

Morning Report - Risk off?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1540.5	-13.1	-0.84%
Eurostoxx Index	2682.2	-43.6	-1.60%
Oil (WTI)	92.52	-0.9	-1.00%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.68	0.419	0.51%
10 Year Govt Bond Yield	1.94%	-0.05%
RPX Composite Real Estate Index	192.8	-0.8

Markets are sharply lower this morning on the news of Cyprus's banking crisis. The fear is that financial contagion could spread the to other sovereigns who have been given a bit of a reprieve from the bond vigilantes. You are seeing a bit of a widening in the PIIGS this morning, but nothing dramatic. Needless to say, the 10 year is benefiting from the flight to quality trade and is trading comfortably below 2%.  MBS are up as well.

This week will have some important economic data points, with Housing starts to be released tomorrow. The Street is at 915k. The FOMC meeting starts Tuesday, with the decision to be announced Wed afternoon. Notwithstanding the Cyprus situation, investors will be looking for clues as to when the Fed ends QE. With the Fed dominating the MBS and Treasury markets, "me-too" traders may find the exit much more narrower than they imagined. The FHFA House Price Index comes out on Thursday, along with existing home sales and leading economic indicators.

This month's CoreLogic Market Pulse discusses the mortgage market in transition, as we move from a market dominated by serial refinances to one driven more by purchase activity. Assuming that the Cyprus situation doesn't trigger another Euro crisis, we can probably say we have seen the bottom of interest rates for this cycle (and maybe for a generation or two).  The good news is that purchase activity will be replacing refi activity; the bad news is that it will take longer to ramp up than refis, which can turn on a dime.

The key to the return of the purchase market is the first-time homebuyer, who has been dormant since 2007.  Household formation has been depressed since the crisis began and is only now beginning to turn around. Unfortunately, it looks like most of these people are becoming renters. Unless you qualify for a FHA mortgage, it is very difficult to get financing these days without a sizeable down payment. Institutional investors have picked up some of the slack, with their market share purchases increasing to 27% from 16% two years ago in places like Phoenix. These properties are most likely going to rentals. Institutional investors like Blackrock have raised billions for this activity since real estate bottomed over a year ago. I suspect they are going to find that the activity less profitable than they modeled and this demand will turn to supply as they ring the register on some of these properties.

Relative to incomes, real estate is the cheapest since the 1970s and the late 90s.  RTWT.  Lots of good stuff in this issue.

Over the past few months, the back up in rates has been quite dramatic, with the 10-year going from 1.6% to over 2%. How has this affected mortgage rates?  It turns out that MBS / Treasury spreads have stayed relatively consistent since last November. Note: These are the yields on the mortgage backed securities, not borrowing rates.

Morning Report - Capex spending around the corner?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1556.5	0.5	0.03%
Eurostoxx Index	2732.2	-12.5	-0.46%
Oil (WTI)	93.69	0.7	0.71%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.27	-0.334	-0.40%
10 Year Govt Bond Yield	2.04%	0.01%
RPX Composite Real Estate Index	193.5	0.0

Markets are flattish this morning after a week of strong gains. The CPI came is a little higher than expected mainly due to higher gasoline prices. Since the Fed is pretty much solely focused on the unemployment rate, this is not going to be a market-moving number. Industrial production rose, while capacity utilization increased to 79.6%. Bonds and MBS are flat.

Chart:  Capacity Utilization Rate:

The Empire State Manufacturing Survey reported that conditions for manufacturers in the NY area continued to improve modestly. The 4 month outlook showed increasing optimism. Input prices rose, while selling prices remained flat. The employment indices remained sluggish. Manufacturers indicated that they were increasingly willing to take on debt and for the first time since 2008, reported that they expected their cash holdings to decrease. Capital Expenditures have been in maintenance mode since the crisis, and this may portend a shift. As we have seen in the chart above, capacity utilization rates are approaching "normalcy," which means that businesses are starting to plan capital expenditures for better days ahead. All in all, things are starting to line up for a normal expansion.

The Senate has released their report on the JP Morgan's London Whale loss. "The Subcommittee's investigation has determined that, over the course of the first quarter of 2012, JPMorgan Chase's Chief Investment Office used its Synthetic Credit Portfolio (SCP) to engage in high risk derivatives trading; mismarked the SCP book to hide hundreds of millions of dollars of losses; disregarded multiple internal indicators of increasing risk; manipulated models, dodged OCC oversight; and misinformed investors, regulators, and the public about the nature of its risky derivatives trading." The "misinformed" charge is a hefty one and will certainly be a focus at the hearing this afternoon. Separately, the Fed said it had found "weaknesses" in JP Morgan's capital plans, which means JP Morgan won't be able to pay any special dividends or conduct stock buybacks. 

President Obama met with Republican leaders and offered them entitlement cuts:  Chained CPI for Social Security and means-testing Medicare, but insisted they cough up new revenues. We'll see if any grand bargain comes out of it.

Morning Report - Glass Steagall Redux

Vital Statistics:

	Last	Change	Percent
S&P Futures	1554.0	4.0	0.26%
Eurostoxx Index	2739.8	35.1	1.30%
Oil (WTI)	92.27	-0.3	-0.27%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	83.05	0.158	0.19%
10 Year Govt Bond Yield	2.05%	0.03%
RPX Composite Real Estate Index	193.5	0.0

Stock index futures are up (again) after initial jobless claims came in lower than expected, and inflation readings at the producer level showed inflation well contained. Initial Jobless claims came in at 332k, better than the street estimate of 350k.  Bonds and MBS are down.

Since the early Feb, the US dollar has been on a tear, as nascent US economic strength is drawing assets from overseas and the Bank of Japan attempts to devalue the Yen. We have yet to see manufacturers complain, but at some point, they will. It will be interesting to see if Jack Lew expresses support for a strong dollar or damns it with faint praise.

A proposal by the Dallas Fed would cap assets at deposit-insured divisions of the largest US banks at $250M and force them to separate investment banking and traditional lending. It isn't a full re-institution of Glass-Steagall - it would require separate capitalization and funding for the investment banking and trading units, but would not formally force them to break up. That said, for all practical purposes, it would effectively re-instate Glass Steagall.  The reason why we repealed Glass Steagall in the first place was because the US investment banks (Goldman, Merrill, etc) couldn't compete with the big international banks in the US derivatives business because the overseas giants had such a huge funding advantage. The big international giants like Barclay's, UBS, and Nomura could borrow at depositor rates (which were often 0%), while the US investment banks were forced to borrow at higher, market-driven LIBOR rates. This meant that Barclay's etc. could offer much better financing rates on derivatives than Goldman or Merrill. The rest of the world does not separate commercial and investment banking, or even draws a distinction between the two.

This proposal would eliminate the reason why investment banks and commercial banks joined up in the first place - cheap financing. Since the big giants are trading with a holding company discount, they will undoubtedly face shareholder pressure to spin off their investment banking operations to eliminate the discount. The reason why the Fed is doing this is to make it easier for the FDIC to close down a failing unit of a big bank. It isn't a systemic risk issue. That said, I have always been highly skeptical of the Glass Steagal theory of the financial crisis. Residential real estate bubbles are the Hurricane Katrinas of banking, and it doesn't matter if you were long real estate through a mortgage loan on your balance sheet, through a holding of mortgage backed securities, or because you sold protection on a basked of CDOs, you were still long real estate and still got crushed when it dropped.  People forget the rationale for Glass Steagall, which was to prevent investment banks from using their captive commercial banks or insurance companies as a "back book" for holding soured underwritten bond offerings. The financial crisis did not occur because JP Morgan was stuffing bad paper onto Chase's balance sheet - it happened because we had a real estate bubble.  And because we are in "do something, anything" mode, we are attacking the wrong reason (Glass Steagall) while ignoring the real reason - the Fed.

RealtyTrac reported that foreclosure filings increased 2% MOM in February, but are down 25% YOY. "At a high level, the U.S. foreclosure inferno has been effectively contained and should be reduced to a slow burn in the next two years" according to Daren Blomquist, VP at RealtyTrac. Nevada, Maryland, Washington, and New York are the states with more work to do, and they have reported big increases in foreclosure starts.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1546.7	-0.1	-0.01%
Eurostoxx Index	2696.2	-15.7	-0.58%
Oil (WTI)	92.97	0.4	0.46%
LIBOR	0.28	-0.001	-0.36%
US Dollar Index (DXY)	82.61	0.029	0.04%
10 Year Govt Bond Yield	2.03%	0.01%
RPX Composite Real Estate Index	193.5	-0.6

Stock index futures are flattish after a good retail sales report. Retail sales increased 1.1%, higher than the .5% estimate. January was revised upward. While retail sales is a notoriously volatile number, it does provide another data point that the economy seems to be picking up speed, not slowing down. Mortgage applications fell. Bonds and MBS are down.

HARP refis are accounting for the lion's share of refinancings in the hardest hit states.In Nevada, they account for 68%.  In Florida, it is 58%.  This has had the effect of taking inventory off the market, which is driving price increases and helping create a virtuous circle of price appreciation and easier credit. The MBA is projecting that lending will fall 21% this year as higher interest rates cool the refi market according to Fannie Mae. Refis will still account for 58% of all origination.

The battle over the Consumer Financial Protection Board continues. Republicans are threatening to block Richard Cordray's nomination to head the agency unless changes are made in its charter to make it more accountable to Congress. Republicans are pushing for the Chairman of the CFPB to be replaced with a bipartisan board and for the agency to be subject to the normal Congressional appropriations process.

Ally has sold a large MSR portfolio to Ocwen for $585 million, covering $85B of unpaid principal balance. No word on what percent were performing, etc.

Morning Report - NFIB Small Business Optimism

Vital Statistics:

	Last	Change	Percent
S&P Futures	1548.6	-1.9	-0.12%
Eurostoxx Index	2715.7	-3.0	-0.11%
Oil (WTI)	92.49	0.4	0.47%
LIBOR	0.281	0.001	0.36%
US Dollar Index (DXY)	82.6	0.030	0.04%
10 Year Govt Bond Yield	2.04%	-0.02%
RPX Composite Real Estate Index	194.1	-0.1

Markets are taking a breather after a string of gains over the past week and a half.  The Dow Jones Industrial Average is at a record high, and the S&P 500 is within striking distance of its 2007 high. Bonds are catching a bounce after a lousy week. MBS are up as well.

The National Federation of Independent Businesses reported that small business optimism increased small in February to 90.8, and is returning to its post crisis norm.  It is still well below its historical average, and even below the lows of the 91-92 recession and the 01-02 recession. The report makes an interesting study in contrasts - while the stock market indices are approaching record highs, and earnings are at or near record highs, the small business sector is still stuck in the morass that began in 2008.  The reason for that international sales account for a bigger percent of the S&P 500, and that has been doing better than the US (Europe notwithstanding). On the other hand, restaurants and retailers, the backbone of small business in the US, are still having a tough go of it as consumers continue to de-leverage. Construction, energy, and manufacturing were the bright spots of the report.

Given Friday's positive jobs report, how long will it take us to get to full employment? Of course it depends on the labor force participation rate.  The low labor force participation rate is what has been holding down the unemployment numbers, as people who have been unemployed over 6 months but are not actively looking for a job are no longer counted among the unemployed. If those people started looking for jobs again, they would start counting as unemployed and the unemployment percentage would increase.  If the labor force participation rate remains stuck at the current lows, it would take 49 months.  If it went back to historical norms, it would take 73 months.

With the continuing resolution approaching, Paul Ryan and Patty Murray will submit dueling budgets. Expect both budgets to be on the partisan side before real negotiating begins.  The sticking point will be the sequester, which the Left wants eliminated and the Right wants to use as the baseline for future budgets. The debt ceiling still needs to be dealt with at the end of the summer.

Mary Jo White promises to get tough on Wall Street if she is confirmed as head of the SEC. Finishing rulemaking under Dodd-Frank is an "immediate imperative" as well. High Frequency Trading will also be a focus. She is expected to be confirmed.

Morning Report - Construction worker shortage

Vital Statistics:

	Last	Change	Percent
S&P Futures	1542.5	-2.0	-0.13%
Eurostoxx Index	2712.8	-16.0	-0.59%
Oil (WTI)	91.9	0.0	-0.05%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.75	0.057	0.07%
10 Year Govt Bond Yield	2.05%	0.01%
RPX Composite Real Estate Index	194.2	-0.6

Markets are slightly weaker this morning after Fitch downgraded Italy's sovereign debt. This week is light data-wise.  We have retail sales on Wed, and industrial production / capacity utilization on Friday. Bonds and MBS are up small.

Legal and business experts have weighed in on the government's case against S&P and have found it, well, wanting. Turns out they don't have any witnesses who will support allegations that S&P intentionally defrauded banks and the credit unions that are the victims in this case. In reality, the victims are not widows and orphans, but sophisticated institutional investors. And it is hard to argue that S&P were the smartest guys in the room and knew that the financial system was about to collapse when everyone else (Moody's, the Fed, etc) did not.

Fed Governor Elizabeth Duke gave a speech to the Mortgage Bankers Association where she predicted that the housing recovery is real and is poised to accelerate. She does note that inventory is very low, and credit standards are very tight which is making it difficult for the first time homebuyer who is going to drive demand in the housing sector. Apparently the fraction of mortgages going to first-time homebuyers is half of what it was in the early 00s. The low housing formation numbers of the past few years represent a lot of pent-up demand and the Fed is forecasting that it should reach 1.5 million a year. Of course some of those people will rent, but still it will drive home prices higher, especially when you consider housing starts had been stuck around 600k - 800k since the bubble burst. Finally, the Fed is watching liquidity in the MBS market and is prepared to slow purchases if it thinks that it is dominating the market.

On the back of last Friday's jobs report, it turns out that there a shortage of construction workers. Builders in some areas are finding it difficult to find workers and are having to raise wages to attract them. It turns out a lot of them left the residential construction industry after the bust and took jobs in trucking and energy. Interestingly, housing starts are up 24% or so YOY, while construction employment is up only 3%. In some ways, the weak housing market probably exacerbates this problem as many workers are stuck in an underwater house and cannot move to where the jobs are.  As house prices rise, this effect should dissipate and could portend a rapid drop in unemployment. Which also means that margins are going to be under pressure for the home builders if they cannot pass the higher labor costs onto home buyers.  Food for thought as the XHB bounds to post-crisis highs.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1547.8	3.4	0.18%
Eurostoxx Index	2744.5	42.6	1.40%
Oil (WTI)	91.3	-0.2	-0.27%
LIBOR	0.281	0.001	0.36%
US Dollar Index (DXY)	82.41	-0.045	-0.05%
10 Year Govt Bond Yield	2.06%	0.05%
RPX Composite Real Estate Index	194.9	-0.3

Markets are higher this morning after a positive jobs report. Payrolls increased by 236k in Feb, higher than the 165k forecast. January was revised down. The unemployment rate fell to 7.7% from 7.9%, however the labor force participation rate fell as well, which means that number isn't as great as it initially appears.  Bonds are getting clocked, with the 10-year solidly above 2% again. MBS are down as well.

The rally in the stock market and rebounding house prices has returned US wealth to its pre-crash levels. Of course the main driver has been the stock market, not real estate, so don't expect this to get us back to pre-crisis levels of consumer spending.  Still, its a start.

The Fed has released the results of its stress tests for the banks. The stress test is a scenario of 12.1% unemployment, a 50% drop in the stock market, and a 20% drop in real estate.  They predict that Tier I capital would fall from 11.1% to 7.7%, which is still above minimum standards.

Morning Report - Regulating from the ivory tower

Vital Statistics:

	Last	Change	Percent
S&P Futures	1541.8	2.7	0.18%
Eurostoxx Index	2690.5	10.6	0.40%
Oil (WTI)	90.67	0.2	0.27%
LIBOR	0.281	0.001	0.36%
US Dollar Index (DXY)	82.41	-0.045	-0.05%
10 Year Govt Bond Yield	1.96%	0.03%
RPX Composite Real Estate Index	194.9	-0.3

Markets are slightly higher after initial jobless claims came in lower than expected at 340k. Productivity fell as unit labor costs increased at a faster clip than expected. The ECB kept rates unchanged. Bonds and MBS are lower.

The Fed released the Beige Book yesterday, a sort of 10,000 - foot view of the economy. The words "modest" and "moderate" were used a lot. Residential Construction increased in most districts with the exception of Kansas City. Low inventories were squeezing prices higher in most districts. Banks reported that credit standards are beginning to loosen, and that very few mortgages are being held on their balance sheets.

The CoreLogic Home Price index increased 9.7% in January, the biggest increase since April 2006. Excluding distressed sales, they increased 9.0%. They anticipate a similar gain of 9.7% YOY for Feb, with a .3% month on month drop. This year's seasonal slowdown has barely registered, which portends well for the summer selling season. Only Illinois and Delaware failed to report gains.

Now that the sequestration crisis is out of the way, it looks like the threat of a government shutdown late this month has gone away as well.  The House passed a bill to fund the government through the rest of the year at sequestration levels. The Senate will make its own tweaks to soften some of the spending cuts, but there is a bipartisan optimism that we won't have a shutdown. Separately, the President met with Congressional leaders in an attempt to figure out if there is room for a grand bargain on a package of tax increases and entitlement cuts. Lest the market think the all-clear has passed, we still have the debt ceiling to deal with in late summer.

The Mortgage Bankers Association responded to FHFA Head Ed DeMarco's plan to rationalize and eventually replace the GSEs. "Proposals of this magnitude need a transparent process to engage with stakeholders, articulate objectives and demonstrate that stakeholder concerns have been evaluated and addressed... The Administration, Congress, and regulators need to engage with other stakeholders to move the ball forward.  Until this happens, the uncertainty in the markets will persist and a full recovery of the housing market will remain elusive."  The Obama administration still regulates from the ivory tower and refuses to consult with the private sector.  It happened in Dodd-Frank and it is happening again. I guess the concern over regulatory capture is a valid concern, but remaking the financial sector or the real estate markets without input from the people who actually do this stuff for a living is bound to have major unintended consequences.

One of the bigger issues regarding the new framework involves how to handle Federal guarantees.  The government believes it has been underpricing (in other words, G-fees are too low) and it wants to increase them so they approach the pricing for PMI. One side effect is that the mortgage insurers, once given up for dead, are back.

Morning Report - Party like its 1999.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1544.0	6.9	0.45%
Eurostoxx Index	2698.8	15.8	0.59%
Oil (WTI)	90.51	-0.3	-0.34%
LIBOR	0.28	-0.002	-0.53%
US Dollar Index (DXY)	82.2	0.114	0.14%
10 Year Govt Bond Yield	1.94%	0.04%
RPX Composite Real Estate Index	195.2	0.1

Party like its 1999. Markets are stronger after the Dow set a record high yesterday. The S&P 500 has about 40 points left to hit a record as well. NASDAQ, well.. about another 60% needed there. No real market-moving news this morning.  Mortgage applications rose 14.8% last week as rates fell. Bonds and MBS are victims of the "risk on" trade and are moving lower.

The ADP February Employment Report estimated jobs increased by 198k last month, higher than the Street estimate of 170k. This probably means the street estimate for non-farm payrolls scheduled to be released on Friday is low at 160k. The increase was mainly in services. On the good-producing side, construction drove the increase. Coupled with the consumption numbers we have seen, it appears that the real economy is taking the Jan 1 tax increases in stride. Perhaps the sequester will end up being a nonevent as well.

Altos is forecasting home prices will rise 10% in 2013, which puts them at the high end of estimates. They cite three big indicators all pointing to higher prices:  First, the percent of homes with price reductions is falling, and below a normal market.  A normal reading is 38%, which makes sense - you overprice and if no one bites, you go lower.  A weak market would have price reductions in the 40% - 50% range, while a hot market would have about 15%.  We are currently at 28%, somewhere between "normal" and "hot."  Blame professional investors and low inventory. Second, the price of newly-listed properties is on the upswing.  Third, median days on the market is falling.  Quickly.

So what happened to this massive glut of supply that was supposed to hit the market?  Well, first of all, new home construction has been anemic. Yes, housing starts have been increasing at a pretty good clip, but we are still not cracking a million per year pace, and 1.5 million a year has been the historical norm. Second, now that prices are increasing, many homeowners who are under no pressure to sell are deciding to hang on a little longer. Finally, the government is doing everything it can to stimulate demand (through FHA lending, QE, etc) and decrease supply (through HARP, HAMP, and other refi programs to keep people in their homes). So far, 2013 is shaping up to be a year of high-ish price appreciation in the context of restricted supply.