Morning Report: Wanna lend some money to Apple?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1587.3	-0.9	-0.06%
Eurostoxx Index	2720.1	2.7	0.10%
Oil (WTI)	93.73	-0.8	-0.81%
LIBOR	0.273	-0.001	-0.36%
US Dollar Index (DXY)	82.16	0.015	0.02%
10 Year Govt Bond Yield	1.65%	-0.02%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	104.7	0.1
RPX Composite Real Estate Index	192.1	1.1
BankRate 30 Year Fixed Rate Mortgage	3.43

Markets are lower this morning on no real news. The Employment Cost Index increased .3% in the first quarter and Q412 was revised down. Wages and salaries increased .5% while benefit costs dropped .1%. No inflationary pressures in the labor market. Today starts the two day FOMC meeting. Bonds and MBS are up slightly.

The S&P / Corelogic / Case-Schiller index of home values came in at + 9.32% year over year and + 1.24% month-over-month. This was the biggest increase since May 2006. Of course the real estate market is pretty bifurcated, with annual growth in the high teens out West and mid-to-high single digit growth elsewhere. They note that housing is now becoming a driver of GDP growth, although the mix still is skewed towards apartments and not single family residences.

Chart:  Case-Schiller indices

Apple is doing a massive bond issue - 6 different issues, including a 30 year bond. The proceeds will be used to fund dividends and buybacks and will help Apple avoid repatriation taxes on the over $100 billion in funds it holds overseas. The 30 year bond is supposedly going to be priced at a 115 basis point spread to Treasuries. That would be around 4%. The 5 year paper will be issued at 1.2%. Those are positively Japanese yields. Grandpa, tell me again about the days when companies would issue debt with yields lower than their dividend yield.

PIMCO's Mohammed El-Arian thinks that the tone of the FOMC meeting will shift from "when do we end QE?" to maintaining it and possibly increasing stimulus. That would certainly be MBS bullish, which could start another refi wave, although prepay burnout has got to be pretty big at this point. He does note the risks of the record amount of stimulus: "The benefits of the Fed come with costs and risks. What I worry about is when you run a system at artificial price levels, you start creating damage, resources are misallocated, too much risk is taken."  Exhibit (A):  Apple is borrowing money for 30 years at 4% to fund a stock buyback.

Morning Report - Personal Spending increases .2%

Vital Statistics:

	Last	Change	Percent
S&P Futures	1581.5	5.0	0.32%
Eurostoxx Index	2697.4	13.9	0.52%
Oil (WTI)	93.36	0.4	0.39%
LIBOR	0.274	-0.002	-0.54%
US Dollar Index (DXY)	82.12	-0.387	-0.47%
10 Year Govt Bond Yield	1.65%	-0.01%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	104.6	0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.43

Markets are higher this morning after better-than-expected consumer spending data. Personal Income data was lower than expected. Bonds and MBS are up small

Personal Spending was projected to be flat, but actually rose .2%. The Bureau of Economic Analysis is claiming that it was primarily due to weather - a cooler than normal spring brought higher utility spending. Personal Income was forecast to rise .4%, and ended up at .2%. The PCE deflator showed inflation remains subdued.

Pending Home Sales increased 1.5% in March, according to the National Association of Realtors. Economists had forecast a 1% increase. Pending home sales are up 5.8% year-over-year.

Lender Processing Services reported that home prices increased 1% in February and rose 7.3% year-over-year. The West is experiencing the biggest gains, while the Northeast and Mid Atlantic continue to languish. This has been borne out by the earnings reports of the homebuilders as well - the ones primarily focused on California have knocked the cover off the ball, while those with an East-Coast / Midwest focus have reported gains, but nowhere near what the West Coast builders are reporting.

Lots of data this week, but the big driver will be the FOMC meeting. We will get the rate announcement on Wed. Investors will be looking for information concerning the end of QE. We will get the jobs report on Friday, which will have the biggest potential to move interest rates.

Lots of homebuilders reported earnings last week - pretty much everyone except NVR beat estimates. Anyone with exposure to the West Coast did well and backlog is up nicely at all of the builders. We will hear from Standard Pacific and Beazer Homes this week. The Homebuilder ETF (XHB) is on a tear and sitting right at resistance.

U.S. News and World Report has a good piece on the state of the first time homebuyer.

Morning Report - Q1 GDP below expectations

Vital Statistics

	Last	Change	Percent
S&P Futures	1575.8	-5.9	-0.37%
Eurostoxx Index	2684.1	-20.3	-0.75%
Oil (WTI)	93.23	-0.4	-0.44%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.61	-0.132	-0.16%
10 Year Govt Bond Yield	1.68%	-0.03%
Current Coupon Ginnie Mae TBA	106	0.0
Current Coupon Fannie Mae TBA	104.5	0.2
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are slightly weaker after Q1 GDP came in weaker than expected. D.R. Horton reported better than expected earnings. Bonds and MBS are stronger

Q1 GDP came in at + 2.5%. lower than the 3% estimate. This is the advance estimate - Q1 GDP will be revised twice in the next two months. Consumer spending increased at 3.2% and the savings rate declined. The back-to-back drop in defense spending was the biggest since 1954. Real disposable incomes fell 5.3% in Q1 on increased taxes. C = 3.2%, I = 3%, G = -4.1%.

The Senate voted to end sequestration-related furloughs for air traffic controllers and the measure will be sent to the House today. President Obama has said he will consider whatever is sent to him.

CoreLogic has acquired Case-Schiller.

The CFPB has proposed amendments to the QM rule.  The proposals are here.

Morning Report - Homebuilder Earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1581.3	7.2	0.46%
Eurostoxx Index	2708.5	6.4	0.24%
Oil (WTI)	91.74	0.3	0.34%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.47	-0.583	-0.70%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	106	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are higher after earnings continue to look decent. Initial Jobless Claims fell, although the data tends to be volatile this time of year. Bonds and MBS are down

Yesterday, the House Financial Services Committee held a hearing on the private label securitization market. Generally speaking the theme centered around regulatory certainty, and that until QRM issues get resolved, the private label market will still be a trickle. Everyone agreed that Fannie and Fred will remain doing what they do for quite some time. Interestingly, Ranking Member Maxine Waters expressed concern about the effects principal mods will have on investors - I wonder if CALPERs and PIMCO had a word with her. If Maxine Waters isn't onboard with principal mods, maybe the whole push is losing momentum. Fun fact that came out of the hearing:  The U.S. government currently bears 50% of the credit risk of the entire mortgage market.

We have had quite a few homebuilders report over the past week, and it is generally a tale of two geographies. The builders that are in the West Coast markets have done great (KBH, MTH, RYL), while the ones with more East Coast exposure (NVR, PHM) are doing better, but nowhere near the others. NVR actually missed estimates and the stock was clobbered for 6% at one point, but it has clawed back its losses with the general strength in the market. Pulte reported this morning and is looking down a quarter. Ryland, which focuses on the first time homebuyer and the second-time move up buyer reported great numbers. Perhaps the long-awaited return of the first-time homebuyer is finally here.

The connection between the first time homebuyer and household formation is something that I have been harping on for a while. CoreLogic talks about it in its latest Market Pulse. Household formation numbers have been depressed ever since 2006, and that has given the illusion that the homebuilders have been building enough starter homes. The problem is that the drop in household formation wasn't due to demographics - it was due to a lousy economy. If a normal run rate is 1 million new households per year, and we average around 600 for five years, that means we have roughly 2 million new households in pent-up demand, along with the normal demand. Of course as the economy improves, many of these households will become renters first, and not first-time homebuyers. But what sort of housing start number will we see in the future to accommodate this demand? Remember, 1.5 million starts is "normalcy." Certainly not the 1 million print we saw last week. Probably closer to 2 million. Think about the homebuilding stocks on double the activity...

Chart Household Formation:

Morning Report: PennyMac earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1575.3	1.7	0.11%
Eurostoxx Index	2679.6	16.7	0.63%
Oil (WTI)	89.52	0.3	0.38%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.97	-0.077	-0.09%
10 Year Govt Bond Yield	1.71%	0.01%
Current Coupon Ginnie Mae TBA	105.9	-0.2
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are flat this morning after a slew of earnings releases. Apple reported a mixed bag last night, with better than expected earnings, but a disappointing Q2 forecast. They are increasing their buyback, which is raising concerns about future growth. Ford reported better than expected earnings as well. We will hear from Ryland and Meritage Homes today. MBA mortgage applications rose .2% last week, while durable goods orders fell. It appears most of the drop in durable goods was defense-related, so you probably shouldn't read too much into it. Bonds and MBS are down small.

New Home Sales rose to 417,000 units in March, which was up 1.5% from February. We are seeing a pickup in activity in the Northeast and the South. The inventory of new homes for sale was 4.4 months, while the median price was 247,000, and the average price was 279,000. Average prices actually dropped on a year-over-year basis, which means luxury building must be decreasing.

Lender Processing Services released their February Mortgage Monitor yesterday, showing delinquencies and foreclosures continue to fall. DQ + FC fell to 10.18% from a peak of 14.82% in Jan 2010. This is still well above normalcy, which is a DQ+FC percent in the 5% range. Mods are starting to pick up havter having declined for 6 consecutive quarters.

PennyMac reported earnings yesterday. Seem to be growing in all 3 business lines: origination, servicing, and distressed MBS.  Some of the highlights:

• PMT reported earnings of .90, better than expectations of .76
• Correspondent loan purchase volume $8.5B, down 15% from Q4
•  Lock volume $8.1B, down 22% from Q4
• MSR portfolio up 36% to $17B UPB
•  Strong demand for reperforming loans
• Correspondent margins decreasing but still above historical norms
• Correspondent will increase as a share of origination market
• Anticipating increase in refi activity as LTVs decrease
• Re-launched prime jumbo program, did over $100M in locks in Q1
• Targeting Q313 for first jumbo private label securitization transaction

Morning Report - FHFA Home Price index increase 7.1% YOY

Vital Statistics:

	Last	Change	Percent
S&P Futures	1561.8	5.9	0.38%
Eurostoxx Index	2644.5	60.9	2.36%
Oil (WTI)	88.24	-0.9	-1.07%
LIBOR	0.276	0.001	0.18%
US Dollar Index (DXY)	82.98	0.303	0.37%
10 Year Govt Bond Yield	1.67%	-0.03%
Current Coupon Ginnie Mae TBA	106.2	0.0
Current Coupon Fannie Mae TBA	104.4	0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.5

Markets are stronger this morning after weak European economic data raised the possibility of further easing. Apple will report after the close. The Markit US Flash PMI came in light. Bonds and MBS are up.

FHFA reported that home prices increased .7% MOM in February. Year-over-year, prices rose 7.1%. The FHFA index reports sales of homes with mortgages owned by Fannie Mae or Freddie Mac, so it is more of a "central tendency" index. It doesn't include cash sales in places like Phoenix or San Francisco which is skewing some of the other indices. Prices are back to October 2004 levels

Chart:  FHFA Home Price Index.

NVR reported disappointing earnings yesterday. The Reston VA-based homebuilder / mortgage originator reported sales increased by 28% and origination increased by 13%. The EPS and revenue numbers were light, however and the stock sold off. NVR is primarily East Coast based, which explains the difference between its results and KB Home's which showed a 60% increase in revenues.

Flights are being delayed across the country due to furloughs of air traffic controllers. This is President Obama's last and best chance to show the country that the sequestration cuts will hurt. His most recent budget will raise taxes on pretty much everyone, although it will mainly hit those who make $200,000 or more. It also includes AMT II, aka the Buffet Rule.

Morning Report - Bull Market psychology is back

Vital Statistics:

	Last	Change	Percent
S&P Futures	1553.5	5.9	0.38%
Eurostoxx Index	2595.5	20.4	0.79%
Oil (WTI)	88.6	0.6	0.67%
LIBOR	0.275	-0.001	-0.36%
US Dollar Index (DXY)	82.78	0.066	0.08%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	105.9	-0.1
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.51

Markets are higher this morning after good earnings from Halliburton and a miss by Caterpillar. CAT's miss was mainly due to a mining slowdown. Bonds and MBS are down small.

Earnings season really begins in earnest this week with heavyweights like Apple and Google reporting. On the real estate front, we will get NVR today, Pennymac tomorrow, ARM Agency REITS Capstead and Hatteras on Wed, Pulte on Thursday and D.R. Horton on Friday. It will be interesting to see what the pipeline looks like for the homebuilders, as the housing starts number last week indicated single family residences were falling while multi-fam was rising.

The week ahead is relatively data-light, although we have the FHFA House Price Index on Tuesday. The FHFA House Price index covers homes with conforming mortgages, so it tends to be more of a central tendency index which strips out the noise of distressed sales / cash-only buyers, and the valuation extremes. CA prices supposedly rose 8.3% in March, supposedly. And no, that number is not annualized. On Friday, we will get the first estimate of Q1 GDP. The street is forecasting a 3.1% rise after a weak Q4.

Americans are starting to pick up on the increase in real estate prices, as 51% think that prices will increase and 34% predict prices will stay the same. The West is the most bullish, and the Midwest is the least. About 1/3 of the respondents are underwater.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1542.1	-3.6	-0.2%
Eurostoxx Index	2546.3	-15.0	-0.61%
Oil (WTI)	86.65	-.02	-0.0%
LIBOR	0.278	0.001	0.18%
US Dollar Index (DXY)	82.45	-0.302	-0.25%
10 Year Govt Bond Yield	1.69%	-0.007%
Current Coupon Ginnie Mae TBA	106.1	0.2
Current Coupon Fannie Mae TBA	104.06	-0.3
RPX Composite Real Estate Index	190.426	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.51

Markets are weaker this morning after some disappointing economic data. Initial Jobless Claims camea at 352k, slightly higher than expectations and the prior week was revised upward. Philly Fed and Leading Economic Indicators were also disappointing.  Bond and MBS are up.

Freddie Mac released their April Economic and Housing Outlook yesterday which does a decent job of going over the latest and greatest economic statistics. They are predicting that GDP will come in at +3% for Q1, dip to +1.3% for Q2 and then rebound into the mid 2s for the final half of the year. For 2013, they are predicting growth above 3%. They believe that construction employment will drive the recovery. Of the 5.5 million jobs lost since bust, 2.2 million (or 40%) were in construction. Since then we have added only 330k construction jobs. If you count the half a million jobs lost in financial services, real-estate related jobs accounted for 50% of the jobs lost in the Great Recession.

The Fed's Beige Book survey contains the words "moderate" and "modest" a lot. The Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City districts were growing at a "moderate" pace, while Boston, Philadelphia, Atlanta, Chicago, and San Francisco noted "modest" growth. Increases in auto and residential construction were offset by cuts in defense-related weakness. The labor markets were generally unchanged, although the Fed noted wage pressures in IT, construction, and engineering.

Minneapolis Fed Head Kocherlakota says that low interest rates will probably generate signs of financial instability, but it is a necessary evil. He noted that QE has helped the housing market and said it would be nice if they could do even more along those lines.

Morning Report - Housing starts break the 1 million barrier

Vital Statistics:

	Last	Change	Percent
S&P Futures	1560.1	+17.6	+1.1%
Eurostoxx Index	2609.3	-15.0	-0.61%
Oil (WTI)	82.17	-.84	-0.78%
LIBOR	0.278	0.001	0.18%
US Dollar Index (DXY)	82.45	-0.302	-0.25%
10 Year Govt Bond Yield	1.71%	+0.03%
Current Coupon Ginnie Mae TBA	106.1	0.2
Current Coupon Fannie Mae TBA	104.06	-0.3
RPX Composite Real Estate Index	190.426	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.51

Markets are bouncing back after yesterday's rout. The indices were already weak before the bombings in Boston, so the selloff was not terror-related. Gold is bouncing back after getting absolutely pounded the last two days. Gold closed Thursday at $1565 an ounce and closed yesterday at $1361. Someone is getting carried out on right now. Bonds and MBS are taking a breather after the risk-off trades of the last few days.

In economic data this morning, the consumer price index fell in March by .2%. This has been due to falling gasoline prices. Ex food and energy, it rose .1%.  Still well below the Fed's target inflation rate of 2%. 

Housing starts broke the 1 million barrier for the first time since the bubble burst. March housing starts came in at 1.036 million, well above the Street expectations of 930k. February was revised upward to 968k. Building permits were lower than expected at 902k, which may explain why the homebuilder ETF is only up small this morning.

Moody's Chief economist Mark Zandi has been rumored to be the next head of the Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac. Zandi has been an outspoken supporter of principal modifications, which the current acting FHFA head Ed DeMarco has resisted. If DeMarco gets the boot, it will undoubtedly excite many on the Left, particularly Dr. Cowbell, who has been calling for DeMarco's head for a while now. The politics of this is difficult - the prospect of mass principal cramdowns was the inspiration of Rick Santelli's rant on the Floor of the Chicago Board of Trade which has been credited with launching the tea party. How will the the government prevent a stampede of strategic defaults?  Your guess is as good as mine. I guess this is Zandi's reward for cheerleading mediocre economic data during the campaign. He may come to regret it.

Morning Report - sell in may and go away

Vital Statistics:

	Last	Change	Percent
S&P Futures	1546.1	-23	-1.48%
Eurostoxx Index	2550.3	-55.0	-2.1%
Oil (WTI)	87.19	-1.6	-1.68%
LIBOR	0.278	0.001	0.18%
US Dollar Index (DXY)	82.45	0.202	0.25%
10 Year Govt Bond Yield	1.74%	-0.05%
Current Coupon Ginnie Mae TBA	106.1	0.3
Current Coupon Fannie Mae TBA	104.2	0.2
RPX Composite Real Estate Index	190.4	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.43

Stocks are declining again as Bank of America stunk up the joint with an earnings miss. MBA mortgage applications increased Commodities are still coming in. Bonds and MBS are up

Bank of America's miss was largely due to lower mortgage banking income and declining gains on the sale of debt securities. They funded $25 billion in mortgages and home equity loans in Q1, up 11% from Q4 and up 56% from a year ago. In spite of the increase in loans originated, margins fell such that core production revenue was $815 million, down from $928 million a year earlier. Delinquencies fell. Headcount fell by 4,378 during the quarter. Separately, they agreed to a $500 million settlement to end a class action lawsuit over Countrywide MBS.

Is the economy headed for a spring swoon? Indicators are starting to point down, and earnings season has not been the blockbuster that the street was expecting. Another year of "sell in May and go away?"

Morning Report - Disappointing Retail Sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1580.1	-7.6	-0.48%
Eurostoxx Index	2639.3	-35.0	-1.31%
Oil (WTI)	91.94	-1.6	-1.68%
LIBOR	0.278	0.001	0.18%
US Dollar Index (DXY)	82.45	0.202	0.25%
10 Year Govt Bond Yield	1.74%	-0.05%
Current Coupon Ginnie Mae TBA	105.7	0.3
Current Coupon Fannie Mae TBA	103.9	0.2
RPX Composite Real Estate Index	190.4	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.57

Markets are lower after disappointing retail sales data. JP Morgan and Wells Fargo reported numbers that beat on the headline, but both are down. Bonds and MBS are rallying, with the 10-year yield back below 1.74%.

Retail sales dropped in March by .4%, the most in 9 months. February was revised down. Apparel, furniture and Home improvement retailers reported gains. Electronics stores reported decreases. Given the lousy jobs report last Friday, it isn't surprising that retail sales fell. Just crossing the tape:  Barclay's has taken down Q1 GDP estimates to 2.8% from 3.2% as a result.

Wells Fargo reported record Q4 earnings, with mortgage originations of $109 billion, down from $125 billion in Q4. MSR valuations were lowered as increasing real estate prices affect prepayment assumptions (Their average MSR note rate is 4.69%). The pipeline is $74 billion, down from $81 billion at the end of Q4.

The IMF is worrying that all of this easy money is going to inflate bubbles elsewhere. IMO, that train has already left the station. A commodity boom and easy money has created a real estate bubble in Canada that is even more expensive than ours was at the peak (median house price to median income ratio is above 5x, while ours peaked around 4.8x in 2006). We probably do have a bond bubble, however the Fed is running the show there and given that it is purchasing 70% of all Treasury issuance, can pretty much handle it has it pleases.

Morning Report - FHA needs a bailout

Vital Statistics:

	Last	Change	Percent
S&P Futures	1583.0	0.3	0.02%
Eurostoxx Index	2664.1	2.5	0.09%
Oil (WTI)	94.28	-0.4	-0.38%
LIBOR	0.277	0.000	0.00%
US Dollar Index (DXY)	82.15	-0.387	-0.47%
10 Year Govt Bond Yield	1.79%	-0.02%
Current Coupon Ginnie Mae TBA	105.4	0.0
Current Coupon Fannie Mae TBA	103.7	0.2
RPX Composite Real Estate Index	190.8	0.5
BankRate 30 Year Fixed Rate Mortgage	3.56

Markets are flattish this morning after initial jobless claims came in lower than expected at 346k. They dropped 42k from last week, which spiked due to a seasonal adjustment related to the Easter holiday. Import prices fell half a percent on lower energy costs.Bonds and MBS are up.

Ever since the Bank of Japan announced its quantitative easing program, the market has been speculating that Japanese investors would enter the US market en masse and purchase Treasuries. There has been plenty of anecdotal evidence, but no real numbers to work with. Yesterday's 10 year auction didn't provide any either - the bid to cover ratio was 1.8 which was a little light.

FHA might need a little more money from the government. They have $30 billion of cash on hand and insure $1.1 trillion in loans. The Administration is projecting they might need another billion. It looks like it was the reverse-mortgage business that hammered them.

One of the interesting things about the latest FOMC minutes is that the dispersion of opinion regarding the future of QE appears to be widening. Some wanted to end QE now, while others not only want to continue it, they want to increase it. Nonvoting hawk Charles Plosser said the Fed would be wise to begin unwinding its balance sheet now.

SIFMA lays into Obama's proposed 2014 budget. It sounds like ETF investors could be in for a nasty surprise. They support the Administration's proposal to create bonds for financing infrastructure spending, but pretty much pan everything else. The proposal is loaded with new taxes on capital Suffice it to say, if you are an investor, the administration is gunning for you.

Morning Report - FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1567.7	4.5	0.29%
Eurostoxx Index	2630.1	35.0	1.35%
Oil (WTI)	93.64	-0.6	-0.59%
LIBOR	0.277	-0.001	-0.36%
US Dollar Index (DXY)	82.38	0.070	0.09%
10 Year Govt Bond Yield	1.77%	0.02%
Current Coupon Ginnie Mae TBA	107.1	1.2
Current Coupon Fannie Mae TBA	103.6	-0.1
RPX Composite Real Estate Index	190.1	0.0
BankRate 30 Year Fixed Rate Mortgage	3.57

Stock markets are higher this morning in anticipation of the Fed minutes which will be released this morning at 9:00 am (a change from their usual 2:00 pm time).  Market participants will focus on hints regarding the end of quantitative easing. Mortgage Applications rose 4.5% last week on the back of the BOJ-led rally in the bond market and MBS. Treasury will also be conducting a 10-year auction around 1:00 pm. It will be interesting to see if the bid / cover ratio is affected by events in Japan. Bonds and MBS are down small.

Earnings season kicked of on Tuesday with Alcoa reporting better than expected earnings, but weaker sales. Retailers Fastenal and Family Dollar are down this morning after missing. We will get JP Morgan and Wells Friday morning before the open.

The President plans to release a $3.77 trillion budget today. He is proposing $1.8 trillion in new spending (although to be fair, that is to replace the sequester). He is also instituting a AMT II on incomes over $1 million of 30%. He also proposes to cap IRAs at $3 million, end carried interest, and to raise taxes on tobacco. He will also propose changes to the way cost-of-living adjustments are calculated - aka Chained CPI - to Social Security. Given that taxes and spending both increase pretty dramatically, the plan is DOA in the house.

It turned out the Fed mistakenly released the minutes early. Still don't have the actual link, but here are some of the particulars: Economy re-accelerating after Q4 slowdown. Private nonfarm payroll increased at a modest rate in January, but expanded more briskly in Feb. (We now know that March was a disaster). The Fed asked primary dealers about their expectations for when the Fed will start tightening (are they running the Fed according to polls now?) and the view seems to be Q114 for the end of QE and Q315 for the first increase in the Fed Funds Rate. They noted that there did not seem to be much of a pullback in the economy in response to the tax hikes that kicked in Jan 1. Opinions about QE were all over the place, with some wanting to end it now and others wanting to increase the pace of purchases.

Morning Report - Hedge Funds betting on Fannie Mae

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.9	4.9	0.32%
Eurostoxx Index	2600.8	15.6	0.60%
Oil (WTI)	93.27	0.6	0.61%
LIBOR	0.279	0.000	0.00%
US Dollar Index (DXY)	82.61	0.111	0.13%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	106	0.1
Current Coupon Fannie Mae TBA	104.3	0.0
RPX Composite Real Estate Index	190.1	0.4
BankRate 30 Year Fixed Rate Mortgage	3.54

Markets are higher this morning on no real news. The Japanese Yen continues to fall, and is now approaching 100 yen to the dollar. The new program of quantitative easing in Japan is re-igniting the yen carry trade, except now the Japanese are borrowing yen to invest in US dollar assets. In case you missed it, Japan's Nikkei 225 stock market index is up 52% since November. Incredible move. Japan's QE program will mean incrementally lower rates on US long-dated Treasuries and MBS. Bonds and MBS are flat this morning.

Alcoa kicks off Q1 earnings season after the close today. We will get JP Morgan and Wells Fargo earnings on Thursday before the open.

Friday's lousy jobs report probably means that any talk of ending QE this summer is probably over. After 3 consecutive economic slumps over the summer months, the Fed is going to stay aggressive. Chicago Fed President Charles Evans said "I'm going to have a lot more confidence if I begin to see indications that growth is well above trend and its going to be sustainable." The Fed is going to be wary of reducing stimulus given that the fiscal policy has tightened a little bit.

Fannie Mae's surprise profit has investors re-thinking the theory that they will be euthanized. Hedge funds are jumping into the preferred stock, which was issued in spring of 2008 as Fannie Mae was circling the drain before becoming nationalized. The 8.25% prefs have a $25 face value and were trading at $4.81 on Friday. All of this is predicated on the idea that Fannie Mae will be able to pay back the government. Once that happens, Fannie will restructure, and the bet is that there will be a place in the capital structure for the prefs. Risky bet, obviously, but big upside too.

Morning Report - Dismal jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1537.5	-17.0	-1.09%
Eurostoxx Index	2590.5	-30.9	-1.18%
Oil (WTI)	92.26	-1.0	-1.07%
LIBOR	0.279	-0.001	-0.36%
US Dollar Index (DXY)	82.43	-0.245	-0.30%
10 Year Govt Bond Yield	1.70%	-0.06%
Current Coupon Ginnie Mae TBA	105.8	0.5
Current Coupon Fannie Mae TBA	104.4	0.4
RPX Composite Real Estate Index	189.7	0.3
BankRate 30 Year Fixed Rate Mortgage	3.59

They're beating the tape with the ugly stick after a dismal jobs report. The S&P 500 futures dropped from -4 to -16 on the report. The 10-year jumped on the news and is now yielding 1.7%.  It is hard to believe the 10 year was above 2% three weeks ago. MBS are rallying as well, but not as much as the 10-year.

The March Employment Situation showed the economy added 88,000 jobs in March, well below the 190,000 estimate. February was revised upward to 268,000 from 236,000.  The unemployment rate ticked down to 7.6% from 7.7%, but that was due to a drop in the labor force participation rate, which dropped .2% from 63.5% to 63.3%. This means that the size of the labor pool dropped as more workers simply stopped looking for a job.  Long-term unemployed workers who are not actively looking for a job are not counted as part of the labor force. Wages were flat month-over-month and increased 2% year-over-year.

The recent rally in bonds pours cold water on the "great rotation" theory -  the idea that 2013 would be the year when investors, particularly big institutional investors, change their target asset allocation and sell bonds to buy equities. So far, it seems like that investors are allocating money equally to both sectors - stock funds have taken in $79 billion while taxable bond funds have taken in $76 billion. Between the Bank of Japan's QE program, which is driving funds to the US, the Fed's QE program, and continued investor purchases of bonds, the expected 2013 bloodbath in the bond market may be held off for a while. Meanwhile, mortgage bankers are licking their chops thinking about another refi wave.

Chart:  US Unemployment rate 1949-Present

Morning Report: Return of the Yen Carry Trade

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.7	2.2	0.14%
Eurostoxx Index	2661.8	22.8	0.86%
Oil (WTI)	93.96	-0.5	-0.52%
LIBOR	0.28	-0.001	-0.25%
US Dollar Index (DXY)	83.19	0.469	0.57%
10 Year Govt Bond Yield	1.77%	-0.04%
Current Coupon Ginnie Mae TBA	104.9	0.1
Current Coupon Fannie Mae TBA	103.7	0.2
RPX Composite Real Estate Index	189.4	0.1
BankRate 30 Year Fixed Rate Mortgage	3.68

Markets are giving back some Japan-led gains after Initial Jobless Claims spiked to 385k from 357k. This was the holiday-shortened Easter week, so there is a seasonality adjustment there.  On a non-seasonally adjusted basis, they fell. Bonds and MBS are rallying, with the 10 year yield down to 1.77%.

The Bank of Japan outlined more aggressive monetary actions last night with their own version of quantitative easing. This pushed the Nikkei 225 stock market index up 2%, and caused a sizeable drop in the yen.  This explains the rally in US bonds as Japanese investors flee for the "high yielding" US treasury market.  Don't laugh - the Japanese 40 year bond (the 2's of 52) yields 1.34%.  The US 10-year at 1.77%, in the context of a depreciating yen, is reviving the yen carry trade. The Yen Carry Trade is when Japanese investors borrow funds at yen rates and invest in high-yielding sovereign debt. They benefit from the pickup in yield and any favorable currency movements. With the high quality Euro sovereigns yielding even lower than the US, we are the only game in town. Punch line - this will put downward pressure on mortgage rates in the US, at least at the margin.

The CoreLogic Home Price Index increased 10.2% on a year-over-year basis in February, the highest increase since March of 2006.  It is the 12th consecutive monthly increase.  The gains were broad based, with 96% of their MSAs reporting gains.  California, Arizona, and Nevada all showed gains in the high teens.   They are forecasting a 2% month over month increase in March, or 12% year over year.

Chart:  CoreLogic Home Price Index

Hank Paulson, George Bush's Secretary of Treasury, says that Fannie Mae's new profitability shouldn't deter the government from establishing a new platform for mortgage finance. He mentioned the Washington Post article that says the Administration is pushing banks to make home loans to people with weaker credit. Nominated to take over as Treasury Secretary just as the housing bubble was peaking, he can be forgiven for being a little gun-shy on re-inflating the bubble.

San Francisco Fed President John Williams said he is hopeful that "the economy has shifted into high gear" and that the Fed could begin slowing the purchases of Treasuries and MBS this summer, with a full exit by the end of the year.

Finally, you can hear my latest interview on Capital Markets Today, where I discuss real estate pricing, politics, and the economy.

Morning Report - The future of Fannie Mae

Vital Statistics:

S&P Futures	1564.7	0.3	0.02%
Eurostoxx Index	2665.2	-14.6	-0.54%
Oil (WTI)	96.64	-0.5	-0.57%
LIBOR	0.281	-0.001	-0.35%
US Dollar Index (DXY)	82.81	-0.117	-0.14%
10 Year Govt Bond Yield	1.85%	-0.01%
Current Coupon Ginnie Mae TBA	104.6	0.0
Current Coupon Fannie Mae TBA	103.3	0.0
RPX Composite Real Estate Index	189.3	-0.2
BankRate 30 Year Fixed Rate Mortgage	3.69

Markets are flat after a mixed ADP Employment report.  They forecast that the private sector added 158k jobs in March, below the 200k estimate.  February was revised upward, however to 237k. Mortgage Applications fell 4%.  Bonds and MBS are flat

The Obama administration is pushing banks to lend to borrowers with weaker credit, encouraging them to use FHA loans and to use more subjective judgment in determining whether to offer a loan. Of course the CFPB has already drawn a line in the sand with DTI. Housing officials are urging the Justice Department to provide assurances to banks that they will not face legal consequences if they comply and the borrowers subsequently default. Working against this initiative is that (a) the CFPB has drawn a bright line around the qualifying mortgage and (b) Ginnie Mae will flush an originator when they get 5% to 10% portfolio delinquencies.

On the other hand, credit IS easing, especially for those who had short sales or foreclosures during the housing bust. Of the 7 million borrowers who had a foreclosure or a short sale, about 1 million are eligible for an FHA mortgage. Second, the return of the private label market (however small) will allow borrowers who don't fit in the government bucket or the super high quality jumbo bucket to get financing.

Fannie Mae's record profit has some questioning the future of the housing finance. According to the Administration's White Paper, the intention seemed to be that the government would euthanize Fan and Fred and replace them with an entity that would act as a re-insurer. However, with more pressing issues facing the Administration, dealing with the GSEs has taken a back seat. In the interim, they are improving their balance sheets and have paid back nearly half of what they owe to the government. And with the stock approaching $1.00, the 4.6 billion shares owned by the government start to become significant. It will become harder to kill the company when the stock is worth some money.  That is obviously what the market has figured out, as the stock has tripled since Fannie announced they will be profitable nearly 3 weeks ago.

Chart:  Fannie Mae Stock Price: