Morning Report - 4Q GDP revised upward

Vital Statistics:

	Last	Change	Percent
S&P Futures	1516.7	0.9	0.06%
Eurostoxx Index	2616.7	4.9	0.19%
Oil (WTI)	92.98	0.2	0.24%
LIBOR	0.287	0.000	0.00%
US Dollar Index (DXY)	81.58	-0.024	-0.03%
10 Year Govt Bond Yield	1.88%	-0.02%
RPX Composite Real Estate Index	194.2	0.2

Markets are flattish after 4Q GDP was revised upward, but less than forecast.  4Q GDP has been revised upward to + .1% from -.1%.  Initial Jobless Claims came in at 344k. NAPM Milwaukee came in BTE at 56.5. Bonds and MBS are up on the news.

The US GDP number was disappointing (the Street was at + .5%) and a drop in defense spending was a big factor.  Don't forget 3Q GDP came in at + 3.1%, well in excess of the current 1.5% trend.  The government's fiscal year ends in September, and there is a "use-it-or-lose-it" dynamic that goes on.  In other words, if an agency doesn't spend their entire budget, it will be cut next year.  So even if they don't actually need to spend the money, they will. The net effect is that government spending tends to accelerate in Q3 and then fall in Q1. You can see this in Table 1 of the official press release.  Punch Line:  Take 3Q and 4Q GDP numbers with a grain of salt. Of course, there is a battle royale going on between the right and the left about how to frame this whole issue as everyone deals with the sequester, so the signal to noise ratio is miniscule.

Tidbits from the Bernank's House Testimony yesterday:  A "significant majority" of the FOMC is supportive of current policy.  The Fed would prefer that US fiscal solutions be less front-loaded. They note some progress in the labor market and haven't seen any significant problems in market functioning. He also gave some insight into the planned exit strategy:  to let the assets run off and then drain reserves.  He said it is a "reasonable guess" that unemployment will get to 6% by 2016.

It is getting easier to raise money in the housing market. There should be an uptick in IPOs for homebuilders this year as there is still a chasm between ease of financing in the private and public markets.  While yield pigs will jump on bond issues from the recently dead, non-public entities still struggle to get access to construction loans. The homebuilders are pretty rich at the moment, sporting P/Es around 30 or so.

Jack Lew was confirmed as Treasury Secretary.  His job will be the pit bull defending government spending and pushing for tax hikes. How this affects the dollar I have no idea.

Morning Report - Its raining money

Vital Statistics:

	Last	Change	Percent
S&P Futures	1493.5	1.1	0.07%
Eurostoxx Index	2581.6	11.1	0.43%
Oil (WTI)	92.45	-0.2	-0.19%
LIBOR	0.287	0.001	0.17%
US Dollar Index (DXY)	81.73	-0.137	-0.17%
10 Year Govt Bond Yield	1.85%	-0.03%
RPX Composite Real Estate Index	194	0.0

Markets are flattish this morning on no real news. Italian Sovereign Yields are slightly lower after the sell-off of the last two days.  Mortgage Applications fell 3.8% last week. Durable Orders dropped 5%, which was a disappointment, but most of that looks to be due to Boeing and their battery problem.  Strip out Boeing, and orders were up 6.3%, which is a signal that businesses are starting to spend on CAPEX.  Fed Chairman Bernake will address the House Financial Services Committee today.  Bonds and MBS are rallying. For those that follow technicals, it looks like the 10 year has broken out of its bear trend of the last 4 months.

The Bernank spoke in front of the Senate Banking Committee yesterday and seemed to tamp down speculation that the Fed intended to end QE any time soon. Remember the December minutes seemed to indicate that there was a consensus forming that purchases of MBS and Treasuries would end sometime this year.  This accounts for the 15 basis point rally we have seen in the 10 year over the past few days. He also urged the government to find a way to kick the sequester can down the road and replace it with more gradual cuts, while at the same time playing down the "fiscal armageddon" predictions.

Bernake assured the Committee that the Fed was monitoring the unintended consequences of low interest rates and said that the risks of new bubbles were offset by companies using low interest rates to lock in low borrowing costs for a long period. Almost on cue, Bloomberg has a story regarding this exact issue, where the yield pigs are feasting on junk bonds, which "trade like dot coms." As an aside, Radian (remember them?  the mortgage insurer left for dead in the depths of the crisis?) They just priced a convert deal, 2 1/4s up 25. Its raining money out there..

Jamie Dimon said yesterday that banks are accumulating more capital than regulators require and will not know what to do with it in two years.  "Lend it" is the obvious answer, but if you can lock up long term capital in the bond market for less than your dividend yield, what are you going to do as a CFO?

The jumbo market is coming back. While still nowhere near pre-crisis levels, jumbo origination is up 60% from last year. While still hard to get, the loans are priced aggressively, at about a 23 basis point spread to conventionals.  A pick up in jumbo activity may well foreshadow the return of the private label market.