Morning Report: House prices continue to rise

Vital Statistics:

	Last	Change	Percent
S&P Futures	1873.5	1.4	0.07%
Eurostoxx Index	3039.4	-0.1	0.00%
Oil (WTI)	44.84	0.4	0.92%
LIBOR	0.326	0.000	-0.09%
US Dollar Index (DXY)	96.17	0.139	0.14%
10 Year Govt Bond Yield	2.08%	-0.01%
Current Coupon Ginnie Mae TBA	104.4	0.0
Current Coupon Fannie Mae TBA	104.1	0.1
BankRate 30 Year Fixed Rate Mortgage	3.87

Markets are up this morning on good economic news overseas. Bonds and MBS are up small.

Slow news day.

The S&P Case-Shiller index of home prices rose 0.37% month-over-month and is up about 4.7% year-over-year. 

Consumer Confidence increased to 103 in September from 101.3.

NAR is saying they expect TRID to delay closings by up to 15 days. There will undoubtedly be a learning curve for the industry. TRID is the biggest change to the industry since the implementation of Dodd-Frank. CFPB claims they will use discretion in not going after lenders who make mistakes but are making a good-faith effort to work within the rules. 

NAR put out the list of the 20 hottest real estate markets. While some at the top are not surprising (San Francisco) some of the other names are more associated with the economic dumpster fires we saw as the collapse began. Cities like Stockton CA and Detroit MI are included in the 20 hottest markets. 

Glencore (which used to be called Xstrata) is a Swiss commodity trader who has been subject to solvency rumors. The stock has gotten hammered over the past year (down over 80%) but is up big today after addressing market rumors about solvency problems. While real estate types don't typically have to worry about what happens in the area of precious metals, energy, and ag, stress in these markets can spill over to the rest of the financial sector. What does this mean for LOs? Stress = lower interest rates. 

Speaking of stress, mutual funds that mimic hedge fund strategies may find themselves wrapped around the axle if we have a period of stress. Hedge fund arbitrage strategies typically require leverage and often invest in illiquid assets. Hedge funds at least have quarterly redemptions, which makes it easier to exit positions if need be. Mutual funds have no wiggle room - they have to accept redemptions daily. This could get ugly if markets turn south. 

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 - 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 - Case Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1490.8	3.6	0.24%
Eurostoxx Index	2586.8	-65.1	-2.45%
Oil (WTI)	92.23	-0.9	-0.95%
LIBOR	0.287	0.000	0.00%
US Dollar Index (DXY)	81.85	0.180	0.22%
10 Year Govt Bond Yield	1.87%	0.01%
RPX Composite Real Estate Index	194.1	-0.5

Markets are higher after yesterday's bloodbath.  Yesterday's sell-off was blamed on Italian election results which caused a 32 bp sell-off in Italian sovereigns.  They have traded another 50 basis points wider this morning. The Bernank will testify before the Senate Banking Committee today.  Bonds are higher, continuing yesterday's furious rally. The 10-year has tightened by 13 basis points and is trading at 1.87%.  MBS are flat.

The S&P Case-Schiller index of home prices rose 6.8% YOY and .88% MOM in December. The only MSA with negative growth was New York.  Separately, FHFA reported that prices increased .6% MOM in December. They note that while the foreclosure pipeline is still high, the actual number of homes available for sale is very low and falling.

Altos has a piece on why inventory is so low. First, they cite low housing starts. From 1957 - 2002, we averaged 1.5 million units a year.  Since the bubble burst, we have been hitting around 700k. Quickly ramping up housing construction is difficult. Second, there is psychological effect of sellers who now see the light at the end of the tunnel.  Prices are rising again, and they are hoping to get out flat. Finally, the government has emphatically sided with home owners over home buyers. They are pulling out all the stops to keep inventory off the market through foreclosure mitigation and refinance opportunities for underwater homeowners.  This has the net effect of restricting supply, which is good for existing homeowners, but not so much for first time homebuyers who want in. The net result:  2013 home price appreciation should be very strong.

In confirmation of the above, the Despot reported a 13.9% increase in 4Q sales, with comps up 7%. While they attribute some of the growth to Sandy repairs, they mainly cite the improving residential real estate market.

In a sign that the refi boom may be over, JP Morgan plans on cutting headcount in mortgage banking by 13k - 15k in an effort to cut $3B in expenses by the end of 2014. They see cutting 3,000 - 4,000 jobs in consumer banking this year, almost entirely by attrition.  The hits keep coming....

Bob Corker is saying the ball is in the White House's court in order to confirm CFPB acting Chairman Richard Cordray.  A January court decision that Obama's recess appointments to the NLRB were unconstitutional is giving Republicans a chance to press for changes to CFPB in order to bring more of it under Congressional control.  They are arguing for a 5 member bipartisan board, and for the budget to be subject to the normal appropriations process.

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 - Case-Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1422.7	2.9	0.20%
Eurostoxx Index	2648.5	-2.6	-0.10%
Oil (WTI)	89.09	0.5	0.54%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.66	-0.015	-0.02%
10 Year Govt Bond Yield	1.78%	0.00%
RPX Composite Real Estate Index	191.8	0.1

Markets are quiet this morning, as most of Europe is shut for Boxing Day. Bonds and MBS are flat.

Not much is happening on the fiscal cliff front, although Obama plans to cut his vacation short and return to Washington to try and hammer out a deal. Chances of any sort of grand bargain are virtually nil; all that could be accomplished at this point is some sort of fig leaf. In spite of the political and economic uncertainty, and the early indications of a weak Christmas, the bond market still refuses to price in the possibility of a recession.

The S&P / Case-Schiller index of home values came in at  145.93 for the month of October, up 4.3% year-over-year and up 66 basis points month-over-month. The hardest-hit MSAs continued to show the biggest gains, with prices up 22% in Phoenix and 10% in Detroit. The Northeast MSAs (Boston and NY) are showing the smallest increases.

Chart:  S&P / Case-Schiller:

The Obama administration is considering expanding its mortgage-refinancing program to include underwater borrowers with non government loans.  Such a move would require legislation to change Fannie and Fred's charters and would also involve a bump in the guarantee fee to price in the additional risk. It will also require the blessing of FHFA, which has indicated general support for the program.  Finally, it will require some sort of immunity from buy-back risk in order to get originators on board.

A new study confirms what many have thought about high-frequency trading:  It is highly profitable and adds no value to the system as a whole. Aggressive, liquidity-taking high frequency trading (in other words, front-running) does the best. The profitability of HFT seems to be persistent - new entrants are less likely to be profitable and are more likely to exit. Speed matters above all, and that is why James Simons is so consistently profitable.

Morning Report - Case Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1403.2	-0.1	-0.01%
Eurostoxx Index	2549.8	7.3	0.29%
Oil (WTI)	87.92	0.2	0.21%
LIBOR	0.312	0.000	0.00%
US Dollar Index (DXY)	80.28	0.033	0.04%
10 Year Govt Bond Yield	1.67%	0.01%
RPX Composite Real Estate Index	190.8	-0.3

Markets are flat this morning after a better than expected durable goods report. The Commerce Department said no companies reported disruption from Hurricane Sandy, although I wonder how much of the orders were caused by Sandy (generators, for example).  Bonds and MBS are flat

The Case-Schiller index rose 3.6% YOY, and is now sitting where prices were in Autumn of 2003. We will get the FHFA Home Price Index later today.

Mary Schapiro has stepped down from the head of the SEC. Elise Walter, one of the Democratic Commissioners has stepped in to take her place.  The criticism of her performance largely centered around the view that she was too lenient with Wall Street. The Walter appointment has the feeling of an interim appointment.  In the meantime, the panel will be evenly split between Democrats and Republicans, which means that enacting controversial new regulations will be almost impossible, especially those regarding prop trading and money-market funds.  That said, my gut tells me that a more aggressive SEC is on the way.  Batten down the hatches.

Brown Forman, the liquor manufacturer, has announced a special dividend, as a way to return capital to shareholders prior to an expected hike in dividend taxes. Expect to see more of this. The stock is up 5%.

CNN discusses the political realities of the mortgage interest deduction.

Fannie Mae discusses the fact that many borrowers don't get competing rates when shopping for a mortgage.