Morning Report - 12^3 edition

Vital Statistics:

	Last	Change	Percent
S&P Futures	1433.3	1.8	0.13%
Eurostoxx Index	2629.5	5.4	0.21%
Oil (WTI)	86.35	0.6	0.65%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.95	-0.116	-0.14%
10 Year Govt Bond Yield	1.66%	0.00%
RPX Composite Real Estate Index	191.1	0.4

Markets are up slightly this morning ahead of the FOMC statement this afternoon. Mortgage Applications were up 6.2% last week. Right to Work was passed in Michigan. Bonds and MBS are flat.

The FOMC statement is due out at 12:30, and at 2:15, the Bernank begins his press conference. Things to look for:  New Treasury purchase plan to replace Operation Twist, 2013 GDP forecast, any comments on its outlook for housing. The WaPo speculates that the Fed will shift more buying to Treasuries than mortgages, and it looks like Bill Gross concurs, as he is lightening up his MBS position.

Looks like FHFA Acting Director will be out of a job soon. This will undoubtedly pave the way for a mass principal forgiveness / underwater refis on Fannie and Freddie loans. Mortgage-Backed securities will be vulnerable to news of more interventionist policies out of FHFA, so beware as you could have Treasury pricing and MBS pricing diverge.

While individual tax rates are going up as part of the fiscal cliff, corporate tax rates may be going down. Obama earlier this year proposed lowering the corporate tax rate to 28% from its current 35%.  The lower rates would be offset by eliminating some deductions and the net revenue would be the same. I would argue that we are at the point on the Laffer Curve where lowering rates would actually raise revenues as it would eliminate some of the transfer-pricing games companies play to declare as much income as possible overseas. The poster child of these transfer pricing games is GE, which paid no US income taxes in 2010. Or Google, which shifted $9.8 billion in revenues to a Bermuda shell company, which allowed it to avoid paying roughly $2 billion in taxes.

Dodd-Frank implementation could stall for a while after Mary Schapiro steps down as Chairman of the SEC, leaving the commission deadlocked with 2 democrats and 2 republicans.  Politically divisive issues like prop trading and restrictions on executive pay will have to wait until a fifth commissioner is nominated and confirmed.  Fun fact:  The SEC has finalized just 32 of the 95 rules that the 2010 law required.

The Fed has been quietly telling the big banks:  No more mergers. Banks that hold 10% of US deposits are already capped in size, but now it looks like the biggest banks just below that threshold are now prohibited from growing by acquisition. Fed Governor Dan Tarullo gave a speech which discusses the TBTF problem and examines various alternatives (re-instate Glass Steagall, capping non-deposit liabilities, etc.)

Morning Report - Challenger and Gray Job Cuts

Vital Statistics:

	Last	Change	Percent
S&P Futures	1407.0	-1.3	-0.09%
Eurostoxx Index	2598.5	6.4	0.25%
Oil (WTI)	87.52	-0.4	-0.41%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.76	-0.015	-0.02%
10 Year Govt Bond Yield	1.58%	-0.01%
RPX Composite Real Estate Index	191	-0.2

Markets are flattish this morning as Washington continues to grind to some sort of agreement on the fiscal cliff.  Initial Jobless Claims fell to 370k. The ECB kept rates at .75% and cut their 2013 GDP forecast to a range of -.9% to .3%.  S&P lowered Greece's bond rating to "selective default."  Bonds are up 1/4 while MBS are flat.

FHFA Acting Chairman Ed DeMarco will be speaking at SIFMA at 1:00 pm. HUD Secretary Shaun Donovan will head to the Hill today to talk about the sorry state of the FHA.

More Republicans are showing openness to increasing rates on the rich in exchange for entitlement spending cuts. So far, the President has shown little interest in cutting any spending aside from defense.  One possibility under discussion involves splitting the difference between 35% and 39.6% on the top rate. That would allow both parties to claim victory.

Challenger and Gray reported job cuts increased 34% in November to 57,000.  This was the second-highest month of the year.  About a third of the announcements come from the Hostess bankruptcy.  Of course December already has 11,000 cuts in the bag as well, courtesy of Citi.  Wall Street has shed 300,000 jobs in the last two years, and more are on the way if revenues don't start increasing.

The NY Department of Financial Services has ordered Ocwen to hire a monitor to ensure compliance with its agreement with the state. The state found instances where Ocwen did not provide a single point of contact to borrowers and did not send a 90-day notice before instituting foreclosure proceedings.

Is the overseas cheap labor arbitrage coming to an end?  Apple announced that it will bring some production back to the US from China. It is a nominal amount - $100 million - and it might just be a symbolic move after the Foxconn PR disaster. The compay has $121B of cash on its balance sheet.

Citi is now advising clients against putting money with Stevie Cohen. SAC spin-off Diamondback is shutting down.

Morning Report - Ed DeMarco and G-fees

Vital Statistics:

	Last	Change	Percent
S&P Futures	1413.3	6.2	0.44%
Eurostoxx Index	2571.5	24.7	0.97%
Oil (WTI)	88	1.5	1.75%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	80.14	-0.196	-0.24%
10 Year Govt Bond Yield	1.63%	0.00%
RPX Composite Real Estate Index	191.2	-0.2

Markets are stronger this morning on optimism over a deal on the fiscal cliff.  3Q GDP came in at 2.7% lower than the 2.8% estimate, but higher than the initial 2% estimate. Initial Jobless Claims were 393k and the prior week was revised upward.  Bonds are down, while MBS are flat.

The mortgage interest deduction, once considered untouchable, could be part of a deal on the fiscal cliff. Certainly that would be a negative for house prices, especially in expensive areas like DC, NYC metro area, and the West Coast.

Another tax break is the Mortgage Forgiveness Debt Relief Act, which is scheduled to sunset at the end of the year.  This prevents borrowers from getting a tax bill if they do a short sale or get a principal forgiveness mod on their loans. Consumer advocates are urging Congress to extend the tax break.

SAC has received a Well's notice. Stevie Cohen has apparently not been named in the Martoma case or the SEC's documents, but the noose is tightening.

FHFA Acting Director Ed Demarco gave a speech at the Exchequer Club in DC yesterday.  Key takeaways:  G-fees have risen and will continue to rise until credit risk is priced as it would be if private entities were doing it. I have seen some estimates that it will go to 75 bps. In addition, they are considering G-fee adjustments by locality, which means borrowers in judicial states will pay more. All of this is in an effort to "crowd in" private capital back to the mortgage market. The ultimate effect will be to make conforming mortgages more expensive, which means the push / pull between the Fed and the regulators will continue.

Jim Grant has a great interview on Bloomberg discussing the Fed's war with the market mechanism and the unintended consequences of ZIRP. Once of the biggest is the creeping "Japanesization" as artificially low rates keep zombie companies alive.

The dog that didn't bark:  The wave of foreclosures that never occurred.

Morning Report 3Q GDP, NAR house price forecast

Vital Statistics:

	Last	Change	Percent
S&P Futures	1403.7	-4.5	-0.32%
Eurostoxx Index	2481.1	-2.3	-0.09%
Oil (WTI)	86.11	0.1	0.07%
LIBOR	0.313	0.000	0.00%
US Dollar Index (DXY)	80.18	0.138	0.17%
10 Year Govt Bond Yield	1.78%	-0.04%
RPX Composite Real Estate Index	193.9	-0.1

Markets are flat after a better than expected GDP report offset the earnings miss from Apple. Surprisingly, bonds and MBS are rallying on the GDP number. Not sure what to make of that.

3Q GDP came in at +2%, higher than the +1.8% expectation.  This is the "advance estimate," which means the source data are still incomplete, so the number will be subject to two revisions.  Increases in consumption and government spending were offset by a drop in nonresidential fixed investment.

The NAR is forecasting that home prices will increase by 3.25% in 2013 based on its survey of 50,000 real estate practitioners.

If Obama wins re-election, Ed DeMarco's days at FHFA are probably numbered. To overcome Republican opposition, he will probably be fired and replaced while Congress is in recess. He has continued to butt heads with the Administration over principal reductions for GSE loans.

The MR may be a casualty of Sandy next week.  Hopefully not.