Morning Report: Toll Brothers misses

Vital Statistics:

	Last	Change
S&P Futures	2642.0	3.8
Eurostoxx Index	386.6	-0.9
Oil (WTI)	57.3	-0.2
US dollar index	86.7	0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	3.88

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Toll Brothers announced earnings this morning that missed analyst expectations. The sector has been on a tear this year, so weak earnings are expected to be punished by the markets. Revenues increased 9% and earnings increased 68%. The company used a lot of its cash to repurchase stock and bonds, which isn't a great sign for future growth. Generally when companies are seeing great opportunities, they re-invest in the business. When they don't, they buy back stock. The street didn't like the guidance, and the stock is down about 6% pre-market. 

Toll is in the luxury end of the housing market, covering McMansions in urban areas out West and luxury apartments in the East. The change in the mortgage interest deduction is probably going to impact demand. Note that the builders that focus on entry-level building are doing much better. For the past 10 years, the luxury end of the market was the only part that was working. Now the market is shifting to the first time homebuyer. 

Speaking of the luxury end of the market, the New York Times frets about the effect tax reform will have on New York City. It turns out that 40,000 residents in New York City account for half the city's revenue. If they leave, it will have a huge impact on the city's finances. The people most affected will be those making over $200,000, and in a high cost area like New York City and the suburbs, that is not rich by any stretch of the imagination. 

Factory orders fell 0.1% in October, ending a generally good month for manufacturing. Capital Goods orders were strong however, and that points to a stronger Q4 and 2018. Capital Goods orders are generally associated with business expansion, capacity increases, and modernization. 

The services economy decelerated in November from a record in October, according to the ISM Non-Manufacturing Survey. 

Tax reform heads to committee to resolve the differences between the House and Senate versions. Here are the biggest sticking points. The committee starts work on Monday, with an eye to have a final vote in Mid-December. 

Home prices rose 0.9% MOM and are up 7% YOY, according to CoreLogic. The fastest growth continues to be in the West and Mountain states. Much of the Midwest remains undervalued while we are seeing overvaluation in places like Florida, Texas, and the West Coast. Note that fears about climate change are not evident in Florida real estate. 

First time homebuyers are still relatively uninformed about mortgages. According to a recent survey, 20% of Americans think it is impossible to get a mortgage with less than 5% down, despite the fact that FHA goes down to 3%, VA allows nothing, and the GSEs have 3% down products. Most people get their information on the Internet, and surprisingly almost nobody gets their mortgage information from the CFPB. 

How did HAMP and HARP help struggling homeowners? It turns out, not much. In fact, borrowers who had a principal reduction had pretty much the same default rates as borrowers without a principal reduction. These reductions were big: 32% or about $112,000 on average. These results pour cold water on the strategic default theory, which says that borrowers will choose to toss the keys to the bank once the home value is less than their outstanding mortgage. FWIW, I think the defaults in 2006 were strategic defaults, as the economy had yet to roll over and professionals were playing the greater fool game. Note that modifying a mortgage payment to a percentage of income didn't really help either. The punch line is that many defaults were caused by a short term blip in a borrower's financial situation - often an unexpected expense like a medical bill - and servicers should work on creating a solution to help the borrower over that hump and then re-evaluate. 

Morning Report: Productivity drops again

Vital Statistics:

	Last	Change
S&P Futures	2177.0	1.0
Eurostoxx Index	342.8	1.0
Oil (WTI)	42.9	-0.2
US dollar index	86.9	-0.2
10 Year Govt Bond Yield	1.58%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Markets are flattish this morning on no real news. Bonds and MBS are flat

Small Business Optimism ticked up last month according to the NFIB. Sentiment remains well below its historical average. The interesting thing is that the inability to find quality workers rose to the #3 problem facing small business after taxes and government regulation. While small business is interested in hiring, they still have very little appetite for capital expenditures. Inflation at the small business level remains nowhere to be found, as small business cut prices on average last month. 

The lack of capital investment ties into another economic number this morning: productivity (or lack thereof). Nonfarm productivity fell .5% in the second quarter, making it the third negative quarter in a row. The Street was looking for a positive .5% reading so the number was a big miss. Productivity is also negative on a year-over-year basis.

Unit Labor costs rose 2% which was a little higher than expected. Comp costs were up 1.5% and productivity losses added another 50 bps. 

Productivity growth is what increases standards of living, which is why a lack of it makes people feel like the recovery is so weak. Part of the explanation is found in the NFIB report - no capital expenditures. Productivity is tough to measure these days, with so much free technology. You know GoToMeeting increases productivity, yet it won't show up in the output numbers because no one pays for it. Same thing with Skype, LinkedIn, etc. While academia suspects there is a problem with the way we measure productivity, no one has found a good way to correct for it.

Completed foreclosures came in at 38,000 in June, a 4% increase from May and a 5% drop year over year. The national foreclosures inventory stands at 375k homes, which is down 26% from a year ago. The number of mortgages seriously delinquent fell 21% YOY to 2.8%, or about 1.1 million homes. The big judicial states like New York and New Jersey lead the pack in foreclosure inventory. 

FHFA says that Fannie Mae and Freddie Mac could require as much as $126 billion in the next housing crisis. Separately, Fannie's home purchase sentiment index hit a new high, albeit it is a relatively new index. 

Wells is saying that the expiration of HARP at the end of the year. Does this mean a dramatic drop in prepay speeds? Not necessarily, in that HARP will probably be replaced with a high LTV refi program. 

Morning Report - Greece may causes some volatility this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	2110.1	1.7	0.08%
Eurostoxx Index	3624.2	-25.3	-0.69%
Oil (WTI)	59.64	0.3	0.42%
LIBOR	0.28	0.001	0.36%
US Dollar Index (DXY)	95.07	0.275	0.29%
10 Year Govt Bond Yield	2.17%	0.03%
Current Coupon Ginnie Mae TBA	102.4	-0.2
Current Coupon Fannie Mae TBA	101.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are flattish on no real news. Bonds and MBS are down.

The week after the jobs report is usually pretty data-light and this week is no exception. The highlights will be retail sales on Wednesday and industrial data on Friday. 

Bonds will be vulnerable to shifts in the wind due to a few big deadlines in Greece this week. To put the Greek situation in perspective, over the past 3 weeks, the German 10 year yield has gone from 7.5 basis points in yield to 77 basis points in yield intraday last week. This is what has been pushing down Treasuries. Last week the 10 year briefly traded over 2.3% in yield.

The Fed may not pursue a path of steady consecutive 25 basis point increases in the Fed Funds rate when they start hiking rates. Interestingly, the article posits that the Fed wants to learn the lesson of the last hike cycle - in which they tightened too predictably, and which some believe caused the real estate bubble. If the Fed truly believes that rate hikes caused the real estate bubble, and everything was fine in the markets before then, it shows we have learned absolutely nothing from 2008. 

The FHFA is extending HARP and HAMP through 2016. 

Morning Report - Housing Scorecard

Vital Statistics:	Last	Change	Percent
S&P Futures	1631.8	1.0	0.06%
Eurostoxx Index	2778.9	1.5	0.05%
Oil (WTI)	94.59	-0.6	-0.61%
LIBOR	0.274	-0.001	-0.36%
US Dollar Index (DXY)	83.34	0.065	0.08%
10 Year Govt Bond Yield	1.91%	-0.01%
Current Coupon Ginnie Mae TBA	104.9	-0.2
Current Coupon Fannie Mae TBA	103	0.1
RPX Composite Real Estate Index	196.6	0.4
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are flattish this morning on no real news. Appalloosa manager David Tepper said on CNBC that he is still bullish and the economy is getting better. Bonds finally catch a bid after a pretty brutal two week sell-off. MBS are up small.

The National Federation of Independent Business released their Small Business Optimism Survey this morning, which showed the index creeping up slightly to 92.1 from 90.7. Owners are still pessimistic about the economy, with a net negative 15% expecting business conditions to improve over the next six months. Hiring and raises are being done only grudgingly, and capital expenditures are only at maintenance levels. Yet the stock market is at record highs. So what gives? Part of it is that the big S&P 500 stocks have a lot of international exposure, which means they can offset US weakness elsewhere. Also, I think quantitative easing is playing a part.

The Obama Administration released their monthly Housing Scorecard which showed home equity increased again last month. HAMP trial modifications jumped, while HAMP permanent mods fell. HARP refis were flat for the month. It is still looking like Mel Watt as the new FHFA Chairman is no sure thing, either. Even if he doesn't get nominated, HARP 3.0 might still happen, which would extend the eligibility dates for HARP refis to include late 2009 and 2010 vintages. That would undoubtedly kick off another refi wave.

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 - 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.