Morning Report: James Bullard thinks no more hikes are warranted

Vital Statistics:

			Last	Change
S&P futures			2722	3.75
Eurostoxx index			392.17	0.2
Oil (WTI)			71.3	-0.06
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

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

Import prices rose 0.3% MOM and 3.3% YOY, driven by oil. Ex-energy import prices were flat. 

St. Louis Federal Reserve Head James Bullard said that interest rates may already be at the level where they are no longer stimulating the economy. There are “reasons for caution in raising the policy rate further given current macroeconomic conditions” he said in his prepared remarks. Bullard has generally been considered a dove, so this is not much of a surprise. He is also a non-voter. He believes that there is little in the inflationary pressures being signaled in the market. 

With respect to inflation signalling, he has a point. The spread between the 30 year bond and the 5 year bond is now the narrowest since 2007. Note that the yield curve generally flattens during tightening phases and is probably not signifying the type of deflationary period that 2007 did. Given all of the QE over the past decade, the signals from the bond markets are heavily distorted and should be taken with a grain of salt. Note short Treasuries is one of the biggest hedge fund trades on the Street. 

Are the homebuilders set to outperform going forward? They have suffered more than the market during the recent declines, but the environment should be favorable for the sector going forward. With a shortage of housing, high demand and rising prices, the sector should be in good shape. The problem for investors? The sector is highly cyclical, and the stock behavior reflects that. In other words, earnings will rise and fall, and the multiple will expand and contract, dampening the effect. So, if the average multiple is typically mid-teens, don't be surprised if P/E ratios fall to the high single digits during boom times. 

Q2 GDP is currently tracking at 3.7%. 

Sen Pat Toomey says that the Trump Administration doesn't have the authority to pull out of NAFTA, since it was passed by Congress. On the other hand, the Admin does have the authority to pull out of the Iran Deal, as well as the Paris Accords because they were only deals with the Obama Administration and not the US - never ratified by Congress. 

Morning Report: Initial Jobless Claims lowest since 1969

Vital Statistics:

			Last	Change
S&P futures			2652.75	8.25
Eurostoxx index			382.29	2.12
Oil (WTI)			68.61	0.56
10 Year Government Bond Yield				3.00%
30 Year fixed rate mortgage				4.62%

Stocks are higher this morning on strong earnings from Facebook. Bonds and MBS are up.

The ECB maintained its current policy and made some cautious comments, which is pushing up bonds in Europe. US Treasuries are following along on the relative value trade. 

The 10 year has made a pretty sizeable move over the past month or so, and mortgage rates typically lag. So don't be surprised if mortgage rates continue to tick up, even if the 10 year finds a home at the 3% level. 

The homeownership rate was flat in the first quarter at 64.2%. It is up from 63.6% a year ago however. It bottomed in the second quarter of 2016 at 62.9%. 

Durable Goods Orders increased 2.6% in March, following a strong February. Ex-transportation, they were flat however and core capital goods, which is a proxy for business capital investment, fell slightly. February's already strong numbers were revised up slightly. 

Retail inventories fell 0.5% while wholesale inventories increased by the same amount. 

Initial Jobless Claims fell to 209,000 last week, which is the lowest number since 1969. When you adjust for population growth, the number becomes even more dramatic:

Deutsche Bank is scaling back its US operations to focus on becoming a more Euro-centric bank. It is hard to believe, but almost 20 years ago, the bank decided to make a big foray into the US market by buying Banker's Trust and Alex Brown. 

Moody's is worrying about the next area of opportunity in the mortgage market: cash-out refinances. As many CLTVs are approaching 75%, homeowners may choose to do a cash-out to either consolidate higher rate debt, or perhaps do home improvements. The other opportunity remains refinancing FHA loans that have accumulated enough equity to qualify for a conforming loan without MI. Finally, those who still have ARMs might find the relative attractiveness of a 30 year fixed to be a compelling switch. In an environment of rising home prices and rising interest rates, these will be the only game in town. 

Homebuilders are facing rising input costs - sticks and bricks, if you will. Framing lumber prices are up 16% this year, and plywood is up 33%. Inventory is so tight that builders are able to pass these costs onto homebuyers. A tight labor market remains an issue for the industry as well. All of this points to higher home prices going forward. 

For those wondering if we are indeed at the end of the credit cycle, here is WeWork's bond offering, which came in at $700 million with bonds paying 7.875%. Borrowing money at 7.875% for 5% cap rate office space? Set that aside for the moment. They introduced a new financial concept, called "community-adjusted EBITDA," which not only strips out interest, depreciation and amortization, and taxes, but also ignores general and administrative, marketing, and design / development costs. That has to be the first time I have ever heard this term before, and it should just be renamed EBBS - or earnings before bad stuff. 

Morning Report: Tax reform passes

Vital Statistics:

	Last	Change
S&P Futures	2657.5	13.5
Eurostoxx Index	388.0	4.0
Oil (WTI)	57.8	-0.6
US dollar index	86.7	0.3
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 after tax reform passes in the Senate. Bonds and MBS are flat. 

This week should be pretty quiet with the exception of the jobs report on Friday. We are in the quiet period ahead of the FOMC meeting next week, so we won't be getting any Fed-speak. 

Tax reform passed over the weekend in the Senate. Now comes the reconciliation between the House and Senate versions. The winners in this bill? Banks, as they generally have fewer deductions and end up paying the high statutory rate. The corporate AMT remains at 20%. The losers? Health insurance companies that will see the healthier and younger eschew health insurance because the mandate is gone. Note however that the penalty for not carrying insurance under Obamacare was pretty small to begin with - so it probably won't make that big of a difference when all is said and done. 

One potential wrinkle in the tax reform bill seems to have been fixed, and that is the treatment of mortgage servicing rights. The tax bill would have made mortgage servicing rights taxable upon creation, which would have been negative for smaller independent mortgage originators. It looks like there was an amendment to eliminate this. Like many things in the tax bill, it will take some time to digest what the provisions were.  

Note that while the stock market has cheered tax reform, bonds and currencies are largely ignoring it. Good news for originators who don't need higher rates. It is early days, however. 

Stocks on Friday had a swoon mid-day on an ABC report that Mike Flynn was directed to make contact with the Russians. This was supposedly the smoking gun in the Trump - Russia collusion story. It turns out that Flynn was told to make contact after the election, which is what you would expect to see from an incoming administration in transition. The reporter from ABC was suspended for the story, although it certainly gave stock investors heartburn for a day. 

One columnist is a bear on the builders after tax reform. FWIW, I think that the absolute dearth of inventory will dominate any secondary effects from the tax bill. He notes that household formation did lag for the Millennial generation, and that student loan debt is an issue. That said, the financial difference between renting and buying is still very favorable towards buying given that interest rates are low and rental inflation is high. Second, the economy is accelerating (the Atlanta Fed just took up its estimate for Q4 GDP to 3.5%) and wage inflation seems to be coming back. The article does make a good point: that the homebuilding business is highly cyclical - and during booms P/E ratios will compress. That said, we haven't had a homebuilding boom in 12 years, which is a long, long time. 

Morning Report: FOMC minutes shock the bond market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2037.3	-4.3	-0.21%
Eurostoxx Index	2939.6	-16.9	-0.57%
Oil (WTI)	46.99	-1.2	-2.49%
LIBOR	0.625	-0.001	-0.16%
US Dollar Index (DXY)	95.44	0.360	0.38%
10 Year Govt Bond Yield	1.88%	0.02%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.4
BankRate 30 Year Fixed Rate Mortgage	3.64

Markets are lower this morning after the FOMC minutes shocked bond markets yesterday. Bonds and MBS are down.

The sentence that sent bonds reeling: "Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low." The FOMC minutes caused a 7 basis point spike in the 10 year and a 6 basis point spike in the 2 year. The Fed Funds futures contracts (which is what the "likelihood implied by market pricing" phrase alludes to) moved from a 10% chance of a June hike to a 25% chance of a June hike and a 60% chance of a hike by September. Earlier this year, the futures were basically betting the Fed would be on hold for the rest of the year. The markets were perhaps a little too complacent about another rate hike. That said, the Fed has set up the markets for rate hikes several times over the past year or two only to get cold feet. 

In terms of the economy, the members and the staff noted that the labor market continues to improve despite a deceleration in economic growth. Inflation remains well below the Fed's target, however they attribute that to commodity price movements, which are transitory. 

The minutes also mentioned that residential mortgage credit was getting a little looser on the government side, but also noted that non-traditional and credit-challenged borrowers still face tight credit conditions. The corporate bond market has improved after a slow January and February. 

In economic news today, the Chicago Fed National Activity Index rose to .10 from a downward-revised -.55 in March. The 3 month moving average is still negative, meaning the economy is growing slightly below its long-term trend. Separately, the Philly Fed Business Outlook Index fell to -1.8. 

Initial Jobless Claims fell to 278k from 294k last week. As a general rule, people are hanging onto their jobs these days.

The Bloomberg Consumer Comfort index was flat last week at 44.5.

The Index of Leading Economic Indicators rose from 0.2% to 0.6% in April. The FOMC minutes mentioned the Fed expects growth to accelerate into the second half of the year. 

Interesting stat: The number of homes worth $1 million has doubled in the last 4 years. Of course 2012 was pretty much the bottom of the real estate market, and it has been the big urban areas like San Francisco and Manhattan that have led the charge higher. Heck, in San Francisco, the median home price is over $800k. 

And that ties into....a lack of starter homes.  Homebuilders are having a tough time making starter homes work financially. Increased regulatory and compliance costs, mandated open space, lower density, higher land prices, and fees imposed by counties and cities are all combining to make affordable starter homes impossible to build. Indeed, the number of starter homes is at a historical low and falling. Here are some industry quotes: "When you start with a high land basis, it's very hard to end up with a purchase price that the first-time buyer finds affordable," said Stuart Miller, CEO of Miami-based Lennar. "No. 1, you see it in just the pure requirements. Those requirements can be a very lengthy list of things you maybe wouldn't have seen 10, 15, 20 years ago. But you're also seeing it in fees that counties and cities impose on new home construction. Fees can be anywhere from $50,000 to $100,000 per home to build," said Taylor Morrison's Bodem. "Things like that ultimately get passed on to the consumer and the price of housing. That's one reason why you see the cost of housing so expensive, especially here in Southern California."

I have said it before, housing is the #1 thing keeping GDP growth around 2% instead of 3%. You would think the candidates for President would understand this and prefer 3% GDP growth to 2% GDP growth, but apparently not.

Turn times increased for refis last month, according to the Ellie Mae Origination Insight Report. Time to close all loans was steady at 44 days, but refis increased from 41 to 44. Turn times are now below where they were pre-TRID. 

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 - Detroit is the best market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1548.9	6.7	0.43%
Eurostoxx Index	2705.4	33.5	1.25%
Oil (WTI)	92.95	0.8	0.86%
LIBOR	0.284	0.002	0.71%
US Dollar Index (DXY)	82.73	-0.264	-0.32%
10 Year Govt Bond Yield	1.94%	0.03%
RPX Composite Real Estate Index	192.3	-0.3

S&P futures are rallying after Cyprus rejected a bank deposit tax designed to help keep it in the euro. Investors are betting that the ECB will continue to support the country's banking system. Given the "risk on" feel, bonds and MBS are down.

Mortgage applications fell 7.1% last week. Fedex missed and guided down. Fedex can usually be taken to be an economic bellwether, but this miss was due more to overseas problems and pricing pressures. I would not take this news to mean that Fedex is forecasting a deceleration in the economy. 

The Fed will release the FOMC decision today around 2:00pm. Nobody expects any major policy changes; the focus will be on when QE ends. Economists are predicting the Fed will start withdrawing from the market  in Q4. It probably won't be an abrupt withdrawal - they will slow the pace of purchases and re-evaluate at the next meeting. The Bernank will hold a press conference today at 2:30. 

Homebuilder Toll Brothers CEO Douglas Yearley said on Bloomberg TV that there is "no inventory on the market" and the company feels "really good" about Spring. Detroit (yes, Detroit) is their best market in the Midwest. NoVa, DC remain strong (so no sequestration fears panning out). He sees orders up 49% this spring. 

Sen Bob Corker (R-TN) is hoping to see the GSEs have a technocrat, not a politician in charge of the agencies. The WH has been considering Rep Mel Watt (D-NC) to lead FHFA. The current left vs right battle in this issue centers around principal reduction mods for Fan and Fred loans. Ed DeMarco, the current head of FHFA, has been resisting calls to reduce principal for Fan and Fred loans. The main reason - the fear that principal mods could trigger a wave of delinquencies as the "not-so-needy" figure out they can reduce their mortgage balance by simply refusing to make their payments. Second, Republicans rightly point out that the GSEs have been used as a tool of social policy and that there have been some unintended consequences. The job of the FHFA director is to look out for the taxpayers, not conduct social engineering, and if nominated, Rep Watt faces a tough road to confirmation. There is very little consensus between Democrats and Republicans over what the replacement for the GSEs should look like.

Abby Joseph Fink?  Blackrock CEO Laurence Fink is predicting a 20% rise in the stock market this year. He also says that Cyprus is a "$10 billion issue" that is more of a symbolic than real economic issue. 

Morning Report - Construction worker shortage

Vital Statistics:

	Last	Change	Percent
S&P Futures	1542.5	-2.0	-0.13%
Eurostoxx Index	2712.8	-16.0	-0.59%
Oil (WTI)	91.9	0.0	-0.05%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.75	0.057	0.07%
10 Year Govt Bond Yield	2.05%	0.01%
RPX Composite Real Estate Index	194.2	-0.6

Markets are slightly weaker this morning after Fitch downgraded Italy's sovereign debt. This week is light data-wise.  We have retail sales on Wed, and industrial production / capacity utilization on Friday. Bonds and MBS are up small.

Legal and business experts have weighed in on the government's case against S&P and have found it, well, wanting. Turns out they don't have any witnesses who will support allegations that S&P intentionally defrauded banks and the credit unions that are the victims in this case. In reality, the victims are not widows and orphans, but sophisticated institutional investors. And it is hard to argue that S&P were the smartest guys in the room and knew that the financial system was about to collapse when everyone else (Moody's, the Fed, etc) did not.

Fed Governor Elizabeth Duke gave a speech to the Mortgage Bankers Association where she predicted that the housing recovery is real and is poised to accelerate. She does note that inventory is very low, and credit standards are very tight which is making it difficult for the first time homebuyer who is going to drive demand in the housing sector. Apparently the fraction of mortgages going to first-time homebuyers is half of what it was in the early 00s. The low housing formation numbers of the past few years represent a lot of pent-up demand and the Fed is forecasting that it should reach 1.5 million a year. Of course some of those people will rent, but still it will drive home prices higher, especially when you consider housing starts had been stuck around 600k - 800k since the bubble burst. Finally, the Fed is watching liquidity in the MBS market and is prepared to slow purchases if it thinks that it is dominating the market.

On the back of last Friday's jobs report, it turns out that there a shortage of construction workers. Builders in some areas are finding it difficult to find workers and are having to raise wages to attract them. It turns out a lot of them left the residential construction industry after the bust and took jobs in trucking and energy. Interestingly, housing starts are up 24% or so YOY, while construction employment is up only 3%. In some ways, the weak housing market probably exacerbates this problem as many workers are stuck in an underwater house and cannot move to where the jobs are.  As house prices rise, this effect should dissipate and could portend a rapid drop in unemployment. Which also means that margins are going to be under pressure for the home builders if they cannot pass the higher labor costs onto home buyers.  Food for thought as the XHB bounds to post-crisis highs.

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 - 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 - FHFA House Price Index

Vital Statistics:

	Last	Change	Percent
S&P Futures	1487.3	-2.1	-0.14%
Eurostoxx Index	2711.0	-5.7	-0.21%
Oil (WTI)	96.78	0.1	0.10%
LIBOR	0.301	-0.001	-0.33%
US Dollar Index (DXY)	79.76	-0.117	-0.15%
10 Year Govt Bond Yield	1.83%	-0.02%
RPX Composite Real Estate Index	192.2	-0.6

Markets are slightly lower this morning in spite of good earnings reports out of IBM and Google.  After the close, we get Apple's 4Q as well.  Mortgage Applications were up last week. Later on we will get the IMF world economic outlook.

The House will vote today to suspend enforcement of the debt limit through mid-May, in order to put pressure on the Democratically controlled Senate to pass a budget and to relieve the pressure on the debt ceiling crisis. Obama says he will go along with it. Which means the next subject will be the sequestration cuts.

The FHFA House Price Index rose .6% in November.  On a YOY basis, prices are up 5.6%.  The FHFA index only looks at conforming mortgages, which is more stable than the broader indices.  Prices are back to August of 2004 levels.

Is the roughly $1.7 trillion of foreign earnings stashed offshore by US companies something that is kept out of the US economy?  Turns out that a lot of it is in offshore accounts, invested in US dollar assets like Treasuries and MBS, which undermines the argument that all of this foreign cash could be circulated in the US economy if we changed the tax laws.  That said, this money is not available for expansion in the US or for distributions to shareholders.

The NAHB expects the housing upturn that started last year to pick up momentum, in spite of headwinds coming out of tight mortgage lending and potential tax changes. Using 2000-2003 as a baseline, the single-family market was running at 44% of normal production.  The NAHB forecasts 949k total housing starts in 2013.  From 1959 through 2002, 1.5 million units a year was considered "normal"

Jamie Dimon had some words for regulators at Davos. Suffice it to say that bankers loved it, and the chattering classes / political classes did not. If obama's inauguration speech was a full-throated defense of activist government, Dimon's speech was a defense of the private sector.

Morning Report: Merger mania on Wall Street

Vital Statistics:

	Last	Change	Percent
S&P Futures	1430.2	-2.9	-0.20%
Eurostoxx Index	2654.9	0.2	0.01%
Oil (WTI)	89.7	-0.3	-0.31%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.12	-0.145	-0.18%
10 Year Govt Bond Yield	1.78%	-0.03%
RPX Composite Real Estate Index	191.8	-0.1

Markets are slightly lower after a slew of economic data this morning.  3Q GDP was revised upward to 3.1%.  Initial Jobless Claims came in at 361k. Consumption rose 1.6%.  The November Index of Leading Economic Indicators fell .2%.  Bonds and MBS are flat.

The FHFA House Price Index rose a half of a percent in October.  Sep was revised downward.  Prices are up 5.6% YOY and the index is 15.7% below its peak in April 2007.  We are more or less back to Summer of 2004 levels.

The Intercontinental Exchange (ICE) has agreed to buy NYSE Euronext for $8.2 billion.  It shows just how much the importance of trading equities has fallen.  Who would have thought a 12 year old scrappy upstart from Atlanta would end up buying the New York Stock Exchange, Paris Bourse, and the Amsterdam Exchange?  The floor of the New York Stock Exchange is more or less just a museum these days.  Separately, Knight Capital Group, the Nasdaq market-maker which lost $460 million on a computer glitch earlier this year, agreed to a deal with Getco, the Chicago-based leader in high frequency trading.

On the fiscal cliff front, the House plans to vote on a measure that increases taxes on millionaires.  Obama has already threatened to veto it. The current bid / ask spread is 400 - 1000, meaning that Obama wants the threshold for higher taxes to start at 400k, while Boehner wants it to start at 1 million. Bloomberg has a good backgrounder on the relationship between Obama and Boehner.

KB Home announced their 4th quarter and full year earnings this morning.  Deliveries were up 6% and average selling prices increased 10% sequentially and 23% year-over-year. Backlog is up 35% and that potential revenue would be the highest since Q407. Larger homes were the driver, which accounts for the jump in ASPs.

Morning Report - Earnings from Toll Brothers

Vital Statistics:

	Last	Change	Percent
S&P Futures	1408.8	1.7	0.12%
Eurostoxx Index	2600.1	17.7	0.69%
Oil (WTI)	88.11	-1.0	-1.10%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.69	-0.188	-0.24%
10 Year Govt Bond Yield	1.63%	0.01%
RPX Composite Real Estate Index	190.9	-0.1

Markets are flattish after John Boehner released the Republican counter-offer to Obama's proposal. Needless to say, the two sides are far apart. We have the ISM New York later this morning and no other economic data.  Bonds are up slightly and MBS are down small.

John Boehner laid out the GOP proposal for the fiscal cliff last night: $800B in new revenues over the next decade, and $600B in cuts to entitlements.  The new revenues would come from limiting deductions on incomes over $250k, and would maintain current marginal tax rates.  Of the spending cuts, they propose to increase the Medicare eligibility age to 67 and to make changes to the CPI calculation that affects cost-of-living increases to Social Security.  Given that marginal tax rates will stay the same on the rich, this plan is obviously a non-starter with Democrats.

Toll Brothers released its 4Q earnings this morning and this release demonstrates how much different the landscape is today from a year ago.  Revenues were up 48%, signed contracts were up 75%, and backlog was up 70%.  Prices were up 3% YOY.  Toll is in the McMansion business, so these numbers are more representative of the high end.  Bob Toll made a point re homebuilding that I have been making - that household formation has been artificially depressed due to the economy, and that has created pent-up demand for new construction.  He cites a Harvard study that estimates that based on historical trends, 1.8 to 2.8 million households should have been formed since 2007 than were actually created.  He goes on to say that experts estimate the the housing industry has to product 1.4 to 1.7 million homes per year to keep up with demographic demand.  Don't forget, 1.5 million has been the average number since the 1950s.  Our recent production has been around half that.  Since 2007.  TOL is up about 3% pre-open.

The upcoming increase in G-fees has created a flurry of activity as borrowers and lenders try and get loans done ahead of the increase.  November issuance of government-backed MBS increased 45% last month.  The G-fee increase takes effect on Dec 1, so expect issuance to fall off in the coming months.

Morning Report - Housing Starts and NAHB Confidence

Vital Statistics:

	Last	Change	Percent
S&P Futures	1381.7	-0.8	-0.06%
Eurostoxx Index	2487.6	-7.6	-0.30%
Oil (WTI)	88.79	-0.5	-0.55%
LIBOR	0.311	-0.001	-0.32%
US Dollar Index (DXY)	80.92	0.050	0.06%
10 Year Govt Bond Yield	1.62%	0.01%
RPX Composite Real Estate Index	191.4	0.0

Futures are lower this morning after Hewlett Packard announced accounting problems at its Autonomy unit. The company has taken an $8.8 billion charge on the Autonomy unit, which is shocking when you consider it only paid $7 billion for the company in the first place. Best Buy also missed. Bonds are down slightly, while MBS are flat.

Housing starts rose to an annualized pace of 894k, well ahead of the 840k estimate.  Sep through July numbers were revised downward. While the rest of the economy seems to be turning down, housing is turning into a bright spot. That said, 894k is still far away from "normalcy," which is 1.5 million units per year. Yesterday's builder confidence index from the NAHB posted another gain, although it is still reflects "unfavorable" conditions, but just barely.

Chart:  Housing Starts

Chart:  NAHB Sentiment Index:

The Bernank is speaking at the Economic Club of NY this afternoon. The market will be looking for clues regarding life after Operation Twist.  Expect Bernake to warn Washington that it won't be able to offset the damage to the economy if we go over the fiscal cliff. 

Hostess and the Baker's union have been asked to enter mediation.  This is a last-ditch attempt to see if the company can continue as a going concern.  One of the biggest issues is the defined benefit pension plan.  In an environment of zero percent interest rates, most, if not all, pension plans will be insolvent as there is no way to earn enough on the assets of the plan to cover healthcare inflation costs. Of course many companies choose to assume unrealistic rates of return on plan assets or unrealistic cost inflation assumptions to make the plans solvent.  By the way, this phenomenon affects insurance companies as well.  One of the (many) unintended consequences of ZIRP.

The recent downturn in the markets has brought out the perma-bears.  Marc Faber and Nouriel Roubini are warning about a tough 2013. Morgan Stanley is also warning of a recession in 2013 if we go over the fiscal cliff.  Even if we don't they are forecasting flat GDP growth next year. That said, after this sell-off, I would be aware of the potential for a face-melting rally if we get a deal on the fiscal cliff. For those who focus on technicals, the S&P 500 is right at the 200 day moving average.

One possible piece of a deal would be a cap on deductions - one current number being bandied about is $35,000.  Needless to say, this will have a negative effect on the high end of the housing market, especially in high cost areas like Coastal California and the NYC area. Moody's estimates that this could cut national home price growth from 4% to 3.5% from 2015 to 2019.