Morning Report - Charles Plosser and ending TBTF

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.3	0.7	0.04%
Eurostoxx Index	2780.9	7.8	0.28%
Oil (WTI)	94.53	-1.9	-1.93%
LIBOR	0.275	0.000	0.00%
US Dollar Index (DXY)	83.03	0.240	0.29%
10 Year Govt Bond Yield	1.84%	0.03%
Current Coupon Ginnie Mae TBA	105.9	0.0
Current Coupon Fannie Mae TBA	103.5	-0.1
RPX Composite Real Estate Index	195.8	0.8
BankRate 30 Year Fixed Rate Mortgage	3.52

Markets are flattish this morning on no real news. We will get the monthly budget statement at 2:00 pm this afternoon. Bonds and MBS continue to sell off, and the 10 year is at 1.84%

The Mortgage Bankers Association reported that 90 day delinquencies ticked up to 7.25% in Q1 from 7.09% in Q4. Separately, foreclosures as a percent of total mortgages fell to 3.55% from 3.74%. This is still an elevated numbers; prior to the bubble, foreclosures were in a 1% to 1.5% range. Similarly, with delinquencies, pre-bubble the typical 90 day delinquency rate was in the 4% to 5% range. It peaked at just over 10% in Q1 2010.

Fannie and Freddie's profits have moved the debt ceiling limit to September from August. Treasury Secretary Jack Lew said that the statutory debt limit will be reached in a few days, but that there are measures the government can take to shift around funds and that we won't really start having issues until after Labor Day. Republicans have proposed a prioritization of creditors, which will go nowhere in the Democratically controlled Senate. My question:  How much of the interest owed is going to the Fed due to quantitative easing? They have been buying up 90% of Treasury issuance. And since the Fed's profits and losses are just sent right back to Treasury, isn't that just money we effectively owe ourselves?

Anyway, the debt ceiling debate is coming up this summer and the Administration and House Republicans are sure to butt heads over raising the debt ceiling. The Administration will not accept spending cuts without tax increases and the House will not accept tax increases at all. Just saying, since the S&P 500 has been a one-way bet since last Fall. There are two exits at the front of the plane and two exits over the wings. Please take a moment to locate the nearest exit, and remember that your nearest exit may be behind you.

Philly Fed President Charles Plosser is skeptical that Dodd Frank can end Too Big To Fail (TBTF). He proposes a more systematic process, in which the ultimate decision-making would be rest with a judge and and deviations from priority would be cleared through a judicial authority and not through regulatory discretion. Derivatives and repos would be treated like other claims. Separately, he is skeptical that QEIII is going to do much good. It would be refreshing to have someone on the hawkish side replace Bernake after having doves for the past 25 years, but we're probably going to get an even bigger dove in Yellen.

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 Blog Post: Obama's opening bid

Vital Statistics:

	Last	Change	Percent
S&P Futures	1375.3	4.4	0.32%
Eurostoxx Index	2484.9	-8.2	-0.33%
Oil (WTI)	85.16	-0.2	-0.26%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	81.07	-0.017	-0.02%
10 Year Govt Bond Yield	1.62%	0.02%
RPX Composite Real Estate Index	192.4	-0.5

Markets are higher this morning after a good earnings report out of Cisco and a benign reading on wholesale-level inflation.  Shades of the late 90s. Retail sales disappointed, but they were affected by Sandy so the market is dismissing the numbers. Later today, we will get the minutes of the FOMC meeting.

Speaking of Sandy, she may become the excuse du jour for companies that miss their quarter.  Be advised.

Obama has put out his plan for the fiscal cliff.  It raises double the amount of revenue that was proposed during the deal with Boehner two years ago and involves more than simply letting rates go up for those making over $250k - it includes limitations on deductions and a surtax for incomes over $1 million.  Geithner has dismissed the Republican plan to leave rates the same and cap deductions.  So that is the bid / ask spread at the moment.

I have heard recent estimates that if we go over the fiscal cliff completely, the economy will contract 1% in Q1.  If we raise taxes on the rich, we will have GDP around 1%, but that number was based on the going back to the old rates, not the additional stuff.  So it would probably be lower. Sounds like flat GDP in early 2013 is a possibility. The FOMC today may provide further guidance re Treasury purchases.  I would not want to be leaning short Treasuries at the moment.

Blackstone sees a two year window to buy foreclosed properties at a discount. They forecast the median existing home price to increase 6% this year, 5% in 2013 and similar gains in 2014.  If homebuilding does not accelerate, they forecast even bigger gains. I keep coming back to the idea that the remaining shadow inventory is largely picked over, and some of it (foreclosures in Harrisburg, Detroit and Stockton) simply aren't going to sell. Meanwhile, Buffet continues to be positive on housing and has been increasing his exposure. Ara Hovnanian isn't as sanguine.

Freddie Mac reported that 29% of refis in 3Q involved a term shortening as people refi from a 30 year fixed to a 15 year fixed. During the quarter, the 30 year fixed rate averaged 3.55%, while the 15 year averaged 2.84%.

Will investors do the heavy lifting of ending TBTF? (too big to fail)  Trillium and AFSCME have sent a proposal to Citi encouraging them to split up.  While it is easy to dismiss this as based on politics (Trillium is representing the Benedictine Sisters and has a .01% stake, and AFSCME is a union), it is true that Citi (and others) are trading at a discount to their peers and are exhibiting the classic holding company discount. Could we see Citi spin off Salomon Brothers?  Bank of America spin off Merrill?  JPM spin off Chase?