Morning Report: Globalism wins in France

Vital Statistics:

	Last	Change
S&P Futures	2395.0	-2.8
Eurostoxx Index	393.7	-0.9
Oil (WTI)	46.2	0.0
US dollar index	89.9
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4.05

Stocks are lower after Emmanuel Macron won the French election. Bonds and MBS are flat.

The election in France is perceived as a rejection of Trumpism (or whatever you want to call it). It was a return to the globalist left. Seems to be a little "buy the rumor, sell the fact" going on in the markets. 

James Bullard is saying that the Fed Funds rate is close to where the Taylor Rule calculation would recommend they be set. The economy is in a low growth regime, but the labor force is in a high growth regime. As long as the labor market is still taking up slack, we won't see much in the way of wage growth, which should keep the Fed from having to normalize too quickly. Depending on how you set some of the variables, the correct Fed Funds rate is anywhere from 67 basis points to 155 basis points. 

The week after the jobs report is generally pretty data-light so we shouldn't have that much in the way of market-moving data. The biggest chance of market-moving data is Friday when we get retail sales and the consumer price index. We do have Fed-speak every day except for Thursday. 

Where are robots more likely to replace workers? It turns out that the upper Midwest is ground zero, however parts of the Northeast are as well. Out West, we see very little of it. This could partially explain why the real estate markets out West are red-hot, while markets in the Rust belt and the Northeast are tepid at best. Automation means jobs are being lost, which results in a declining population. For decades now, the general trend of population growth has been similar to what you would see if you picked up the United States by Maine, dangled it and shook it. Of course robots are a symptom of a bigger problem - some of these industries have high cost structures, and they will either automate or go out of business. Note that the West may not be immune - the next shoe to drop will be artificial intelligence and machine learning which will replace a lot of white collar workers as it develops.

Compare this to the CoreLogic real estate heat map:

Definitely seems to be a correlation between overvalued (red) and undervalued (green) real estate markets and the presence of automation. It makes sense. If people are leaving the green areas, you would expect to have a harder time selling a home (or easier time buying) than in places that are experiencing an increase in population. 

Buffetapalooza or Capitalist Woodstock (the Berkshire Hathaway shareholders' meeting) was over the weekend in Omaha, where you can sing with the Fruit of the Loom guys, eat at Warren's favorite steak house, eat Sees candy, etc. He did have a few words about Wells's scandal (BRK is WFC's biggest shareholder). 

Morning Report: Pending Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2363.5	-1.5
Eurostoxx Index	368.6	-1.4
Oil (WTI)	54.5	0.6
US dollar index	90.8
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.09

Stocks are lower this morning on overseas weakness. Bonds and MBS are up small. 

We have a slew of economic data this week with the second revision to Q4 GDP, Personal Income and Spending, Construction Spending, and the ISM data. Even though this Friday is the first of March, the jobs report will be released on the 10th. Finally, we get some Fed-speak this week, culminating with Janet Yellen on Friday, which will begin the quiet period ahead of the March FOMC meeting. 

Durable Goods orders rose 1.8% MOM but are down 0.6% YOY. Capital Goods expenditures fell 0.4% MOM and are up 0.5% YOY. Capital Goods orders are a proxy for business investment (and therefore the animal spirits), so for all the talk about improved sentiment businesses are still in maintenance mode, not growth mode.

Pending Home Sales fell 2.8% in January as tight inventory reduced sales. Lawrence Yun, NAR chief economist, says home shoppers in January faced numerous obstacles in their quest to buy a home. "The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," he said. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago 1. Most notably in the West, it's not uncommon to see a home come off the market within a month."

Donald Trump's proposed budget includes increased defense spending, a cut to agency budgets, and no changes to Social Security and Medicare. This is just an opening bid, and Congress will ultimately determine who gets what. Separately, Trump signed an executive order taking aim at excessive regulations. 

Jeffrey Gundlach, CEO of Double Line Capital sees the 10 year heading to a range of 2% - 2.25% as there is a "stealth flight to safety" happening globally and the most crowded trade on the planet (short bonds) goes the wrong way. He is supportive of Treasury's plan to issue longer-dated bonds (30 years up to 100 years). At these rates, why not? Warren Buffet won't touch them with a barge pole, however. 

For those that follow Buffet, here is his annual letter to shareholders, which is usually a fun read. 

Morning Report: Home prices continue to rise, but are there problems at the high end?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2086.6	3.4	0.16%
Eurostoxx Index	3125.0	7.4	0.24%
Oil (WTI)	43.23	0.6	1.38%
LIBOR	0.636	-0.002	-0.35%
US Dollar Index (DXY)	94.42	-0.423	-0.45%
10 Year Govt Bond Yield	1.92%	0.00%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.4
BankRate 30 Year Fixed Rate Mortgage	3.68

Talk about it here: http://thenadtearsheet.blogspot.com/

Stocks are up this morning on overseas strength. Bonds and MBS are flat.

The S&P / Case-Shiller index of home prices rose .66% on a MOM basis and is up 5.38% YOY. Their take on the housing market: “Mortgage defaults are an important measure of the health of the housing market. Memories of the financial crisis are dominated by rising defaults as much as by falling home prices (see first chart). Today as well, the mortgage default rate continues to mirror the path of home prices. Currently, the default rate on first mortgages is about three-quarters of one percent, a touch lower than in 2004. Moreover, the figure has drifted down in the last two years. While financing is not an issue for home buyers, rising prices are a concern in many parts of the country. The visible supply of homes on the market is low at 4.8 months in the last report. Homeowners looking to sell their house and trade up to a larger house or a more desirable location are concerned with finding that new house. Additionally, the pace of new single family home construction and sales has not completely recovered from the recession."

In other economic news, durable goods orders rose 0.8% in March, versus Street expectations of an increase of 1.9%. Capital Goods orders (a proxy for business capital investment) was flat. The Markit US Services PMI and the Markit US Composite PMI indices both improved in April. The Richmond Fed Manufacturing index fell, as did consumer confidence. 

The FOMC begins their two day meeting today. Here is Mohammed El-Arian's take on what to look for in the statement. Here is a more in-depth parsing of what the Fed may say and what it means. 

What is going on this weekend aside from the NFL draft? Buffetapalooza or Woodstock for Capitalists. The Berkshire Hathaway shareholder meeting in Omaha, where you can play ukelele with the Fruit of the Loom guys listen to Warren wax poetically about value investing. This year, it will be streamed live. 

We are starting to see weakness in the top end of the hottest real estate markets as supply surges and foreign demand begins to wane. Will it spread?

Did you know Trump and Hillary share the same address?

Morning Report: Lousy numbers out of Walter and Ocwen.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1941.7	-1.0	-0.05%
Eurostoxx Index	2920.2	-8.9	-0.30%
Oil (WTI)	32.89	0.1	0.34%
LIBOR	0.635	-0.001	-0.08%
US Dollar Index (DXY)	98.3	0.153	0.16%
10 Year Govt Bond Yield	1.75%	-0.01%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.69

Markets are higher this morning after the Chinese cut reserve requirements in an effort to stimulate their economy. Bonds and MBS are flattish.

The ISM Milwaukee Index improved to 55.2 from 50.4, while the Chicago Purchasing Manager index fell to 47.6 from 55.6.

Pending Home Sales fell 2.5% in January, according to NAR. A dearth of inventory continues to weigh on the market. 

The corporate bond market is having difficulty digesting new issuance. Over the past 12 months, there have been 75 "no go" days, where the primary market was essentially shut. This is higher than the bad old days of 2008-2009. High Yield is even worse, with issuance down 75% year-over-year. 

When the stock and bond markets disagree, go with what bonds day. Unsurprisingly, asset managers continue to rotate out of stocks and into bonds. 

Warren says don't worry, be happy. Also the annotated version of the annual letter.

What are the characteristics of houses that sell quickly? Spanish architecture and 1,500-2,000 square feet.

Originator and servicer Walter Investment reported lower than expected earnings this morning and the stock is down about 10%. for 2015, originations were up 36% and the servicing portfolio increased by 4%. In the fourth quarter, origination volume was up 8% YOY. 

Walter wasn't the only company to miss this morning: Ocwen also is down about 11% after missing its quarter. Delinquencies rose to 13.7% from 13.1%.