Morning Report: Existing Home Sales highest in 10 years

Vital Statistics:

	Last	Change
S&P Futures	2355.0	3.0
Eurostoxx Index	378.8	0.7
Oil (WTI)	50.6	-0.1
US dollar index	89.8
10 Year Govt Bond Yield	2.23%
Current Coupon Fannie Mae TBA	102.97
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

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

Existing Home Sales rose to their fastest pace in 10 years, according to the NAR. Existing Home Sales increased at a 5.79 million annual rate, which was the fastest since January 2007. Lawrence Yun, Chief Economist of NAR said: The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month," he said. "Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does." The median existing home sale price was $236,400, up 6.8% from a year ago. Inventory increased, however it remains at about 3.8 months' worth. Days on market dropped to 34, a huge decrease from a year ago, when it was in the mid-high 40s. Inventory remains the biggest problem as homebuilders have yet to pump out the required supply to meet demand. 

More Millennials (ages 18-34) live with their parents than with a spouse. Of course we have seen a general trend of waiting until later in life to get married and have kids, so this is somewhat just the extension of a trend. How many of these young adults would like to move out of their parent's home but find rents / house prices too expensive? 

The next big issue for the bond market (and markets in general) is the debt ceiling debate. The government will run out of money by the end of the month, although it can play some accounting games to keep the lights on until a new CR is passed. If not, we could see a partial government shutdown on April 29. It appears that Trump will need some Democrats to pass a CR, and they are demanding that funds be appropriated to shore up the Obamacare exchanges. Trump wants more money for a wall, immigration enforcement and defense spending, which the Democrats oppose. So far, the markets view this as so much theater, but we will see how far the brinkmanship goes. 

Delinquencies have hit an 11 year low, according to Black Knight Financial Services. Total non-current inventory (30 days down +) is at 2.3 million. Prepay speeds increased however, as rates fell. Foreclosure starts ticked up slightly MOM, but are down 18% YOY. 

Why the exurbs are the new high growth area, and what that means for urban living (and politics). Technology is lowering the cost of transportation (basically lowering the cost of distance), and more manufacturing does not need to be near the big cities, and it looks like the exurbs will take up the slack. This has enormous implications for politics, as Democrats dominate the cities and Republicans dominate the suburbs. 

More problems for Backwards Newco. North Carolina is prohibiting them from acquiring new servicing until it fixes defects in how it handles escrow accounts. Separately, the CFPB is going after them as well. The stock was down over 50% yesterday on about 20x normal volume. 

Legendary macro trader Paul Tudor Jones is sending a warning about the stock market. You are seeing more and more strategists fretting about valuations as the Trump reflation trade deflates. If the stock market takes a swoon, that will not be lost on the Fed. Yet another reason why we may have seen the highs for mortgage rates and the 10 year already. 

That said, Treasury Secretary Steve Mnuchin says the Administration is "pretty close" to bringing major tax reform. It will probably be an end-of-year event, as the previous August deadline is not going to happen. The Administration has a narrow window to get things done, as politicians will turn to the 2018 midterms soon after the new year. 

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 - S&P earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1477.5	-1.4	-0.09%
Eurostoxx Index	2715.3	-11.3	-0.42%
Oil (WTI)	95.48	-0.1	-0.08%
LIBOR	0.302	0.000	0.00%
US Dollar Index (DXY)	79.92	-0.116	-0.14%
10 Year Govt Bond Yield	1.86%	0.02%
RPX Composite Real Estate Index	192.8	1.0

Markets are flattish on no real news.  Japan has announced a 2% inflation target, similar to what the Fed has been doing, in an attempt to weaken the yen.  The World Economic Forum meets in Davos this week. For once, there isn't a major crisis to deal with.  We don't have a lot of economic data this week, with the exception of leading economic indicators on the 24th.  Bonds are down half a point and MBS are down a tick or two.

We have decent earnings reports this morning from DuPont, Travelers, Johnny John, and Freeport.  This is one of the heaviest weeks for earnings reports, and erstwhile market darling Apple reports tomorrow after the close.

The WSJ is predicting that companies will increase share buy-backs this year as companies try and figure out what to do with excess cash. This will buoy the S&P 500 and mask the effect of flat earnings. Many strategists believe that US companies have pretty much wrung out all of the excess costs they can and any further earnings growth will have to come from revenue growth.  And if you can't get revenue growth, how do you show increasing EPS?  You guessed it - buybacks.

Is the financial system finally back on its feet?  We will see if Silver Lake is able to obtain financing for its planned $24 billion LBO of Dell. This is one of the side effects of the Fed's QE efforts - in an era of rock-bottom interest rates, pension funds and insurance companies are starving for yield, which makes the splashy LBO possible again.

The Chicago Fed National Activity Index came in +.02 in December, down from +.27 in November. The 3 month moving average is still negative, indicating economic activity is below its historical trend.

The House will vote on a 4-month extension of the debt ceiling, which seems to take the default issue off the table.  All eyes will then turn to the sequestration cuts and the continuing resolution.

The CFPB has released a summary of the new broker / LO loan comp rules.  LO comp may not be based on any of the transaction's terms of conditions. In other words, the interest rate does not matter, and LOs cannot be comped for steering a borrower to purchase title insurance from an affiliate. Pricing concessions are out as well.

Finally, as a child of the 70s, I note with sadness the passing of Atari.

Interview with Capital Markets Today

Latest interview covering the debt ceiling, sequestration cuts, the fiscal cliff, QM rules, Jack Lew, Fexit, and 2013 economic forecasts.

http://tobtr.com/s/4257903

Morning Report - What a difference a year makes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1462.4	-2.8	-0.19%
Eurostoxx Index	2688.7	-12.9	-0.48%
Oil (WTI)	93.32	0.0	0.04%
LIBOR	0.303	0.000	0.00%
US Dollar Index (DXY)	79.86	0.085	0.11%
10 Year Govt Bond Yield	1.80%	-0.03%
RPX Composite Real Estate Index	191.7	0.3

Markets are weaker this morning after the World Bank cut its global growth forecast.  Goldman and JP Morgan both reported better than expected earnings. Mortgage applications rose 15% last week and the CPI showed that inflation remains under control. Industrial production rose .3% and capacity utilization rose to 78.8%.  Bonds and MBS are up.

The National Association  Homebuilders Confidence index held at 47 in January, the highest level since April of 2006. A reading of 50 represents the point where builders view conditions as neutral. Conditions improved in all areas of the country, with the West performing the best, while the Midwest and Northeast performing the worst. This is the second sentiment report that has the "what a difference a year makes" theme.

The CoreLogic Home Price Index rose 7.4% YOY in Nov 2012. This is the largest gain since May of 2006.   Excluding distressed sales, home price increased nationally by 6.7%.  December's gain is forecast to be down .5% MOM (reflecting the typical seasonal pattern) and will be up 8.4% YOY. Mark Fleming, the Chief Economist made a point about QM - "that the recently released Qualified Mortgage rules issued by the CFPB are not expected to significantly restrict credit availability relative to today."  I am sure Cordray is breathing a sigh of relief on that one... the point of the QM rule was to expand credit.

Bank of America is intent on growing the mortgage business again after a hasty retreat in 2011. Of course this meant they missed the mother of all refinancing booms. They exited the wholesale business and basically ceded the market leader position to Wells Fargo. It also signals that they believe the worst is behind them with respect to Countrywide.

It is looking more and more like Republicans will not force a showdown on the debt ceiling (though "clean" debt ceiling increases have been rare in the past).  The polls aren't with them and the politics aren't there. Republicans will probably save spending cut demands for the sequester and the continuing resolution.

It looks like the case against Stevie Cohen has hit a wall.

Morning Report - The Debt Ceiling Dance

Vital Statistics:

	Last	Change	Percent
S&P Futures	1457.5	-6.8	-0.46%
Eurostoxx Index	2701.4	-13.7	-0.51%
Oil (WTI)	93.67	-0.5	-0.50%
LIBOR	0.303	-0.001	-0.33%
US Dollar Index (DXY)	79.65	0.158	0.20%
10 Year Govt Bond Yield	1.82%	-0.02%
RPX Composite Real Estate Index	191.9	0.0

Futures are deteriorating on fears that Congress won't find a way to raise the debt ceiling. Fitch ratings said that it would put the US credit rating under review for a downgrade if there is a delay in raising the debt ceiling. The Bernank weighed in on the debt ceiling at the University of Michigan yesterday. The producer price index showed inflation remains under control at the wholesale level and Dec retail sales were better than expected.  Bonds and MBS are up.

The Empire State Manufacturing Survey indicated that conditions for New York State manufacturers continued to decline at a modest pace. Roughly 20% of businesses surveyed expected to increase payroll, while the same number expect to decrease payroll. Capital Expenditures dropped again to its lowest level since 2009. That said, the outlook for 2013 remained mildly positive.

Lennar reported a profit of 56 cents a share for the 4th quarter and FY12 EPS of $3.11 a share.  Revenues were up 42% in Q4, and backlog was up 32%. Margins also increased.  The CEO noted that the housing recovery seemed to accelerate in Q4 as low mortgage rates, affordable home prices, lower foreclosures and a compelling rent vs own comparison drove the recovery.

The CoreLogic Market Pulse showed that 2012 was better than expected for the housing market. They raise a good point though, that 2012 had no major economic shocks - no Japanese tsunami, no debt ceiling debate / downgrades, no major blow-ups of big financial entities. They characterize 2012 as "a year in recovery, but not one in which the country has actually recovered."  They foresee further recovery next year, but note that supply has been constrained as many move-up buyers have been underwater.  As prices rise, those properties will be put back on the market. As the economy recovers, the first-time homebuyer will become in a better position to purchase these properties, which will provide the increased demand to meet the increased supply.

The debt ceiling debate has been getting more confrontational, with the President using hostage-taking metaphors during his speech yesterday. Sen Pat Toomey (R-PA) has introduced a bill to avert default by requiring Treasury to prioritize payments (with interest, SS, and active duty military pay taking precedence) and allowing them to borrow just enough to cover those expenses if revenues aren't enough. My personal belief is that Republicans know the politics aren't there for a debt ceiling standoff, but they will accept the full sequestration cuts. The sequestration cuts were designed to never happen - the cuts were supposed to be unpalatable to both sides.  Much to the surprise of Democrats, Republicans are more comfortable with cutting defense than they thought, which means that the roughly $109 billion of spending in 2013 will get left on the cutting room floor.

To put the sequestration into perspective:  the 2012 budget was $3.729 trillion.  The 2013 budget is $3.803 trillion.  The increase is roughly $74 billion.  In other words, the actual cut to government spending is $109 billion - $74 billion or about $35 billion.  $35 billion is 22 basis points of GDP. We are currently spending 24% of GDP, while the highest taxes as a percent of GDP have ever gotten in a touch over 20%, primarily during the equity bubble when capital gains tax receipts were huge. To get spending down to where we are able to balance the budget under the best of conditions, we would need to lop off $567B from 2012, or about 4% of GDP.  Republicans would be wise to give Obama what he wants on the debt ceiling and then force the Administration to explain why cutting spending by 22 basis points of GDP is somehow intolerable. Of course, the Administration has already telegraphed how it will fight this battle (terrorists will run wild, pollution will increase, airplane accidents will happen, we won't be able to deal with natural disasters) so Republicans will be well advised to separate out the necessary functions of the government (basic safety net, FAA, FBI, FDA, etc) from the "nice-to-haves" like foreign aid to places like Egypt, agricultural subsidies, green energy subsidies, etc.

Morning Report - NFIB Pessimism

Vital Statistics:

	Last	Change	Percent
S&P Futures	1454.8	-1.0	-0.07%
Eurostoxx Index	2703.9	8.4	0.31%
Oil (WTI)	93.5	0.3	0.33%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.37	0.113	0.14%
10 Year Govt Bond Yield	1.89%	-0.01%
RPX Composite Real Estate Index	192.2	-0.2

Markets are lower this morning as we kick off 4Q earnings season. Alcoa officially begins the parade after the close. Bonds and MBS are up small.

The NFIB Small Business Survey for January ticked up slightly in December after falling off a cliff in November.  The current level of 88 is a recession-level reading.  Capital Spending is still in maintenance mode. Employment growth is flat. Housing, energy, and autos (the average age of a car is over 10 years) look to be the drivers of growth in 2013. But, overall, it was a glum report.

Chart:  NFIB Small Business Optimism:

The National Association of Home Builders Improving Market Index rose to 242 (out of 361 MSAs total) in January from 201 in December. This strength during a seasonally weak period bodes well for the summer selling season and confirms our view that housing bottomed about a year ago. Rentals are still booming as rents increased 3.8% YOY last quarter.  The vacancy rate dropped to 8%.

Could the East Coast get a break in gasoline prices?  Currently, the East Coast refineries use North Sea Brent crude oil, which trades at a premium to West Texas Intermediate, which is the source for West. Burlington Northern will boost crude oil shipments by 40% this year (primarily Bakken shale oil), and is looking to ship east to supply refineries on the Eastern Seaboard.  As coal shipments decline, oil is taking their place. Since railroads have more flexibility than pipelines, the continental US energy market will become more equalized.  Good news for the East Coast.

A new study shows that we may hit the debt ceiling sooner than expected, around Valentine's Day (how romantic). Obama has said that the debt ceiling is non-negotiable. My sense is that Republicans will cede the debt ceiling point and use the sequestration or the expiration of the government's operating budget to push through spending cuts.  As a plan B, the trillion dollar coin is still being bandied about, particularly by the Krug Man and Greg Sargent (who talks to NYPD hostage negotiators, instead of economists, apparently).