Morning Report: Small Business optimism falls

Vital Statistics:

	Last	Change
S&P Futures	2135.0	-17.0
Eurostoxx Index	314.7	-0.6
Oil (WTI)	45.1	-1.2
US dollar index	86.5	0.3
10 Year Govt Bond Yield	1.66%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Markets are lower this morning as overseas stocks remain weak. Bonds and MBS are flat

Small Business confidence slipped in September according to the NFIB Small Business Optimism Index. Small business earnings are taking a hit as labor costs increase and sales growth remains muted. Small Businesses added .24 workers on average, which is the 12th monthly increase in a row and the highest reading this year. That said, job openings are falling, so we could be losing some momentum here in the future. Planned capital expenditures (another big measure of confidence) fell. Overall, as NFIB Chief Economist Bill Dunkelberg says, "Small business cannot get out of second gear." Sentiment still remains lower than pre-recession levels and Washington remains the first and second biggest issues facing business. 

Completed Foreclosures fell 3.9% MOM and 16.5% YOY, according to CoreLogic. Foreclosure inventory is down 29% to about 355,000 homes or 0.9% of all homes with a mortgage. The Northeast (especially NY and NJ) continue to have the highest level of foreclosure inventory. 

Yesterday, stock rallied after Lael Brainard called for prudence in raising interest rates. The Fed now enters their quiet period until the FOMC decision next week. The Fed Funds futures are assigning a 20% probability of a rate hike in September and a 60% probability of a rate hike by December. Meanwhile, JP Morgan CEO Jamie Dimon says "just hike rates, already"

The House is expected to pass a reform of Dodd Frank today. The Senate has their own bill that has yet to be introduced. Obama will undoubtedly veto any change, but it will be on the table for the next administration. The biggest part will be providing regulatory relief to smaller entities, and bringing the CFPB under Congressional oversight. 

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: Professional investors exiting the foreclosure market

Vital Statistics:

	Last	Change
S&P Futures	2162.0	16.0
Eurostoxx Index	338.8	3.0
Oil (WTI)	45.6	0.8
US dollar index	86.9	-0.2
10 Year Govt Bond Yield	1.53%
Current Coupon Fannie Mae TBA	103.2
Current Coupon Ginnie Mae TBA	104.2
BankRate 30 Year Fixed Rate Mortgage	3.47

Stocks are higher this morning after the Bank of England declined to cut interest rates. Bonds and MBS are down

Initial Jobless Claims fell to 254k in a holiday shortened week. 

Consumer comfort increased last week to 44.7 from 43.5

Producer prices increased 0.5% in June, versus expectations of a 0.3% increase. On a YOY basis, they increased 0.3%. Higher energy prices drove the increase, however we are a long way from seeing true inflationary pressure. Inflationary pressure won't build until we start seeing wage inflation, and there we have a dichotomy: Firms with highly skilled labor are having to raise wages to keep top talent, while technology is depressing wages for people in jobs that will eventually be replaced by robots and expert systems. Note the Fed's Beige Book characterized wage growth as "modest to moderate." This is Fed-speak for "almost imperceptible." That said, wage growth appears to have broken free from post-crash 2% level and is beginning to register in the mid 2%s.

JP Morgan reported better-than-expected earnings this morning. Mortgage banking revenue was up 2% QOQ and 5% YOY. Portfolio growth and and production revenue increases were offset by lower servicing revenues. The stock is up 2.5% pre-market.

Has the big rally in prices for foreclosed homes run its course? RealtyTrac suggests that it may have, as more and more "mom and pop" investors are winning foreclosure auctions and the professionals are pulling back from the market. Professional investors accounted for almost 10% of all home purchases in the depths of the housing bust, now they account for about 2.5%. There are some fears that this signals another housing bubble. FWIW, home prices are stretched compared to incomes, however that ignores the effect low interest rates are having. Housing bubbles are rare things - prior to the 2006 bust the last bubble in real estate popped in the 1920s. Anyone reading this will probably never see another one. 

Speaking of foreclosures, the people who got foreclosed on early in the housing bust basically missed out on about 10 years of house price appreciation. To add insult to injury, many sold into a cheap housing market (to the professional investors mentioned above) and moved into expensive rentals (managed by the professional investors above). 

Earnings season has just started, and the S&P 500 is at record highs. Is this rally for real? It will depend on earnings, which have been declining the past several quarters. The other thing that will drive the market is share buybacks. With the world's central banks driving down interest rates, they are lowering Corporate America's cost of capital. Many companies are choosing to issue debt to retire stock. This move is essentially a no-brainer for corporate CFOs who don't have much in the way of profitable expansion opportunities. When you can issue debt for 4% to retire stock with a cost of capital of 10%, you do it. 

The flip side of ultra-low interest rates is a boring, risk-averse economy. This has been a conscious choice among policy-makers (remember "Make banking boring again"?). Of course a major problem is that usually global economies de-leverage after asset bubbles, but that hasn't happened this time around. As global debt levels rise, they act as sand in the gears for the economy, slowing it down. Ironically, the policy-makers who drove this are concerned first and foremost about inequality, and the unintended consequence of their policy has been an economy that gooses asset prices and retards business formation (which means less jobs). This increases inequality even further - the opposite of what they intended. 

Of course the endgame for these policies is Japan, which is discussing new fiscal measures to try and pull their economy out of a 25-year bust.

Speaking of Japan, do you have kids that are playing Pokemon Go? (the latest craze). This has really caught investors by surprise: Nintendo stock is up 76% over the past week.

Morning Report: consumer sentiment is falling

Vital Statistics:

	Last	Change	Percent
S&P Futures	2075.8	-0.8	-0.04%
Eurostoxx Index	3054.4	-6.4	-0.21%
Oil (WTI)	40.52	-1.0	-2.36%
LIBOR	0.628	-0.001	-0.20%
US Dollar Index (DXY)	94.76	-0.139	-0.15%
10 Year Govt Bond Yield	1.78%	-0.01%
Current Coupon Ginnie Mae TBA	105.5
Current Coupon Fannie Mae TBA	104.8
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are lower this morning as commodity prices fall. Bonds and MBS are up.

The Empire Manufacturing Index increased in April to the highest level in over a year. The bad news is that industrial production, manufacturing production and capacity utilization all fell in March. Some of that is going to be due to low oil prices, however global demand continues to fall. Economists are looking for weak Q1 GDP numbers, possibly below 1%. 

Consumer Sentiment dipped in April, as increasing gasoline prices rose. Most consumers think the economy is getting worse. This was borne out in the Fannie Mae Housing sentiment index where consumers are the most pessimistic about the economy in two years. 

Citigroup posted better than expected earnings this morning based on cost cutting. They launched a new round of layoffs, with up to 2,000 people being let go. Cost-cutting is the theme of banking right now, as Goldman is also calling for the deepest cuts in years. 

Foreclosures are declining in importance in most markets - in fact foreclosure activity is below pre-recession levels in just over a third of metro areas, according to RealtyTrac. “Despite a seasonal bump higher in March, foreclosure activity in most markets continues to trend lower and back toward more healthy, stable levels,” said Daren Blomquist, senior vice president at RealtyTrac. “More than one-third of the 216 local markets we analyzed were below their pre-recession foreclosure activity averages in the first quarter, and we would expect a growing number of markets to move below that milestone the rest of this year — while the number of markets with a lingering low-grade fever of foreclosure activity continues to shrink.”

We are starting to see weakness at the very high end of the real estate market. A combination of fevered building of luxury urban properties and waning overseas demand has created a glut of property in places like Miami, where prices are sliding 6% - 8%. The top 10% of condos saw a 15% price decline. Ever since the bust, luxury has been the only place that has been consistently working for builders. 

Economists are becoming less convinced we will see 2 more rate hikes this year. Given the fragile global economy and the complete absence of inflation, the risks of hiking are growing larger. Until you see wage inflation, it is hard to imagine any real inflation pushing through to consumers. Even then, the Fed has said they want to let the labor economy "run hot" for a while, which probably means they will accept moderate wage inflation for some period in order to get the labor force participation rate back up. 

Morning Report: The global engines of growth are stalling

Vital Statistics:

	Last	Change	Percent
S&P Futures	1847.6	-4.9	-0.12%
Eurostoxx Index	2882.8	-13.8	-0.48%
Oil (WTI)	32.15	-0.1	-0.40%
LIBOR	0.619	0.001	0.10%
US Dollar Index (DXY)	96.44	-0.850	-0.87%
10 Year Govt Bond Yield	1.73%	-0.02%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.69

Markets are down after yesterday's blood bath. Bonds and MBS are up small.

Since the Fed tightened rates at the December meeting, the 10 year bond yield has fallen by 58 basis points. Fun fact: The Japanese 10 year bond yield is now negative.

In economic data, the NFIB Small Business Optimism Index fell from 95.2 to 93.9 last week. This is surprisingly tame given the activity in the markets over the past couple months. That said, small business optimism didn't ride the post-2009 rally in the markets up, so it probably will be a little insulated on the way down. Hiring plans remain intact, which is a good sign, however finding qualified applicants continues to be an issue. 

Job openings are pushing close to new highs, according to the JOLTS job report. Quits are increasing, which is a bullish sign for the labor markets.

Wholesale sales and inventories both fell in December. We are seeing a buildup in inventory, which is bearish for the economy.

Bottom line: the markets are signalling pain in the global economy, but it is hard to draw the conclusion that conditions in the US are driving it. If anything, the US appears to be taking its historical role of the engine of growth in a soft global economy.

The canary in the coal mine (besides oil) has been the absolute carnage in the banking sector, especially overseas. Deutsche Bank has been cut in half since September. Same as Credit Suisse. Citigroup is down 27% since Jan 1. So is BNP Paribas. Not sure what this is signalling (exposure to energy? exposure to China?) but it is a big warning button for the global economy and it is flashing red.

Even though the economy has recovered, the hatred of the financial sector hasn't changed, and it is being channeled through Bernie Sanders. The ironic thing is that the "Wall Street" they are railing against hasn't existed for 10 years. Regardless it isn't an environment conducive to risk-taking. 

Speaking of politics, the New Hampshire Primaries are today. Clinton and Sanders look neck and neck, and Trump looks to be ahead of the pack for the Republicans. 

Completed Foreclosures fell to 32,000 in December, which is down 2.4% from November and 22.6% year-over-year. 

Morning Report: Foreclosures continue to fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	1918	2.7	0.07%
Eurostoxx Index	3101.4	16.7	0.54%
Oil (WTI)	30.16	-1.2	-2.57%
LIBOR	0.62	0.003	0.49%
US Dollar Index (DXY)	98.93	0.709	0.72%
10 Year Govt Bond Yield	2.12%	-0.05%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.7
BankRate 30 Year Fixed Rate Mortgage	3.81

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

The NFIB Small Business Optimism Index rose from 94.8 to 95.2 last month. We see big positive numbers on plans to increase employment and capital expenditures. Earnings trends are down, however. Note that confidence is still depressed however. 

Job openings continue remain at 16 year highs, according to the JOLTs jobs report. 

The IBD / TIPP economic optimism index inched up as well last month

Junk bond spreads are widening as troubles continue in the energy patch. According to one prognosticator, the current risk premium for high yield debt is implying a 44% chance of a recession next year. Note the Fed seemed to be pretty sanguine about HY in the FOMC minutes. 

China's economic slowdown is having repercussions all over the global economy. The US is probably the most insulated, but it is wreaking havoc in South America and Asia.

There were 33,000 completed foreclosures in November, down from 41,000 last year, according to CoreLogic. The foreclosure rate of 1.2% is back to late 2007 levels. 

Morning Report: Foreclosures continue to decline

Vital Statistics:

	Last	Change	Percent
S&P Futures	2057.6	9.6	0.47%
Eurostoxx Index	3436.9	74.7	2.22%
Oil (WTI)	41.53	-0.2	-0.50%
LIBOR	0.364	0.002	0.55%
US Dollar Index (DXY)	99.55	0.105	0.11%
10 Year Govt Bond Yield	2.30%	0.03%
Current Coupon Ginnie Mae TBA	104.1
Current Coupon Fannie Mae TBA	103.2
BankRate 30 Year Fixed Rate Mortgage	3.87

Markets are higher this morning after good numbers out of Wal Mart and the Home Despot. Bonds and MBS are down.

Russia and France are going to coordinate military operations against ISIS. 

Foreclosures fell to 1.88% of all homes with a mortgage in the third quarter, according to the Mortgage Bankers Association. While we are approaching normalcy, we still have a ways to go to get there. That said, I wonder how many of the homes left in foreclosure will ever sell. Many have been vacant for years and are in areas where the population is leaving. 

Mortgage delinquencies fell to 4.99% from 5.3% as well. 

The National Association of Homebuilders sentiment index slipped to 62 in November from 64 in October. 

Inflation remains well-controlled, as the Consumer Price Index came in at 0.2% MOM in October and is up 1.9% YOY. Real average weekly earnings were up 2.1%. 

Industrial production fell 0.2% in October, while manufacturing production increase 0.4%. Utilities and mining dragged down the industrial production numbers. Capacity Utilization fell to 77.5%.

Yes, house prices are approaching their 2006 highs. Do we need to worry about another bubble? The Fed says no. The bubble years were fueled by an expansion of mortgage credit, while this time around we aren't seeing that. Two other indicators: the house price to rent ratio and mortgage debt to personal income ratios are both well below the bubble years. I have always said bubbles are a psychological phenomenon. People have to believe an asset class is "special" and cannot go down in value. That isn't the case anymore.

Morning Report: Strange things happening in the financial markets

Vital Statistics:

	Last	Change	Percent
S&P Futures	2062.0	-7.0	-0.34%
Eurostoxx Index	3409.0	-39.4	-1.14%
Oil (WTI)	42.2	-0.7	-1.70%
LIBOR	0.356	0.001	0.14%
US Dollar Index (DXY)	99.05	0.039	0.04%
10 Year Govt Bond Yield	2.33%	0.00%
Current Coupon Ginnie Mae TBA	103.9
Current Coupon Fannie Mae TBA	102.9
BankRate 30 Year Fixed Rate Mortgage	3.86

Stocks are lower this morning as comments from Mario Draghi fail to inspire markets overseas and commodity prices cannot get out of their own way. Bonds and MBS are flat. 

Job openings increased to 5.5 million in the US last month. 

Macy's cut its profit outlook, which is an ominous sign for the holiday shopping season. Note we get retail sales tomorrow.

The Bloomberg Consumer Comfort Index rose from 41.1 to 41.6 last week. Sentiment regarding the economy and people's personal finances were unchanged, but the perception of the buying climate improved. I am sure low gas prices are having an effect here. 

Initial Jobless Claims were flat at 276k last week. They are at a 5 week high, but are still below 300k and are sitting at lows we haven't seen since the 1970s. 

Mortgage Applications fell 1.3% last week as purchases rose 0.1% and refis fell 2.2%. 

Five head scratchers in the market which are caused by regulation and central bank distortions. People are demanding higher rates from the government than they are demanding from other banks. Theoretically this should be impossible, however capital requirements have made it happen. There are other strange pricing / volatility events happening, which is why the Fed is anxious to get off the zero bound, even though inflation remains well controlled and the economy remains tepid. 

Completed foreclosures increased to 55k in September as the judicial states continue to work through their foreclosure inventory. The national foreclosure inventory stands at 470,000 homes, which amounts to about 1.2% of all homes with a mortgage. This is down 24% YOY. Here is what is behind the spike in REO. Part of it is seasonal - many states have foreclosure moratoriums around the holiday season. 

Sentiment for home purchases declined slightly in September, according to the Fannie Mae Housing Survey. Overall, sentiment about the real estate market is slowly improving, but it has been a tough slog. 

Morning Report - Main street is hiring

Vital Statistics:

	Last	Change	Percent
S&P Futures	1998.5	-12.4	-0.62%
Eurostoxx Index	3193.5	-53.9	-1.66%
Oil (WTI)	46.82	-0.3	-0.59%
LIBOR	0.321	0.001	0.31%
US Dollar Index (DXY)	94.79	-0.053	-0.06%
10 Year Govt Bond Yield	2.05%	-0.04%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.3
BankRate 30 Year Fixed Rate Mortgage	3.9

Markets are lower this morning after weak economic data out of China. Bonds and MBS are up.

The NFIB Small Business Optimism index rose to 96.1 from 95.9 the prior week. Good news on the labor front - small businesses are hiring or trying to hire despite the volatility in the markets. This actually points to a bit of dichotomy we have seen since the financial crisis - a bifurcation of the "S&P 500 economy" and the "main street economy." The S&P 500 economy has a lot of international exposure and this acted as a tailwind for the stock markets as the US economy began recovering. Many people were perplexed that the economy could feel so tepid yet the stock market was hitting new highs. Now the phenomenon seems to be reversing. Companies with big international exposure are feeling the effects of the commodity sell-off and emerging markets pain, while the small manufacturer who serves the local area is thinking about expanding and hiring. 

Low oil prices are here to stay, at least through 2016, according to the IEA. You have a combination of decreasing demand as China slows combined with an additional million barrels of oil a day coming out of Iran. Rig count has already fallen and is at 5 year lows.

There were 36,000 completed foreclosures in August, according to CoreLogic. This is up 0.8% versus July, but down 20% year-over-year. The foreclosure rate of 1.2% is back to January 2008 levels. The non-judicial states have largely worked through their inventory, however the judicial states (especially in the Northeast) still have some wood to chop. 

UBS has a piece out on hybrid funds - funds that hold stocks and high yield debt. If we continue to see a sell-off in junk bonds, these funds will face redemptions, and that meant that the stocks will get sold as well. This is an issue in particular for the energy patch. 

Morning Report: Labor market slowly improving

Vital Statistics:

S&P Futures	1954.2	32.5	1.69%
Eurostoxx Index	3264.1	66.1	2.07%
Oil (WTI)	45.72	-0.3	-0.72%
LIBOR	0.332	-0.002	-0.45%
US Dollar Index (DXY)	96.06	-0.169	-0.18%
10 Year Govt Bond Yield	2.19%	0.06%
Current Coupon Ginnie Mae TBA	104.1	-0.3
Current Coupon Fannie Mae TBA	103.8	-0.2
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are higher this morning on overseas strength. Bonds and MBS are down. 

The Labor Market Conditions Index rose 2.1% in August, better than the forecast. This is an index of various leading and lagging indicators. 

The jobs report last week probably didn't move the needle one way or the other with respect to the Fed's decision next week. Yes, payrolls disappointed, but the 2 month revision was strong. The labor force participation rate remained mired at 38 year lows, however the unemployment rate ticked down and wage inflation ticked up ever so slightly. Note that August's payroll miss seems to have a seasonal element to it and is usually revised upward. 

The bond market seems to be ready for a rate hike. The Fed Funds futures are forecasting a very slow pace of tightening, the yield curve remains positively sloped, with the 10 year bond relatively heavy. Option volatility shows little sign of panic. The 10 year bond forward contracts indicate that even if the Fed hikes rates, the 10 year should maintain levels right around here. 

The NFIB Small Business Optimism index edged up in August. Note that the survey was taken before the sell-off of the last few weeks. The labor data was decent - with businesses adding 0.13 workers, a historically strong number. Interestingly, 56% reported hiring or trying to hire, however 86% of those who are trying to hire are unable to find qualified candidates. (I wonder if "qualified" means someone with the wisdom of a 60 year old, the vision of a 50 year old, the efficiency of a 40 year old, the drive of a 30 year old and the paycheck of a 20 year old). Note that obama made an executive order over the weekend demanding that Federal contractors offer paid sick leave. 

China has spent $260 billion trying to support its stock market. That is 2.4% of GDP. Note that stocks are not a major part of household assets, at around 2%. Real estate and bank deposits account for 70% and 24% of assets respectively. Interestingly the LTV of a typical Chinese home mortgage is about 17%. To put that in perspective, the US LTV is at 39%, and peaked at 57% in 2009. 

Completed foreclosures dropped to 38,000 in July, according to CoreLogic. This is down 24% from last year, and 6% from June. Pre-financial crisis, 21,000 was a typical reading, so we have a way's to go yet. Foreclosure filings have ticked up this year as the judicial states start to address their foreclosure inventory. The Northeast and Florida remain the states with the highest foreclosure inventory. 

Morning Report: Is the rust belt making a comeback?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2019.6	-5.8	-0.29%
Eurostoxx Index	3309.0	-44.5	-1.33%
Oil (WTI)	41.09	-0.2	-0.56%
LIBOR	0.333	0.001	0.15%
US Dollar Index (DXY)	95.38	-0.601	-0.63%
10 Year Govt Bond Yield	2.07%	0.00%
Current Coupon Ginnie Mae TBA	104.3	0.1
Current Coupon Fannie Mae TBA	104	0.2
BankRate 30 Year Fixed Rate Mortgage	3.87

Stocks are lower this morning again after yesterday's bloodbath. Bonds and MBS are up small.

Some people think the bond market's strength is telling the Fed not to hike rates. I agree that bonds are pricing in the view that inflation is never, ever, ever going to come back. However, the US interest rate market is so manipulated by central banks (indeed all bond markets are these days) that I don't think bond prices are the reliable signal they typically are. 

Foreclosure inventory is down 24% year over year, according to Black Knight Financial Services. The delinquency rate has fallen to 2.2%, pretty much a post-crisis low. 

Is the rust belt making a comeback? House prices are rising again in the Midwest as the auto industry recovers and the place becomes simply too cheap for business to ignore. Of course parts of the Midwest were ground zero for CRA lending, especially places like Detroit, which is filled with abandoned homes worth $10,000 with $100,000 mortgages on them. If you want to see what economic collapse looks like, check out this video of Toledo Ohio, my hometown. Most of these houses are worthless, and this is why I have always thought the fears of the big foreclosure inventory were overblown. These houses may count for the foreclosure numbers, but they certainly are not competing with anything and are probably never going to sell. 

Morning Report - Fannie Mae is getting sued for discrimination

Vital Statistics:

	Last	Change	Percent
S&P Futures	2087.4	-10.4	-0.50%
Eurostoxx Index	3573.1	-51.3	-1.42%
Oil (WTI)	59.72	0.5	0.79%
LIBOR	0.28	0.001	0.36%
US Dollar Index (DXY)	94.52	-0.493	-0.52%
10 Year Govt Bond Yield	2.30%	0.02%
Current Coupon Ginnie Mae TBA	101.5	-0.3
Current Coupon Fannie Mae TBA	100.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.89

Stocks and bonds are lower as the bloodbath in European bonds continues. The German Bund is trading at 67 basis points. The reversal in Eurobonds has been nothing short of astounding. 

Small business optimism bounced back in April, according to the NFIB. That said, optimism still has not fully recovered from Q1's weakness. Labor markets continue to improve slowly but surely. 

Job openings fell in March from 5.14 million to 5 million. The quits rate is steadily increasing (from 1.8% last year to 2.0% this year, which is a good sign. 

Completed foreclosures fell to 41,000 in March, according to CoreLogic. Foreclosure inventory is still the highest in the judicial states of New York, New Jersey and Florida. The national seriously delinquent rate fell to 3.9%.

More evidence the first time homebuyer is coming back. The NAR is forecasting prices will increase 5.9% this year, more than last year's 5.7%. They are forecasting the average 30 year mortgage rate will come in around 3.9% for the year

The National Fair Housing Alliance is suing Fannie Mae for racial discrimination in lending. “Fannie Mae fails to perform basic maintenance and marketing tasks for foreclosed homes it owns in African

American and Latino neighborhoods, while consistently maintaining its foreclosed properties in white neighborhoods.” I wonder how much of this is due to the fact that in some places like Toledo OH, Detroit MI, and Camden NJ, there simply isn't a bid for these properties given their stripped state and unpaid back taxes. 

Morning Report - Glass Steagall Redux

Vital Statistics:

	Last	Change	Percent
S&P Futures	1554.0	4.0	0.26%
Eurostoxx Index	2739.8	35.1	1.30%
Oil (WTI)	92.27	-0.3	-0.27%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	83.05	0.158	0.19%
10 Year Govt Bond Yield	2.05%	0.03%
RPX Composite Real Estate Index	193.5	0.0

Stock index futures are up (again) after initial jobless claims came in lower than expected, and inflation readings at the producer level showed inflation well contained. Initial Jobless claims came in at 332k, better than the street estimate of 350k.  Bonds and MBS are down.

Since the early Feb, the US dollar has been on a tear, as nascent US economic strength is drawing assets from overseas and the Bank of Japan attempts to devalue the Yen. We have yet to see manufacturers complain, but at some point, they will. It will be interesting to see if Jack Lew expresses support for a strong dollar or damns it with faint praise.

A proposal by the Dallas Fed would cap assets at deposit-insured divisions of the largest US banks at $250M and force them to separate investment banking and traditional lending. It isn't a full re-institution of Glass-Steagall - it would require separate capitalization and funding for the investment banking and trading units, but would not formally force them to break up. That said, for all practical purposes, it would effectively re-instate Glass Steagall.  The reason why we repealed Glass Steagall in the first place was because the US investment banks (Goldman, Merrill, etc) couldn't compete with the big international banks in the US derivatives business because the overseas giants had such a huge funding advantage. The big international giants like Barclay's, UBS, and Nomura could borrow at depositor rates (which were often 0%), while the US investment banks were forced to borrow at higher, market-driven LIBOR rates. This meant that Barclay's etc. could offer much better financing rates on derivatives than Goldman or Merrill. The rest of the world does not separate commercial and investment banking, or even draws a distinction between the two.

This proposal would eliminate the reason why investment banks and commercial banks joined up in the first place - cheap financing. Since the big giants are trading with a holding company discount, they will undoubtedly face shareholder pressure to spin off their investment banking operations to eliminate the discount. The reason why the Fed is doing this is to make it easier for the FDIC to close down a failing unit of a big bank. It isn't a systemic risk issue. That said, I have always been highly skeptical of the Glass Steagal theory of the financial crisis. Residential real estate bubbles are the Hurricane Katrinas of banking, and it doesn't matter if you were long real estate through a mortgage loan on your balance sheet, through a holding of mortgage backed securities, or because you sold protection on a basked of CDOs, you were still long real estate and still got crushed when it dropped.  People forget the rationale for Glass Steagall, which was to prevent investment banks from using their captive commercial banks or insurance companies as a "back book" for holding soured underwritten bond offerings. The financial crisis did not occur because JP Morgan was stuffing bad paper onto Chase's balance sheet - it happened because we had a real estate bubble.  And because we are in "do something, anything" mode, we are attacking the wrong reason (Glass Steagall) while ignoring the real reason - the Fed.

RealtyTrac reported that foreclosure filings increased 2% MOM in February, but are down 25% YOY. "At a high level, the U.S. foreclosure inferno has been effectively contained and should be reduced to a slow burn in the next two years" according to Daren Blomquist, VP at RealtyTrac. Nevada, Maryland, Washington, and New York are the states with more work to do, and they have reported big increases in foreclosure starts.

Morning Report - QE4EVA

Vital Statistics:

	Last	Change	Percent
S&P Futures	1427.7	0.5	0.04%
Eurostoxx Index	2625.6	-4.8	-0.18%
Oil (WTI)	86.29	-0.5	-0.55%
LIBOR	0.308	-0.002	-0.48%
US Dollar Index (DXY)	79.87	0.058	0.07%
10 Year Govt Bond Yield	1.71%	0.01%
RPX Composite Real Estate Index	191.3	0.5

Markets are flat after a mixed bag of economic data.  Retail sales increased .3% in November vs an expectation of .5%.  Initial Jobless claims fell to 343k and were well below the 369k expectation. The Producer Price Index showed inflation running lower than anticipated. The Bloomberg Consumer Comfort Index fell.  Bonds are down a few ticks and MBS are flat.

As expected, the Fed announced a Treasury buying program in its FOMC statement. $45 billion per month, until unemployment drops below 6.5% and inflation stays below 2.5%.  Bernake was careful not to characterize the 6.5% unemployment rate as NAIRU - or the non- accelerating inflation rate of unemployment. They took down their GDP projections from September, with their 2013 GDP forecast falling to a range of 2.3 - 3.0 from a range of 2.5 - 3.0.  They also took down unemployment as well, to a range of 7.3% to 7.7% from a range of 7.6% - 7.9%.  Inflation forecasts were lowered as well. Here is a video of the press conference.  Bonds reacted negatively to the announcement.  Biggest takeaway - the Fed has the pedal to the metal and they are writing the book as they go along.

Looks like no progress so far on the fiscal cliff. A recent poll shows overwhelming support for increasing taxes on the rich.  Business execs have been lobbying for a deal. Liberals are fighting spending cuts. Bernake mentioned in his press conference that the Fed does not have the ability to offset the negative effects to the economy if we go over.

A delay in BofA's jumbo deal shows just how hard it is to bring private capital back into the mortgage market. Private Label Securitizations were $3.5 billion this year, versus $1 trillion in 2006. Blame Dodd-Frank's proposed "skin in the game" rules, which combined with accounting and other requirements would require banks to hold capital against all of the underlying loans.

Transunion is forecasting mortgage delinquency rates to fall to 5.06% at the end of 2013 from 5.32% today. RealtyTrac reported foreclosure starts are at a 71 month low.

From the Department of Irony:  it turns out that the government's exit from GM hinges on the success of its newly-unveiled full size Silverado pickup.  I could have sworn I heard many in Washington claim that the reason GM hit the wall was because they were making these huge vehicles that "nobody wants."

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?

Morning Report: QE Targeting

Vital Statistics:

	Last	Change	Percent
S&P Futures	1428.8	5.6	0.39%
Eurostoxx Index	2554.3	20.4	0.81%
Oil (WTI)	86.74	-0.4	-0.40%
LIBOR	0.313	0.000	0.00%
US Dollar Index (DXY)	80.44	0.393	0.49%
10 Year Govt Bond Yield	1.76%	0.04%
RPX Composite Real Estate Index	194.1	-0.3

Futures are higher on the back of a better-than-expected October jobs report.  Bonds are MBS are down

Nonfarm payrolls increased 171k in Oct and the Sep number was revised ipward from 114k to 148k.  The unemployment rate ticked up to 7.9% from 7.8% as the labor force participation rate increased to 63.8%. Weekly hours and pay fell. The report pretty much confirms the labor market is on the mend, albeit slowly.

The Northeast continues to pick up the storm damage, although gasoline shortages are becoming a problem as the lack of power in NJ means that gasoline can't be pumped out of the large tanks into trucks. This will be an additional drag on the 4Q economic numbers as people stay home instead of shopping.

We have another glimpse of how long the Fed thinks QE should last - until the unemployment rate falls below 7.25%. Boston Fed President Eric Rosengren cautioned that this was a threshold, not a specific target. Rosengren is one of the most dovish Fed members, but does not have a vote at the moment.  He went further to say that if the unemployment rate falls to 6.5%, it is time to start moving away from ZIRP.

Colony Capital won an auction for 970 Fannie Mae foreclosed homes in Arizona, California, and Nevada. It is a complicated partnership agreement and Colony plans to rent out the properties. It looks like they paid close to BPO $176MM for a portfolio that was appraised at $157MM in Feb.  Since Feb, prices have shot up in Arizona.  Colony will get 20% of the rents as a management fee, and will take 10% of the profits up to $136MM, and then their take grows to 50%.  It looks like they only have to put up something like $34 million.  Fannie was unable to sell the Atlanta portfolio.

The MR will be spotty next week as I am traveling to the Left Coast.