Morning Report - Risk On

Vital Statistics:

	Last	Change	Percent
S&P Futures	1499.6	6.2	0.42%
Eurostoxx Index	2645.8	20.6	0.78%
Oil (WTI)	96.73	0.6	0.58%
LIBOR	0.296	0.000	0.00%
US Dollar Index (DXY)	79.63	0.075	0.09%
10 Year Govt Bond Yield	2.01%	0.06%
RPX Composite Real Estate Index	193	-0.1

Markets have a better tone this morning after yesterday's sell-off.  Euro sovereign yields are down.  Bond yields are at the 2% level.

Stock index futures back up.  Dell doing a $23B LBO. Retail Investors Returning. Bonds can't get out of their own way. Is the risk-on trade happening?  Feels like it. That said, the S&P 500 is nearing the top of its trading range since 2000. The 1970s bear market was a rangebound market where people would start to pile in at the top, only to have a crisis or inflation push the market back down.  The final cri de coeur was Business Week's late 1979 piece The Death of Equities. That is what secular bear markets feel like when they end. The article even quotes a very happy diamond dealer in NY after ERISA changed the laws to let institutions buy hard assets, as if CALPERS was going to start burying gemstones in the back yard.

Chart:  1970s Bear Market in Stocks.

The CoreLogic Home Price Index rose 8.3% in December, the biggest jump since May 2006. Excluding distressed sales, prices increased 7.5%.  They are forecasting a 7.9% YOY jump in January. The states with the biggest growth were AZ, NV, ID, CA, and HI.  The worst were DE, IL, NJ, and PA. It does feel like the secular bear in real estate is over.

Listings of new homes has dropped to a 12-year low. For all of the fears of the shadow inventory, the problem seems to be a lack of merchandise. Many potential sellers are holding out for better prices, while professional investors are buying properties before they even hit the market.  Mark Zandi of Moody's estimates that inventories might remain tight for a year or two. Sellers are worried that they may not be able to find a replacement home if they sell. This means the homebuilders are going to have a very good year.

Senate Democrats are trying to figure out a way to delay the sequestration cuts scheduled to take effect March 1. They are looking to replace the spending cuts with a surtax on oil companies and an end to the carried interest loophole. Meanwhile, House Republicans are considering a stopgap measure that would fund the government through Sep 30, which is $974 billion, well below the current level of $1.043T. Implicit in that measure is the assumption that the sequestration cuts happen. Republicans are resigned to having to accept the sequestration cuts and don't have the appetite to try and negotiate a deal with the WH, which is going to delay releasing its budget until late March. While it has zero prospect of getting enacted as-is, it will be a clue as to whether the President is interested in some sort of long-term solution to the budget or is content to fiddle at the margins with what is currently out there.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1503.0	-3.7	-0.25%
Eurostoxx Index	2679.2	-30.9	-1.14%
Oil (WTI)	96.79	-1.0	-1.00%
LIBOR	0.296	0.000	0.00%
US Dollar Index (DXY)	79.45	0.325	0.41%
10 Year Govt Bond Yield	2.03%	0.01%
RPX Composite Real Estate Index	193.1	0.0

Markets are weaker on the back of big declines in the Italian and Spanish bourses. Euro sovereign yields are starting to tick back up. There doesn't seem to be a story out there driving it.

As the bond market has backed up, there is a lot of talk about whether this is the big rotation out of bonds and into stocks. Within the bond market, there is a rotation out of Treasuries and into high yield. Overall, the "risk on" trade seems to be gaining steam, which means we have seen the low point for mortgage rates. It also means that the private label market might come back.

Obama wants more revenue, specifically through reducing loopholes and deductions. I don't know if this is posturing for the sequestration cuts or something else. Liberals are using the negative Q4 GDP report to argue that we can't cut spending. That is simplistic - Q3 government spending was higher than normal due to the government's "use it or lose it" budgeting. The government's fiscal year ends in September, and there is always a push to spend your budget, even if you don't really need it, to ensure your budget doesn't get cut. Which means that Q4's government spending was borrowed in Q3. Obama is being a little disingenuous when he says things like "The big problem was defense spending was cut 22 percent, the biggest drop in 40 years." which implies we are already cutting to the bone. He is in favor of "smart spending reductions," whatever that means, to bring down the deficit.  I suspect the only smart spending reductions he favors are the Orwellian-named "tax expenditures" and oil subsidies.  And don't forget, the definition of what is considered a spending cut depends greatly on what the baseline is when you start counting. Many in Washington prefer to use the baseline from when spending was the highest (late 2010) as the baseline, project spending out 10 years from there, and count any difference between the old projection and the new projection as a "spending cut."