Morning Report - Obamacare goes before the Supreme Court

Vital Statistics:

	Last	Change	Percent
S&P Futures	2108.8	-5.1	-0.24%
Eurostoxx Index	3580.6	-10.5	-0.29%
Oil (WTI)	49.66	0.1	0.14%
LIBOR	0.262	0.000	0.10%
US Dollar Index (DXY)	95.4	-0.062	-0.06%
10 Year Govt Bond Yield	2.09%	0.01%
Current Coupon Ginnie Mae TBA	102.2	-0.2
Current Coupon Fannie Mae TBA	101.5	0.0
BankRate 30 Year Fixed Rate Mortgage	3.85

Markets are flattish on no real news. Bonds and MBS are up small.

The ADP Employment number came in at 212k, slightly lower than expectations. The Street is forecasting Friday's payroll number to come in at 235k. The key number on Friday will be average hourly earnings, not payrolls. 

Mortgage Applications rose .1% last week. Purchases were down .2%, while refis were up .5%. Refis as a percentage of applications dropped to 61.5%. A month ago, they were 71.5%. 

Great interview with Stuart Miller, CEO of Lennar on CNBC. Key points: Spring Selling Season is just getting started, but initial indications look good, not seeing any sort of slowdown in the energy states, and a hike in interest rates will probably mean the economy (and wages) are improving, so it isn't necessarily a negative for the builders. 

Oral arguments over Obamacare will be heard at the Supreme Court today. At issue is what the term "established by the state" means. 33 states refused to set up exchanges for Obamacare health plans. Does this mean they are ineligible for Federal subsidies? Does "the state" = "the government" or does it mean a particular state?  The Administration is arguing that the intent was to provide subsidies to everyone, even if they didn't set up an exchange. Others have pointed out emails showing it was meant to be a carrot to encourage states to establish exchanges, and regardless of intent, the law says what it says. If the SC rules for the plaintiffs, the issue gets punted back to Congress to fix, and since Republicans control the House and Senate, there will be a negotiation over the fix. If the SC rules for the Administration, then nothing changes. The decision is expected in June. 

The CFPB is going after forced arbitration language in credit card loans, auto loans, etc. So other lenders are going to share in all the fun the mortgage industry has had over the past 5 years or so.

Morning Report - Household formation is back

Vital Statistics:

	Last	Change	Percent
S&P Futures	2108.8	-5.1	-0.24%
Eurostoxx Index	3580.6	-10.5	-0.29%
Oil (WTI)	49.66	0.1	0.14%
LIBOR	0.262	0.000	0.10%
US Dollar Index (DXY)	95.4	-0.062	-0.06%
10 Year Govt Bond Yield	2.09%	0.01%
Current Coupon Ginnie Mae TBA	102.2	-0.2
Current Coupon Fannie Mae TBA	101.5	0.0
BankRate 30 Year Fixed Rate Mortgage	3.85

Stocks are lower this morning on no major news. Bonds and MBS are down small.

January auto sales are generally coming in below estimates this morning, which has largely been attributed to the weather.

Bad weather in the Northeast didn't stop the ISM New York survey from jumping to 63.1 from 44.5. This is the highest reading since September.

The IBD / TIPP Economic Optimism Survey rose to 49.1 from 47,5. 

CitiGroup is selling its subprime lender OneMain Financial to Springleaf for $4.25 billion in cash. Springleaf is controlled by Fortress. The demolition of the House that Weill Built continues...

Lumber Liquidators fell 25% yesterday after a 60 Minutes report said that there were unsafe levels of formaldehyde (a carcinogen) in its Chinese-made flooring. The company disputes the report and made a filing with the SEC claiming that all of its flooring meets the safety standards set by US regulators. The company blames short sellers for feeding the report to 60 minutes. FWIW, the days to cover has jumped over the past month from about 8 to 14.5. While not quite Herbalife, this one could become a battleground stock. 

The absence of the first time homebuyer has been an issue for the real estate market, both in terms of transactions and new building. Housing formation has been depressed since 2006 as a combination of unaffordability during the bubble years and a tough job environment for new grads post-bubble has kept household formation low. Note the Millennial Generation is actually bigger than the Boomers - so this isn't due to fertility rates 25 years ago. It appears that household formation has finally rebounded at long last. Granted, many of these new households will be renters, but it seems like we have at least made the leap back to normalcy (latest reading is just under 2 million) and we are out of this depressed range of 250k - 750k households forming a year. Now if we could only get housing starts back to a normal range of 1.5 million to 2 million, we would be in good shape economically. 

Morning Report - The Great American Deleveraging continues....

Vital Statistics:

	Last	Change	Percent
S&P Futures	2104.9	2.1	0.10%
Eurostoxx Index	3586.1	-12.9	-0.36%
Oil (WTI)	49.31	-0.4	-0.90%
LIBOR	0.262	0.000	0.10%
US Dollar Index (DXY)	95.15	-0.140	-0.15%
10 Year Govt Bond Yield	2.01%	0.02%
Current Coupon Ginnie Mae TBA	102.6	-0.1
Current Coupon Fannie Mae TBA	101.8	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.92

Markets are flattish this morning on no major news. Bonds and MBS are down small.

Merger Monday is back with a couple of big deals in the tech space. NXP is buying Freescale Semi for 11.8 billion, and HP is buying Aruba Networks for $2.7 billion. 

Lots of important economic data this week, but the jobs report on Friday will be the highlight of the week. Bond Markets will be focused on average hourly earnings. Below is a chart of average hourly earnings. Note the change in the slope of the line starting in 2009. That is a change from roughly 3.2% annual growth to 2% annual growth, which is more or less in line with inflation. Later on this week, we will get non-farm productivity, which is expected to fall, and unit labor costs which are expected to increase 3.3%. 

Personal Income rose .3% in January, which was below expectations, but flat with December. Wages and salaries were up .6%, which was a big increase from the .1% reading in December. This tends to be a volatile component however, so don't read too much into one data point. Disposable income rose .9%. The savings rate increased to 5.5% from 5% last month as well.  Personal spending fell .5%, however that was partially driven by lower energy prices. Stripping out food and energy, spending increased .1%, which is pretty much in line with what we have been seeing. The punch line: The Great American Deleveraging continues. As incomes increase, that money is used to pay down debt or is getting put in the bank. Investors hoping for another late 90s or mid aughts debt-driven consumption boom are probably going to be disappointed. 

Construction Spending fell 1.1% in January, a disappointment. December was revised upward from .4% to .8%. Month to month numbers tend to be volatile. Where is the money going? Lodging, office and commercial space as well as manufacturing. Also public infrastructure spending with increases in transportation, and sewage. Where is it not going? Residential (still). Given the price increases and the current tight inventory, you should expect to see more homebuilding. If the personal income numbers continue to improve that will hopefully change. 

Note that optimism about 2015 construction is the highest in 20 years, according to Wells Fargo. Nonresidential construction is the driver, not resi however. Still, that means we are finally seeing some capital expenditures which is encouraging. 

The ISM Manufacturing PMI dropped in February to 52.9 from 53.5. The West Coast port slowdown is impacting exporters. The current level of 52.9 corresponds to a GDP growth rate of 3.1%.

Stanley Fischer is telling the markets not to get used to being spoon-fed by the FOMC. Once rates start increasing, the guidance will become more and more murky. 

Warren Buffet's annual letter to shareholders is out. There is nothing earth-shattering in the letter, except for the usual schedule of events for Buffetapalooza, where you can try to throw a newspaper more accurately than Warren. No mention if he is going to bust out the ukulele and jam with the Fruit of the Loom guys however....

Morning Report - Confidence is back at boom time levels.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2108.0	-1.9	-0.09%
Eurostoxx Index	3572.0	-2.9	-0.08%
Oil (WTI)	49.23	1.1	2.20%
LIBOR	0.261	0.000	-0.08%
US Dollar Index (DXY)	95.04	-0.250	-0.26%
10 Year Govt Bond Yield	2.01%	-0.02%
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	101.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.94

Stocks are lower this morning after GDP came in a little better than expectations. Bonds and MBS are up small.

The second revision to fourth quarter GDP came in at 2.2%, a bit higher than the estimate of 2%, but a big drop from the Q3 reading of 5%. Personal consumption rose to 4.2%, a strong reading that bodes well for growth going forward. Government spending was down, driven by a 12.4% drop in defense spending. Business inventories were revised downward as well. Private capital expenditures slowed their rate of growth as well. 

Pending Home Sales rose 1.7% in January, lower than expected, but better than the upward-revised 1.5% drop in December. They are up 6.5% year over year. Supply remains tight, however the percentage of all-cash sales is decreasing, which indicates the professionals may be exiting, leaving room for "real" home buyers to enter. The big question remains regarding inventory: will it simply jack up prices, or will it attract new building? The answer may be "both."

In other economic data, the ISM Milwaukee Index came in at 50.32, a disappointment, while the Chicago Purchasing Manager index fell sharply from 59.4 to 45.8. The University of Michigan Consumer Sentiment index rose to 95.4. These consumer confidence indices are driven by gasoline prices for the most part, but the numbers are encouraging nonetheless. We are back to boom-time levels. This is being confirmed by the strong personal consumption numbers this morning.

Why is Germany worried about government spending when it is getting paid to borrow? Switzerland, Sweden, and Denmark are imposing negative interest rates on bank deposits. Separately, are these ultra-low rates creating issues that will blow up later? We are in uncharted territory, and while everyone hopes that the world's central banks can stimulate the global economy without causing another crisis, that is no sure bet. The stock market seems blithely oblivious to this possibility, however and that is another issue. I am wondering if this will all come to a head in time for the 2016 elections. Monetary policy acts with a lag, and if the Fed starts tightening in June, the effects will start kicking in by summer of 2016. Wouldn't it be ironic to see obama struggle with a financial crisis at the end of his term the way W did?

We are starting to see more evidence of improvement in the labor market with small business, which has been the engine of job creation historically. We are actually beginning to see the unwind of a strange dichotomy: the stock market had been flying over the past few years, yet things have been pretty gloomy for the economy overall. To the average American, the economy didn't feel like the stock market should be at record levels -  in other words, it didn't feel like 2005 or 1999. The reason for this was that the big S&P 500 names have lots of international exposure, which was driving earnings and the indices and ultimately their stock prices. Not only that, they could borrow at exceptionally low rates, while smaller business was subject to tighter credit. This is beginning to reverse however: as Europe weakens and the US dollar strengthens, the international divisions of the big index names are having a rougher go of it, while US domestic focused small business is benefiting from a turnaround in the US economy.  

Morning Report - The McMansion is back

Vital Statistics:

	Last	Change	Percent
S&P Futures	2109.9	-0.3	-0.01%
Eurostoxx Index	3553.7	11.9	0.34%
Oil (WTI)	49.73	-1.3	-2.47%
LIBOR	0.261	-0.001	-0.19%
US Dollar Index (DXY)	94.61	0.399	0.42%
10 Year Govt Bond Yield	1.97%	0.00%
Current Coupon Ginnie Mae TBA	102.8	0.1
Current Coupon Fannie Mae TBA	101.9	0.0
BankRate 30 Year Fixed Rate Mortgage	3.91

Markets are flat this morning on no real news. Global bonds continue to rally, but Treasuries are not really participating. 

Inflation remains largely muted, with the Consumer Price Index falling .7% in January. Ex-food and energy, it rose .2, a little higher than expectations. On a year over year basis, inflation ex food and energy increased 1.6%. 

Durable Goods orders rose 2.8% in January, rebounding smartly after a very weak December. Capital Goods (a proxy for business capital expenditures) rose .6%. 

Initial Jobless Claims rose to 313k last week from 282k the week before. The Bloomberg Consumer Comfort Index fell from 44.6 to 42.7 last week. 

Home Prices rose .8% in December, according to the FHFA. Home Prices are now about 4% from peak levels. The report has been expanded to include all sorts of additional data. The growth continues to be on the West Coast, while the Northeast lags. 

Delinquencies and foreclosure rates dropped in Q4, according to the MBA. For the most part, we are back at pre-2007 (or pre-crisis) levels. Judicial states still have 3x the foreclosure rate as non-judicial states.

The McMansion is back. The median square footage of new homes topped 2,400 square feet last year. Builders are chasing the affluent because the first time homebuyer is still largely out of the market. That said, some builders, like D.R. Horton, are introducing new brands that are in the first time homebuyer price points.  

How much slack is there really in the labor market? Are wages rising because of a shortage of labor in some areas? If so, then that means (a) the speed limit of the economy is lower, because more people working = higher output, and (b) the Fed will have to move earlier than they may want to in order to quell inflation. If these discouraged workers return to the labor force, downward pressure on wages will continue, however in the long run, output will be higher. This issue was discussed in the June 2014 FOMC minutes, but it hasn't been brought up since. 

Morning Report - New Home Sales still depressed

Vital Statistics:

	Last	Change	Percent
S&P Futures	2111.7	-2.0	-0.09%
Eurostoxx Index	3540.4	-6.7	-0.19%
Oil (WTI)	49.64	0.4	0.73%
LIBOR	0.262	-0.001	-0.38%
US Dollar Index (DXY)	94.3	-0.192	-0.20%
10 Year Govt Bond Yield	1.99%	0.01%
Current Coupon Ginnie Mae TBA	102.6	0.0
Current Coupon Fannie Mae TBA	101.8	0.0
BankRate 30 Year Fixed Rate Mortgage	3.92

Markets are down small this morning as we go into Day 2 of Janet Yellen's Humphrey-Hawkins testimony. Bonds and MBS are flat.

New Home Sales fell to 481k from 482k in December. We are still at something like 34% of peak levels during the bubble, which is a historically recessionary level. Toll Brothers was somewhat bullish, and it seems like the spring selling season is improving, but tight inventory remains an issue. Given that builders have pushed price hikes about as far as they can go, in order to boost revenues, they will need to push through more units. 

Chart: New Home Sales 1963 - Present

Mortgage Applications fell 3.5% last week. Purchases were up 4.6% while refis fell 7.5%. Rates jumped a lot for jumbos - from 3.92% to 4.09%, while the 30 year FRM forse from 3.93% to 3.99%. The 10 year picked up 6 basis points in yield last week as well. Mortgage rates did not follow Treasuries down during the plunge of late January, and therefore had held steady as rates went back up. It looks like we are back to mortgage rates moving with Treasuries. Not sure what is going on in jumbos, though - that is a big move. 

Janet Yellen's prepared remarks pretty much revealed nothing new. "Patient" still means 2 FOMC meetings. She came out strongly against the "audit the Fed" movement, pointing to 1970s inflation as the result of Congressional meddling in monetary policy. Elizabeth Warren laid into her like a prosecutor on cross over of matters, even getting Yellen to roll her eyes at one point. There was talk about possible regulatory relief for small community banks. For the most part, it was a non-event. Day 2 continues today in front of the House. 

Mortgage REIT Annaly Capital reported better than expected earnings yesterday. It looks like they made few adjustments to their portfolio.  Their conference call is later today. Annaly is a big player in the TBA market, which is the starting points for loan pricing. 

Big Box Home Improvement Retailer Lowe's reported good numbers this morning as home improvement continues to drive sales. Can't afford a new home? How about a new kitchen?

Retailer TJ Maxx is raising wages to $9.00 to compete with WalMart in attracting and retaining the best talent. While we are still nowhere near seeing anything that could be considered "wage inflation," it appears we could be laying the ground work for it. Wage inflation and new home construction are the last pieces to the puzzle for the US economy. 

Morning Report - Janet Yellen on the hill

Vital Statistics:

	Last	Change	Percent
S&P Futures	2106.0	-0.7	-0.03%
Eurostoxx Index	3526.4	6.9	0.19%
Oil (WTI)	50.09	0.6	1.29%
LIBOR	0.263	0.001	0.42%
US Dollar Index (DXY)	94.75	0.183	0.19%
10 Year Govt Bond Yield	2.08%	0.02%
Current Coupon Ginnie Mae TBA	102	-0.2
Current Coupon Fannie Mae TBA	101.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.94

Markets are flat this morning after the EU and Greece agreed to a 4 month extension of their rescue package. Bonds and MBS are down small.

Janet Yellen is set to testify in front of the Senate this morning. Watch for volatility in rates. The prepared remarks are here. Initial reaction of bonds is negative.  

Home prices rose .87% month-over-month and 4.5% year over year, according to Case-Shiller. We continue to approach normalcy, but housing starts / new home construction remain at recessionary levels. The Great Millennial Develeraging continues...

The Home Despot reported good earnings this moring, and the stock is up smartly. They boosted their quarterly dividend by 26% and authorized an $18 billion buyback. Sale store sales increased 7.9%. The conference call is going on right now, and it appears that the strike in the West Coast ports has not become an issue yet. Also, they are not seeing upward wage pressure as their wages are "above market."

McMansion builder Toll Brothers beat numbers this morning, and took up guidance for 2015. ASPs are forecast to increase to $742,500 higher than the previous guidance of $735,000. Deliveries will increase as well to 5,600 units from 5,500 units. They will hold a conference call at 11:00 am EST.