Premier Mortgage Group

RATES FLAT DESPITE FED WITHDRAWLS

STRAIGHT STATISTICS

In an odd leap, long-term Treasury yields blew up, Wednesday the worst single day in nine months. The 10-year T-note stopped at 3.88%, a level touched for the fifth time since last June, but the violence of this move threatens upward breakout. Meanwhile, mortgages held fairly well, inside the 5.25% top that has held since August.
The peculiar part: big sell-offs like this are driven by good economic news, but that’s not what we got. February sales of new and existing homes fell, new ones at the slowest pace since stats began in 1963, 303,000 annualized. Unsold inventory rose, exisiting homes from 7.8 months’ supply to 8.6 in February; new-home inventory estimates ranged from 9.2 months to 14.4, depending on overall optimism of the estimator.
Orders for durable goods picked up a half-percent in February, but hardly an economy-mover. The University of Michigan confidence measure stayed flat at 73.6, a recession level.
Unemployment claims fell 14,000 to 442,000 last week, but must drop well into the 300s to mark new hiring. The BLS says unemployment in February rose in 27 states, fell in 7, and 16 were flat. California at 12.5% unemployed rather more than offsets North Dakota at 4.1%, and Nebraska and South Dakota at 4.8%. Four states — Florida, Nevada, North Carolina, and Georgia — set all-time highs for percentages out of work.

COMMENTARY

This rate rise is likely to be intercepted by self-correctives: fewer mortgage applicants, and more bond investors. However, the wildly out of control fiscal situation will tend to prevent any quick or deep reversal — for that we would need new and ugly evidence of non-recovery.
The overall economic view is just as much a standoff as it has been for a year. The stock market is optimistic, joined by big international business, technology and health care; and the Fed seems all-out to normalize its measures, more intent on preparation to reverse stimulus than to aid recovery. Most citizens on Main Street would disagree.
The wild cards in the next two weeks are the full-stop to Fed buying government paper — effectively dropping support for all kinds, including Treasurys — and new data for March, especially payrolls.

In an odd leap, long-term Treasury yields blew up, Wednesday the worst single day in nine months. The 10-year T-note stopped at 3.88%, a level touched for the fifth time since last June, but the violence of this move threatens upward breakout. Meanwhile, mortgages held fairly well, inside the 5.25% top that has held since August.

The peculiar part: big sell-offs like this are driven by good economic news, but that’s not what we got. February sales of new and existing homes fell (new ones at the   lowest pace since stats began in 1963, 303,000 annualized), and unsold inventory rose.

Unemployment claims fell to 442,000 last week, but must drop well into the 300s to mark new hiring. The BLS says unemployment in February rose in 27 states, fell in 7, and 16 were flat. California at 12.5% unemployed rather more than offsets North Dakota at 4.1%, and Nebraska and South Dakota at 4.8%. Four states — Florida, Nevada, North Carolina, and Georgia — set all-time highs for percentages out of work.

So, why the rate blow-up? Three theories, so far. The first: the healthcare bill. Nobody in the credit markets believes its revenue assumptions, nor does anyone believe the expense forecast. No politics involved! If you work in the credit markets and trust government promises, your career will be short. Centerline market estimate for healthcare’s annual deficit addition: $50-$100 billion. However, no matter how accurate, that’s a long-term worry. Something short-term happened here.

Theory two: national debt of all kinds is in trouble, budgets from Club Med to Japan immensely out of balance, all selling mountains of new paper. Maybe, but the Europeans seem to be kicking the Grecian urn down the autobahn, no immediate crisis in prospect. Besides, that mess is pushing cash to dollars and Treasurys.

Theory three: The Fed is pulling the plug.

The Fed has been buying MBS and associated Fannie-Freddie debt for fifteen months, the total roughly $1.4 trillion. This winter everyone wondered what would happen to mortgage rates when the Fed stops buying next week, but we’ve been watching the wrong market.

The Fed bought those Agency MBS from super-cautious investors who buy only government paper. The Fed’s buys had three effects, one indirect: they did pull down mortgage-Treasury spreads, and the buys did provide “quantitative easing” (the Fed shooting money directly into the economy, bypassing busted banks that can’t make loans). The third effect that most of us missed: the Fed’s buys soaked up last year’s entire federal deficit, pulling down Treasury yields themselves.

The mechanism: lift $1.4 trillion in government paper out of that market, and investors then used the cash to buy other government paper. Treasurys.

Next week the Fed will stop, but the Treasury will not: it will continue to sell bonds at a pace near $150 billion per month. Who will buy those bonds, and the flood issued by governments from Athens to Tokyo, and at what rates have been mysteries that will soon find answers. The Fed fears overdoing its quantitative easing: possibly inflationary, possibly generating backlash from excessive use of power, or worst of all, breeding accusations of round-heeled “monetizing” of government indiscipline.

If the Fed is out, the nightmare-dilemma end game has arrived. Cut the Keynesian deficit while the recession runs on? Or allow that spending to drive up interest rates, and maybe do more damage than fiscal discipline would do?

I think the Fed mistakes putting down panic for recovery, while we are still in a slow-motion landslide in asset values. Nothing but low rates will stop the slide. However, for the Fed to stay in the game a while longer, a commitment to fiscal discipline by Congress and Administration would be mandatory.

How different all of this might look if Mr. Obama had reversed priorities early last year: appointed a bi-partisan commission on healthcare, and put all of his momentum and majority behind getting our books in order.

The first phase of the 2010 U.S. Census is under way. With over 140,000 Census workers out on the streets, here are a few tips to protect your identity and credit:

• - Do not provide your Social Security number, bank or credit card info – Census workers will not ask for it.
• - You are only required to tell them how many people live at the address, no matter what they ask.
• - Census workers will not ask for donations.
• - Census workers will always have a badge, handheld device, Census Bureau canvas bag, and confidentiality notice.

Read more about the 2010 U.S. Census here.

RATES FLAT AS DATA MOSTLY IN LINE WITH EXPECTATIONS

STRAIGHT STATS

Mortgage interest rates were mostly flat again this past week as most economic data was in line with expectations. February Industrial Production was up 0.1% and Capacity Utilization came in at 72.7%. The February Core Producer Price Index was up 0.1%, the February Consumer Price Index was unchanged, and core CPI was up 0.1%. Weekly jobless claims fell by 5k, February Leading Economic Indicators increased by 0.1%, and the March Philadelphia Fed Business index came in at 18.9. All of the aforementioned reports were in line with expectations. February Housing Starts fell 5.9% on expectations that they would fall 3.5%. February Building Permits, though, fell only 1.6% on expectations that they would fall 3.2%. Also, as expected the Fed left short term interest rates unchanged at the conclusion of its FOMC meeting on Tuesday.

COMMENTARY

If we get some genuinely strong economic data, obviously rates will scream upward, markets especially sensitive as next week is the last with the Fed as MBS-buyer. However, the bond market has voted decisively in favor of an open-ended weak economy — that’s the fundamental reason that mortgage rates are so close to Treasurys, closest ever, and long Treasurys so stable.
Next week, instead of domestic data, look to overseas. Specifically: Europe and China. The euro-zone shows every sign of painful re-organization. A smaller group of nations with economies productive enough to stay in a currency union with Germany may band together, but Germany may be too strong for any to stay with it. In a closed union, Germany’s export engine tends to impoverish all of its partners, and it refuses to stimulate its domestic economy to absorb others’ exports. China is same song, different verse: China’s export engine is harmful to everyone, but as exports declined last year it tried to replace external demand with credit gasoline, and now has to fight inflation. Oddest of all…. all of this is a help to the dollar and US interest rates.

Long-term Treasury rates have remained stable, the 10-year T-note in a band 3.60%-3.75% for a whole month. However, mortgages are beginning to vibrate, trying to find an appropriate level as the Fed stops buying: in just the last week rates have moved between 4.875% and 5.125%.

Treasurys are getting buying support from the slow-motion chaos in Europe. Germany has at last refused to help to Greece, saying it’s an IMF problem and not the European Union’s, thereby putting the rest of the Club Med dominoes on notice. Germany never has graded better than a “C” for playing well with others. France today expressed dismay at Germany’s IMF proposal. Although dismay is a French specialty, it is correct: if Europe cannot look after its own, “union” is a fantasy.

As so often during fracture of a collective effort, all members overestimate their individual advantage, Germany in the lead. Actual breakup — even the departure of Greece — would cascade cash to the only remaining safe-haven. Us. Believe it or not.

The Fed’s post-meeting statement that “Economic activity continued to strengthen…” would get a poor reception in your average Main Street saloon. Improve, yeah, in places; but, “strengthen”?… nah. If it were truly strengthening, how come exceptionally-low-rate-for-extended-period?

The Fed also hit the end game of its housing-forecast. In November, “Activity in the housing sector has increased”; December, “Some signs of improvement”; January, no comment; this week, “Housing starts have been flat at a depressed level.”

Every administration must generate happy-talk forecasting. However, Tuesday’s Geithner-Orszag-Romer official report to Congress was either the most honest ever, or if happy-spun we’re in more difficulty than the Fed will acknowledge. We will not see 200,000 jobs created in a month until sometime in 2011, unemployment will still be 9% at the end of 2011, and 8% a year after that. Stranger than honesty, the report www.treas.gov/press/releases/tg589.htm recites mini-policies but is void of real stuff, nothing on what really ails the economy and inhibits recovery, or what to do.

With that backdrop, the Fed next week will stop buying MBS.

Play the tape all the way back. The housing Bubble Zones began to deflate at the end of 2005. The wholesale bank run and credit collapse began in July 2007, and the Fed began to cut the overnight cost of money. Market rates, mortgages included, did not follow, as global cash instead ran to somebody’s — anybody’s — Treasury paper. Early in 2008 mortgage rates rose almost to 7% and many classes of mortgages became unobtainable, some for good (toxics), some for ill (jumbos, sensible underwriting). That credit drought pulled the housing collapse beyond the Bubble zones before the recession really hit, post-Lehman, fall 2008.

Incredibly to me, the Fed did nothing to support mortgage markets until it announced its MBS-buying intentions at Thanksgiving 2008, and did not begin to buy until January ‘09. Yes, the Fed could argue that such dramatic action could not be taken until the precipice was clear to politicians. The counter: no American recessions in the last 40 years ended until a deep drop in mortgage rates ignited housing. We still don’t have a deep drop. The rate centerline during the Fed’s 2009 buys has been the same as 2002-2003, and barely more than 1% below the 2004-2008 average — and much of that benefit has been cancelled by hysterical tightening of credit standards at Fannie and Freddie (mercifully, the FHA has held constant, standards the same since WWII, no easier during the Bubble, no tighter now.)

The housing market has gradually fallen out from under the Fed’s support in the last year, demand flat at best versus increasing distressed inventory.

The utterly wacky, perverse good news: so far, perhaps due to diminished demand, perhaps because the Fed has not merely bought but removed altogether from the table $1.25 trillion in MBS… mortgage rates are holding. We’ll take that.

RATES FLAT DESPITE TREASURY DEBT AUCTIONS

STRAIGHT STATS

Mortgage interest rates were mostly flat on the week despite supply pressures from $74 billion in Treasury debt auctions. The Treasury auctioned off $40 billion in 3 year notes, $21 billion in 10 Year notes, and $13 billion in 30 year bonds. Overall, the auctions were met with strong demand. Economic data was sparse. Of note, weekly jobless claims fell, but not as much as expected. Continuing claims, though, increased on expectations that they would decrease. February Retail Sales were better than expected. Also, excluding automobile sales, Retail Sales were much stronger than expected. The University of Michigan Consumer Sentiment index was weaker than expected.

COMMENTARY

All of us in the credit markets “read” them by reviewing the raw data, watching the instantaneous reaction on-screen, and then considering the observations of other professionals and commentators. Never, ever has that last part been so confounding, and the media are the center of the problem. Straight news — Cronkite news — used to be the media standard. Today’s basic news channels have broken into partisan cheerleading: pick your party with your channel. However, business channels and newspapers don’t even bother with competing parties: the whole show is one, big, tub-thumping parade for recovery, growth, and the stock market, negative news forbidden.

Thus a lot of head-scratching at trading desks. The credit markets are not buying the tub-thumping. They are buying bonds and MBS because an honest read of the data says there is no real recovery, no inflation, incipient deflation, and a 0% Fed that may stay that way for a long time. Watch the 10-year T-note stay rock steady, mortgages too, in a big week for Treasury borrowing, the Fed about to stop buying MBS… that’s a lot of big and smart money voting with its wallet, no matter what CNBC says.

Long-term Treasury rates rose under pressure from constant borrowing, but mortgages did well, holding at 5.00% with lowest fees. Versus the 10-year T-note at 3.70%, that’s the narrowest spread ever measured.

Retail sales for February this morning have been mis-described as a strong surprise; in reality, post-revisions, Jan-Feb were close to flat versus December. Overall retail sales have risen 6% since the pit one year ago, but are still 6.5% below 2008. New unemployment claims are still elevated, running 462,000 last week.

Take good news where you find it: a reasonably stable “L” economy beats hell out of deterioration. The National Federation of Independent Business released its small-business survey, methods constant since 1973 (www.nfib.com, “SBET”), charts for confidence, sales, earnings, and hiring all “L” since last summer and stuck near the worst levels ever measured. Stability has a price: the Treasury hosed $221 billion in borrowed cash in February, our largest-ever monthly deficit. Quite the sugar jolt.

The small-biz results reflect Main Street conditions, as opposed to life at the fancy multi-nationals. Those guys began to re-deploy two years ago when the music stopped here: shed US costs and labor, and set up turnstiles in the hot, emerging-nation-trade markets. Half of S&P500 earnings come from overseas operations.

For those with bi-focals, the most exciting reading every 90 days is the Fed’s Z-1 Flow of Funds.

This week’s release of 4^th quarter 2009 data exposes healthy imagination among the big-recovery green shooters. Thursday’s WSJ announced that credit markets have healed, but Z-1 later that day revealed the worst US credit collapse ever measured. In impressive spin, the Journal today says the absence of credit signals recovery.

Credit for consumers is declining steadily, down $110 billion in 2009, overall now at the same level as 2006. Home mortgages dropped $58 billion in the quarter, $215 billion in 2009, also to 2006 totals. Total debt in the economy grew at the smallest rate ever measured, 1.6% in the 4^th quarter; however, excluding the Treasury’s massive borrowing it was 1% negative. Think that through: civilians and the real economy are starved of credit, and the Treasury borrows instead. Unsustainable.

One policy is working: the Fed’s “extended period” commitment to zero-percent money. After eighteen months of holding zero-return cash, more people and institutions see the non-recovery, trust the Fed to stay put, and have begun to buy “out the yield curve.” That is, buying longer maturity bonds in search of yield. However, only the highest quality: hence guaranteed MBS are improving, closing on Treasurys, and easy-borrowing Big Biz buddies of the WSJ wonder what all the credit fuss is about.

Z-1 shows the whole pattern. The “shadow banking system” was badly abused in the Bubble years, but the flipping of securitized loans off bank balance sheets was and is essential to adequate credit supply. The market for ABS is still dead as a hammer; the total outstanding has free-fallen 25% since 2007, a $1.14 trillion hole in supply. The ABS market funded jumbo mortgages… remember those?

Z-1 gives answers to brand-new questions. The Fed bought $1 trillion in MBS last year… so, who sold ‘em? A net $300 billion by foreign investors, and the rest by US “households.” Households? Yup: bond-market mutual funds, which then bought big-business bonds, and soaked up the flood of Treasurys.

Then a dog that didn’t bite (yet): total 2nd mortgages outstanding, $1 trillion, about the same as 2006, have unwound only 8.6% since the 2007 peak. Certainly, damned few new 2nds have been made, and by now defaults should have cut outstandings a lot. A loan departs Z-1 when paid or written-off. Odd that so few have departed.

The $450 billion in 2nds still on the books at Wells, BoA, Chase, and Citi… you don’t suppose that they’re carried near full value? The underwater ones that roadblock short sales, some banker hoping to get paid someday? Maybe half a dead loss?

RATES FLAT ON MIXED DATA

STRAIGHT STATS

Mortgage interest rates were mostly flat on the week on mixed data. Todays February employment report showed non-farm payroll losses of 36k on expectations that 20k jobs would be lost. Unemployment remained unchanged at 9.7% on expectations that it would increase to 9.8%. Economic data better than expected included January Personal Spending, the February ISM Services Sector Index, weekly jobless claims, and January Factory Orders. Data weaker than expected included January Personal Income, the February ISM Manufacturing Index, and January Pending Home Sales. Also of note, Q4 productivity was revised higher and unit labor costs were revised lower. This implies that businesses are not hiring and getting more out of their existing workers.

COMMENTARY

February’s data — all of the first flashes from the month — were lost in an argument about weather. But not really. Through the flakes, bits of last year’s alphabet soup stuck out of snowdrifts: this is not a “V” — that’s for sure. It’s a “U” with a geometric argument: most of the economy has bottomed in some way, but has the far side of the “U” begun to rise? The usual suspects (stocks, White House) claim so, but the data say not yet, not in self-sustaining form. Auto sales are still running about 10 million annual, only 70% of theoretical rerplacement costs. Manufacturing has gotten a pop from pipeline filling and a weak dollar last year, both reversed now. Something lousy happened to home sales Dec-Feb, but it’s not clear what — winter markets are so slow that it might just be seasonal wobble.

The certain indicator: tax revenue. A rising economy generates revenue at all levels of government, and no report indicates that turn. Until then… just bottom, no far-side-up.

Long-term interest rates rose this week, 10-year Treasurys to 3.69% and mortgages toward 5.125%. The drivers: economic data not as weak as could have been, $74 billion in fresh Treasury borrowing next week, and the ever-closer conclusion to Fed purchases of MBS.

The northeast-centered media assume that their weather determines the course of national economic activity, and the loss of another 36,000 jobs in February was just a snow distortion. Nevermind that the Bureau of Labor Statistics counts you with a job if you were on a payroll, whether you got to work or not. Legitimate good news: preliminary retail sales figures were up, and weather really does suppress shopping.

As observed here before, we still have no national consensus about the cause of the financial wreck, or how to escape its consequences, or how to prevent a recurrence. The result is not a policy vacuum, but an overfilled political sausage split to pieces. Almost three years after the financial show stopped, dozens of factions — experts, agencies, lobbyists, politicians, regulators, voters — are still shouting, their only unity an angry search for bad guys, rage at bailouts, and demand for new regulation.

The hunt for senior bad guys should proceed: too many CEOs and directors have slipped away. However, deep and broad misconception about bailouts and regulation have intercepted good policy-making.

The center of bailout rage: the TARP hose of taxpayer cash into ungrateful banks.

The ragers are wrong. The original TARP appropriation was $700 billion, but only about half of the money ever went anywhere, and half of that is already back. $245 billion went into banks, but the big-bank portion ($167 billion) has been repaid, with interest. The rest went to local banks, spread in dribs that will return in a few years. $80 billion went to Chrysler and GM (keep your fingers crossed). And $30 billion to AIG.

The AIG accounting is tricky, but illustrates why the 2008 advances were wise, and not a bailout of anybody but us. In addition to the $30 billion from TARP, AIG borrowed $100 billion from the New York Fed against future sales of pieces of itself. Last week AIG was able to sell a subsidiary for $35 billion, at least double the bids in the awful winter of ’08, proceeds to the Fed. AIG has already paid down a total of $50 billion.

The TARP and Fed operations were bridges across a panic, when fire-selling assets would have torched us all. A “bailout” is a dead-loss advance; but even Fannie and Freddie will one day pay back their loss bridge.

Regulation… those wronged by any industry want a tough rulebook imposed and enforced. The traditional flaws: rulebooks are expensive straightjackets; and although they forbid past misbehavior, they fail to anticipate future malinvention.

We do need new regulation: of derivatives, and plug-pulling “living wills” for giant institutions. However, the most frustrating part of this last episode: enforcers did not use their existing authority. The most gratifying news today: the enforcers are roused to action, embarrassed, and fearful that authority will be taken away. Use it or lose it.

Item: Days after Goldman was exposed as enabler in Greek debt shenanigans, the Fed began an investigation and named Goldman. Perfesser Bernanke’s quick mention of “counterproductive” behavior may seem too soft-spoken, but nobody on the Street can withstand such notice. Never in Mr. Greenspan’s reign was such notice taken.

Item: As revelations from Greece continued (credit-swap profiteering has caused a downward spiral in Greek bonds), the Justice Department began an investigation and publically ordered by name several hedge funds and trading houses to preserve all records of trades and correspondence involving Greece.

This is the way the Fed, Justice, and the SEC used to work, before faith in markets addled their brains and slacked their guts. No rulebook can keep up with the wizards and vampires of Goldman. But, vigilance, speed, transparency and sunshine… nothing scares Wall Street like the threat of sunburn, and it’s back.