Premier Mortgage Group

Mortgage interest rates improved slightly on the week on a flight to safety as a result of unrest in the Middle East.  Economic data was mixed.  Economic reports better than expected included February Consumer Confidence, January Existing Home Sales, weekly jobless claims, and the University of Michigan Consumer Sentiment Index.  The February Consumer Confidence Index increased to 70.4, its highest level in three years.  Economic reports weaker than expected included January Durable Goods Orders and the second look at Q4 GDP.  Q4 GDP was expected to be revised upward to +3.3% from +3.2%.  As reported, though, Q4 GDP fell to +2.8%.  Also of note, the Treasury Department auctioned $99 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes.  The auctions were met with somewhat soft demand.

The Dow Jones Industrial Average is currently at 12,114, down about 280 points on the week.  Crude oil futures are currently trading at $97.06 per barrel, up about $11 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

Next week look toward Monday’s Personal Income and Outlays and Pending Home Sales Index, Tuesday’s ISM Manufacturing Index, Thursday’s weekly jobless claims, and Friday’s employment report for February as potential market moving events.

Mortgage rates are back in the fours, taken there by the 10-year T-note’s drop to 3.42%, which has wiped out the whole early-February spike. We have Libya, oil, stocks, housing, and the economy to thank, but how those pieces interact is not obvious.

Arriving economic data is obscured by incessant “recovery” cheerleading among business media. Some news is pretty good: both consumer-confidence surveys found three-year highs, which may indicate some hiring. New claims for unemployment insurance are holding down near 400,000. Every measure of manufacturing is doing well, although barely 15% of our economy.

The wait-a-minutes are led by today’s downward revision in supposedly corner-turning 4^th Quarter 2010 GDP (3.2% to 2.8%). Wal-Mart’s sales in the last 90-days fell 1.8%. Orders for durable goods in January (ex super-volatile transportation and defense) tanked 6.9%. The Chicago Fed’s January national index rolled to a minus sign. Growth, sure; self-sustaining, accelerating… uh-uh.

If you’re in doubt, consider housing. New home sales dumped 12.6% in January. But, the National Association of Realtors says sales of existing homes rose 2.7%. Hmmm. A story cooking for months: NAR has over-reported those sales for 10 years or more, high by perhaps a half-million each year versus CoreLogic (its parent a title company using real data), and since 2008 about 1.5 million imaginary sales each year.

Nothing intentional, of course. I first joined NAR in 1978 and quickly learned not to trust it to count to ten on its toes and get the same answer twice in a row. If existing-home sales are running below four million annually instead of above five million, then we have rather more trouble with distressed-inventory absorption than we thought. And market buyers and sellers have left the field or been elbowed from it.

And on that subject, NAR said only 37% of January sales were distressed (“only”… sheesh). www.CampbellSurveys.com says the distressed fraction was 44% in November, and shot up to 49.6% in January (CA 66%, FL 63%, AZ-NV 72%).

Now two things not to worry about: inflation and the Middle East.

Inflation comes in a few well-defined forms. The deadly one is the wage-price spiral, which plagued us in the 1970s and can be stopped only by recession. The US today is impervious to such a spiral because we have near-zero wage growth. In fact, rising oil prices will slow this economy by crowding out other spending. Note that commodity prices have fallen, not following oil, instead anticipating slowdown. Same for stocks.

Other inflation forms include the classic money-printing of Zimbabwe and Weimar. The Fed’s QE does print monetary electrons, but they cannot make it into wallets because the credit system is still broken. No credit, no money.

The last form, cost-pushed inflation, is temporary, not a structural ramp-up in general prices. That’s what this is. Oil is driven by speculators, just like 2008, and all should be reassured that this spike has stopped far short of that run to $150/bbl.

Middle East… it takes some serious chutzpah to be relaxed about the place. But, concept number one: they need to sell oil worse than we need to buy it, no matter who is in charge over there. Non-oil economies in the Middle East have never developed, and ten-fold growth in population has made ‘70s-style embargoes impossible today.

Two. Despite US bejabbers about radical Islam, these brave Tunisians, Egyptians, and Libyans are in their streets waving their national flags, not pictures of Osama.

Three. Post-revolutionary peoples’ governments, no matter how they may roil and rock are steadier by far than rotten autocracies, especially in dealings with neighbors. Some go sour (Iran), some are in doubt (Iraq), but dictatorships breed anger and extremism, and dictators need to pick external fights with pretend enemies. Re-founded nations, even while struggling to establish representative government, have stabilizing advantages. The greatest of these: pride at self-liberation won hard.

We live in one of those places.

Mortgage interest rates improved slightly on the week on mixed economic data.  Economic data weaker than expected included January Retail Sales, January Building Permits, January Industrial Production, January Capacity Utilization, and January Leading Economic Indicators.  Economic data stronger than expected included December Business Inventories, January Housing Starts, and the February Philadelphia Fed Business Index.  Inflation data was slightly higher than expected.  The January Producer Price Index (PPI) increased 0.8% on expectations that it would increase 0.7%.  Excluding the food and energy components, core PPI increased 0.5% on expectations that it would increase by 0.2%.  This is the largest month over month increase in core PPI since October of 2008.  The Consumer Price Index (CPI) increased 0.4% on expectations that it would increase 0.3%.  Core CPI, excluding food and energy, increased 0.2% on expectations that it would increase 0.1%.

The Dow Jones Industrial Average is currently at 12,368, up almost 100 points on the week.  Crude oil futures are currently trading at $87.39 per barrel, up almost $4 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

Next week look toward Tuesday’s Consumer Confidence, Wednesday’s Existing Home Sales, Thursday’s Durable Goods Orders, weekly jobless claims, and New Home Sales, and Friday’s second look at Q4 GDP as potential market moving events.

Long-term Treasury rates, the bellwether for everything (recovery, inflation, recession, fear, joy…), have stopped rising in the last two weeks, and even improved a  bit and helped mortgages.

Interpreting markets is hard these days. The deafening financial-market chant, recovery…inflation…recovery…commodities…recovery…sustained…recovery… makes it hard to concentrate. Maybe we could set the whole thing to music and hire the Super Bowl babe to sing the wrong words.

Many think that Middle East unrest has held rates down, but thus far it’s small-potatoes unrest. A more likely cause: inbound data do not support acceleration of the US economy (retail sales half of February forecast, flat industrial production, mortgage apps falling near record lows…). Global food and commodity prices are rising, igniting inflation fear among those who have worried about inflation ever since it broke in 1981, never to return. These price rises are cost increases likely to slow the US economy, as there is no wage growth with which to pay them, or to pull into broad-gauge inflation.

Public policy is the deal, now — not markets, and not even the economy. In gathering force, ordinary civilians have decided: given a flat-broke Treasury, and a choice to borrow, to raise taxes, or to cut spending, we’re going to cut spending. Oh, we’ll have higher taxes, but by three or four to one, spending cuts will dominate.

Crystallizing public will is most evident in the states.

Mr. Obama looked in December as though he understood, but was a no-show at his own State of the Union, and the most charitable thing said about his new budget this week was the Washington Post’s “Punt.” The budget reflects the Mind-in-Chief: empty of urgency, and despite all the centrist noise, a desperate-Left determination to maintain social spending that we cannot afford.

Congress moves without the President only when the people lead, and it is moving now. A bi-partisan “Gang of Six” in the Senate is working to codify the Simpson-Bowles commission findings. Tough, fair, and popular Republican Jim Christie, spending-cutting governor of New Jersey, visited Washington to lecture Congress: “If people who I campaigned for don’t stand up and do the right thing, the next time they will see me in their district is with my arm around the shoulder of their primary opponent.”

If the President made that threat, no one would care. When the people are moving, either catch up or face irrelevance.

Here in Colorado, new Democratic governor Hickenlooper (prior effective and popular mayor of Denver) delivered his budget, which closes the next in a series of immense fiscal gaps entirely by spending cuts. A half-billion bucks, two-thirds falling on education (state budgets are education and Medicare — take your pick). Support for increased taxes was too weak even to conduct a debate.

Protesting Wisconsin public employees, widely unionized, jammed the statehouse after new Republican governor Walker proposed to close its deficit by cutting the cost of state employees instead of laying them off (they will contribute more for their benefits). 40% of teachers reportedly called in sick. Mr. Obama decried an “assault on unions” — of all things to say, the most helpful possible to the governor.

Public employees are free of private-sector job instability, yet the bulk of US union membership is now public. Many studies find public-sector workers better paid than the poor sods who cough up the taxes to pay them. Those people, America’s ordinary best, have decided. If we don’t have enough income to pay our bills, we’re not going to borrow, or pretend, or make Dad pick up the tab; we’re going to stop spending.

If, two years ago, a fine author wrote a novel in which a formless-fruitcake right-wing uprising lucked into public fears of national bankruptcy, and forced the Republican party closer to the American center than Barrack Obama… no publisher would have accepted a plot so outrageous. Change, and hope, indeed.

Mortgage interest rates increased slightly on the week without much new economic data for markets to digest.  Of note, weekly jobless claims fell by 36k to 383k filings, its lowest level since July of 2008.  December Consumer Credit increased by $6.1 billion on expectations that it would increase by $2.5 billion.  The December Trade Balance came in at a deficit of $40.58 billion, in line with expectations.  The University of Michigan Consumer Sentiment Index came in at 75.1, an eight month high.  Also of note, the Treasury auctioned $72 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds.  Overall, the auctions were met with mixed demand.

The Dow Jones Industrial Average is currently at 12,250, up over 150 points on the week.  Crude oil futures are currently trading at $85.45 per barrel, down over $3 per barrel on the week.  The Dollar has strengthened versus both the Yen and Euro on the week.

Next week look toward Tuesday’s Retail Sales, Wednesday’s Housing Starts, Producer Price Index (PPI), and Industrial Production, and Thursday’s Consumer Price Index (CPI), weekly jobless claims, and Philadelphia Fed Survey as potential market moving events.  Also, the minutes from the previous FOMC meeting will be released on Wednesday.

Economic optimists remain firmly in charge of markets and the media, and the search for data to support their view.

— Wait! A Not-News flash! The administration has at last released its Fannie-Freddie study, which contains three plans that will not be enacted. Nor will any until housing and the financial system recover, which they may or may not given current underwriting. Home mortgages total more than the national debt, and we don’t know what to do with that, either. Bi-partisan criticism of the GSEs will continue, as Fannie and Freddie are no longer sources of campaign cash. Back to actual news —

The optimists found some supporting evidence, but too close to the broad baseline of wobbles to confirm a self-sustaining recovery. Consumer credit card balances at last rose in December, for the first time since August 2008. New claims for unemployment insurance likewise broke to a three-year-low 383,000 last week, but a slowdown in layoffs is not the same as hiring.

The National Federation of Independent Business small-company survey (www.nfib.com) is critical because small firms have been absent from this “recovery” and are the heart of US job-creation. The overall survey reached a three-year high, but to a level similar to the worst of the two prior recessions. Earnings have nudged up (makes sense, firms cut to gristle), as have plans to increase inventories (ditto), and although sales expectations are the best since 2007, actual sales are still sliding. Current employment has stabilized from negative, but plans to hire are flat.

The finger-drumming and toe-tapping wait for recovery, or not, would be unbearable without comic relief from Rupert Murdock’s newly dumbed-down Wall Street Journal page-one headlines. This week brought a new standard in the mindless hunt for positive news: in 48-point type, “Cash Buyers Lift Housing.”

It is true that cash purchases soared in 2010, oddly enough in places like Phoenix’ 42%, Miami’s 54%, and Las Vegas’ 45% (data from the always-questionable Zillow), and nationally from 14% in 2008 to 28% in 2010 (NAR). However, these transactions are not lifting anything — these are the bone-picking, cripple-shooting take-downs of foreclosures. Cash is required. Just try asking the Public Trustee to take a pre-qual letter, and wait a month for your appraiser and clear-to-close from underwriting.

Next week: “Lens Caps Found To Cause Photo Underexposure.”

On Monday, Mr. Obama told a US Chamber of Commerce audience to “get in the game” and use retained earnings to hire people. More than one attendee expressed puzzlement at hiring people they did not need, and found it improbable that doing so would add to their sales.

In genuine good news, the oil-drilling rig count in the US has jumped to the highest number in 23 years, as gas-fracking technology is suddenly working the same miracle in oil-bearing strata. Domestic production will pick up one million barrels per day in the next four years, 20% of total US output. Some will object: the global warming fearful (who have had a frustrating winter), and the “Gasland” mob convinced that fracking causes fiery tap water. Back to lens caps, above: if you drill a well for water into gas-bearing strata, you’ll get gas with your water (see Colorado Division of Natural Resources investigation of the “Gasland” well).

Serious business… The Treasury borrowed $72 billion in new cash this week, selling long-term bonds at auction. These are the same bonds the Fed is buying at a $100 billion per-month clip, and post-auction is always our best shot at a reversal of a sustained rise in rates. Not this time: the 10-year T-note crept down to 3.60% from 3.74%, mortgages down a hair from 5.25%, but that’s been it. If the Fed cannot control long-term rates, they are out of all control.

Housing will have to deal with rising rates so long as recovery optimism holds, and the optimists will have to deal with the contradiction.

Forces building since October have at last blown long-term rates to the next levels. The all-defining 10-year T-note is trading 3.66% this morning (prior range: 3.28% to 3.51%, which held since early December), and there is nothing to stop it short of 4.00%, the April top in 2010. The mortgage damage is similar, low-fee 30-year loans pushing 5.25%.

The double impetus pushing the rate rise — stronger economic numbers and borrowing by the Treasury — are not rocket science, but the details are more Alice Through the Looking Glass than normal recovery cycle.

The economy has not changed pattern; we just have a great deal more of the same. Business giants, joined by any venture plugged in to the global economy have accelerated to a new plane — not just earnings, but now “top line” growth in revenue. Those who thought the emerging world could pull the US caboose were correct. The Institute for Supply Management has surveyed big business for 88 years, and the January findings are spectacular: manufacturing to 60.8 (versus 57.0 in December and 58.2 expected, and the best reading since 2004) and the vastly larger service sector to 59.4, one of the highest results on record. December Factory orders were forecast to decline .7%, and instead rose .2%, and November was revised up a half-point.

The China-led steam is pulling more trains than ours: unemployment in Germany has fallen to an 18-year low. Northern Europe also benefits from a euro undervalued for them, held artificially low by Club Med travails. However, quiet in that crisis has reduced safety buying of Treasurys.

Pattern same: the big and global are doing well, but they are not hiring here. The gorilla of all reports released today found payrolls growing by only 36,000 jobs in January versus forecasts of four times that. The weakness was dismissed as weather distortion. The unemployment rate fell to 9.0% from 9.4%, trumpeted as a great victory (if you’re a stock-market smoke-blower, you get to pick your weather). Unemployment fell because the percent of Americans in the workforce — defined as people looking for work — fell by a half-million souls to 64.2%, the lowest sustained reading since the ‘70s, when women had just begun to take jobs outside of homes.

The locomotive of US employment is small business. We will learn on Tuesday, February 8 from the www.nfib.com survey if there is big-biz pull-through to small-biz. I doubt it — small business correlates strongly with housing. The NFIB has found for three years that the worst problem facing small business is poor sales (duh), and that reflects the financial condition of households. Rising mortgage rates do not help.

It is possible that we are on the threshold of a top-down business recovery, and the first recovery in 65 years in which housing will be last. Possible.

Meanwhile, the jump in long-term rates since October, now 1.25% overall and a 50% increase from the 2.50% 10-year at the time… has bond vigilante fingerprints all over it. Better: palm prints on the shoulder blades of a market still in free-fall.

A money-manager friend whom I deeply respect insisted this week that long-term rates move only with inflation, and not the supply of new bonds. The market this week said otherwise. Prior to every payroll report (first-Friday every month) the bond market freezes because the data is so important but forecasts are such black comedy. This week, the 10-year yield broke upward out of its range yesterday, before the payroll data, and has continued to move up despite a report weaker than anybody thought.

Reason, near-term: next week the Treasury will raise $72 billion in long-term cash by selling new bonds in three-day auction. The Fed’s QE2 will buy a like amount of the same paper this month, but tenders of old paper when the Fed offers to buy are dwarfing QE2. The Fed will stop buying long paper in June.

Then who will want the stuff? So long as US political leadership is unwilling to engage fiscal affairs, borrowing half of all spending open-ended, the vigilantes will be in charge and able to intercept recovery.