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Apr 16, 2010 Credit News by Lou Barnes

Mortgage and long-term Treasury rates are falling suddenly today, as the SEC’s fraud charge against Goldman Sachs is tanking the stock market.

Couldn’t happen to a nicer bunch of people. The 10-year T-note has broken below recent 3.80% resistance to 3.77%, mortgages headed toward 5.00%.

Interpreting new economic data is trickier than ever, even for professionals, as an odd confluence has tipped public sources into uniform economic cheerleading. The whole country would like not to hear another word about recession, and is hungry for news of recovery. Media tend to supply whatever it takes to sell soap.

CNBC years ago dispensed with real news. Bloomberg television was a reliable replacement, but this winter cloned CNBC’s grinning kids in happy talk (its web-based news is still as straight as anything available). The WSJ under Murdock is dumbing-down to the USAToday of business. It does have the old, reliable hostility to real estate and government, but its stock-boosting leads to a parade of “strong-recovery” stories. The New York Times has been the counterweight, but now it has a President that it likes, and pushes administration success and recovery.

Meanwhile, the economy is in a cycle never seen before, parts in actual recovery, parts not, and which one is predominant and trend-setting should preface every story.

The legitimate good news this week: March retail sales jumped 1.6%. If only by means of stimulus doesn’t matter — the deficit spending and big tax refunds are supposed to work. Industrial production crept upward .1%, but capacity in use has been in a steady climb to 73.2%, as has every measure of manufacturing. Some of that is just pipeline-filling, but some is honest exporting, as the emerging world and Asia continue to rocket and consume. China’s GDP shot up 11.7% in Q1.

That’s it for the good news. Careful readers saw mini-stories about another jump in unemployment claims, up 45,000 in two weeks. Harder to find: a sudden sharp drop in purchase mortgage applications, just when the expiring tax credit (and that recovery thing) was supposed to boost them. The major dailies dutifully reported the chasm between administration housing policy and result, but with far too much deference.

I could not find the following news in any outlet listed above. The National Federation of Independent Business has been the definitive small-business trade group and surveyed its members since 1973. It issued two reports this month: its regular survey opened, “The persistence of Index readings below 90 is unprecedented… 18 consecutive months.” Every sub-index chart shows a recession-level “L” tipping to weaker. The top small-business problem is basic: sales volume is awful.

The second report at www.nfib.com is a special study on small-business credit, and Perfesser Bernanke’s testimony revealed the Fed had assisted its preparation (no leading outlet gave priority either to the study or the Fed’s involvement). The title  revealed most of the 45-page content: “Small Business Credit In A Deep Recession.” The report detailed a crucial linkage — and surprise to the NFIB itself — small business is terribly reliant on real estate credit, and that is in the shortest supply of all.

Perfesser Bernanke gets it, now. Fed commentary has been stuck on the banker line, that credit is short because applicants are lousy, but the Chairman’s testimony changed: “Banks have been… imposing tough lending standards and terms; this caution reflects bankers’ concerns about the economic outlook and uncertainty about their own future losses and capital positions.” Thank you, sir. Better late than never.

Jamie Dimon preened at Chase’s 55% pop in Q1 earnings, and noted the splendid health of big business. He doesn’t know any small business people. Probably wouldn’t want his daughter to marry one. The fine print in his quarterly result: three-quarters of the $3.3 billion net income was from trading profits, not from lending, and new bad-debt chargeoffs continued their $7 billion-per-quarter pace.

 

Apr 16, 2010 Market Update

RATES IMPROVE ON MIXED ECONOMIC DATA

STRAIGHT STATS

Mortgage interest rates improved this past week as economic data was mixed.  Economic reports better than expected included March Retail Sales, which were up 1.6% on expectations that they would be up 1.1%.  Excluding automobile and truck sales, retail sales were up 0.6% on expectations that they would be up 0.5%.  February Business Inventories and March Housing Permits were also stronger than expected.  Housing permits increased 7.5% to their highest level since October of 2008.  Economic reports weaker than expected included March Industrial Production, weekly jobless claims, March Housing Starts, and the University of Michigan Consumer Sentiment Index.  Also of note, the March Consumer Price Index (CPI) increased only 0.1%.  Excluding the food and energy components, core CPI was unchanged.  Both data points reflect tame inflation.

COMMENTARY

Mortgage and long-term Treasury rates are falling suddenly today, as the SEC’s fraud charge against Goldman Sachs is tanking the stock market.

Couldn’t happen to a nicer bunch of people. The 10-year T-note has broken below recent 3.80% resistance to 3.77%, mortgages headed toward 5.00%.

Interpreting new economic data is trickier than ever, even for professionals, as an odd confluence has tipped public sources into uniform economic cheerleading. The whole country would like not to hear another word about recession, and is hungry for news of recovery. Media tend to supply whatever it takes to sell soap.

CNBC years ago dispensed with real news. Bloomberg television was a reliable replacement, but this winter cloned CNBC’s grinning kids in happy talk (its web-based news is still as straight as anything available). The WSJ under Murdock is dumbing-down to the USAToday of business. It does have the old, reliable hostility to real estate and government, but its stock-boosting leads to a parade of “strong-recovery” stories. The New York Times has been the counterweight, but now it has a President that it likes, and pushes administration success and recovery.

Meanwhile, the economy is in a cycle never seen before, parts in actual recovery, parts not, and which one is predominant and trend-setting should preface every story.

 

Apr 9, 2010 Market Update

RATES IMPROVE DESPITE TREASURY DEBT AUCTIONS

STRAIGHT STATS

Mortgage interest rates improved slightly this past week despite supply pressures from Treasury debt auctions. The auction of $40 billion of 3 Year Notes, $21 billion of 10 Year Notes, and $13 billion of 30 Year Bonds was met with reasonably strong demand. Economic data was sparse. Of note, the March ISM Services Sector Index increased to 55.5, its highest level since May of 2006. February Pending Home Sales increased 8.2% on expectations that sales would be unchanged. Year over year, pending home sales increased 17.3%. Weekly jobless claims increased by 18k on expectations that they would fall by 6k and February Consumer Credit unexpectedly fell by $11.5 billion on expectations that it would increase by $1.6 billion.

COMMENTARY

Just when everyone was certain that long term rates would rise, they fell. Wednesdays 10-year T-note auction drew more bidders than any since 94, and its yield thumped down from near 4.00% to 3.85%, mortgages back down to 5.125%. The improvement is gradually reversing, but for the moment were okay. An $11.5 billion dive in consumer credit in February more than wiped out a revised gain in January, the first in 11 months. New claims for unemployment insurance were supposed to continue improvement, dropping to 433,000, but jumped to 460,000. Careful with the hosannas to March retail sales: the measure that jumped 9% was a year-over-year comparison, and March last year was the pit of panic. The easy Treasury auction revealed the enormous gulf between the noisy sustained-recovery believers, and the quiet skeptics who elbowed to buy the bonds. Perfesser Bernanke laid it out this week: We are still far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both.

 

Apr 9, 2010 Credit News by Lou Barnes

Just when everyone was certain that long term rates would rise, they fell.

Wednesday’s 10-year T-note auction drew more bidders than any since ’94, and its yield thumped down from near 4.00% to 3.85%, mortgages back down to 5.125%. The improvement is gradually reversing, but for the moment we’re okay.

An $11.5 billion dive in consumer credit in February more than wiped out a revised gain in January, the first in 11 months. New claims for unemployment insurance were supposed to continue improvement, dropping to 433,000, but jumped to 460,000. Careful with the hosannas to March retail sales: the measure that jumped 9% was a year-over-year comparison, and March last year was the pit of panic.

The easy Treasury auction revealed the enormous gulf between the noisy sustained-recovery believers, and the quiet skeptics who elbowed to buy the bonds. Perfesser Bernanke laid it out this week: “We are still far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both.”

Along the whole length of disagreement, the widest spot in the canyon: those who understand the impact of housing on the economy, and those who do not.

Many have believed with some merit that too many American resources have gone to housing: too much credit, too many tax benefits, too much consumption, houses too big, and too much assistance to undeserving wannbe owners. Others have believed the same things with little merit: those who think everybody should put more money into the stock market instead of those silly houses.

Nothing like a blown bubble to create momentum for re-allocation. Certified good-guy, Fed vice-chair Donald Kohn in his most recent pre-retirement farewell: “Housing is almost certainly going to be a smaller part of the economy than it was when lax credit standards encouraged overbuilding and over-borrowing.”

That’s fine: no more lax standards. However, Kohn went on: “Households need to continue rebuilding wealth. They became too indebted and too dependent on housing wealth to finance current purchases and provide for future events like the education of their children and their retirement. Now they need to repay debt and save more out of current income.” You hear some version of that every day, but not from senior policy makers. The reason: Americans have not saved significant sums since the 1970s, and have never “built wealth” by saving from current income. We build wealth just like everyone else on earth, by the rising values of our assets.

From Kohn to the Fed’s loony bin… Minneapolis Fed president Kocherlakota on Tuesday: “Yes, the housing sector is important, but residential investment makes up just 2.8% of the country’s GDP. We can — I believe that we will — have significant growth in output without seeing a major turnaround in the housing market.”

Wow. Sonny, don’t believe everything that pops into your head. Talk like that makes me feel like the alumnus who hears his college football team will be “de-emphasized.”

The GDP contribution of residential construction is indeed minor. However, there are other accounts. From 2002-2008, “mortgage equity extraction” as measured by the Fed often contributed as much as 8% of disposable income — 10% in 2005. Without that addition (clearly with Greenspan’s assent, clearly overdone), every GDP analysis has shown that the US would not have emerged from the ’01 recession. MEW has been subtracting from income since the 2^nd quarter of 2008, an overpowering headwind.

Then there’s the consumption-crimping and demoralizing hit to household net worth, $7 trillion lost. And the huge, ongoing, and unrecognized losses to banks, impairing their ability to lend, and feeding a downward spiral in asset values.

Housing will get help, sooner or later (credit!). And we’ll muddle, and adapt. Even if the housing de-emphasizers have their decade, we’ll still out-fox ‘em. It will take time, but one genetic imperative drives homo sapiens harder than any besides sustenance and reproduction: the determination next year to live in a better cave.

 

Apr 2, 2010 Credit News by Lou Barnes

A pleasant surprise in March hiring has pushed up all long-term rates: 10-year Treasurys to 3.94%, and mortgages to 5.25%.

Even better news than the jobs: rates could have gone a great deal higher. Other new data this week were as positive as employment: the ISM survey of manufacturing in March jumped past expectations to the best reading since 2004, a 59.6 reading. The level of industrial activity is still below pre-recession, but improvement is clear.

Rebounding auto sales are pulling all the way through the supply chain from inventory rebuilding to the shop floor to raw materials. Sales were 10.4 million in 2009, and the pace now is 12 million (however, note the average ‘97-‘07: 16.8 million). Hot emerging markets are also pulling exports from our most competitive industries, notably heavy equipment and IT.

All financial markets have been locked in debate for a year, one side expecting a “V” recovery and attendant inflation and rate explosion, the other skeptical of any recovery at all. The traditional hair-trigger for a “V” event, in every recovery for 60 years: the turn in the job market to self-feeding positive. Is this it?

Nope.

The most important testimony: the bond market. Yes, it is a semi-closed day, Good Friday, but thin markets tend to magnify surprises, not dampen them. That rates have not rocketed today reflects the eye-glazing detail in the BLS employment stats.

The surprise: non-farm payrolls rose by 162,000 jobs, in line with forecasts for a big jump in temporary census workers; but instead 114,000 of the gain were real jobs, and January and February were revised up to positive ground. This is legitimate good news: at that pace the economy can at least absorb new entrants into the workforce; not enough to absorb the unemployed, but better.

Big print giveth, and fine print taketh away… one-third of the job gain was temp-help, and another 27,000 hired into the loopy, non-productive, healthcare Ponzi scheme. The companion survey of households found little improvement in anything, an additional 414,000 people joining the long-term unemployed in March alone, and “involuntary part-time” growing to 9.1 million.

The toughest single piece of fine print told the tale: wages in March fell. Only .1% percent, but fell. Looking farther back: job losses in recessions prior to 1990 were made good in 15-month Vees; the 1990 recession took 30 months, and the 2002 took 47; we are 27 months into this one, job losses three times as large as the prior two, and might have bottomed. Might. Neither inflation nor recovery is made of such stuff.

Nor are good politics or public policy.

Long-run conclusions are inescapable. Beginning with the emergence of China circa 1990, American labor has come under fierce wage pressure. Two bubbles, stocks and housing, sheltered the economy for a time. Today there is no such shelter available, not in “job creation” programs or anything else. The American standard of living has and will modestly decline until we restore global competitiveness.

We will succeed and come out of this. No doubt at all. However, in the meantime, here in the happy quickening of spring, average citizens are angry at their predicament, at government, and at each other. Our politics for 200 years were based on dividing up the spoils of increasing wealth (no other nation can imagine such good fortune!).

Today, the arithmetic of pie-shrinkage is deeply upsetting to us: if you want to keep all that you have, you must take from someone else. That is the root of all of this public anger, fragmentation, and governmental dysfunction. We are not remotely conditioned to the shared sacrifice of our grandparents and parents.

There is no quick fix available, but in that knowledge, and in awareness of the deeply uneven sacrifices in our society, then understanding and patience are our most plentiful and least costly resources. (As sermons go, short is better.)

 

Apr 2, 2010 Market Update

RATES INCREASE ON MARCH EMPLOYMENT REPORT

STRAIGHT STATS

Mortgage interest rates increased this past week, largely driven by today’s employment report for March. Non-Farm Payrolls increased by 162k on expectations that they would increase by 200k. However, the private sector added 123k jobs, much more than anticipated. Most of the gains in employment were expected to come from the temporary hiring of US Census workers. Only 48k government employees were added, much less than anticipated. Other data was mixed. Reports better than expected included the January Case Shiller Home Price Index, the March Consumer Confidence Index, weekly jobless claims, and the March ISM Manufacturing Index. Reports weaker than expected included the ADP employment change, the March Chicago Purchasing Managers Index, continuing jobless claims, and February Construction Spending. Also of note, the Fed’s $1.25 trillion mortgage backed securities purchase program concluded at the end of March.

COMMENTARY

A pleasant surprise in March hiring has pushed up all long-term rates: 10-year Treasurys to 3.94%, and mortgages to 5.25%. Even better news than the jobs: rates could have gone a great deal higher. Other new data this week were as positive as employment: the ISM survey of manufacturing in March jumped past expectations to the best reading since 2004, a 59.6 reading. The level of industrial activity is still below pre-recession, but improvement is clear. Rebounding auto sales are pulling all the way through the supply chain from inventory rebuilding to the shop floor to raw materials. Sales were 10.4 million in 2009, and the pace now is 12 million (however, note the average ‘97-‘07: 16.8 million). Hot emerging markets are also pulling exports from our most competitive industries, notably heavy equipment and IT.

 

Mar 26, 2010 Market Update

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.

 

Mar 26, 2010 Credit News by Lou Barnes

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.

 

Mar 19, 2010 Market Update

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.