Is the floor in mortgage rates in? After hitting a record all time low of 4.19% in the week ended October 14, the Freddie 30 Year Fixed mortgage rate has risen slightly but appreciatively to 4.21% (chart below). This is not all that surprising considering the 10 Year UST has been meandering around the 2.5% spot for a while now. What it does indicate, however, is that absent QE2 mortgages may have just hit their floor for the current regime. As it is no secret the Fed is intent on lowering mortgage rates as low as possible the question becomes whether a level in the low 4%'s is enough for mortgage activity to finally pick up.
First off let's follow up on 10s/30s in the US. The market saw almost to the tick the topside of the channel resistance and is flattening quite a bit this morning (see attached chart). Given how steep the curve is and over-extended the move has been, I expect a correction of at least 20bps if not more here. I have been recommending conditional flatteners in TYZ0/USZ0 and I stick to the strategy. It isn't late to get on board, levels are still relatively attractive and one can enter the trade premium/delta neutral. I have added the Japan 10s-30s chart as well to put things in perspective, both with respect to how boring a stealth depression can be, and to give an idea where we stand in terms of steepness historically. Interestingly if one charts 10s/30s in Japan on the same chart with the Nikkei, one can realize that with the exception of 2005 when 10s30s flattened as the Nikkei rallied with markets believing Japan was about to embark on a hiking cycle, 10s30s and Nikkei have traded in synch for the past decade. Flattening has traditionally been bull-flattening associated with Nikkei weakness and conversely (see NKY Vs 10-3- chart). The other exception? Right now! The Nikkei is 5,000 points cheap to the curve!! Or is it the curve which is 50bps rich to the Nikkei? Obviously as one can see on the SPX Vs NKY chart the Nikkei is where it is because of USDJPY as the strong Yen hurts Asian exporters. So based on that either the Yen should be 40% weaker, or more likely the SPX is 35% overvalued and the curve too steep due to excessive liquidity expansion in the system which is not reflecting underlying economic activity. Something certainly has to give, and for those who do not favor outright positioning in either the curve of equities, it seems like trading the curve against equities in Japan is starting to appear like a good relative value opportunity. - Nic Lenoir
"Philly Fed factory survey improves slightly in October; both it and Conf Board's leading indicators index in line with expectations." Translation: more free money.
And so the chapter of Goldman's prop trading operation comes to an end. As Dealbook reports, "famed New York proprietary trading desk is headed to Kohlberg Kravis Roberts, as the investment bank winds down the operation to comply with new federal regulations for Wall Street." Of course, all those who are left at Goldman prop will be put in "client facing" positions, which means nothing really as they will merely hold inventory based on what Goldman's flow bias is, even as Goldman follows in Morgan Stanley's footsteps and ramps up its VaR to fresh all time highs.
The CONference Board announced its Leading Indicators increased 0.3 percent in September to 110. This was in line with expectations. What was also in line with expectations is the ongoing revisionist lie that has permeated every single government statistic: the August number was lowered from 0.3% to 0.1%. Of course, at the time it was a beat to the consensus estimate of 0.1% and likely resulted in an other mad rush to cover stocks. Now that it has been fully priced in, the true number can be revealed. And so continues the Chinization of the US economic release complex. As the AP noted: "The index had grown steeply since April 2009 on the strength of the stock market, record-low interest rates and a rebound in manufacturing. But the rate of expansion tapered off this summer as U.S. economic growth slowed." One wonders just how deplorable the state of the economy would be if the truth were actually released.
The FHFA has just released it revised "draw" projections for the GSEs, i.e., money which US taxpayers will have to spend to keep the nationalized securitization monsters alive. The reality: after already receiving $148 billion from Tim Geithner's US Treasury, the FHFA now estimates that its downside case will result in additional $220 billion over the next 2 years, for a total of $363 billion through 2013. And since this is based on Moody's housing price forecasts, two things are certain: (i) the "upside" case of only $221 billion in cumulative draws can be heckled, and (ii) the final cost will likely be well north of half a trillion. Of course, by this point it will become clear that Fannie and Freddie have no idea whose mortgages they own (as they will discover post their subpoenaing of JPM and others), and the real cost will be potentially well in the trillions, and require a second full scale nationalization of what are already nationalized companies. Actually there is one more point: by 2013 the US will long be insolvent, the Fed will be monetizing everything (say in your best Tepper voice), and the NYSE and the Zimbabwe Stock Exchange will have merged in futile pursuit of synergies to generate $0.01 of revenue away from the 99.999% dark pool dominanted marketplace, and so what happens 3 years down the line is completely irrelevant.
How Google's Refusal To Pay US Taxes Means US Taxpayers Fund Its Innovation, Resulting In A Benefit Of $100/ShareSubmitted by Tyler Durden on 10/21/2010 - 09:28
We first discussed the topic of cash repatriation (or lack thereof) about a month ago. Since then, more and more seem to be waking up that of the over $1 trillion in cash on the corporate "balance sheet" not only is most of it unusable domestically (without being taxed at the marginal tax rate upon repatriation), but that companies are effectively boosting earnings by not paying taxes (money which should be going to the US coffers to pay for the same corporate friendly policies enacted by the government, that is currently being funded almost exclusively by individual taxpayers, and the Fed of course). And massively so. An expose in Bloomberg details how courtesy of various, perfectly legal, tax avoidance schemes, Google's effective tax rate is 2.4%, which has resulted in $60 billion in less taxes paid to the US, and which has boosted the company's stock price by a whopping $100/share!
Jobless claims "fell" to 452k with the story as usual being in the revision. Last week's 462K number which was originally expected to be 445K is now revised to 475K! But of course it is so much more palatable to get the BLS lie piecemeal instead of in one place. We are now on 25 out of 26 sequential upward revisions, and up to just under 250k Year to Date on initial claims. With this week's number beating expectations of 455k, only means the revised miss will be announced next week, when this week's number is revised to north of the expectation. The same identical story in continuing claims: the print was 4,441K, a deterioration from last week's 4,399K which again was revised to 4,450K (revision 36 out of 37). Lastly, those falling of regular rolls once again jumped, and for the week ended October 2, those on Extended Benefits and EUCs rose by 280K. Since the news confirms the US economy continues to lose workers, this will do nothing for the market's expectations of trillions in free liquidity to be announced in two weeks by the Fed. Then again, none of this matters - as Jim Iurio said earlier: "We are all currency traders."
- Banks Clueless on Foreclosure Mess Severity: Jonathan Weil (Bloomberg)
- New York Fed Faces `Inherent Conflict' in Mortgage Buybacks (Bloomberg) - as we speculated first, the FRBNY gets dragged into this as not pursuing action would be dereliction of fiduciary duties to taxpayers by Maiden Lane
- Geithner suggests major currencies "in alignment": report (Reuters)
- Geithner's Goal: Rebalanced World Economy (WSJ)
- Chinese growth slows to 9.6% (FT)
- On the "cash on the sidelines" BS and on Google's 2.4% effective tax rate (Bloomberg)
- Osborne vows not to backtrack on cuts (FT) as UK unveils dramatic austerity measures (FT)
- Greek, Portugal Bonds Lead Peripherals Lower After Spanish Sale (Bloomberg)
- We See Totally Surreal Markets (Bob Chapman, h/t John)
- Baltic Dry Index falls for fourth day as rents for all vessel types slide.
- Beige Book: Despite high unemployment and persistent weakness in housing market, consumer spending edges up.
- China’s economy grew 9.6% in Q3 - the smallest gain in a year.
- Euro-zone Oct. composite PMI falls to 53.4 - fresh one-year low.
- US 30-year yields near 1-week low as longer maturities attract.
- Deutsche Bank sells $856.6M in bonds tied to commercial properties.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/10/10
First it was the New York Fed, now the FHFA itself (regulators of Fannie and Freddie) is getting involved in putbacks. The WSJ has just reported that the GSEs have hired law firm Quinn Emanuel as the "agency considers how to move forward with efforts to recoup billions of
dollars on soured mortgage-backed securities purchased from banks and
Wall Street firms... The FHFA hasn't disclosed the targets of its subpoenas, though some
banks have acknowledged receiving them, including J.P. Morgan Chase
& Co. The probe is focused on so-called private-label securities
that were originated by mortgage companies, packaged by Wall Street
firms and then sold to investors." Not to be confused with RoboSigning, which is at the heart of the Fraudclosure and could serve as a catalyst to what some claim as the unwind of the multi-trillion MBS market in a worst case scenario, this is a parallel effort that seeks to get banks to repurchase far more of misrepped and miswarrantied mortgages. As we previously disclosed, it is precisely this ongoing action that Bank of America and Wells Fargo have been (under)reserving against: and if the GSEs, together with the FRBNY, Pimco, BlackRock and who knows who else, are sensing the current moment as one of terminal weakness for the mortgage servicers, who knows how many billions in mortgages could be putback to the TBTF banks, who are luckily flush with still fresh taxpayer cash and trillions in excess reserves. Either way, it appears that while the New York Fed is going after BofA, the GSEs are about to dine on Jamie Dimon. Either that, or all this is a smokescreen to promptly settle all current and future possible litigation in an adversarial process involving government entities, and thus streamlined to a mutually amicable resolution.
Part four of David DeGraw book "The Road Through 2012: Revolution or World War III.”: "Now that we have an understanding of how the Global Banking Intelligence Complex ran operations through BCCI, let’s look at how some of BCCI’s key players kept operating after the bank was finally shut down. As discussed in the last chapter, during the 1980s and early ’90s, the CIA worked in partnership with BCCI in what was, at the time, the agency’s largest covert operation ever, pumping an estimated $10 billion into funding the Afghan Mujahideen. Through this operation, Osama bin Laden’s al Qaeda network was formed. Bin Laden had accounts in BCCI and ran CIA/BCCI-funded camps."
Big Macro Discusses QE2 Impact On Pricing Power, Corporate Margins And Exporting Inflation Via The Renminbi PegSubmitted by Tyler Durden on 10/20/2010 - 22:24
Our friends over at Big Macro have put together the latest issue of their periodic newsletter. In this issue they look at the at seemingly inexplicable divergence between the VIX and the EURUSD 3 month implied correlation (never a good sign), the increasing delinquency rates across all consumer loan classes (as in buying but not paying, leading to companies like Netflix which made $7 million in cash in the quarter to have a market cap of over $8 billion), but most notably at the differential between commodity prices and the CPI, superimposed against inflation. What is uncovered is that while when unemployment is below 6% companies can increase prices faster than commodity prices can go up, at current levels of joblessness, it will be impossible to pass through surging input costs (whether these be in wheat, cotton, or rare earth minerals). This leads to the conclusion: "What does this mean for the inflation/deflation debate? If the FEDs QE program will continue to push up prices, companies can only squeeze their margins so much. The reason we are not seeing inflation today is that there is a lag in the feed trough from commodity prices to consumer prices, partly because companies have been able to temporarily save their margins by aggressive cost cutting. I think we are potentially set up for a big decline in returns for equity investors." The last statement has a linear severity with the amount of free money that Bernanke floods in the market in two weeks.
Oil prices came roaring back, which is what we have come to expect. The bears really had the bulls on the ropes on Tuesday, and a haymaker on Wednesday could have beaten the bulls decisively and sent them in a complete rout. We have discovered repeatedly this year that the bears no longer have that knock-out punch. The buying started on Tuesday night into Wednesday morning, when the US dollar started to lose ground. As Wednesday continued, the euro made steady progress as the dollar dropped in an almost vertical decline that lasted throughout the session. And equities rallied, putting two big outside factors on oil’s buy side. - Cameron Hanover