From Russ Certo of Gleacher & Company
Let it ever be said that America had no sooner become independent than she became insolvent of that her infant glories and growing fame were obscured and tarnished by broken contracts and violated faith, in the very hour when all the nations of the earth were admiring and almost adoring the splendor of her rising.
A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned- this is the sum of good government.
Rather go to bed supperless than rise in debt.
Uprisings in Africa and the Middle East last week trumpeted any and all global investment themes. The hearts and minds of peoples against regimes played out on a global scale. Crude ended the week up 9.1%. CBOE Volatility Index, VIX, rose 15%. Global equity bourses retreated a few percent with the U.S. outperforming by a marginal percent on QUALITY flight.
The Swiss Franc traded like GOLD as both assets also benefitted from safe haven flows. The 30 year long bond was another beneficiary and its performance dramatically flattened the yield curve as investors translated the prospect of higher energy prices as an economic TAX and not a harbinger of inflation expectations.
In some ways there is a marriage of both global and domestic themes alike as the peoples yearn for representation and the embodiment of what government REPRESENTS for people. Or doesn’t represent. Played out on a minor scale, one eye this week was on Wisconsin, Indiana, Ohio, New Jersey and the battles of the hearts and minds of public and private employees alike or better quantified as the high profile and human debate of the efficient allocation of private tax dollars and the consequent rate of return of public service. To oversimplify, it seems like the relevant and searching question everywhere in nation(s) is, how effective does government allocate public and private resources and consequently represent its peoples?
This is the looming topic in the United States this week as both sides of the Congressional isle try to avert a government shutdown as lawmakers have funded our domestic "obligations?" only through this Friday. I guess obligation is a relative term. Federal agencies are scrambling to figure out how to handle a shutdown of government. Hey, mail would continue but Federal Parks would be closed. There are many other obvious fiscal and market iterations to be learned as to any auxiliary impacts of how a shutdown or our budgetary largess will shut us down from our creditors.
Why not add another "supervisory" policy body to the equation to this week to complicate the mix as "helicopter" Ben delivers a generally demonstrative semi-annual Humphrey Hawkins testimony to the Congressional wigs on the Hill. Years ago Humphrey Hawkins was one of the most volatile trading sessions of the year. Let’s see what can learn about future monetary policy from "helicopter" or "biofuel" Ben given what central bank monetary policies have contributed to recent commodity and energy instability and maybe partial catalyst to "imbalances’ around the world? Further, Treasury Secretary testifies on cutting the U.S. role in the mortgage market. Trying to trade the likes of robust month end index extensions, FED buybacks, and fundamental payroll reports (Friday consensus est. +200,000) this week almost seems like an afterthought to government hand in global policy AGAIN.
What are the fundamentals that have been relegated to back page news given the seemingly fundamental(ist) change brewing in the Middle
East? Rosenberg in Barron’s this weekend highlighted Thursday’s release of Commerce Department January durable goods orders and shipments. Beneath the surface the durable orders "ex" transportation and defense components, dropped 6.9%, the worst since January 2009, the zenith of the great recession. Granted these data are volatile but this portends consideration of the underbelly of prospective economic recovery. As a timely side note, he and other pundits recently have equated every sustainable $10 increase in the price of crude (last week) lobs a near percent off GDP.
Also, domestically and back page Wal-Mart posted its 7th straight sales decline at U.S stores last week. Is this is a sign of a consumer recovery hedonic switch to higher consumer outlets and outlays? Further, the front page of Saturday NYT business reports that recession wary consumers are keeping their stuff longer, literally. Car owners, for example, are holding onto their clunkers longer than at any time since 2008. Not just the big ticket items like durables noted above. For a number of products like cars, phones, computers, even shampoo and toothpaste, the data shows a slowing of product life cycles and consumption.
Stephanie Pomboy noted in an interview with Barron’s that there is an unfavorable seasonal adjustment period that moves from very low in January to high in March and April and that retail sales will have a high hurdle adjustment to show positive prints in coming months. Further year over year comparisons will also become optically challenging as the year progresses. Moreover, she notes that Federal stimulus dollars are widdling away.
This is at a time when retail investors had added $32 billion to mutual and exchange traded funds. Planners are mystified at risk adverse clients who have been profiled to have liquidated equities near the lows and appear to be capitulating with the S&P up 100% from pre-crises lows. I will also suggest that these investors are STARVED for performance given Fed engineered paltry low yields. Hard to grow your net worth with conservative bank CD rates and fixed income living ZIRP rates. They are being forced into the market by Fed policy and I think we can anticipate the outcome, given what other policies action conclusions we have reached and have impacted corners of around the world. Weekly net inflows into stock funds averaged $5.5 billion on the week.
A dichotomy of investment flows or is it that this week, Bank of America, the largest U.S. bank, said that in January that the loss in its credit card division widened to $6.6 billion in 2010 versus $5.3 billion in previous year. Meanwhile, the Obama administration is pushing a settlement to reduce the loan balance of troubled borrowers who owe more than what their homes are valued at, which is approximately 23% of all mortgages outstanding in the United States. This would cost big banks billions but could ultimately help clear housing stock. I’ll leave the moral hazard aspects and contract right considerations to the quotes of our founding fathers above and below.
Mortgage players years ago subscribed to the notion that the U.S. housing market embodied quantifiable specific Metro characteristics which were mined for clues regarding underwriting standards and loan performance and, hence, security valuation. The marketplace learned during the great recession that markets can very quickly become correlated and represent national not metro themes. So, recent history bundled many of these correlations from a performance point of view UNTIL NOW.
As just noted before the housing "boom" regional and national prices in the 14 biggest markets had a negative correlation. According to Case Shiller index from 1997 to 2006, however, correlations become close or were determined by market liquidity or illiquidity functions. Correlations are still quite high by pre-1997 standards but they ARE supposedly weakening. For example medium prices for existing home sales declined from the previous year in 134 of 152 metropolitan statistical areas. By contrast in the 4thquarter of 2010, median prices ROSE in 78 markets, fell in 71 and were unchanged in three.
One would think this is a hopeful sign but the above data from the National Association of Realtors (NAR) is based on quarterly price data and can be skewed higher or lower by merely a few transactions. This is why some economists look at Case Shiller because it is based on repeat sales of specific homes, arguably more accurate but limited to only the 20 biggest markets. Mind you, this week home prices home prices fell to now lows in eleven cities in December, according to NAR. But also this week it was revealed that NAR may have been over-counting home sales dating back to 2007. For 2010 the group had reported a convenient mere 5.7% drop in home sales compared to a 10.8% drop by CoreLogic, the shtick real-estate analytics firm.
The WSJ urges getting a mortgage before the door gets shut. They observe that new laws and regulations, still declining home prices, new fees associated to GSEs shoring up their finances, and Dodd-Frank provisions slated to kick in will adversely impact the ability to get affordable loans.
Fannie and Freddie ARE adding new fees to loans to people with the best credit, credit scores over 720 but who put down less than 25% or borrowers with scores between 700 and 719 who put down less than 20%. The new fees will be 25bp to 50 bps on the loan values.
Dodd-Frank provisions to take place on April 18th will change how mortgage brokers are paid. Perhaps, a responsible pursuit, but the likely consequence is a bevy of new costs that will be passed onto borrowers. Also, there will be more restrictions with the FHA and its relationship with both consumers and the GSEs.
The FHA needs to bolster its capital and is raising its required annual mortgage-insurance premium for its loans by 25% of the loan value. This is really important as these loans are aimed for first time home buyers and FHA has been the major backstop in last several years requiring only 3% down and has grown its market share from less than 3% of origination market share to greater to 30% given comparatively tight credit conditions in other lending markets. There will also be an up-front mortgage insurance payment of 1% of loan amount and an ANNUAL premium of 1.15% which also goes into effect on April 18.
Even more tenuous for borrowers (of last resort) is that the FHA is changing the minimum down payment required for a loan to a whopping 10% vs. recent 3%. Also, Fannie and Freddie loan limits are likely to drop back to $625,500. The limits were temporarily increased to $729,750 in 2008 when the market for "Jumbo" loans all but disappeared.
A separate article in the Sunday NYT real estate section discusses how the new fee rate structures above would raise the cost of a $157,000 mortgage, a typical FHA loan amount, by about $33 a month or $396 a year. Or if you live in Manhattan where the average home price is still one million, the Fannie and Freddie loan limit changes, mean the higher cost of non-federally insured jumbo loans. Again, Treasury Secretary Geithner testifies on cutting U.S. role in mortgage market, a commendable pursuit but with important varied implications for all player stakeholders, which will like ensure even higher fees.
The above bank and originator stakeholders above which are likely to pay higher fees for originating new loans as part of the afore-mentioned "reform" were also the focus this week of Fed’s Hoenig , who no longer votes on interest rate decisions, is known as a dissenter of what he perceives to be destructive Fed money printing tactics. This week he chimed in on the undeniable complete failure of Dodd-Frank’s stated goal of eliminating the threat of too big to fail institutions.
As a result of Dodd-Frank there is greater concentration of derivative exposure amongst the top five biggest banks. The concentration of derivative risk has never been greater and the top five biggest lender banks account for 98% of total derivative exposure. Also, the complexion of transactions is highly concentrated between the firms themselves, leaving the "systemic risk from too-big to fail firms even worse than before the crises." Obviously Fannie and Freddie still also have a small derivative counterparty concentration of activity with less than two dozen players. Another hailed watershed policy endeavor which illustrates again the inefficient allocation of government "regulation".
Barron’s this weekend ran a piece titled, "Beyond Laissez-Faire" which revisits Adam Smith who is known for his laissez-faire theories in his 1776 "An Inquiry into the Nature and Causes of the Wealth of Nations." The great economist railed against allowing any bank to get so big that its failure could bring down the financial system.
As we may have studied, Smith felt the "invisible hand" of open competition to transmute private self interest into the public good of LOWER prices was essential. Monopolies, preferential tariffs, less-than-impartial regulation and other restraints fettered the invisible hand which just maybe peoples around the world have discovered recently.
I think this is particularly timely reminder given the symbolic unrest caused by overarching demagogue around the world, a domestic imminent vote on increasing the debt limit above $14 trillion dollars, and the partisanship of state and private workers fighting for varied visions representation by government.
As we turn the page the chief of federal budgeting, Jacob Lew, the director of the Office of Management and Budget is misleading the public on Social Security in Barron’s.
And the "government-guaranteed annuities would let us retire without fear" and help the Treasury find a new source of domestic demand for its paper. A topic we have discussed often.
"Government is best when it gets out of the way of the marketplace by largely restricting its activities to limited regulation, national defense, protection of property rights".- Adam Smith. The parallels of what is affecting both domestic and global markets this week.