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David Kotok | Fed, Mortgages, Housing (and Chuck Gabriel of CapAlpha)
Important comment from David Kotok and exerpt from Charles Gabriel of Capital Alpha on the lowering of the conforming loan limit. Obama fiddles as American housing (and investors) burn via deflation stoked by government policies. -- Chris
Fed, Mortgages, Housing
September 22, 2011
“The Lord giveth and the Lord taketh away.” –Job 1:21
We shall paraphrase. The Fed giveth and the Congress taketh away.
First the Fed.
By now, everyone between here and Mars knows about “Operation Twist.” Simply put: the Fed is selling short-term securities and buying longer-term securities. The overall size of its portfolio remains the same. Markets reacted with a lowering of longer-term interest rates. The 10-year benchmark US Treasury note traded to a record low yield; it is currently 1.78%. The 30-year bond broke below a 3% yield and is currently at 2.89%.
Shorter-term rates are unchanged. Worldwide dollar flows coupled with huge excess dollar liquidity balances combine to keep these rates near zero. The 2-year Treasury note yields 0.19% this morning. The Fed is committed to maintaining its very low short-term rate strategy for two more years. BTW, Bernanke’s term as Fed Chairman ends in 2013. Every Republican candidate has indicated he/she would replace him if elected president. Bernanke has the votes (seven affirmative) to continue his policy; he is now accustomed to three dissenting voting presidents. The market is used to them, too.
The Fed also committed to rolling its mortgage portfolio by reinvesting cash flows into more qualified mortgage paper. This policy action was a surprise to many observers. The mortgage paper originates with the federal agencies (GSEs). It is riskless because of the US government backstop of Fannie Mae, Freddie Mac and FHA. Residential mortgage rates reacted by falling. We are about to see the 15-year conforming mortgage interest rate below 3% and the 30-year below 4%. This policy is designed to help the real estate market stabilize. Thus, the Fed giveth.
Now to the Congress, where the lunatics we elect to represent us taketh away.
Congress has been in a fight over funding FEMA, which needs money. It is dealing with hurricane and flood damage from South Carolina to Vermont. It also needs to be prepared for the next event. The post-Katrina FEMA cannot exist as a “pay as you go” and/or “wait until we need you” agency. It has to be forward-looking so it can react to crisis in a timely way.
But Congress is stymied by those who will not fund emergency appropriations without cutting something else. So FEMA sits in limbo while Washington fiddles, Texas burns, and Vermont tries to dry out. What has that got to do with housing and the Fed? Answer: a lot.
Here is an except from a research note penned yesterday by Charles Gabriel of Capital Alpha Partners, LLC. We thank Charles for giving us permission to share this note with readers, and for providing the links to see the details.
Readers: please take a few minutes and examine the information in the links below. This is huge. In New Jersey, as an example, every county is negatively impacted by the Congress’ inability to reach common ground decisions.
“Last Chance Hopes for a Loan Limit Reprieve Are Now Dead – What Does It Mean?
“… Separately, Feinstein's decision to hold back her last-ditch amendment was said to be due to a lack of Republican votes, although as we wrote earlier, the measure would likely have gone nowhere in any event. This means that the higher loan limits can now be considered all but officially dead, unless they are reinstated retroactively later this year (a prospect only in the event of another sharp implosion in the economy).
“… perhaps the most worrisome effect could be that in some 620 of 3143 U.S. counties, or 20% of the total, an average drop of as much as 14% in FHA loan rates might ensue, with an even bigger impact (per the National Association of Home Builders) ‘because these counties include significant concentrations of population and housing.’ Thus, the FHA-related change might impact as much as 59% of all owner-occupied housing in the U.S. [See a useful NAHB study summary here and chart of affected U.S. counties here.]“
Many thanks again to Charles Gabriel, his partner Jim Lucier, and their colleagues for superb research.
As for our elected Washington lunatics, we fear that Congress may undo all the Fed is trying to do. It seems to me that the finger-pointing by Congress at the Fed is aimed in the wrong direction. House Members and Senators of both parties need to look in the mirror.
We are headed to Helsinki and Stockholm next week. Helsinki for brief meetings (one day) and then to Stockholm for the Swedbank annual global economic outlook meeting. It will be followed by the Global Interdependence Center conference (www.interdependence.org). European sovereign debt issues and resolution options will be the subject of both the public portion and the private discussion.
Some thoughts on stocks before we leave for Stockholm.
It looks like markets are going to test the 1100 level of the S&P 500 index. That was the intraday low reached on August 8 and retested twice in the futures market. Was it an interim selling climax or was it “the” selling climax? History suggests it was the final climax, if we are not going into another recession. If we are heading into recession again, history suggests that the bear market will be longer and the bottom deeper.
We are on the “no recession” side. Slowdown yes, but steep recession, no. We admit that uncertainty is very high, and all expectations have wide confidence intervals. We look at the S&P 500 Index dividend yield and see it higher than the riskless 10-year Treasury note yield. We look at conservatively estimated earnings yields and compute an equity risk premium of 600 to 700 basis points. That is an extraordinarily high reward for anyone willing to invest in stocks. History shows it is a bargain. We will seize it. Our longer-term target for the S&P is above 2000 by the end of this decade, if not before.
Skoal.
David R. Kotok, Chairman and Chief Investment Officer
Resources:
To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.aspx
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.aspx?file=styles_index.asp
For personal correspondence: david.kotok@cumber.com
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Copyright 2011, Cumberland Advisors. All rights reserved.
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David,
It looks like you are talking your book. I would not discuss the recession stuff and/or SPX 2000, it's up to you to bet on this. Yet your comments regarding debt limits and joy regarding the fact that "Fed giveth" is outright disgusting! What the Fed is giving? My money! To whom? To you! I am getting less that 1% on my CDs, and after these shenanigans would get even less. And for what? So you can "buy the dip"? And your colleagues at Capital Alpha would not loose on their houses? Nice!
The whole scheme should be abolished, and the sooner the reasonable people left in Congress do it, the better.
David,
It looks like you are talking your book. I would not discuss the recession stuff and/or SPX 2000, it's up to you to bet on this. Yet your comments regarding debt limits and joy regarding the fact that "Fed giveth" is outright disgusting! What the Fed is giving? My money! To whom? To you! I am getting less that 1% on my CDs, and after these schenangians would get even less. And for what? So you can "buy the dip"? And your collegaues at Capital Alpha would not loose on their houses? Nice!
The whole scheme should be abolished, and the sooner the reasonable people left in Congress do it, the better.
David - sloppy / lazy (naive?) analyisis. The Twist operation has the Fed swapping short term Treasurys for 10 to 15 year MBS securities (notably NOT 10 -15 yr UST).
Firstly, the Fed has not only vastly increased the duration and convexity (essentially PRICE RISK) of their bond portfolio, but also has increased the CREDIT RISK of their portfolio. Sounds like desperation to me. Guess the ES agrees w/ my assessment as well.
Secondly, Congress is doing nothing as measured by the passing (none) of legislation. Individual coingresspeople are in fact being very active (effective?) as measured by their desire to CUT Federal Spending.
Adding points 1 and 2 above completely throws your article into the dust bin of a Lame Stream Media report.
You add no value at all.
Ahhhh David... your big text don't make it so. Hurts my eyes.
I agree Rocker, if this is not a recession I don't know what is. Been looking for work for a while now and have not even gotten a fuck you kindly message back from all the places I've tried.
Being mid 50's, educated and experienced does nothing for you.
Being mid 50's, educated and experienced does nothing for you...
Sure it does, it gets you a fat retirement check in the mail, (or direct deposited), medical benefits and plenty of time off to enjoy the national park system at a discount. Given your education was based on a social service that landed you with a department of education or a law enforcement career with government for the last few years or so.
Didn't you get the memo?
Boy that sarcasm bites deep. I am fully employed with two jobs. commercial real estate (which is dead and I get cheated out of commissions), and some publishing, which pays for the gas. I'm 58, no way to get a job in the market cause I'm 'overqualified', so back to reinventing myself for about the fifth or sixth career. I'm thinking of opening a llanteria, they seem to do well.
Yeah, we were suckers doing start up businesses and private enterprise. Should have taken a county job and sat on my fat fucking ass.
FEMA only needs funding if you accept the premise that the country needs FEMA.
Precisely.
The huge increase in conforming loan limits during the 2008 crisis was one of the most stealthful and pernicious actions taken by policymakers. Now these limits are scheduled to come back to a more reasonable (and much closer to actual market) level. The upshot is that the people who made poor decisions during the (policy induced and therefore false) housing boom will be unable to extricate themselves from these decisions on the backs of taxpayers. Just what is the problem here?
Exactly. This program was never intended to be helping people get 3/4 of a million loans at better rates.
So, do you think KPMG will take your advice, Chris?
No Recession. LOL How about Depression ?
Yes Rocker.
No recession? He already lost that call.
It's already a Depression, so how about calling it a Uber Depression?
It's so bad the current system cannot be saved. Everything will get better under a new system, but that is going to take quite some time and there will be a lot of winners, and even more losers.