Friday, October 31, 2008
Tuesday, October 28, 2008
Tuesday 10/28/2008
10/28/2008
Another bad day for the rate markets.
Yesterday mortgage prices plunged 30/32 with rates up about 50 basis points, today mortgages off 19/32 with another 25 basis point increase. The long end of the curve took the biggest hits, with the 10 yr note yield jumping 16 basis points. The stock market is very oversold and due for a strong bear market rally that we believe started today and gained momentum right into the close. Mutual fund selling is about over in equities but those hedge funds are still leveraged and difficult to tell if they are finished their forced selling for the moment. Looking at all of the technical's on the three key indexes, the selling recently has held the lows put in on Oct 10th. Not good news for the rate markets; with huge amounts sitting in treasuries if equities gain traction in the near term it will likely drag treasury and mortgage prices lower. That said, the strength of today's stock market move may have shot the wad for most of the potential rally.
Although the stock market is looking like it has put in a bottom at these levels; any rebound now isn't likely to last long or climb too high as the economy still has a lot of headwinds and not likely to see improvement for many months. We expect unemployment to increase to over 7.0% within the next four to five months (now 6.1%). Consumers are tapped and will pull in their spending, with the coming Christmas shopping season one of the worst in years. Today the Conference Board released their consumer confidence index; it plunged to one of the biggest month to month decline we have seen in years, from 61.4 in Sept to 38.0 in October----undoubtedly its the crashing equity markets and the losses in 401Ks and other retirement investments.
Markets continue to look for a 50 basis point cut from the FOMC meeting tomorrow when the statement is released at 2:15. Do not look for any major change in the rate markets however; this time a rate cut will have little impact on interest rates. Markets are well aware of the coming cut and have not reacted to it as is the usual case. We are more interested in rate cuts coming from the ECB and the bank of England when they meet.
Lenders of all types are keeping their purses shut; borrowing money for autos, homes and credit cards remains tight. To measure the potential length of the recession look at the residential real estate market and further to mortgage credit underwriting. Not anything being said these days about dealing with the mortgage market crisis, except to throw money at banks and open credit lines for banks to keep them floating. Obviously, that is necessary but it only goes so far. The US economy is built on consumers and consumers are motivated primarily on housing markets. Lets not take our eye off the ball with the alphabet soup of various bailout packages that the Fed has initiated. Treasury must step up and start buying mortgages!
The number of vacant houses for sale edged up to 2.23 million vacant units in the third quarter from 2.1 million units in the second quarter, according to a Census Bureau report, as foreclosures continue to bolster this inventory of unsold homes. The number of vacant houses on the market rose above 2 million in the fourth quarter of 2006 and has not retreated despite builders slashing construction of new homes to levels not seen in 26 years. (Nat'l Mtg News)
This afternoon's $34B 2 yr note auction was well bid but the rate was higher than in the WI trading prior to the 1:00 auction. A 1.6% rate against 1.57% trading in the WI market this morning, a solid 2.49 cover and a high 42% indirect bidder take (foreign investors). The previous auction saw a 2.115% rate and a 2.21 bid-to-cover with a 27.9% indirect bidder participation rate. Tomorrow $24B of 5 yr notes goes off.
Tomorrow expect the stock market to open better and rates under additional pressure. The stock market is starting a bear market recovery that shout increase the DJIA index 1000 to 1500 points in a choppy back and worth process. At 2:15 the FOMC announcement; if the Fed cuts only 25 basis points it will disappointment markets as most are fully expecting 50 BPs. At 8:30 Sept durable goods orders, a volatile series, is expected down 1.0%.
The dollar had a good day against the yen but weaker against the euro. Crude oilat about unchanged at $63.00. Gold traded up about $4.00.
Keep rate locks locked in overnight.
Another bad day for the rate markets.
Yesterday mortgage prices plunged 30/32 with rates up about 50 basis points, today mortgages off 19/32 with another 25 basis point increase. The long end of the curve took the biggest hits, with the 10 yr note yield jumping 16 basis points. The stock market is very oversold and due for a strong bear market rally that we believe started today and gained momentum right into the close. Mutual fund selling is about over in equities but those hedge funds are still leveraged and difficult to tell if they are finished their forced selling for the moment. Looking at all of the technical's on the three key indexes, the selling recently has held the lows put in on Oct 10th. Not good news for the rate markets; with huge amounts sitting in treasuries if equities gain traction in the near term it will likely drag treasury and mortgage prices lower. That said, the strength of today's stock market move may have shot the wad for most of the potential rally.
Although the stock market is looking like it has put in a bottom at these levels; any rebound now isn't likely to last long or climb too high as the economy still has a lot of headwinds and not likely to see improvement for many months. We expect unemployment to increase to over 7.0% within the next four to five months (now 6.1%). Consumers are tapped and will pull in their spending, with the coming Christmas shopping season one of the worst in years. Today the Conference Board released their consumer confidence index; it plunged to one of the biggest month to month decline we have seen in years, from 61.4 in Sept to 38.0 in October----undoubtedly its the crashing equity markets and the losses in 401Ks and other retirement investments.
Markets continue to look for a 50 basis point cut from the FOMC meeting tomorrow when the statement is released at 2:15. Do not look for any major change in the rate markets however; this time a rate cut will have little impact on interest rates. Markets are well aware of the coming cut and have not reacted to it as is the usual case. We are more interested in rate cuts coming from the ECB and the bank of England when they meet.
Lenders of all types are keeping their purses shut; borrowing money for autos, homes and credit cards remains tight. To measure the potential length of the recession look at the residential real estate market and further to mortgage credit underwriting. Not anything being said these days about dealing with the mortgage market crisis, except to throw money at banks and open credit lines for banks to keep them floating. Obviously, that is necessary but it only goes so far. The US economy is built on consumers and consumers are motivated primarily on housing markets. Lets not take our eye off the ball with the alphabet soup of various bailout packages that the Fed has initiated. Treasury must step up and start buying mortgages!
The number of vacant houses for sale edged up to 2.23 million vacant units in the third quarter from 2.1 million units in the second quarter, according to a Census Bureau report, as foreclosures continue to bolster this inventory of unsold homes. The number of vacant houses on the market rose above 2 million in the fourth quarter of 2006 and has not retreated despite builders slashing construction of new homes to levels not seen in 26 years. (Nat'l Mtg News)
This afternoon's $34B 2 yr note auction was well bid but the rate was higher than in the WI trading prior to the 1:00 auction. A 1.6% rate against 1.57% trading in the WI market this morning, a solid 2.49 cover and a high 42% indirect bidder take (foreign investors). The previous auction saw a 2.115% rate and a 2.21 bid-to-cover with a 27.9% indirect bidder participation rate. Tomorrow $24B of 5 yr notes goes off.
Tomorrow expect the stock market to open better and rates under additional pressure. The stock market is starting a bear market recovery that shout increase the DJIA index 1000 to 1500 points in a choppy back and worth process. At 2:15 the FOMC announcement; if the Fed cuts only 25 basis points it will disappointment markets as most are fully expecting 50 BPs. At 8:30 Sept durable goods orders, a volatile series, is expected down 1.0%.
The dollar had a good day against the yen but weaker against the euro. Crude oilat about unchanged at $63.00. Gold traded up about $4.00.
Keep rate locks locked in overnight.
Monday, October 27, 2008
Strategy
10/27/2008
STRATEGY We are finally seeing some signs of improvement
in the credit markets. Overnight Libor fell to 1.67% from 5.09% last
week. Overnight commercial paper rates fell to 1.05% from 3.50% last
week. Caveat Emptor- 1, 3 and 6 month Libor are still about 150
basis points higher than they should be reflecting the skittishness
and uncertainty over what the future brings us. Mortgage rates jumped
this past week. Just what we do not need. Until this uncertainty is
lessened or removed, the markets will continue to trade all over the
place.
COMMENTARY What are the issues that now need be
addressed as we move forward given that the fix is in for the financial
institutions? The US economy is not going to recovery quickly without
a recovery in housing. How do we accomplish this is the mill io n -
dollar question? We can begin by getting back to reality in terms of
underwriting standards. As long as the tightening continues, and we
see almost weekly another big lender tightening, we will prolong the
recovery. Obviously we never want to be where we were in say 2006
with the most insane(inane) lending that took place. We do however
expect that the complete reversal of lending s tandards from the Wild
West days to complete control freak days of today to find a balance
somewhere in between. It is human nature to go to extremes if cooler
heads do not prevail. We desperately need cooler heads to prevail
and the days of the tight wad need to be abandoned. The current
credit starvation is preventing long-term rates from coming down not
to mention our government’s huge borrowing needs. Now that the
government has control of the GSEs, they need to lead the pack and
start easing lending standards and others will follow suit and then
mortgage rates will come down.
The consumer has surprised us for so many years now that the
seeming change that we are experiencing in course is sending us
reeling. This may be the first time in perhaps 50 years that the
consumer is acting differently. We can no longer use our homes
as ATM machines. We are already so tapped out on our credit
cards. Where will money come from for the consumer to continue
spending? Another stimulus check? We certainly implore our
“geniuses” in Congress to learn from the recent past. The firs t
stimulus package was a one-up deal. We do not need to add to
our deficits with another one-up deal which will no t give the
consumer the shock treatment that our Congress seems to think
will work. Our senses are impaired and we are scared. The banks
are not the only one’s that are hoarding money. We do not hear
from a n yo n e we know that they are not tightening their belts
significantly regardless of their financial s ituation.
As for tax increases, they should be instituted in fat times, not
in times of severe dislocation. Yes, we understand that we cannot
continue to build on our deficits and that by raising taxes we can
help reduce them. Not now. We are too severely dislocated. We
are in a recession and making it harder for people and
businesses with increased taxes will only prolong this recession.
What is really needed is for our government to seriously downsize.
Lead by example has ne ver been more important. The budget
needs to be chopped everywhere. We need to create jobs. Instead
of s loshing money around for a one-up deal with another useless
consumer s timulus package, we should take that money to invest
in the rebuilding of our infrastructure which will create jobs and
thus create real productivity. The old ways do not work in this new
world we find ourselves in.
The week ahead does not bring us any s ignificant economic
data. Monday’s September leading indicators report is already old
news. Friday’s September existing home sales report is expected
to be unchanged from August. The markets are very jittery and until
we have some notion of what all the bad debt amounts to,
whenever that will be, we expect they will remain very volatile. We
also expect that Libor rates across the board will ease further.
STRATEGY We are finally seeing some signs of improvement
in the credit markets. Overnight Libor fell to 1.67% from 5.09% last
week. Overnight commercial paper rates fell to 1.05% from 3.50% last
week. Caveat Emptor- 1, 3 and 6 month Libor are still about 150
basis points higher than they should be reflecting the skittishness
and uncertainty over what the future brings us. Mortgage rates jumped
this past week. Just what we do not need. Until this uncertainty is
lessened or removed, the markets will continue to trade all over the
place.
COMMENTARY What are the issues that now need be
addressed as we move forward given that the fix is in for the financial
institutions? The US economy is not going to recovery quickly without
a recovery in housing. How do we accomplish this is the mill io n -
dollar question? We can begin by getting back to reality in terms of
underwriting standards. As long as the tightening continues, and we
see almost weekly another big lender tightening, we will prolong the
recovery. Obviously we never want to be where we were in say 2006
with the most insane(inane) lending that took place. We do however
expect that the complete reversal of lending s tandards from the Wild
West days to complete control freak days of today to find a balance
somewhere in between. It is human nature to go to extremes if cooler
heads do not prevail. We desperately need cooler heads to prevail
and the days of the tight wad need to be abandoned. The current
credit starvation is preventing long-term rates from coming down not
to mention our government’s huge borrowing needs. Now that the
government has control of the GSEs, they need to lead the pack and
start easing lending standards and others will follow suit and then
mortgage rates will come down.
The consumer has surprised us for so many years now that the
seeming change that we are experiencing in course is sending us
reeling. This may be the first time in perhaps 50 years that the
consumer is acting differently. We can no longer use our homes
as ATM machines. We are already so tapped out on our credit
cards. Where will money come from for the consumer to continue
spending? Another stimulus check? We certainly implore our
“geniuses” in Congress to learn from the recent past. The firs t
stimulus package was a one-up deal. We do not need to add to
our deficits with another one-up deal which will no t give the
consumer the shock treatment that our Congress seems to think
will work. Our senses are impaired and we are scared. The banks
are not the only one’s that are hoarding money. We do not hear
from a n yo n e we know that they are not tightening their belts
significantly regardless of their financial s ituation.
As for tax increases, they should be instituted in fat times, not
in times of severe dislocation. Yes, we understand that we cannot
continue to build on our deficits and that by raising taxes we can
help reduce them. Not now. We are too severely dislocated. We
are in a recession and making it harder for people and
businesses with increased taxes will only prolong this recession.
What is really needed is for our government to seriously downsize.
Lead by example has ne ver been more important. The budget
needs to be chopped everywhere. We need to create jobs. Instead
of s loshing money around for a one-up deal with another useless
consumer s timulus package, we should take that money to invest
in the rebuilding of our infrastructure which will create jobs and
thus create real productivity. The old ways do not work in this new
world we find ourselves in.
The week ahead does not bring us any s ignificant economic
data. Monday’s September leading indicators report is already old
news. Friday’s September existing home sales report is expected
to be unchanged from August. The markets are very jittery and until
we have some notion of what all the bad debt amounts to,
whenever that will be, we expect they will remain very volatile. We
also expect that Libor rates across the board will ease further.
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