Yesterday's close on the Dow, a 6 year low, has brought back the flight to quality crowd who are hitting the offer for bonds, notes, mortgage backs, gold, and anything else that fall under the safe haven umbrella.
Stocks took out the November low, punishing most sectors, especially the financials. Fears of nationalizing Citi and B of A are doing the damage. S & P futures however, are still holding above the November low (740), now trading at 762. It is the last line in the sand and if violated, especially on a day end closing basis, should start another leg down towards 6000 (Dow). If this happens, your 401K which is now a 201K, will turn into a 101K. Fingers crossed for that level to hold.
Earlier today, CPI, inflation at the consumer level, came in spot on up .3% headline and up .2% core. The print left inflation unchanged for the 12 month period ending January 2008 while achieving the lowest level gain in 53 years. Fast money traders have done their best Sugar Ray Robinson imitation as the bob and weave trading is a fast moving target.
When it comes to the economy, there is no quick fix on the road to redemption. The bad news is there's probably more economic pain on the horizon to be endured as we wring out the excess. Time will heal the destruction but many are growing impatient with the White House, the Treasury, and questionable "plans" that are starting to look more like entitlement than anything else.
Technically, the buying today has kept the market from building on yesterday's bearish trend. For the strength to be meaningful, we need to see a close below 2.73% on the 10 year note (currently at 2.728%). Elliot Wave patterns remain constructive but added and continued momentum is needed for this to be more than a one hit wonder. Currently, the 10 year note is plus 35/32's, mortgage backs up 10/32's, and stocks off 124 points on the Dow.
Tactical strategy tells us to stay defensive and lock em' in when you get a little rally as improving pricing is a 2 hour - 2 day event. One simple watching point will be stocks, if they stay under fire, mortgage backs will stay positive. If a bear market rally occurs in stocks (likely within the next couple of weeks), mortgage pricing will slip slide away.
Be careful out there.
-Courtesy PrimeLending Capital Markets Group
GDP (Gross Domestic Product) took a dive in the 4th quarter, falling 6.2% with core inflation up .8%. The contraction was the largest since 1982 and well below economists expectations of down 5.4%. Domestic investment did the most damage in this report, falling over 20%. The National Association of Purchasing Managers report was also released, rising .9 to 34.2. The market was looking for a slight decline to 33. The improvement seems to be masked by the fact that some construction and other services are in the index and along with manufacturing, may have artificially bumped the numbers.
The big story of the day is Citi, which reached an agreement with Uncle Sam to substantially increase its stake in the bank. Citi will offer as much as 27.5 billion in preferred stock, upping the governments ownership to 36%. The good news is that private investors have already been lined up to participate in the Public-Private framework to inject capital. The bad news is that the short sellers in the market have targeted Citi and most other financial institutions, driving their stock into the ground. At the open, 10 million shares of Citi's traded at $1.50. Talk about a fall from grace.
As one would expect, stocks had a rough go of it to start the day but have since bounced back, now down only 64 points on the big board. Mortgage backs looked promising in pre-market action, trading up 2 or 3/32's. That has quickly faded as current market conditions now post MBS down 5/32's while the 10 year note is off 10/32's, trading at a yield of 3.02%.
To us, this still looks like a range trade which is merely at the lower end of the range. For a rally to occur, we will need to see a yield on the 10 year of 2.90% or less. The pain trade will happen if we breach the 3.07% yield mark and go higher. We like the odds of a little improvement in mortgage pricing next week but at the same time, will stick with our defensive, risk adverse strategy.
-Courtesy PrimeLending Capital Markets
Nothing pretty about today's market as both stocks and bonds/mortgage backs are taking heat.
After opening on the soft side, both fixed income and equities have slowly deteriorated as the trading day moves on. The 10 year note is currently off 24/32's, trading at a yield of 2.88%. Mortgage backs are now off 19/32's in the lower note rates and 11/32's in the more premium note rates. Don't be surprised to see a second round of price changes for the worse.
A couple items seem to be at work here. First, neither bonds or Wall Street for that matter, found comfort in the President's speech last night. Although a little more upbeat from his previous missives, last night's speech was more of a tongue lashing of the banks and other financial institutions, talking about the day of "reckoning", long in the making, now being upon us. Throwing money on top of money, the administration has been trying to stop the destruction of our economy, only to have its pocket picked every time it writes a check. We need to find a happy medium between Barney Frank and his band of angry taxpayers and the free market capitalists that make their home on Wall Street as well as main street.
Earlier today, Existing Home Sales fell 5.3% to 4.49 million units, well below economists' expectations. 45% of the sales were the result of foreclosures or short sales. The inventory of unsold home widened as well to 9.6 months. No joy in Mudville in this report.
From our technical page, the 10 year note is wound tighter than a drum, looking for a catalyst to break out into a new trend. For this to happen, the chart will need to close below a yield of 2.72% (bullish) or above 2.90% (bearish). Currently, we are at 2.88%, holding onto support at the lower end of the range. Although trading looks a little spooky, we expect the range to hold and trading to continue between the levels I just mentioned. If so, we will probably see a little improvement in mortgage pricing in the days ahead.
Both stocks and bonds have been a little sloppy today, trading in opposite directions. Stocks opened on the plus side, getting a lift from White House statements talking about keeping banks and other financial institutions in private hands, not having any intentions of nationalizing them. Citi however, is back with hat in hand, looking for additional funds to keep the doors open. Looks like the tax payers could own as much as 40% of that mess within days.
The news initially rallied stocks and hurt bonds/mortgage backs. Since the open, stocks have lost their luster, currently down 160 points on the big board. Treasuries and MBS have rallied back a touch with mortgage backs down 3/32’s as we speak (we priced down 5/32’s).
No news today, other than our politicians talking it up, but the balance of the week will be chocked full of Consumer Confidence and the FHFA House price index tomorrow, Existing Home Sales on Wednesday, Weekly Claims, Durable Goods, and New Home Sales on Thursday, and preliminary GDP/ Chicago PMI on Friday. Sir Bernanke will be testifying tomorrow and Treasury Secretary Geithner will provide more details on banks/toxic asset bailouts on Wednesday.
Throw in another 94 billion of treasury paper going to auction and you have a witches brew for volatility.
For now, the bulls have kept the market (treasuries/mortgage backs) from deteriorating further by holding above the lows of last week (high yield mark). Conditions do remain mixed as buy signals are present on daily charts but trend studies lack direction signals. This type of market will typically tread water until better info becomes available, forming a trending market. Elliot Wave studies still remain bullish but need a new rally to make their case.
Best to take the safety off and play a little more defense.
The PPI swing from -1.9% to a 0.8% this morning was the first up tick in inflation in 6-mos. The core PPI, which strips out volatile food and energy prices, rose 0.4% after rising 0.2% in December. Economists thought it would rise just 0.1%. This has put pressure on the bond market, and mortgages are .250-.375 worse than yesterday.
The number of new filings for unemployment didn't change significantly this week from last at 627,000, but the continuing claims hit a record 4,987,000.
To fund all the new Government programs, the Treasury has been busy auctioning off notes at a record pace. The Treasury announced Thursday that next week it will auction $40 billion in 2-year notes, along with a record $32 billion in 5-year notes and a record $22 billion worth of reintroduced 7-year notes. Treasury's records go back to 1980.
The Dow Jones has continued its gradual slip today as Wall Street worries that Washington's bailout plans may not work. Big board is currently down 65 at 7590. The Dow and the S&P 500 are within the range of the bear market lows of No. 20 and 21st.
The markets continue to be very choppy. Now is not the time to speculate with your locks. Locking with a float down is still the best deal in the industry.
Today’s update will be a bit short.
Treasuries and MBSs are down a bit after the Housing Affordability Plan was released (see details below), some would argue this is due to the ongoing rescue efforts taking the safe-haven bid out of play. As I type, the 10 year is off 15/32s and the mortgages are off 2/32s. The DOW is not fairing much better, slightly down for the day at 7543.
Details on the Obama administration’s housing relief plan have been released. They include:
· Facilitating refinances of mortgages controlled or serviced by the GSEs or government, even with LTVs over 80%
· Government sharing of costs to lower borrower mortgage payments to 31% of income
· Incentives for servicers to modify
· Increasing preferred stock purchases in Fannie and Freddie to $200 billion each from $100 billion
· Increasing Fannie and Freddie balance sheets to $900 billion from $850 billion
· Standardized modification guidelines to be pushed industry-wide
· Allowing “judicial modifications” also known as cram-downs via bankruptcy
· and more
- Courtesy PrimeLending Capital Markets Group
Doom and gloom grabbed the stock market by the throat this morning, sending stocks reeling for nearly 300 points on the big board. Pick your poison, whether it be the Stimulus (Spending) Plan, the market’s lack of confidence in Treasury Secretary Geithner, Global economies and equities slumping, State and Local municipalities with their backs against the door (some near broke), or the sobering reality that this recession is going to be much deeper than any we’ve been through. The reality is it’s all of the above and then some.
February’s Empire State (NY) Manufacturing Index didn’t help matters either as the print came in at a record low, minus 34.65. No need to give you the details, they all stunk.
The plus side of Wall Street’s G and D is the flight to quality that has happened in gold, treasuries, and mortgage backs. Gold in closing in on $1,000.00 an oz, the 10 year note is up 1 and 24/32’s, trading at 2.67%, and mortgage backs in the lower rates are up 11/32’s and 6/32’s on the higher rates.
One piece of encouraging news came via the TIC report, a measure of net purchases/sales of treasuries by foreign entities. The net effect was a positive 18.5 billion buys verses sells, telling us that those across the pond and worlds beyond still like our paper. Maybe they think if we default they’ll have a shot at owning Disney Land or Beverly Hills.
The week ahead will feature New Residential Construction, PPI, and CPI as the headline economic releases. Take advantage of the market where appropriate as today’s strength has willing sellers (hedge funds). It also should be evident to you that a “trend’ may last 2 days or 2 hours so don’t miss the bus. Technically, the charts are more positive than negative with a 5th wave high forming on the Elliot Wave studies.
Looks good but as many a trader has said in the past, “don’t get married to it”.
If red is in vogue, then both bonds and stocks have dressed appropriately.
Stocks off 42 points on the big board, the 10 year note down 1 point( yield 2.85%), 30 year bond down 2 and 3/4th point (yield 3.60%), and mortgage backs off a smooth ½ point.
We talked about a correction coming on the heels of overbought conditions, auction paper in need of distribution, and the market’s fear of price discovery (what are the toxic assets worth, etc.). Well it’s in full bloom yet corrective in nature, not a trend change.
The University of Michigan Sentiment Survey, which was expected to rise 1 point, fell 5 points to 56.2. Most components of the survey slipped since January, portraying a consumer who is hunkered down in preservation mode. Can you relate?
Technically, the big picture has improved for the bulls (rally lovers) with the rebound we seen over the past week. The short term however is overbought, backed by Elliot Wave patterns favoring the correction. First target will be right here at 2.87% (38% retracement target). Next level, if support does not hold, will be 2.95% (62% retracement target). Price action should form corrective overlaps, leading us to our bias that higher mortgage rates/worsening pricing will be a short term event (another few days to a week).
Best bet is to stay defensive until the market returns to more neutral levels.
We’ll warp up this exhausting week this afternoon.
Hot off the wire, the Obama Administration just announced plans to lower financing costs for homeowners with problem mortgages.
After testing the means of the borrower and setting a new value for the home, the government will subsidize the monthly mortgage payments. FNMA and FHLMC will assist in the process.
Not much change with mortgage pricing (still down 2/32’s in choppy trading) as this has to do with the problem children already on the books. Could be a good thing to help stabilize the foreclosure crisis.
Weekly Unemployment Claims dropped 8K to 623K while Continuing Claims rose 11K to a new record high. The four week moving average rose to 607K, the first time we’ve been in the 600 handle since November 1982.
Retail Sales were also released, surprising to the upside with a print of plus 1%. The ex-autos component was also higher, up .9%. Better than expected sales at auto retailers, gas stations, and general merchandise did the trick. Gift card redemptions may have been behind this however, distorting the numbers for January.
Last but not least, Business Inventories fell 1.3% and Sales dropped 3.2%, a bit more that market consensus.
Market reaction has been bearish for both bonds and stocks. Currently, the 10 year note is off 3/32’s, trading at 2.81%. Mortgage backs, especially in the low rates between 4.625% - 4.875% are off 7/32’s and investors price changes for the worse are running across our screens. Part of this is due to the 30 year bond auction which met will mediocre results, creating a 5.5 basis point tail and only a 2.02% bid to cover ratio. Indirect bidders did take 33.9% of the auction which was a plus.
Now the distribution phase of the auctions will occur as Wall Street needs to spread this paper around to the end users.
Given this process, the markets will be choppy and volatile.
Careful out there.
Earlier today, the December Trade Deficit fell 4% to 39.9 billion, the lowest level since February 2003. Exports of goods and services fell 6% to 133.8 billion, the lowest level since May 2007. Imports fell roughly the same percentage and together, narrowed the trade gap with China by 13.8%.
In other news, we have 21 billion of 10 year note coming to auction with results due at high noon cst. The amount taken by indirect bidders (foreign players) will be the key and one that could move mortgage pricing.
Outside of the auction, a star studded cast of 8 major bank CEO’s are testifying before Congress on “How I spent the TARP money”. Finger pointing and arguing for the most part but good theater nonetheless.
Levels and pricing look great today and with our oscillators (chart work)moving into nose bleed territory, odds are good that a correction/consolidation is around the corner. A good time to lock in as we haven’t seen these levels since early January.
Good day for MBS, closing up 24/32’s, about 4/32’s better than where we started the day. Stocks had a not so good day (don’t look at your 401K). That market responded to vagueness in the rescue package put forth by Treasury Secretary Geithner as it seems the market knew everything about what he was going to say before he said it. Maybe he’s been spending too much time running Turbo Tax. Down 381 points on the big board, the Dow lost 4.6% of its value and the S & P nearly 5%.
One of the reasons for our rally, besides a little flight to quality, was the fact that Geithner’s plan called for less money to be tapped (350 million and maybe 500 million) than traders expected. Another reason is that yesterday, the bears pushed the market right back to the November lows (high yield) but couldn’t take it out. We call that a reversal from critical levels which in turn carried over into today’s trade. On the close, note futures closed above the 8 day moving average for the first time since early January and eliminated the bearish trend. It also completed a 4 wave down Elliot Wave correction. Good start but it does not mean we are out of the woods.
Simply put, the market is back to neutral from bearish. More work will need to be done (stability) for a more meaningful rally to occur.
What does this mean for mortgage pricing? Early tomorrow, you may see a little better pricing followed by consolidation as traders position to take down the 10 year note auction. Stocks will be the wild card. Bad stocks, good for pricing. Reversal in stocks, not so good for our pricing. Great time to catch the bus you missed the last time around.
Overall, call it neutral with a slight edge to the bulls.
Treasury Secretary Geithner announced his Financial Stability Program of 500 billion in government financing with the possibility to roll it up to 1 trillion. The “public-private” investment fund, comprised of the Fed, FDIC, the Treasury, and private capital will determine the prices for troubled, illiquid assets. Another part of the plan, TALF (troubled assets relief facility) will look to buy up to 1 trillion of collateralized debt, including mortgage backed securities. The plan also includes housing and foreclosure prevention along with a “stress” test on the banks.
All said, nothing changed on mortgage pricing but stocks took a beating (now down 307 on the Dow).
Just across the wire, the stimulus plan passed 60 something to 30 something, and Fed Chief Bernanke has just finished his chicken, veggies, and roll, preparing to testify on the financial world as we know it.
Given the heavy load of treasury supply coming this week (103 billion), investor indifference to Capitol Hill, and a host of other cross currents moving the market, best bet is to take the money and run (good mortgage pricing), at least for the February and early March closings. Use the float down and be a hero.
Markets are locked and loaded with the Treasury Secretary Geithner’s rescue plan announcement coming at 10:00 am CST, Federal Reserve Chairman Bernanke’s testimony before the House Financial Services Committee around high noon, and the vote on the stimulus package due around 1:00 CST.
Geithner’s baby is about 1.5 trillion, aimed at buying securities backed by commercial real estate, credit card securities, car loan securities, another 100 billion for capital injections in waffling banks, and on and on.
The stimulus package is in the neighborhood of 820 billion and touting the creation and/or retention of 4 million jobs. Smells more like bacon to me. One way or the other, it will get done and hopefully will get the economy going again.
Treasuries and mortgage backs have rallied this morning, more from a technical trade than anything else. Yesterday, the market retested the November 2008 lows (high yield) where buyers reentered the market, finding value at the 3.0% level on 10 year note. MBS has had a nice pop, up 12/32’s on good volume. Good time to take advantage of the rally as who knows what those on the Hill will do to us as the day moves on.
Nonfarm Payrolls fell 598K, blowing by market expectations of minus 525K. The unemployment rate also jumped, posting a 7.6% level, the highest in more than 16 years. Service sector jobs did the most damage, falling 279K while most of us built in a number closer to 230K. Overall, the number is something of concern as the U.S. economy has lost 3.5 million jobs in the last 12 months.
What you are seeing here is a consumer who is unemployed or under employed, going into full preservation mode. Even those who can spend, won't. In our opinion, what the administration needs to do is apply the "shock and awe" treatment and quickly. A few bullet points come to mind:
We can do our part to get the economy going. First call the baby sitter and go out tonight (salary cap for sitting will apply). Then go out to dinner (dollar menu is acceptable). Now stop by the liquor store and get some beer (Keystone will do). Then go to a cheap feel good movie (Lassie in HD will work) and sneak in a few beers (cost cutting measures). Nice night and the economy will thank you.
As we were pretty close to our employment "guess", we didn't get the expected reaction from treasuries and mortgage backs. Both are off post data with the 10 year note down 16/32's (yield 2.96%) and MBS off 5/32's. Both seem to be pessimistic about Monday's rescue plan (due for release by the President and Treasury Secretary) and fearful of new supply coming next week (treasury refunding auctions). Stocks seem to have built in a 600K number and are hopeful of something good for banks, etc. in Monday's rescue plan.
For now, we feel the market is closer to neutral than bearish and expect a little improvement once the auctions are out of the way next week. Until then, hope the Apple Dumpling Gang on Capitol hill get's it right on Monday. We'll wrap this up later today.
Weekly Unemployment Claims hit the tape this morning, up 35K to 626K while Continuing Claims rose to a record 4.788 million. It's interesting that in each case the current data is bumping up against or surpassing record high levels that were hit in the fall of 1982. That period marked the peak of jobless claims as we began to pull out of the recession in the early 1980's. "History doesn't repeat itself but it sure does rhyme", Mark Twain.
Preliminary 4th Quarter Productivity was also released, up 3.2%, much higher than expected. Trouble is, the number is smoke and mirrors as the hours worked declined by 8.4%, pushing productivity higher. Kind of like doing more with less while receiving less compensation. Sound familiar?
Factory Orders completed the hat trick, falling 3.9% overall and 4.4% ex-transportation. No need to kick that number when it's down.
Market reaction to all of the above has been muted for bonds, mortgage backs, and stocks. After a lower open, stocks have pulled themselves back on the plus side (up 28 points). Mortgage backs are up 1 or 2/32's, and the 10 year note is plus 3/32's (yield 2.90%). Technically, the bears took the market right to the cliff yesterday but couldn't throw it over.
This market is not out of the woods by any means but the potential for a nice rally to develop is clear. For this to happen, the market must maintain a yield on the 10 year note of 2.98% or less.
I like the odds of this happening due to the poor economic climate and the current administration struggling to find a clue. If they screw this up (new stimulus, etc.) stocks will hate it and probably take a look at 7000 on the Dow. Given that outcome, a flight to quality bid in treasuries will develop, hauling MBS along for the ride. If they somehow get it right, stocks will like it and housing/financial sector companies will like it, probably lowering mortgage rates as part of the New New Deal.
FDR is probably rolling over in his grave. More on our employment report "guess" this afternoon.
To borrow from the great Winston Churchill: “I cannot forecast to you the action of the markets. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key”.
For now, the “key” is supply and demand, especially when it comes to treasuries and mortgage backed securities. Capitol Hill is not helping much. With what seems to be too many cooks in the kitchen, the course of stateside and global economic direction could be effected for generations to come. Let’s hope they get it right.
ADP, the private payroll firm, came out with its prediction for Friday’s Employment release. Citing a huge drop in both service and goods producing jobs, their best guess is minus 522K jobs. For once, they are close to market expectations which peg the number at minus 525K. Our official forecast will be out on Thursday. The “supply” I talked about earlier, will come in the form of 32 billion 3 year notes, 21 billion in 10 year notes, and 14 billion of 30 year bonds. All part of next week’s Treasury refunding announcement. Throw in a few billion of cash management bills, etc. and the total is over 100 billion.
With so much uncertainty in the market, finding willing buyers for all this paper will be a challenge. That’s why we are seeing a concession, driving yields higher, looking for a level that is attractive for investors. Mortgage backs are unfortunately tagging along, down 7/32’s as we speak.
Technically, this thing looks like a dog. The channel line we have been talking about which should have been good support, has failed to hold the market. Targets on the chart now point to support on the 10 year note between 3.00% and 3.06%. Currently, we are down 22/32’s at a yield of 2.92%.
If you are looking for a silver lining, the best we have is something positive out of President Obama. Good luck to all of us. For now, we will preach the same message we’ve been preaching for the past 10 days. This market is dangerous and waiting for 4% to 4.5% mortgage rates is fool’s gold (at least for now). Lock em’ in and don’t play in the street (Wall Street).
December Pending Home Sales hit the tape plus 6.3%, printing the index at 87.7. This was the highest reading since September 2008. Economists were expecting the index to come in at 82.3. Pending Home Sales rose in areas where affordability conditions improved such as the South and Midwest. The West and Northeast posted negative numbers.
Post data, bonds and mortgage backs slumped while the Dow and Naz have seen modest gains. More than anything, trading has been in the doldrums or on hold due to the lack of direction on Capitol Hill with respect to additional stimulus packages and TARP money. With the Fed the only buyer of MBS, days like yesterday produced a little rally while no Fed today sees MBS slipping away.
Interesting news in Dallas paper today (front page) and I'm sure in a number of papers across the country on expectations for mortgage rates going to 4.0%, given the new stimulus package. Not to say this couldn't happen, but ask yourself, how much can the Federal Government buy in MBS and for how long to maintain interest rates in the low 4's. With most other investors shying away from MBS (especially the Chinese since the Treasury Secretary and VP ticked them off), the Fed will have to go this alone. I'll take the other side of that trade, betting against any sustainable program. For now, we need to be satisfied with rates in the low 5's to high 4's.
Currently, the 10 year note is down 26/32's (yield 2.81%), mortgage backs are off 6/32's, and the Dow is up 47 points in quiet trading. Although the selling today has taken the market back to recent lows, the power of the sell signals and daily oscillators is waning. In other words, the bears are running out of gas. Given that assumption, we would expect a supportive range trade (mortgage pricing getting a little better) into Friday's Payroll number.
By the way, that number is expected to be a woofer.
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