Friday, May 29, 2009

Bloomberg: Bernanke Bid to Lift Housing Scuttled by Rising Rates

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First, the whole premise that the central bank of a country should be interfering in markets like this is shameful. Or better put, did the central bank ever apply the breaks to "cool things down" on the housing sector when it was screaming higher? Of course not... there were no actions even 1/100th of the magnitude when times were good... but all the king's horses (and men) have been called to the wall on the flip side of a bubble (that they helped create)

The two title insurers we own have been obliterated of late - while we are "somewhat" hedged by our short of the iShares Barclays 20+ Year Bond (TLT), I continue to be amused at how vicious everything reacts in short durations now. It is as if the difference between 4.75% and 4.95% 30 year mortgages mean all housing activity will cease if you believe the stock prices. Even more so, homebuilders should be hit much harder than title insurers as there will still be foreclosed homes selling (they are about half of all sales in America at this time) at 4.75%, 5%, or 5.5% interest rates. But that's too granular for the stock market... and after all the title insurers can suffer while new home builders can go up... ? huh? Anyhow, apparently yesterday 30 year mortgage rates shot up quite significantly so for the first time in a significant manner not only did bond yields rise (as they have been doing for over a month now) but even the market the Fed is pressing its foot on, "stopped behaving" as the overlords wish. Some talk of 30 years jumping to 5.2%ish rates yesterday after sitting in the 4.7-4.8% range for a long while.

p.s. someone sent me a message that CNBC said yesterday this rise in mortgage rates was a "good thing"... i.e. higher rates will 'force' panicked buyers to buy homes 'now' before rates jump higher... oh those cheerleaders are shameless. So (a) Low rates are good because it gives homeowners cheap money but (b) so are rising rates... because it causes a buying stampede. See how it works? Either way is "good". I really need to change to a straight out bull - all news is good news. Mmmm.... Kool Aid. Can't wait to hear how $100 oil is "good" - maybe it will cause consumers to rush to the gas station to "buy now" before prices go higher. Wait a second... isn't that the definition of unanchored inflation? Wait... I digress.

We are seeing a reversal of this recent trend today as long term bonds finally rebounded a bit (bond yields move in inverse of prices - so as bonds rebound, yields fall - i.e. what the "easy money government" wants to happen is happening today). Recall I exited almost my entire short of TLT 48 hours ago below $91; I started slowly reshorting today north around $94, hoping for something closer to $96 to short more [May 27, 2009: Bookkeeping - Covering Majority of iShares Barclays 20+ Year Treasury Bond]... as I stated in that piece "Too far too quickly in my opinion" but I continue to love this trade in the year(s) to come. But for that staid market, the move of late has been parabolic.

While this is sort of wonky talk, and frankly the bond market never held my attention much in the previous 15 years - it now has mattered in a significant way the past 1.5 years. And will only continue to matter more as we can expect the market to react more and more to the battle between (a) all the interference by the powers that be throw at the bond market v (b) the "free market". It is sort of fascinating and I will assume at some point the bond market will be bigger than the "bottomless" Federal Reserve balance sheet. But as with all things in the market, knowing "when" is many times more important than "what".

I probably gloss over this topic to some degree since I've talked about it in many posts, and done it piecemeal but here is a good Bloomberg piece that describes the battle between manipulation and "free markets". Keep in mind (AGAIN) the whole consumer recovery story is based on jobs (dead), low rates (manipulation left and right), and low commodity prices especially energy ("the market" is ruining that one). And let me give you the other side of my argument to be fair and balanced. Bona fide bulls say yields rising and commodities rising are great because it signals the return of super charged growth ahead. In a normal world I'd agree, but many of our "markers" have been so meddled with who knows what anything is saying anymore. All I know is this fragile consumer cannot sustain high energy prices and higher rates. But right now the bulls have their cake, and can eat it too. Everything is good news. And there are no consequences.
  • Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom.

  • Kyle McGee went to his mortgage broker’s office yesterday hoping to refinance and save about $200 a month. He walked away empty-handed. McGee was expecting a rate of 4.7 percent; the broker offered him 5.375 percent. The average 30-year fixed-mortgage rose to 5.27 percent as of yesterday, according to Bankrate.com.
  • Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.” (that should sound familiar to blog readers ... except I use squeeze blood out of stone - more dramatic!)

  • Homeowners aren’t cooperating. Refinance applications this week fell 19 percent to the lowest since early March, before the U.S. announced a loosening of Fannie Mae and Freddie Mac rules to allow more borrowers with little or no home equity to arrange new loans. (remember we used to call these people renters - now they are called homeowners in "our money is free" policies) The Fed also announced increased purchases of mortgage-backed securities and a program of buying Treasuries.

  • The 30-year fixed rate fell to a record 4.78 percent twice in April, according to Freddie Mac, the McLean, Virginia-based mortgage buyer. The average rate for a 30-year loan rose to 4.91 percent from 4.82 percent a week earlier, Freddie Mac said yesterday.

Now remember, much of my thesis for increased consumer confidence and indeed "green shoots" are the newly found house AMT v3.01, along with tax money that is coming back to Americans in the spring.
  • Freddie Mac estimates 73 percent of the projected $2.7 trillion of mortgage originations in 2009 will be for refinancing.
But again this can only be squeezed so much (repeated house ATMs) as more and more Americans are underwater (1 in 5 going on 1 in 4) ... unless Ben is successful in getting rates down to 4.25% or something even more magical than we've engineering so far.
  • Rates at historic lows have convinced prospective buyers and homeowners that even 5 percent seems high, said Greg McBride, senior financial analyst at Bankrate in North Palm Beach, Florida. Yesterday’s rate of 5.27 percent is the highest since February.

  • People are looking for that magical four percent,” said McGee’s broker, Norman Calvo, chief executive officer of Universal Mortgage Inc. in Brooklyn, New York. “When you get there you have that feeling of ‘Oh my God it’s the best thing, I’ve got to buy.’”

Personally, I am waiting for the day I am paid a few % a year by the government to buy a house. Why not? Our money is free and we can make as much as we want of it. Why should I pay someone to borrow money? Squeeze this lemon! I know that sounds absurd but if I told you everything that was to come in the next 2 years circa May 2007, you'd tell me that was absurd!
  • The Fed plans to buy as much as $1.25 trillion of mortgage- backed securities and up to $300 billion in Treasuries as part of a plan to lower rates. Minutes of the central bank’s April 28-29 meeting show some officials said the Federal Open Market Committee may yet boost asset purchases to spur a more rapid economic recovery.

  • The central bank’s purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae had brought down the yields of those securities, allowing lenders to reduce the rates on new home loans and still sell the mortgage securities at a profit. Fannie Mae and Freddie Mac are government-chartered mortgage companies that are being supported by $400 billion of back-up taxpayer capital.
  • The Fed has to step up the purchases just to keep rates from rising further,” McBride said. “As much buying as the Fed is doing this year of Treasuries and mortgage-backed debt almost exactly equates to the amount of new Treasury debt being dumped onto the market.”

  • Treasury yields are rising as the U.S. government sells debt and investors anticipate more supply of government securities being sold to fund federal spending. That in turn is helping push mortgage rates higher.

I expected the Fed to announce a bigger program at the last meeting which is why I covered my TLT short going into the meeting. That did not happen which surprised me, and now the Fed sees what happens when the constant threat of their intervention is not hanging over the bond market. Now I expect them to announce a new fleet of B52 bombers dropping money from the skies at the next meeting in late June. And we'll play this song and dance of not only having to guess 1 million moving parts that make up the market, but also guessing what is in Uncle Ben's brain.

********** Completely unrelated, as I wrote this piece the market spiked nearly 1.5% in just over 15 minutes. Good job PPT.

.... and with that, nice markup in the last 15 minutes to finish the month off. Surely a rush of buyers who did not want to buy stock all day decided they must own stocks in the last 10 minutes. Again. Via RealMoney.com :) Hello Invisible Hand.

The volume in the five-minute bar from 3:55 to 4 p.m. on the S&P e-mini was 252,837 contracts! This is the largest volume spike I have ever seen on a Friday close. Also, the next five-minute bar from 4 to 4:05pm was 146,777 contracts! This is unbelievable. By my calculations, it would take close to $2 billion to move this market in 10 minutes. Who's got that kind of money on a summertime Friday afternoon?

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