Buzz on the Street: Investors Prepare for Fed Announcement After Volatile Week
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, June 10, 2013
Is the Home Price Increase From New Mortgages?
We'll be doing some work over the coming days to figure out where the real gain in household net worth is coming from, but I came up with what I think is a very cool and telling chart about the drivers behind the boom in real estate.
Lately, there has been a number of articles about how bids are heating up for homes and anecdotally that has been the case for about 9 months now. Also, a large number of articles have pointed towards private equity as the marginal buyer for homes. Below is a chart that hopefully puts that idea to bed.
On the top panel is real-estate loans as a percentage of total bank credit (residential only) vs the S&P/Case-Shiller unadjusted home price index. The second panel has the bank credit and real-estate loans broken down.
So this translates into a decline of $288.5b in real estate loans while overall bank credit has risen by $805.5b, and recently home prices have risen. The large driver behind bank credit has not been consumer loans or new mortgages, but commercial & industrial (C&I) loans, which have taken off after bottoming in the 1Q 2010.
Admittedly, there are a few holes in this chart. Home purchases could be done through all cash payments or through non-commercial bank loans (small, but possible). Private equity firms could be using non-bank credit lines, also small, but possible. Lastly, it's also good to look at home prices in the context of remaining home inventory.
The second chart shows existing homes on the market, which reached a 14-year bottom in the first quarter, suggesting distressed sellers may have been taken out of the market.
Bottom line, I think we'd be wary to point towards the individual home buyer as the driver of gains in the real-estate market over the last few years. More so, it's been private equity or corporate buyers, as referenced by the large decline in inventory. The takeaway is that we're extended, but at the same time have a lot more upside, because the individual buyer has yet to stop renting and return to the market.
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My old ugly/expensive friend Biogen Idec Inc. (NASDAQ:BIIB) is getting rejected by the old uptrend. This is one of my favorite trades and I think we can easily see the 50 break down on this one now. I am now shorting this stock again with a target of around 200 or so.
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Credit for Everyone!
The credit markets have been a little shaky lately to say the least, particularly in the junk world where things seem to go topsy-turvy every couple of days. And then there's what may be a real unwind of the long Treasury trade as rates continue to creep up.
So I think now is an interesting time to see advances in credit market structure:
1. The industry just cleared its first single-name CDS, with ICE clearing a trade brokered through Barclays for Citadel. This is being hailed as an important development as it will allow portfolio margin netting, and increase liquidity while reducing systemic risk.
2. Last week, ProShares filed to register 8 different CDS-based ETFs
3. ICE is launching CDS index futures on June 17, another example of OTC products being moved on to normal exchanges that should bring wider credit-market participation.
Now, the folks behind all these initiatives are making a big deal out of how they're all good for the market, and how they'll help folks comply with Dodd-Frank and increase market liquidity and help people manager risk.
They may have the best of intentions, but I'm not sure that greater availability of these types of products is necessarily a good thing.
Like with leveraged and other exotic ETFs we'll see an increased number of people masquerading as macro mavens, trading arcane products that they barely understand.
And secondly, the timing just feels weird -- all this stuff is coming to market exactly when credit appears to be under stress after a long bull run.
Tuesday, June 11, 2013
Good morning. Given how equity futures are trading it's no great shocker that the credit/credit derivatives complex is a mess this morning. PIIGS bonds and CDS are ripping higher; 2-year swaps are gaining a footing in the 19bps handle; even CDS of large US financials are somewhat wider. And the elephant in the room is the long end of Treasuries. At 139-10 the 30-year is now firmly below weekly TDST Level Down (139-30), and the next and last stop before things could get unruly is the weekly TD Prop Exhaustion Down target at 138-13.
Yesterday's new corporate issuance was again minimal as it's becoming apparent that buyers are taking a hiatus as they wait for higher rates.
It's the day before "judgment day" as the German Constitutional Court will hold hearings tomorrow on the legality of the European Central Bank's "outright monetary transactions" (OMT) program. The OMT is a program designed to give the European Central Bank (ECB) the ability to purchase government bonds as a "backstop" against higher interest rates. Surprisingly, the ECB has yet to actually engage in OMT. Despite that, it is none other than the ECB's President, Mario Draghi, who states, "OMT has brought stability, not only to the markets in Europe, but also to the markets worldwide." Still, while our markets are currently not paying much attention to the Euro Zone, I think there should be concern over what damage said hearings might do. Indeed, in past missives I have targeted June 11/12th as a potential "pivot point" for some downside action that I thought would be contained leading to higher highs into the end of the quarter. Accordingly, this week shapes up as an important week to see if we will extend higher into the first part of July, or if we will "fail" into quarter's end leading to this year's first meaningful decline. As of yesterday, the jury remains "out."
One arena where the jury remains "in" is household net worth, which rose by $3 trillion in 1Q13 to a record $70.3 trillion. Obviously that increase reflects the rise in the value of financial, and real estate, assets. Yet, those gains are NOT evenly distributed among participants. Such uneven distributions seem to be getting attention from the Federal Reserve. Moreover, the Fed governors seem surprised long-term interest rates have risen so rapidly. That rise is not justified by the economic outlook. Inflation is trending low. With the improving near-term federal budget outlook, the Treasury is borrowing less than expected. None of this suggests upward pressure on L-T interest rates. Yet, yesterday the 10-year T'note tagged another new reaction high of 2.231% as its yield broke out to the upside in the charts (see chart). The result left the S&P 500 (INDEXSP:.INX) (SPX/1642.81) in a sideways session, but it could have sent the SPX back to the downside if this was the start of the decline I have been expecting to commence in mid-July. Nevertheless, there are more energy signals targeting a retreat in prices perhaps until the end of this week, but the "tea leaves" are confusing since the SPX has had a massive upside move. This morning, however, it is not Germany that is spooking markets, but Japan as the Bank of Japan decided not to follow up on its $1.4 trillion stimulus program leaving the yen sharply higher and world markets sharply lower. The support zone for the SPX lies between ~1608 (its 50-DMA) and last Thursday's intraday low ~1598.
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It All Comes Down to Prepayment Speeds on Mortgage Pools
There is a lot of chatter about convexity hedging from the mortgage market, much of it wrong.
It is on a pool or portfolio basis, not individual mortgages.
As rates rise, the speed of prepayment slows. So if at 2% you're expected a certain pace of prepayments (or refinancings), then at 2.5% you expect less prepayment. It is the lower prepayment assumptions that effectively extend the pool/portfolio.
For the mortgage investors trying to maintain it as a spread product, they have to hedge and extend the duration of the hedge. Yield investors may reclassify the maturity bucket, forcing them to rebalance other yield product holdings (selling longer bonds to possibly buy shorter-dated bonds)
There are many other factors that affect prepayment speed assumptions, but rates are the one people are focused on.
One thing to remember is that this convexity goes both ways.
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