Today's Tidbits

Mortgage Markets Under Pressure
From Dow Jones: “Three words describe mortgage bond performance in the first half of this year: less than stellar. So far in 2007, the $3.5 trillion market in mortgage-backed
securities guaranteed by housing finance agencies Fannie Mae (FNM) and Freddie Mac (FRE) have turned in negative returns as rising interest rates and growing supply weigh on the market… Investors from Asia - who had been big buyers of mortgage bonds in recent years - in particular have been less than enthusiastic about the market so far this year as the rise in global equities competes for their attention… Through June 1, the Lehman mortgage index logged a negative seven basis points in excess returns over Treasurys, compared with positive 39 basis points for the same period a year earlier.
Rising Treasury yields have damped investor demand since such a rate environment makes mortgage bonds less attractive… Waning interest in mortgage bonds is coinciding
with an increase in agency mortgage bond supply. One cause of the extra supply: more borrowers are taking out loans that conform to agency guidelines as lenders tighten underwriting standards in the wake of the subprime market’s woes.”

Changing Fed Outlooks
From Goldman Sachs: “Today we announced a significant change to our outlook for the US economy and financial markets. Most importantly, we no longer forecast any rate cuts by the Federal Reserve between now and the end of 2008, though we still believe that the risks lie in the direction of monetary easing. We also modestly boosted near-term growth rates on the anticipation of a more pronounced upturn in manufacturing output, and we dampened the expected increase in unemployment. In conjunction with these adjustments, we also lifted the profile for movements in long-term yields by 30-50 basis points; after a period of directionless trading around its current level for the remainder of 2007, we look for the yield on 10-year notes to drift up toward 5¼% by year-end 2008.”
“… are raising our near-term GDP estimates (Q2 goes from 2% to 3%, Q3 to 2½% from 2%).”

From Merrill Lynch: “…the Fed is not going to be cutting rates at any time this year…This is a Fed that is 100% concentrated on not only getting core inflation below 2%, but as several Fed officials have told us lately, it has to get to 1.5% and with a higher unemployment rate than the 4.5% print we saw on Friday. The fact that the Fed has retained a hawkish stance in the face of five consecutive quarters of below-average 3% growth, not to mention what was a near-recession like 0.6% GDP pace in the first quarter, is a clear signal that the Fed does not care so much about what the real economy is doing as much as what the unemployment rate and core inflation are doing.”

From Deutsche Bank: “The Fed has been right to hold to its opinion of a moderation of economic growth with upside inflation risks. The growth outlook remains moderate and
inflation is beginning to move back into the Fed’s comfort zone, keeping hopes alive that the next move will be a rate cut. However, resilient labour markets means the Fed is in no rush. We’ve pushed our forecast for the first Fed cut into Q4’07.”

From Bear Stearns: “We’re maintaining our forecasts for 3% second quarter growth, more in the second half of 2007, a decline in the unemployment rate, one or two Fed hikes in the second half, and a somewhat stronger dollar as the Fed shift toward hikes becomes apparent.”

MISC
From Dow Jones: “…the 10-year yield remained just short of the keynote 5% mark… The dollar gained against the euro Wednesday after the ECB lifted interest rates to 4.0%
but put forth no firm plans to hike rates again soon. Meanwhile, the dollar declined against the yen as a decline in U.S. stocks spurred some risk aversion that caused yen-funded carry trades to unwind modestly…The major [equity] indexes were all down about 1%. Decliners outnumbered advancers by about five to one…Crude oil futures shook off losses and turned higher Wednesday on reports that Turkey sent several thousand troops into northern Iraq in pursuit of Kurdish rebels, heightening worries about Middle Eastern oil supplies.”

From MarketWatch: “U.S. stocks fell sharply Wednesday, with the Dow Jones Industrial Average losing over 100 points, as news that unit labor costs jumped in the first quarter fueled concerns over inflation, interest rates and rising bond yields, further sapping enthusiasm in the market. Losses accelerated in afternoon trade after the Dow and the S&P 500 failed to hold key technical levels… Of the Dow's 30 components, 27 retreated…” [Dow closed down 130, S&P down 13.5 points]

From Morgan Stanley: [On European equity markets] “As of Friday, our Fundamentals
indicator tells us to sell too, because of higher bond yields and higher ISM new orders. This is in addition to existing sell signals on our Valuation (CVI) and Risk indicators. Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980. Equities have always been down in the next 6 months, on average by 15%. Previous occasions include September 1987 and April 2002.”

From Lehman: “…fixed-rate mortgages had been trending higher and are up 36% on a y-o-y basis while adjustable-rate mortgage are down nearly 30% y-o-y. This is to be expected given tighter lending standards and a shift away from risky mortgages.”

From RBSGC: “Natl. Assoc of Realtors projects US home sales will fall 4.6% this year, with prices down 1.3%. Last month the forecast was -2.9% and -1%, respectively.”

From AP: “Many public companies are putting dramatically lower expenses on their books for stock options awarded their executives than what they are reporting to the IRS under two differing sets of rules, Senate investigators have found…found a $43 billion "gap" for stock options between corporate IRS tax returns and expenses reported in financial statements for December 2004 to June 2005. That means U.S. public companies legally avoided billions in taxes for that period by claiming $43 billion more in tax deductions for options awards than the compensation amount for options recorded on their books, said Levin, the subcommittee's chairman. While not breaking the law, the companies benefited from an "outdated and overly generous stock-option tax rule,"…”

From Barclays: “…not only has there been a very significant move up in quantities consumed in all commodity sectors so far this decade, but that for many there has been further acceleration in growth so far in 2007, especially in base and precious metals. It is also worth noting that this has happened despite the weakness of the US economy in Q1. The move up in average growth rates for many commodities is a long-term phenomenon and is likely to continue putting the supply side under pressure to keep up, especially if the recent surge in output of many commodities begins to falter once again.”

From RBSGC: “…we found a dramatic shift in the Stone & McCarthy Survey -- one of our preferred proxies. The Survey went from near the longest it's been since 2003 to dead flat. This means that the pain trade for this audience is no longer desperately lower, i.e. lower levels won't force buying. The drop was the biggest 1-week move we've seen in a while. This is more in line with other recent proxies like CoT specs and Dealer holdings which should a similar, albeit far less dramatic, move from long to less long. It's part of a healthy process to get the market in a more neutral state…”

From Bear Stearns: “For most households, their biggest asset is the net present value of their future earnings. Expected lifetime earnings, sensitive to unemployment and compensation, is the primary support for consumption. The negative wealth effect from the decline in stocks in 2000-2002 and the decline in home prices in 2006-2007 left consumption growth largely unaffected – we think because the unemployment rate was relatively low.”

From Lehman: “The ECB governing council raised the official refinancing rate from 3.75% to 4% at today's meeting - as expected. The new Staff Projections entailed upward revisions to the 2007 growth and inflation forecasts, but kept the 2008 inflation forecast unchanged, while reducing the growth forecast for next year slightly.”
From Lehman: “…hedge funds generated 7.11% since the beginning of 2007 and have pulled ahead of the first five months of 2006 (5.23%).”

From Dow Jones: “A typical carry trade involves borrowing yen, which is loaned at rates near zero and then using the proceeds to buy currencies offering much higher interest rates. The investor then pockets the interest gained from the high-yielder before buying back yen to repay the loan. The risk is that while interest is accruing, the high-yielding currency plunges in value, or the yen surges, which could wipe out carry trade profits in an instant.”

From The Financial Times: “Opec on Tuesday warned western countries that their efforts to develop biofuels as an alternative energy source to combat climate change risked driving the price of oil “through the roof”. Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries, said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels. The warning from Opec, which controls about 40 per cent of global oil production, comes as the group of eight leading industrialised nations meets on Wednesday with climate change at the top of its agenda. The US and Europe want to use biofuels to combat global warming and to strengthen energy security…”

From AP: “General Mills Inc. said on Tuesday it would raise cereal prices to match increases by competitors… customers should actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent.”