From JP Morgan: “Commercial paper outstanding fell again in the week ending August 29 (-$62.8 bn sa), although the magnitude of the drop was not as large as in the prior two weeks (avg decline $90.7 bn). Asset-backed commercial paper (ABCP) outstanding fell sharply, but financial CP stabilized after earlier declines. In the last three weeks, seasonally adjusted CP outstanding has fallen 11%, with ABCP down 16%, and financial CP down 6%. Nonfinancial CP—which makes up only 10% of outstanding CP—has remained within a narrow range for the last two months. Concerns about the quality of ABCP has also raised yields and shortened the maturity of new issuance. In contrast, yields on financial and nonfinancial CP have been quite stable.”
From Bloomberg: “Treasury three-month bill yields fell for a third day as investors fled asset-backed commercial paper and opted for the safety of government debt…. The average yield on the highest-rated asset-backed commercial paper with one-day maturity rose 11 basis points to 6.15 percent, the highest since January 2001.”
From Citi: “The liquidity crisis that began in early August in the commercial paper (CP)
market has since spread into the interbank market. Have the Fed's moves been successful? Our review of market liquidity conditions since the inception of the liquidity crisis on August 9 clearly shows that liquidity conditions have not improved in most of the affected short-term markets, despite the Fed's recent actions. In fact, market liquidity problems have since spread to other sectors, such as short-term municipals and auction rate preferreds. The current liquidity crisis could be much worse if it were not for the prevailing market expectation of an impending ease in the Fed Funds rate.”
From Deutsche Bank: “We thought that the Fed's use of the discount window, which included an expansion in acceptable collateral to cover bank sponsored commercial paper, would be enough to loosen the seizing-up of the money market in general and the asset backed commercial paper market in particular. If these non-traditional measures had worked, the Fed may have been able to keep the fed funds rate steady through, and possibly beyond, Q3. It has been nearly two weeks since the Fed first cut the discount rate, and financial conditions within the money market have further deteriorated. In response to this situation and the possibility that a much broader credit crunch could develop, we believe the Fed will reduce interest rates at the September 18 FOMC meeting by 25 bps and retain its easing bias.”
From Bloomberg: “The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market…The pound fell after the announcement on concern U.K. lenders are finding it harder to borrow money. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank. ``When people tap into this facility, it can mean only one thing: liquidity is gone,''…``It's clearly more of a sign of stress than stability,''…”
More on OFHEO Home Price Changes
From Lehman: “According to OFHEO, nominal home prices are still rising, albeit at the slowest pace since the early 1990s. After adjusting for inflation, real prices declined 1.4% q-o-q. As always, the focus of this report is on the regional data. To no surprise, Nevada, Michigan and California witnessed the biggest price declines of about 1.5% y-o-y. On the opposite end, Utah and Wyoming showed healthy appreciation of 15.3% and 12.8% y-o-y, respectively. On a MSA level, 61 out of 287 cities witnessed depreciation from the same quarter a year ago…the 20 weakest cities of which 12 are in California, 6 in Florida and the other two in Nevada and Michigan. Outside of Michigan, which has a depressed local economy, the cities showing the biggest declines are formerly bubble cities. For comparison, in Q1 2006, 12 of the top 20 strongest cities were in California and Florida.”
OFHEO Index Should be Supplemented with S&P Case/Shiller Data
From Lehman: “Historically, OFHEO has been the preferred measure of home prices since it has the broadest geographic coverage and controls for quality using a weighted repeat sales methodology. As such, it is used in the Federal Reserve Flow of Funds and is in most macro models. However, the fact that OFHEO only tracks homes with conforming mortgages has taken away from the attraction of OFHEO given the current state of the mortgage market. The exclusion of the depressed subprime and volatile jumbo sectors likely understated home price appreciation during the boom and is likely overstating during the bust. We therefore advise caution when interpreting OFHEO prices and suggest also monitoring Case-Shiller home prices.”
From JP Morgan: “Like the Case-Shiller index, the OFHEO indexes measure the price of constant-quality homes and controls for regional shifts in the mix of homes sold. However, unlike the CS indices, they does not include any nonconforming (jumbo) loans, and probably understate transactions financed with subprime loans. As a result, we believe the OFHEO indexes are overstating price appreciation at this time.”
From Merrill Lynch: “Over the past several years OFHEO's numbers have overstated home price growth (one gauge is to simply take the difference between the OFHEO and SPCS numbers) for a few important reasons: To be sure, a huge portion of OFHEO's loan sample are cashout refinance loans, which normally get higher than average appraisals, right? Freddie Mac's cashout refinance monitor shows loans that have been purchased by
that FM over the past few quarters have been predominantly "cashout" loans (loans that were 5% or more of the original UPB). This bias in OFHEO's data set will artificially inflate home price growth values.”
GDP Revisions Reduce First Quarter Incomes and Likely Increase Productivity and ULC
From Merrill Lynch: “Today's preliminary GDP report also contained new estimates for 1Q wages and salaries, which took personal income down by $17B in 1Q. Real personal disposable income growth was revised down to 5.4% QoQ (annualized) from 5.9%. These numbers reflect downward revisions to wage and salary disbursements, based on new and more complete estimates of income from the quarterly census of employment and wages (QCEW)… The BEA is now also in the process of smoothing out the $50B in bonuses accrued in 4Q 2006 and paid out in 1Q 2007. Wage and salary accruals, which feed into estimates of unit labor costs (ULC), were revised up by $33B in 1Q and by $25B in 2Q. So wage and salary accruals in the nonfarm business sector saw growth revised up to 4.2% QoQ (annualized) in 1Q (was 3.3%) - there was no change to 2Q growth of 7.2%. This implies an upward revision to ULC by a similar amount (was reported as 3.0% QoQ (annualized)). At this point the BEA has not altered the $50B assumption for bonuses accruals in 4Q, but in the July 2008 comprehensive NIPA revisions we expect them to smooth this number out, matching the bonuses against the profits earned in each quarter…Nonfarm business sector productivity growth is expected to be revised up to 2.7% QoQ (annualized) from 1.8% due to an expected upward revision in real nonfarm business sector output. Based on these numbers, ULC growth will be revised down to 0.9% from 2.1% (slowest growth since 2Q 2006). The YoY rate will edge down to 4.4% from 4.5%.”
From JP Morgan: “Today’s report showed a solid rebound in 2Q corporate profits, led by financial corporations. Labor compensation was also revised higher. These trends underscore balanced income growth over the past year, with both profits and labor compensation growing at a healthy clip. The income revisions will also further lift unit labor cost from already elevated levels: we now expect 2Q ULC to be revised higher to 4.9%oya from 4.5%. Recent tepid readings on core inflation notwithstanding, the Fed will certainly be alert to this important source of upside risk.”
Freddie Profit Falls 45% in 2nd Quarter
From Bloomberg: “Freddie Mac, the second-biggest U.S. mortgage finance company, reported second-quarter profit fell 45 percent after setting aside $320 million for losses from the worst housing slump in 16 years. Net income declined to $764 million, or $1.02 a share, from $1.4 billion, or $1.93, a year earlier… Revenue dropped 4.8 percent to $2.26 billion…``A lot of people's attention will next go to how they manage credit expenses because the time from delinquency to default is compressing,''… Net interest income fell to $973 million from $1.17 billion, reflecting the higher cost of Freddie Mac's maturing long-term debt. Credit-related expenses rose to $336 million from $63 million because of the provisions for losses on home loans…Administrative expenses will be about $1.7 billion in 2007, or about $100 million more than in 2006, Piszel said. Expenses had soared because of the probe into the company's accounting. ``We're going over a hill as far as our cost structure,'' he said. ``In 2008 and 2009 we should be coming down the other side.''”
Ginnie Mae Removes $417K Limit From Veterans Administration Mortgages
From RBSGC: “GNMA says they are eliminating the current $417,000 loan limit for VA loans they will accept for securitization effective September 1. Given the limited availability of credit for jumbo loans currently in the private market, we think this will draw a suprisingly large amount of interest from veterans. GNMA spreads are trading down today, with market participants anticipating increased issuance and changing loan characteristics. Currently, VA loans make up only 30% of GNMAs, and this could increase that percentage. One question we are looking into is whether GNMA securities with loans over $417,000 would be TBA eligible, or whether they would have to trade as specified pools.”
MISC
From Goldman Sachs: “…we are pulling down 2007 forecast for house prices to a fall of 7%, from -5% previously. We see further price declines of 7% in 2008, enough to get us close to, but not all the way to historical ratios of incomes and rents to house prices.”
From RBSGC: “Housing Affordability, July -- fell to 103.6 vs. 104.9 prior -- low in this cycle was 100 last July.”
From The National Mortgage News: “"Last week, the mortgage industry basically told their loan officers and call center representatives to simply stop taking calls. They basically stopped on a dime." --John Challenger, chief executive officer of Challenger Gray & Christmas, a Chicago outplacement consulting firm, reporting that over 13,000 mortgage jobs were lost the previous week and that nearly 88,000 mortgage industry workers had lost their jobs this year.”
From Bloomberg: “On the last business day of each month, new bonds sold during the month are added to bond market indexes, prompting some investors to buy on that day. The effect is typically biggest at the end of February, May, August and November, when
the Treasury holds its quarterly auctions of notes and bonds. The government sold $53 billion of notes and bonds in four auctions this month, including $31 billion in its monthly auctions of two- and five-year notes this week.”
From Barclays: “Real money buying in the long end. Index extension is fairly
large. Buying in both MBS and agencies from state funds in good size.”
From RBSGC: “…our London office estimates that $43 bn of assets will need to be sold from SIV-lites near-term. Most of these assets are AA or AAA and include US subprime collateral.”
From Lehman: “Initial claims rose to 334,000 from 325,000 last week as the series shows its fifth consecutive increase taking claims from 303,000 to the current level. The four week average is now 18,500 above the level seen in July. As a result of this jump, our model suggests a lower payroll print. As a result we are lowering our payroll forecast to 95,000 from 115,000 and also increasing our unemployment rate forecast to 4.7% from 4.6%. However, this will likely be an exercise in rounding with the actual figure close to 4.65%.”
From Dow Jones: “The help-wanted advertising index - a measure of job offerings
- slipped one point to a reading of 25 in July …the Conference Board said that in the last
three months, help-wanted advertising declined in all nine U.S. regions, with the largest decrease of 17.4% in the West North Central region.”
From Dow Jones: “General Electric Co.’s GE Capital Corp. priced a two-part, 60-year bond issue, in spite of the continued fallout from the U.S. subprime mortgage market and associated turbulence in credit conditions. The issue attracted a total of $5 billion of bids from investors, showing that despite the shocks that are currently reverberating trough the market, investor appetite for debt is still present.”
From Bloomberg: “Wheat rose to a record for a second day as demand increased for U.S. supplies and global inventories were forecast to fall to the lowest in 26 years… futures have gained 97 percent in the past year after global consumption exceeded production for the seventh time in eight years.”
From USA Today: “…one in four renters are paying more than half their income on rent — the highest level in at least two decades — according to a study being released Thursday by the Center for Housing Policy. That's up from one in five renters in 1997.”
End of Day Market Update
From RBSGC: “The market made some ground today, although largely replicating the range established Wednesday. The nuanced difference in the price action was that instead of closing at the lows of the day, prices are closing at the highs and, also, at the highest levels in this cycle (TY). We again point out that 10s closing under 4.62% tomorrow represents a break of a monthly trendline that reaches back to the low yield of 2003. The curve held onto its steepeness… Friday is an odd day -- month- and quarter-end for some banks, a big extension to contend with, and laden with data including July PCE and Chicago NAPM. More important than any of that is a speech from Bernanke on housing and the economy.”
From Lehman: “At the risk of sounding like a broken record, it was another very volatile day in treasuries and the market rallied sharply… Volumes were heavy today, and the market continued to trade in dislocated fashion, as quarter-end balance sheet constraints and holiday-week liquidity have clearly added to volatility… Thursday's yield changes were roughly as follows: 2 years: -4.0 bp 5 years: -5.9 bp 10 years: -5.1 bp
From Bloomberg: “U.S. stocks resumed their summer sell-off after Lehman Brothers Holdings Inc. said rising credit costs may reduce bank profits and Freddie Mac predicted the housing market will keep languishing. Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., Wall Street's biggest securities firms, led the Standard & Poor's 500 Index to its third decline this week. Freddie Mac fell the most in four years after the second-biggest U.S. mortgage finance company said the housing slump cut profit by 45 percent. The S&P 500 decreased 6.12, or 0.4 percent, to 1,457.64. The Dow Jones Industrial Average declined 50.56, or 0.4 percent, to 13,238.73. The Nasdaq Composite Index rose 2.14, or 0.1 percent, to 2,565.3, extending its gain after the biggest rally in a year. Lehman reduced its earnings estimates for investment banks two days after Merrill Lynch analysts slashed their projections. Financial shares in the S&P 500, which comprise about one-fifth of the index's value, are headed for their worst quarter in five years amid concern that higher borrowing costs spurred by mortgage defaults by the riskiest borrowers will erode earnings.”
From Bloomberg: “The yen rose, rebounding from the biggest decline versus the euro since January 2001, as concern U.S. subprime mortgage losses are weakening credit markets pushed investors to shun riskier assets funded by loans in Japan. Japan's yen was the best performer of the 16 most-active currencies as traders fled asset-backed commercial paper and turned to the safety of government debt.” [ Dollar index +.17 to 80.87]
From Dow Jones: “Crude-oil futures declined [15 cents] Thursday to just above $73 a barrel on a bout of profit- taking that was exacerbated by renewed concerns about the strength of the U.S. economy…”
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The following graph of the S&P 500 clearly shows the increased volatility in the market recently, versus a few months ago. Each bar shows the range between high and low prices for each trading day. Compare daily ranges in March or April versus August .
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