Tuesday, July 22, 2008

This Week's Economic Figures....Lot's of Data, little value.

Stock movements, Oil, regulation push from Hank Paulson (America's Treasury Secretary) on Fannie and Freddie matters, as well as financial updates from our nations largest banks (Wachovia due out today) are going to drive residential mortgage pricing this week more than any of these macro-economic reports. That said, this country continues to slide into recession, regardless of the two day run we witnessed last week in the stock market.



Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report drew nothing more than a passing glance from mortgage investors.

Tue. July 22, 1:00 p.m. ET
Treasury auctions 20-year inflation-indexed securities
The “adjustable” feature of this offering will likely make it attractive to a broad range of investors. As witnessed, this had no discernible impact on the direction of mortgage interest rates today. If fact we opened lower and continue to trend lower still.

Wed. July 23, 1:00 p.m. ET
Treasury auctions
2-year notes
A solid auction with good foreign investor participation will likely be considered an omen that not only is confidence returning to dollar denominated assets -- but the prospects of a near-term rate hike from the Fed remains extremely low. If this auction goes well, it will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.

Wed. July 23, 2:00 p.m. ET
Fed releases latest “Beige Book” data
Named for the color of its cover, this compilation of economic data from all 12 Federal Reserve Districts is expected to show generally sluggish growth across the country and anecdotal evidence of an uptick in inflation pressures at both the wholesale and consumer levels. Nothing in this report will likely surprise anyone – so its impact on the direction of mortgage interest rates will probably be minimal to non-existent.

Thurs. July 24, 8:30 a.m. ET
Initial jobless claims for the week ended 7/19
Up 9,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of 9,000 or more new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell last week look for investors to push mortgage note rates higher. My take here, it will be higher and while and we shall see headline news in this area.

Thurs. July 24, 10:00 a.m. ET
June Existing Home Sales
Down 1.2%
The expectation for another puny existing home sales number from the National Association of Realtors is already priced into the mortgage market – probably making it a “yawner” as far as most investors are concerned. In the off-chance the Realtors report a month-over-month gain for existing home sales – look for mortgage interest rates to move higher.

Thurs. July 24, 1:00 p.m. ET
Treasury auctions
5-year notes
Given the big run-up in yields last week – I look for this offering to be well received by market participants.

Fri. July 25, 8:30 a.m. ET
June Durable Goods Orders
-0.3% vs. last 0.0%
The modest decline in the June Durable Goods Orders figure was likely created by significant weakness in transportation orders. It really does not matter much – since this data is unlikely to have a notably impact on the trend trajectory of mortgage interest rates today.

Fri. July 25, 10:00 a.m. ET
June New Home Sales
Down 1.8%
Home Builders continue to find it difficult to reduce their inventories. As long as this number remains negative -- it will likely have little impact on the direction of mortgage interest rates. In the off-chance that new home sales post a positive number expect investors to react by pushing note rates higher and prices lower.

Mon. July 28
No releases.

Have a great week. Keep an eye on the developments of Fannie and Freddie. I am not sure their powerful lobbyist' contingencies are going to keep them out of regulation any longer. They simply failed to keep the cash aside over the last few years run up for anyone to feel comfortable in allowing themselves to be self-managed.

Wednesday, July 16, 2008

National City Bank - Did the C' Ranks Really Drop the Ball?

The following blurb was taken directly from National City Bank's 2007 annual Report:

National City Corporation (NYSE: NCC), headquartered in Cleveland, Ohio, is one of the nation's largest financial holding companies. The Company, though it's principal subsidiary National City Bank, operates an extensive banking network in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and Wisconsin, and also serves costumers in selected markets nationally. Primary business activites include commercial and retail banking, mortgage and asset management. Visit NationalCity.com for more information.


I believe the opening statement says a lot about who National City is and exactly why NCC's present stock price (currently $3.82) has dropped from a 55 week high of $33.54. Keep in mind, 6 months ago, NCC was the US' 8th largest U.S. bank. Wisely National City no longer offers the current daily quote for NCC's stick price on their splash page.


While CFO and Vice Chairman Jeff Kelly has been asked to step down (ok retire) and several other C' level executives (including CEO Peter Raskind) have also been rumored to consider early retirement, it appears all is lost for this once proud intuition.


It's easy to pick on someone when they are down. So I don't give additional props to such characters as widely watched tv televangelist Jim Cramer and his Mad Money show (http://www.cnbc.com/id/15838459 & http://www.cramers-mad-money.com/) along with many, many others who (correctly so), shown National City ZERO love as this struggling entity trys valiantly to stay afloat. So what happened? Was NCC' so mismanaged that despite their efforts to explain otherwise see (http://biz.yahoo.com/prnews/080714/clm098.html?.v=71) that they indeed are the next to fall? Are we going to find out that there was an exploit of this firm in the way Enron and others have come to light? The answer may be a little of both.


To understand what currently and has happened to NCC, one need not look at volumes of their financial records, trading account, negotiated execution levels through their various trading partners or even their C' level expense accounts. NCC is a humble company with humble leadership. Corporate expanses are tightly controlled and waste is looked down upon. What happened to NCC can be derived by simple economic fundamentals (mostly outside the CEO and Board's control) and a few poor decisions. Allow me to opine further.


Well before the national liquidity crisis which halted (for all intense and purposes) the fixed income mortgage markets in August of 2007, NCC was in trouble. It's mortgage unit (once a top 6 player nationally) had fallen due to new market participants, poor product placement, lack of technology, poor service times, as well as a weak marketing and branding effort. The banking unit found it's deposits slowing and reversing in key states such as Ohio, Indiana and Michigan. NCC leadership witnessed these events and to their credit looked to expand their banking arm to sunnier states such as Florida and Illinois. As illustrated below, NCC was concentrated in markets which were troubled prior to any bubble bursting. National City's mortgage unit drove a significant amount of revenue to NCC's bottom line. In order to understand the health of the mortgage market and capture credit conditions, one has to look at the dynamics for the entire market. Many other measures simply reflect certain parts of the process, and can vary significantly based on local conditions. A heat map reflecting Q3 mortgage late's and foreclosures are shown below (sorry the images aren't great).










There are few other charts worth mentioning. I think you'll begin to see my agreement.

National City based its growth out of the rust belt focusing on auto, manufacturing and steel. It has been well documented that these industries are in trouble. Unlike Comerica who moved their headquarters out of Michigan to Texas, NCC choose to ride it out and make the best of it's markets. While other banking institutions were focused in 2006 and 2007 on depository growth, NCC through it's marketing efforts was fee' based. This was the wrong decision and can be blamed on executive management. The fact that the banking footprint for NCC is an absolute albatross is not their fault. While several of it's competitors Key Bank and 5th Third choose to extend their efforts on commercial lending not residential, it does not bode well for NCC's C group to not aggressively expand into other markets. Playing Monday morning quarterback is easy given the executive decisions made by NCC over the past 18 months. It should be noted and understand the challenges NCC's leadership has to work with. 2006 was a highly robust year for the US economy and the mortgage industry (NCC's so-called cornerstone). To properly respect the challenges the bank was facing (prior to this present day economic challenges), I'll leave you with the unemployment totals for 2006'. You need income earning clients to fund aand grow a bank.


2006 Unemployment Totals

UNITED STATES 4.60

1 HAWAII 2.40
2 UTAH 2.90
3 NEBRASKA 3.00
3 VIRGINIA 3.00
5 MONTANA 3.20
5 NORTH DAKOTA 3.20
5 SOUTH DAKOTA 3.20
5 WYOMING 3.20
9 FLORIDA 3.30
10 IDAHO 3.40
10 NEW HAMPSHIRE 3.40
12 ALABAMA 3.60
12 DELAWARE 3.60
12 VERMONT 3.60
15 IOWA 3.70
16 MARYLAND 3.90
17 LOUISIANA 4.00
17 MINNESOTA 4.00
17 OKLAHOMA 4.00
20 ARIZONA 4.10
21 NEVADA 4.20
21 NEW MEXICO 4.20
23 COLORADO 4.30
23 CONNECTICUT 4.30
25 ILLINOIS 4.50
25 KANSAS 4.50
25 NEW YORK 4.50
28 GEORGIA 4.60
28 MAINE 4.60
28 NEW JERSEY 4.60
31 PENNSYLVANIA 4.70
31 WISCONSIN 4.70
33 MISSOURI 4.80
33 NORTH CAROLINA 4.80
35 CALIFORNIA 4.90
35 TEXAS 4.90
35 WEST VIRGINIA 4.90
38 INDIANA 5.00
38 MASSACHUSETTS 5.00
38 WASHINGTON 5.00
41 RHODE ISLAND 5.10
42 TENNESSEE 5.20
43 ARKANSAS 5.30
44 OREGON 5.40
45 OHIO 5.50
46 KENTUCKY 5.70
47 DISTRICT OF COLUMBIA 6.00
48 SOUTH CAROLINA 6.50
49 ALASKA 6.70
50 MISSISSIPPI 6.80
51 Michigan 6.90

The following websites were used in preparing this blog:

National City Bank http://www.nationalcity.com/

Mortgage Bankers Association http://www.mortgagebankers.org/
Housing America http://www.housingamerica.org/

National Mortgage News Online http://www.nationalmortgagenews.com/
Reuters http://www.reuters.com/
US Census - Government Link
US Treasury http://www.ustreas.gov/

Tuesday, July 15, 2008

Present Day Fixed Income Challenges

As I write morning, Fed Chairman Bernanke just finished his monetary policy testimony to the Senate Banking Committee. Today’s appearance is part of his semi-annual trek to Capitol Hill to discuss the economy and monetary policy with members of Congress. In response to questions from committee members, Bernanke made it crystal clear that restoring financial market stability is job #1 at the Fed. Bernanke offered nothing new in terms of how exactly the Fed intended to achieve their primary mission – leaving little on which to pin hopes for notably lower mortgage interest rates on.
Just prior to Bernanke began his testimony the Labor Department reported that headline inflation at the producer level rose 1.8% in June as energy prices soared – pushing the overall Producer Price Index to its biggest monthly gain since November. Over the past twelve months producer prices are up 9.2% -- the strongest year-over-year gain since a jump of 10.4% in June of 1981. If there was any good news on inflation, it was that core producer prices (a value that excludes the more volatile food and energy components) edged up just 0.2% last month – a touch below most economists’ forecast calling for a gain of 0.3%. Look for mortgage investors to be very edgy for the balance of the day – the big gains in producer prices can only be absorbed by businesses income and balance sheets for so long before they are passed on to the consumer. We’ll find out if that time has come tomorrow morning when the June Consumer Price Index figures hit the news wires at 8:30 a.m. ET. A core consumer price index reading of more than 0.2% will likely bring the recent rally to lower note rates and higher investor prices to a screeching halt. Separately, the Commerce Department reported this morning that retail sales rose 0.1% in June, less than economists had forecasted. Excluding autos, retail sales rose 0.8% which was also below the consensus forecast. It appears the government rebate check effect faded sharply after supporting the May sales figures. Most bond investors had been anticipating a rather weak June retail sales report – so the actual numbers had little, if any direct effect on the current level of mortgage interest rates.

My old employer (National City Bank) has been in the news alot lately on fears of a similiar event of Indymac Bank. I have conducting a sizeable amount of research on National city and what exactly happened. I anticipate uploading this blog this evening.
It's something you don't want to miss!

This weeks' economic events:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 14,
No data

Tue. July 15, 8:30 a.m. ET
June Producer Price Index
Core rate
+1.3% vs. last +1.4%
+0.3% vs. last +0.2%
Surging energy prices undoubtedly drove up costs at the producer level for the sixth straight month. The core rate, (a value stripped of the more volatile food and energy components) probably posted a gain of 0.3% last month. Investors have already priced-in a relatively “hot” read for June producer inflation. If the consensus estimate proves accurate look for a rather muted market reaction. Should the core producer price index post a gain greater than 0.3% -- mortgage interest rates will likely finish the day notably higher.

Tue. July 15, 8:30 a.m. ET
June Retail Sales
Excluding Autos
+0.4% vs. last +1.0%
+1.0% vs. last 1.2%
The expected gain in June retail sales will be heavily discounted as investors’ factor in the impact of government rebate checks on overall activity. Look for this data to be sharply overshadowed by the Producer Price Index report and Fed Chairman Bernanke’s testimony to the Senate Banking Committee later this morning.

Tue. July 15, 10:00 a.m. ET
May Business Inventories
+0.5% vs. last +0.5%
This bit of stale data will do nothing more than take up space on today’s calendar of events.
Tue. July 15, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the Senate Banking Committee
Bernanke will be on the “hot seat” today as he will undoubtedly be grilled on everything from his take on the economy, to inflation and to the biggest question of all -- what, if anything, happens next in relation to the financial viably of Fannie Mae and Freddie Mac. Look for Bernanke to do a decent job of allaying the overwrought disaster scenarios whipped up by the media and, at least temporarily, soothing investor fears. If I’m right I don’t expect a rally to lower mortgage interest rates today – but I do think one of the preliminary stepping-stones for a bounce toward the end of the week will have been put in place.

Wed. July 16, 8:30 a.m. ET
June Consumer Price Index
Core Rate
+0.7% vs. last +0.6%
+0.2% vs. last +0.2%
In my opinion this is the “bigge” of the week with respect to the macro-economic reports scheduled for release. If the core rate (a statistical measure of inflation pressure at the consumer level that is net of the more volatile food and energy components) matches the consensus estimate, a second stepping-stone for a rally in the mortgage market later this week will have been moved into place. On the other hand, a core consumer inflation reading of 0.3% or higher will likely slingshot note rates higher while investor prices plummet. My personal opinion is that the actual core rate number will match the consensus estimate.

Wed. July 16, 9:15 a.m. ET
June Industrial Production &
Capacity Utilization
Unchanged
79.3 vs. last 79.4
The earlier Consumer Price Index and Fed Chairman Bernanke’s testimony later this morning will easily overshadow this data.

Wed. July 16, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the House Financial Services Committee
His prepared text testimony will be exactly the same as he delivered yesterday before the Senate Banking Committee – and I bet the structure of the questions he will be called on the answer this morning won’t differ much either – likely making this event anticlimactic with respect to its likely impact on the trend trajectory of mortgage interest rates today.

Thurs. July 17, 8:30 a.m. ET
Initial jobless claims for the week ended 7/12
Up 34,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of more than 15,000 new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage note rates higher.

Thurs. July 17, 8:30 a.m. ET
June Housing Starts &
Building Permits
Down 1.5%
Down 1.8%
This report will have headline news but regardless of the figure, both starts and permits are broadly anticipated and therefore this data will likely have little, if any impact on the trend trajectory of mortgage interest rates today.

Fri. July 18,

Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report will likely draw nothing more than a passing glance from mortgage buyers.

www.efinitygroup.com

Monday, July 7, 2008

Taking Account

I am writing this morning from Houston where I have spent the last 72 hours trying to explain to my family, my dad's friends and his concerned golfing partners that despite his good health.... he still had a cardiac event the evening of July 4th. He is in CCU, and battling for his life. So while my focus has not been on the state of the union, the existing housing crisis, the price of oil, the mismanagement of Regional Banks, or the sagging dollar; that does not mean it hasn't been on another commodity... our time. Life, like money, is best utilized when it is spent wisely.

This week's economic calendar is as follows:

Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 7,

Tue. July 8, 10:00 a.m. ET
May Pending Home Sales
-3.0% vs. last +6.6%
Most analysts anticipate a little “give back” in May after April’s surprising surge. If the consensus estimate is accurate, investors will likely view this data as slightly mortgage market friendly. In the unlikely event the actual number comes in stronger-than-expected (a slump of 2.5% or less) look for mortgage interest rates to creep fractionally higher.

Tue. July 8, 10:00 a.m. ET
May Wholesale Inventories
+0.7% vs. last +1.3%
Traders holiday sunburns will likely draw far more of their attention than this data set will.

Wed. July 9
Void of economic news

Thurs. July 10 8:30 a.m. ET
Initial jobless claims for the week ended 7/5
Down 14,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. A decline of 14,000 or less in the number of jobless claims filed last week will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage notes and fixed income products to move their rates higher.

Thurs. July 10, 1:00 p.m. ET
Treasury Dept. auctions
10-year inflation indexed securities

Mortgage investors will likely pay a little more attention to this auction than normal. These securities will likely serve as a bellwether index for the longer-term trend trajectory of mortgage interest rates. If the yield on the 10-year inflation-indexed securities should rise look for mortgage interest rates to rise as well -- while a steady to lower yield on these securities will likely indicate the trend trajectory will favor steady to fractionally lower mortgage rates ahead.

Thurs. July 10, afternoon
The current delivery month for most mortgage-backed securities will “roll” to August

This is a standard monthly administrative function of the mortgage market. The price impact on this change from July to August delivery is roughly 25 basis points and is already reflected on most of your investors’ rate sheets.

Fri. July 11
Empty


Mon. July 14
Empty