Something To Get Off My Chest: CNBC vs Zerohedge

Not anything mentioned today on CNBC, but there have been plenty of times in the past where I've heard CNBC commentators making snarky comments directed in general at "financial bloggers" but were veiled references at specific ZH blog entries.

To CNBC...I've watched your channel since it's infancy. I watch FNN religiously before you were even conceived. I remember the days of Neil Cavuto and Kathleen Campion...Me and you go way back...

But cut out the snarky comments directed at ZH. ZH does some things much better than CNBC. They cover the sausage making that goes on at the Fed. ZH provides the ugly details that CNBC glosses over or doesn't mention. They cover the European unwind in much better detail that CNBC.

There is a place in the world for both. No need for the snark, we can judge for ourselves.

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Fannie Mae 3.5% Bond Chart Comment Addition

In the comments section of the bond chart just posted I mentioned: "It looks like the more ambitious objective of 103.91 (from Sep 22 high) is going to be next target, and should get fufilled." I left out that the target should be fufilled sometime between the 2nd or 3rd week of January.

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Fannie Mae 3.5% Bond Chart

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Vegas Baby

At least Vegas gives you pretty girls in skimpy outfits with plenty of free booze to go around. The ES doesn't even give you a kiss.

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Treasuries at 1.88% - Stocks Remain Near 3 Month Highs

Frankly, I don't think this can last much longer (but I could definitely be wrong), with treasury yields indicating anticipated recessionary levels (although with help from the Fed and currency flight from Europe) and stocks remaining elevated. A big problem with such heavy Fed intervention is that it distorts what the markets are indicating.

Do we listen to the bond market, or the stock market? If you put a gun to my head, I'd say listen to the bond market. Of course, the rational thing to do is probably to simply stay out of the market entirely...sometimes the most profitable trading path is to take a vacation.

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Best fan sign of the year: Packers fan uses game tickets to get back at cheating ex

The Packers are the heart and soul of Green Bay. Fans own "stock" in the team, and season tickets are a valuable commodity. That made tickets to the Christmas night game with archrival Chicago either the best gift a fan could find under the tree, or (if her sign is to be believed) a perfect way to get back at a cheating boyfriend.

http://sports.yahoo.com/nfl/blog/shutdown_corner/post/Packers-fan-uses-game-t...

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China's Role In European Bailout vs 2 Months Ago

I would be laughing if it wasn't so tragic...If you're wondering the depths of European desperation, as well as China's, consider the following stories are a mere two months apart. There was no way in hades that China was ever going to step up to the plate for Europe.

Oct 27, 2011:

China could play key role in EU rescue

http://www.ft.com/intl/cms/s/0/7505d210-00ba-11e1-8590-00144feabdc0.html#axzz1hcMBJbzc

December 25, 2011

China Insolvency Wave Begins As Nation's Biggest Provincal Borrowers "Defer" Loan Payments

http://www.zerohedge.com/news/china-insolvency-wave-begins-nations-biggest-provincal-borrowers-defer-loan-payments

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FNMA 3.5% Chart for Dec 20 2011

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Doug Short's Four Bad Bears

http://www.advisorperspectives.com/dshort/updates/Four-Totally-Bad-Bears.php

This chart series features an overlay of the Four Bad Bears in U.S. history since the market peak in 1929. They are:

The Crash of 1929, which eventually ushered in the Great Depression, The Oil Embargo of 1973, which was followed by a vicious bout of stagflation, The 2000 Tech Bubble bust and, The Financial Crisis following the nominal all-time high in 2007.

The series includes four versions of the overlay: nominal, real (inflation-adjusted), total-return with dividends reinvested, and real total-return.

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FNMA 3.5% Chart

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CBO’s Budget Infographic

http://cboblog.cbo.gov/?p=3042

The federal government's finances are pretty complicated and not always easy to understand, and most of CBO's reports about the budget outlook are fairly lengthy and detailed. In fact, one of the questions we're most frequently asked is how much the government spends and takes in each year. For those who are not very familiar with the budget, finding the answer is sometimes harder than it should be.

CBO's newest infographic—that is, information presented in a graphic form—describes some key elements of the federal budget, including a breakdown of its major components and a visual history of the budget and federal debt over the past 40 years. This graphical budget primer is more accessible than some of our longer reports, and we're hopeful that it will make the federal budget easier to understand.

Today's infographic is the latest installment in our ongoing effort to present more budgetary information in a graphic form. This past summer we provided a set of easy-to-view slides on the outlook for the budget and economy. In addition, we published an infographic on Social Security, which provides historical statistics and projections of the program's financial status, the number of workers per beneficiary, the distribution of recipients, and the program's share of federal spending.

Jonathan Schwabish of CBO's Health and Human Resources Division and Courtney Griffith of CBO's communications team prepared today's infographic.

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CBO’s Estimate of the Cost of the TARP: $34 Billion

http://cboblog.cbo.gov/?p=3058

Today CBO released the latest in a series of statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP)—the program established in October 2008, during the financial crisis, to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of “troubled assets.”

To further our effort to demystify certain aspects of the federal budget, CBO also prepared an infographic on the TARP. Its aim is to summarize the most pertinent details about the TARP since its inception: the types of assistance, cash disbursements, and net budgetary costs or gains.

What is CBO’s current estimate?

CBO estimates that the net cost to the federal government of the TARP’s transactions, including the cost of grants for mortgage programs that have not been made yet, will amount to $34 billion. CBO’s analysis reflects transactions completed, outstanding, and anticipated as of November 15, 2011.

That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding home foreclosures: CBO estimates a cost of $59 billion for providing those three types of assistance.

But not all of the TARP’s transactions will end up costing the government money. The program’s other transactions with financial institutions will, taken together, yield a net gain to the federal government of about $25 billion, in CBO’s estimation.

 

How does the estimate differ from our March 2011 estimate?

CBO’s current estimate of the cost of the TARP’s transactions is $15 billion higher than the $19 billion estimate shown in the agency’s previous report. That increase in the estimated cost stems primarily from a reduction in the market value of the government’s investments in AIG and General Motors.

 

How does the estimate compare with OMB’s estimate?

The Office of Management and Budget (OMB), in its latest estimate, projects the program’s costs to total $53 billion. CBO’s current estimate is less than OMB’s estimate, largely because CBO projects less spending for the Treasury’s housing programs under the TARP; that difference is partially offset by CBO’s higher estimate of the cost of assistance to AIG.

How does the cost compare with our original estimate?

CBO’s current estimate of the total disbursements by the TARP and the net cost of those disbursement is well below what was originally envisaged. Only $428 billion of the originally authorized $700 billion will be disbursed through the TARP, CBO estimates.

When the program was created, the U.S. financial system was in a precarious condition, and the transactions envisioned and ultimately undertaken engendered substantial financial risk for the federal government. Nevertheless, the costs directly associated with the TARP, when taken in isolation, have been toward the low end of the range of possible outcomes anticipated when the program was launched—in part because funds invested, loaned, or granted to participating institutions through the Federal Reserve and other government programs besides the TARP helped limit those costs.

This report was prepared by Avi Lerner of CBO’s Budget Analysis Division. The infographic was prepared by Jonathan Schwabish of CBO's Health and Human Resources Division and Courtney Griffith of CBO's communications team.

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Cost of Tax Cut: Another $17 a Month on Most Mortgages

http://www.cnbc.com/id/45708514

Who is paying for the two-month extension of the payroll tax cut working its way through Congress? The cost is being dropped in the laps of most people who buy homes or refinance beginning next year.

The typical person who buys a home or refinances starting on Jan. 1 would have to pay roughly $17 more a month for their mortgage, thanks to a fee increase included in the payroll tax cut bill that the Senate passed Saturday. The White House said the fee increases would be phased in gradually.

The legislation provides a two-month extension of a payroll tax cut and long-term unemployment benefits that would otherwise expire on Jan. 1. It would also delay for two months a cut in Medicare reimbursements for doctors that is scheduled to take effect on New Year's Day. The House is expected to act on the bill early next week. Two more months of the Social Security tax cut amounts to a savings of about $165 for a worker making $50,000 a year.

To cover its $33 billion price tag, the measure increases the fee that the government-backed mortgage giants, Fannie Mae and Freddie Mac, charge to insure home mortgages. That fee, which Senate aides said currently averages around 0.3 percentage point, would rise by 0.1 percentage point under the bill.

For the holder of a typical $200,000 mortgage, that means their monthly housing payment would be about $17 higher.

The 0.1 percentage point increase will also apply to people whose mortgages are backed by the Federal Housing Administration, which typically serves lower-income and first-time buyers.

The higher fee would not apply to people who currently have mortgages unless they refinance beginning next year.

Because of the weak housing market and the huge numbers of foreclosures in the last few years, private insurers have not competed strongly for business with Fannie Mae and Freddie Mac, which have the backing of the federal government. As a result, about 9 in 10 new home mortgages are backed by Fannie Mae, Freddie Mac and the FHA.

President Obama and many congressional Democrats and Republicans want to curb Fannie Mae's and Freddie Mac's dominance in the mortgage market. Obama earlier this year proposed raising the mortgage guarantee fees they charge as one way to do that.

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Interest Rates: FNMA 3.5% Dec 16, 2011

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Important Moments: Living History of Interest Rates, A Guaranteed Longshot

Interest Rates are declining today: a "perfect storm" for those looking to refinance, with the window of opportunity opening today. As I write this email, the interest rate on the 10 Year Treasury note is at 1.98%. While 30 year fixed mortgage rates don't move in 100% lockstep with 10 Year Treasuries, the correlation is extremely high; think of a tether linking the 30 Year Fixed Mortgage rate and the 10 Year Treasury Note.

I am writing this email while watching Jon Corzine testify in front of Congress. It's a very sad day for the former CEO of Goldman Sachs and the recent CEO of MF Global to say under oath that he doesn't know where the money went.

But this email is not about Jon Corzine's testimony, per se. It is about a "Perfect Storm" that appears to be unfolding that may, potentially, lead to slightly lower interest rates in the immediate near future.

The "Perfect Storm" is 1) the combination of the failure of the EU to come to a meaningful agreement, essentially buying more time because fundamentally the countries are having immense difficulty coming to an agreement to resolve their issues, and 2) a lack of liquidity in the financial futures markets that has resulted from the MF Global fiasco. Up until now, this lack of liquidity, since the October 31, 2011 bankruptcy of MF Global hasn't had a catastrophic impact on the financial markets. But with the potential severity of the EU situation combined with the reduced liquidity in the financial markets from the MF Global fiasco, we may be facing somewhat temporary, but very upsetting "Risk Off" trade, meaning money would be temporarily flowing on a major scale into US Treasuries, perceived to be a safe haven. With interest rates under 2% on the 10 Year Treasury, it seems that process has begun. The question is: will it continue, and if so, how far?

History of EU Summits

Hat Tip to Barry Ritholtz' The Big Picture Blog link

(click on link to see chart)

As we can see above, we've had many Euro Zone meetings in 2011 to address the European debt crisis. And the net effect of these meeting has been disappointment, and it appears that today's summit is going to be disappointing as well.

Now, as I write this email, we don't know the final announcement from European leaders. That will come out in the wash tomorrow. Maybe there will be a pleasant surprise for the markets to cheer.

If we get a "pleasant surprise" from the markets, the short term effect will be a relief rally in "Risk On" assets and a selloff in "Risk Off" assets. To simplify matters, "Risk On" assets are assets like stocks and commodities. "Risk Off" assets are U.S. Treasury Bonds and mortgage backed securities. In short, "Good News" means higher interest rates, "Bad news" means lower interest rates.

So if we get "bad news", implying lower interest rates, the big question is "how much lower can interest rates go?". The answer is, historically, not that much lower, but enough to make a difference in your refinance rate. It's critical that if you are looking to refinance right now, that you have someone watch the interest rate market like a hawk, with a finger on the lock trigger.

The History Of Interest Rates - A Guaranteed Longshot
Below is the graph, from the Federal Reserve Bank of St. Louis link, of the daily closing yield of the US 10 Year Treasury from January 1, 1962 to December 6, 2011.

As I write this email, the U.S. Treasury 10 Year yield is at 1.98%. To put this yield into historical context, I have downloaded all of the days in the above chart, a total of 13,026 days, from January 1, 1962 to December 6, 2011. Out of these 13,026 days, there has been a grand total of 19 days, all of them in 2011, with interest rates below 2%. Most people would look at a 19 out of 13,026 chance as being an incredible long shot, a long shot not even worth considering or thinking about because, well, let's face it a 19 out of 13,026 long probably is not going to happen. But in this case, today, if you are looking to refinance,  we have a guaranteed opportunity to lock in a 19 out of 13,026 long shot. It's literally here today.

Now putting together the historical opportunity presented above, there is also the practical matter of refinancing. If you do not have a loan application in the system, you need to begin the process. It only takes a few minutes of time on the phone. Once we get an automated approval, we can get the lock process started.

Can interest rates go lower?
I'm going to surprise some folks when I say this, but if the official EU announcement is perceived by the markets as disappointing, then the answer to this question in yes, it is possible that we may see interest rates going slightly lower than where they are at right now. But we also know that interest rates simply don't stay below 2% for very long. Some sort of crisis pushes the rates below 2% for a few days (think of a beach ball pushed below the water and then popping back up quickly) , and then the economic pressures causing the rates to go below 2% ease up, and rates pop back up. Historically, the lowest interest rate on the 10 Year Treasury in the Fed's database, from 1962 to today, was on September 22, 2011 at a rate of 1.72%. Here are all the interest rates below 2%, from 1962 to today.

 

Date	Interest Rate
2011-09-22
2011-10-03
2011-10-04
2011-09-23
2011-09-21
2011-11-23
2011-09-26
2011-09-30
2011-10-05
2011-09-09
2011-09-12
2011-11-22
2011-09-20
2011-11-17
2011-09-19
2011-11-21
2011-11-25
2011-11-28
2011-09-06
2011-09-29

 

 

1.72

1.80

1.81

1.84

1.88

1.89

1.91

1.92

1.92

1.93

1.94

1.94

1.95

1.96

1.97

1.97

1.97

1.97

1.98

1.99

 

If you are considering refinancing your mortgage, I would say that this rare window of opportunity is now open. "Guaranteed" longshots rarely come along in life, and when they do, one needs to be prepared to take advantage of the opportunity that presents itself.

Note:this is the text version of an email sent to clients. I'm posting this via posterous, which does not allow me to include the graphs. For those that want the original email, I can be contacted at dan.mellis@htlkirkland.com

 

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