Dow Tanks 724 Points on China Tariff Announcement, VIX Spikes To 23.34 (Trump Wants Quid Pro Quo)

The US plans to impose tariffs on up to $60bn in Chinese goods and limit the country’s investment in the US in retaliation for years of alleged intellectual property theft (such as my book which is sold in China, yet I have never received a penny in royalties). But it is more about inequality in tariffs where China has higher tariffs on US imports than the US has on Chinese imports.

As Dr. Hannibal Lecter once uttered, “Quid pro quo.”


Financials and Industrials led the way down.


The VIX spiked to 23.34.


The media ignores the fact that Fed rate increases coupled with balance sheet decay has helped make the equities markets more fragile.


Strange Brew! FHFA House Price Index Rises 0.8% MoM In January (And 7.30% YoY While Hourly Earnings Growing At 2.6% YoY)

Strange brew! The FHFA’s house price index rose 0.8% in January, double what analysts forecast.

Not surprisingly, the Pacific region and the Mountain region led both MoM and YoY growth.


While the national HPI Purchase Only index rose at 7.30% YoY, too bad the average hourly earnings grew at 2.6% YoY. That is close to 3 times hourly earnings growth!


And note the trajectory of YoY house price growth!

Is that Mose Schrute introducing Cream playing Strange Brew?



Some Toys ‘R’ Us Stores May Be Worthless, Deutsche Bank Says

Beleaguered retail chain Toys ‘R’ Us is packing a punch for CMBS investors.

  • Properties in CMBS backed by 123 stores may be reappraised
  • Subordinated bondholders could lose control with lower value

Some Toys “R” Us stores could turn out to be worthless to commercial mortgage-bond investors.

As many as 26 of the weakest properties in a 2016 commercial mortgage-bond deal secured by 123 Toys “R” Us stores may have little or no value, Deutsche Bank AG analysts Ed Reardon and Simon Mui wrote in a note Wednesday. The stores backing the $512 million bond had an estimated value of around $618 million in 2016 if they were to be vacated and re-leased. But that figure could be one-third lower now because retailers’ revenues have been dropping and more have been filing for bankruptcy.

The properties are probably subject to a new appraisal following the Wayne, New Jersey-based toy store’s bankruptcy filing in September 2017, based on the securities’ offering documents, the analysts wrote. An appraised value of less than $495 million could lead to the most junior bondholders losing control of servicing decisions or taking losses, the analysts wrote.

Toys “R” Us sold the bonds in October 2016, less than a year before it filed for bankruptcy. The largest portion of the offering received AAA ratings from S&P Global Ratings and Morningstar Credit Ratings. The $63 million Class F piece of the deal, which would be the first to take losses, had junk ratings.

Such ‘Flux’

The analysts estimated a new appraisal may value the properties at $407 million. Adding difficulty to valuations are the varying types of store locations — including outside malls, strip centers and standalone locations — and a retail industry “in such a state of flux.”

Real estate investment trusts including Retail Properties of America Inc.DDR Corp.and Kimco Realty Corp. are candidates to purchase some of the spaces in primary and secondary markets because many already operate similar properties, the analysts said. Local real estate investors may be the best option for lower-value lots, but could also end up buying mid-tier spaces if national buyers pass.

Potential replacement tenants “have significant negotiating power” when leasing the spaces, the analysts said. Some loans in the deal have other large vacancies nearby, or other weak tenants that may close stores. In some cases, potential replacement tenants like Michaels Cos. and Dick’s Sporting Goods Inc. already have stores near or in the same shopping strip where a Toys “R” Us is closing, meaning they’re unlikely to step in and lease.

“Buyers of these properties face massive execution risk,” the analysts said, noting that owners of the spaces may face lower-than-expected rents, more retailer defaults or a long leasing process.

The TRU portfolio is truly awful.
And CMBX BB S6 is showing a dramatic decline since mid-2015 as retail concerns mount.

With retail store closings continuing to ramp up, retail REITs and CMBS investors had better watch out.


Fed Comes A Little Bit Closer To Taylor Rule (Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!)

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!


The sentiment for 4 rate hikes in 2018 is growing.


The Fed Dots Plot for today’s meeting shows optimism over economic growth.


I was hoping that Jay Powell was going to sing a ballad to former Fed Chair Janet Yellen.


MBA Refinance Index Now At Lowest Level Since 2008 (Down 4.45% WoW)

The MBA refinance index is now at its lowest level since 2008.


The MBA Refi Index decreased by 4.5% from 1159 to 1108, for the week ending on March 16, on a seasonally adjusted basis.

The Conventional Refi Index decreased by 5%, Government Refi Index decreased by 1.5%.


Perfektenschlag! U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down (Perfect Storm For Affordable Housing)

Combine insane land use restrictions (zoning), influx of millions of immigrants from south of the border, a booming tech industry and super low interest rates from The Federal Reserve and we have  “Perfektenschlag” for US affordable housing policy: the perfectly UNAFFORDABLE HOUSING MARKET (aka, coastal California).

(Bloomberg) – Homebuyers in the U.S. have plenty to grouse about these days. Prices have climbed steeply in many metro areas, mortgage rates are rising and inventory is thin. But for people looking to purchase their first home, it’s ugly out there.

“Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC” than they were six years ago, the real estate website Trulia reported Wednesday after analyzing housing stock across the country.  Trulia began tracking prices and inventory in 2012.

It’s grim all over. American homes are at their least affordable in the report’s history. But the median listing price of available starter homes has risen 9.6 percent in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter, Trulia reported.

Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes. The share of income needed by those in the market for a premium home was 15 percent, and for a trade-up home 27 percent. For a starter it was 41 percent.

Adding insult to injury, the homes aimed at first-time buyers are less likely to be ready for human habitation than others, with fixer-uppers accounting for 11.2 percent of the category. They’re about nine years older than they were in 2012, and 2 percent smaller.

On the bright side, 2 percent isn’t a whole lot smaller. Until you learn that homes overall are more than 8 percent bigger.

The markets that are the least affordable are concentrated in California with Boston being the sole market not located in the Golden State. In some of the most expensive places in the country like San Francisco, San Jose and Los Angeles, those income earners at the bottom third of the market would need to spend all their income and more (over 100%) to afford a median starter home.  The starter home price among all ten of these markets has also increased since this time last year.


Combine California Governor Jerry “Moonbeam” Brown and former UC Berkeley economics professor Janet Yellen collaborating on affordable housing policy, and you get the median price of a starter home in San Francisco of $820,550.


Yes, throw in California’s tight land use controls, a legislature that encourages open borders, a Federal Reserve keeping interest rate extremely low for a decade and a booming technology sector and we have an AFFORDABLE HOUSING CRISIS in coastal cities.


Or as Dwight Schrute said, “Perfektenschlag.”


Born To Run! Libor Rises for 30th Straight Day Ahead of Fed Decision (Highest Since Financial Crisis)

With a rate increase a foregone conclusion when the Federal Reserve concludes its two-day policy meeting on Wednesday, traders have been actively pricing it in. The three-month U.S. dollar London interbank offered rate, or Libor, which is one of the benchmarks for setting borrowing rates worldwide, has been on the rise since Feb. 7, reaching 2.25 percent, the highest since 2008 (and the financial crisis).


Meanwhile, its gap over similar-maturity risk-free rates, known as the Libor-OIS spread, has more than doubled since the end of January to 55 basis points, a level unseen since 2009.


With The Fed taking its foot off the monetary brakes (at long last), Libor and the Libor-OIS are “born to run.” UP!

Here is my friend, Atlanta Fed’s President Raphael Bostic, and Fed Chair Jerome Powell.


Fed Enters Brave New Forecasting World Beset With Same Old Data (Actual data look very similar to those Fed faced in December)

The Fed’s Open Market Committee (FOMC) is meeting today and tomorrow to decide what to do. Well, it is pretty much a foregone conclusion that the Fed Funds Target Rate (upper bound) will be raised to 1.75% from 1.50%.


But what is different at this meeting than at the last meeting in 2017? In short, GDP is expected to growth at a faster pace and inflation is rising ever so slowly.

(Bloomberg) -By Jeanna Smialek- Federal Reserve officials will face an unusual predicament as they update their economic projections this week: Everything has changed but the data.

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.


And if we look at the Rudebusch Model for the Taylor Rule, it is screaming for a Fed rate hike even with unemployment rate at 4.1% and Core PCE Inflation at 1.52%.


While The Fed forecasts GDP to grow at 2.5%,


the Atlanta Fed’s GDPNow Forecast for Q1 has fallen to 1.8%. Be warned! This is one noisy forecast model!!


Home prices keep growing at over twice that of hourly wage growth.


Part of The Fed’s Brave New World is trying to cope with housing prices rising over twice as fast as wage growth.



Q4 Mortgage Median Down Payment 7.1% (Same As Peak Flipping Year Of 2005)

The median down payment for a US residential mortgage was 7.1% as of Q4 2017

median_down_payment_Q4_2017 (1).png

According to Attom, the median down payment increases 20 percent from year ago
The median down payment on single family homes and condos purchased with financing in Q4 2017 was $18,000, down from a record high $19,100 in the previous quarter but up 20 percent from $14,950 in Q4 2016.

The median down payment of $18,000 was 7.1 percent of the median sales price of the homes purchased with financing during the quarter, down from a four-year high OF 7.3 percent in the previous quarter but still up from 6.2 percent in Q4 2016.

“The median down payment in the greater Seattle area of 14.1 percent is twice the national average and continuing to rise,” said Matthew Gardner, chief economist at Windermere Real Estate covering Seattle. “This is good news for homeowners in our market as it provides them with a layer of protection should home prices see a downturn in the future.”

Among 143 metropolitan statistical areas analyzed for down payments, those with the biggest median down payments were San Jose, California ($268,000); San Francisco, California ($174,500); Santa Rosa, California ($123,450); Los Angeles, California ($119,800); and Ventura, California ($107,000).

Hey buddy, can you spare a quarter of a million dollars for a down payment in San Jose?

This coindices with the peak quarters of the US home flipping in late 2005.


As of Q4 2017, Wells Fargo continues to be the leader in mortgage purchase originations with Quicken Loans being the leader in mortgage refis.


Quicken has Rocket Mortgage. Wells Fargo has Wells Fargo Express!!


LIBOR-OIS Jumps To 49, Highest Spread Since 2012 As Fed Prepares For Rate Increase (Probability of 99.7%)

The LIBOR-OIS spread (between the 3 month Libor rate and the 3 month USD swap overnight indexed swap [OIS]) has risen to its highest levels since early 2012.


The 3 month LIBOR rate is now at 2.145%.


The implied probability of a Fed rate hike at the next meeting is 99.7%.