Dividend vs. Bond Yields: Time To Buy Stocks? Loan Apps At 9 Month High

Loan Apps At 9 Month High
The Mortgage Bankers Association reported that apps were up almost 7% last week, hitting a 9-month high mostly due to refinancing. And as one would expect, purchase apps sunk to a 13-year low. Refi’s were up over 9% last week, but purchase apps fell 2%.

Dividend vs. Bond Yields: Time To Buy Stocks?
Here is an interesting investment phenomenon. No one can foretell the future, but currently the dividend yield on the Dow Jones Industrial Average’s 30 stocks is roughly 3%. If you purchased a 10-yr Treasury Note, you would earn a risk-free yield of about 2.92% for the next ten years. So if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury notes! Of course, stocks and bonds could both go up or down in price in the next 10 years, but still, stocks are increasingly attractive, on a relative basis, when compared to bonds. Heck, the dividend yield on many utility stocks is between 5-6%, and who doesn’t want to make money every time someone recharges their Blackberry or turns on their air conditioning?

Will New Regs Really Change Lender Rate Sheets?
Assuming the Financial Reform Bill passes next week, what will eventually happen to rate sheets everywhere? How will correspondent and wholesale rate sheets look? Some believe that sheets will only offer rates at a cost to borrowers or a par rate with no rebate. So a broker or loan agent, who is receiving their compensation based on whatever their fee is per loan, will offer a much more limited set of pricing to borrowers. Others believe that rate sheets won’t change much, and that investors and brokers will figure out a way around it. One veteran said, “In the old days I had a Fannie Goldbook on my desk, which showed different prices for different rates. And bond math dictates that, given the same risk, maturity, etc., an investor will pay a higher price for a higher yield.”

Mortgage Bond Markets Continue Higher
Mortgage security prices, whether or not the price improvements are passed along by mortgage accumulators, continue to “grind tighter and even higher”. Recent prepay (early pay off) numbers indicate that older pools of mortgages, filled with 30-yr loans above 5%, are not prepaying very fast, which in turns helps ease prepayment fears. Fannie & Freddie 4.5% & 5% securities (made up of 4.75%-5.625% loans) are deemed the most “refinance-able” due to their strict underwriting and pristine borrower credit scores, but they may be somewhat capped out equity-wise with home values not having changed much since the original loan was funded. This is tough, since 4.5% pools are trading at a price near 104 (4 point rebate!). No one is looking for much, if any, increase in rates through 2010, given the world-wide economic climate.

Just Over 30% of Homes Refinancable
Speaking of refinancing, recent business school graduate analysts estimate that just over 30% of the mortgage universe is “refinanceable” given the tight underwriting standards and poor housing market conditions. They believe mortgage rates to the consumer would have to drop below 4.50%, with the 10-yr yield falling well below 2.80%, to achieve much pick up in the refinancing. And one has to ask – what will our economy look like if it gives rates that much reason to fall to those levels?

Market Summary
Yesterday stocks started off the day with a good bid, attempting to end 7 straight days of being down, and bond prices were relatively flat. That changed as the day progressed, with stock prices sliding and bond prices (including mortgages) improving – leading to many investors offering intra-day price improvements. We learned that the U.S. service sector expanded in June for a sixth straight month but the rate of growth slowed to its lowest pace since February, the latest evidence that the economic recovery is cooling. By the end of the day roughly $2 billion in originations had been sold – “average” – and mortgage prices actually improved relative to Treasury prices due to investor interest. The yield on the 10-yr went down to 2.94% and by the end of the day 30-yr mortgage security prices were better by .375. Will investors pass that along? Anyway, here this morning we find the 10-yr at 2.93% and mortgage prices better by .125-.250.

Daily Humor
Drug companies continue to do research on new drugs, many aimed at women.

DAMNITOL
Take 2 and the rest of the world can go to hell for up to 8 full hours.

EMPTYNESTROGEN
Suppository that eliminates melancholy and loneliness by reminding you of how awful they were as teenagers and how you couldn’t wait till they moved out!

ST. MOMMA’S WORT
Plant extract that treats mom’s depression by rendering preschoolers unconscious for up to two days.

PEPTOBIMBO
Liquid silicone drink for single women. Two full cups swallowed before an evening out increases breast size, decreases intelligence, and prevents conception.

DUMBEROL
When taken with Peptobimbo, can cause dangerously low IQ, resulting in enjoyment of country music and pickup trucks.

FLIPITOR
Increases life expectancy of commuters by controlling road rage and t he urge to flip off other drivers.

MENICILLIN
Potent anti-boy-otic for older women. Increases resistance to such lethal lines as, “You make me want to be a better person”.

JACKASSPIRIN
Relieves headache caused by a man who can’t remember your birthday, anniversary, phone number, or to lift the toilet seat.

ANTI-TALKSIDENT
A spray carried in a purse or wallet to be used on anyone too eager to share their life stories with total strangers in elevators.

BUYAGRA
Injectable stimulant taken prior to shopping. Increases potency, duration, and credit limit of spending spree.