Stocks and bonds both rallied yesterday. MBS prices were better by .5 in price on the lower coupons, and .375 in the slightly higher ones on $1.7 billion in origination. The yield on the 10-yr closed at 2.59%. The election results came in after the US markets closed, but were pretty much as expected – and really have not impacted the markets. In what is viewed as a broad rebuke to President Obama’s agenda, Republicans have taken back the House of Representatives, picking up over 60 seats, with the majority in the Senate unchanged but narrowing. And it seems that we have a new Speaker of the House: John Boehner, a republican from Ohio. Although small and large businesses are the engines that create jobs, avoiding political gridlock will be critical to any kind of decent economic recovery.
Market/Economic Stat Roundup
Mortgage applications in the U.S. fell last week. Apps were down 5%, with refinancing down 6.4% but purchase apps up 1.4%. Refi’s are still well above 80%, which is why mortgage activity could drop 30% in 2011. In the employment arena, ADP’s numbers showed private sector jobs were up 43k in October and revised slightly lower in September.
But the big news today is the FOMC meeting results at 2:15PM EST, 11:15AM PST where it’s expected they will announce another round of quantitative easing. A trader from Merrill Lynch (BofA) wrote that he expects the Fed to “put forth a plan to purchase around $500 billion of Treasuries over a six-month period, with a commitment to buy more as needed, link policy to their inflation outlook, and explain that they expect these actions to help the economy by improving financial conditions. Ahead of the announcement, the 10-yr is down to 2.56% and mortgage security prices are better by about .125.
Why Are Bank Stocks Languishing?
The FT says:
“The new regime of financial regulation will hit annual profits, at the US’s eight biggest banks, by between $19.5 billion and $22 billion, according to one of the first assessments of the new law. S&P’s analysts say there will be a noticeable loss of income as a result of restrictions on proprietary trading, credit card fees and derivatives activity, along with increased compliance costs, at Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, PNC Financial, US Bancorp and Wells Fargo.
“We think that these banks will eventually be able to offset these deficits by making smaller additions to loan-loss reserves and raising prices for some products and services. A return to more typical banking conditions would, in our view, mitigate most, or even all, of the financial costs of Dodd-Frank for these banks.”
The analysts acknowledge there are other “significant uncertainties” because much of the rules are still to be fleshed out by regulators following the passage of the Dodd-Frank Act in June.
Bank Capital Rules
In a somewhat related issue, U.S. Treasury Secretary Geithner recently agreed with European Union financial markets chief Michel Barnier on a December 2011 date to implement new Basel trading book rules. An agreement was reached a few months ago by the Basel Committee on Banking Supervision in order to toughen capital and liquidity standards. Basel III, although not on the radar screen of many loan originators, will indeed impact them. The value of servicing is a huge question mark right now. Basel III will impact banks’ Tier 1 common equity ratios, and whether or not capital would be used for incremental growth or when some of it could be returned to shareholders. One of the policies is for banks to meet higher capital hurdles before using any net new capital for strategic initiatives.
Jamie Dimon, CEO of JPMorgan, says banks would likely become Basel III-compliant quicker than when most people think. The early achievers will be at a strategic advantage, able to first seize new opportunities in the marketplace, as well as make strategic acquisitions and undertake shareholder-friendly measures, such as reinstating dividends or share-buyback programs. Some analysts believe that Goldman Sachs looks to be in the best position to meet the new Basel III minimum targets, as it expects its Tier 1 common to near 8% currently and near 11% by the end of 2012. JPMorgan sees its Basel III Tier 1 common to be 7% by the end of this year and 9% by the end of 2011. Wells Fargo indicated it expects its new Tier 1 common to be 7% sometime in the next few quarters, while Citi guided it would be between 8% to 9% in 2012 and Bank of America indicated it would be greater than 8% in 2012.
Mortgage Insurance Rebound
Radian Group, the number two mortgage company in the US, saw its stock price shoot up 15% – the most in seven months – after posting its first profit in five quarters. “We continue to see signs of credit-trend stabilization,” Chief Executive Officer S.A. Ibrahim said, and “a decline in the delinquency count for the third consecutive quarter.” As most know, MI companies pay lenders when homeowners default and foreclosures fail to cover the costs, and per Radian delinquencies continued to decline in October. Most MI company’s stock rose, despite continued “less than exciting” performance by Genworth (higher-than-expected losses from Florida mortgages), MGIC (recently reporting a loss of $51 million in the 3rd quarter), and PMI (who posted a loss of $281 million).