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Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com


Building Strong, Lasting Relationships; One Client at a Time.
Wednesday, June 23, 2010
Technically speaking, yesterday was a good day for the mortgage markets with July MBSs breaking resistance and moving to new near term high prices. The bellwether 10 yr note yield fell 9 basis points to 3.16% yesterday, but it did not break resistance at 3.16% and remains in its month-long range between 3.16% and 3.32%. Early this morning both mortgage prices and treasury prices opened slightly lower, no follow-through from yesterday. The 10 yr at 9:00 am -3/32 at 3.17%, mtg prices -3/32 (.09 bp) frm yesterday's close; the DJIA index futures +42 after dropping 149 yesterday. Today is important; if the 10 yr note and mortgages cannot advance (price) the near term outlook is for rates to increase somewhat with traders selling at the bottom of the recent yield ranges with expectations that the 10 yr may move back to the top of the recent range (3.32%).

At 9:30 the DJIA opened +20, 10 yr at 9:30 +2/32 at 3.15% -1 BP and mortgage prices -2/32 on 4.0 coupons and +1/32 on 4.5 MBS coupons.

At 10:00 May new home sales, expected to have fallen 20%, earlier this week the consensus was a decline of 14.5% but many moved estimates lower after yesterday's decline in existing home sales (-2.2%) that were widely expected to have increased. As reported new home sales collapsed! -32.7% in May to 300K (annualized) against estimates of 400K. The lowest new home sales ever going back to 1980. May was a disaster but it gets worse; April sales were revised from 504K units annualized to 446K and March revised from 439K to 389K. Based on the May sales there is an 8.5 month supply. We have warned for months that the housing sector would continue to decline, today's report is even worse than we were expecting by a wide margin.

The key for the near term interest rates and the equity markets is how the Fed frames the FOMC policy statement at 2:15 this afternoon. Will the Fed actually admit that the US and global economic outlook has weakened since the last FOMC meeting (Apr 28 and 29)? The US economy is not likely to achieve the lofty forecasts for growth that economists had expected a month or two ago; estimates for GDP growth have been revised slightly lower over the past month with Europe's economies' slowing and US consumer spending leveling off and declining fractionally. The Fed walks a tight line today; admit economic growth won't meet previous estimates or paint another mixed picture that confuses investors; we opt for the later. The Fed will try to remain optimistic as the Greenspan Fed did right up the the collapse of the housing bubble that Greenspan "didn't see coming".

At 1:00 Treasury will auction $38B of 5 yr notes in the second of three auctions this week. Yesterday the $40B 2 yr note was strong with very good demand; today the demand may be a little less but we expect it will still be a solid auction as demand for US debt continues to be strong.

Early this morning the MBA released its Weekly Mortgage Applications Survey for the week ending June 18, 2010. The Market Composite Index decreased 5.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 7.3% from the previous week and the seasonally adjusted Purchase Index decreased 1.2% from one week earlier. The unadjusted Purchase Index was 36.8% lower than the same week one year ago. The decline in total purchase applications was driven by a 4.4% decrease in government applications, while conventional purchase applications increased by 1.0%. The four week moving average for the seasonally adjusted Market Index is down 0.5%. The four week moving average is down 1.1% for the seasonally adjusted Purchase Index, while this average is down 0.4% for the Refinance Index. The refinance share of mortgage activity decreased to 73.8% of total applications from 74.8% the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.75% from 4.82%, with points increasing to 1.07 from 0.89 (including the origination fee) for 80% loans. This is the lowest 30-year contract rate observed in the survey since the week ending May 15, 2009. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.19% from 4.23%, with points increasing to 1.00 from 0.83 (including the origination fee) for 80% loans. The average contract interest rate for one-year ARMs decreased to 7.05% from 7.07%, with points remaining constant at 0.27 (including the origination fee) for 80% loans.

May new home sales were a disaster; the reaction sent the 10 yr note yield down to 3.10% 1 basis points from the reactionary low rate hit at the end of May. You cannot believe some of the chatter after the report that some of the bullish people tried to spin the May sales data. Amazing that many can't see the train coming.





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