Capital Markets Update

Louis S. Barnes Fryday, October 7th, 2011

Maintain sense of humor. Most of the following could not be made up.

Freddie Mac yesterday announced the lowest mortgage rates ever found in its 40-year survey, 3.94% with .8% origination fee. National media today trumpet that result. Freddie takes its horse-and-buggy survey early each week and releases on Thursdays; in a financial world fully real-time for 20 years, consensus rates available at a keystroke, Freddie reports three-day-old trash. Clueless boobs.

In real time rates rose all week long, today about 4.25%, completing a second, perfect two-week cycle: the 10-year T-note broke below 2.00% to 1.72% on September 22, taking mortgages below 4.00% for the best borrowers (only). Lasted two days. By September 28 the 10-year was back to 1.99%, mortgages 4.125%. Over last weekend, 10s fell to 1.75%, mortgages to 3.875%; today, the 10-year is 2.10%.

This 2.10% is the highest high since mid-September, and has technical analysts fearful of an upward breakout. Likely not. These moves are driven by two things: first, new lows beget waves of refi rate-locks, which overwhelm financial markets that do not want to buy anything, and it takes a couple of weeks to digest the supply. Second, if you missed it, confused and frightened markets do not want to buy anything. At all.

One tell-tale: mortgage spreads to the 10-year are at least 35bps wider than normal, despite the Fed’s resumption of MBS buys in OpTwist.

Refi strategy: pick a target just above — above — the low that your banker says that you (or he) has just missed. Yes, we should revisit the lows, but they will fly by lickety-split. The idea is to get something done, not just enjoy the view.

Nothing in the economic picture has changed. Despite widespread forecasts of recession (40% chance by Goldman, guaranteed by the very reliable ECRI), we are not in recession or close to it. September job data confirm: another stumbling, sorry gain, half the jobs necessary for real growth, but a gain. The ISM’s September service-sector survey arrived at 53, only a hair off September, and three points into positive ground.

Europe. Merciful heavens. Club Med plus France are in a free-falling elevator. The plan: just before impact, all will jump up as high as they can. The European Financial Stability Facility is just that: the insolvent 60% of Europe offering its own guarantees to a new fund that will borrow new money to bail itself out. Rescued by lifting its own suspenders — that was the phony deal announced July 21 that pulled the plug on global markets for everything, banks in another all-time run on each other.

European Plan B: as the elevator car passes each floor, a new cry from inside to Angela Merkel standing outside: “Would you please do the proper thing for One Europe, and get down in the bottom of the shaft and catch this thing?”

Merkel stirred herself this week to advocate recapitalization of European banks, quickly, each nation to guarantee its own. France immediately requested access to the EFSF to do so because its bank-hole is too big for it to recap by itself. Among Europe’s problems, each of the weak has its own fatal illness; France has relatively low (to Italy) sovereign debt, pays its taxes, saves money, but has a banking system three or four times its GDP and with the largest holdings of Club Med bonds. Adieu, Cheri, adieu.

Everybody knows that if a way to save Spain and Italy cannot be found, the problem would be too big for Germany to fix, even if it were willing. However, right now France is key: banks are the arteries of post-coinage-and-barter economies.

The first big institution to run for cover, giving up on Euro-self-salvation: the Bank of England. Its Governor, Mervin King, was slow to understand in 2008, but not now; in anticipation of an unfortunate conclusion the BoE yesterday announced the doubling of its own QE. When the guy in the elevator next to you puts on his parachute….

Hanging over all is this other-world White House. Mr. Obama at last mentioned economic “emergency,” but his DOA jobs and tax plans, and sudden revelation of hard-Left conviction leave the Center that put him in office feeling deceived. And speechless, the spectacle too unnerving for discussion even among friends and at trading desks.