Vital Statistics:
Stocks are higher this morning as investors reach for risk. Bonds and MBS are down.
The week ahead won’t have much in the way of market-moving data, but we will get a lot of housing indicators with housing starts, existing home sales and homebuilder sentiment.
Business activity increased in New York State last month, according to the Empire State Manufacturing Survey. New orders and shipments surged, while employment remains weak. Inflation continues to trend down, with input prices falling while prices received were flat.
Atlanta Fed Chairman Raphael Bostic doesn’t see rate cuts this year, as inflation is still too high. “What we’ve seen is that inflation has been persistently high, consumers have been really resilient in terms of their spending, and labor markets remain extremely tight. All of those suggests that there’s still going to be upward pressure on prices,” he said. “If there’s going to be a bias to action, for me would be a bias to increase a little further as opposed to cut.”
PacWest is down again pre-market and were are getting more discussion about banning short selling in bank stocks. FWIW, I have always been skeptical about short selling bans in general – governments only step in after the easy money has been made, and in many cases the borrow in these names is already expensive.
When you short a stock, you have to find someone to lend you the stock to sell. This borrowed stock is what you deliver to the buyer on trade settlement date. Your prime broker will charge you a fee to borrow that stock, and we are seeing fees in the high teens and up. This means that your prime broker is lending you PacWest stock at a 20% fee, you will be paying about 40 basis points a week to maintain that position.
I think at this point, short sellers are not driving the price action in these names. There simply isn’t a deep borrow in these names and it costs a lot of money to borrow them. I suspect that many holders of these stocks will simple choose to not lend them out any more, which will make it difficult to short in the first place, and may force people with established short positions to exit them.
Lending standards are tightening across the board, especially for commercial real estate and residential lending. For residential, the tightening was more pronounced in jumbo and Non-QM as opposed to GSE and government loans. We are seeing weaker demand for HELOCs and other residential real estate loans.
Banks are also tightening standards on multi-fam, by increasing spreads, hiking covenants and lowering LTVs.
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