small business – The Daily Tearsheet

Morning Report: Oil goes negative

Vital Statistics:

	Last	Change
S&P futures	2751	-50.1
Oil (WTI)	14.23	-7.29
10 year government bond yield		0.55%
30 year fixed rate mortgage		3.38%

Stocks are lower as oil continues to weaken. Bonds and MBS are up.

The front month oil contract went negative yesterday, which was probably a first. I think at one point it traded at -$40 a barrel. Why? Nowhere to put it. Storage is pretty much full, and any incremental capacity out there is expensive. The May contract still trades, but June is really the active one.

Forbearance requests are now up to 6% of all mortgages. 8.26% of Ginnie loans are in forbearance and 4.6% of Fannie / Freddie loans are in forbearance. “With over 22 million Americans filing for unemployment over the past month, homeowners are contacting their mortgage servicers seeking relief, leading to a sharp increase in the share of loans in forbearance across all loan types,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “Mortgage servicers continue to receive a very high level of forbearance requests, but volumes were down somewhat compared to the prior week.”

Most economists think the eventual recovery will be U-shaped, in other words and extended downturn before things get back to normal. The other predictions are a V-shaped recovery or a W-shaped one. Obviously it depends on how long the lockdown lasts, and whether people get back to work wearing gloves and masks. Interestingly this has begun to fall down partisan lines, with red-staters wanting to get back to work, and blue-staters hectoring them about it. Note that Texas supposedly opens this week, and Georgia and Tennessee are looking to re-open May 1.

Retailers are looking for bailout as well. While many small retailers will be able to access the Main Street Program, many larger ones like Macy’s or Needless Markup cannot. The government’s fear is that it would be propping up companies that have larger problems than just the COVID-19 virus and were probably heading for bankruptcy to begin with.

The Senate may be close to a deal for further funding of small business. Apparently one of the issues with the previous deal was that larger companies with existing relationships with the banks got there first, before the the smaller businesses did. This would set aside something like $125 billion for the smaller guys with no relationships. “We insisted that a chunk of the money be separate from the competition with the bigger companies, you know the ones that have two, three, 400 people and a relationship with the banks, and we got $125 billion that will go exclusively to the unbanked,” [Chuck Schumer] said. “To the minorities, to the rural areas and to all of those little mom and pop stores that don’t have a good banking connection and need the help.”

Morning Report: A rebound in the markets

Vital Statistics:

	Last	Change
S&P futures	2828	81.25
Oil (WTI)	33.56	2.49
10 year government bond yield		0.62%
30 year fixed rate mortgage		3.22%

Stocks are higher this morning after yesterday’s violent sell-off. Bonds and MBS are down.

Despite the huge drop in bond yields yesterday, mortgage rates only improved by 4 basis points. It seems like the main buyers in the TBA market are originators adjusting their hedge positions. Pipelines are full, and most people are building in more margin on their rate sheets. I can’t imagine sub 2% yields for a security with pretty heavy interest rate risk is going to entice many bond funds.

If you called Bank of America to get a refinance yesterday, there was a two-hour wait to speak with a loan officer. Lenders are inundated with business right now. “Demand has ramped up in a way that many lenders have never experienced,” said Matthew Graham, chief operating officer at Mortgage News Daily, which tracks rates every morning. “Some of them have taken to raising rates in order to deter new business. Others have completely stopped accepting new applications.” Once rates stabilize and the margin calls / fallout fears recede, the industry is going to feast. 2020 will probably break records.

The VIX (which is the CBOE volatility index, a measure of fear in the market) spiked over 60 yesterday, which is the highest since the financial crisis. Anyone remember what the spike in February 2018 was all about? The market had the worst 1 day point decline in history up until that point. How about the one in August 2015? The Dow lost 1,000 points and the S&P lost 120 in one day. If you search the news stories, the sell-offs are attributed to some bad economic number out of China, or something else transitory. Who knows, in two years we might look back at this sell off and scratch our heads wondering what was going on.

Small business remained optimistic in February, according to the NFIB. The survey pre-dates the market freakout and Fed cut, so maybe it is too early to see an impact from Coronavirus. “The small business economic expansion continued its historic run in February, as owners remained focused on growing their businesses in this supportive tax and regulatory environment,” said NFIB Chief Economist William Dunkelberg. “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”

The White House is looking at a payroll tax cut to ease the pain of Coronavirus. Other measures being considered involve paid sick leave for those who become ill. This is in addition to the big spending bill that was just passed.

Morning Report: 35% of the top 100 metros are overvalued

Vital Statistics:

	Last	Change
S&P futures	2821	26
Oil (WTI)	61.65	0.61
10 year government bond yield		2.42%
30 year fixed rate mortgage		4.17%

Stocks are higher this morning as overseas stocks rebound. Bonds and MBS are down.

Small Business Optimism increased in April, according to the NFIB. Pretty much every component of the index increased, with only capital expenditure plans unchanged from March. “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,” said NFIB’s Chief Economist Bill Dunkelberg.

What will global warming do to Florida real estate values? According to one environmentalist, lending for 30 year for Florida property is insane. “No one should be lending for 30 years in most of Florida,” [Woods Hole senior fellow Spencer Glendon] said at an investment conference in New York last week. “During that time frame, insurance will disappear and terminal values” — future resale income — “will shrink. I tell my parents that it’s fine to rent in Florida, but it’s insane to own or to lend.” Note that the US flood insurance is heavily subsidized and will probably have to be cut back if the more extreme forecasts end up being borne out.

Stocks had a bit of a rebound yesterday after Steve Mnuchin assured that the trade talks with China are still ongoing. Uber had another rough day, with the stock closing at $37.10 a share, down 18% from the IPO price on Friday.

30 day DQs are down 80 basis points from 4.8% to 4% according to CoreLogic. DQs fell in every bucket, and the foreclosure rate fell from 0.6% to 0.4%. Separately, home prices rose 3.7% YOY in February. 35% of cities have overvalued housing stock, while 26% are undervalued and 39% are fairly valued.

Morning Report: Consumer inflation remains muted

Vital Statistics:

	Last	Change
S&P futures	2787	2
Eurostoxx index	372.85	-1
Oil (WTI)	57.27	0.47
10 year government bond yield		2.65%
30 year fixed rate mortgage		4.32%

Stocks are higher with a general “risk-on” feel to the tape. Bonds and MBS are down.

Lael Brainard speaks this morning and then the Fed enters its quiet period ahead of next week’s FOMC meeting.

Consumer inflation rose 0.4% MOM in February. Ex-food and energy, the index rose 0.4% and is up 2.1% YOY. Inflation remains under control, which should give the Fed the leeway to hold the line on rates next week. Falling energy prices at the end of 2018 helped keep the index under control, and we are seeing evidence that medical costs are finally stabilizing. Medical goods fell 1% MOM and services were flat. Stabilizing medical costs should translate into stable health insurance costs, which leaves more room for wage increases.

Retail Sales in January rose 0.2%, a touch higher than expectations. Those looking for a big rebound after December’s anemic numbers were disappointed. Given the strong consumption numbers in Q4 GDP, the holiday shopping season remains a bit of a mystery. The government shutdown is a possible explanation, and while it certainly hit the shops at Tyson’s Corner, the rest of the nation was unaffected. Note that the Fed’s consumer credit report showed that revolving credit increased only 1.1% in December and 2.9% in January, both well below run rates we have seen in the months leading up to it

Nancy Pelosi doesn’t support impeaching Trump. This is probably a tacit admission that the Mueller report isn’t going to contain anything we don’t already know.

Small business optimism rebounded in February. Earnings trends fell as many contractors were temporarily sidelined due to the government shutdown. Employment trends also slipped, probably for the same reason. Plans for expansion rose, however they are still below levels we saw in 2017-2018, which were extremely strong. Actual hires were the highest in years, and small business still finds a shortage of qualified workers. I am curious as to whether the “shortage of qualified workers” means (a) nobody around knows how to do the job, (b) nobody around knows how to do the job and can pass a drug test, or (c) nobody around that knows how to do the job will accept what I am willing to pay.