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May 20, 2010 – The Federal Reserve is Cautious on Housing & Job Growth
Mortgage Applications for Home Purchases dropped 27.1% last week. The SEC creates new
“circuit breaker” rules. Financial Regulations are on the horizon. The Minutes from the April 27-
28 FOMC Meeting are a non-event. A Risk Aversion Scorecard
The demand for mortgages to purchase a home fell 27.1% last week, which is a direct result of the
expiration of the home buyer tax credits on April 30th. The reading for the Purchase Index is at the
lowest level since May 1997. The Refinance Index jumped 14.5% as homeowners seek to take
advantage of the 4.94% 30-Year fixed rate mortgage. The spread between the mortgage rate and the
US Treasury 10-Year yield has widened to the 150 to 160 basis point range. Remember my
“Mortgage Mulligan”? That rate would be set at 100 basis points over the 10-Year, which would be a
benefit for all US homeowners with a mortgage.
Under new SEC rules designed to prevent another “flash crash” of May 6, 2010 US stock
exchanges would halt briefly to avoid the “lack of liquidity” plunges. Beginning in mid-June, if any
S&P 500 stock rises or falls by 10% or more within a five-minute period the stock will be halted for five
minutes. The time window will be from 9:45 AM to 3:35 PM. This reform will apply to all US exchanges.
The trial period for this “circuit breaker” rule ends on December 10th.
Financial Regulations are on the horizon - The resulting reforms will be short of what is needed
including a non-ban of speculative or proprietary trading be commercial banks. In my opinion that ban
was an important component that is necessary to end the concept of “too big to fail”. As FinReg gets
watered down, my response is why bother!
I am interested in the details on resolving the “too big to fail” issue and what to do with the non-
exchange traded derivative contracts? Senator Dodd is copping out on the derivative issue by
suggesting a two-year delay in the implementation forcing banks to spin off their derivative businesses.
To me controlling CDOs and Credit Default Swaps should be a cornerstone to FinReg. Without the
“Volcker Rule” or full transparency on derivatives we risk another financial meltdown.
The Minutes from the April 27-28 FOMC Meeting are a non-event - The April 27-28 FOMC meeting
occurred one and two days following the Dow’s 52-week high of 11,258. Since then we had the end of
the homeowner tax credits, the “flash crash” on May 6th, the constant bashing of the euro and related
problems including the German ban on naked shorting of key bank stocks, and uncertainties relative to
financial regulations. US Treasury yields remain lower, gold traded to a new all time high and has since
faded, crude oil traded below $68 per barrel, and the stock market technicals have turned negative on
daily and weekly charts. I would say that if the FOMC meeting were held today some of the concerns
may have resulted in different meeting comments.
The Key Points from the Fed Minutes – Cautious Comments does not justify improved outlook
• The Federal Reserve will not be aggressive in unwinding the agency and mortgages bought
through March 31, but will redeem maturities without replacement
• It is unlikely that consumer spending will be a major factor in driving economic growth. So 80%
of the economy will be a drag?
• Recovery in housing appears to have stalled. I totally agree and that’s bad news for Main
Street.
• Recovery could loose traction without substantial job creation. I believe this will be the case.
• Some members of the FOMC are concerned that the crisis in Europe could hurt US Financial
Markets. That has been part of my reason to be bearish on US stocks.
• Comments by the FOMC did not merit upping GDP 2010 range to 3.2% to 3.7%, and did not
merit lowering unemployment to 9.1% to 9.5% particularly with the rate rising to 9.9% in April.
• Core PCE inflation being lowered 0.9% to 1.2% does not make sense either. Every American
on Main Street knows that the Cost of Living is on the rise.