FOCUS ISSUE FOR THE WEEK: There were three times more positive signals this week than negative. Within the mortgage industry directly there were the positive earnings reports from Chase and BofA for first quarter, declining mortgage yields, rising housing starts and building permits, and recovery in prices of home builder bonds. From our own research we find the mortgage industry had the highest rate of mortgage origination profit in 2009 since our firm started to measure it in 1993. Within the general economy we have rising industrial production, minimal consumer inflation, declining Treasury yields, rising builder confidence, three rising manufacturing indices, and rising indices in trucking, rail shipments, and parcel service. The worst negative trend was rising initial claims for unemployment for the past two weeks. Overall, this was a very good week.

WORLD TRENDS: Yet another rescue has been put together in Europe for Greece and the euro recovered back to $1.35. But few observers see this as more than temporary since the root cause of the problem hasn’t been addressed—the huge public debt (120% of GDP). How much longer will Germany be willing to bail out Greece to save the euro? The interest rate Greece is paying for its debt is still too high for it to support (7.1% for 10-year maturities).

The DJIA rose 0.2% this week from 10,997 to 11,019. During this week there were 17 positive trends vs. 6 negative trends.

Positive Trends

• The CPI rose 0.1% in March, up from 0.0% in February. This is up 2.3% from a year ago and is still very mild. The core CPI was unchanged in March from February and was up 1.1% from a year ago. Rent and clothing prices fell.

• Retail sales rose 1.6% in March, up from 0.5% in February. Strong auto sales were a major component of the increase.

• The yield for the 10-year Treasury dropped to 3.76% from 3.88% last week.

• The yield on the 30-year fixed rate mortgage fell to 5.07% from 5.21% last week on the Freddie Mac survey..

• Chase Bank’s earnings in 1Q10 were $3.33 billion, up from $3.28 billion 4Q09. Three-fourths of its profit came from its investment bank. It had record fixed income trading revenue and a reduction in provision for credit losses. Chase’s CFO said there is a “fundamental real improvement in consumer mortgage and credit card delinquencies.” This was the first earnings report by a major bank for 1Q10 and suggests that the worst of the credit crisis as the banks is over and loss provisions can now wind back down allowing profits to increase.

• B of A reported earnings of $3.18b and was the first positive report after three quarters of losses. It was driven by sharply higher investment banking earnings and reduced credit card losses.

• The Ceridian-UCLA index of truck fuel consumption (amount of diesel fuel bought using credit cards at U.S. truck stops) rose 1% in March reaching the highest level since September 2008. In another survey by the American Trucking Association, truck tonnage rose in February for the third month in a row. These data reports indicate the recover is spreading beyond the manufacturing sector.

• U.S. freight railroads originated an average of 288,793 rail carloads a week in March, up 6.9% from a year earlier. Although this is up nicely, it is still down 11.4% from the level it was at two years ago. The economy hasn’t yet recovered to its prior peak yet.

• United Parcel Service declared higher profit in 1Q10 than expected due to rising demand for foreign shipments.

• Housing starts in March rose to a 626,000 annual rate, up from 616,000 in February. That latter rate had been revised upward from 575,000.

• Building permits in March rose to an annualized 685,000 rate, up from 637,000 in the prior month. Both housing starts and building permits rose much more strongly than expected.

• U.S. homebuilder bonds have recovered to levels last seen before the global credit freeze as investors gain confidence the economic recovery is strong enough to prevent defaults. Yields fell to 6.06 percentage points over comparable Treasuries which is narrowest since August 2007, reported Bank of America/Merrill Lynch. That means the worst is over for home builders.

• The National Association of Home Builders/Wells Fargo index of builder confidence increased to 19 in April, exceeding the median forecast of economists surveyed by Bloomberg News, from 15 in March. This was the last month of the federal tax credit for homebuyers.

• Three indices of manufacturing rose in March from February—the Federal Reserve, the New York Fed, and the Philadelphia Fed.

• Industrial production rose 0.1% in March, a bit less than the 0.3% growth in February. Output is still 11.6% below its prior peak in 1Q08 before the recession began.

• Capacity utilization rose 73.2% in March, up from 73.0% in February (which was revised up from the earlier report). This higher level is still 7 percentage points below the 50 year average for this indicator (80.3%).

• Sharply rising first quarter earnings at three high tech firms—Google, AMD, and Intel—is an indicator of improvement in this bellwether sector. S&P predicts a 79% increase in tech earnings in 1Q10 over a year ago. New job postings are up strongly.

Negative Trends

• The FDIC board approved a preliminary proposal on April 13 to raise fees for banks with more than $10 billion in assets. Those banks with over $50 billion in assets would pay an even higher fee.

• Rising oil prices have been close to 18 month highs. On April 16 oil hit $83.24/barrel on Nymex down from $87 earlier in April. The International Energy Agency raised its 2010 global oil demand forecast to 86.6 million barrels a day, which would be the highest level on record. There has been rising consumption in China and Saudi Arabia. This is up from $55/barrel in January 2009 but down from $145 in summer 2007. Higher oil and gasoline prices may be the source of declining consumer confidence.

• Initial jobless claims unexpectedly increased last week, rising by 24,000 to 484,000, the highest in two months. The four week moving average also rose. Continuing claims for unemployment rose to 4,629,000 for the week ending April 3, up from 4,566,000 the prior week.

• The University of Michigan index of consumer sentiment fell unexpectedly to 69.5 in April from 73.6. This was the lowest level in five months. Most observers expected it to rise. Consumers are discouraged about the high rate of unemployment and perhaps the higher prices for gasoline.

• Goldman Sachs was sued by the SEC on April 16 over fraud committed in issuing CDOs backed by subprime mortgages. This caused their stock price to plummet 13% and also the stock prices of several other large financials who might also be implicated in class action law suits. BofA and Chase fell 4% to 5% and all 27 banks in the S&P Diversified Financial Index fell.

• The FDIC closed down two more banks (both small) on Friday for a total of 44 this year. The two were in Florida and Michigan and no buyer was found for either institution. The FDIC has on average shut down three banks per week. At this rate they will shut down 156 banks by year end.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Retail and Consumer Direct Channel – May 18-20, 2010 in Milwaukee.
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. We do customized reports from databases of mortgage lenders. For more details see www.accessmrc.com or phone 410-772-1161.