Pre-Open News: Unfriendly to MBS

As mentioned on Friday, in the absence of economic reports, "headlines" are moving the MBS and futures markets in early trading.  Recall that last week, we ended on a high note with the MBS holding it's gains from Thursday despite a rally in the Dow on Friday.  This opened the door for a bit of a technical rebound, should the headlines have been unfriendly to MBS.  This appears to be the case this morning:

1. As some analysts (and many of the firm's shareholders) predicted, the 2 dollar per share price offered for Bear Stearns is apparently off the table as the new price of 10 dollars per share is being discussed by JP Morgan Chase.  Many felt that $2/share was a "low-ball," with Bear's biggest shareholder labeling the offer as "derisory."  Those outspoken few are vindicated this morning as shares are up over 50%.  This is one of the key factors bolstering Dow Futures this morning and potentially drawing some money out of the bond market.
2. The Financial Times reported today, citing analysis from JP Morgan Chase, that there is a historical Precedent of "large firm collapses" being among the final signs that a rebound is eminent.  Analysts argue that, in the past, incidents such as the Bear Stearns collapse, have shortly preceded a market bottom.
3. Inflation.  The slide in the dollar index combined with more Fed rate cuts and various other factors have the "I" word back on traders' minds.  The evidence for an inflation problem is mounting.  This is never good news for MBS
4. Market Technicals indicate resistance to stocks moving lower or to MBS moving higher.  As mentioned on Friday, some traders apply "technical analysis" to the stock and MBS markets.  Market technicals are certainly not a hard and fast rule, but they do speak to a certain psychology that is present among traders.  The technicals are not in MBS favor, with prices continuing to "bounce off the ceiling."  These ceilings are created by historical highs.  In addition, technicians note that the S and P 500 has failed to break through the "floor" of a 20% loss from its highs in the last 6 months.  Some view this as further evidence recovery is nigh as a small rally in stocks, as we've seen this past week, is one of the the first indicators of recovery.
5. More MBS headlines: some good, some bad.  The standard issue (at least in the recent past), MBS headlines continue as investment banks are either downgraded, or reporting write-downs as a result of their MBS holdings.  Despite that news, the concerted effort to raise liquidity for the MBS market is evident with last week's landmark announcements of the FED opening up the discount window to non-participating institutions, injecting capital into the MBS markets by agreeing to buy 200 billion of bad debt from struggling firms, OFHEO lifting reserve requirements for Fannie and Freddie (adding another couple hundred billion of liquidity or so), and the FHLB being "green-lighted" this morning to buy up to 100 billion of Fannie/Freddie Debt. 
   

Some of these headlines, especially the ones that speak to increased liquidity for Agency-Backed mortgages are great news for MBS.  Unfortunately, the "bad news" headlines seem to be winning the day.  As the stock exchanges are opening as I finish up this morning's post, the Matterhorn-type cliff of MBS descent is beginning to show its true viciousness.  We're down and we're down big:

Remember that, just as the markets produce them, I always convey bond pricing in 32nds.  So the 1-02 drop in the 5.0% coupon today means that it costs Big Box Lender 34/32nds more today to sell/buy a 5.0% mortgage than it did on Friday.  You can be sure that at least this level of price worsening will make it into today's rate sheets (as lenders always take it away faster than they give it back).  So the 5.5% 30 year fixed that may have been near PAR (at the wholesale level) on Friday, will be at least 23/32nds, or about .625-.75 worse in YSP this morning.  Sorry to be the bearer of bad news.

Speaking of bearers, let's talk about the potential continuance of our bear market.  With this emotional frenzy of stock buying (don't forget we had a long weekend too), the "rocket" of stock prices will try to make a run at the atmosphere and break free of the "gravity" that has been caused by negative economic data and headlines.  There are several very important reports this week.  If these reports have unexpected positivity, the lemmings will almost certainly perceive this as "the sign" they have been looking for, and it will be "all in" on the stock table.

Even if opinions and solid data suggest this is premature, the markets may not want logic.  There is emotion involved here too.  Stocks, treasuries, and MBS all have cyclical trading patterns.  Historically, they don't ever move in straight lines up or down.  After a week like last week, we knew we would have to give something back, but we didn't know when.  It's conceivable that despite this morning's weakness that we still will not know that depending on the rest of the week's data.  As I suggested on Friday, that was the safest time to lock, but if you were a bear on the overall economy (meaning that you think we have farther to fall), that you could still try to run the table, beat the technicians warnings of "ceilings," and let it ride this week hoping for negative economic news.  If the news is negative enough, that will still turn out to be a good decision.  Even if we have to give something up this whole week, if our upward trend continues, we will get it back in the near future.

There is simply so much to digest in all markets right now, not to mention the MBS-specific data, and it's interconnectedness with the bigger picture.  If you are panicked that the economy has "hit bottom" and we will now begin to recover, lock lock lock.  If you are a firm bear, believing that traders are clinging to false hope, float float float (if you have enough time to wait for the "cycles,").  If you are somewhere in between, as most should be, then keep an eye on the market with me and make your decisions as the appropriate times present themselves.  After the DJIA began trading this morning, MBS have not crashed through their floor of the 100-22 range established last week on FOMC day.  Unless we dive through that, cautiously floating is in your best interest.  The caveat, as always, is that you must check back here for updates.  We are working diligently to provide instant email alerts and with 100% certainty will have them available, it's just a matter of time.