MBS MORNING: ECONOMIC ATROCITIES

By: •

Jobs Data is out...PRESS RELEASE <--CLICK ME

Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today."

Market consensus was for 524,000 jobs losses with the range of expectations between 450,000 and 750,000. After the announcement TSYs sold off as next week's expected surplus of supply trumps the "within range" jobs data. MBS didn't budge initially but there was some selling briefly thereafter which as since stabilized...

FN30_________________________                GN30______________________

FN 4.5 -------->>>> -0-08 to  100-15                   GN 4.5 -------->>>> -0-07 to  100-24

FN 5.0 -------->>>> -0-05  to  101-18                  GN 5.0 -------->>>> -0-03 to  101-28

FN 5.5 -------->>>> -0-04  to  102-05                  GN 5.5 -------->>>> -0-04 to  102-12

FN 6.0 -------->>>> -0-03  to  102-29                  GN 6.0 -------->>>> -0-04  to  102-27

Stocks and Bonds....

Let's jump into the Employment Situation Report...

I am just going to come right out and say it...THINGS ARE GETTING WORSE AT AN ACCELERATING PACE!!!

Sorry to tear the band aid off  but sometimes it's necessary to do so because the reactions of financial market don't always provide a real time indicator of economic conditions and the general public develops misconceptions.

This chart however should put the economic woes in perspective...

See what I mean by acceleration pace??? To further your understanding...

"Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors."

AND

"Over the past 12 months, the number of unemployed persons has increased by 4.1 million and the unemployment rate has risen by 2.7 percentage points."

AND

"The number of persons who worked part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged in January at 7.8 million; however, this measure was up by 3.1 million over the past 12 months. Included in this category are persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs."

  • Manufacturing employment fell by 207,000 in January, the largest 1-month decline since October 1982.
  • Construction lost 111,000 jobs in January. Employment in the industry has fallen by about 1.0 million since peaking in January 2007
  • The temporary help industry lost 76,000 jobs in January. Since its recent peak in December 2006, temporary help employment has declined by 695,000.
  • Retail trade employment fell by 45,000 in January and by 592,000 since a peak in November 2007.
  • Transportation and warehousing lost 44,000 jobs in January and 202,000 since the start of the recession.
  • Employment in financial activities declined by 42,000 over the month and by 388,000 since a peak in December 2006.
  • Health care employment continued to trend up in January with a gain of 19,000. Employment gains in the industry averaged 30,000 a month in 2008

NOT TO MENTION CHECK OUT THE REVISIONS.... BIG ADJUSTMENTS MADE

Lastly as I discussed last night I like to check out some of the data tables that that are hidden deep within the report..

THE REAL UNEMPLOYMENT RATE IS 13.9%

Be sure to note tables C and  D because the BLS makes revisions to their data survey...for more on the Jobs Report read THE BIG PICTURE <-- LINK

Now that it is painfully obviously that the economy is deteriorating at an accelerating pace President Barack Obama's Stimulus package becomes objective numero uno for our political leaders...wait is JUST A STIMULUS PLAN enough to prevent protectionism from sending us into a depression?

I don't think so..its time to GO BIG OR GO HOME. Monday we get new developments RE:BAD BANK PLAN from newly appointed Treasury Secretary Timmy Geithner...WAIT IS JUST A STIMULUS PACKAGE AND BAD BANK PLAN GOING TO BE ENOUGH???

Probably not...the Fed will have to step in and offer guarantees and more capital injections just to get private equity to jump back in the game. Then, JUST MAYBE, banks might start creating money (lending reserves)

We need to do some "back patting"....This AM PIMCO CEO/CIO Mohamed El-Erian (THE MAN) stated that a strategy similar to the Brady Plan (<--LINK) might be an effective way to remove bad assets from bank balance sheets...just remember you heard that here first. Don't Remember us saying that?

This is what we said: Maybe a "Brady Bond" type strategy? Distribute the badness evenly around the world....in this Blog Post....http://www.mortgagenewsdaily.com/mortgage_rates/blog/46543.aspx

This would be a big help too: http://www.reuters.com/article/hotStocksNews/idUSTRE50K4DA20090205

Anyway prepare yourself for the political poo to be flying all over Capitol Hill next week....

Onto to MBS...

Last night we got mortgage prepayment data for the month of January. Prepayment speeds are THE key determinant of the (relative) value of MBS. If prepays increase or decrease more than expected it can drastically alter the value of an MBS holder's portfolio.  MBS market participants are then forced to adjust their portfolios to offset dissimilar cash flows. This translates into either buying "up in coupon" or buying "down in coupon" (selling too) which consequentially implies better or worse mortgage rates for you.

Plain and Simple: Prepayment expectations STRONGLY influence the value of MBS which consequentially influence mortgage rates

Prepay speeds for January turned out to be slower than expected for 6.0 MBS and above. Total pay downs came in around $79bn ($53 FN, $26 GN) which was less than expectations for a total ranging from $80 to $90bn.

Translation: This gives MBS buyers some room to sell lower yielding coupons and buy fuller (higher yielding) coupons...they can move up in coupon! BUT....

Prepay speeds are expected to increase in the months ahead...so the extent to which we see buyers moving towards 6.0s will be slightly shackled. Look for the Federal Reserve to buy more MBS as spreads widen and day traders to cling to the Fed bid as lower yielding coupons get cheaper...DON'T FOLLOW?

READ SPEEDS AND SPREADS

Rate sheets are WORSE