Wednesday, May 7, 2014

Fed Is Stepping on Accelerator and Brakes (excerpt)

Bad weather may be a poor excuse for the recent stalling of the housing recovery. On Monday, Jeff Gundlach, the CEO of DoubleLine Capital, recommended shorting homebuilders. He did so at the Sohn Investment Conference, the annual gathering of big-name investors. I have noted that the weakness in new and existing home sales in recent months might reflect declining affordability, as home prices and mortgage rates have risen sharply.

The Fed’s senior loan officer survey released Monday showed that banks are not making it easier for potential homebuyers. The survey of 74 domestic and 23 foreign banks operating in the US shows that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months.

Fed officials have frequently stated that their ultra-easy monetary policy is aimed at keeping mortgage rates low to revive home sales. Their tapering talk last spring caused the 30-year mortgage rate to jump by about 100bps. It is still 82bps above the May 2, 2013 low. Meanwhile, the Fed is subjecting the banks to regular stress tests, which discourages them from making risky loans to would-be homeowners. In other words, the Fed is tapping on the mortgage-lending brakes and the monetary accelerator at the same time. This hasn’t stopped banks from making lots of business loans secured by inventories and other working capital.

Today's Morning Briefing: Train Spotting. (1) Stocks, the economy, and the weather. (2) Exports rising very slowly. (3) Homegrown growth. (4) Are railroads too busy hauling oil to ship autos? (5) Gundlach shorts housing. (6) Fed stepping on brakes and accelerator. (7) Transportation stocks rising along with business inventories. (8) Focus on overweight-rated S&P 500 Transportation stocks. (More for subscribers.)

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