Friday’s Last-Minute Stock Action, Potential Consequences Of 5.5% Mortgage Rates

I arrived safe and sound in Brazil on Monday, so I should be back in the swing of things. Looking at charts, I am finding more to like on the long side, although I am generally a bit suspicious of Friday volume spikes. Karl Denninger posted an interesting take on Friday’s last-minute action:

There were 146,083 contracts traded in that one-minute period between 14:59 and 15:00 (Central); the next minute, when the real dislocation hit, traded 91,774 - after the cash market bell had rung.

The closing bell is usually busy. But this sort of volume is absolutely unheard of. To put it in perspective yesterday the same time recorded 26,540 contracts, and 36,642 the minute after.

There are only two possibilities that I can come up with, and both demand answers:

1. “Someone” was forcibly liquidated out of a short position - a fairly big one. 1,000 S&P “big” contracts has a maintenance margin requirement of $22,500,000 - that’s not a small position, and each point, as noted, has a $250,000 move associated with it. Who was it and why?

2. “Someone” who didn’t give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level. They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

At any rate, I am still balancing long and short positions with loose stops to avoid the whipsaw. Here are some I am watching for long trades on Monday:

- UNG

- SD

- CBE

- APD

- FLR

- HMSY

- OCN

- OPLK

- ULTI

- CLMT

Just to be clear, I know a number of people who think it’s back to buy-and-hold time, tons of cash on the sidelines, the worst is over, etc. That’s not me. But until the bulls decide to give up on their overbought rally, I’m going to play along. I’ve been caught short too early too often recently…

In the news, the GM (GM) bankruptcy is likely to dominate the headlines. I have no idea how the market will react to that. Another factor that might throw a wrench into bullish plans, and soon, are rising interest rates. Mr. Mortage discusses the Potential Consequences of 5.5% Mortgage Rates:

If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. The following is not speculation. This is what happens when rates surge up in a short period of time - I lived this nightmare many times.

Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day. Jumbo GSE money - $417k - $729,750 - has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world - well, I thought I had.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity.”

The consequences of 5.5% rates are enormous. Because of capacity issues and the long time line to actually fund a loan in this market, very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone.

A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lenders without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-30 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s time line. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock - a large percentage of these suddenly died yesterday. From the lows of a month ago to today, rates are up 20%. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates - if rates don’t come down quickly many will have to be canceled out of the lender’s system.

To add insult to near-mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.

Mr. Mortgage, good stuff. In a related story, Bloomberg concludes: Bernanke Bid to Lift Housing Scuttled by Rising Rates.

This seems to be a natural development as lenders demand higher rates for debt that carries a higher risk, which would seem to be most debt these days. At the same time, Bloomberg also reports, Treasuries, Dollar ‘Only Game in Town’ as China Buys:

“The U.S. Treasury market is the widest, deepest, most actively traded market in the world,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “There’s really no other game in town.”

Lastly, the Washington Post had an interesting article on US demographics and which regions will benefit the most from universal health care. This is only one aspect of the issue, but worth reading to understand the some of the dynamics of state labor and healthcare laws, and how they influence industry and human welfare.

Then there is the matter of paying for universal health care. The plan picking up steam on Capitol Hill is to cover much of the $1.2 trillion cost over 10 years by taxing employer-provided health benefits. And who has the highest benefits? People in the North and the East, thanks to pricier health care markets, higher state standards for health coverage and stronger labor unions. Depending on how such a tax were designed, it could land hard not only on corporate executives but also on union workers whose compensation gains show up as health benefits instead of wages.

It would not be the first time that the historically more affluent part of the country has subsidized the less prosperous one. Long before jobs flowed to Mexico and China, they flowed from Massachusetts and Michigan to North Carolina and Tennessee, where unions were weaker and employers could pay less and provide fewer benefits.

The people followed, moving to a Sun Belt where taxes were lower because states offered less in the way of safety nets - nets that the North and the East will now pay to stitch up via universal health care.

“The cost of health care benefits was very much a factor in plant relocations in the eighties,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “And now we end up paying for [Sun Belt health care] anyway? It’s incredible.”

…Nationally, about 15 percent of Americans lack health insurance. But in the North, many states in addition to Massachusetts have less than 11 percent uninsured. They include Pennsylvania, Connecticut, Michigan, New Hampshire, Ohio, Iowa, Wisconsin and Minnesota. In the South and the West, where small businesses dominate, many states other than Texas have more than 17 percent, including Arizona, Florida, California, Louisiana, Georgia, Arkansas, Mississippi, Oklahoma, Nevada and New Mexico.

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