View From The Heart Of The Desk…

For most of us, activity in the markets is of great interest but it does not dominate our life. We watch it, debate it with friends and commentators, alter our portfolio based on news or interpretation, but on the whole, it’s our second or third job.

On the other hand, if you are running the function called “secondary trading” at a large mortgage producer like EverBank, it’s an all-day, all-night obsession.

Meet Cameron
I get several emails from Cameron Beane daily and I read them all, every word. Cameron is the Director of Secondary Trading for EverBank and a 20-year veteran of the capital markets. In this role, he is responsible for hedging EverBank’s considerable mortgage pipeline. Under his direction, this team trades around $50 billion a year in U.S. Treasury- and mortgage-backed securities. The bottom line is: Cameron is deeply involved in the markets, and I listen very closely to what he has to say.

After a tumultuous fortnight with pronouncements about Greece, the European Central Bank, the U.S. Fed, and a plethora of newly issued statistics, I thought it would be great to sit down with Cameron to get his reading of the pulse, let you know what he is seeing, and hear his ideas about what may lie ahead.

Please note that my conversation with Cameron took place May 14, 2015, so the world may have changed by the time you read this.

“It All Points To Stress, Slack, Downward Motion”…
First, we took a look at some of the numbers released into the market by government agencies.

Cameron started by noting that employment figures are possibly the most important reports his team views and that “up until the most recent figures, we’ve seen strong growth in employment, both in the government and the private sector.” But inside the numbers released over the past two weeks, there has been clear weakness and “most alarming were the revisions to previous months, which were down sharply.”

I would also note that the Labor Force Participation Rate as published by the Bureau of Labor Statistics (BLS) has been in decline since it peaked in 2000 (Figure #1). Some of that decline is demographic – for example, the larger proportion of individuals who have reached retirement – but combined with the weak employment creation figures noted above leaves me a little concerned.

Source: EverBank Research Team, based on analysis of publicly available data from the U.S. Bureau of Labor Statistics (BLS).

Cameron completed the thought: “And combined with some indications of inflation rolling up from commodities all the way to retail sales, this all points to stress, slack, downward motion in economic growth.”

Regular readers of the Daily Pfennig® newsletter certainly know that this fits nicely with our view that things are OK, but not as sunny as sometimes painted elsewhere.

What Is Market Volatility Telling Us?
One of the things the Daily Pfennig® has covered often is the concept that unstable prices and high volatility indicate that the market – as a whole – does not have consensus on where the underlying economy is headed. I put this question about volatility to Cameron.

“I watch the flows. Where is the real money going? We’ve moved out of range-bound trading.” Adding to this, Cameron noted that, in his estimation, “Money is moving to the sidelines. Money is not going into equities. Money is not going into bonds. And, when there is less volume coupled with an opinion, then values can change significantly on small news releases.”

He added, “We are thinking that the market will now require the Fed to do something, such as raise rates in June or September, not so much because it is the thing to do, but rather that it feels compelled to do something because it said it would.”

Stay tuned for that.

What’s Going On In Housing?
These days we all know that the housing market is a very important component of the economy. As a large participant in that market, I asked Cameron to blend what he is seeing internally with what he is hearing and reading across the industry to make a few comments about where housing and home lending stand.

“Generally speaking, there has been a significant rise in purchase volumes in 2015” across all lenders and in the statistics. Of course, this contrasts with the massive refinancing that occurred over the past seven years as low rates allowed eligible borrowers to enhance their cash flow with lower rates. A rise in purchase business may indicate that people are more confident and secure in their financial situation as they commit to new homes.

This also means that homes in general remain affordable – the combination of home price, borrowing costs, and household income combine to boost sales and underpin home values. And, even with rates slightly up since the first quarter, this trend appears to be continuing.

The bottom line: He’s seeing an economy that is doing better than bumping along but still has some issues and has some potential to fall off the growth wagon.

Looking Ahead
I don’t think anyone can accurately predict the market, but to make decisions, we need to create a model of what might happen. I asked Cameron to weigh in on thoughts for the rest of the year.

“There is a lot of slack and slowness, and I expect that will continue through the rest of the year.” Employment gain, volatility and measurement drift make it a little hard to pin down if there is a real advancement in the number of people working, and at what price.

On the probability of Fed action such as a policy-generated rate rise, “I don’t think that June is in the cards, September is more likely.” When we look at the factors the Fed is likely to consider most – growth and underlying employment – neither are setting records. There is also a lack of a good secondary market in bonds, partially driven by the high rate of Fed participation over the past seven years.

We ended our discussion with Cameron adding that volatility will continue throughout the summer, and it might get worse.

So, there we have some of the views from the midst of the trading room desk. There’s still a lot of hope in the message but with more than a small amount of caution.

Onward and upward.

Until the next Daily Pfennig® edition…

Frank Trotter
EVP & Chairman
EverBank Global Markets Group