MBA Mortgage Applications - 3-20-13

TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications fall again for the second straight week.  MBA reported a 7.1% drop in total applications.  The more important number for us was the refinance component, which was down 8%, bringing the percentage of total applications that are for refinancing activity down to 75% (this was 85-90% only a few weeks ago).  We are still being patient and are collecting a nice return on our IO portfolio while waiting for "burnout" on specific pools of MBS.  When we get closer, the carry will be higher as will the price of the securities.  We expect IO’s to appreciate quickly.  There is nothing like getting paid to wait for big upside, while maintaining positive convexity.  For now, prepayments will continue to be elevated as HARP is doing a good job of getting underwater borrowers a lower mortgage rate.  That being said, the cracks are now appearing and we believe that we are close to the end of the greatest refi wave in history.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Applications for U.S. home mortgages tumbled for a second week in a row last week as interest rates continued to climb to seven-month highs, data from an industry group showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 7.1 percent in the week ended March 15. The index of refinancing applications dropped 8 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, slipped 3.9 percent. The refinance share of total mortgage activity fell to 75 percent of applications from 76 percent the week before. Fixed 30-year mortgage rates averaged 3.82 percent, up 1 basis point. It was the highest level since last August, shortly before the Federal Reserve launched its latest stimulus program of buying mortgage-backed securities. The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

New Home Sales 2-26-13

TRADEX GLOBAL INTERNAL COMMENTARY

New home sales surged!!!  Single family sales came in at an adjusted annual rate of 437k, which was significantly above the consensus of 339k.  This was also 16% higher than the revised December rate.  Homebuilder sentiment has been gaining strength, but we are now also seeing sales pick up.  Today we saw both increased sales and increased prices, making for a good day in the housing sector.  We follow this sector very carefully and have been saying that steady improvement will be the new-normal for the foreseeable future.  This is positive news on a day where markets gyrated up and down 100 points due to Italy and the Fed.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

New home sales surged in January, rising almost 16% from December in another sign of an improving housing market. Sales of new single-family homes in January came in at a seasonally adjusted annual rate of 437,000, the government said Tuesday. The results bested consensus estimates of 381,000. The pace of sales was almost 29% above the January 2012 estimate of 339,000, and almost 16% above the revised December rate. The strong showing in January follows an uptick in home builder sentiment and housing starts in recent months that hadn't been matched with an increase in sales. "Now, we're seeing sales pick up," says Patrick Newport, economist with IHS Global Insight. The homebuilding industry has been starved for good news for years. Last year's new home sales totaled 367,000, making 2012 the third lowest year on record for new home sales. They hit record lows in 2011. IHS Global Insight expects new home sales to rise to 464,000 this year. IHS doesn't expect new home sales to return to more normal levels, above 800,000 a year, until 2015. Increased new home sales are a strong indicator of increasing consumer confidence in the overall U.S. housing market, says John Tashjian, principal, Centurion Real Estate Partners. As buyers absorb existing inventory, builders will ramp up construction starts, which is also give the economy a "much needed shot in the arm," Tashjian says.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Case-Shiller - 2-26-13

TRADEX GLOBAL INTERNAL COMMENTARY

Home prices rise the most in 6 years!!!  The Case-Shiller Index of Property Values in 20 cities increased 6.8% YoY from December 2011.  The increase slightly outpaced the median projection of 6.6% and 19 of 20 cities showed an increase.  Record low borrowing and better employment is fueling home price appreciation.  The impact of HPA is being felt via lower foreclosures and lower loss severities if a home does go into foreclosure.  The home sector is clearly coming out of a depression and the increases are all off the bottom.  Regardless, we are still very encouraged by the strength of the move.  This bodes very well for our Liquid Real Estate Strategy and for the overall economy.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Home prices in 20 U.S. cities rose in December by the most in more than six years, a sign the housing-market recovery is strengthening. The S&P/Case-Shiller index of property values increased 6.8 percent from December 2011, the biggest year-to-year gain since July 2006, after advancing 5.4 percent in November, a report showed today in New York. The median projection of 30 economists surveyed by Bloomberg called for a 6.6 percent advance. Nineteen of 20 cities showed gains. Near record-low borrowing costs and gains in employment are fueling demand and boosting property values as the number of houses on the market drops and foreclosures ease. The improvement is shoring up household net worth and confidence, which may underpin consumer spending even as an increase in the payroll tax reduces take-home pay. “The key here is it’s not as if we’re getting all the juice from one area, it’s broadly based across the country,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly projected the year-over-year increase. “Rates are low, prices are attractive, so affordability is high, and the labor market is gradually healing as well. If you were in the market to buy a home, right now it’s a good time." Another report showed residential property values climbed 0.6 percent in December from the prior month, according to data from the Federal Housing Finance Agency. They were up 5.5 percent in the fourth quarter from the same time a year earlier.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

2013 Scenario: Musical Chairs Will Cost Negatively-Convex Investors

The Tradex Group Weekly Blog

February 25, 2013

By Michael Beattie, Chief Investment Officer

2013 Scenario: Musical Chairs Will Cost Negatively-Convex Investors

What’s coming down the pike on interest rates and negatively convex investments?

It’s a fair - and relevant – question, given the fact that many investors are negatively convex in a big way, and thus exposed if interest rates rise.

Thanks to automatic $1.2 trillion budget cuts in the federal budget on March 1^st (political types call those cuts a “sequester”), investors are still getting out of equities and putting more assets into bonds.  According to Citigroup, bond fund inflows for the second week of February totaled $2.6 billion, compared to $1.8 billion for equities.

No doubt, those investors are in search of safe harbor investments, and are expressing some anxiety over the volatility of the stock market and are growing increasingly skittish about the U.S. economy.

But be careful what you wish for…  Fixed income investors may not be accounting for interest rate risk.  Currently, the federal funds target rate stands between 0% and 0.25% — historic lows by any measure.  If inflationary pressures begin to swell, interest rates have nowhere to go but up.  The question isn’t if rates will rise, but when.

Make no mistake, if rates rise (as will inflation), those fixed income investors will lose money.  When investors are long credit, they have negative convexity if rates spike upward.  Most investors hold these negatively convex securities right now, such as corporate high-yield bonds and exchange traded funds that earn some (small) yields in their portfolios.

That investment path, to a point, is understandable.  Investors aren’t getting much yield from Treasuries, where the 10-year bond is returning a measly 1.98%, as of February 24, 2013.  Yet reaching out for longer-term bonds and bond ETFs has left fixed income investors exposed, and at significant risk.

Call it a dangerous game of musical chairs.  When the music stops, and interest rates rise, some of these investors will be left without a chair.  That could prove to have a catastrophic impact on client portfolios, especially since investors in many cases really aren’t earning more than 5%, making the convexity a big “risk versus reward” issue.

What to do to get out of the negative convexity trap?  We recommend turning to positively convex securities, such as agency interest-only (I/O) mortgage derivatives where the asset value rises when interest rates rise, or to be outright short high-yield bonds where prices are expensive and risks of interest rates rising and further destroying value are large.

As stated above, since rates have already hit near ‘rock-bottom’, there’s really nowhere to go for them but up.  And that’s where mortgage IO derivatives and short expensive high-yield bonds can protect investor’s portfolios, providing strong returns even as rates rise.

Consider that strategy before rates rise, and insulate the fixed-income portion of your investment portfolio from collateral damage due to negative convexity.

Jobless Claims - 2-21-13

TRADEX GLOBAL INTERNAL COMMENTARY

Don't panic yet, but the weekly jobless claims number was higher than expected, and the 4-week moving average rose to 360,750 from 352,750 last week.  The 4-week average, which is less volatile, really is the number to watch.  It still feels as if the layoffs are pretty much done, but companies are just not confident enough to expand at this point.  The continuing claims, which were up 11k, is also concerning as more people are out of work for extended periods of time.  CPI, which increased by 1.6% YoY, shows tame inflation and very little ‘Fed Printed’ money hitting Main Street.  I still believe that we will see Washington and the Fed changing strategy to get money directly into the economy by direct lending, and not waiting for banks to get aggressive with lending.  This could possibly have a major effect on employment.  As I see it, financial assets rising do not put people back to work!  Keep nimble out there - Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Applications for unemployment benefits in the U.S. rose for the first time in three weeks, returning to levels seen prior to the holiday period and indicating little change in the pace of firings.  Jobless claims increased by 20,000 to 362,000 in the week ended Feb. 16, the Labor Department reported today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for an increase to 355,000. The number of applications in three states and the District of Columbia was estimated because of the holiday-shortened week, a Labor Department spokesman said as the data was released. Companies are maintaining their staffing levels even amid concern that rising gasoline prices and a January tax increase will damp consumer spending. Looming cuts in government spending also threaten to slow growth, a sign that hiring may be limited in coming months.

“It’s a stable level of claims,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York, which predicted claims would rise to 365,000. “The main issue is the pace of hiring is not picking up. Businesses feel very uncertain about the outlook.” The cost of living was little changed in January for a second month as a drop in energy costs offset gains in clothing, hotel rates and airline fares, another report from the Labor Department showed today. Over the past 12 months, the consumer- price index increased 1.6 percent, the smallest year-over-year gain since July.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

In This Trading Environment, “60-40” Is A Losing Proposition

The Tradex Group Weekly Blog

February 18, 2013

By Richard Travia, Director of Research

In This Trading Environment, “60-40” Is A Losing Proposition

Change is constant on Wall Street – even a 24-year-old with a simple 401k plan knows that.

And that’s a good thing. Investment strategies that hang around for a while tend to resemble a loaf of bread left on the kitchen counter for a week or so. First it grows stale, and after a while you start to question whether the bread is healthy to eat or not.

In short, it’s a trust issue.

The same goes for Registered Investment Advisors and Broker/Dealers wedded to a traditional 60-40 equities and fixed income portfolio strategy model.

Whether it’s stubbornness or fear of trying a new approach, financial services professionals stick to traditional investments, and avoid alternative ones – to the detriment of their clients’ portfolio performance.

That’s a big mistake. In this chaotic investment environment, I wouldn’t want to be long only in any traditional equity or fixed income position – you really need to be diversified among both traditional and alternative investments.

That not only enhances returns historically, but it can also provide more stable cash flow, and leverages robust return opportunities in non-traditional investment sectors like shorting, interest rates, mortgage securities or commodities to name a few.

How good are those returns?

According to a NACUBO-Commonfund Study of Endowment Results from 2003 to 2012, the Standard & Poor’s 500 index returned a measly 2.7%, while 472 university endowments of all sizes consistently outperformed the index. The key factor in that over-performance? The study reports endowments with the greatest exposure to alternative assets easily outpaced the S&P Index, with average annual yields of 6.9%.

For RIA’s and Broker/Dealers, there are additional reasons for blending more alternatives into traditional portfolios. Let’s review some advantages and differences between traditional and alternative investments: 

Alternative Investments	Traditional Investments
Absolute performance objective	Relative performance objective
May use leverage	Limited or no leverage
Performance dependent primarily on alternative investment manager skill	Performance generally dependent primarily on market returns
Historically low to moderate correlation with market indices	Historically high correlation with market indices
Typically have reduced liquidity ranging from monthly to 12-month-plus lock-ups	Typically offer daily liquidity
Generally higher fees, which may include performance fees	No performance fees but may include fixed management fees for professional management.

Source: Morgan Stanley

So where should RIA’s and Broker/Dealers focus when discussing alternatives with their clients?

Target these three key areas:

Diversification – Brokers don’t talk about it much, but the traditional definition of diversification really doesn’t hold water. It’s really not about allocating client funds to dozens, or even hundreds of stocks and bonds (i.e., in the traditional 60-40 model). Instead, focus on strategy diversification, mixing in different alternative options.  Long/Short Equity, Long/Short Credit, Volatility Arbitrage, CTA’s and Mortgage Trading are some strategies that offer a diverse way to access relatively liquid asset class opportunities.

Risk evaluation – Financial services professionals should focus on targeting risk factors of both traditional and alternative investments. That said, the risk story you engage your client with is a good story to tell. Alternatives come from an asset class of investments that offer significantly different risk/return scenarios. In addition, alternatives have little correlation with each other – and to the S&P 500 or any common bond index. That gives you ample wiggle room to reduce risk in your clients’ portfolios.

Returns – As stated above, a portfolio blended among stocks and bonds and alternative investments beats a “traditional-only” portfolio model. Tout that advantage, and talk up the reduced risk and increased diversification, and your investors will be more receptive to abstaining from that stale loaf of bread on their portfolio tables.

Jobless Claims 2-14-13

TRADEX GLOBAL INTERNAL COMMENTARY

Jobless claims drop 27k to 341k and beat even the lowest forecasts by economists.  The four-week moving average was slightly higher at 352k (this is a more accurate number).  Companies feel more confident not to do any additional layoffs, but at this rate unemployment is likely to hang around at 8%.  Way too high to see meaningful interest rate hikes!  I still maintain that printing money only to be stuck at the Fed, or in a bank vault, will not get the private sector going.  I think that the Fed and Washington will come out with some more direct fiscal stimulus where they lend directly to the private sector or lend against some form of IOU.  The employment picture is just improving too slowly and I think something will change soon to unleash the sleepy animal spirits in the private sector.  Either way, this number is not too bad.  Keep nimble, from Miami...Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Claims for jobless benefits plunged last week, showing U.S. employers have little need to trim staff as demand improves. Applications for unemployment insurance payments decreased by 27,000 to 341,000 in the week ended Feb. 9, fewer than any of the 49 economists surveyed by Bloomberg projected, according to Labor Department data issued today in Washington. Another report showed consumer sentiment last week climbed to the highest level in a month. A drop in firings will probably help workers feel more secure in their jobs, which, combined with a housing-market rebound and rising stock prices, may bolster consumer confidence and in turn spending. Sustained pickups in hiring and incomes would ensure that households have the means to overcome the burden of a higher payroll tax. “The labor market is improving, but only at a very steady pace,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who had the lowest forecast in the Bloomberg survey. “What we need is an acceleration in hiring to move the unemployment rate lower.” The Bloomberg Consumer Comfort Index rose to minus 35.9 in the period ended Feb. 10 from minus 36.3 in the prior week, another report showed. The gauge advanced for a second consecutive week, led by waning pessimism about the economy. Shares were little changed as the drop in claims tempered concern over disappointing economic data from overseas. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,521.12 at 10:52 a.m. in New York after reports showed economies in Europe and Japan shrank more than forecast in the fourth quarter.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global