C.M.O. 4.27.2009

Credit Market Overview
April 27, 2009

Missouri, or "Mi-zur-y", as it is pronounced by the residents there is also unofficially known as the “show me” state. The origin of this sobriquet is not certain but it is often attributed to U.S. Congressman Willard Duncan Vandiver, who served in the United States House of Representatives from 1897 to 1903. While a member of the U.S. House Committee on Naval Affairs, Vandiver attended an 1899 naval banquet in Philadelphia. In a speech there, he declared, "I come from a state that raises corn and cotton and cockleburs and Democrats, and frothy eloquence neither convinces nor satisfies me. I am from Missouri. You have got to show me."

Were the entire country to adopt Vandiver’s slogan the reaction to the housing numbers late last week might have been different. On Thursday, MoM Existing Home Sales were expected to come in at -1.5% but were actually down -3.0%. On Friday MoM New Home Sales were expected to be flat but were reported down -0.6%.

The XHB (SPDR S&P Homebuilders ETF)) sold off initially on Thursday’s number but closed close in the upper half of its range for the day and was followed on Friday by a solid upside move closing the week at $13.79 a level not seen since the $14.04 close on October 31st of last year. Evidently the market showed those from "Mi-zur-y" and the other 49 states that was and what is expected to be are two quite different things.

The National Association of Realtors (NAR) said that first-time home buyers accounted for half of the existing home sales numbers. This could, to some extent, be the result of the combination of progress being made by the Government in lowering mortgage rates and the first-time home buyers tax credit which is $8,000 nationally as a result of the stimulus bill and an additional $10,000 in California, one of the states hardest hit by the over-building that occurred during the credit boom that came before the credit bust.

A 30-year fixed rate mortgage averaged 4.80% last week; down just 0.02% from the previous week but down 1.23% from the 6.03% seen a year ago. Additionally, “Interest rates for one-year ARM’s exceeded those for 30-year fixed rate mortgages over the last two weeks; this is the first time this has happened since FRE began collecting data for ARMs in January of 1984” Frank Nothaft, FRE’s chief economist said.

MKM’s chief economist sees the effect of lower rates on conventional mortgages filtering through to “jumbo” mortgages as well as rates on the loans over $417,000 and in some areas over $729,000 are down to 6.3% from 7.7%. The difference between conventional and jumbo mortgages used to be 0.25% so while things are not back to where they used to be they are better than they were.

Adam York, not chief, but an economist none the less with Wachovia was a bit more measured in his assessment of last week’s numbers saying, “If buyers are tentatively walking back into the market-place, it’s certainly a positive sign; but the market remains under severe stress.” In describing the statistics Mr. York thought they weren’t “necessarily more bad news, but it certainly wasn’t better news either.”

The CEC Strategy is long DHI, HD, KBH and LOW in the homebuilder sector. Long positions are a result of narrowing CDS spreads and rising stock prices and that combination has to be evident to initiate positions. There are a total of 21 names in this area of the CEC’s universe. It will take continued negatively correlated movement between these two markets for the long exposure in this area to increase as in the CEC Strategy, like those from Missouri, it wants to be shown.

Enjoy the week.

Jim Delaney