• lock/float: FLOAT. 
    • Fundamental and Technical data mixed after slightly worse than expected PCE.  Spreads staying wide... If lenders prices at 1020AM, slight risk of reprice for the worse, but not likely.  Next 30 minutes are the deciding factor, so stay tuned for alerts


A wild week overall last week has given way to a wild morning so far this week.  Technical charts are indicating that we were, are, and should be above a newly established "floor" near the bottom of today's trading range.  Despite higher spreads, MBS continue to show sufficient resilience for us to keep floating.  With each passing day, it seems that our previous position that June was the market bottom for the year gains more and more support.

Still, caution is in order as the general demand for MBS is very weak.  No one wants to buy.  But on the fundamental side, considering impending potential woes for equities, the stage is set for us to at least hold our ground.  The sentiment remains: the longer you have to decide, the more likely floating is beneficial.  There may be more ups and downs before we realize gains, but if you have a while, the gains should come.

Today's Numbers

  •  6.0's started around 100-16 and rapidly fell to 100-05, we've been all the way back up to 100-12, but now settling around 100-07 (see graph)
  • Dow started the day down, then following oil news has rallied to nearly unchanged.  This pressure can be seen in the above graph from 11am-noon.
  • S and P Gained 5.21 to 1255.10
  • Oil has fallen around 4 bucks to around 121 / barrel
  • UST's have been decent all day and are currently just a tick or two improved on the day.  "steady eddy" UST prices contrasted against more sensitive MBS is the reason for the spread gappiness we're seeing so far today.  But of course, we always have to consider that widening spreads creates a potential "value buy" for MBS.

The News

  •  Incomes and Outlays
    • Income rose .1%, better than the consensus of a .2% decrease
    • More importantly, spending rose more than the expected .4% with an actual read of .6%.  However, this is a deceleration from May's reading of .8%
    • Most importantly, the PCE rose at a .3% rate versus expectations of .2%.  Not a huge difference, but every little bit hurts when we're dealing with one of the Fed's favorite inflation barometers
  • Factory Orders
    • Rose at 1.7%, more than double the .7% increase
    • However, the energy sector contributes greatly to this number so the impact of this discrepancy was relatively unfelt
  • Oil
    • As previously stated, it has fallen 4 bucks a barrel, helping stocks rally off their bottom, thus putting slight pressure on fixed income (more MBS than UST's)

The Bottom Line

Things are still looking promising for MBS.  Following the last two month's series of lower highs and lower lows with each passing week, we have turned the corner to the opposite trend of higher highs and higher lows (bring me a higher low?).  So this is prime floating time, especially on the heels of our annual MBS bottom call (which normally occurs mid-summer).  Fundamentals don't look good for general market health, and mortgage woes should be subsiding with increased underwriting stringency.  Keep in mind, all this change will be gradual and our "higher low" could be lower than where we are right now!  So floating isn't a sure bet unless your time frame allows for that "higher high" to come back into the picture.  All this assumes inflation can stay at bay.  If you're sure it won't, the don't float.

Let's Talk Techs

We often allude to "technical factors" (aka, techs, technicals, technical charts, etc..) as an alternative to examining market fundamentals.  Indeed many consider fundamentals and technicals diametrically opposed forces.  The true technician pays no heed to the macroeconomic climate, relying solely on numerous "rules systems" applied only to the price data of a security in order to determine its future movement.  The "pure" technician will tell you that all of the past, present, and future expectations of the macroeconomic climate is already "baked in" to the price curve.  Thus, examining the curve will tell you all you need to know.

Conversely, the fundamentalist, although required to observe the price action of a security, does so while giving significantly more weight to the macroeconomic forces as opposed to the price action.  For instance, a fundamentalist might say new legislation that restricts mortgages will have an impact on MBS price, whereas the technician would only agree if the previous price curve supports that prediction.  Some MBS forecast sites rely HEAVILY on techs.  I can't speak as to whether or not that's a smart move.  I do know that "in all things, the middle path" is an adage that serves us well in almost every aspect of life.  So we try to take a balanced approach (weighted towards fundamentals if anything) that considers and cites the most relevant aspects of both the technicals and the fundamentals.

With that out of the way, today will be our impromptu maiden voyage for some technical charts.  More to follow...

UPDATE: MBS have ticked up to 100-10, so keep floating...