Jan 17. Can a revived housing sector provide economic sustainablility?

–Boring session Wednesday. Continued selling of premium with TYH atm straddle now around 3.8 vol, lowest in months.
–News today includes Housing Starts, expected 887k; there has been a gradual increase in positive housing data. From Mortgage News site: “Home prices increased on a year-over-year basis for the ninth consecutive month according to the CoreLogic Home Price Index (HPI) released today. The November HPI was up 7.4 percent from its November 2011 level and represented the largest jump in the index in nearly seven years.” This is important news, especially when one considers that household mortgages are the ONLY real category where deleveraging (whether by choice or not) has occurred. According to Fed’s Flow of Funds, Mortgage debt growth has been negative in 17 of the past 18 qtrs. In Q1 ’08 it was 10.6T, by Q3 ’12 (last available) it was only 9.5T. What this means is that many “underwater” homeowners are now likely to see the surface where they can REFI, which would provide strong support for the economy. I have seen/read a few things that indicate a demographic bulge of new possible households that represent ‘pent up demand’ since many people have been doubling up, i.e. kids moving back with parents. I am somewhat skeptical of relying on this group for growth, since they are also the demographic being saddled with student loans and Obamacare (young and healthy essentially pay for old and infirm). However, the sector that really brought down the US economy has turned the corner, though perhaps due to artificially suppressed rates. In any event, though the first half of 2013 is looking awful due to increased taxes and sequestration, things may improve in the latter half. (Some of these thoughts I’ve lifted from an interesting slide show presentation by Naufal Sanaullah, not to say I agreed with it entirely). http://www.businessinsider.com/naufal-sanaullah-guide-to-the-us-economy-in-2013-2013-1 If it does have merit, I would think that deferred one year calendar spreads in eurodollars are cheap. Indeed there were some option plays yesterday that benefit from steeper calendars.
–Other news today includes Job Claims expected 368k and Philly Fed expected 6.0 from 8.1.

Posted on January 17, 2013 at 5:41 am by alexmanzara · Permalink
In: Eurodollar Options

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