BofA Just Made A Huge Upward Revision To Its Home Price Forecast

Bank of America Merrill Lynch just cranked up its home price forecast to 11.8%in 2013, from a previous estimate of 8%.

This comes after yesterday's Case Shiller index climbed 12.1% in April and Q1 home prices were up an annualized 16.7%.

Chris Flanagan at Bank of America explains that home prices are being revised up for three key reasons — better inventory dynamics, share of distressed sales, and home price momentum.

"All three have been favorable for home prices this year. The share of distressed properties continues to fall, reaching 19.5% in April which is the lowest level since August 2008.

"Inventory dynamics are also very favorable. Inventory collapsed through last year with months’ supply of existing properties reaching a low of 4.3 months in January. Sellers have started to respond to favorable housing conditions with an increase in inventory starting in February (on a seasonally adjusted basis). Months supply has edged up to a still-low 5.1 months as of April. We forecast a continued modest rise to 5.5 months by the end of the year. With rising home prices, sellers will continue to enter the market. Overall, this is a positive development as it will lead to greater turnover of the housing stock.

"The increase in momentum may be the most powerful driver of home prices. As we learned the hard way from the past cycle, expectations about the housing market are an important input into future home prices. Home prices have now been rising consistently since February 2012 and have accelerated notably at the turn of the year. As the Fannie Mae housing survey shows, 55% of respondents now expect home prices to increase over the next 12 months, compared to only 35% this time last year. The University of Michigan survey shows a similar dynamic with 12% of respondents reporting it is a good time to buy because of rising home prices, back to levels last seen in mid-2005."

Flanagan does however expect the pace of home price growth to slow in the second half of the year. Paul Diggle at Capital Economics shares a similar view.

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5-YEAR TREASURY AUCTION FINISHES ON THE SCREWS

The results of today's auction of $35 billion of 5-year U.S. Treasury notes are out.

The high yield during the auction was 1.484%, matching the when-issued yield before the auction. In bond market parlance, this means the auction finished right "on the screws."

The bid-to-cover ratio, which measures the dollar amount of bids versus the dollar amount of bonds actually auctioned, came in at 2.45, down from 2.79 at the May auction – marking the weakest demand for 5-year notes since September 2009.

Direct bidders, those who bypass Wall Street primary dealers and buy notes directly from the Treasury, only accounted for 4% of today's take, the lowest share taken by directs since November 2009.

53% of the notes at today's auction were awarded to indirect bidders, a group of investors that includes foreign central banks. That marks the highest share of a 5-year note auction going to indirect bidders since January 2010.

Today's auction of 5-year notes is closely watched by traders because the 5-year is part of the "belly" of the yield curve that makes up the largest portion of the Federal Reserve's balance sheet. Fears that the Fed will begin to taper bond purchases later this year have hit 5-year notes especially hard relative to Treasuries of other maturities.

"5-year notes and 7-year notes look pretty attractive here," said Brean Capital Head of Rates Russ Certo prior to the announcement of the auction results. "They've been bludgeoned, they've been the face of convexity and mortgage liquidation, as well as redemptions, and that's the area of value if you were going to have a tactical transaction in the marketplace."

The reaction in the bond market is fairly muted so far, but 5-year and 10-year Treasury futures are drifting higher following the announcement of the results of today's auction.

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Things Are So Crazy, Bond God Jeff Gundlach Scheduled A Surprise Conference Call On What The Heck Is Going On

DoubleLine Funds just blasted an email alerting everyone that bond god Jeff Gundlach would be hosting a surprise webcast Thursday.

Gundlach just held a webcast on June 4, and his next webcast was scheduled for September 10.

So, why is he doing this?

Well, we think Gundlach is probably getting inundated by calls from clients about his bullish forecasts for Treasury bonds.

During his June 6 webcast, he predicted that the 10-year yield would probably end the year at 1.7%. He was also quoted saying that it would not go above 2.5%.

Even as rates surged, Gundlach doubled down last week and told CNBC that Treasuries were "the one place" to make money.

For you beginners, bond prices fall when yields rise.

Currently, the 10-year yield is at 2.54%, and it was as high as 2.62% earlier this week.

While we're on the subject of out-of-the-money calls, Chipotle is up 9.6% since Gundlach recommended shorting the stock on April 11.

For both Treasuries and Chipotle, Gundlach may be proven right in the long-term.  He is, afterall, a long-term thinker.  We expect him to reiterate this tomorrow.

Anyway, here's a look at the performance of the 10-year U.S. Treasury yield. You can probably see why Gundlach's followers have raised their eyebrows.

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HUGH HENDRY: The 'Invisible Regime' Keeping Volatility In Check Has Become 'Unhinged'

From Hugh Hendry, CIO of The Eclectica Fund.

$('.icon-tooltip').tooltip();This year we have pursued five macro themes: long the US dollar, short China, long Japanese equities, long low variance equities and long interest rate contracts at the short end of G10 fixed income markets.

Towards the end of May, however, the Fund experienced a sharp rise in its volatility from an annualised rate of 4% to 7%. The invisible regime of low volatility and low correlations that had been so supportive of risk markets for at least the last year started to become unhinged.

The catalyst came from the announcement that the US Federal Reserve may soon tighten its monetary policy following yet another better than forecast US employment figure. The jobless rate in America is down to a four-year low. This purported change of policy however created a chain reaction that spread across global financial markets.

As cross-asset correlations rose, the Fund became less diversified. This necessitated that we reduce our risk exposures across all trades; G10 receiver trades and Japanese and low variance equities were closed completely as their severe price reaction challenged their intermediate up-trends.

As a consequence, the Fund fell by 2.1%. The main negative contributors were the short-end interest rate swaps and afore-mentioned equities, offset by modest gains from FX positions as the dollar strengthened and volatility trended higher in EM currencies.

In the Far East, by contrast to the bullish American outlook, the evidence of an economic slowdown in China continued to mount and commodity exporting countries that rely heavily on sales to the Middle Kingdom came under heavy selling pressure. China accounts for 27% of total Australian exports, mostly raw materials, and the country finds itself in China's slipstream. Unfortunately, in a break with the recent past, it was the currency markets, and not our 3yr interest rate contracts, that benefited the most from the move. The Australian dollar recorded its seventh worst monthly performance (-7.7%) of the past 20 years. But instead of enjoying some of this move, the spectre of tighter US monetary policy contaminated the outlook for rates globally and our 2y1y swap positions rose rather than fell costing the Fund 57bps.

In Japan, rising bond yields were also the culprit. Volatility surged as Japanese 10-year rates went from 30bps to trade over 1% at one point in May, before closing at 0.85%. As it costs the government about a quarter of its total tax revenues just to pay the interest on its debt at current levels, the unsettling disorder in the bond market was rapidly interpreted as a threat to public finances and GDP growth. Japanese stocks saw heavy profit taking with the TOPIX recording a 17% slide in late May. The Fund recorded a loss of 31bps from Japanese equities.

Heading into June, we retained a slightly larger short China position, we boosted our long position in the US dollar and re-directed it to reflect an outright short of emerging market currencies.

We also transformed our Australian rates trade into a bullish curve steepener (that is to say, we added a short ten year leg). A similar position was initiated in Korea. These countries remain unique in having a developed world FX profile and overnight rates which remain high by international standards, giving the authorities considerable leeway to cut overnight interest rates. Ten-year rates, however, are liable to be dragged higher by US Treasuries. So if the respective central banks do react to the slowdown evident in China by cutting short term rates, this could give rise to further steepening.

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The Chart That Best Illustrates How Gold Was A Bubble

The bubbles in the chart below represent the total market value of all positions in the gold futures market (open interest multiplied by price).

The last time there were fewer open contracts on gold in the futures market was four years ago, when gold was trading under $1000 an ounce.

What does this mean? Investor interest in gold has waned dramatically since prices peaked in 2011.

The flip side of this, of course, is that seven years ago, there was nowhere near this much activity in the gold market.

Miller Tabak Chief Economic Strategist Andrew Wilkinson writes today in a note to clients:

The current reading of open interest has fallen to 390,647 contracts as sellers drive the price of gold to $1,235. The last time open interest was this low was exactly four years ago when the price of gold stood at $927.40 per ounce. The current market value of outstanding gold positions of $48.24 billion is the least since September 2009 when gold stood at $1,008 per ounce attracting 458,691 contracts.

The reduction in investor positioning as reflected in declining open interest hardly suggests a rebound for interest in gold especially when the clear story remains ‘heading for the exit’. Indeed the tone points to further reductions, which judging by the magnitude of recent declines could easily put gold back under $1,000 per ounce.

The bubbles in the chart are clearly getting smaller. Given the sharp decline in gold prices in the second quarter of 2013, it seems unlikely that they will be expanding again any time soon.

Miller Tabak/Andrew Wilkinson

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11 American Cities That Are Shells Of Their Former Selves

Even as the U.S. population steadily grows, some cities have seen drastic decreases in population.

Many of these cities relied on a particular industry — coal, steel, automotives — that has since left the area and taken away thousands of jobs. Suburbanization has also played a major role, as families fled in favor of suburbs with less crime and better schools.

Here's a look at 11 American cities that have experienced some of the most drastic population decreases in the country, and what they looked like in better days.

Population at peak (1960): 627,525 
Population in 2010: 343,829
Decline from peak: 45.2% 

While Katrina helped relieved the city of 29% of its population between 2000 and 2010, the rise of Houston and the broader Texas Gulf Coast port and refinery complex had already put a dent into what was for much of the 19th century and early 20th century the most bustling port in the South.

Population at peak (1960): 262,332
Population in 2010: 141,527
Decline from peak: 46.1% 

Dayton Metro Library

Dayton, Ohio's population declined after major companies like Mead Paper and General Motors left. Manufacturing was also big in Dayton, and many of those jobs have since left the city.

Population at peak (1930): 143,333
Population in 2010: 76,089
Decline from peak: 46.9% 

Scranton, Pa. was the center of Pennsylvania's coal industry in the first half of the 20th century. The population declined along with the coal industry in the second half of the century.

Population at peak (1960): 102,394
Population in 2010: 50,194
Decline from peak: 51% 

Niagara was never the same after a 1956 landslide destroyed part of the city's largest hydroplant. The construction of the Robert Moses Parkway has also been blamed for the city's decline as it allowed travelers to completely bypass the city on the way to Canada.

Population at peak (1950): 580,132
Population in 2010: 270,240
Decline from peak: 53.4% 

Buffalo, N.Y. used to be a big transportation hub with the Erie Canal and the Buffalo Central Terminal, a major railroad station. The rise of Amtrak in the 1970s took trains away from the Buffalo Central Terminal and St. Lawrence Seaway that extended to Lake Erie created competition for the Erie Canal. In addition to all that, many manufacturing jobs went overseas.

Population at peak (1950): 676,806
Population in 2010: 305,704
Decline from peak: 54.8% 

The Steel City is another town that has struggled with industrial decline and fleeing manufacturing jobs.

Population at peak (1960): 178,320
Population in 2010: 80,294
Decline from peak: 55% 

Gary, Ind. took  a big hit when the steel industry collapsed. The city has deteriorated so badly over the past few decades that the city is now considering cutting off city services to about half its land and moving residents to more viable areas.

Population at peak (1950): 914,808
Population in 2010: 396,815
Decline from peak: 56.6% 

Many large companies that once provided thousands of jobs to people in Cleveland, such as John D. Rockefeller's Standard Oil Company, have since left the city. The country's industrial decline over the past few decades along with the rise of suburbanization drove Cleveland's drastic population decline.

Population at peak (1930): 170,002 
Population in 2010: 66,982
Decline from peak: 60.6% 

Youngstown has been accused of failing to diversify to stave off nationwide industrial decline. Many regard the shuttering of the Youngstown Sheet and Tube Company on September 19, 1977, aka "Black Monday," as the death knell of the city.

Population at peak (1950): 1,849,568 
Population in 2010: 713,777
Decline from peak: 61.4% 

Detroit has lost more than a million people since its peak in the mid-20th century, and the population decline isn't expected to end anytime soon. Known as Motor City, Detroit was the center of an auto industry boom after World War II. The boom has long since ended, however, and many manufacturing jobs have disappeared. Detroit's population decline can also be attributed to middle-class families moving to the suburbs to avoid the high crime and plummeting property values in Detroit.

Population at peak (1950): 856,796
Population in 2010: 319,294
Decline from peak: 62.7% 

St. Louis was once the continent's railway hub, but as rails became less important, so did the city. Its problems were further compounded by disastrous urban renewal policies that sparked an intense wave of mid-century white flight. The city is now not even in the top 50. 

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