Today's Market: New Regulations To Hurt The Housing Market?

|
 |  Includes: AIG, BZH, MTG, RDN, WFC
by: Matthew Smith

Summary

Highlight continued M&A activity and discuss the week ahead.

Look at why financials will play a key role during this earnings season.

Discuss the fears about the mortgage insurers and why it is possible the worst news is behind.

This week shall be a busy one, with a good deal of economic data paired with earnings from some key US companies. Also in the news today are a number of mergers, further proving that 2014 is the year that M&A activity picks up. Most of the announced deals are in the pharmaceutical industry and focus on tax issues like inversion, but deals are deals and they continue to help and drive this market higher.

There is a lot of talk about the market trading at high valuations, but this is why a lot of attention is being paid to this earnings season. If the financials can deliver some decent growth this quarter, then a lot of this talk could cease and rather than looking negatively upon the entire market investors could focus upon areas with real problems such as retail.

Chart of the Day:

The financials will be key in helping the market reach projected growth goals this quarter and those ahead. If the financials do not come out this week and set the tone for a move higher, then the market could be in for a correction as we see a collective pause.

Click to enlarge

Source: Yahoo Finance

We have no economic news today, but tomorrow will lead off a busy week with further insight into the US consumer.

The Asian markets are higher today:

  • All Ordinaries -- up 0.45%
  • Shanghai Composite -- up 0.96%
  • Nikkei 225 -- up 0.88%
  • NZSE 50 -- up 0.53%
  • Seoul Composite -- up 0.26%

In Europe, the markets are higher this morning:

  • CAC 40 -- up 0.66%
  • DAX -- up 0.89%
  • FTSE 100 -- up 0.83%
  • OSE -- up 1.24%

Mortgage Insurers

For years the mortgage insurers were a great investment as the business had little risk and a healthy ratio of risk to capital. The 'Great Recession' highlighted the faults in the old system and drew new, better capitalized competitors into the industry. That is the good news for the industry; that there are companies that could continue operating were regulators to tighten the exposure these companies were allowed to take on.

We point this out due to the news Friday that regulators were looking to tighten risk ratios for the industry in order to build more confidence for Fannie and Freddie securities. Both Radian (NYSE:RDN) and MGIC Investment Corporation (NYSE:MTG) were hit hard, with Radian shares falling over 5% and MGIC shares down nearly 10%, as investors fretted about those two companies losing marketshare to rivals such as American International Group (NYSE:AIG) and the better capitalized new entrants (those companies which entered the market after the mortgage meltdown).

It was a brutal session for MGIC Investment bulls on Friday, but we now know how bad the new regulations could be. Our thinking is that regulations will not get more stringent than the most recent proposal and could in fact be relaxed as big lobby groups let it be known where they stand.

Click to enlarge

Source: Yahoo Finance

Housing Could Be Hurt

Initially we doubt that there will be problems arising from the new regulations, but as the excess capital that is already in the market is used and spoken for we could see issues arise for names like Wells Fargo (NYSE:WFC), the largest mortgage originator in the US, and possibly homebuilders such as Beazer Homes (NYSE:BZH), which builds in some of the areas which could be impacted the most from tighter regulations. As the proposed new rules are up for comments we believe that the powerful lobby groups from the housing industry and related sectors will convince regulators to minimize the impact on the industry, and by extension consumers.

In this instance we are believers in having adequate capital in the system, so we find ourselves leaning towards favoring the tighter risk controls. However, as is always the case when dealing with the amount of risk an entity can take on we believe in finding a suitable equilibrium point within the market. One would not want to throw a bucket of cold water onto the already weak housing recovery, but at the same time we would not want to see the insurers unable to cover their obligations down the road.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.