Housing Slumps, Jobless Claims as Expected | The Daily Peel | 8/19/22

Market Snapshot

Markets started the day lower, with the Nasdaq moving down for the third day in a row. WTI Crude was up slightly, and the 10-year yield hovered around 2.87%.

The housing market has now slid into a recession, but markets did pull a head fake and eventually turned around during yesterday's trading.

At the closing bell, stonks were up ever so slightly. The Nasdaq was up 0.21%. The Dow climbed 0.06%, and the S&P was up 0.23%.

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Let's get into it.

Banana Bits

  • Are we actually in a recession? Economists weigh in
  • A new corporate minimum tax is going to change how we think about taxation
  • Russia is pulling out of the ISS; this could be an opportunity for NASA to grow and succeed
  • Talk about a fat loss: SoftBank gets schwacked in their quarterly earnings
  • The Venture space is fast-paced and exciting; do you have what it takes?

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Yesterday What demographic attribute goes up but never comes down?

Your age.

Today - It's 150 bananas off of our Real Estate Modeling Course for the first 15 correct respondents. LFG!

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Macro Monkey Says

High Rates, High Regret - Home prices in the United States declined for the sixth straight month in July.

As the economy starts to slow, homebuyers have started to taper the pace at which they're willing to throw money at a new (to them) dwelling.

While some slowdown is great for the buyer in what has been a seller's market for the last couple of years, the negatives seem to outweigh the positives.

As buyers have finally had some sense talked into them by Daddy JPow, inventories have somewhat recovered to decently sustainable levels. Time on the market for homes looking to be sold is up considerably.

The best part is that the median price for a home sold in the US has dropped from above 413k down to 403k. At this rate, the median home price may be below 400k by the end of this month. That's great news for millennials, GenZ-ers, and cash buyers who have been looking for somewhat of a housing market reset of late.

But here's the bad news: as interest rates have gone up, some buyers have been "priced out" of the market, no longer able to afford the monthly payment for the type of home they had been eyeing for months or even years now.

A 6% 30-year fixed is a hell of a kick in the wallet compared to a 2.6% loan back in early 2021. If you know anything about how loans work and amortization schedules, take a look at the percentage of the principal that gets paid off each month early in a loan with an interest rate that has doubled. It ain't pretty. It doesn't take a rocket scientist with a Ph.D. from MIT to understand these newly induced limitations in the housing market.

This has also affected housing starts and the rate at which homeowners have been looking to refinance. If you were thinking about refinancing and never got around to it, you're probably feeling the burn right now and potentially regretting that you missed out when the music was playing.

But a 6% mortgage is still historically low. There are no guarantees that rates ever make their way back down to like 0% in the near future, and we likely have at least a 50, a 50, and a 25 bps rate hike in front of us as the Fed keeps up its taper tantrum.

What does that mean? Well, mortgage rates are going to keep rising in the short term, and that's good for inventories but bad for your monthly payment.

We will see what happens when inflation is back under control in the eyes of the Fed.

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What's Ripe

BJ's Wholesale Club ($BJ) - Aside from having a stock ticker that we know Elon would appreciate, the wholesale club BJ's had one hell of a quarter.

Revenues were up 22%, and profits grew at an even faster clip. This sent shares soaring.

Shares of $BJ were up 7.52% yesterday after strong earnings. But do they have more to run?

Cisco Systems ($CSCO) - Shares of Cisco Systems had a great day yesterday, finishing the day up 6.12%.

As a tech name, markets were generally fearful of crappy earnings from Cisco, but their quarterly report was anything but.

The good news sent their shares higher and also buoyed the sector.

What's Rotten

Bed Bath & Beyond ($BBBY) - Meme stocks are back, but today the news isn't good.

$BBBY took a dump yesterday, closing down 19.45%. The reason: Gamestop frontman Ryan Cohen revealed his intent to sell the entirety of his position in the household goods retailer.

That sent shares tumbling, all the while ratcheting up the volatility.

Kohl's Corporation ($KSS) - Kohl's was taken out behind the barn and beat up a little bit yesterday after a less than stellar earnings report hit the street.

Shares ended the day down 7.72%.

Revenues are falling at Kohl's, mostly due to a softening consumer who is playing a little bit of defense. They also have some inventory challenges and some troubles on the horizon with refreshing their look to entice consumers.

Thought Banana

New School vs. Old School Finance - Rising interest rates aren't just good for housing inventories by market locale; they're also good for capital markets.

Case and point: the traditional large banks like Goldman, Wells Fargo, and JP Morgan have staged a comeback as the Fed has started to work its magic on interest rates.

The cost of capital has gone up, and that means more profits for cash-rich lenders. These big names have outperformed the S&P since June, even as equities put together somewhat of a bear market rally.

But you know who hasn't been doing well? Fintech.

Fintech lenders have the opposite problem. Sure, they hand out loans, but their cost of capital has become prohibitive. Rising costs of servicing their own debt has made it harder to stay afloat for some of what I call direct-to-consumer fintech operations.

Companies like Carvana and Upstart are being forced to charge even more exorbitant interest rates on the money they give away in order to keep the lights on.

This isn't the difference between a 2.6% mortgage and a 6% mortgage. It's way worse. We're talking about convincing consumers to borrow money north of 25% APR. I'm sure none of you are thinking about these types of loans.

Dave Ramsey, love him or hate him, would definitely call these loans "bad." Passing along higher rates and increased cost of capital to consumers makes these shitty loans look, well, even shittier.

These once trendy fintech darlings are down in the dumps, many of them losing money hand over fist. Unfortunately, their business model was developed to do really, really well when the world was an ocean of liquidity. Now that things are drier than Betty White's… sense of humor, their outlook is not the same.

Will they survive?

Well, no fintech name is too big to fail. Depending on their balance sheet, enough cash might help weather the storm in an economic slowdown. Otherwise, it might be time to declare some of the fintech names tango uniform.

Wise Investor Says

"Our financial markets work best when they are competitive, fair, and transparent." - Ken Griffin

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