Issue 26

 Issue 26 

October 28,2020 

This issue is dedicated to election poll volunteers. It is not an easy time for them. 

The Open 

Two Chicks and a Hammer. Flip or Flop. Las Vegas Flip. Fix it and Flip It. There is no end to the television shows about buying a rundown house, repairing it and selling it for a profit. It’s like day trading internet stocks in 1999, everyone is quitting their day jobs to get into the racket. And just like in 1999, these people have no idea about the risk they are taking, where the trouble might come from and what reward they should expect for taking these risks. 

Real estate is doing well right now, but not all parts of the sector. In the commercial space, offices and retail are getting hammered while warehouse, distribution and logistics centers are trending higher. The real star of real estate, however, is the residential group, specifically single-family homes. Large rental divisions are not keeping up due to covid related moratoriums on rental collection. It is the American dream to own a home, and that dream is reflecting one of the hottest markets in the global economy today. 

Possibly from the beginning of human economic activity until recently, real estate went up during inflationary times. Inflation simply means rising prices, which can take place in specific pockets as well as the big picture. Internet stocks experienced inflation in 1999 while everything else was deflating. The last time the US economy saw broad based inflation was the 1970’s as oil prices shot up and everything else from food to real estate pushed up. Real estate has always been a way to protect and profit during periods of inflation. Well, not anymore. 

As long as America avoids a full-scale war with China, we will never live through another period of rapidly rising prices in the stuff we buy to survive. I have a 13-year-old son. His grandchildren will not live to see it. I realize this is a shocking statement to some of you, especially if you worked during the 1970’s. But carve my words in stone, bury them in a time capsule, dig it up every 10 years for a century and I will still be proven correct. Prices can rise for short periods of time here or there, but real inflation in our lives is dead. Forever. 

If inflation is dead, why are residential real estate prices going up so much lately? Interest rates. The market is being entirely driven by the all-time low interest rate environment we have been in since March. I know a lot of people attribute it to covid. Work from home is spiking home related projects. Lower spending on entertainment and other areas is increasing spending power for the house. None of that matters nearly as much as interest rates. If 15-year mortgages were five percent instead of half that amount, the residential market wouldn’t be this crazy. It is all about the low interest rates. Don’t believe me? Here is the proof. 

Global interest rates are primarily set by the US government 10-year bond. The 10-year is the benchmark that everything else pings off. America was paying just under two percent in January to borrow money for 10 years. That rate crashed to less than a half a percent in early March as world economies came to a stop. Interest rates then began to fall in every corner until a few months ago when people could get a 15-year mortgage at less than three percent. Free money to buy a house, and that is exactly what people have been doing. 

Housing related stocks have soared since March as the tide has lifted every boat in the group. Home Depot stock has doubled. ITB, a basket of home building companies, is up 130%. PKB, a basket of construction related firms, has advanced 

150%, and PFSI, a mortgage service provider, has screamed ahead by 350%! It has been 15 years since this group did as well. 

Here is the thing. The US 10-year plodded along near those low levels from late March to early June, when a spike took it to 95 basis points (just under one percent, or 100 basis points). All housing related stocks immediately pulled back. The 10-year receded until the middle of August and guess what? All housing related stocks went back up. As the 10-year jumped in August, housing stocks fell again. Over the last two weeks, the 10-year ran up to its highest level since early June, hitting 87 basis points last week. Housing stocks fell right on cue. 

The correlation between interest rates and the housing market will stay in place for quite a while. It is unlikely that America will ever see a crash in the housing market that was like 2008 when prices in some areas like San Diego and Las Vegas dropped by 60% or more. If interest rates keep rising, however, home prices will stop rising as fast and may even go slightly negative. That will be enough to put the Two Chicks and a Hammer back in the toolbox for a bit. 

The federal reserve still has enough ammunition and a conducive environment to maintain their agenda of steady, but somewhat low interest rates for a few years at least. The 10-year is probably locked in a trading range of 65 to 140 basis points for, well, 10 years. These are some of the best tools you need to keep your investing house in tip-top shape. 

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The Beach 

Sometimes I feel like a broken record, but that is partially due to the hyper-active culture we live in today. People check their phones, look at their email and tune into the news constantly, mistakenly believing that the entire world is going to change every five minutes. That may be perception, but it is not reality. 

Change takes time and trends evolve and develop. Events like Pearl Harbor and 9/11 are true outliers. This is one of the reasons why the stock market is the greatest leading indicator available. These changes take place in the stock market 

before the rest of society notices them in their lives. The only thing left is to know how to read the market. The major trends that TradeHawk has been talking about since May 1st are still mostly in place. Big, American companies remain the best stock market investments and bonds are still bad idea. The US federal reserve maintains the ability to control interest rates to a large degree and that group wants rates to stay in a range between 50 and 150 basis points in the US 10-year. The only time to think about buying bonds is when rates creep closer to the top of that range. Otherwise, stay away. It is also time to be heavily invested in stocks. With the growing probability of regime change in Washington soon, we might begin to see investors placing some money in foreign stock markets, but the signs haven’t shown up yet. There is no reason to anticipate a move like this as there will be plenty of evidence and ample time to react and adjust. ___________________________________________Shoeshine Corner It is lucky for us that the shoeshine boy enjoys working his corner. If he took his stock tips and sailed away to some hidden beach, all of us would be a little less well off financially, and we would have dirty shoes! His last whispering of trading greatness came on October 7th when he slipped us the idea of buying SNAP at $26.73. Last week SNAP crushed the earnings estimate and the stock flew. The Shoeshine boy sold half his position around $36 a share, and it is now sitting just above $41. That is a total return of 45% in three weeks, the best trade, so far, in TradeHawk history. He is still holding his remaining SNAP shares. I was having my wingtips cleaned on September 16th when I heard him talk about buying SSO at $75.73. It did hit $82 on October 12th, but he is in this for an intermediate trade. He is adding to it again today at $70.35. The Shoeshine boy is confident that SSO will hit a new all-time high at some point in the next four months. That is a return of 17%, but it may take the entire four months to get there. 

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Bottom Line 

Emotions are high these days, and that can be easily seen in the stock market tool that measures the intensity of the swings, called the VIX. The VIX jumped up the last three days, closing at its highest level since June 11th. This is presenting us with the opportunity that I’ve been waiting for since September 2nd when TradeHawk sold a bunch of stock (at the EXACT high up to that point). The Beach already mentioned that it is once again time to be heavily invested in stocks. That idea is being emphasized here. 

There are several internal stock market indicators that have exceeded their September 2nd levels while stock market prices have yet to do so. The 80-year history of these indicators suggest that prices will follow over coming months. I fully appreciate that many of you are nervous, anxious and concerned. I am not. And when it comes to your investments, I suggest you should not be either. Stocks may continue the recent turbulent behavior for another few weeks, but the best probability outcome between now and February is a resumption of the intermediate uptrend, which should take stocks to new highs and beyond. 

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Investing and trading are hard; TradeHawk can help. Please contact us with any comments or questions. 

hawk@tradehawk1.com 

317-452-2083 

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