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Rocket Companies Is Dirt Cheap, but There’s a Catch

Rocket Companies (NYSE:RKT) was briefly one of the hottest meme stocks out there. In early March, powered by countless rocket emojis on Reddit’s wallstreetbets,…

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This article was originally published by Investor Place

Rocket Companies (NYSE:RKT) was briefly one of the hottest meme stocks out there. In early March, powered by countless rocket emojis on Reddit’s wallstreetbets, RKT stock catapulted as much as 85% in a single day to a high of $43. A few days later, shares tumbled back to $25, and they’ve continued sliding lower ever since.

Source: Shutterstock

The downturn in RKT stock has accelerated over the past week, with shares hitting a new 52-week low near the $15 level today. The surprising thing is that the company is still reporting strong quarterly earnings results. However, analysts expect that to change in a hurry.

RKT Stock Is Incredibly Inexpensive

The main bullish thesis for RKT stock is its seemingly ludicrous valuation.

The company’s diluted earnings per share for the past 12 months stand at $2.81. With the stock price near $15.20, that amounts to a P/E ratio of just 5.4. You don’t need me to tell you that’s highly unusual, especially in this stock market.

Normally, the S&P 500 trades at a historical median P/E of around 15. Lately, however, the market’s earnings multiple has climbed to a lofty 25 thanks to the huge runup in stocks over the past 18 months.

On that basis, Rocket is selling at a breathtaking discount to the average company in the S&P 500. Normally, outside of structurally declining businesses such as, say, shopping malls or coal mines, you simply don’t see stocks going for a sub-6 P/E ratio.

So it’s time to buy RKT stock, right? Not so fast.

Why Rocket’s Earnings Are Set to Plunge

The big drawback is that Rocket is a highly cyclical business. Specifically, it is tied to interest rates and the housing market.

When interest rates are low, it helps companies like Rocket in two ways. One, people can afford to take out bigger mortgages since the interest cost is less as a portion of the total payment. Two, people like to refinance mortgages when interest rates decline to either cut their monthly payment or take some cash out of the property.

Rocket has been enjoying a best-of-both-worlds scenario. The pandemic caused the Federal Reserve to slash interest rates, which stimulated refinancing activity. And many people decided to upgrade their living situations as a result of being stuck inside for so long. These factors led to a massive housing boom.

However, these tailwinds are likely to turn into headwinds in the not-so-distant future. With inflation on the rise, the Fed has said it will tighten monetary policy by raising interest rates, likely starting in early 2022. That will make mortgages less affordable and particularly ding Rocket’s refinancing business. Furthermore, on the housing market front, the initial pandemic-driven boost is fading, a trend that is likely to continue as the economic recovery slows.

How Much Will Rocket’s Revenue and Earnings Fall?

Rocket nearly quadrupled its revenue from around $4 billion in 2018 to $15.7 billion in 2020. Even with the company’s ambitious expansion plan, it still couldn’t have achieved anything like that simply from standard organic growth. Rather, Rocket managed to cash in on a super-charged housing market.

It wasn’t just them, either. Chief mortgage rivals such as UWM Holdings (NYSE:UWMC) and PennyMac Financial Services (NYSE:PFSI) also saw their revenue more than triple in recent years.

So, how far will revenue and earnings recede once the good times end?

Analysts see Rocket pulling in around $12.5 billion in revenue this year, with that number dropping to $9.8 billion in 2022. That decline in revenues, in turn, is expected to cause earnings to plunge 47% this year and another 30% in 2022. That puts RKT stock trading at 7x estimated 2021 earnings and 10x estimated 2022 earnings.

Now, to be clear, 10x earnings is still a cheap stock. However, it’s far less inexpensive than the valuation based on the past year’s record-breaking results.

In short, as the housing market cools, Rocket is likely to see a dramatic decline in business activity that will result in RKT stock growing more and more expensive. Given this, you can start to understand why investors have been aggressively dumping shares.

The Bottom Line on RKT Stock

Now, if the analysts are wrong and the housing boom isn’t over yet, Rocket should see its shares recover. It’s possible the Fed will lose its nerve and delay its planned tapering and interest rate increases. Or maybe the housing market will continue to soar even in the face of higher interest rates.

That said, RKT stock seems like a fairly priced offering at this level, rightly balancing the reward of a cheap security with the likelihood that earnings rapidly deflate.

Additionally, it should be noted that key mortgage rival PennyMac is trading at 4x this year’s estimated earnings and less than 5x next year’s. If you like RKT stock because it’s cheap, you should absolutely love PennyMac.

Rocket has little to recommend it versus either PennyMac or UWM Holdings on a valuation or business outlook basis.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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Author: Ian Bezek

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Economics

The Gaslighting Of America

The Gaslighting Of America

Authored by Bob Weir via AmericanThinker.com,

I remember a comedy skit several years ago in which a woman comes…

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The Gaslighting Of America

Authored by Bob Weir via AmericanThinker.com,

I remember a comedy skit several years ago in which a woman comes home unexpectedly and finds her husband in bed with another woman.  Shocked, she demands to know who the woman is and why her husband is doing this.  The couple get out of bed and start getting dressed as the man says to his wife, “Honey, what are you talking about?” The wife, perplexed at the question, says, “I’m talking about that woman!”  Meanwhile, the other woman, now fully dressed, heads for the door.  The husband says, “What woman?  Honey, are you feeling okay?  There’s no woman here.”  Feeling dazed and confused, the wife begins to question her own sanity.

That’s a pretty good example of what the Biden administration is pulling on the psyche of the American people.  

What they’re doing is not merely “spin,” which has become SOP whenever a political party does a clever sales job on the public in order to keep certain facts from them.  No, this is much more than shrewd marketing; this is blatantly lying in the public’s face and telling them they’re crazy if they believe their own eyes.  

When we look at videos showing thousands of migrants coming across our southern border with impunity, while Biden and his cohorts tell us they have the situation under control, we’re being gaslighted.

When thousands of Americans and Afghan allies are abandoned to be tortured and killed by Taliban terrorists, while Biden’s press secretary, Jen Psaki, tells us the war ended successfully, we’re being told not to believe what we’re seeing.  

President Trump made our country energy independent, only to have his success overturned by Biden on day one of Biden’s presidency.  That forced our country to once again be dependent on foreign oil.  Biden said his action would help protect the environment.  We scratch our heads and wonder how it makes sense to ship millions of barrels of oil on cargo ships from thousands of miles away, only to be used the same way it was used when it was processed here.  

Does foreign oil have less environmental effect than American oil?

When Biden proposes a $3.5-billion “infrastructure bill” that is heavily weighted toward social engineering and radical “Green New Deal” initiatives, we’re told that everything is infrastructure.  

We’re also told that the massive spending bill will cost “zero dollars” because the new taxes will be assessed only on the wealthy.  

Then, to add more consternation to a public getting groggy trying to keep up with twelve-digit numbers, Biden and his accomplices want another $80 billion for the IRS so its agents can check into every bank account that has transfers of $600 or more.  As if the IRS weren’t already a liberty-crushing organization, Biden wants to provide it with more ammo to use against those who oppose him.  Nevertheless, we’re told it’s going after only tax cheats.  Why would these people need $80 billion more to do what they’ve always done?  Don’t ask, lest you get audited for questions they don’t want asked.

When the supply chain of cargo ships, carrying about a half-million shipping containers filled with goods from all around the globe, are stalled in the waters outside major American port cities, we’re told by White House chief of staff Ron Klain that it’s just “high-class problems.”  

In other words, only the wealthy are waiting for the goods to arrive at stores.  Moreover, Jen Psaki mocks it as the “tragedy of the treadmill that’s delayed” — another elitist poking fun at the reasonable expectations coming from the working class.

The list of gaslighting incidents is growing longer than Pinocchio’s nose. 

Each time we are faced with another destructive lie, our attention is diverted to the latest Trump investigation or the probe of one of his supporters.  Keeping the January 6 imbroglio alive is one of those diversions.  The radical left has come to power by a sinister display of distractions from reality.  A major part of that distraction is using accusations of racism to muzzle opposition.  Most people will cower in fear of such labeling, even when they know in their hearts it’s not true.  That’s precisely what makes the accusations so useful to those who seek power through intimidation and distortion of reality.  

President Trump called out situations for what they are, without the odious and murky filtration of political correctness.  That’s why the entrenched powers of Deep State corruption despised him.  

Now we’re stuck with a president who says “what inflation?” as we pay higher prices than ever at the gas pump and the supermarket.  I seriously doubt that shoppers are questioning that reality.

Tyler Durden
Mon, 10/25/2021 – 21:10

Author: Tyler Durden

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Economics

The U.S. Budget Deficit

#CKStrong The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to…

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#CKStrong

The U.S. Treasury findly released their monthly statement on Friday, which closed the books on the government’s 2021 fiscal year (October to September).  The deficit came in at $2.8 trillion (12.0 percent of GDP, based on our Q3 GDP estimate) , a bit lower than FY 2020’s $3.1 trillion (14.8 percent of GDP).  Those are some massive deficits, folks. 

 

U.S. Deficit Larger Than 95 Percent Of Global Economies

In fact, the FY 2021 deficit was larger than Italy and Canada’s economy, bigger than 185 of the 192 country economies in the lastest IMF database.  Take a look at the peak 12-month deficit of $4.1 trillion in March.  The March deficit would have made the G5. 

This image has an empty alt attribute; its file name is usg_deficit_3.png

Financing The COVID Deficit

How can the U.S. Treasury finance $5 trillion in borrowing over the past 18-months without spiking global interest rates, crowding out investment and other asset markets, and tanking asset prices?   They can’t.  

The table below breaks down the financing in several different measures.  Check it out.

The bottom line is that 23 percent of the COVID deficit borrowing has been financed by an increase in Treasury bill issuance, easy given the mass excess liquidty on the short-end where the Fed is soaking up over a trillion with overnight reverse repos in order to keep short-term rates postives.  Most of that liquidity, by the way, was created from QE.   

Of the remaining $4.1 trillion of non T-Bill debt issuance, 75 percent was taken down by the Fed, albeit indirectly.   

No Judgement

There you have have it, folks, T-Bills and the Fed have financed the bulk of the COVID deficit and debt buildup.   No judgment, but policymakers are now going to have engineer a soft landing in the economy and asset markets as we approach a fiscal cliff to normalize the budget deficit and tighten up monetary policy. 

We are not throwing stones as they saved the world from a global economic castasophe.

We do criticize their continued irresponsible policies as inflation rages and stagflation sets in.  It’s not wise, in our experience, to try and monetize supply shocks.  We learned that hard and painful lesson by doing so with the OPEC oil shocks.  

Narrow window for a soft landing.  Stay tuned. 

Email us or comment if you have questions.  








Author: macromon

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Economics

An Anti-Inflation Trio From Three Years Ago

Do the similarities outweigh the differences? We better hope not. There is a lot about 2021 that is shaping up in the same way as 2018 had (with a splash…

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Do the similarities outweigh the differences? We better hope not. There is a lot about 2021 that is shaping up in the same way as 2018 had (with a splash of 2013 thrown in for disgust). Guaranteed inflation, interest rates have nowhere to go but up, and a certified rocking recovery restoring worldwide potential. So said all in the media, opinions written for everyone in it by none other than central bank models.

It was going to be awesome.

Straight away, however, right from the very start of 2018 there were an increasing number (and intensity) of warning signs. Flat curves were a big one – which then later inverted. In global economic data, crucial contradictions were purveyed by Japan and Germany.

In other words, taking cues from those three – Japanese and German conditions augmented by consistent contortions in the US Treasury yield curve – before we even got to the end of 2018, while the mainstream narrative prevailed unopposed with Jay Powell still hiking rates, we said very differently. Here’s early November 2018, with already negative GDP in both those places:

This year is proving to be a trainwreck in too many important places. It was supposed to be the arrival of worldwide recovery. Worse, too many arrows are still pointing down for 2019. But you wouldn’t know it from the Bank of Japan, ECB, Federal Reserve, etc. Not until they are forced into some honest assessments for once.

Heads in the sands (or another orifice, if you prefer), “tightening” became the preferred if only option across the globe. The Fed, the ECB, others around the world rushed to get ahead of the (imagined) inflationary pressures “everyone” said were on the cusp.

Just a few months further on, March 2019, everything had already changed though it would take many more months for the stunned mainstream to even begin appreciating all the roughness.

As is standard practice, when weak data began showing up last year it was attributed to anything, everything else. Europe was downright booming, they said, so there was no possible way for a macro negative scenario…Europe isn’t the only place where manufacturing declines are showing up. Just as Germany is a bellwether for global trade and therefore global economy, Japan is in very much the same situation. Export-oriented, if Japan Inc. isn’t making new goods that’s because the rest of the world isn’t demanding them.

Germany. Japan. Yield curve. Twenty-eighteen.

Twenty twenty-one?

Germany:

Japan:


Yield curve:

Germany and Japan the economic bellwethers for the whole global economy (the importance of trade at the margins) along with the Treasury curve reacting to, and forecasting ahead from, the real global economy’s interior and insides. Economists are, by contrast, so removed from the realities of real-time facts so as to be modern day astrologers making claims based on little more than specious privileges.

Germany or Japan struggling isn’t really about Japan or Germany; nor the UST curve specific to US and Treasury. With a massive overflow of goods heading toward especially the US, however warehoused on the way, as I wrote earlier today, what might this trio bode with regard to the direction for future demand?

Many companies have claimed they are absolutely ready for “too many goods”, believing both their newfound penchant for individual supply chains as well as logistical consulting to manage more than ever. This so long as demand doesn’t “unexpectedly” fall off, even a little, which then might trigger the downside of the inventory cycle.

Three years ago, these three indications taken together were keen warning signs how demand was about to and would fall off “unexpectedly” (if it hadn’t already). And these ended up being highly accurate measures of the global economic direction that were completely, utterly contrary to the surefire, guaranteed inflation/recovery/BOND ROUT!!! no one ever challenged.

Is this time different? Hope so, but history keeps repeating because no one ever explains what happened last time. And the time before. And the time before. And…






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