Steal of the Century, Round 2

  • The next housing crisis is here…
  • … and this time it’s rentals
  • From mortgage forbearance to foreclosures
  • Wall Street: Occupy Main Street
  • Payroll firm ADP’s big win (Seriously?)
  • Another brilliant idea from Elon Musk & Co.
  • Crappiest Twitter marketing campaign EVER
  • A reader thanks Dave for his bravery… Another asks: “What do you think we should do?”… Decades of wrongs can’t be undone yesterday… And more!

“My tenants think I’m rich,” says Maribeth Shields. In reality, however, “they have better cars than me, better nails and better tax refunds.”

Ms. Shields owns 27 low-income apartments in West Haven, Connecticut. More than half of her tenants, affected one way or another by lockdown measures, aren’t paying. “The state banned evictions until July and allowed tenants hurt by the pandemic to defer with no penalty,” Bloomberg News reports. Now she’s $1.2 million in arrears on her mortgages.

“The next housing crisis is here, and this time, it’s about rentals,” Bloomberg declares. “About half of the 43 million rental units in the country are owned by small businesses such as Shields’ one-woman enterprise.”

And many landlords are in the same fix. Mortgage forbearance? Not for the two-thirds whose mortgages have no backing by Fannie Mae or some other arm of the government. Loans from the Paycheck Protection Program? Many property owners have no payroll; Shields hauls around a lawn mower in the back of her Toyota Prius.

Even if they can keep up the mortgage, they might lose their properties to unpaid property taxes.

“Small investors own much of the naturally occurring affordable housing in the U.S.,” Bloomberg continues, teeing up the most important sentence in its story…

“If they’re forced to sell or abandon properties, more of the market might wind up in the hands of Wall Street firms.”

Welcome to the next phase of the “steal of the century.”

That was the name 5 founder Addison Wiggin and I gave to a scheme the feds rolled out with little fanfare in early 2012. The formal name was “REO-to-rental.”

At that time, millions of foreclosed single-family homes were sitting on the federal government’s books in the wake of the 2008 housing bust. Under this scheme, hedge-fund and private-equity types could buy these homes at a deep discount and manage them as rentals.

These homes were available only to investors who could drop $1 billion on a bulk transaction. If you merely wanted to buy the bargain-priced foreclosure down the street and pull in a little investment income, you were out of luck. It was crony capitalism at its worst.

(Although given all the trouble small landlords are having in the wake of the lockdowns, maybe you dodged a bullet?)

We also warned in 2012 that the investors in these rentals would eventually turn their holdings into REITs — real estate investment trusts whose shares you could buy on the stock market.

“Alas, by then,” said Addison, “the easy money will have been made.”

Indeed it was. By way of example, Starwood Waypoint Homes went public in early 2014 and sorely underperformed the S&P 500 for the 3 and a half years it was an independent company.

Then it was taken over by the biggest player in the space — Invitation Homes Inc. From its launch in early 2017 up through a year or so ago, INVH’s performance has… well, it’s neatly tracked that of the broad stock market. Might as well have bought an S&P 500 index fund…

Easy Money

But now might be a different story for these single-family rental REITs.

If indeed a new wave of bargain-priced foreclosures will be coming on the market — properties passing from the hands of mom and pops to Wall Street — the biggest beneficiaries have to be the existing players. And unlike with the previous wave, you can take advantage right away.

As we said, INVH is the biggest name. But there are a couple of others — American Homes 4 Rent (AMH) and Front Yard (RESI).

All of them are worth a look — well, if your conscience is OK with aiding and abetting Wall Street’s ongoing takeover of Main Street…

To the markets today, where the risk-on trade is in force.

The major U.S. stock indexes are solidly in the green, with the Dow leading the way — above 26,000 for the first time in nearly three months. The S&P 500 has pushed past 3,100 for the first time in three months. And at 9,668, the Nasdaq is only 1.5% below its record close notched on Feb. 19.

Hot money flowing into stocks is flowing out of Treasuries and gold. A 10-year T-note yields 0.76% this morning, a level last seen in mid-April.

And gold? Ugh — back below $1,700 again. Hopefully this trip below $1,700 will be as short-lived as the one a month ago. And in any event, a little consolidation is never a bad thing when you’re still near seven-year highs.

At least some of today’s risk-on atmosphere is being attributed to the big economic number of the day, which falls under the category “awful but not as bad as expected.”

The payroll firm ADP says private U.S. employers shed 2.8 million jobs in May. Compared with expectations for a loss of 8.7 million, that’s considered a huge win, apparently.

Time for the stock market to take a pause? Not necessarily. Even now, hedge funds have historically low exposure to stocks, according to figures from the firm Hedge Fund Research.

That means much of the rally since the March 23 bottom has been driven by retail investors — which makes sense given the huge number of new E-Trade accounts and the spike in trading on the Robinhood app. Amid the pandemic, there’s a surprising number of people with both time on their hands and money to burn.

Our Zach Scheidt mentioned the FOMO phenomenon here on Monday — how “fear of missing out” could well drive the stock market still higher going forward. Who’d have guessed that buying pressure might come from the pros?

“We’re finally back in the game,” says Ray Blanco — back with us today for an update on the investment implications of the first manned U.S. space launch since 2011.

“It’s a huge step forward for the private sector and America as a whole,” Ray says. “No longer will we have to pay Russia $80 million a seat to send our men and women to the International Space Station.”

Of course it’s a huge win for privately held Space Exploration Technologies Corp. But Elon Musk & co. aren’t resting on their laurels.

“Pivoting from this launch, SpaceX is ready to launch a new fleet of satellites into space,” says Ray, “with the hope to provide global high-speed internet to the world.”

Already 400 of these satellites are spinning the Earth, with plans for 1,584 total by 2022. Public beta-testing of its Starlink internet is set for this November.

“Starlink wants to turn a profit, unlike its many predecessors who either failed to reach that level of technology or eventually went bankrupt,” Ray explains. “And a partnership with another tech giant could unlock that potential — or even inspire others to beat them at their own game.”

If that sounds investable, Ray says you’re absolutely right. He’s laid out a game plan that can help you potentially make a killing off the next potential partnership.

And now we see what happens when a pandemic collides with social disintegration — the world’s most tasteless Twitter marketing campaign.

As you might be aware, yesterday many large companies tried to, depending on your perspective, 1) latch onto the outrage over the death of George Floyd; 2) pass themselves off as “woke”; 3) both.

For instance, Apple’s Music store shut down briefly…

Black Lives Matter

But for maximum cringeworthiness, nothing holds a candle to Tushy — one of the makers of bidets whose business took off amid the toilet-paper shortage in March.

The bathroom puns are just brimming with sincerity, no?

Black Lives Matter

Black Lives Matter

“Think what this would look like with more iconic brands and their brand messages,” writes Jeff Beer at Fast Company. “Maybe McDonald’s goes with ‘I’m (not) lovin’ it!’ Or KFC’s ‘Finger Lickin’ Good (Justice).’ Or Dunkin’s ‘America Runs (from riot police) on Dunkin’.”

Speaking of social disintegration, we got a lot of feedback from yesterday’s 5.

“Dave, you hit the nail right on the head with your comments,” one reader writes. “Thank you for your bravery in calling out the politicians and the police who violated common, ordinary people's rights. Doug Casey's earlier comments look pretty prophetic, as do yours. 

“My guess is we will soon have martial law declared, unfortunately. I hope not, but it sure doesn't look too good to me.”

“I don't understand your comments,” writes another.

“What do you think we should do? If the police can't control this, then do we allow the ‘protesters’ to run amok? In Vietnam we couldn't tell the good from the bad so we watched out for all of them.”

Along those same lines, one more: “Probably agree with 90% of your commentaries, but the question you did not answer is is is is …what is the response to the rioting, the arson, the looting and now the shooting? 

“Negotiate with the anarchists and nihilists, kneel, abandon all efforts to maintain a semblance of order, hold news conferences and extend them a measure of support or justification, let them advance into residential areas??? 

“You were likely not yet born in the late ’60s when ‘they’ got out of hand. I saw some of it, heard some of it, retreated more than once. Empty rhetoric, cheap slogans and posturing did us no good then and not now.

“You need to understand the players and the game — otherwise, they'll eat you for lunch.”

The 5: The 2015 Baltimore riots came within four feet of my living-room window, so spare me the lectures.

(In retrospect, my day-after account underplays the alarm my wife and I felt. Still in shock, I guess. By the end of that week, I was able to pen a few thoughts you might find relevant to the present moment.)

Meanwhile, the three questions we posed yesterday were food for thought — not a policy prescription.

You want a policy prescription? Our acquaintance Scott Horton, director of the Libertarian Institute and tireless podcaster, had a very good one the other day.

“We need an end to all drug and gun prohibition, a permanent ban on all SWAT team night raids, to shut down the military’s 1033 and Homeland Security’s militarization of local police programs and federal militarized Joint Task Forces and most of all we need a massive new consensus to force the Supreme Court to overturn their made-up, Old World-style qualified immunity doctrine. If government is above the law, then it is not law at all, only edicts of tyrannical men.

“This is an emergency. These changes must be made immediately.”

Fat chance, you say? Yeah, that’s why we’ve got no answer to your “But, but, but, the rioters!” entreaty. There are literally decades of wrongs that need to be undone yesterday.

And there’s another reason we’ve got no answer to this question that, frankly, is more urgent than it is important.

“Deliberately or not, the rioters have directed our attention away from the government’s crimes and onto their own,” writes John Whitehead of the Rutherford Institute.

“This is a distraction.

“Don’t allow yourself to be so distracted.

“Let’s not lose sight of what started all of this in the first place: the U.S. government.

“More than terrorism, more than domestic extremism, more than gun violence and organized crime, the systemic violence being perpetrated by agents of the government constitutes a greater menace to the life, liberty and property of its citizens than any of the so-called dangers from which the government claims to protect us…

“When the government views itself as superior to the citizenry, when it no longer operates for the benefit of the people, when the people are no longer able to peacefully reform their government, when government officials cease to act like public servants, when elected officials no longer represent the will of the people, when the government routinely violates the rights of the people and perpetrates more violence against the citizenry than the criminal class, when government spending is unaccountable and unaccounted for, when the judiciary act as courts of order rather than justice, and when the government is no longer bound by the laws of the Constitution, then you no longer have a government ‘of the people, by the people and for the people.’”

What we’ve got instead is something we’ll also leave hanging today as food for thought…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. One more reader email: “Alas, Dave, does neofascism as a concept even arise when the citizenry is law-abiding?”

Probably not. The question then is: Are the laws already just… or is the citizenry merely compliant with laws that are unjust?

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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