- U.S. home prices: Zach Scheidt’s contrarian perspective
- A great dividend-stock opportunity (REIT)
- Jim Rickards: “Goldilocks gets eaten by the bears”
- Elon Musk is charged with CEO neglect
- Flying the Elvis skies… Dude, where’s my stock?… And more!
“Zach, I’m seeing big national homebuilders completely walk away from land purchase agreements,” an expert on land development tells Paradigm’s retirement-and-income pro Zach Scheidt.
“And in many cases, they’re leaving earnest money on the table just to get out of these deals,” he emphasizes.
Zach notes: “My friend’s experience matches what I’ve been seeing in my research for the last several months; higher interest rates are having a big impact on would-be homebuyers.
“Leading up to 2022, buyers were already concerned about higher prices. As families moved out of large cities and into suburban areas — largely to minimize risks from the pandemic — home prices surged.
“But with interest rates low and plenty of capital available,” he recalls, “buyers were still willing to pay just about any asking price for a home.
“Now the surge in interest rates makes mortgage payments unaffordable for many buyers, and investors are worried about a potential drop in home prices as a result.
“While the data on the homebuilder industry is sobering,” says Zach, “it points to higher home prices ahead, even if they’re pulling back a bit in today’s market.
“Here’s why… Thanks to pessimism in the housing market, homebuilders are pulling back on construction plans.
“We’re seeing lower housing starts, fewer housing permits being issued and most of the homes already under construction sold.
“So there are very few units for sale — and even fewer planned for the future as homebuilders cancel plans for new developments.”
Zach’s conclusion? “The supply of available homes is tight. And it’s not going to get better anytime soon…
“Economics 101 tells us that prices will naturally rise when there’s a limited supply of something and strong demand for it,” Zach adds. “That’s exactly what I expect to play out in the housing market over the next several years.
“Millennials are the largest generation of Americans to date,” he says. “And these young adults are around peak homebuying age, which means demand for homes should remain high.
“This supply/demand imbalance has a much bigger effect on home prices than the current mortgage rate,” Zach asserts. “Plus, as the economy starts to slow, traders are already anticipating a pause for these interest rate hikes — and the potential for rate cuts next year.
“These rate cuts could reignite a hot housing market and lead to higher home prices. In the meantime, millennial demand for homes should keep home prices from dropping much further.
“Of course, there will be differences in specific local markets. But on a nationwide level, home prices should be quite resilient.
“So how can you profit from this trend?
“If you agree that housing prices will stabilize and rise over the next few years,” Zach says, “I’ve got a great investment opportunity…
“Shares of Invitation Homes (INVH) offer investors both income for today and growing wealth over time. This real estate investment trust (REIT) owns more than 82,000 single-family homes across the United States,” he says.
“At current home prices, it’s typically much more affordable for families to rent from INVH than buy their own homes,” Zach says. “And thanks to a nationwide shortage of homes available for sale, the company’s portfolio of homes should grow in value for years to come.
“Shares of INVH have pulled back in recent months because investors are worried about a housing market crash due to higher interest rates,” he admits. “But the current situation is nowhere near the speculative bubble we had in 2007.”
Zach believes: “The pullback for INVH now gives you a great opportunity to buy into this income play at a discount.
“INVH currently pays a quarterly dividend of $0.22 per share… And this dividend is up 30% from last year’s level!
“The company can pay larger dividends because rental income continues to rise with inflation,” he explains. “At this point, INVH will likely increase its dividend again for the next payment due in February.
“So while the stock’s current dividend yield is 2.7%, I expect you to collect a better yield as the company increases its dividend next year.
“Bottom line,” says Zach, “INVH is a great investment play to help grow your retirement wealth in today’s market. And thanks to a short-term pullback for the stock, you’re getting a great deal on the stock right now.”
“The question for markets is whether the Fed will balk and pull the plug on rate increases as early as February, stopping at a level of 4.75%,” says our macro expert Jim Rickards, summarizing this week’s FOMC meeting.
“Furthermore, assuming the economy is bordering on a recession (or in one) by February, will the Fed ‘pivot’ to rate cuts as early as next May?” Jim wonders. “That’s the Goldilocks or ‘soft landing’ scenario that Wall Street cheerleaders are rooting for. And it’s the scenario that has fueled recent stock market rallies going back to last summer.
“Don’t bet on it,” Jim adds.
“The reality is that [Powell] does not want to repeat Paul Volcker’s mistake of 1980 when he stopped the rate increases too soon and inflation took off with a vengeance,” Jim notes. “Volcker had to raise rates to 20% to undo the damage of his policy blunder.
“Powell does not want to be that guy. In Powell’s world, Goldilocks gets eaten by the bears.” Jim concludes: “A recession is in the cards, and unemployment will rise significantly.”
It’s a risk-off day at the market: The S&P 500 is faring the worst among the three major U.S. indexes, down 1.5% to 10,670. At the same time, the Dow is down 1.4% to 32,740 while the tech-laden Nasdaq is down 1.25% to 10,670.
As for commodities, a barrel of crude is selling for $75.18 (-1.2%), but gold is up 0.65%, just a hair under $1,800 per ounce. And silver is holding steady at $23.
The crypto market, on the other hand, is getting clobbered today. Bitcoin is down 3.5% to $16,800 and Ethereum is down 6% to $1,190.
For the major economic number of the day, the composite “flash PMI” for December — which follows the manufacturing and services sectors — slumped to 44.6, well below the forecast 47. (Reminder: Any number below 50 means U.S. business activity is contracting.) It also happens to be the lowest reading since the early days of the pandemic; once again, highly recessionary…
“Between Twitter, Tesla, SpaceX, Neuralink” — and other ventures — “Elon Musk is certainly a prolific figure in the tech world,” says Paradigm’s science-and-technology authority Ray Blanco.
“Now, as the head of Twitter, Musk is focused on developing a digital ‘town square’ for people.” Allegedly. “However, this latest endeavor has occupied quite a bit of his attention… and Tesla Inc. (NASDAQ: TSLA) investors are starting to voice their concerns.
“Ironically enough,” Ray says, “much of that concern is being expressed on, well, Twitter.” For instance, managing partner Gary Black of The Future Fund LLC — which owns roughly $50 million worth of Tesla stock — tweeted this on Monday:
Regardless of what you think of Musk — savior or fraud — there’s no denying that he pulled off the improbable as “one of the few successful independent automakers and a pioneer in the electric car market…
“Since then, TSLA stock saw a meteoric rise that peaked during the pandemic-era bull market,” Ray says. “Now TSLA is struggling to regain lost ground.
“Just take a look at the three-month chart:
Source: Technology Profits Daily
“Even before Elon took over at the social media company, TSLA was having a tough time,” says Ray. “To be fair, Big Tech has been locked in quite a tough trading environment, with the Nasdaq down around 30% this year so far.”
But at the time of writing, “TSLA is down about 60% this year,” Ray says. “If we don’t see some insane rally, the company is on the rails for its worst year in the market. By a wide margin.” For some context, the only year Tesla shares finished in the red — 2016 — TSLA was down about 10%.
“With a multitude of other auto manufacturers jumping into the EV race, [Musk’s] minor slipups could amount to lost market share as more options become available to consumers,” says Ray.
“Couple that with the fact that Elon bought Twitter with borrowed cash leveraged against his TSLA shares and you have a potentially dangerous situation brewing for the car company,” he concludes.
(This just in: The New York Times reports that Musk sold an additional block of TSLA shares, worth $3.6 billion, this week… Yet another reason for investors to be apprehensive.)
On Jan. 4, a piece of aviation — and rock ’n’ roll — history will go up for sale.
Mecum Auctions will start the bidding on one of Elvis Presley’s private airplanes, a 1962 Lockheed JetStar that’s been rusting in a Roswell, New Mexico (right?), airfield since 1990.
Photo courtesy: Mecum Auctions
Purchased by the rock icon in 1976 for $840,000 — almost $4.4 million adjusted for inflation — as you can see, the plane is a project. It’s missing all four engines as well as “many cockpit components,” according to the auction house.
But it does retain its original Kenmore microwave and RCA VCR! State of the art in 1976… And in case you’re wondering, yes, the plane’s cabin interior is exactly what you’d expect from The King…
Photo courtesy: Mecum Auctions
No word yet on a minimum bid, but the auction house says: “[The plane] serves as an incredible restoration opportunity and a chance to create a unique Elvis exhibit for all the world to enjoy.”
Hmm…
“This is not a request for personal financial advice,” a reader writes. “I do, however, have a general question.
“I bought IIVI shares about a year ago and haven’t paid much attention since. Now, I find the company bought Coherent and changed its name to the same, with a new ticker COHR.
“My question is what’s become of IIVI stock?”
The 5: To answer our reader’s question, we reached out to Paradigm’s editor Zach Scheidt, who says: “Good question… Yes, IIVI acquired Coherent, and all Coherent investors received a cash payment along with shares of IIVI.
“Then IIVI decided to rebrand its business, taking on the Coherent name (ticker COHR). Here’s the press release explaining the rebrand.
“This was a fairly simple transaction,” Zach says. “Every IIVI share has now become a COHR share. So it’s essentially just a name change; your original IIVI position should be the same — just with a new ticker. Hope that clears it up!”
Have a great weekend, and we’ll catch up with you tomorrow… Our Saturday highlight issue features a European nuclear superpower (but it’s not what you think).
Best regards,
Emily Clancy
The 5 Min. Forecast
