Tesla becomes electrified

Stocks had a mixed close in yesterday’s session, with some indexes being held back by Netflix’s poor performance. Earnings continue to bear estimates giving hope that stocks can be poised for further gains.

House music.  It is no secret that the housing market is in a bit of a, shall we say, bubble. Come on, I know you have looked your home up on Zillow.com to check your Zestimate and wonder about the possibilities. Your big dreams of upsizing or downsizing are quickly quashed once you notice how much a new home will cost you. Not only have home costs themselves gone up, but so has the cost to finance purchases with a mortgage. Now, I know that I have mentioned this before, but as 30-year fixed rate mortgages quite literally spiked in the past few weeks alone to levels not seen since 2010, another go at it may be warranted. Foremost, one would expect home demand to be crimped by higher prices and higher rates, ultimately causing home prices to ease back a bit. That is, after all basic economic theory, which is often quoted here in this very daily market note. Let’s take a closer look.

According to the S&P CoreLogic Case-Shiller Home Price Index, home prices rose by some +50% from the end of The Great Recession through the end of 2019, just prior to the pandemic. It seems like a lot, but home prices became slightly depressed after the 2004-2007 housing bubble popped leading to the Global Financial Crisis and 2008/2009 recession, where prices lost around -33% peak to trough. By late 2008 Fed Funds were effectively pegged near 0% and the Fed introduced QE. Interestingly, mortgage rates did not come down all that much, having fallen from 5.79% to 5.39% through the recession. Just 10 years earlier, mortgage rates were well over 6%. After the 2008 recession, mortgage rate slowly fell, ultimately trading within a tight range around 3%, helped along by accommodative Fed policy. It is clear that those lower mortgage rates helped home prices grow as bank credit policies eased somewhat and lower rates helped buyers afford more. Then came 2020 which ushered in the COVID pandemic.

Fed funds plunged in an instant to 0% once again and the central bank began an even more ambitious bond buying QE program. This served to push mortgage rates well below 3% hitting a low of 2.87% by year end. Low rates certainly increased demand for homes and the increased demand played a large role in pushing home prices higher. But that is only half of the equation. Since the start of the pandemic housing supply sunk rapidly. Early in the pandemic, prospective sellers pulled their homes off the market. Home builders, always happy to jump in to fill the gap, were stymied with labor shortages, supply hang ups, and raw material price surges. That only meant that whatever homes were being built would be more expensive…if you could even get your hands on one. According to the Case-Shiller index, home prices have surged by some +33% since January 2020. Annual growth rates were below 5% in 2019, and by Summer of last year, those rates rose to +20% with the last reading coming in at +19.1%. This puts housing near the top of the list of largest contributors to the current inflationary environment. Sure, food, energy, and transportation costs are big factors as well, but housing costs are certainly contributing to the pain. So, that brings us back to the top. Will the coming onslaught of rate hikes and mortgage-backed bond sales push mortgage rates higher? Yes, but not likely by too much if history is an example. Will these markedly higher mortgage rates slow home price growth causing this latest bubble to deflate? It may help, but higher financing costs certainly won’t do all the heavy lifting. Existing home supply remains tight and that may be exacerbated by higher mortgage rates as owners may become reticent to roll into new homes and costlier mortgages. In this case, homebuilders may have the answer with monthly housing starts at the highest level since 2006. Additionally, authorized permits too, have surged. This just means that a lot of supply is about to hit the market…assuming labor and materials shortages continue to ease. Ultimately that should cause home price growth, A BIG CONTRIBUTOR to inflation, to moderate. Not sure if all that new building will help with the increased cost of chicken (up +13.8 since last year), nor am I convinced that Fed bond-selling and rate hikes will help either.

WHAT’S SHAKIN’

Tesla Inc. (TSLA) shares are higher by +7.68% in the pre-market after it announced last night that it beat EPS and Revenue estimates by +41.76% and 4.69%. The company announced that higher pricing and strong demand were contributors to the successful result. While the company explains that supply chain challenges will continue to impede margin growth, it is confident that it has the challenge well in hand. Potential average analyst target upside: -1.2%. WHY IS THIS NEGATIVE?  Because the current share price is higher than the average analyst price target. While that may be interpreted as a stock being expensive, it does not mean that shares cannot continue to climb.

Equifax Inc (EFX) shares are lower by -9.78% in the pre-market despite announcing that it beat EPS and Revenue targets by +3.82% and +2.64% respectively. The selling was caused by the companies weaker FY forward guidance. Dividend yield: 0.70%. Potential average analyst target upside: +24.5%.

ALSO, this morning: Dow Inc (DOW), Alaska Air (ALK), Danaher Corp (DHR), AT&T (T), Tractor Supply (TSCO), Philip Morris International (PM), Pool Corp (POOL), and Marsh & McLennan(MMC) all beat on EPS and Revenues while Quest Diagnostics (DGX) missed on Revenues and KeyCorp (KEY) missed on both fronts. Still up before the opening bell is Spirit Air (SAVE), NextEra Energy (NEE), Blackstone (BX), Freeport-McMoRan (FCX), AutoNation, Nucor (NU), and Union Pacific (UNP).

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday with the Nasdaq and S&P500 being held back by losses in heavyweight Netflix. The S&P500 slipped by -0.06%, the Dow Jones Industrial Average gained +0.71%, the Nasdaq Composite Index dropped by -1.22%, the Russell 2000 advanced by +0.37%, and the S&P500 ESG Index rose by +0.09%. Bonds gained some ground and 10-year Treasury Note yields gave up -10 basis points to 2.83%. Cryptos slipped by -0.98% and Bitcoin gained +0.32%.

NXT UP

• Philadelphia Fed Business Outlook (April) may have pulled back to 21.4 from 27.4.
• Initial Jobless Claims (April 16) is expected to come in at 180k after last week’s 185k claims.
• Leading Economic Index (March) is expected to have grown by +0.3% for a second straight month.
• After the closing bell announcements:  Boston Beer, PPG Industries, Intuitive Surgical, SVB Financial, and Snap.