Morning Report: Bad inflation report

Vital Statistics:

S&P futures4,535-43.2
Oil (WTI)90.140.43
10 year government bond yield 2.00%
30 year fixed rate mortgage 3.94%

Stocks are lower this morning after inflation came in hotter than expected. Bonds and MBS are down.

Inflation rose at a 7.5% annual pace in January, according to the Consumer Price Index. Ex-food and energy, it rose 6%. Rising energy costs were the big driver of the headline number, however used cars were another item. Shelter rose 4% YOY, however the price appreciation of the past year is only beginning to be reflected in the inflation numbers. If you take away seasonal adjustments, the headline CPI rose 8.2%.

Needless to say, the bond market took a beating on these numbers. Mortgage backed securities are down a half a point, and roll rates are increasing. This should translate into higher lock prices.

Foreclosure completions increased to 4,784 properties in January, which is up 57% MOM and 235% YOY. “The increased level of foreclosure activity in January wasn’t a surprise,” said Rick Sharga, executive vice president of RealtyTrac, an ATTOM company. “Foreclosures typically slow down during the holidays in November and December and pick back up after the first of the year. This year, the increases were probably a little more dramatic than usual since foreclosure restrictions placed on mortgage servicers by the Consumer Financial Protection Bureau expired at the end of December.”

Given that the foreclosure moratorium has expired, we should expect to see increases in foreclosure activity. Will we see a repeat of 2009 – 2010? I don’t see that as even a remote possibility. What is the difference? Home equity. Home price appreciation has been so strong that borrowers who cannot afford their current mortgage payment can sell their property and move to a cheaper place. Investors who are hoping to pick up a cheap properties as the moratoriums expire are probably going to be disappointed.

Rocket CEO Dan Gilbert is being sued for alleged insider trading. The complaint alleges that Gilbert sold $500 million worth of stock two months before the company announced that gain on sale margins were falling. The plaintiff alleges that guidance out of Rocket pushed the stock to $41.60, after which Gilbert sold stock. Rocket’s spike was not due to guidance, it was due to rumors on Reddit that Rocket could be a short squeeze candidate. Redditors were envisioning another Gamestop situation. Pro tip: If the float of a stock is tiny, but the founders have a lot of stock they would like to sell, it isn’t a short squeeze candidate.

I wouldn’t be surprised to see more suits like this given how god-awful mortgage banking stock have performed in the market. Just about a year ago, Loan Depot was trading above $30 a share. It is now closer to $4. That is a 87% decline. You would think the stock would be in trouble, right? Well, not exactly. The company is expected to make $0.64 this year, which gives it a P/E of 6.5. It also has a dividend yield of 7.7%. I know mortgage banking stocks are as popular as mask mandates these days, but at some point, they have to be too cheap to ignore, right?

As a housekeeping note, I will be retiring this email in the near future, and it will come from my WordPress site Hit the follow button, and you should keep getting these daily missives.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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