Interest Rates Unchanged, Inflation and The Next Potential Short Squeeze

Fed Maintains Interest Rates and Bond Purchases - Great News for Growth Stocks

The Federal Reserve declined to raise interest rates today, and also decided to maintain its bond purchase program. This is good news for the stock market as a whole, but primarily for growth stocks as discount rates will stay near historical lows allowing investors to keep their models unchanged.

Tesla jumped about 3% after the announcement, as did many other growth/tech names. Most other indexes jumped on the announcement, but the Nasdaq and Russell 2000 benefited the most. 

Low interest rates generally means corporations can more easily borrow to fund growth. Low rates and other quantitative easing methods used by the Fed proliferate the concept of “easy money”, which usually means continued short-term gains in the stock market. However, these short-term gains but can have negative consequences in the long-term. Negative consequences we are thinking about include inflation and potential over-levered balance sheets as corporations have incentives to take on debt.

Our long-term view on the markets has remained unchanged. Inflation will eventually catchup to this historically easy monetary policy, leading to higher interest rates and potential corporation and Sovereign default. Maintaining a basket of “real assets” should remain beneficial to the patient investor.

Inflation

Many of the questions asked by reporters at the press conference today revolved around inflation. More specifically, are we on track to exceed the Fed’s target inflation rate of 2% or more?

Recently, the Fed increased their inflation target to the low 2% range, but many worry that inflation could skyrocket with the large increase in money printing and rise of debt levels over the last year.

In particular, Ray Dalio warned investors about this topic in his post titled, “Why in the World Would You Won Bonds When…”. In the post Dalio penned the following:

“The economics of investing in bonds (and most financial assets) has become stupid. Think about it. The purpose of investing is to have money in a storehold of wealth that you can convert into buying power at a later date.

If I give $100 today how many years do I have to wait to get my $100 back and then start collecting the reward on top of what I gave? In US, European, Japanese, and Chinese bonds an investor has to wait roughly 42 years, 450 years, 150 years, and 25 years[1] respectively to get one’s money back and then one gets low or nil nominal returns. However, because you are trying to store buying power you have to take into consideration inflation. In the US you have to wait over 500 years, and you will never get your buying power back in Europe or Japan. In fact, if you buy bonds in these countries now you will be guaranteed to have a lot less buying power in the future. Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better?

If you’re worried about inflation, commodities are a solid area to look at investing in. 

Inflation increasing means that asset prices are increasing. It is a simple supply and demand problem. When there is more money in the system than the demand can handle, prices will increase. We are already seeing this happen in the oil and gas market. For an example, the demand for oil and gas is starting to come back due to individuals returning to a normal, post-COVID, life. As demand for oil and gas increases the supply has not returned (due to lack of capex in the sector) resulting in higher prices. We think this issue will be multiplied in the coming months as the velocity of money increases and individuals continue to consume oil and gas.

If you are worried about inflation, consider investing in hard assets. A few examples include lumber suppliers, farm land, industrial manufacturers like Boeing, physical gold and silver, raw land, real estate (apartment complexes) and oil and gas companies. You could also invest in a commodity ETF like $GSG for commodity diversification.

In general, companies without hard assets or ones that hold a large amount of cash are usually worse off in an inflationary environment. Examples include tech companies like Facebook, Salesforce, or other tech companies that hold intangible assets over real assets on their balance sheet.

What’s r/WallStreetBets Talking About?

Most of the posts on r/WallStreetBets are still about GameStop. GME has been on a tear since Part 2 of the squeeze started last month.

Another name we keep seeing in the “Rising” section of WSB today is UWMC Holdings Corporation (UWMC). UWMC is a SPAC turned mortgage company. We think UWMC is a WSB target partly because of the success of a similar company, Rocket Companies (RKT), and partly because of its short interest.

Andrew Walker on Seeking Alpha laid out a clear case why he thinks the Company could short squeeze:

Just to summarize everything above, UWMC is a SPAC coming public in the hottest market for post-SPAC companies we've ever seen (where SPACs routinely rip up 10%+ for no other reason than they are a SPAC or a former SPAC). They're coming public in the best mortgage environment in their company's more than three decades history and at a value multiple (low double digit P/E). In addition, they're coming public with a tight float yet they'll be eligible to get added to a variety of major indices. In fact, given their multiple, their market cap, and their dividend yield (>3% at current prices), I would guess a lot of mutual funds tied to benchmarks are going to be begging the indexes to add Gores / United so that they can buy it.

Put the combination together and you have the potential for a squeeze higher. Again, UWMC is coming public with only ~6% of their float (~$1B) in the free float. Once you factor in the sponsor shares and the PIPE, the actual trading amount of shares available is even lower for the near future (probably closer to $500m shares tradeable). If and when Gores starts getting added to indices, there is going to be a lot of forced buying into a very small amount of available shares. Shares could rocket higher given that dynamic.

In addition, a WallStreetBets user summarized their bull case for UWMC: Relatively high short interest, good sales growth, and a great market outlook for home sales and refinances in this low interest rate environment. 

Jim Cramer has also been discussing the stock lately, and had the CEO on his show the other week. UWMC is definitely a company we are keeping our eyes on.

Do You Want To Get Started In Real Estate But Don’t Have The Funds? Try Wholesaling

A common line I hear among new investors is that they want to invest in real estate but they don’t have the funds to do it. The solution? Wholesaling.

Wholesaling is a common way a newbie in real estate can get started with no to low funds. For those new to wholesaling:

In real estate wholesaling, a wholesaler contracts a home with a seller, then finds an interested party to buy it. The wholesaler contracts the home with a buyer at a higher price than with the seller, and keeps the difference as profit. Real estate wholesalers generally find and contract distressed properties. Unlike flipping, a real estate wholesaler doesn't do any renovations or additions, and carry no costs.

If you are interested in learning more about wholesaling check out a step by step wholesaling guide here.

In the guide, Clairvoyant Property Group will walk you through the process they used to scale a multiple six-figure wholesaling business in just one year. Topics discussed include legal processes, systems for lead generation, and finding a buyer. This step by step guide will teach you everything you need to do to turn somebody else’s burden into a five figure paycheck.

What we are working on

We have a few investing ideas that are close to being finalized. Two of these ideas are high risk, high return stock picks. One is a royalty/trademark company that could either double (or more) or head back down to zero. We expect the company to report earnings later this month which should get them back into compliance with their lenders as EBITDA should return to a more normalized level. In addition, there is potential opportunity this company may sell itself in parts or as a whole, giving investors a quick return on their money.

The second company is a fertilizer company that has seen the price of its end product spike to levels not seen since the 2010 era. In addition, the company should receive a large tax credit from the US government and has potential to refinance their high interest debt to a much lower rate. We expect the shares could more than double as all three of these catalysts occur sometime in mid-2021.

Are you interested in stock ideas that could potentially beat the market? Shoot us a note if you are. We plan to release these ideas for paying members in the coming days.

Shower Thoughts

• "My wifi was out" is the new "I was stuck in traffic "

• There’s only so far you can walk into the woods before you’re walking out of the woods

• Celebrities can sell their second-hand stuff for more money that they had bought it for

• We are actually closer to the year 2050 than we are 1990

• Children claim to love bubbles, yet destroy them at sight

• As hard as it is to imagine infinity, it's equally as hard to comprehend absolutely nothing

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