$RKT - May FOMC rate hike and quantitative tightening

Bullish PR piece by $RKT CEO

Oooops! sorry this was something I was working on but just posted automatically? is there anyway the mods can delete this? thanks!

Too late. I invested my life savings plus an additional life savings on margin. You better be right!

/s :grin:

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Quantitative Tightening Explanations:

Sorry for the poor organization of this thread. Hopefully, we can trim the fat and make it more concise and focused?

This article was probably the best explanation for Quantitative Tightening for me:

https://www.washingtonpost.com/business/what-the-feds-quantitative-tightening-plans-mean/2022/04/07/4774f172-b627-11ec-8358-20aa16355fb4_story.html

What’s interesting here is that QT has only been conducted once in the Fed’s history back in 2017 and led to some pretty disastrous results. Namely, the 2018 stock market correction:

At first, it kept to its QT policy, with Powell – by then Yellen’s successor as chair – at one point saying the program was on “automatic pilot.” But after the S&P 500 Index tumbled almost 16% over three weeks in December 2018, the Fed blinked. It abandoned rate hikes in January and went on to announce the phasing out of QT in March 2019.

Here’s also a decent read of comparisons in QT:
https://www.reuters.com/business/feds-qt-plan-then-now-2022-04-06/

What’s Different This Time?

Inflation. It wasn’t out-of-control in 2017/2018 the way it is now and places the Fed in a very difficult situation in that should liquidity being taken out of the market/economy cause the stock market to drop, the Fed can’t just turn the printer back on. The Fed says there are different mechanisms in place, like emergency liquidity market injections, that they can do autonomously and prevent a collapse.

More importantly, as @The_Ni has pointed out, QT usually meant just having treasuries and MBS roll off the balance sheet (essentially expiring and the Fed cancelling out the debt owed to itself). This in and of itself takes liquidity out of the economy/market as the Fed will not be buying additional treasuries/MBS but that doesn’t mean treasuries and MBS are going to stop being created. They still get underwritten and sold but now since the Fed isn’t going to buy them they’re being sold to financial institutions (who can pass on it) and hedge funds. The financial institutions and hedge funds would want higher yields thus driving up rates while the price of these instruments go down.

Lastly, there is the faint possibility that if the Fed wants to get really aggressive in reducing their balance sheet, they can actively sell the MSBs instead of having them expire but there aren’t many big players that can handle that much work. More importantly, that would take more liquidity out of the market, and hyper-accelerate yield increases.

The Play:

FOMC is May 3/4. It’s expected that they’ll announce 50bps minimum. More importantly, they will give guidance on QT which is likely to start in June. Should the Fed definitely announce QT beginning in June, we should start to see the market begin to price in (as in start the FUD) next week. Since this type of QT is unprecedent and it’s effect on the market a wildcard, more uncertainty, I believe will lead to more volatility.

Should they announce that MSBs will be actively sold (the most extreme option) then you can see the mortgage industry shit the bed.

$RKT derives a big chunk of their profits from refinancing. For this reason, it’s the easiest ticket to play as it’s been on a downward trend since IPO last year and homeowners are not refinancing their mortgages. There is the argument that 2nd mortgages are still cheaper than HELOCs so households may be organizing their debt this way.

$TREE is the same online lending industry as $RKT but less liquid. However it has fallen way off it’s highs. Ancillary industries to mortgages are online realtors like $Z and $OPEN.

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More layoffs in the mortgage industry. This was last week with WFC:

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Interesting! With their earnings on 5/5, would you recommend playing this upto FOMC/earnings, or after?

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Oh I missed that my apologies. Was focusing on $RKT that has earnings on 05/26.

Without looking into $TREE more maybe the standard Valhalla earnings playbook might be in order with an early cut at/before FOMC?

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Thank you to @The_Ni for pointing out nasdaq has $RKT reporting in 05/05 https://www.nasdaq.com/market-activity/stocks/rkt/earnings.

Earnings whispers shows 05/26 and I can’t seem to find a formal announcement on the company website: Rocket Companies, Inc. - News & Events - Events & Presentations

Might be a wait and see as if there earnings fall closer to FOMC can it create more uncertainty with the play.

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Voluntary Termination Package Offer

Voluntary buyout means those not taking it will be laid off.

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thank you for this @theproudestfool ! so looks like $RKT is looking to trim it’s workforce as well: tent Services, LLC. trimming payroll will usually look favourably on a share price IIRC as you’re reducing your fixed costs and “trimming fat”. however it’s also a pretty big indicator that the health of the company is not great. especially a 10% cut/buyout.

By WWJ Newsroom, WWJ Newsradio 950

WWJ Newsradio 950

19 hours ago

DETROIT (WWJ) - Hundreds of employees are faced with a big decision this week after Detroit-based Rocket Mortgage announced it is asking some of its workforce to accept a buyout on Monday.

Following a recent decrease in the mortgage market due to rising interest rates, roughly 10% of 26,000 employees for Rocket Mortgage and Amrock were given a voluntary buyout option in an attempt to reduce the company’s workforce.

also, looks like higher rates has translated to the obvious downturn in mortgage applications as of this morning:

https://www.bloomberg.com/news/articles/2022-04-27/gauge-of-u-s-mortgage-applications-slides-to-lowest-since-2018

A gauge of U.S. mortgage applications tumbled last week to the lowest level since late 2018, illustrating the hit to the housing market from mortgage rates that are now approaching a 13-year high.

The Mortgage Bankers Association’s index of total applications dropped 8.3% in the week ended April 22 to 343.1, the Washington-based group said Wednesday.

thanks @Haplo for providing this on TF. mortgage refis are down 70% from last year:

Just wanted to point out that although mortgage refis are a core component of RKT, they’ve been strategically diversifying their revenue streams.

Companies and services they own:

  • Rocket Mortgage
  • Amrock & Amrock Title Insurance Company
  • Nexsys
  • Lendesk
  • Edison Financial
  • Rocket Homes
  • ForSaleByOwner .com
  • Rocket Auto
  • Rocket Loans
  • Truebill
  • Lower My Bills .com
  • Rock Connections
  • Rocket Central
  • Rocket Innovation Studio
  • Woodward Capital Management

Even though higher interest rates will affect their income, having a wide variety of companies that bring in cash could help them maintain a strong balance sheet.

Speaking of their balance sheet, their last reported D/E was 0.42 which puts them in a safe position even after the Truebill acquisition.

Just something to keep in mind. I do believe the housing market is in some sort of bubble so I’ll probably hop on puts after earnings.

thanks so much for this @notmisa! The diversification is nice to see in a downturn economy and the Truebill acquisition seems like a nice stand-alone business unrelated to mortgages and financing.

Earnings have been announced for Tuesday, May 10th, at 4:30 p.m. Low volume and no upcoming catalysts other than FOMC has it tracking SPY and it’s receiving a nice bump back up to the $9 range. If I were to be hawkish on FOMC next week, would probably look to take a position today or tomorrow morning. If FOMC announces plans for QT, should drop or could wait up to earnings on 05/10 and cut before.

Another ticker to keep an eye on in the mortgage origination industry is Loan Depot ($LDI). The mortgage companies like $RKT, $TREE, and $LDI spend a substantial amount on marketing and advertising. Unfortunately, this is catered to the average retail potential homebuyer or homeowner. My theory is that these expenses are showing little to no return as the demand for retail mortgages has cratered and large investors can bypass this method of financing. All 3 of these tickers report this week or next.

As noted in the Stagnation Thread, institutional buyers are buying large blocks of homes such as Blackrock. These large institutional investors can negotiate directly with banks to secure financing at better rates than anything $RKT, $TREE or $LDI can provide. And of course, these deals can be “cash offers”. For this reason, the average home buyer that’s looking for a single-home is getting out-bid or can’t find a home that’s suitable.

My reasoning behind this is:

  1. Mortgage applications and refinancing applications have plummeted. I don’t think these statistics factor in large institutional buying as their credit facilities may not take the shape of a traditional mortgage.

  2. New home sales and prices continue to stay positive (albeit barely). So if traditional mortgages applications are down, but prices are sticky, who’s buying? Most likely large investors buying up swabs of new homes and competing against each other.

  3. Increased mortgage rates (above 5%) effect the average retail homebuyer disproportionately than institutional buyers.

All this for me means the next couple of months we’ll be seeing a real shaking of the trees in the mortgage industry. Layoffs at numerous companies, including traditional banks, have been announced. Once FOMC rates hikes are confirmed, the last shoe to drop will be QT guidance. We should see these companies emerge looking very different from the ones that rode the low-rate era of easy money.

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Well today is the big day, as we see the effects of the presumed 50bps hike from the Fed. Earlier today, MBA Mortgage data was released and showed an increase of 2.5% in new applications. Refis continued it’s downward trend. This is the start of the Spring homebuying season and we’ll see how strong the demand is given low inventory, high prices, and higher rates.

Something to note, RKT’s CEO, Farmer Jay (not lying, the CEO’s name is Farmer Jay) bought 100k shares between April 25th-April29. Might be a sign of confidence for the upcoming earnings.

thanks, Castle for the update to the thread. always a bullish sign when C-suite buy shares in the company.

FOMC not only confirmed the 50bps rate hike but JPow gave guidance that 50bps was the most likely hike for the next three months. More importantly, QT guidance came in as expected with $47.5B coming off the books every month for the next three months. MBS will account for $17.5B/month before increasing to $35B/month.

Reaction from $RKT was bullish and closed up at 3.99%. $Z, $TREE, and $OPEN all didn’t correlate as strongly to $SPY as $RKT did. The 10-Yr yield dropped to close at 2.917% from hovering over 3% for the better part of the day.

With earnings announced for $Z, $TREE, and $OPEN on 05/05, poor results would probably drag $RKT and $LDI down in sympathy. Zak’s is expecting a bad earnings season for $RKT:



$TREE reported Q1 earnings before the bell and are trading 4% higher. they crushed EPS but fell short on revenue.

Guidance is down:

This article describes what we should see in terms of Redfin, Zillow and OpenDoor stating that Redfin is usually the harbinger of the real estate market (especially guidance wise):
https://www.barrons.com/articles/zillow-redfin-opendoor-earnings-housing-market-51651689527?tesla=y

Just going to drop this here:
https://twitter.com/lisaabramowicz1/status/1522217760524148737?s=21&t=HRWvsWRogQaSxIPrEQ135A

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