Capital investors shoot housing market, why would homebuyers do this meme big

Friday Four Play: The “Financial Feudalism” Edition

Great Ones, have you ever heard the saying “Safe as houses?” My grandmother used to say this occasionally, and it means exactly what you’d think it does — that houses, or homes in most cases, are the safest places on earth.

I’ll let you argue the veracity of that one — I’m pretty sure it depends on where you call home — but I would argue that “safe as houses” only truly works in the regular world, not on Wall Street. I mean, the housing market collapse wasn’t that long ago.

“It’s different this time around,” or so I’m told by both Wall Street analysts and several colleagues. Housing prices are near record highs and climbing due to a low supply of new homes and record-low interest rates.

We know. We know! So, what else is new?

Yes, I guess you would know. The housing market is one of the hottest topics on Wall Street this year, right behind cryptos, chip shortages and meme stocks.

But a new wrinkle is emerging in the housing sector that should probably worry investors … and downright terrify homebuyers. Player two has entered the game.

Who is “player two?” Well, when you go to buy a house, typically, you’re bidding against others like you. Other people looking for their first home, their dream home, their retirement home.

But the current rate of acceleration in housing prices, the wealth of easy money and low interest rates have attracted another bidder to the game, and they are cleaning house.

That new bidder — that “player two” — is investment capital. Private equity firms, pension managers and big-time Wall Street money are all chasing single-family homes these days. In their never-ending quest for yield, these massive pools of investment capital are buying up not only single homes, they’re gobbling up entire neighborhoods!

For example, earlier this year, property-investing platform Fundrise LLC dropped $32 million for a brand new 124-home community in Conroe, Texas. D.R. Horton built the homes and sold the entire lot for a 50% gross margin.

In short, newlyweds, first-time homebuyers and retirees are not just bidding against each other … they’re also now bidding against Wall Street. And it’s exacerbating not only the ridiculous rise in home prices but also the massive surge in rental prices.

As my good friend Ted Bauman, Editor of The Bauman Letter, told me last night: “It’s all about acquiring a dominant position in some asset markets and then using that position to extract revenue from ordinary wage-earning households.”

While this may seem like a massive boon for investors with stakes in the housing market or homebuilders, home prices won’t go up forever. There will be a reckoning. And the higher prices go — the more investment capital buys into the housing market — the harder the fall will be once that reckoning arrives.

We’re not at the top of the housing market’s surge just yet, but you can certainly see the end of the bull run from here.

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And now for something completely different! Here’s your Friday Four Play:

No. 1: Chew On This

Problem with Wookie steaks little Chewy meme

Sometimes it seems like Wall Street doesn’t like to be reminded of reality. As proof, I give you Chewy’s (NYSE: CHWY) quarterly report.

Chewy offered up what I would call a dream report. It beat on revenue. It beat on earnings. It beat on second-quarter guidance. It beat on full-year guidance. It beat on active customer accounts. It even beat on margins.

That’s what … like a sextuple beat?

You kiss your mother with that mouth?

Quiet, you.

Anywho, you’d think that with that kind of outperformance, CHWY stock would skyrocket. But it’s not. CHWY actually fell more than 4% today.

Why? Because of the global reopening supply crunch — it’s not just semiconductors, you know. Chewy told investors that “elevated out-of-stock levels” were a headwind that will continue through the current quarter:

These industrywide headwinds are supply-driven, and we expect them to abate in the second half of the year as additional production capacity comes online.

Can confirm. My good boy needs special prescription dog food, and Chewy was out for nearly two months this year. But things have picked back up, and Chewy believes they will continue to do so.

However, just the mention that there are supply chain issues (and there will be for a bit longer) sends Wall Street into a hissy fit like a toddler who was told it can’t have that puppy in the window.

With that fundamental performance, I think I’m pretty safe in saying that if you are a CHWY bull looking for a good price, this post-earnings sell-off is a prime opportunity.

No. 2: She Sells Sea Sick By The Sea Shore

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Cruise lines started sailing again this month. The beleaguered industry has been stuck in port ever since the pandemic began. So, this is a critical time for Royal Caribbean (NYSE: RCL), Carnival (NYSE: CCL) and Norwegian Cruise Line (NYSE: NCLH) to strut their stuff and show us just how safe taking a cruise can be!

I mean, it’s literally all they’ve talked about this past year — when they’re not begging for a bailout, that is. For months, we’ve heard about how safe cruises are. You just wouldn’t believe it!

Let’s check in and see how that’s going, shall we?

Two guests onboard a Royal Caribbean cruise test positive for COVID-19.”

To quote Iago from Disney’s Aladdin: “Oh, there’s a big surprise! That’s an incredible … I think I’m gonna have a heart attack and die from not surprise!”

These companies literally can’t control outbreaks of norovirus (aka diarrhea), and all you have to do to safeguard against that is wash your damn hands.

Anyone who didn’t see this coming isn’t paying attention. And it will get worse before it gets better, so get ready, cruise line investors.

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No. 3: Microsoft Swims Upstream

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Usually, I feel like the old man yelling at the cloud … but cloud gaming? This finally has my mind off missing out on the PS5, if that says anything.

Playing games over the cloud is much like the move from DVDs to streaming. Music and movies moved into the streaming realm because people got tired of paying $25 for a CD for one song.

And while I’m sure there are a few of you DVD/Blu-Ray hoarders are out there, for the vast majority of people, a wall of cheap plastic DVD boxes is just an eyesore from a bygone era.

But video games, for as wide as the global gaming audience is, have yet to catch up with the streaming times.

Digital game downloads have been the norm for a while now, but Microsoft (Nasdaq: MSFT) is the first to jump into cloud gaming with its Xbox Cloud Gaming service, where your TV can connect to a remote server that’s actually running the game.

Gamers (myself included) might be ready for cloud gaming now … but the internet itself sure isn’t ready. You need both a reliable downstream and upstream to play a game seamlessly. It’s the same reason why, even with 1-gigabit-speed internet, I can stream 4K video just fine, but I look like a lagging pixelated disaster on a Zoom call.

Getting fast speeds to and from your gaming device is the one thing standing in cloud gaming’s way. And if (when) someone figures that out, console makers might as well just pack up and go home. Why would you even need an Xbox or PS5 if the game just streams to you à la Netflix?

We have the technology — just not the speed. Yet. Microsoft finally sees the writing on the wall ahead of the trend — ahead of its beloved Xbox consoles becoming utterly obsolete. By preempting the move into cloud gaming, Microsoft is actually … ahead for once?

No. 4: That Is Some Bougie $#!*

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It’s no surprise: If people are comfortable paying (and overpaying) for houses, people are probably comfortable overpaying to fill said houses. I mean, with something other than that wall of DVD and video game cases you’ve got there…

It also shouldn’t surprise you that I’m ridiculously out of touch with the luxury furniture market — the same high-end market that’s propelled Restoration Hardware (NYSE: RH) to almost make a new all-time high with its double-beat-and-raise report.

Restoration Hardware — do y’all just call this RH? — saw revenue skyrocket 78% to reach $861 million and beat estimates for $758 million. Per-share earnings hit $4.89 and also topped expectations for $4.10 per share. Narrow beats, sure, but what analysts are really hyping up here is RH’s guidance.

The company raised its already-high full-year and quarterly revenue estimates, which had the analyst crowd nigh-on euphoric. RH now expects second-quarter revenue to grow between 35% and 37%. What other furniture store do you see predicting that kind of growth? Not Pier One, I’ll tell you that.

RH CEO Gary Friedman expects that “the un-masking of the general public could lead to a Roaring Twenties type of consumer exuberance.” I mean … that’s one way to play up the stimulus-flush spending spree, especially when your furniture is meant for the deep-pocketed, Gatsby-wannabe market.

Ladies & Gentlemen — The Weekend!

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You know what time it is, Great Ones: Time to break into the weekend like a Kit-Kat, get some sun and see what’s going on in that “real world” everyone keeps mentioning.

Unless … you’re like me and are now relishing the chance to sit inside, thank the heavens for aircon and catch up on some games. Whatever floats your goat, just remember to drop us a line in the inbox before you get too deep into the weekend craziness, capisce?

I know, I know. We were supposed to dive into that mailbag yesterday, but that just means next week’s Reader Feedback will be jam-packed with your greatness — like a fluffernutter with an extra dab of fluff. So, whatever’s lingering on your mind this week — market-related or otherwise — give us a shout and share your thoughts.

In the meantime, here’s where you can find our other junk — erm, I mean where check out some more Greatness:

Until next time, stay Great!

Joseph Hargett

Editor, Great Stuff