📈 A Mortgage Stock for Rising Rates

POWERED BY HOME SAFETY TRENDS

REVIEW

US stocks finished higher Friday as a wild trading week came to a close. All three major indexes staged a midday rally after being down earlier in the session. The Dow Jones Industrial Average closed out the final day of the week by climbing over 560 points. This was after the 30-stock index was down earlier in the day by over 350 points. Some investment strategists say volatility will continue to be a challenge for the market, given the prospect of tightening financial conditions. December’s core PCE, a key inflation indicator, rose by 5.8%, the fastest increase since 1982. The Federal Open Market Committee held its two-day meeting last week. During comments afterward, Fed Chair Jerome Powell indicated the economy has plenty of room for several interest rate hikes in 2022. Investor unease surrounding the central bank’s plans to combat rampant inflation is just one factor roiling markets. Wall Street’s fear gauge also rose to its highest point since October 2020 last week. In company-specific news, shares of Apple gained after an upbeat earnings report. The tech-heavy Nasdaq Composite was initially buoyed by the news. In the week ahead, investors will be focusing on a handful of important data releases that will hopefully help paint a more robust picture of the US economy. Tuesday, manufacturing data for January is due along with an early reading on the labor market in the form of December job quits. More jobs data is on the way Wednesday with the ADP employment report and then January nonfarm payrolls as well as the unemployment report are due on Friday. Circling back to the earlier points on inflation, that and jobs are two key factors the Federal Reserve must consider. The central bank wants people employed and price increases to be palatable. Satisfying both is always tricky. On the whole, the Dow Jones ended the week higher by 1.3%. The S&P 500 rose 0.8% and the Nasdaq Composite finished flat.

PREVIEW

The January Chicago PMI is due Monday. This barometer helps determine the health of the economy in the Chicago region, especially as it relates to manufacturing. Any reading greater than 50 indicates the manufacturing sector is expanding. A reading below 50 means the sector is contracting. In December, the Chicago PMI came in at 63.1.

Tuesday, watch for the Bureau of Labor and Statistics’ number of job quits in December. November’s number showed 4.5 million Americans left their job, which was a record. Also, the final January Markit Manufacturing PMI is set for release along with December construction spending.

On Wednesday, January’s ADP employment report will be released, showing the number of private jobs added for the month. In December, 807,000 jobs were added, doubling analyst expectations. The US Census Bureau will also release the Q4 homeownership rate, which was at 65.4% for Q3 2021 — down 2% compared with the previous year.

Thursday, initial jobless claims will be published. After reaching a three-month high two weeks ago, last week’s numbers were down — falling to a better-than-expected 260,000. December factory orders are also due from the US Commerce Department.

A series of key labor market indicators are on the way Friday, with January’s non-farm payrolls, monthly unemployment rate, and average hourly earnings for January all set for release. The labor force participation rate for January is also on the Friday docket. As of the most recent figure, this number remains below pre-pandemic levels.

A relatively packed earnings week is ahead. The Dutch multinational semiconductor manufacturer NXP Semiconductors (NXPI) is scheduled to report its latest results tomorrow. After a tumultuous start to 2022, the tech sector looks to industry giant Alphabet (GOOGL) as it submits its most recent report card on Tuesday. On Wednesday, Facebook parent company Meta Platforms (FB) will post its most recent quarterly earnings, with investors looking at how the company plans to secure market share in the metaverse. Amazon (AMZN) will report earnings on Thursday, marking Amazon’s second earnings report since Andy Jassy took over as CEO of the ecommerce giant. On Friday, healthcare sector titan Bristol-Myers Squibb (BMY) will release its most recent quarterly earnings.

POWERED BY HOME SAFETY TRENDS

Monitor, Protect, and Answer Your Door From Anywhere

Peace of mind, safety, and security: these are the reasons millions of Americans have decided to purchase a doorbell camera for their homes.

The Home Safety Trends Door Ringer is an effective way to help keep your family and neighborhood safe. Over 210 million packages were stolen by "porch pirates" last year—you'll want video evidence so you can fight back if this should happen to you. In fact, research shows doorbell cameras cut down neighborhood crime by as much as 55%.

The Home Safety Trends Door Ringer also eliminates hassle with the growing number of deliveries we all receive: know for sure if the delivery driver stopped by after he or she said you weren't home!

Plus, it's an effective way to screen visitors to your home. Just connect your smartphone to the doorbell camera and receive alerts when someone rings the bell or motion is detected.

Easy to install and use, this device can even help some homeowners save money on their insurance. Secure the safety of your home and neighborhood right here.

Mr. Cooper's Mortgage Servicing Business

Rising Interest Rates Have Nothing on This Mortgage Stock

Mortgage rates are on the rise which could put a damper on the housing market. As of last check, the average rate on a 30-year fixed home loan was hovering around 3.5%. That’s compared to December when it was at a low of 3%. If home loan rates continue to rise, it could cause mortgage volumes to decline, putting pressure on the industry and stock prices.

One company, however, could still emerge a winner, even in a depressed real estate market: Mr. Cooper Group (COOP). The mortgage company, which got a name change from Nationstar Mortgage back in 2017, does brisk business servicing mortgages. That may be enough to offset any losses from a declining real estate market.

Loan Servicing Growing

Cooper makes half its money servicing home loans. It is the biggest nonbank mortgage servicer in the US, handling mortgage payments for about 3.5 million customers with balances totaling $668 billion. Cooper wants to service $1 trillion in mortgages in the next three years. That will come from mortgage refinances, new home loans it issues, and from purchasing mortgages from other lenders.

Once Cooper issues mortgages, it packages them together and sells them to Fannie Mae and Freddie Mac as mortgage-backed securities. Cooper gets to keep the servicing rights. When interest rates move higher, it decreases the number of people who refinance into lower-cost mortgages. That extends the life of the servicing contract, making Cooper’s cash flow last longer.

Big Asset Sale Coming?

In addition to owning a loan-servicing business that tends to become more valuable as interest rates rise, Cooper runs an online platform that auctions off foreclosed properties. Inventory on the Xome platform has been increasing since the halt in foreclosures ended this past summer. Cooper intends to eventually sell Xome, which some analysts estimate could bring in $750 million to $1 billion.

There is risk to the Cooper story. It does get half its revenue from issuing home loans which makes it exposed in a slowing real estate market. Still, the growing loan-servicing business and the potential to make money off the sale of its foreclosure platform shouldn’t be overlooked. Both could be catalysts for the stock or at least give real estate investors a place to hide out if the market sinks.

Why Auto Insurers Need to Rethink Their Pricing Models

COVID-19 Throws Vehicle Repairs Out of Whack

Auto insurers are in a precarious position. Supply shortages and parts delays are driving the cost of vehicle repairs higher. It’s worse if the vehicle is a total loss. With people holding onto their used cars longer, many vehicles are hitting the threshold where repairing would cost more than paying the book value. All of which means the cost of business is getting more expensive for auto insurers.

It also means the data auto insures traditionally relied on to estimate the costs of repairs or replacements needs an overhaul. The same goes for the capital structures of the insurers. Some may have to assess if they have enough cash in the coffers to cover the cost of repairs in the future.

Auto Insurers Need to Embrace Change

This market shift may spell doom or opportunity for insurers. The ones that are able to embrace change means adapting new valuation metrics should be beneficial as a result of more precise estimates. The ones who don’t evolve may be scrambling to shore up cash to cover the rising costs of repairs.

Historically repair data stays the same for years, making it easy to assess the cost of repairs. COVID-19 and the ensuing demand/supply imbalance changed that. Now data needs to be more granular, detailed, and personalized. It requires new sources of information. That will in turn create more accurate pricing and insurance rates.

Overhaul Coming

With used car values expected to be 50% higher post-pandemic, insurers won’t be served by simply increasing current and future claim reserves by 50%. Rather they need to create new risk-rating and pricing models.

These systems need to be able to churn out insurance rates that are personalized, taking into account the vehicle’s condition, attributes, and value. At the same time, these models are constantly assessing risk via data including mileage, travel routes, and driver behavior.

Overhauling an industry, particularly one that has long relied on legacy data, can be difficult but not insurmountable. Thanks to artificial intelligence and cloud computing, this new model is in the reach of auto insurers. The ones that grab it stand to benefit.

POWERED BY HOME SAFETY TRENDS

Monitor, Protect, and Answer Your Door From Anywhere

Peace of mind, safety, and security: these are the reasons millions of Americans have decided to purchase a doorbell camera for their homes.

The Home Safety Trends Door Ringer is an effective way to help keep your family and neighborhood safe. Over 210 million packages were stolen by "porch pirates" last year—you'll want video evidence so you can fight back if this should happen to you. In fact, research shows doorbell cameras cut down neighborhood crime by as much as 55%.

The Home Safety Trends Door Ringer also eliminates hassle with the growing number of deliveries we all receive: know for sure if the delivery driver stopped by after he or she said you weren't home!

Plus, it's an effective way to screen visitors to your home. Just connect your smartphone to the doorbell camera and receive alerts when someone rings the bell or motion is detected.

Easy to install and use, this device can even help some homeowners save money on their insurance. Secure the safety of your home and neighborhood right here.

EV Battery Material Supply Shortages Will Be An Issue in 2022

Processed Lithium Used in EVs Skyrockets

Last year was a record one for electric vehicles and more of the same is expected in 2022. Shortages of batteries are still forecasted to be an issue in the new year but now vehicle manufacturers also have to worry about the materials that go into these batteries.

Processed lithium is one of them. With a lack of supply for this key material, the prices for batteries are rising at a rapid pace. Add the fact that much of the EV supply chain is located in China, which is embroiled in a shadow fight with the US, and the EV industry faces challenges in 2022.

Lesser-Known Materials Also Lacking

Of the materials used to make electric vehicle batteries, lithium is in extremely short supply. That has resulted in the prices of lithium carbonate quintupling in China year-over-year. Nickel, cobalt, and other materials are also facing shortages, which is adding to the price surge in batteries.

Demand for EVs is also creating supply shortages for some of the lesser-known components found in these batteries including binder material polyvinylidene fluoride or PVDF which is used as connectors in the batteries. Morgan Stanley estimates there won’t be enough supply to meet EV demand until 2025. There are substitutes but they cost more, which could impact vehicle makers’ bottom lines.

China to Dominate for Now

The lack of these smaller components is worrisome, given China controls half the market for PVDF batteries and three-quarters of the market for wet-separators, another component in short supply. Mining for lithium and cobalt is largely done outside of China but the nation does lead the way in the other steps required to create the batteries. Other countries are investing in local EV supply chains but China is in the lead. That means it will likely be a dominant player in the EV supply chain for years to come.

Demand for EVs is booming but a lack of key materials is sending costs skyrocketing. How long before it's passed on to manufacturers and thus consumers remains to be seen.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.