“Higher-for-Longer" Narrative Crushes Stocks

[CLICK HERE JOIN OUR LIVE TRADING & TRAINING SESSIONS]( Hello investor, “Higher-for-Longer" Narrative Crushes Stocks Wall Street’s fear gauge, the VIX, jumped above 20 intraday yesterday for the first time since May, as the Nasdaq 100 plummeted by 1.8% after August’s job openings data came in hotter than expected. Notably, traders targeted travel stocks (such as Airbnb and cruise ship operator Carnival) because the industry is known for being cyclical. In other words, Wall Street believes that rates could go higher and stay higher for longer. That could slow down the economy, hitting these cyclical industries more. Consumer discretionary stocks also struggled with Domino’s Pizza falling by 5.2% and Amazon.com declining by 3.8% (Photo: Carnival) The number of available positions jumped to 9.61 million versus less than 9 million in July, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, or JOLTS. Since traders haven’t fully priced in the “higher-for-longer" narrative, they are re-positioning to reflect this new outlook. Reinforcing this outlook is Atlanta Fed President Raphael Bostic saying that the central bank needs to keep rates elevated “for a long time” and doesn’t forecast a rate cut until the end of next year. The next up is the monthly payrolls report due on Friday. - “Unless, the NFP report comes in lower than expected, Wall Street will likely start to fully price in at least one more Fed rate hike before the end of the year,” said Ed Moya, senior market analyst for the Americas at Oanda. Investors are also worried about the housing market. The average 30-year fixed mortgage rate jumped to 7.72%, hitting a new high since late 2000. Higher rates could slow down real estate and tip the economy into a recession. “It is now the first week of October, and data has been stronger,” wrote Matthew Graham, chief operating officer at Mortgage News Daily. “This morning’s JOLTS is the biggest, baddest confirmation so far this week, and it’s pushing yields to fresh long-term highs. Pretty simple stuff, actually, even if unpleasant and unfortunate for fans of low rates.”  New Top Stock Is A Money-Making Machine Today’s Stock Pick: Arbor Realty Trust ([ABR]() Have you heard of Leon Cooperman? He is a billionaire investor, and he is one of the major shareholders of Arbor Realty. Nothing special about it. However, here was the special thing that happened during Arbor Realty Trust’s 3rd quarter earnings call. Leon Cooperman (Photo: CNBC) Typically, an earnings call would start with the CEO giving a scripted commentary about the company. After that, other executives chipped in with their own scripts. Finally, the call will be opened to the questions. These questions nearly always came from Wall Street analysts. But billionaire Leon Cooperman popped in the earnings call, representing his family office Omega Advisors. And he began asking tough questions about Arbor Realty raising cash through bonds. Leon thought Arbor was paying interest rates too closely to its stock’s yield. That was a legitimate question that Wall Street analysts almost never ask. Here was Cooperman’s issue – Arbor raised money through bonds, offering to pay an annual interest rate of 4.5% to 6.25%. And the stock itself yields 10.91% through dividends at that time. In Cooperman’s eyes, the spread between cost of raised cash (bonds) and profit (dividend yield) was too close to each other. He said: - “What are you putting money out at these days? And you said that there's tremendous opportunities. I assume with the tremendous opportunities, your spreads should get wider, right?” said Leon Cooperman. And the CEO’s answers revealed a fascinating insight about the business of Arbor Realty. First, the CEO said it would receive a 10% to 12% yield from making multi-family bridge loans. These multi-family loans make up about 90% of Arbor’s loans. By itself, it looks like a solid economics. - “…the range, when we put out money on multifamily bridge loans, we're generally getting a 10% to 12% yield…” said CEO Ivan Kaufman. But it is only the beginning. Here is why. Bridge loans are a different kind of a loan. It offers a loan to bridge the gap between times when financing is needed but not yet available. The duration of a bridge loan is short-term – a period of 2 weeks to 3 years. And often, it is collateralized to a real estate property. So, let’s say if you want to purchase a new home. And your current home is up for the sale. You couldn’t make the down payment to the new home because your equity is tied up to your unsold home. Therefore, you take out a bridge loan (using the equity of your current home as a collateral) to make the down payment for the new home. When you finally sold your current home, it would pay off the bridge loan. Makes sense? That’s why bridge loans are usually higher interest rates, giving Arbor a yield of “10% to 12%.” That’s what Arbor does for multi-family investors. These investors would identify an undervalued asset that has been under managed and/or is located in a recovering market. But they don’t want to take out a conventional, 30-year loan to purchase the property, with the loan rate based on the current state of a building. - For example, a building might be shabby. It would require some improvements. And most importantly, it wouldn’t meet Freddie Mac’s requirements. In general, Freddie Mac offers irresistibly low rates, and investors would want a loan under it. Therefore, investors would take out a bridge loan with Arbor to purchase the property. Upgrade the property. Then it would apply for a conventional loan under Freddie Mac and receive better rates. Got it? But Arbor makes far more money than just from bridge loan interest rates. Like I said, it would only be the beginning. Arbor earns more money through origination fees, deferred interest, yield look-backs, and equity interests (owning a percent of the future cash flow in a property). And guess what? Arbor is also a Freddie Mac-approved lender. What does it mean? An investor who received a bridge loan with Arbor is likely to get a conventional loan (called agency loan) with Arbor, as well. Arbor makes money from the gain on sale of the agency loan and the servicing fee. First, it earns a fee from originating a loan. Consider this like a broker’s fee. A real estate agent would charge you 3% of the house’s sale value. Same with Arbor. It would earn 1.44% on loan sales volume, as written on their annual report: - “Our gains and fees as a percentage of our loan sales volume (“sales margin,”) was 144 basis points...” That’s the first step – earning a broker fee on the loan originated. Then the second step is servicing fees. What does it mean? Arbor would charge servicing fees from a small percent of every mortgage payment. That’s Arbor’s compensation for handling mortgage payments from the investor to the lenders, like the government’s Freddie Mac. Precisely, Arbor would earn revenue on servicing fees for the entire lifespan of the loan. Often, these loans have 30-year terms. That would be a 30-year worth of recurring revenue for Arbor. Arbor would earn about 0.52% on the outstanding loan amount for its servicing fee, as shown below: (Source: Arbor Realty’s Annual Report) Don’t you think it sounds like a money-making machine? Arbor would make tons of money from one investor through (1) bridge loan, (2) convert to an agency loan and earn origination fees, and finally (3) earn servicing fees throughout the lifespan of a loan. Indeed, Cooperman agreed: - “It was like a potential machine you've created here,” said Cooperman. A monster dividend stock: Obviously, Wall Street is bearish on real estate stocks because of rising interest rates. As a result, Arbor is now trading at a dividend yield of approximately 12%! And the CEO emphasized that Arbor is built to thrive in any cycle: - “We've also strategically built a platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to thrive in this economic downturn,” said CEO Ivan Kaufman. Moreover, Arbor said its dividends are well-protected because it has the lowest dividend payout ratio with no significant short-term debt maturities. Bottom line: Arbor Realty built a money-making machine that is annuity-based. Its dividend yield is now at 12%, which is absurdly high for a high-quality company like Arbor. And the dividends will only increase in the future since Arbor raised its dividend payout for ten years straight. So, your current yield of ~12% will only increase over the years. This is a no-brainer opportunity to own Arbor Realty at its discounted price.   [CLICK HERE JOIN OUR LIVE TRADING & TRAINING SESSIONS](     © All Rights Reserved, Trade Alliance  If you no longer want to receive these messages, you may [click here]( to unsubscribe.