Take an Economics Lesson Before Buying UWM Holdings

Figuring out which trade will benefit from a social media boost isn’t merely about looking for an embattled and heavily shorted company. Case in point is UWM Holdings (NYSE:UWMC). More commonly known as United Wholesale Mortgage, it went public via a reverse merger with special purpose acquisition company (SPAC) Gores Holdings IV. SPACs are one of the hottest trends on Wall Street, which partially explains the enthusiasm toward UWMC stock.

An illustration of a miniature house with a "for sale" sign popping out of a smartphone.

Source: Shutterstock

Indeed, our own Robert Lakin pointed out that the UWM-Gores Holdings IV merger was the biggest SPAC transaction to date. Further, UWM stock represents strong competition against Rocket Companies (NYSE:RKT), which is another mortgage originator. As you know, real estate was one of the biggest surprises of the novel coronavirus-impacted year of 2020, with housing prices skyrocketing in major metropolitan areas.

It made you wonder, where the heck was this money when we were in the pre-pandemic paradigm? Leading up to the crisis, the mainstream media proliferated headline after headline about how millennials can’t afford homes and are missing out on important milestones relative to prior generations.

Of course, UWMC stock didn’t just benefit from millennial sandbagging. With interest rates cratering, this was a once-in-a-lifetime opportunity for those who had money to do something with it. As the Washington Post detailed last year, affluent buyers didn’t need convincing, securing homes with cheap financing terms while simultaneously worsening the national housing crisis.

However, the ultra-low interest rate environment did see an upside correction, with benchmark yields rising recently. That did not augur well for UWMC stock as it implies more expensive financing terms for mortgage seekers.

In addition, higher yields also reflect inflation concerns. Initially, that might appear beneficial for stocks. However, increased inflation erodes purchasing power for everyday goods. It could also mean higher real estate prices – an obvious negative for mortgage originators.

The Other Side of the Coin for UWMC Stock

With genuine concerns over rising yields and a possible inflation spike, you can appreciate why UWMC stock has been all over the map these days. For instance, on March 3, shares hit an intra-day high of $12.45 and ultimately closed at $9.62. A few days later on March 12, UWMC finished the session at $8.36.

But with President Joseph Biden’s administration securing a major victory when Congress adopted its $1.9 trillion stimulus package, should investors take the cue and buy the discount on UWMC stock? After all, you should never bet against America in the long run, no matter who’s running the show.

Speaking as agnostically as possible, you can make the argument that mortgage-related firms have significant upside potential. Primarily, this is because yields might not rise to levels feared by many investors.

This is an above-the-pay-grade argument so you’ll have to bear with me. But the main thesis is that internationally, the U.S. bond market offers a contextually attractive investment. For example, Japanese investors eschew their domestic bond market due to low-to-negative yields. But as a buyer of U.S. Treasuries, they can accrue reliable returns.

Since bonds and yields are inversely correlated, the purchase of Treasuries reflects higher demand (i.e. price), which conversely lowers yields. Beyond that, Japan and other Asian countries are exporting nations so it’s in their best interest to keep the U.S. dollar relatively weak via lower yields.

Better yet – “better” in context, mind you – the U.S. benefits from this relationship because it can keep “printing” money, so to speak. Someone’s always buying the debt, as in China and Japan, the second- and third-largest economies in the world.

I’m not an economist so I’m not sure how long this charade will last. But if you believe in UWMC stock, you’re not without justification.

My Opinion on United Wholesale Mortgage, FWIW

Having said the above, here’s my take on United Wholesale, for what it’s worth. Ultimately, despite a reasonable bullish argument, I think investors should stay cautious on UWMC stock.

Mainly, I’m skeptical about the economy. As you know, one of the reasons why the market perked back up was due to lower-than-expected weekly jobless claims. Personally, I don’t see that as enough of a reason to be risk-on for stocks. We’re still printing claims that are higher than the single-largest weekly claims total during the Great Recession.

Also, money velocity – or the rate each unit of currency is circulated in the economy – is way down. That’s deflationary, which on one hand lowers real estate prices. However, this also implies a coming dearth in commercial activities, which could result in massive job losses, particularly for higher-paying jobs.

I think you have to read between the lines here. My interpretation is that we’ve got a long way to go before resolving this economic crisis.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2021/03/take-econ-lesson-before-buying-uwmc-stock/.

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