The Fed Was Expected to Cut Rates Three Times This Year. Ron Butler Says a Hike Is Now More Likely.

Trade idea

The speaker discusses the likelihood of bond yields reaching extreme levels, such as 7%, by the end of the year, stating that the probability is less than 1%. They also note that the likelihood of a rate hike by the FOMC is now higher than a rate cut, a shift from previous trends. This indicates a growing market concern about inflationary pressures and the potential for rate hikes, even in a low-interest-rate environment. The speaker suggests that traders should consider the implications of these rate changes on mortgage rates and fixed-rate products.

RKT

The speaker suggests that Rocket Mortgage (RKT) is a decent trading product due to its relatively low stock price, high volatility, and tight bid-ask spreads in its options. The speaker implies that the stock has been punished recently, which may present an opportunity for a rebound. The speaker also notes that the company has made smart moves in the mortgage brokerage space, which could support its stock performance.

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The speaker sells puts on home building stocks like Lennar, Pulte, and D.R. Horton, which have been punished recently. The speaker believes these stocks are at the mercy of the housing cycle and are currently on the offside of it. The speaker suggests that selling puts can provide decent returns, but the speaker also notes that the option markets for these stocks are not very active and that the speaker rarely trades them outright. The speaker also mentions that the Canadian dollar is currently cheap and that there may be opportunities for trading it, but the speaker does not provide specific details on how to trade it.

Mortgage Decision Focus

When individuals are making mortgage decisions, they should prioritize obtaining approval over focusing solely on interest rates. The speaker emphasizes that getting approval first ensures that the mortgage process is on track, and rates can be discussed later. This approach is crucial because the actual cost of a mortgage is heavily influenced by bond yields, which are the primary determinant of mortgage rates.

Market Commentary on Bond Yields and Interest Rates

The speaker discusses the current yield on the 30-year bond at 4.3% and speculates that US mortgages are around 5.5%. They analyze the probability of bond yields reaching extreme levels, such as 7%, by the end of the year, stating that the probability is less than 1%. The speaker also notes that the likelihood of a rate hike by the FOMC is now higher than a rate cut, a shift from previous trends. This indicates a growing market concern about inflationary pressures and the potential for rate hikes, even in a low-interest-rate environment.

Market Misalignment and Housing Prices

The speaker highlights a severe misalignment in housing prices in Canada, particularly in major population provinces, where house prices are significantly higher compared to similar properties in the U.S. This misalignment makes it unattractive for institutional investors like BlackRock to enter the Canadian housing market. The speaker notes that even though prices have dropped 26% from their peak in 2022, they still do not make economic sense, which discourages investment.

Volatility in Canadian Dollar Options

The volatility in Canadian dollar options is relatively high, which presents opportunities for traders willing to take on risk. This volatility can be leveraged for potential rewards, as noted by the speaker who emphasizes the importance of being rewarded for taking risk. The high volatility is attributed to the current market conditions and the potential for shifts in energy-related policies in Canada.

Avoiding Panic in Trading Decisions

The speaker emphasizes the importance of avoiding panic when making trading decisions, particularly in volatile situations. They caution against impulsive actions driven by fear, such as switching from adjustable-rate to fixed-rate products during market uncertainty. The advice highlights the need for rational, calm decision-making rather than reacting emotionally to market fluctuations.

What do you think people are doing right when they're trying to make a decision about what to do with their mortgages?

People are focusing on interest rates, but the speaker argues that they should prioritize getting approval first. This is because bond yields, not just rates, are the primary factor in mortgage pricing.

TakeawayPrioritize mortgage approval over interest rates when making decisions.

Are you seeing the same thing with the Central Bank of Canada?

The speaker confirms that similar trends are being observed with the Central Bank of Canada, indicating that the likelihood of a rate hike is now higher than a rate cut, even though interest rates are low.

TakeawayThe speaker suggests that the Central Bank of Canada is also experiencing a shift in the likelihood of rate hikes over rate cuts, similar to the Federal Reserve.

Are you seeing the same institutional buying in Canada as in the U.S.?

The speaker states that there is no significant institutional buying in Canada, as house prices are misaligned and do not make economic sense. This is in contrast to the U.S., where companies like BlackRock are buying up tracts of land and neighborhoods.

TakeawayInstitutional investors are not entering the Canadian housing market due to misaligned pricing.

Are the US home building stocks active up in Canada?

The speaker states that the US home building stocks like Lennar, Pulte, and D.R. Horton have no operations in Canada and are strictly US-based. The speaker also notes that these stocks are at the mercy of the housing cycle and are currently on the offside of it.

TakeawayUS home building stocks are not active in Canada and are strictly US-based. These stocks are at the mercy of the housing cycle and are currently on the offside of it.

What advice would you give to a new trader?

The speaker advises new traders to avoid panic and make rational decisions, especially during market uncertainty. They emphasize the importance of not acting on fear and instead waiting for clearer market signals.

TakeawayNew traders should focus on emotional control and avoid impulsive decisions during market volatility.