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It's a big noisy universe of stocks out there. Welcome to good buy or goodbye. Our goal to help cut through that noise to navigate the best moves for your portfolio. Today we're taking a look at rate sensitive names and I'm here with Tolu Capital Management founder and chief investment officer Spencer Hakeemian. Um, and let's start with the stock that you're bullish on and that is JP Morgan. The stock, it's had a little bit of a pullback here lately, but it was recently trading at a record and the stock is up quite a bit. I think more than 30% over the past year. So let's get to why you still like it, you think it still has more upside. So, there's been a lot of talk about the new administration coming in and sort of lightening up regulations on the banking industry. How is that going to benefit JP Morgan?

So, uh, you know, as it relates to big banks, especially commercial banks, uh, Basel 3 and other uh regulatory um updates that are coming along are going to as it's strongly considered by the sector to help uh improve profitability. Uh it's going to require less capital upfront and generally speaking, that will help to increase returns on equity, net interest margins and it'll generally just make it a more favorable environment for lending for all big banks.

And their profit margins are have already, you know, largely recovered post-financial crisis, right?

Uh, currently, right now, return on equities for a big bank like JP Morgan is basically as high as it's been, definitely since after GFC, but even before GFC, right, like 2005, 2006 prices. So, I mean, a levels. So it's, uh, it it it's great and it looks like it may even get a little bit better for banks.

And then also on the sort of macro big picture policy front, we could be seeing tax cuts coming or at least an extension of the existing tax cuts. Why is that going to be good for JP Morgan?

Well, at the end of the day, a tax cut will one way or another lead to extra deposits that will flow to all banks. Naturally, JP Morgan, being the biggest bank in the United States will get a big amount of those deposits and these types of deposits tend to be uh some of the cheapest deposits that banks get in terms of their funding costs. Uh, and that's great because they can lend it out, they can go buy US Treasuries with it, they can do a host of activities with it. And you know, generally speaking, deposits up for a bank, profitability up for a bank. So that's just something that we're keeping an eye on as we get towards Easter and those tax cut conversations begin.

Yeah, speaking of taking it in and lending it out, let's talk about net interest margins, right? Because, uh, we've got, uh, this sort of higher for longer environment. What is that imply for a bank like JP Morgan?

So, it's actually ironically been one of the best things that could have happened to banks, especially the big banks, uh, since late 2022, because big banks have a much lower funding cost than the small regional banks do because of a presumed assumption of safety with dealing with a bigger bank. And, you know, because that yield curve is expensive, they're lending out that money at, let's say, 200 basis points above the 10 year, they're getting a very nice interest on their money and at the same time, um, you know, rates on, let's say, a checking account have hardly moved at all and the flow to, let's say, you know, accounts that actually pay yield, although it's been big, it actually hasn't been been so big as a proportion of bank's total, uh, you know, deposits which are their liabilities. So this is just so we think it's a great environment. We think we're seeing it in higher ROEs, higher net interest income margins. We think we're seeing it all around.

We have been seeing it certainly for J.P. Morgan. So what can go wrong? Let's talk about that. If, I mean, there have been some slowing growth concerns creeping into the market here. What would that mean for JP Morgan? And I guess, how likely do you think that is also?

I mean, so at the end of the day, a bank is, you know, it's it's a leveraged investment on the growth of the economy. Uh, they're lending to the economy. So if if defaults were to increase, if, you know, credit card charge-offs were going to increase, if people were to default on mortgages, people started losing jobs, this is all going to negatively impact J.P. Morgan. J.P. Morgan happens to be one of the more conservative banks in terms of their balance sheet. Uh, but nonetheless, you know, anytime you get a increase in defaults and banks are leveraged business, it's going to hit them disproportionately. We saw it 2008, we saw it Q1 2020, we saw it in 2023, although that technically wasn't, uh, you know, an economic issue. So that's always the big risk when you're dealing with the bank, uh, if the economy were to go soft. But with J.P. Morgan, they are one of the most financially conservative large banks. They hold a lot of cash relative to their to their required capital and uh they have such a big exposure to short duration treasuries that they could adjust their book pretty easily if we were to get into a recession. So if we were to get into a recession, they would be one of the better performing banks in that scenario.

And and before we move on to the stock, you don't like as much, do you guys hold JP Morgan?

No, we we we uh we have exposures to the financial sector, but no individual security.

Okay, got you. All right. Let's get to the stock that you don't think is as good a buy here and that's DR Horton, the home builder. Those uh shares haven't done very well over the past year. Um so let's get to what's going on in in terms of supply and demand, which is a big deal for the home builders. You say there's over supply in the sun belt at this point.

Without a question. Yeah. Uh a lot of the over supply started in the aftermath of COVID and as people were leaving uh the northeastern states towards Florida, towards Texas, towards Georgia. Uh, builders responded with excess inventory. And as always, uh inventory tends to people get a little bit too excited and build too much relative to what actually ends up happening. That population growth uh decelerated and now we're in a situation where Florida is over supplied, Texas is over supplied. We're seeing parts of the Carolinas start to get somewhat over supplied. And at the end of the day, this is a builder that has to move inventory. So if it can't move it, it's going to have to lower its price and that's a lower margin profit margin than what the Wall Street may be expecting.

Right. Margins have been a big focus, I know for investors, whereas policy might be positive for the likes of JP Morgan, maybe not so positive for DR Horton on a number of different fronts, whether we're talking about tariffs or immigration. Walk me through that.

Sure. So let's just start with tariffs. Uh, you know, higher steel prices, higher aluminum prices, higher, you know, any type of raw material prices, that's all going to feed into higher home prices. At the same time, when you have that over supply, it's very hard to justify making your customer base absorb that cost. So if you were to model it out, you would expect that more of that cost would have to be absorbed by the home builders rather than by, uh, you know, the consumers. And that would again lead to lower profits. And then again, housing is just a function of population growth to a to a pretty big extent. Less immigration, you know, whether it's good or bad for, you know, politically, that's just going to mean less people than what was, you know, priced in, let's say, in 2023 or 2024. And if that happens, there's just simply going to be a little bit less demand for housing. And that means again, builders are going to we might see supply build up, build up, build up and it could be a hard situation for builders in 25 and 26.

And then there's rates, which cut both ways, right? We had talked about the JP Morgan upside. Obviously here, high mortgage rates are have been a real uh issue for anyone buying home, whether it's a new home or an existing one.

Definitely. Um and and specifically in the case of DR, you know, they're selling new homes. So the new home market uh does not have the people that are insulated from rates that are stuck in those 2021 2% rates. These are all people that are going to have to assume a new mortgage. So the demand for a new home is a lot lower than demand for an existing home. At the same time, DR Horton to try and move inventory does something called a rate buydown where they uh you know, they they subsidize a portion of your mortgage for a couple of years. And again, that's just expensive. These are all things that are raising the costs uh for home builders and at the same time, we just we don't see the demand out there for new homes right now.

And then finally, I guess, what could switch the thesis here on DR Horton? If we see a longer term decline in rates?

Yeah. If we can somehow manage to get, you know, the long end of the yield curve, so 10s to 30s to fall sustainably and and for a long amount of time, not just for a month or two months or three months, but for half a year, year, year and a half, while not having the economy fall into some kind of recession because you know, the long end usually falls when we're in a recession or a growth scare. If we can somehow manage to get that, we can eventually move these homes. I mean, consumers still have jobs, they still have cash. Asset prices are just off all-time high. So consumers can buy homes if rates get a little bit more affordable and, you know, the market, the economy is still there. So things can always change.

Things can always change. Spencer, thank you so much for coming in. Really appreciate it. And thank you so much for watching goodbye or goodbye. We'll be bringing you new episodes at 3:30 p.m. Eastern.