Things you need to know –
– So, they crushed the regionals yesterday – but was that an overreaction?
– SVB is back on the block – Many of the VC’s that started the hysteria now talking about taking it back
– Bond yields plunge as investors seek safety.
– Gold surges, the dollar index declines, Oil testing 2023 lows at $72.
– Try the Sweet Corn Crème Brulé
So by now you know the name – Silicon Valley Bank – You also know a bunch of other smaller/regional bank names – you witnessed pressure on the group – KRE – S&P Regional Bank ETF – 12% on the day – and you witnessed the destruction of many of the individual names on Monday – FRC -61%, WAL -44%, CMA -27%, KEY – 27%, ZION -25% – but as you might expect – the action yesterday is now being perceived as a ‘bit overdone’ and there appears to be lots of interest in the names today – all quoted 10% – 25% higher in the pre-market as investors are betting that the selloff yesterday was dramatic enough to go shopping…..
In addition the word now is that the FEDs are attempting to sell SVB again (remember – they tried that on Friday and failed) this after the gov’t rescued depositors – taking some of the pressure off. Even some of the VC’s -Pear VC, Founders Fund, Union Square Ventures, Coatue Management and Y Combinator to name just a few – the very ones that helped to create the hysteria appear to be talking amongst each other about buying either parts of or all of the bank……Oh, boy – it is a tangled web we weave….the SEC should take a look at their PA’s first along with many others to see who might have benefitted (cashed in) from the chaos…..Capisce….Like I said on Friday – follow the money…..Other names to consider looking at would be Billy Ackman and Petey Thiell….both who have been outsized voices during this drama…..
Now, by now you also know what SIVB did or FAILED to do, you know all the drama it created and you know what the gov’t response was – right or wrong, bailout or rescue – it is what it is….We can argue all you want over the definition of the response…but in my mind – we had NO choice but to do what we did….Otherwise we risked massive damage to our banking system, our economy, our markets and then to markets across the world as word leaked out that the US banking system is not the US banking system…..and the ripple effects would have been felt around the world. In the end – it was a complete lack of financial controls, governance and accountability to the industry, investors and depositors. In addition it was also the complete failure of the California regulator – charged with oversight….leaving me to suggest that ‘heads need to roll’….
As you can imagine – there was no ‘lack of commentary – both good and bad – concerning what we did….Many now talking about the ‘new’ Moral Hazard the FED has created. But – You see – the birth of this problem began a long time ago – the FED holding rates artificially low for way too long after the GFC…. (Think 13 yrs.) forcing money to search for yield – which requires risk…. then the gov’t closed the economy in 2020 – when the world got hit with covid only to flood it with money in 2020-2021 (as they tried to counter the shutdown) – giving rise to inflation that began in the spring of 2021…all while they told us it was nothing to worry about…as they continued to stimulate into and thru 2022 even as the transitory inflation became more permanent inflation as they began raising rates – a move that was well telegraphed for one year before they started and then nearly every month after they started. The terminal rate of 0% was forecast to go to 5% – it was forecast to go there – EVERYONE knew that…..Bond yields became inverted in February of 2022 and have remained inverted ever since…..This wasn’t a secret at all! Everyone knew that too. Managing fixed income risk at a bank that has ‘flighty customers’ in a rising rate environment is not for the faint of heart….and it is not for the inexperienced either.
Rising rates put extreme pressure on the banking industry, the consumer debt markets, the consumer, the equity markets and the bond markets. Analysts worrying that JJ and the FED would raise rates too far – warned us that something would break, Fed Chair JJ told us not to worry, Treasury Secretary Janet Yellen chose to ‘keep an eye out’ all while SIVB circled the drain – yet no one was apparently paying any attention. So, the idea that something was gonna break became a reality on Wednesday evening when SVB announced a $1.8 billion bond portfolio loss and the need to raise $2.25 billion to recapitalize…causing all of those ‘VC’s’ to panic and force a run on the bank…..Which is funny really, because VC’s are the type that usually don’t panic at all….they are much more methodical and calculated – until they aren’t – all of them screaming ‘FIRE’ in a very crowded theater….…..….…..In the end, the hysteria brought on by this group forced the FED, the Treasury and the FDIC to fix it or risk a complete US ‘run on the banking system’. Now, don’t be fooled – it is the speed at which we can send the messages and move the money that caused this spectacular implosion….
And fix it they did – for now – they backstopped all of the depositors in both SIVB and Signature Bank – another bank that they shut down on Sunday – due to overexposure in the crypto world. But what became very obvious here is a couple of things. It appears that everyone was asleep at the wheel. There was NO Chief Risk Officer at SVB for 7 months….Their bond portfolio was completely mismatched to their needs, there didn’t appear to be an adult in the room…the C-Suite was busy making stock sales only days before going belly up and giving out bonuses the morning of the implosion…..State Regulators were drinking martini’s at lunch – a very long lunch at that – and that only exacerbated the issues. In the end – It was the FDIC, the Treasury and the FED that completely backstopped the depositors – not the company, not shareholders not bondholders. Some will say – we rescued the 1%, I would say we rescued the US banking system. Can you imagine what yesterday would have looked like had we NOT backstopped deposits?
Stocks convulsed all day….surging then selling off – attempting to rally again only to end the day lower…for the most part. – The Dow lost 90 pts, the S&P’s down 6, the Nasdaq gained 50 pts the Russell lost 28 and the Transports gave up 235 pts.
Bond yields plunged as prices rose – in what is a real flight to quality (safety)….the 2 yr. yield ended the day at 3.97% that is down from a 5.1% yield just one week ago but is now yielding 4.25% this morning as the mood calms down. The 10 yr. yield fell to 3.57% down from 4% last week but is also up a bit this morning at 3.61% and the shorter duration bond yields fell as well – the 6 month yield fell to 4.5% down from 5.25% last week and this morning it is holding steady.
This morning we are due to get the latest read on inflation – the CPI – and it is expected to be +0.4% m/m and +6% y/y. Ex Food and Energy of +0.4% and 5.4% respectively. Which leaves us to ask – What does the FED do now? Can they continue to put the inflation fight first and raise rates or is the latest drama going to force them to reconsider their stance? The headlines this morning are suggesting that there is an 85% chance that the FED will raise rates next week by 25 bps.
Now – Goldman came out and said that ‘they’ do NOT expect the FED to raise rates at all for the rest of the year…that the weekend drama has now changed the narrative – that the 2nd and 3rd largest bank failures ever in our history is the reason to stop….……But they (GS) are outside of the bell curve….the majority of the big banks remain in the camp that the FED can and should raise rates by 25 bps as discussed…that the banking situation is no longer on ‘the edge’ and that the focus has to be on inflation. That the recent failures are NOT a reason to take our eye off the ball. So expect to hear more about this all day today and into next week. Remember – we are now in the quiet period….Members of the committee are now sequestered. But we might hear from members of the Fed that are non-voting members of the FOMC….Or – we’ll continue to hear from their mouthpiece – Goldman Sachs.
Tomorrow then brings us the PPI report – which is inflation at the producer level and that too is expected to remain hot. The headlines this morning is suggesting that there is an 85% chance that the FED will raise rates next week by 25 bps.
In any event – no matter which way they go – they can point to a number of data points that support whatever that move will be. My sense is that if they do nothing – that will send a message that the Fed realizes that there are potentially more banks on the edge and even a 25 bps hike will be enough to create another crisis. A move up continues the narrative that we have been discussing….and it suggests that the FED is not aware of or concerned about another bank failure.
Oil is under a bit of pressure – nervousness over risks of global financial contagion destroying demand is one explanation. Higher inflation is another explanation. Increased supply or lower demand is always an explanation…. This morning – oil is trading at $72.80 – down $2…..near the lows of the year….and at a place where we usually hear the Saudi’s and OPEC start banging the drum….about cutting production to help support oil prices….At 6:30 we are just below the $73 trendline….- which potentially sets us up to test the December low of $70.90.
Gold – shot up and thru $1900 – on a flight to safety surge trading as high as $1920/oz. This morning trader types are ringing the cash register – taking some of the recent gains off the table…Gold is down $8 at $1907/oz. The dollar index which declined significantly yesterday – down 1% helped to support that move up in gold yesterday and this morning the dollar index is trading a bit higher and that is what is causing the trader types to ring the register in gold. We are now above trendline resistance at $1882….and would look for that level to offer support if gold traded lower. The dollar index found support at 103.45 and now remains in the 103.45/105.15 trading range.
US futures are up…..Dow +100, the S&P’s +15, the Nasdaq up 45 and the Russell +10 ….the move is not surprising after the drama yesterday. Investors will continue to debate the banking issues as they consider today and tomorrow’s inflation data along with a Janet Yellen appearance on Capitol Hill on Thursday. Tread lightly as the market reprices….because it will reprice. And all that means is there will be new opportunities.
European markets are also up this morning, not dramatically, but they are up about 0.3%….across the board….They too, continue to consider the SVB fallout across Europe as they await today’s US CPI report and what that means for interest rates here and what it could mean for the ECB and interest rates across the continent. Tomorrow brings Eurozone Industrial Production figures and Thursday brings the next ECB rate decision.
The S&P closed at 3855 down 6 pts…..and remains below all trendline supports…the angst yesterday took us right down to 3800 – A level I had suggested we would test, Well – we tested it and held…this morning if futures hold – then the move today is up – but it will be better defined at 8:30 when we get the latest CPI read. – expect to hit resistance at 3940…where both the 100 and 200 dma’s are converging…..It appears as if we are in the 3800/3940 trading range right now. If we fail to hold 3800 – that then opens the door to test the October lows of 3600….so – stay awake.
Prepare yourself for more volatility – remember that the chaos creates opportunity…..I think the sell off yesterday in the regional banks was WAY overdone….Stick with quality (as if I need to tell you that)….Watch as many of these bounce right back – remember – the FED does NOT want to see regional banks disappear….regional banks provide a lifeline to local economies and provide opportunities for long term investors. Make sure you do your homework, understand the customer base, understand capital tier levels…Know what own and why you own it..…… In the end –allocate capital accordingly…..
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Sweet Corn Crème Brulé
For this you need: 1 and a half cups of corn, 4 and a half teaspoons butter, 3 cups heavy whipping cream, 1 cup 2% milk, 8 large egg yolks, 1 1/3 cups of sugar, 2 tablespoons vanilla extract.
In a large saucepan, sauté corn in butter until tender. Reduce heat. Add cream and milk, heat until bubbles form around sides of pan. Cool slightly. Transfer to a blender; cover and process until smooth. Strain and discard corn pulp. Return to pan.
In a small bowl, whisk egg yolks and 1 quarter cups sugar. Stir a small amount of hot cream into egg mixture. Return all to the pan, stirring constantly. Stir in vanilla.
Transfer to six 6-oz. ramekins. Place in a baking pan; add 1 in. of boiling water to pan. Bake, uncovered, at 325 degrees for 40-45 minutes or until centers are just set (mixture will jiggle). Remove ramekins from water bath; cool for 10 minutes. Cover and refrigerate for at least 4 hours. Then remove.
Broil the custards, place ramekins on a baking sheet; let stand at room temperature for 15 minutes. Sprinkle with sugar. Broil 8 in. from the heat for 4-7 minutes or until sugar is caramelized. Serve immediately if you are using as a dinner side – or refrigerate and serve as a desert!
Buon Appetito.
