Things you need to know –
– The FEDs allow SIVB to FAIL while rescuing depositors – This was not a bailout.
– Signature Bank (NY) is also shuttered on crypto exposure concern – Depositors made whole.
– VC’s turn up the heat on FRC – follow the money – how are they positioned?
– CPI and PPI due out this week.
– Try the Seafood Paella
**Here is my appearance with Stuart Varney on Varney & Co – Friday morning when Silicon Valley Bank was halted prior to the opening….
https://video.foxbusiness.com/v/6322287402112#sp=show-clips
Who is Silicon Valley Bank? And why did it collapse on Friday (actually it started long ago) ……Although there were some savvy investors/hedge funds that saw the writing on the wall….even after SIVB bank President Greg Baker told Bloomberg back in May 2021 –
“I always tell people I’m confident I’ve got the best bank CEO job in the world, and maybe one of the best CEO jobs out there.”
Confident? Really? Did you have any clue what was going on not only at your bank, but in the financial world? Did you know that the FED was intent of raising rates to combat inflation that was spinning out of control all while congress and the administration was spending money like drunken sailors? Were you aware that the Fed was on course to raise rates at every meeting beginning in January 2022 – taking the terminal rate from 0% to somewhere north of 5%? Were you unaware of the risks of a ‘long duration bond portfolio’ that was anchored to low rates had on YOUR customer base? Were you aware that the FED was pushing rates higher and the treasury was issuing new bonds that paid higher rates causing your lower rate bonds to decline in value? Were you aware that you serviced the tech/startup/VC world? Where was your ‘risk management team? Did you have a risk management team? Did you have anyone on your team that lived in 1975 – 1982 that had ANY history and experience with a rising rate environment? And these are only some of the questions that so many people are asking….
In January 2023 – after they announced earnings one hedge fund manager – Raging Capital Ventures – implored investors (and regulators) via Twitter to dig deeper into their earnings statement…..to find ‘a much bigger set of problems’…identifying the HTM (Hold To Maturity) accounting ‘trap’ that allows banks to AVOID mark to market losses on bonds that it doesn’t plan to sell…..identifying more than $15 Billion dollars of ‘losses’ IF the bank were forced to mark to market or worse yet – have to sell that portfolio…..telling the Twittersphere that the bank was ‘functionally underwater’…but alas – no one in a position of control chose to address this concern…Not one regulator in California, no one at the FED and no one at the Treasury paid any attention….which reminds me of Harry Markopolos….Do you remember him?
He was the financial analyst that turned investigator and exposed Bernie Madoff for the fraud he was………telling regulators and anyone else who would listen that Madoff was a ‘problem’ and that regulators need to go in and pull back the sheets to expose him – but recall that they chose to ignore the warnings because Bernie was in bed with all the regulators, he was an ‘advisor’ to the system, he was one of the ‘go to’ guys that regulators could count on for clarity, direction and ‘honest policy’….Yeah – how’d that work out? So, like then – no one listened then and no one listened now….It’s amazing how history continues to repeat itself and we don’t learn…..
In any event. It was all about the drama -that the collapse of SIVB had on the banking industry – more so on smaller regional banks – and the role of regulators and the impact this was (or could have) on future FED moves….I suspect that we will hear all kinds of accusations from the progressive left (think Warren and Sanders) about how this is the FED’s fault – that they should have known better – blah, blah, blah…..which will only prove that even they don’t understand the banking industry rules and regulations. I would put the blame squarely on SIVB’s lack of risk controls, and the California Dept of Financial Protection and Innovation – DFPI – as they are responsible for protecting consumers and overseeing the operations of state licensed banks…along with a host of other financial institutions in California. You might even consider the role of Treasury Secretary Janet Yellen….She (they) were aware of the risk as far back as October….and only chose to ‘watch’ the situation, vs doing something about it before rates went even higher causing increased risk to the system and to the bank – never mind all of the depositors….but that’s another story….
In any event the SIVB news did dominate the headlines and even ended up overshadowing the NFP report….. Which did show an INCREASE in payrolls…(not helpful) while at the same time showing easing pressure on wages – (better) and an uptick in the unemployment rate – going from 3.4% to 3.6%….and that is helping to ease the latest hysteria surrounding the next FED move…. Now – the banking crisis has now added a new dimension to this conversation….. The question now is – Can the FED continue to raise rates in light of this recent disaster?
Last Monday – Fed Fund futures were pricing in a 30% chance of a 50 bp move, by Thursday that percentage chance shot up to almost 80% and then on Friday after the mixed NFP report – traders changed their minds and cut the chances back down to 38%…..this morning – Futures are pricing in a 50% that the FED does nothing next week……No matter what the CPI and PPI show. And in a nod to ‘deep throat’ – Goldman tells us that THEY no longer expect the FED to make a move on rates next week. (Remember – GS is one of the mouthpieces that the FED uses to float ideas to the marketplace.)
How will they explain it away if both continue to reflect higher inflationary pressures. In any event – no matter which way they go – they can point to a number of data points that supported whatever that move will be.
Now – many asking if the FED will take the SVB disaster into account before raising rates again… Last week – I would have said – Don’t be ridiculous….the SVB issue is specific to SVB and while the ripple effects could be significant for some – this is NOT a BS or LEH brothers moment at all…..But after the weekend drama – I do think they have to reconsider that move. Now while this is not by any stretch a global financial crisis – a la 2007 – 2009….I do think – the markets have to digest it and figure it out. And for those who think this is a ‘bailout’ – think again….equity and bondholders got sacrificed. Bank management got thrown out and should face consequences – We allowed the 17th largest bank in the US to FAIL – It was the depositors that got saved from bank and regulatory FAILURE. A bailout is defined as ‘giving financial assistance to a failing BUSINESS OR ECONOMY to save it from collapse’. We did not SAVE the business – Again – we allowed the 17th largest US bank to FAIL…..we rescued depositors and gave credibility to the US banking system. Period.
In any event – The SIVB issue, the NFP plus the coming CPI and PPI data continued to put pressure on investors and the markets…and stocks sold off – hard – again….The Dow down 345 pts or 1%, the S&P’s lower by 57 pts or 1.5%, the Nasdaq down 200 pts or 1.8%, the Russell off 54 pts or 3% and the Transports down 360 pts or 2.45%.
Remember – what I told you on Friday…..There is nothing wrong with a bond portfolio on the face of it, there is only something wrong if it is inappropriate for the bank (which this was) and IF you are forced to SELL it (which they were) …..at a deep discount…..bad for you, but good for the buyer – because those bonds will mature and pay back 100% of the principle – there is zero risk of loss or default. In my mind – it was hysteria created by a handful of VC’s that encouraged a run on the bank…..and a run on the US banking system….coupled with poor long term judgment on behalf of global risk management at the bank. And btw – those same VC’s are at it again….targeting FRC on Sunday and this morning….
Remember – the loss is NOT realized if they can hold the portfolio to maturity…then there is no issue….SIVB found itself in the position of not being able to do that -thus the complete collapse….but don’t worry – Janet told us over the weekend that considering what happened at SIVB – she is now keeping her ‘eye on the ball’ – comical isn’t it?
Once again – every sector was under pressure as reality sets in….Basic Materials, Real Estate, Housing, Retail, Tech, Airlines, Disruptive tech, Metals and Miners, Artificial Intelligence, Cyber Security, Exploration and Production – were all lower by better than 2%, while Consumer Staples and Healthcare were the winners – down less than 1%!
The contra trades continue to outperform….in all this nervousness…..the SH +1.5%, PSQ + 1.4% and the DOG +1%. Once again – the VIXY stole the show…up another 10% as FEAR grips the market…Just to be clear – the VIXY was up 38% last week alone……so when you tell me that there is NO opportunity in a declining nervous market – I’d say – think again.
Now there will be more macro data next week – let’s not kid ourselves while there are only two ‘real’ data points that anyone cares about – this ‘depositor rescue’ will suck the air out of the room….….so, sit tight….don’t make emotional decisions, tread lightly in the Regional banking space – but no need to worry about any of the big Money Center banks….JPM, BAC, C, WFC, etc.….. a pullback in the big names is an opportunity for those that have a strong stomach.
Oil under a bit of pressure – as some tried to explain it away as nervousness over risks of global financial contagion destroying demand. Whatever…. WTI is down $1.40 this morning….at $75.30. Right now WTI remains in the $73/$80 trading range….
Gold – shot higher – rising $38/oz to end the day at $1872 and is higher this morning on the back of the bank failure (think real safety trade)…..Gold up $26 at $1893. The dollar index as expected has sold off and that is also giving support to the precious metal. We are now above trendline resistance at $1882…..do I hear $1950?
US futures which were up big overnight are now mixed this morning…. Dow down 77, the S&P’s flat, the Nasdaq up 55 and the Russell down 12 ….the confusion is not surprising after the weekend drama…..Investors will now debate what happened as they consider the coming CPI and PPI reports….If they are strong – can the FED really pause right now? Or is there an argument for ongoing 25 bp hikes? So tread lightly as the market reprices….because it will reprice. And all that means is there will be new opportunities.
European markets are all lower this morning…. down about 2.5% – 3% across the board….as Europeans consider what happened here and what the fallout could be across the continent.
The S&P is now down 8% from the February high – 5% of that last week alone…the S&P is now cut thru all trendline supports…ending the week at 3861 – 80 pts or 2% below support levels….leaving us about to test the December lows of 3800…..and if the CPI and PPI data come in hot – then watch as even that level will come under pressure….setting us up to test the October lows of 3600…..Which is what I think is the worst case…… But, IF we continue to get the banking a system coming under fire or hearing of outsized exposure somewhere else or we hear of other banks – with the same type of bond portfolio’s being targeted by the war mongers? What does that mean? It means more volatility ahead. But I am confident that the measures put in place should address those issues….Haters will always hate – no matter what happens…this is not the time to fall asleep.
Prepare yourself for more volatility……recall that all the big banks announced massive increases in loan loss reserves this quarter….as they warned us about the coming storm….. In the end – none of this should surprise anyone…..allocate capital accordingly…..
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Paella de Mariscos
– My wife made this on Saturday evening…. see pic on my twitter @kennypolcari.
Paella – what is it? It is an incredibly delicious rice dish that originated in Valencia Spain. Valencia is the 3rd largest city in Spain and is located in the eastern part of the country. Paella was originally a peasant meal or laborer’s meal as it is easy to make in large quantities to feed a lot of people and it is just as good on the second day. It was cooked over an open fire and eaten directly from the pan by the workers….because seafood is rare in Valencia – the dish was originally made with meats……Paella is also a source of pride in Valencia – everyone lays claim to being the best paella cook and paella cooking contests are common in the region.
PAELLA DE MARISCOS- Seafood Paella – for this dish – you will need: Mussels, clams, cleaned and deveined lg shrimp, lobster tails, scallops, rice, bijol (or Saffron), olive oil, sofritto*, white wine, s&p. ( Also – ask the fish guy to give you a bag of shrimp shells to make stock with.)
*Sofrito – onions, garlic, tomatoes, red, green and yellow bell peppers, cilantro. You can dice all of this up or Puree all of these in the food processor. set aside.
Bring a pot of water to a boil and add the shrimp shells to make a stock – boil for 10 mins and set aside.
In a “paellera” or the pan that you will make the Paella in – sauté sofrito in olive oil.
Now add the shrimp stock and about 1 cup of dry white wine (not fruity). Add about 1/2 tablespoon of salt and some pepper to taste. Add the Saffron or Bijol* for color.
Add the clams and mussels and sauté around until they open – about 10 mins or so. discard any clam or mussel that does not open – (*in the event that you cannot find the saffron or bijol – you can use 1 can of tomato paste)
Once the clams are opened – add the rice – Goya (or vitarroz) medium grain is good. – Now you want the rice covered in water…so add just add enough to cover the rice. Keep the heat on med high until the water is absorbed into the rice…..turn heat to low (simmer) – make a mound in the middle by pulling the rice away from the sides. Now add the shrimp, scallops, and cut up lobster tails. You can just lay them on top – or you can push into the rice – either way is fine. Cover and let simmer.
Paella is done when rice is cooked. Total time about 90 mins. Set the outdoor table, light the candles, put on some easy listening Spanish music – maybe – Juan Luis Guerra Y 440 is always good.
Buen Provecho!
