“I don’t know if everything happens, everywhere, all-at-once,” but I’ve always expected bankers to be smarter. In a rising rate environment, why haven’t bankers been exchanging long-dated, low-interest securities – for more short-dated, higher performing ones? Yep, rising rates present a legitimate problem for our banking sector because when you issue new Treasury bonds with higher yields – immediately nobody wants the old, lower performing ones. How is this NOT on all bank risk officer’s minds? Well, I’m betting a ton of risk officers were doing that exact exchange on Friday, and taking a loss on their long-dated maturities. So, be careful as you shake-your-finger at that ‘crypto-bank’ (Silvergate) or at that ‘tech-startup bank’ (SVB) – because those who save their money in glass banks should never throw stones.
Per Paul Krugman: “Cryptocurrencies allow you to make electronic transactions, and so do banks, debit cards, PayPal, and Venmo. They all require trusting a 3rd-party, and unless you're buying drugs or planning assassinations – that’s never been a big deal.”
“Bail vs Jail”… Per ML: SVB was a mismanaged bank with a ridiculously concentrated customer base, that was overly exposed to interest rate risk. Just imagine, if all of your depositors were startups and had the same handful of VCs on their boards. What if a couple VCs (who are competing to be influencers) started whispering to others: “Hey, did you hear, everyone’s taking their money out of SVB – maybe you should too.” Voilà, it’s no surprise that all of your depositors took their money out at the same time. This ain’t rocket science! Where was the leadership – the Chief Risk Officer?
The Market:
‘You can’t fix stupid’… It may go down in history as the time a prominent bank inflicted such injury on itself that it had to be rescued by another bank or else risk going down in flames in 1-single day. Who will acquire: Silicon Valley Bank is the question of the weekend. Not because it’s falling apart at the seams, but rather because it blew the timing on some of its most important actions / messaging. Factually:
- SVB suffered a mark-to-market bond portfolio valuation decrease coupled with rapid client withdrawals.
- It sold off $21B of its treasury bond portfolio at a $1.8B loss.
- They tried to sell over $2.25B in equity to re-strengthen their balance sheet and cover accelerating withdrawals. This sale failed and so have early attempts to find a buyer.
- Fear surrounding that failure led to a further acceleration in withdrawals to get funds out of an institution perceived to be at risk of blowing up.
- The bank’s deposits have been transferred to a new entity created by the Federal Deposit Insurance Corp., and insured depositors will have access to their funds come Monday morning. Unfortunately, depositors with funds exceeding FDIC insurance caps will get receivership certificates for their uninsured balances.
- The bank had a negative cash balance of nearly $1B and couldn’t cover its outgoing payments at the FED after customers tried to withdraw $42B on Thursday alone.
Time is often the only cure that will calm this type of crowd. One tactic employed during a previous bank run, was to have the bank tellers: (a) give everyone all of their requested funds, (b) give it to them in $1 bills, and (c) count it out individually and meticulously. Those instructions bought the bank enough time and the depositors enough patience – that cooler heads prevailed. It appears that SVB depositors will be unaffected, and only the equity shareholders will have to deal with repercussions of the situation. But once again, our FED/government is forcing companies to make bad decisions by distorting free market conditions. [Factually: Per NG: “A contraction in the money supply (which is going on now) has only occurred 4 times in the last 150 years. Each time a Depression with double-digit unemployment followed.”].
In Summary: Is SVB as important a financial institution as: Bank of America, Lehman Brothers or Bear Stearns? Absolutely not. Watch (in the coming days / weeks) what the arrangements are between SVB and their new ownership – that will guide the contagion risk going forward. Bail vs Jail – I think that SVB will get ‘bailed-out’.
InfoBits:
- “Consumer spending isn't slowing that much… the labor market continues to run hot, and inflation is not coming down as fast as I had thought." – FED-head Christopher Waller.
- Why does the FDA prefer NJOY over JuuL? “NJOY is an authorized vs pending product. There are no litigation challenges. The youth usage is minimal.”
- As the tech industry continues to shed employees… demand for bartenders, servers, and hotel staff has kept unemployment low.
- Meta is cutting thousands more employees this week.
- Google warned that fewer employees will receive promotions this year.
- Salesforce CEO Marc Benioff says that he is… bracing for a brutal recession this year.
- General Motors offered voluntary buyouts… to its U.S. white-collar employees – in order to cut costs.
- J. Powell on Wednesday said… "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
- Perks-B-Gone for efficiency purposes. Instead of growth at all cost, the focus for many companies is now profit at less cost. Disappearing ping-pong tables and more layoffs translate to better returns for investors.
- The fate of TikTok: A bipartisan group of senators rolled out a new bill that would enable the government to ban Chinese technology, including TikTok. Why? Because a Chinese company is harvesting the data from all of the users, and choosing what kind of content these poor souls are shown.
Crypto-Bytes:
- Multicoin Capital’s portfolio suffered a 91.4% drawdown in 2022. They dodged Terra and 3AC but got hit hard when FTX imploded.
- Kraken Bank is definitely coming “very soon”… despite the current U.S. regulatory environment.
- Grayscale went to court to argue… that the SEC’s denial of its spot Bitcoin ETF application was arbitrary, and the judges did NOT disagree.
- Binance.US may acquire Voyager after all… as presiding Judge Michael Wiles said that he couldn’t wait forever for the SEC to explain why it was objecting to the deal.
- Crypto friendly Silvergate bank said… that it would wind down operations and begin voluntary liquidation. Customer deposits will be fully repaid.
- JPM closed Gemini’s bank account… after Gemini had banked with them since 2020.
- Bernstein analysts said DeFi has a convincing shot at replacing banks. That explains why Congress dislikes crypto.
- Based upon Friday and Yellen’s lack of action… Per HL: “Self-Custodied Bitcoin, or Ethereum / digital assets are KING!”
TW3 (That Was - The Week - That Was):
Monday: This is a busy week with: our Fed Chair speaking on Tues/Wednesday, JOLTs data on Wednesday, and Friday’s JOBS Report. The annual testimony from FED Chair Powell and February’s Non-Farm payrolls data will be key for our economic direction this week. Over the weekend, China set a GDP growth target of around 5%, which is lower than market expectations. In those 2 days with Powell, Congress will hammer him on when he's going to stop hiking rates. It will be painful to endure, but he’s not going to back down. He's seen what the markets do when he gets a little dovish and he doesn’t want that to happen again. I like the technicals that are firming up on BLNK, and if it gets over $9.66 I think I'll take on some.
Tuesday: Markets are currently pricing a 32bps tightening at the March FOMC meeting and a terminal Fed Funds rate of 5.45%. With Powell testifying today, I feel there’s a better chance at the market getting soggy than running higher. Congress will pound him with statistics, and he will stick to his guns: “Rates are going higher for longer.” He knows that raising rates is going to hurt jobs, hurt the middle class, and that's his job. He's been instructed to induce pain on the little people and he's doing it.
Wednesday: The market is hoping that by dumping us for +600 points yesterday, that J. Powell will comprehend the error of his ways and come out all dovey today – that won’t happen. If he stands firm, we will be on pace for the DOW’s 5th straight losing week out of 6. In response to Powell, the 2-year yield topped 5% for the first time since 2007 and the yield curve inversion reached its highest level since 1981. The JOLTS report hit and it showed that the labor market is still tight, and Powell will use that for hikes. TSM has been crawling along it’s 50-day for two weeks now. I’ll take a shot over $90.50, but may wait for it to top $91.33 to be safe.
Friday: There's been a rush into bonds. Think about it, why put your money in a local bank (which could get stressed) when you can get 5% short term from Uncle Sam? What’s interesting is that 2 days ago chances for a March 50bps hike were running at 73%, but because of the SVB meltdown – they’ve dropped to under 50%. The market is struggling to figure out what to do with the Jobs Report. They were looking for a gain of 225k jobs, but got +311k – much stronger than anticipated. However, unemployment went from 3.4% to 3.6% due to the labor participation rate rising. Manufacturing lost jobs while hospitality gained, but what else is new. The SVB run is causing people to ask: "Did Powell's rate hikes break the debt market?" The 2-year has plunged faster than any time since Lehman imploded. Now granted SVB is a very different type of bank, but it really has both the street and the debt market rattled.
AMA (Ask Me Anything…)
‘I’ll see you in court’… The SEC has emerged as the most aggressive crypto regulator. But in their flurry of enforcement actions, they’ve still failed to explain what makes certain crypto assets securities. Twice this week, U.S. federal judges revealed themselves to be less than impressed with the SEC’s slip-shod explanations. In the first hearing where the SEC denied Grayscale’s application to convert its Bitcoin Trust into a spot ETF, the judges seemed to agree with Grayscale that it was inconsistent to have approved a futures-based Bitcoin ETF but deny spot ETFs that use the same price indices. And in the case of Binance.US's purchase of Voyager’s Digital assets, the judge overruled the SEC’s objection to the case. So far, 2023’s best regulatory process seems to be coming through the courts.
Next Week: A Walk Down 2008’s Memory Lane…
Friday started with a hot jobs number of 311,000 new jobs, followed by an increase in the unemployment rate, and a revisit to the 3931 – 3800 volatility box. In order to sound the all-clear, we will need to definitively get above 3931 in order to give this market any upside momentum.
One Bad Bank = SIVB? Right now, we are not in a financial crisis, but we are seeing the early signs of one. We are seeing a Regional Bank crisis where the interest rate spread between the long-dated maturities (where Regional Banks have their money) and short-dated notes – as the largest in 40 years.
Regional Banks: On Monday morning watch the following banks for any unusual activity – because this is where you will see the next bank runs: PNC (-17% YTD), CBNK (-25%), CUBI (-30%), MCB (-25%), PACW (-50%), and SBNY(-40%).
Immediate Resolution or Panic-at-the-Disco? I do NOT believe that we will have an immediate resolution (bail-out) of this Regional Bank Crisis this weekend; therefore, we could be subject to: Panic-at-the-Disco next week. We will quickly find out which Regional Banks had good risk management practices in place – and which were asleep at the switch. We always said: “If there’s going to be another leg lower inside of the S&Ps – it was going to come from the financials.”
The Russell was Crushed, Bonds Exploded, and VOL inverted: The IWM fell 10% on the week, and is currently flat on the year. People are buying 30-Year bonds over 2-Year bonds – because they’re that scared. The VIX (volatility index) is at the highs of the year; therefore, buying Unbalanced Butterflies is an inexpensive, liquid, way of protecting your cash.
TRADES:
- Protect yourself with an Un-Balanced Butterfly in AMZN, C, and DIS. See examples below.
SPX Expected Move:
- Last Week: $78 (EM 5-day-week). Last week we moved downward about $200 from $4050 down to $3860 on the SPX. No one wanted to go home ‘long’ this weekend – for fear of a bank run on Monday morning.
- Next Week: $115 (EM 5-day-week). This is one of the largest expected moves that we’ve seen in quite some time. The Tuesday CPI release could easily move us $100, but at this point – it’s all about the Regional Banks. If any high-level player even thinks that our Regional Banks are in trouble – they will be.
Tips:
Are we in trouble? Absolutely. The implosion of this fiat economy is simply a matter of When and not If. When you make the markets heroin addicts, and feed their addiction with 0% rates for a decade, and then jam them with one of the most aggressive rate hiking campaigns in history – many of those market junkies are going to get withdrawal sickness. We saw some of that last week. Until the 2-Year coughed up a ton-of-yield on Friday, people were focusing on simply buying treasuries and getting a risk free 5% on their money. If there was ever a time to lift an eyebrow and think: “Maybe I should have more of my savings in gold and silver, instead of in the bank” – this would be that time. Keep your head on a swivel. We just saw the biggest bank failure since the 2008 crisis. Caution is very warranted.
HODL’s: (Hold On for Dear Life)
- PHYSICAL COMMODITIES = Gold @ $1,872 & Silver @ $20.6/oz.
- 30, 60, & 90-Day Treasuries @ 4.6 to 5.1%
- **Bitcoin (BTC = $20,100 / in at $4,310)
- **Ethereum (ETH = $1,400 / in at $310)
- AMZN – Amazon:
o BOT: Mar 31, Unbal-Fly: 94 / 95 / 95 CALLS for $0.60 CREDIT
- C – CitiBank
o BOT: Apr 14, Unbal-Fly: 51 / 52 / 53 for $0.44 CREDIT
- DIS – Disney
o BOT: Apr 6, Unbal-Fly: 102 / 103 / 104 for $0.25 CREDIT
- DNN – Denison Mines ($1.07 / in at $1.32)
o SOLD the April $1.50 CALLS
- GME – DRS’d and HODL
- Innerscope (INND = $0.0046 / in at $0.0052)
- MESO – Mesoblast Ltd. ($3.35 / in at $3.60)
o SOLD July $5 CALLS for $0.85
- NFGC – Newfound Gold ($3.52 / in at $3.75)
o SOLD the April $5.00 CALLS
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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