Stock Investing and Recession

[Mike Parrish]

24 minutes ago, mspart said:

With the Signature bank failure as well as SVB, and First Republic stock price losing 73%, can we honestly say all is well.  And let's not forget the utter tanking of FTX.   Everyone figured that was an isolated incident.   But now there seems to be a wave brewing. 

This seems eerily similar to what I was hearing in 2008.   Market is up today but I am not so sure it will be for long.  The recession may be here sooner than everyone thought.  

mspart

 

These things share superficial similarities but are not the same things.

FTX was fraud.
SVB was incompetence(investing in treasuries without hedges).
Signature bank was crypto.

During COVID, the financial sector was awash in a huge ocean of money.
Now that that's drying up, the various skeletons are being exposed.

[mspart]

1 minute ago, Mike Parrish said:

These things share superficial similarities but are not the same things.  

FTX was fraud.
SVB was incompetence(investing in treasuries without hedges).
Signature bank was crypto.

During COVID, the financial sector was awash in a huge ocean of money.
Now that that's drying up, the various skeletons are being exposed.  

Mike, in your first sentence you essentially say these were all isolated events, having nothing much to do with each other.   It only took you 4 sentences to say that due to COVID and its effect on the financial sector, now the skeletons are exposed.   I'd say that statement pretty much agrees with what I said.  

SVB going down affects a huge number of other entities.   This will  reverberate throughout the economy.   Hopefully these recent events are isolated and we can all go about our business.   But with First Republic now in trouble, I don't see much of an isolated event.  But in 2008, it was all isolated until it wasn't.   I think your last sentence points to that. 

It would seem not much was learned form 2008 except new ways to skin the cat. 

mspart

[Mike Parrish]

10 minutes ago, mspart said:

Mike, in your first sentence you essentially say these were all isolated events, having nothing much to do with each other.   It only took you 4 sentences to say that due to COVID and its effect on the financial sector, now the skeletons are exposed.   I'd say that statement pretty much agrees with what I said.  

SVB going down affects a huge number of other entities.   This will  reverberate throughout the economy.   Hopefully these recent events are isolated and we can all go about our business.   But with First Republic now in trouble, I don't see much of an isolated event.  But in 2008, it was all isolated until it wasn't.   I think your last sentence points to that. 

It would seem not much was learned form 2008 except new ways to skin the cat. 

mspart

Sorry,
That was unclear on my part.

These insitutions share a common thread of 'too much free money allowed them to do stupid things', but their underlying failure mechanisms are distinct.

SVB's depositors are covered.
That will mitigate most of the potential downside for tech firms in the short to mid term.
Missed payroll, accounts payable, interest payments, etc.

Longer term, raising money, managing IPOs, new business creation will need to find another home than SVB.

I suspect another firm will step into the space pretty quickly, since these are all lucrative investment banking services.

 

I think your point is that there may be other financial institutions who have similarly papered over vulnerabilities that may become exposed. Now that everyone is alert, I think regulatory intervention will be swift and aggressive to prevent any possibility of systemic failure.

Edited March 13, 2023 by Mike Parrish

[mspart]

https://finance.yahoo.com/news/stock-market-news-today-live-updates-march-13-2023-114351107.html

The moves came after stocks got smoked on Friday, rounding out their worst week so far this year. Federal regulators closed tech-focused lender Silicon Valley Bank in the biggest U.S. bank failure since the 2008 financial crisis.

President Joe Biden addressed the nation Monday morning regarding the turmoil in the financial sector. Biden said that “no losses will be borne by the taxpayers” and he assured customers that they would be protected. The president also vowed to ask Congress and regulators to strengthen rules for banks.

His remarks came after regulators took extraordinary action Sunday to stem the fallout in the baking sector. Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chairman Martin J. Gruenberg announced that depositors of the failed Silicon Valley Bank would be able to access all their money starting Monday.

The saga of Silicon Valley Bank has had a rippling effect on a second bank: Signature Bank (SBNY) was closed Sunday, the second bank failure in three days. Among the measures, the Fed said depositors would be made whole. It created a new “Bank Term Funding Program” (BTFP) facility that enables other banks to obtain quick cash in exchange for collateral.

Meanwhile, the sour bank sentiment spread across regional banks Monday, as the KBW Bank index (^BKX) fell nearly 12%, while index members including Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) all traded down.

JPMorgan analysts led by Marko Kolanovic said in a note to clients that the stock plunge for larger banks was "overdone," but they did point to "emerging cracks" dating back to banks' fourth-quarter earnings that painted a daunting picture in the nearer term.

"While we do not believe there is a banking crisis in the making and the SVB situation is somewhat unique, we do expect increased investor scrutiny of banks," the analysts said.

Other regional bank stocks including First Republic Bank (FRC) plummeted more than 60% after JP Morgan lent the bank a hand. The California-based bank secured funding from the Wall Street giant that gives it more than $70 billion in unused liquidity.

PacWest Bancorp (PACW), Zions Bancorporation (ZION), Regions Financial (RF), and Western Alliance Bancorporation (WAL) stocks were halted Monday morning, triggered by volatility. The stocks ended the day down 20%, 26%, 7%, and 47%, respectively.

SVB is having an affect on the financial system.   Stocks generally were down today after being up on Biden's optimism.  There is more to this article but 10 banks got hit hard today as named above.  

mspart

[Wrestleknownothing]

Let me take a crack at this. All banks work pretty much the same way. They take either maturity risk (i.e. borrow short-term and lend long-term), credit risk, or both. This can be done very riskily or not. To mitigate some of that risk some banks also pursue fee based businesses.

But an old school, traditional bank activity is to take deposits (borrow short-term) and pay little or no interest on those deposits. They then make longer-term loans to businesses and individuals (mortgages, for example). Long-term rates tend to be higher than short-term rates, so they make money on the spread. But there is a basic problem all banks need to manage. The deposits can leave at any time, but they do not have the right to call the loans. If all depositors want all of their money back at the same time, every single bank in the world will become insolvent. They can make the most prudent, intelligent loans ever that are all money good and it still will not matter. They have to wait to get their money back, but depositors do not.

One way to manage this risk is to have diversified sources of depositors. Open branches everywhere, offer toasters and pens, advertise locally and nationally, etc. That way all depositors are less likely to act as a single group.

Silvergate and Signature were two large bankers for the crypto industry. Their deposits were tightly tied to the health of crypto as many of their customers were crypto exchanges who needed access to the traditional financial system. When crypto exchanges faced massive withdrawals, they took their deposits en masse. It no longer mattered what their loans looked like.

Ditto for Silicon Valley Bank, except substitute private equity funded start ups for crypto. With start up money drying up they turned from net depositors to net withdrawers. SVB also failed to manage their maturity risk appropriately so that when the mark-to-market value of their loans (i.e. long dated treasuries and agency mortgage bonds) went down their capital ratio shrunk. Private equity investors noticed and told all their clients to pull their deposits. When the heard moves, there is not much that can be done (especially if you have mis-managed this risk).

Ultimately, it was the combination of losing non-diversified deposits and higher interest rates (which decreased the current value of assets, but not necessarily the future value) that got all three. Unless other banks have made similar mistakes, then they have not much to worry about, except that all banks survive on depositor confidence - just ask George Bailey.

[mspart]

WKN - You know nothing!!! 

Very good description.   Why is this all happening now? 

I heard today that SVB went 8 months last year without a Risk Officer, someone watching the stuff you describe.   I hope for all of our sakes that this is isolated but the article I presented shows a larger effect.   Hopefully that calms down. 

Now for another question:   FDIC insures each account for $250k.   So if I had 1 million in SVB in one account, should I be able to demand all of that or just the $250k?   FDIC made a decision on this, and it seems like we are making exceptions here.   It seems it would have been smarter for me to have 4 accounts with $250k in each or possibly 5 with $200k in each.   Then I would be covered right?   Or is it per depositer?   I also heard that when you did something with SVB you had to keep your money and accounts with them.   It does make it easier by not having to go to several different banks to take care of your needs, but that seems like a local bank rule that may need to be looked at. 

No doubt the bank officers and shareholders should lose out.  That's how it works.   I hope they do not get bailed out or that will create a bigger threat to the economy I think.  But I think the gov et al reimbursing 100% is not proper, legal, or good financial business.  

mspart

Edited March 13, 2023 by mspart
Put the Winkie in. Just pulling WKNs leg there.

[Mike Parrish]

Just now, mspart said:

WKN - You know nothing!!!

Very good description.   Why is this all happening now? 

I heard today that SVB went 8 months last year without a Risk Officer, someone watching the stuff you describe.   I hope for all of our sakes that this is isolated but the article I presented shows a larger effect.   Hopefully that calms down. 

Now for another question:   FDIC insures each account for $250k.   So if I had 1 million in SVB in one account, should I be able to demand all of that or just the $250k?   FDIC made a decision on this, and it seems like we are making exceptions here.   It seems it would have been smarter for me to have 4 accounts with $250k in each or possibly 5 with $200k in each.   Then I would be covered right?   Or is it per depositer?   I also heard that when you did something with SVB you had to keep your money and accounts with them.   It does make it easier by not having to go to several different banks to take care of your needs, but that seems like a local bank rule that may need to be looked at. 

No doubt the bank officers and shareholders should lose out.  That's how it works.   I hope they do not get bailed out or that will create a bigger threat to the economy I think.  But I think the gov et al reimbursing 100% is not proper, legal, or good financial business.  

mspart

The problem with having a bunch of accounts is managing all the accounts and the fees on all of those accounts.

It's not unmanageable with $1M, but if you have $100M, it becomes ridiculously difficult.

The FDIC needs to raise the limit per account, but the underlying problem will still exist, regardless of the cap number.

Most of the customers of SVB were just using the bank as standard banking customers.

[mspart]

Not knowing better, I will agree with you on the customers.   I agree with the $100M too, except they have pros taking care of their money so it can be done.  Might not be worth the fees vs the bank fees but I don't know.

SVB was 89% beyond insurance.   This meaning that 89% of the money in SVB was beyond the $250k/account threashold.  I'm not sure I would call those folks standard banking customers.   I certainly wouldn't qualify as a standard bank customer at SVB.

I can't find how many accounts were fully FDIC insured there.   That might be interesting to know.   How many accounts total, and how many fully insured.  That info might support your position, or not, depending on the makeup of the account depositers. 

mspart 

 

[Mike Parrish]

2 hours ago, mspart said:

Not knowing better, I will agree with you on the customers.   I agree with the $100M too, except they have pros taking care of their money so it can be done.  Might not be worth the fees vs the bank fees but I don't know.

SVB was 89% beyond insurance.   This meaning that 89% of the money in SVB was beyond the $250k/account threashold.  I'm not sure I would call those folks standard banking customers.   I certainly wouldn't qualify as a standard bank customer at SVB.

I can't find how many accounts were fully FDIC insured there.   That might be interesting to know.   How many accounts total, and how many fully insured.  That info might support your position, or not, depending on the makeup of the account depositers. 

mspart 

 

Standard banking customers in the small to medium tech company demographic was what I was talking about.

Even $10M spread out in $250K chunks (40 accounts) would be problematic.

The bigger problem with SVB was that they had hedges against rising interest rates for their government securities as recently as December and then let that all lapse.

It's like letting your medical insurance lapse on the eve of your MMA debut...

And letting executives sell stock and take bonuses while this was happening is inexcusable. I hope the management gets prosecuted and given a lifetime ban from the industry.

Edited March 14, 2023 by Mike Parrish

[Wrestleknownothing]

4 hours ago, mspart said:

WKN - You know nothing!!! 

Very good description.   Why is this all happening now? 

I heard today that SVB went 8 months last year without a Risk Officer, someone watching the stuff you describe.   I hope for all of our sakes that this is isolated but the article I presented shows a larger effect.   Hopefully that calms down. 

Now for another question:   FDIC insures each account for $250k.   So if I had 1 million in SVB in one account, should I be able to demand all of that or just the $250k?   FDIC made a decision on this, and it seems like we are making exceptions here.   It seems it would have been smarter for me to have 4 accounts with $250k in each or possibly 5 with $200k in each.   Then I would be covered right?   Or is it per depositer?   I also heard that when you did something with SVB you had to keep your money and accounts with them.   It does make it easier by not having to go to several different banks to take care of your needs, but that seems like a local bank rule that may need to be looked at. 

No doubt the bank officers and shareholders should lose out.  That's how it works.   I hope they do not get bailed out or that will create a bigger threat to the economy I think.  But I think the gov et al reimbursing 100% is not proper, legal, or good financial business.  

mspart

No winkie needed. I got it.

The article actually presented worries that there is a larger effect rather than actual evidence of one. Capital markets have been known to over-react to news on occasion. I am not saying that today's price moves are over-reactions, but they are also not evidence of anything. They are just the current consensus view.

As for FDIC insurance it is per depositor, per bank. So to get a multiplier on your coverage you would need to spread your deposits among many banks. You can see why that would be practically difficult for business accounts. If you are using the money to make payroll you need the money to come from a single account, for example. And one of the confounding issues at these three banks is that their depositors were primarily businesses with large, unstable balances that were not covered by FDIC insurance.

Now the real thing to understand about deposit insurance is that it is all about confidence. It was instituted to give retail depositors confidence in banks at a time when confidence in banks was in short supply. There is a very good reason for this. The maturity mis-match that banks provide (borrow short-term, lend long-term) is very valuable to the economy. It is how deposits get turned into productive uses for things like mortgages and business loans. The government wants to promote that activity so they provide the insurance that makes it possible for you and me not to think about our bank accounts as anything but 100% money good. And when it comes to savings deposits there really is no such thing as 99% sure. You are either sure, or you are not.

In this instance the government decided to extend the insurance coverage beyond the $250k limit because there was good reason to. The loans and bonds that these banks have outstanding do not appear to be the issue (depositor flight is the issue). They have good collateral, it is just locked up in long-term loans. In that scenario it makes sense for the government to effectively lend them money to satisfy withdrawals and take the loans and bonds as collateral against those loans. In this way the government effectively replaces the depositors.

There are some confounding accounting issues as well, but this is already too long to go down that rabbit hole.

[jross]

There are good long term buys on the market now for profitable companies that pay dividends.  These are companies with stock prices equal to 10 years ago.  I started positions in a couple but still expect substantial buying opportunity in a few months.

[Mike Parrish]

Inflation continues to drop

 

https://www.nytimes.com/live/2023/05/10/business/cpi-inflation-fed/inflation-economy-fed

[mspart]

This is true and it good news for the nation.    It needs to go lower still as it is still higher than it has been the last 30 years barring this latest round.  

mspart

[jross]

Trades since this post:

• Cashed out of Treasury Bills
• Sold 80% of Coty stake (will re-enter under $10.50)
• Bought into SoFi for under $5 and double downed at $9.  
• Started positions in beaten-down Disney, AT&T, Southwest Airlines, Western Union, Alibaba, Verizon, Dish Network, and Advance Auto Parts
• Holding 40% cash reserves.

YTD returns: 36.8%.

 

Edited June 15, 2023 by jross

[mspart]

Nice return!!

mspart

[DJT]

I didn’t realize there was investment talk on this forum… I’ve been asking for advice on the other message board I frequent. Does this look like good advice?