A Few Bad Apples – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

The nation’s 16th largest bank was taken by the Fed as regulators did not wait…they acted swiftly and efficiently to curb continued withdrawals that had totaled 42 million dollars on Thursday, as SVB endured one of the largest bank-runs. SVB Bank data was and is highly suspect, with unrealized losses of a staggering $16 billion, (Total assets of $200 billion). Nearly 18% of deposits were crypto related. Silicon Valley Bank was the ‘bank of choice’ of 44% of U.S. venture tech start-ups. Another ‘domino’ fell on Sunday as Signature Bank (SBNY) was taken by regulators. The Federal Deposit Insurance Corporation indicated a majority of large depositors (over $250,000.00) would ‘come out whole.’ Yet another bank crisis, First Republic Bank (FRC) was developing, as regulators began to ‘peel back’ financials, revealing balance sheet flaws. Market values far exceeded balance sheet values with the loan numbers suspect. So as with SVB, First Republic was heavily deposited by ‘tech’ stocks, start-ups and even numerous Crypto affiliated companies with ‘short-term monies,’ with deposits and withdrawals commonplace. Depositors were beginning to mass to withdraw savings, as the realities of a possible failure was very real. Investors and traders immediately began to lighten-up bank holdings, affecting nearly all banks from JPMorgan Chase and Bank of America to the smaller regional banks the likes of Huntington Bank (HBAN) and KeyBank (KEY). All suffered on Friday and Monday as shares lost value. By day’s end on Friday share prices had dropped significantly falling from 7% to 47%. Some recovery occurred on Monday afternoon’s market and Tuesday, as investors and traders scooped up ‘bank bargains.’

Tuesday’s release of the CPI (Consumer Price Index), for February, which fell a small ‘bit’ to 6%, from 6.4%. Stubborn as it is, the trajectory is on track as each of the 8 months has seen a decline. As Mr. Powell has reiterated many times, the obstinate inflation must be ‘defeated’ and the Fed will ‘stay the course.’ As gloom hangs over the banking sectors, investors have turned heavily to bonds, nudging the 10-year and two-year Treasuries higher. Stocks rose Tuesday, churning higher as the collapse fears lingered. With the failure of SVB Bank, First Republic Bank and Signature Bank, pressures mounted on the Federal Reserve and Mr. Powell to ‘lighten-up’ on the coming rate hike, quite possibly omitting March’s 0.25% or 0.50% hike. The Indexes were positive Tuesday, with the Dow Jones Industrial Average up 336 points, on heavy trading, and ‘bank-stock’ trading. Wednesday’s market was lackluster as indices were nearly even, as traders and investors were ‘under the veil’ of the negative bank activities. Jim Caron, a Morgan Stanley Management Portfolio Manager said his team has been adding to holdings of bank stocks’ attractive discounts. The Dow gave back Tuesday’s slight gain, with a market that stumbled all day. Even oil faltered a bit, hovering at $67.60, its lowest in over a year, with Brent crude from $71 to $74.99. Stockpiles of oil are being built in all parts of the world. Dependent Japan has amassed significant reserves since Russian threw a ‘wrench’ into the world-wide balance. The Dow Jones was up 350 points in mid-day trading Thursday as Wall Street wondered what ‘bank’ might be next. First Republic Bank is in discussions with JPMorganChase and Morgan Stanley for financial help. Many larger banks have stepped up to help financially and or offer to take over troubled banking institutions. As the bank debacle sorts out with those banks wallowing in financial distress, traders and investors will settle in on the inflation fight.

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Baranby Wilson, Portfolio Manager, Lazard Asset Management, Barron’s “Our analysis shows that high-quality stocks can outperform the broader market over time, in both value and growth markets.”

Randall W. Forsyth, Lead Writer of UP & DOWN WALL STREET, Barron’s, “An exorbitant privilege or a curse? Both terms have been used to discrete the U.S. dollar’s unique status as the world’s primary reserve currency. It’s the main medium of exchange for global trade and finance, and the premiere store of value for financial institutions and corporations around the world, as well as for individuals abroad who prefer greenbacks to their own less-stable currencies.”

Bill Smead, of Smead Capital Management, on the Silicon Valley Bank debacle, in The Wall Street Journal, Barron’s “This is the first sign that there might be some kind of a crack in the financial system.”

Mark Haerfele, chief investment officer at UBS Global Wealth Management, WSJ “The Fed now has very clear evidence that they are having an impact on the financial system and the economy—rate increases are starting to bite,” said Mr. Haefele. “While that’s not enough to give them pause, it is something they will take into consideration.”

Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, WSJ “You had another hot jobs report which would argue for a 50 basis point hike,” she said. “But also the Fed watches financial conditions and I think that with the way the market responded to SVB today, financial conditions have tightened. In that sense, this could be dovish for the Fed.”