The Weekend Edition # 79
A week of carnage; What's next after Silicon Valley Bank?; Earnings and Recession
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to all the new subscribers this week!
Here’s what we cover:
Market Recap - A week of carnage
Macro - What's next after Silicon Valley Bank?
Earnings - Earnings and Recession
Premium Articles - March Strategy Note & China Picks
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - The week ahead
Let’s dive in ⬇️
Market Recap - 06 Mar - 10 Mar, 2023 📉📈
This was certainly a tough week to say the least. A little scary, in fact. First, we had the Fed Chair’s testimony on Tuesday and Wednesday. He came out with quite the hawkish statement just before the testimony on Tuesday that saw the markets take a tumble. Fed Funds Futures started pricing in a 50bps hike for March and a terminal rate of 6%.
Later in the week, traders reversed course pricing in a 25bps hike, on the news of Silvergate and Silicon Valley Bank collapsing. Shocking to see two banks closed down in one week. But, what was even more shocking was the speed at which Silicon Valley bank fell. These are the consequences of living in an online world. As the news of withdrawals spread, it took a day for people to hit the withdrawal button and cause a run on the bank on Friday. People no longer have to "run” to the bank.
And with the that the market saw extreme selling pressure not just with the regional banks but, all the financials and the broader market in general.
The commodities took a hit as well, other than Gold. Gold and to a certain extent, Silver, held up because of a flight to safety. As did long term bonds - TLT was up 3%.
Finally, we also had the unemployment report on Friday. The unemployment level has actually inched up from 3.4% to 3.6% and hourly wages have gone up to 4.6% YoY from 4.4% but came in better than the expected 4.8%. Finally, the labor force participation rate continues to move up slightly from 62.4% to 62.5%. This is still a very tight labor market.
Macro - What’s next after Silicon Valley Bank?
I don’t know. There are a number of people all over social media calling for various banks to collapse but, I haven’t done enough work on any of these to say that this might be the case. If anything, the collapse of SVB may actually cause other banks to look into their financial controls and make sure that this doesn’t happen to them.
Speaking of which, I did look into SVB a bit and my take was that this was the result of greed and poor internal controls. It seems to me that the Bank made some terrible choices, didn’t realize how fast the Fed would hike and perhaps even bought into the idea of a Fed pivot.
And now there are people, and very senior people, who are blaming the Fed for this. Well, the Fed had and has no other choice - the Bank should’ve seen it coming. They had an asset-liability mismatch - they matched short-term deposits to long-term investments in bonds. This is something we monitor on a monthly basis or even every two weeks within banks.
Usually, the biggest risk you have with a bank is the risk of customers and clients defaulting; this was not the case here. They willingly invested in bonds that went down in value and didn’t hedge against the rate hikes. Therefore, blaming the Fed for aggressive rate hikes is a little off base.
The fallout from this will be contained - within the VC and startup sector. That’s who they primarily banked. But the companies will take a hit. The FDIC has taken immediate steps to contain the situation and make sure that the depositors get their money back. Deposits are insured up to $250,000 and they have a plan for the rest.
Furthermore, there is no emergency meeting at the Fed. The meeting is a regular meeting that takes place and it’s only under expedited procedures which means it will be short meeting. To be fair, after looking at the bank in detail, it’s very clear that this is not a situation for the Fed to cut rates because the Bank “messed up”. Janet Yellen also came out saying that there will be no bail out for the Bank.
Finally, the Fed knows that they have to ruffle some feathers along the way. Volcker put a few banks out of business with his hiking cycle, Powell probably doesn’t have a problem doing the same and they are getting ready for it. ⤵
“The Federal Deposit Insurance Corp. and the Federal Reserve are weighing creating a fund that would allow regulators to backstop more deposits at banks that run into trouble following Silicon Valley Bank’s collapse.”
We had quite a few earnings this week, but I doubt very many people took notice about what’s going on because of all the excitement around the banks.
We have Q1 estimates now from FactSet and the level is now -6.1%.
FactSet Earnings Scorecard:
It would seem that recession fear abated during earnings calls this last quarter but, that only perhaps because we thought inflation was under control after some supply chain easing and with the hope that the Fed will be less aggressive about hikes.
But, what’s interesting is that the banks didn’t stop talking about a recession. Most of the big banks we heard from discussed a mild recession on the horizon. After last week, it’s tough to imagine that we don’t see a recession.
Article of the Week
Premium membership is $10/month or $100/year.
What's going on with the US Banks? - Free Article
50bps back on the table... - What we need to see in the macro picture
The Week Ahead
Silicon Valley Bank will not be the last to blow up. The Fed knows it and the banks know it. There are certainly other banks with weak controls and they are beginning to surface.
We can only hope that the banks take this as a warning and decide to put better controls in place before they are met with similar fate as SVB. But, this is not a full blown contagion and people are fear mongering on the internet.
These banks probably deserved some rerating as many were trading at quite high multiples. There is cause for concern and we need to be careful because we don’t know the extent to which the regional banks are exposed to poor liquidity and bad assets. My plan for next week is tread very carefully and not make any big moves at all, and definitely to stay away from the banks.
I have been warning about the macro and the fundamentals for a while now. It is seriously very important to study and make sure that you really know what you’re buying.
Investing and trading was easy in era of free money and ample liquidity. The true test comes now.
Be careful out there.
Here’s wishing you safe investing.
Please take a moment to share and subscribe, if you found this newsletter useful.
Ayesha Tariq, CFA
There’s always a story behind the numbers.