Category: Markets

The Week Ahead – OPEC+, Unemployment, Four-Day Trading Week

Posted on by phoffman@channelchek.com

A New Quarter Begins Following Market Strength

Welcome to a holiday-shortened trading week. Yes the U.S. stock market will be closed on Friday. In terms of economic numbers and reports it should be very quiet as we begin the second quarter of 2023. These “quiet” weeks, when the market is not sure where to focus, have proven themselves to be volatile surprises as focus is on unexpected events instead. Last week the major indices resumed its march higher. All closed in the green for the week. Market participants are looking for follow-through to confirm whether we’ve entered a new bull market.

Monday 4/03

  • 9:45 AM ET, The final Manufacturing Purchasing Managers Index (PMI) for March is expected to come in at 49.3. This would be unchanged from the mid-month flash to indicate a slight economic contraction.
  • 10:00 AM ET, Construction Spending is expected to have experienced a flat month for February as the forecast is expected to show unchanged following January’s 0.1% decline.
  • 10:00 AM ET, The ISM manufacturing index has been below 50, indicating a contraction for the last four months. March’s consensus estimate is 47.5 versus February’s 47.7.

Tuesday 4/04

  • 10:00 AM ET, Factory Orders, a leading indicator, are expected to fall 0.4 percent in February versus January’s 1.6 percent decline. Durable goods orders for February, which have already been released and are one of two major components of this report.
  • 10:00 AM ET, JOLTS (Job Openings and Labor Turnover Survey) have been strong at 10.82 million in January. Forecasters see February openings falling to a still high 10.4 million.
  • 10:00 AM ET, Existing Home Sales for February are expected to rise to a 4.17 million annualized rate after January’s lower-than-expected 4.0 million rate.

Wednesday 4/05

  • 10:00 AM ET, the Institute for Supply Management (ISM) is expected to slow after a 55.1 read in February, to a still positive (above 50) 54.4 level in March.

Thursday 4/06

  • 7:30 AM ET, The Challenger Job Cuts Report counts and categorizes announcements of corporate layoffs based on mass layoff data from state Departments of Labor. The prior reading was 77,770.
  • 8:30 AM ET, Jobless Claims for the week ended April 1 week are expected to come in at 201,000 versus 198,000 in the prior week. 
  • 10:00 AM ET, James Bullard, the St. Louis Fed President will be making public comments.

Friday 4/07

*The bond markets and the rest of the banking system follow a different schedule and are open.

  • 8:30 AM ET, Employment, A 240,000 rise is expected for nonfarm payroll growth in March. This compares to 311,000 in February. Average hourly earnings in March are expected to rise 0.3 percent on the month for a year-over-year rate of 4.3 percent; these would compare with 0.2 and 4.6 percent in February. March’s unemployment rate is expected to hold unchanged at 3.6 percent.
  • 2:00 PM ET, The Securities Industry and Financial Markets Industry Association (SIFMA) is recommending an early close for those operating under their purview. The U.S. stock market is closed.

What Else

OPEC+, which comprises the Organization of the Petroleum Exporting Countries and allies led by Russia, is due to hold a virtual meeting of its ministerial monitoring panel, which includes Russia and Saudi Arabia, on Monday. OPEC+ is likely to cut oil output at a meeting scheduled for Monday. Oil has recovered to above $80 a barrel for Brent crude after falling to near $70 on March 20.

Media companies are attracting more interest. Investors in Florida this week with an interest in this sector are welcome to see if there is a seat available to them at one of three different roadshow events with Beasley Broadcast Group. Information is available at this link.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://us.econoday.com/

https://www.bbc.com/news/business-65157555

Michael Burry Suggests He is Now Bullish

Posted on by phoffman@channelchek.com

Michael Burry’s New Comments Highlight the Importance of Pivoting

With most major indexes in positive territory for the year but still, well below their 2022 starting point, are markets moving to make up their losses? Michael Burry thinks so. In the most positive tweet I have seen from him in almost four years, Burry posted he was “wrong to say sell.” As recently as late January, Burry posted a one-word tweet, “Sell.” The pundits read into it that perhaps another economic crisis similar to the one that occurred in 2008 will crush markets. His almost cult-like following was built by being one of the few individuals who correctly positioned his investments for the housing and subprime mortgage problems that shook the U.S. in late 2008.

Michael Burry Suggests We Have a Bull Market

Market participants are surprised at both Burry’s bullishness and open acknowledgment that he believes he was overly negative and has gotten it wrong this time. The widely followed investor has been bearish and broadcasting this sentiment to his 1.4 million Twitter followers. The suggestions have been that they should consider lightening their holdings. Burry even caught investor attention with his own 13F reported short position in Apple (AAPL).

Burry points to high levels of dip buying, which may have changed today’s market landscape. This is backed up by other reports, including one from Bloomberg that gives a reason that 2023 is shaping up to be one of the best years for dip-buyers.

Importance of Pivoting

He may not have been “wrong.” The best investors understand their time frame and will recognize when market moves are not as expected. On February 2nd, a few days after Burry’s January 31st “sell” tweet, the S&P 500 index closed at 4,180 just after the Fed interest rate target increased by 25 basis points. To date, that is the large-cap index’s highest close of 2023, as weeks of declines followed. The NDX  had fallen nearly 3% since that day.

But the trend, if it continues, appears to have changed. The equity market in March has been surprisingly resilient. It has been able to shrug off multi-country concerns surrounding the banks, elevated expectations of an economic downturn, and forecasts that S&P 500 companies will report their biggest quarterly earnings decline since the second quarter of 2020.

Moving from a sell to a more bullish position, for those that are looking to capture short-term moves, seems to be what is implied in his tweet. It may be that Michael Burry was not wrong in direction, as the markets did fall, just wrong in how long they would stay weak.

Take Away

There are long-term trends and short-term trends. Also, trends that are weak and strong through different sectors at the same time. While time will tell if Burry is correct in his most recent direction, the ability to see market sentiment changing and go with it is characteristic of a successful trader.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bloomberg.com/news/articles/2023-03-30/should-i-buy-the-dip-michael-burry-of-big-short-fame-congratulates-dip-buyers#xj4y7vzkg

https://www.marketwatch.com/story/michael-burry-of-big-short-fame-says-he-was-wrong-to-tell-investors-to-sell-d1259c0f

The Week Ahead –  March Markets, Out Like a Lamb?

Posted on by phoffman@channelchek.com

Much of the Noise this Week Could Be from Outside of US Markets?

The U.S. does not get a great deal of economic data to react to this week. But that usually means the focus shifts, and market participants grasp onto signs they may otherwise ignore. There are many inflation reports during the week. They are from outside of the U.S. economy until Friday morning. Global inflation, not just trading partners could impact other nations. This is because if one region raises its benchmark interest rate, others either follow or risk weakening its own native currency.

March German inflation will come late in the week, starting with Germany’s CPI on Thursday. This will be followed by France’s CPI on Friday, then the full Eurozone later Friday. February PCE data from the U.S. will also be posted on Friday. Australia will be posting its February CPI on Wednesday. Most reports are expected to show declines, with the reservation that much of the reduced increases are derived from lower fuel costs. This would suggest that economic forces raising prices are still largely at work.

Monday 3/27

•             No pertinent Economic numbers are to be released

Tuesday 3/28

•             10:00 AM ET, Consumer Confidence, after two months of market surprising declines, the consumer confidence index is not expected to perk up in March, the consensus is instead a further decline in confidence to a consensus 101.0 versus February’s 102.9.

•             10:00 AM ET, Michael Barr, the Vice Chair for Supervision at the Federal Reserve will give Testimony before the Michael Barr, the Vice Chair for Supervision at the Federal Reserve will give Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Watch here.

•             1:00 PM ET, Money Supply, since some banks have experienced difficulties with lower deposits, is becoming closely watch report once more. The prior month, money supply read 30.9 billion. The measure has two main components, M1 and M2. M1 is included in M2. M1, the more narrowly defined measure, consists of the most liquid forms of money, namely currency and checkable deposits. The non-M1 components of M2 are primarily household holdings of savings deposits, small time deposits, and retail money market mutual funds.

Wednesday 3/29

•             10:00 AM ET, Michael Barr will testify before the U.S. House Financial Services CommitteeThe Energy Information Administration (EIA) Petroleum Status Report,  provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

•             10:00 AM ET, Pending Home Sales during February are expected to rise 1.0 percent on top of January’s 8.1 percent elevation.

Thursday 3/30

•             8:30 AM ET, GDP’s third estimate for 4Q 2022 is expected to remain at 2.7 percent growth in the quarter’s second estimate. Personal consumption expenditures, at 1.4 percent growth in the second estimate, is also expected to remain unchanged.

•             4:30 PM ET, The Fed’s Balance Sheet has received more attention since the beginning of quantitative tightening (Q.T.). The last report  should an increase as a result of the new Bank Term Funding Program (BTFP).

Friday 3/31

•             8:30 AM ET, Personal Income and Outlays is expected to have risen 0.3 percent in February with consumption expenditures expected to have increased 0.2 percent. In January there was a rise of 0.6 percent for income and 1.8 percent surge for consumption. Inflation readings for February are expected at monthly increases of 0.4 percent both overall and for the core (versus 0.6 percent increases for both in January) for annual rates of 5.1 and 4.7 percent (versus January’s respective rates of 5.4 and 4.7 percent).

•             10:00 AM ET, Consumer Sentiment in late March is expected to be unchanged from the mid-month flash of 63.4.

What Else

We congratulate all the NCAA basketball teams that made the final four teams competing in the NCAA championships. This includes the Florida Atlantic University basketball team that has made the final four for the first time. While we wish all teams well, the large investor conference sponsored by Channelchek, NobleCon19, will be held at the elaborate College of Business Executive Education at FAU. So this adds to all of our interest at Channelchek. These final March Madness games start on Saturday, April 1st, and while we officially don’t have a consensus read on the final outcome, we hope for excellent play from all. Learn more about the NobleCon19 conference on the FAU campus by clicking here.

Paul Hoffman

Managing Editor, Channelchek

noblecon19.com/

Sources

https://www.federalreserve.gov/newsevents/pressreleases/other20230319a.htm

https://us.econoday.com/articles.aspx?cust=us&year=2023&lid=0

Investing in the Development of Cancer Drugs May be Considered Defensive

Posted on by phoffman@channelchek.com
Image: Visualization of a cancer cell (nucleus in blue) treated with bi-modular fusion proteins (BMFPs). BMFPs bind to an antigen on the surface of the cancer cell to be destroyed. – Inserm (Flickr)

Understanding the Cancer Treatment and Therapy Segments of Biotech

Transforming research discoveries into new cancer treatments takes investment in time and capital. But no one would argue that the end goals of this healthcare (biotech and pharma) sector are not worth it. Investing in the future of treating tumors, and preventing cancer growth is obviously rewarding from the human standpoint of saving life, but breakthroughs in oncology themselves could provide an investor that understands some of the more promising companies, oversized portfolio rewards. It goes without saying, knowledge and understanding of many companies at different stages of research and development, help the odds of being invested in successful stocks.  

Exploding Growth

According to a report by Grand View Research published in early last year, the global oncology drugs market size was valued at $135.7 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 8.3% from 2022 to 2028. The increasing prevalence of cancer, the rising geriatric population, and advancements in drug development and treatment modalities are some of the key factors driving the growth of the novel oncology drugs market.

Relief managing the side effects of treatments, especially chemotherapy, without opiods is also a part of this market. Changing treatment modalities, and growing demand for personalized medicine is still relatively new, and creating more growth opportunities. In addition, a continuing trend of mergers and acquisitions from pharmaceutical companies to expand their oncology drug pipelines and portfolios plays a part in the growth of this sector.  

Meet the management of Onconova (ONTX) in NY,NY for lunch on March 28. This is a clinical-stage biopharmaceutical company focused on discovering and developing novel products for patients with cancer. To request attendance, click the registration link here.

Where to Explore Cancer Treatment/Therapy Companies

Investors use Channelchek as one of their trusted outlets to discover and explore smaller public companies involved in oncology treatments and therapies. Below are five companies with a wealth of information housed on the platform. This includes high quality research and video content. For an expanded list of companies, a simple search on Channelchek under “Oncology” or “Cancer” will provide a wealth of more opportunities to discover.

Worth a Deeper Dive?

Onconova Therapeutics Inc. (ONTX) is a clinical-stage biopharmaceutical company focused on discovering and developing novel products for patients with cancer. It has proprietary targeted anti-cancer agents designed to disrupt specific cellular pathways that are important for cancer cell proliferation. Onconova’s novel, proprietary multi-kinase inhibitor narazaciclib (formerly ON 123300) is being evaluated in two separate and complementary Phase 1 dose-escalation and expansion studies. These trials are currently underway in the United States and China. Onconova’s product candidate rigosertib is being studied in an investigator-sponsored study program, including in a dose-escalation and expansion Phase 1/2a investigator-sponsored study with oral rigosertib in combination with nivolumab for patients with KRAS+ non-small cell lung cancer. For more information, please visit www.onconova.com.

Onconova has a roadshow scheduled on March 28 in Manhattan, NY. More information on attending the lunch is available here.

Genprex, Inc. (GNPX) is a clinical-stage gene therapy company focused on developing therapies for patients with cancer and diabetes. Its technologies are designed to administer disease-fighting genes to provide new therapies for populations with cancer and diabetes who currently have limited treatment options. Genprex works with world-class institutions and collaborators to develop drug candidates to further its pipeline of gene therapies in order to provide novel treatment approaches. Genprex’s oncology program utilizes its proprietary, non-viral ONCOPREX® Nanoparticle Delivery System, which the Company believes is the first systemic gene therapy delivery platform used for cancer in humans. ONCOPREX encapsulates the gene-expressing plasmids using lipid nanoparticles. The resultant product is administered intravenously, where it is then taken up by tumor cells that express tumor suppressor proteins that are deficient in the body. The Company’s lead product candidate, REQORSA™ (quaratusugene ozeplasmid), is being evaluated as a treatment for non-small cell lung cancer (NSCLC) (with each of these clinical programs receiving a Fast Track Designation from the Food and Drug Administration) and for small cell lung cancer. Genprex’s diabetes gene therapy approach is comprised of a novel infusion process that uses an endoscope and an adeno-associated virus (AAV) vector to deliver Pdx1 and MafA genes to the pancreas. In models of T1D, the genes express proteins that transform alpha cells in the pancreas into functional beta-like cells, which can produce insulin but are distinct enough from beta cells to evade the body’s immune system. In T2D, where autoimmunity is not at play, it is believed that exhausted beta cells are also rejuvenated and replenished.

In 2022 Genprex was one of the more popular presenters at the NobleCon investor conference. A video replay of its presentation is available here.

Imugene Ltd. (IUGNF) is a clinical stage immuno-oncology company developing a range of new and novel immunotherapies that seek to activate the immune system of cancer patients to treat and eradicate tumours. Our unique platform technologies seek to harness the body’s immune system against tumours, potentially achieving a similar or greater effect than synthetically manufactured monoclonal antibody and other immunotherapies. Our product pipeline includes multiple immunotherapy B-cell vaccine candidates and an oncolytic virotherapy (CF33) aimed at treating a variety of cancers in combination with standard of care drugs and emerging immunotherapies such as CAR T’s for solid tumours. We are supported by a leading team of international cancer experts with extensive experience in developing new cancer therapies with many approved for sale and marketing for global markets.

For more data and information, visit immunogen on Channelchek.

MAIA Biotechnology Inc. (MAIA)  is a targeted therapy, immuno-oncology company focused on the development and commercialization of potential first-in-class drugs with novel mechanisms of action that are intended to meaningfully improve and extend the lives of people with cancer. Our lead program is THIO, a potential first-in-class cancer telomere targeting agent in clinical development for the treatment of NSCLC patients with telomerase-positive cancer cells. Noble Capital Markets initiated coverage of MAIA on February 21, 2023. A copy of the report can be found here.

PDS Biotechnology Corporation (PDSB) is a clinical-stage immunotherapy company developing a growing pipeline of targeted cancer and infectious disease immunotherapies based on our proprietary Versamune® and Infectimune™ T cell-activating technology platforms. We believe our targeted Versamune® based candidates have the potential to overcome the limitations of current immunotherapy by inducing large quantities of high-quality, potent polyfunctional tumor specific CD4+ helper and CD8+ killer T cells. To date, our lead Versamune® clinical candidate, PDS0101, has demonstrated the potential to reduce tumors and stabilize disease in combination with approved and investigational therapeutics in patients with a broad range of HPV-positive cancers in multiple Phase 2 clinical trials. Our Infectimune™ based vaccines have also demonstrated the potential to induce not only robust and durable neutralizing antibody responses, but also powerful T cell responses, including long-lasting memory T cell responses in pre-clinical studies to date. To learn more, please visit www.pdsbiotech.com or follow us on Twitter at @PDSBiotech.

As part of the Channelchek TakeAway Series, Senior Life Sciences Analyst, Robert LeBoyer sat down with management and discussed PDS Bio, listen to the discussion, including questions from the audience here.

Take Away

In the investment arena, oncology is a growing part of the healthcare sector, specifically the biotechnology and pharmaceutical segments. Companies that develop and market oncology drugs or provide related services are viewed as uncorrelated to other sectors. The demand for the next generation of improved treatments is expected to be ongoing.  While the approval process and regulatory bottlenecks of biotech are unlike any other product category, there are many reasons to review and consider this largely uncorrelated sector – then  dig deeper to possibly cancer R &D.

For the smaller companies considered to have the most potential, a good starting point is Channelchek where you’ll find articles, research, videos, and data, all in one place.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.marketwatch.com/press-release/oncology-drugs-market-share-and-forecast-till-2028-2023-03-20

https://investingnews.com/daily/life-science-investing/biotech-investing/top-oncology-companies/

Michael Burry’s Chart Tweet is Worth Understanding

Posted on by phoffman@channelchek.com
M. Burry – Cassandra B.C. (Twitter)

To Show Banks at Risk, Michael Burry’s Picture Equals 1000 Words

Michael Burry has a well-deserved reputation for foreseeing approaching crises and positioning his hedge funds to benefit client investors. While he’s most famous for his unique windfall leading to and after the mortgage crisis of 2008-2009, the current banking debacle has him tweeting thoughts most days. His most recent bank-related tweet is worth sharing and, for most investors, needs some explaining.  

Recently Burry posted a chart of some large banks and their insured deposit base relative to their Tier 1 capital.

@michaeljburry (Twitter)

Common Equity Tier 1 Capital (CET1)

To best understand this chart it helps to be aware that for U.S. banks, the definition of Tier 1 capital is set by regulators. It’s an apples to apples measure of a banks’ financial strength and easily used to compare bank peers.  Overall it is the bank’s core capital, and helps to understand how well the banks financial infrastructure can absorb losses. It includes equity and retained earnings, as well as certain other qualifying financial instruments.

 

Unrealized Bank Losses

The sub-prime banking crisis of 2008 is different than what banks are struggling with now. The problem then was created by lax lending practices, including liar loans, floating rate mortgages with teaser rates, significant house flipping using these introductory (teaser) first year rates, and repackaging and selling the debt – often to other banks.

The current issue facing banks today is the prolonged period of rates being held down by monetary policy. Low rates makes for easy money and economic growth, but there is eventually a cost. The cost is overstimulus and inflation, then what is needed to fight inflation, in other words, higher rates.

Higher rates hurt banks in a number of ways. The most calculable is the value of their asssets, including publicly traded fixed rate obligations (Treasuries, MBS, municipal bonds, corporate bonds, other bank marketable CDs) all decline in worth when rates rise. The other way banks get hurt is that loans extend out when rates rise by a significant amount. As a bank customer, this is easy to understand, if you took out a 30-year mortgage two years ago, your rate is between 2.75%-3.50%. If mortgage rates move, as they did to 7%, the prepayment speeds on the loans extend out farther. That is to say fewer borrowers are going to add more to their principal payment each month, and those that may have bought another residence by selling the first and paying the loan off, are staying put. The banks had assigned a historic expected prepayment speed to each loan that represents their region, and the low rate loans are now going to take much longer to repay.

FDIC Insurance

Michael Burry (on assets as described above) used his Bloomberg to chart large bank unrealized losses to the potential for depositors to remove their uninsured deposits. Currently the FDIC is only obligated to insure bank deposits up to $250,000. Customers with deposits in excess of this amount (depending on how registered) leave their excess money at a single bank at their own risk.

It would seem logical for large customers and small, in this environment to check their own risk and bring it to zero.

The Wisdom of the Chart

The further up and to the right banks are on the chart, the more at risk the bank can be considered. This is because uninsured deposits equal more than 60% of liabilities, so prudent customers would move someplace where they are better protected.

However, if depositors do move money out of the banks listed here, the bank would have to either find new deposits, or stand to lose 30% or more by selling assets that are underwater because of rising rates. The banks are currently not easily able to go out into the market and attract money. Partially because we are now in a climate where even basic T-Bill levels would be high for a bank to pay, but also because there is less money supply (M2) in the system.

@michaeljburry (Twitter)

Take Away

Michael Burry is a worth paying attention to. His communication is often through Twitter, and his tweets are often cryptic without context. His most recent set of tweets, including one commenting on the chart outlines what is happening with a number of banks that find themselves in the unenviable position of ignoring the Fed’s forward guidance on rates and very public inflation data.

Sign-up for free stories daily from Channelchek, along with research and a full calendar of investor events. Sign up here.

Paul Hoffman

Managing Editor, Channelchek

Sources

Cassandra B.C. on Twitter

The Central Banks High Wire Act

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve

Worst Bank Turmoil Since 2008 – Fed is Damned if it Does and Damned if it Doesn’t in Decision Over Interest Rates

The Federal Reserve faces a pivotal decision on March 22, 2023: whether to continue its aggressive fight against inflation or put it on hold.

Making another big interest rate hike would risk exacerbating the global banking turmoil sparked by Silicon Valley Bank’s failure on March 10. Raising rates too little, or not at all as some are calling for, could not only lead to a resurgence in inflation, but it could cause investors to worry that the Fed believes the situation is even worse than they thought – resulting in more panic.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia University.

What’s a Central Banker to Do?

As a finance scholar, I have studied the close link between Fed policy and financial markets. Let me just say I would not want to be a Fed policymaker right now.

Break It, You Bought It

When the Fed starts hiking rates, it typically keeps at it until something breaks.

The U.S. central bank began its rate-hiking campaign early last year as inflation began to surge. After initially mistakenly calling inflation “transitory,” the Fed kicked into high gear and raised rates eight times from just 0.25% in early 2022 to 4.75% in February 2023. This is the fastest pace of rate increases since the early 1980s – and the Fed is not done yet.

Consumer prices were up 6% in February from a year earlier. While that’s down from a peak annual rate of 9% in June 2022, it’s still significantly above the Fed’s 2% inflation target.

But then something broke. Seemingly out of nowhere, Silicon Valley Bank, followed by Signature Bank, collapsed virtually overnight. They had over US$300 billion in assets between them and became the second- and third-largest banks to fail in U.S. history.

Panic quickly spread to other regional lenders, such as First Republic, and upset markets globally, raising the prospect of even bigger and more widespread bank failures. Even a $30 billion rescue of First Republic by its much larger peers, including JPMorgan Chase and Bank of America, failed to stem the growing unease.

If the Fed lifts interest rates more than markets expect – currently a 0.25 percentage point increase – it could prompt further anxiety. My research shows that interest rate changes have a much bigger effect on the stock market in bear markets – when there’s a prolonged decline in stock prices, as the U.S. is experiencing now – than in good times.

Making the SVB Problem Worse

What’s more, the Fed could make the problem that led to Silicon Valley Bank’s troubles even worse for other banks. That’s because the Fed is at least indirectly responsible for what happened.

Banks finance themselves mainly by taking in deposits. They then use those essentially short-term deposits to lend or make investments for longer terms at higher rates. But investing short-term deposits in longer-term securities – even ultra-safe U.S. Treasurys – creates what is known as interest rate risk.

That is, when interest rates go up, as they did throughout 2022, the values of existing bonds drop. SVB was forced to sell $21 billion worth of securities that lost value because of the Fed’s rate hikes at a loss of $1.8 billion, sparking its crisis. When SVB’s depositors got the wind of it and tried to withdraw $42 billion on March 9 alone – a classic bank run – it was over. The bank simply couldn’t meet the demands.

But the entire banking sector is sitting on hundreds of billions of dollars’ worth of unrealized losses – $620 billion as of Dec. 31, 2022. And if rates continue to go up, the value of these bonds will keep going down, which fundamentally weakens banks’ financial situation.

The Fed has been aggressively raising rates to stem the rapid increase in prices for items such as food.

Risks of Slowing Down

While that may suggest it’s a no-brainer to put the rate hikes on hold, it’s not so simple.

Inflation has been a major problem plaguing the U.S. economy since 2021 as prices for homes, cars, food, energy and so much else jump for consumers. The last time consumer prices soared this much, in the early 1980s, the Fed had to raise rates so high that it sent the U.S. economy into recession – twice.

High inflation quickly cuts into how much stuff your money can buy. It also makes saving money more difficult because it eats at the value of your savings. When high inflation sticks around for a long time, it gets entrenched in expectations, making it very hard to control.

This is why the Fed jacked up rates so fast. And it’s unlikely it’s done enough to bring rates down to its 2% target, so a pause in lifting rates would mean inflation may stay higher for longer.

Moreover, stepping back from its one-year-old inflation campaign may send the wrong signal to investors. If central bankers show they are really concerned about a possible banking crisis, the market may think the Fed knows the financial system is in serious trouble and things are more dire than previously thought.

So What’s a Fed to Do

At the very least, the complex global financial system is showing some cracks.

Three U.S. banks collapsed in a matter of days. Credit Suisse, a 166-year-old storied Swiss lender, was teetering on the edge until the government orchestrated a bargain sale to rival USB. A $30 billion rescue of regional U.S. lender First Republic was unable to arrest the drop in its shares. U.S. banks are requesting loans from the Fed like it’s 2008, when the financial system all but collapsed. And liquidity in the Treasury market – basically the blood that keeps financial markets pumping – is drying up.

Before Silicon Valley Bank’s collapse, interest rate futures were putting the odds of an increase in rates – either 0.25 or 0.5 percentage point – on March 22 at 100%. The odds of no increase at all have shot up to as high as 45% on March 15 before falling to 30% early on March 20, with the balance of probability on a 0.25 percentage point hike.

Increasing rates at a moment like this would mean putting more pressure on a structure that’s already under a lot of stress. And if things take a turn for the worse, the Fed would likely have to do a quick U-turn, which would seriously damage the Fed’s credibility and ability to do its job.

Fed officials are right to worry about fighting inflation, but they also don’t want to light the fuse of a financial crisis, which could send the U.S. into a recession. And I doubt it would be a mild one, like the kind economists have been worried the Fed’s inflation fight could cause. Recessions sparked by financial crises tend to be deep and long – putting many millions out of work.

What would normally be a routine Fed meeting is shaping up to be a high-wire balancing act.

The Week Ahead –  UBS Buying Credit Suisse, FOMC Decision

Posted on by phoffman@channelchek.com

What Will the First Week of Spring 2023 Bring Investors?

The week started out with Swiss authorities having persuaded UBS Group AG (UBSG.S) on Sunday to buy Credit Suisse Group AG (CSGN.S). UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses in a deal backed by a massive Swiss guarantee. It is expected to close on the deal this year.

The main focus of investors this week is still expected to be the two-day FOMC meeting and rate decision on Wednesday. While the need to dampen inflation hasn’t changed, weakness in the banking system, in part brought on by weaker asset prices which occurs naturally with higher rates, may cause the Fed to adjust its approach.

Monday 3/20

  • No Economic numbers are to be released
  • 5:24 PM ET, Spring 2023 begins.

Tuesday 3/21

  • 9:00 AM ET, The first day of a two-day Federal Open Market Committee (FOMC) begins.
  • 10:00 AM ET, Existing Home Sales for February are expected to rise to a 4.17 million annualized rate after January’s lower-than-expected 4.0 million rate.isting home sales in

Wednesday 3/22

  • 10:30 AM ET, The Energy Information Administration (EIA) Petroleum Status Report,  provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.
  • 2:00 PM ET, FOMC statement released. It has been a year since the Fed began its tightening post FOMC meetings and is expected to raise rates again. However, the statement after the meeting should yield clues as to the impact, if any, weakness in banks has on the path forward for the Fed.
  • 2:30 PM ET, Federal Reserve Chair J. Powell will hold a press conference to discuss the Fed’s decision.

Thursday 3/23

  • 8:30 AM ET, Jobless Claims Jobless for the week of March 18 are expected to come in at 195,000 versus 192,000 in the prior week.
  • 10:00 AM ET, New Home Sales are expected to fall to 645,000 after surging to a 670,000 annualized rate in January.
  • 4:30 PM ET, The Federal Reserves Balance Sheet now includes the new Bank Term Funding Program (BTFP) announced last Sunday.

Friday 3/24

  • 8:30 AM ET, Durable Goods Orders are expected to post a 1.5% rise in February boosted by an easy comparison against January’s 4.5% decline which was impacted by lower aircraft orders.
  • 9:30 AM ET, The ST. Louis Federal Reserve President James Bullard is expected to give a public address. Bullard has been an outspoken hawk among Fed regional Presidents.

What Else

The markets are focused on the Fed announcement Wednesday, and holding its collective breath to see if there will be more bank closures and forced sales, or if there are only a few banks impacted by weak balance sheets.

On Tuesday there will be a live online event that is part of the Take Away series by Noble Capital Markets. This event will feature select mining companies from the PDAC mining conference held earlier this month. Learn more about the no cost event here.

For institutional or individual investors in New York or South Florida, there may be the opportunity to listen to the management of some interesting companies (no cost). Entravision (EVC) will be presenting in New York on March 23, and management of Maple Gold Mines (MGMLF) is making themselves available to meet investors on March 25 in Miami. Get more information here on attending. 

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/pressreleases/other20230319a.htm

https://us.econoday.com/articles.aspx?cust=us&year=2023&lid=0

The FOMC’s March Meeting Considerations

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve (Flickr)

Will Systemic Risks to the Banking System Override Inflation Concerns When the Fed Meets?

Yes, the Federal Reserve’s central objective is to help maintain a sound banking system in the United States. The Fed’s regional presidents are currently in a blackout period (no public appearances) until after the FOMC meeting ends on March 22. So there is little for markets to go on to determine if the difficulties being experienced by banks will hinder the Fed’s resolve to bring inflation down to 2%. Or if the systemic risks to banks will override concerns surrounding inflation. Below we discuss some of the considerations the Fed may consider at the next meeting.

The Federal Reserve’s sound banking system responsibility is part of its broader responsibility to promote financial stability in the U.S. economy. The Fed does its best to balance competing challenges through monetary policy to promote price stability (low-inflation), maintaining the safety and soundness of individual banks, and supervising and regulating the overall banking industry to ensure that it operates in a prudent and sound manner.

While the headline news after the Fed adjusts monetary policy is usually about the Fed Funds target, the Fed can also adjust Reserve Requirements for banks. Along with that, the rate paid on these reserves, Interest on Excess Reserves (IOER). Another key bank rate that is mostly invisible to consumers is the Discount Rate. This is the interest rate at which banks can borrow money directly from the Federal Reserve. The discount rate is set by the Fed’s Board of Governors and is typically higher than the Federal Funds rate.

Banks try to avoid going to the Discount Window at the Fed because using this more expensive money is a sign to investors or depositors that something may be unhealthy at the institution. Figures for banks using this facility are reported each Thursday afternoon. There doesn’t seem to be bright flashing warning signs in the March 9 report. The amount lent on average for the seven-day period ending Thursday March 9, had decreased substantially, following a decrease the prior week. While use of the Discount Window facility is just one indicator of the overall banking systems health, it is not sending up red flags for the Fed or other stakeholders.

The European Central Bank Raised Rates

There is an expression, “when America sneezes, the world catches a cold.” The actions of the central bank in Europe, (the equivalent of the Federal Reserve in the U.S.) demonstrates that the bank failures in the U.S. are viewed as less than a sneeze. The ECB raised interest rates by half of a percentage point on Thursday (March 16). This is in line with its previously stated plan, even as the U.S. worries surrounding the banking system have shaken confidence in banks and the financial markets in recent days.

The ECB didn’t completely ignore the noise across the Atlantic; it said in a statement that its policymakers were “monitoring current market tensions closely” and the bank “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

While Fed Chair Powell is restricted from making public addresses during the pre-FOMC blackout period, it is highly likely that there have been conversations with his cohorts in Frankfurt.

The Fed’s Upcoming Decision

On March 14, the Bureau of Labor Statistics (BLS) reported core inflation (without volatile food and energy) rose in February. Another indicator, the most recent PCE index released on February 24 also demonstrated that core prices are rising at a pace faster than the Fed deems healthy for consumers, banking, or the economy at large. The inflation numbers suggest it would be perilous for the Fed to pause its tightening efforts now.

What has so far been limited to a few U.S. banks is not likely to have been a complete surprise to those that have been setting monetary policy for the last 12 months. It may have surprised most market participants, but warning signs are usually picked up by the FRS, FDIC, and even OCC well in advance. And before news of a bank closure becomes public. Yet, the FOMC continued raising rates and implementing quantitative tightening. The big difference today is, the world is now aware of the problems and the markets are spooked.

The post-meeting FOMC statement will likely differ vastly from the past few meetings. While what the Fed decides to do remains far from certain, what is certain is that inflation is still a problem, and rising interest rates mathematically erode the value of bank assets. At the same time, money supply (M2) is declining at its fastest rate in history.  At its most basic definition, M2 is consumer’s cash position, including held at banks. As less cash is held at banks, some institutions may find themselves in the position SVB was in; they have to sell assets to meet withdrawals. The asset values, which were “purchased” at lower rates, now sell for far less than were paid for them.

This would seem to put the Fed in a box. However, if it uses the Discount Window tool, and makes borrowing easier by banks, it may be able to satisfy both demands. Tighter monetary policy, while providing liquidity to banks that are being squeezed.

Take Away

What the Fed will ultimately do remains far from certain. And a lot can happen in a week. Bank closings occur on Friday’s so the FDIC has the weekend to seize control. So if you’re concerned, don’t take Friday afternoons off.

If the Fed Declines to raise rates in March it could send a signal that the Fed is weakening its fight against inflation. This could cause rates to spike higher in anticipation of rising inflation. Everyone loses if that is the case, consumers, banks, and those holding U.S. dollars.

The weakness appears to be isolated in the regional-bank sector and was likely known to the Fed prior to the closing of the banks.

Consider this, only two things have changed for Powell since the last meeting, one is rising core CPI. The other is that he will have to do an even better job at building confidence post-FOMC meeting. Business people and investors want to know that the Fed can handle the hiccups along the path to stamping out high inflation.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/releases/h41/20230309/

https://www.bls.gov/news.release/cpi.nr0.htm

Will the Fed Now Exercise Caution?

Posted on by phoffman@channelchek.com
Image Credit: Adam Selwood (Flickr)

FOMC Now Contending With Banks and Sticky Inflation

The Federal Reserve is facing a rather sticky problem. Despite its best efforts over the past year, inflation is stubbornly refusing to head south with any urgency to a target of 2%.

Rather, the inflation report released on March 14, 2023, shows consumer prices rose 0.4% in February, meaning the year-over-year increase is now at 6% – which is only a little lower than in January.

So, what do you do if you are a member of the rate-setting Federal Open Market Committee meeting March 21-22 to set the U.S. economy’s interest rates?

The inclination based on the Consumer Price Index data alone may be to go for broke and aggressively raise rates in a bid to tame the inflationary beast. But while the inflation report may be the last major data release before the rate-setting meeting, it is far from being the only information that central bankers will be chewing over.

Don’t let yourself be misled. Understand issues with help from experts

And economic news from elsewhere – along with jitters from a market already rather spooked by two recent bank failures – may steady the Fed’s hand. In short, monetary policymakers may opt to go with what the market has already seemingly factored in: an increase of 0.25-0.5 percentage point.

Here’s why.

While it is true that inflation is proving remarkably stubborn – and a robust March job report may have put further pressure on the Fed – digging into the latest CPI data shows some signs that inflation is beginning to wane.

Energy prices fell 0.6% in February, after increasing 0.2% the month before. This is a good indication that fuel prices are not out of control despite the twin pressures of extreme weather in the U.S. and the ongoing war in Ukraine. Food prices in February continued to climb, by 0.4% – but here, again, there were glimmers of good news in that meat, fish and egg prices had softened.

Although the latest consumer price report isn’t entirely what the Fed would have wanted to read – it does underline just how difficult the battle against inflation is – there doesn’t appear to be enough in it to warrant an aggressive hike in rates. Certainly it might be seen as risky to move to a benchmark higher than what the market has already factored in. So, I think a quarter point increase is the most likely scenario when Fed rate-setters meet later this month – but certainly no more than a half point hike at most.

This is especially true given that there are signs that the U.S. economy is softening. The latest Bureau of Labor Statistics’ Job Openings and Labor Turnover survey indicates that fewer businesses are looking as aggressively for labor as they once were. In addition, there have been some major rounds of layoffs in the tech sector. Housing has also slowed amid rising mortgage rates and falling prices. And then there was the collapse of Silicon Valley Bank and Signature Bank – caused in part by the Fed’s repeated hikes in its base rate.

This all points to “caution” being the watchword when it comes to the next interest rate decision. The market has priced in a moderate increase in the Fed’s benchmark rate; anything too aggressive has the potential to come as a shock and send stock markets tumbling.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Christopher Decker, Professor of Economics, University of Nebraska Omaha.

How Easy Money Killed Silicon Valley Bank

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve

SVB Invested in the Entire Bubble of Everything Says, Renowned Economist

“SVB invested in the entire bubble of everything,” writes Daniel Lacalle, PhD, economist, fund manager,and once ranked as one of the top twenty most influential economists in the world (2016 and 2017).  He explains in his article below the pathway the Silicon Valley bank took and “bets,” which it lost, that led to the bank’s quick demise. “Aaaaand it’s gone,” Lacalle says, borrowing a line from a South Park episode that originally aired in March 2009. – Paul Hoffman, Managing Editor, Channelchek

The second-largest collapse of a bank in recent history after Lehman Brothers could have been prevented. Now the impact is too large, and the contagion risk is difficult to measure.

The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealized losses and the financial hole in the bank’s accounts would not have existed if not for ultra-loose monetary policy. Let me explain why.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits, according to their public accounts. Their top shareholders are Vanguard Group (11.3 percent), BlackRock (8.1 percent), State Street (5.2 percent) and the Swedish pension fund Alecta (4.5 percent).

The incredible growth and success of SVB could not have happened without negative rates, ultra-loose monetary policy, and the tech bubble that burst in 2022. Furthermore, the bank’s liquidity event could not have happened without the regulatory and monetary policy incentives to accumulate sovereign debt and mortgage-backed securities (MBS).

SVB’s asset base read like the clearest example of the old mantra “Don’t fight the Fed.” SVB made one big mistake: follow exactly the incentives created by loose monetary policy and regulation.

What happened in 2021? Massive success that, unfortunately, was also the first step to demise. The bank’s deposits nearly doubled with the tech boom. Everyone wanted a piece of the unstoppable new tech paradigm. SVB’s assets also rose and almost doubled.

The bank’s assets rose in value. More than 40 percent were long-dated Treasurys and MBS. The rest were seemingly world-conquering new tech and venture capital investments.

Most of those “low risk” bonds and securities were held to maturity. SVB was following the mainstream rulebook: low-risk assets to balance the risk in venture capital investments. When the Federal Reserve raised interest rates, SVB must have been shocked.

Its entire asset base was a single bet: low rates and quantitative easing for longer. Tech valuations soared in the period of loose monetary policy, and the best way to “hedge” that risk was with Treasurys and MBS. Why bet on anything else? This is what the Fed was buying in billions every month. These were the lowest-risk assets according to all regulations, and, according to the Fed and all mainstream economists, inflation was purely “transitory,” a base-effect anecdote. What could go wrong?

Inflation was not transitory, and easy money was not endless.

Rate hikes happened. And they caught the bank suffering massive losses everywhere. Goodbye, bonds and MBS prices. Goodbye, “new paradigm” tech valuations. And hello, panic. A good old bank run, despite the strong recovery of SVB shares in January. Mark-to-market unrealized losses of $15 billion were almost 100 percent of the bank’s market capitalization. Wipeout.

As the bank manager said in the famous South Park episode: “Aaaaand it’s gone.” SVB showed how quickly the capital of a bank can dissolve in front of our eyes.

The Federal Deposit Insurance Corporation (FDIC) will step in, but that is not enough because only 3 percent of SVB deposits were under $250,000. According to Time magazine, more than 85 percent of Silicon Valley Bank’s deposits were not insured.

It gets worse. One-third of US deposits are in small banks, and around half are uninsured, according to Bloomberg. Depositors at SVB will likely lose most of their money, and this will also create significant uncertainty in other entities.

SVB was the poster boy of banking management by the book. They followed a conservative policy of acquiring the safest assets—long-dated Treasury bills—as deposits soared.

SVB did exactly what those that blamed the 2008 crisis on “deregulation” recommended. SVB was a boring, conservative bank that invested its rising deposits in sovereign bonds and mortgage-backed securities, believing that inflation was transitory, as everyone except us, the crazy minority, repeated.

SVB did nothing but follow regulation, monetary policy incentives, and Keynesian economists’ recommendations point by point. SVB was the epitome of mainstream economic thinking. And mainstream killed the tech star.

Many will now blame greed, capitalism, and lack of regulation, but guess what? More regulation would have done nothing because regulation and policy incentivize buying these “low risk” assets. Furthermore, regulation and monetary policy are directly responsible for the tech bubble. The increasingly elevated valuations of unprofitable tech and the allegedly unstoppable flow of capital to fund innovation and green investments would never have happened without negative real rates and massive liquidity injections. In the case of SVB, its phenomenal growth in 2021 was a direct consequence of the insane monetary policy implemented in 2020, when the major central banks increased their balance sheet to $20 trillion as if nothing would happen.

SVB is a casualty of the narrative that money printing does not cause inflation and can continue forever. They embraced it wholeheartedly, and now they are gone.

SVB invested in the entire bubble of everything: Sovereign bonds, MBS, and tech. Did they do it because they were stupid or reckless? No. They did it because they perceived that there was very little to no risk in those assets. No bank accumulates risk in an asset it believes is high risk. The only way in which banks accumulate risk is if they perceive that there is none. Why do they perceive no risk? Because the government, regulators, central banks, and the experts tell them there is none. Who will be next?

Many will blame everything except the perverse incentives and bubbles created by monetary policy and regulation, and they will demand rate cuts and quantitative easing to solve the problem. It will only worsen. You do not solve the consequences of a bubble with more bubbles.

The demise of Silicon Valley Bank highlights the enormity of the problem of risk accumulation by political design. SVB did not collapse due to reckless management, but because they did exactly what Keynesians and monetary interventionists wanted them to do. Congratulations.

About the Author:

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), among others.

Lacalle was ranked as one of the top twenty most influential economists in the world in 2016 and 2017 by Richtopia. He holds the CIIA financial analyst title, with a postgraduate degree in higher business studies and a master’s degree in economic investigation.

The Week Ahead – SVB Contagion Concerns, CPI Inflation, FOMC Blackout 

Posted on by phoffman@channelchek.com

Reasons Investors Should Beware the Ides of March

The FDIC, no doubt, was working overtime this weekend trying to find a suitor for Silicon Valley Bank. The bank’s demise makes it the second-largest bank in US history to have not managed its risks well enough to survive. Investors, depositors, and other interested parties have been awakened and are now checking their own likelihood of overexposure to banks. Some of this exposure could be through investments in companies that had uninsured deposits at SVB.

One risk that may be impacting investors’ psyche now is recollections of 2008 and viewing last Friday’s bank closure as the canary (or Lehman Bros.) in the coal mine. Whether this is a singular incident or just the beginning of escalating problems remains to be seen. But investors tend to always look back on the most recent similar event then think “here we go again.” Important economic numbers aside, such as CPI on Tuesday, or Residential Construction on Thursday, the loudest news will be centered on SVB and whether the Fed will now pivot.

The Fed and regional Presidents have been in a blackout period since Saturday; this is normal leading up to an FOMC meeting (March 21-22). However, this blackout period has been partially breached with a joint statement between Fed Chair Powell and Treasury Secretary Yellen, who incidentally was his predecessor. Keep an eye on Channelchek news postings for more information on this statement.   

Monday 3/13

  • No Economic numbers are to be released

Tuesday 3/14

  • 6:00 AM ET, The Small Business Optimism index has been below the historical average of 98 for 13 months in a row. The small business optimism index comes a monthly survey that is by the National Federation of Independent Business (NFIB). The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect the economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.
  • 8:30 AM ET, Consumer Price Index (CPI), investors now lay awake waiting for inflation reports. For February, core prices are expected to hold steady at an elevated 0.4 percent monthly gain, with overall prices also expected to rise 0.4 percent after January’s 0.5 percent rise. Annual rates, which in January were 6.4 percent overall and 5.6 percent for the core, are expected at 6.0 and 5.5 percent.

Wednesday 3/15

  • 8:30 AM ET, Producer Price Index (PPI), this measure of wholesale inflation ought to be the second most market-impacting number of the week. After rising a sharper-than-expected 0.7 percent in January, producer prices in February are expected to slow to a monthly 0.3 percent. The annual rate in February is seen at 5.4 percent versus January’s 6.0 percent. February’s ex-food ex-energy rate is seen at 0.4 percent on the month and 5.2 percent on the year versus January’s 0.5 and 5.4 percent, both of which were also sharper than expected.
  • 10:00 AM ET, The Housing Market Index jumped 4 points in January and another 7 points in February but further improvement, given a sharp rise in mortgage rates, is not expected for March where the consensus is a 1 point decline to 41.
  • 10:00 AM ET, Business Inventories in January are expected to remain unchanged following 0.3 percent builds in both December and November. Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future. On the other hand, if unintended inventory accumulation occurs then production will probably need to slow while current inventories are worked down. This is why business inventory data is a forward indicator.
  • 10:00 AM ET, Atlanta Fed Business Inflation Expectations is was previously 2.9%. The percentage provides a monthly measure of year-ahead inflation expectations and inflation uncertainty from the perspective of firms. John Williams the President of the New York Fed will be speaking.

Thursday 3/16

  • 8:30 AM ET, Housing Starts in February is expected to come in flat at 1.315 million. Permits that were 1.339 million in January, are also seen flat at 1.340 million.
  • 8:30 AM ET, Jobless Claims for the March 11 week are expected to come in at 205,000 versus 211,000 in the prior week.

Friday 3/17

  • 10:00 AM ET, Consumer Sentiment is expected to repeat at a depressed 67.0.  
  • 10:00 AM ET, the Index Leading Economic Indicators is expected to fall a further 0.2 percent in February. This index has been in severe decline though contraction did slow in January to minus 0.3 percent. It seldom moves markets as most of the components that make it up are already known.

What Else

The clock change ought to cause some traders to be more tired than normal. However, all will be looking to see the FDIC’s plans for SVB.

The markets have been a stock pickers market since January 2022. The consensus is that the stock indices will be weak after a strong January and bonds, according to the Fed itself, face strong monetary policy headwinds. Yet, inflation is high and therefore so are the detrimental erosive effects of price increases. So remaining in cash is like accepting a buying power loss.

For institutional or individual investors in New York or South Florida, there may be the opportunity to listen to the management of some interesting companies (no cost). The company that Michael Burry recently owned, GEO Group ($GEO) will be holding a luncheon roadshow in NYC on March 14. This is an interesting company with political policy headwinds and extreme historical positives. Get more information here on attending.  Another interesting opportunity for investors to meet and question management of a company that doesn’t necessarily wilt with economic weakness is the breakfast (Boca Raton, FL) or lunch (Miami, FL) meetings with 1(800) FLOWERS ($FLWS). Register to see if there are still open seats here.

Paul Hoffman

Managing Editor, Channelchek

Stock Market Prices Have Been Demonstrated to Be Impacted by Daylight Savings Time

Posted on by phoffman@channelchek.com
Image Credit: Vlada Karpovic (Pexels)

Stock are Less Likely to Spring Ahead for Daylight Savings Time

Alan Greenspan once made a brief comment saying that there is a correlation between sales of mens underwear and difficult markets ahead. Apparently, the Great Maestro, could support his data with an elasticity of demand chart. The data showed that sales in underpants were extremely consistent, except just before a recession. Another stock market correlation (with likely causation), is daylight savings time and stock prices. This has been the subject of another time-consuming study of numbers by a couple of Yale College professors.  

With all stock market traders eager to develop an edge in the market, over time there has been a growing interest in the impact of external factors on the stock market. A study titled “Losing Sleep at the Market: The Daylight-Savings Anomaly,” conducted by Matthew J. Kotchen and Laura E. Grant from Yale University. It explored the impact of DST on stocks. The study found that DST may have a negative impact on the market during the first week after the time change.

Kotchen and Grant’s study focused on the impact of DST on the New York Stock Exchange (NYSE) from 1964 to 2012. They found that during the first week after the springtime change to DST, stock prices tended to dip. This effect was most pronounced on the Monday following the time change, with an average decrease of 0.31% in stock prices. This effect was observed even after controlling for other factors that may have affected the stock market.

One possible explanation for this phenomenon is that the disruption to people’s sleep patterns may affect their productivity and decision-making abilities. This could lead to a decrease in trading activity and a temporary decline in stock prices. Another explanation is that the time change may lead to a decrease in trading volume due to confusion or technical glitches.

It’s worth noting that the effect of DST on the stock market, while statistically significant, is not very large and normally short-lived. The study found that the negative impact on stock prices disappeared after the first week, and there was no significant impact during the fall transition out of DST.

While Kotchen and Grant’s study sheds light on the impact of DST on the stock market, it’s important to keep in mind that many other factors have a much greater impact on stock prices. Economic indicators, political events, and company earnings reports are just a few examples of factors that can affect the stock market. Investors should not view this as significant enough to trade off of.

Take Away

“Losing Sleep at the Market: The Daylight-Savings Anomaly” suggests that DST may have a small, temporary negative impact on the stock market during the first week after the time change. However, the overall impact of DST on the stock market is likely to be small compared to other factors that affect stock prices.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.cnbc.com/2022/04/08/recession-signals-these-unusual-indicators-may-be-worth-monitoring.html

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=208623

OpenAI. Retrieved March 10, 2023

What Investors Should Note About SVB’s Loss

Posted on by phoffman@channelchek.com
Image Credit: Joe Shlabotnick (Flickr)

The SVB Loss Demonstrates A Risk Investors Should Pay Attention To

Individual investors and even some institutional money managers are reminded of a helpful truth from the Silicon Valley Bank (SVB) balance sheet problem. The reminder of the investment risk stands in conflict with what many top firms have been recommending to investors. So it should be revisited because, unlike banks, individuals and wealth managers tend to have a wider variety of places to look for return.

Bank balance sheet management is tricky. I say this with some credibility. In August of 2008, I accepted a role as the Treasurer of a mid-sized bank just two weeks before Freddie Mac and Fannie Mae were placed into conservatorship, and three weeks before Lehman filed for bankruptcy. I was responsible for quickly finding solutions for a big potential balance sheet problem. It was a problem similar to SVB’s. Depositors at the bank were taking money out at a faster pace than bank investments, including loans cashflows, could cover. Money that had not been committed to loans were invested in low-risk investment-grade fixed-income securities. It was nerve-racking, at one point, I calculated if any two of the largest ten customers withdrew all of their funds, the bank would not have the ability to cover the withdrawal. The pain that SVB is faced with is not dissimilar.

SVB is a bank that serves many fledgling companies during a period when capital and investment in start-ups have weakened from the days of easier money just a couple of years ago. Banks make money by borrowing short from customers (demand deposits, checking, and CDs) and then lend long, presumably at a higher rate. Here they make the spread that a typical upward-sloping yield curve provides. The main risk is in maturity. What happens if your longer-term loans were made at Fed Funds plus 2.50% two years ago when average deposit costs were 0.20%, since today Fed Funds are 4.50%? Your loans are paying the bank less than the bank’s cost to fund them with short deposits. This is a risk that all banks manage – balance sheet risk.

As deposits ran off at SVB because of business conditions in Silicon Valley, the bank turned to its investment portfolio to fund withdrawals. Securities in a US bank portfolio, when purchased, are designated at the custodian, by the Treasurer, either “Trading” which in this department of the bank is rare, “Available for Sale,” which provides the treasury department the ability to sell if need be, but also requires the assets to be priced at market (this impacts the banks valuation), or “Hold to Maturity” where the fixed income securities appear on the balance sheet at cost.  

If the securities are designated at purchase “Hold to Maturity” and the bank finds itself needing to sell any “Hold to Maturity” security, all securities marked “Hold to Maturity” become what regulators call tainted. The entire portfolio also becomes designated “Available for Sale.” This decision could dramatically reduce the bank’s book value in cases when interest rates have risen and bond values have dropped.

In the case of SVB, its securities portfolio, designed to earn more than deposits, was marked “Available for Sale.” When they sold, the market values were in such a lower position, from just a year earlier, that they recognized a dramatic loss. A $1.8 billion dollar loss which prompted its shares to lose more than half their market price.

Self-Directed Investors and Money Managers Should Note

The SVB explanation above, wernt a long way to remind that bonds, including US Treasury Notes have prices that rise and fall. They are different than equities, but price risk is real, and the $1.8 billion loss SVB recognized is front page proof. But since the beginning of the year many top-tier investment firms have recommended investors increase these fixed income investments and capture the new higher yields. Some even suggested ETFs in mortgaged-backed securities (MBS) or emerging markets (EM).

Goldman Asset Management is just one of the respected firms that have loudly suggested fixed income investments (CNBC, February 7, 2023)

Bond prices fall as rates rise. The Chair of the Federal Reserve, the same person that had orchestrated near zero rates, has clearly stated that the Fed will continue orchestrating higher rates. So while the stock market has been unattractive over the past 14 months, so have bonds. The difference, of course, is that bond math is absolute. As rates rise, the present value of any fixed-income security is calculated by the future value of future cash flow – this more or less determines the bonds price movement. For example,  if an investor buys a bond that yields 3%, and later rates go to 6% for the same maturity, the present value is about halved. This is a plausible scenario currently, with inflation near 6%.

Stock indexes have taken a beating over the past 14 months, just like bonds. The difference is rising rates sink all bonds. It doesn’t sink all stocks.

So while the S&P 500 is down 17% since January 1, 2022, and the Russell 2000 small-cap index is down 20%, one doesn’t even have to get out of the A’s to find AT&T (T) is up 4.15% in the same period, and Canadian Company Alvopetro (ALVOF) is up 43.6%). You won’t find this type of disparity in performance or direction on the fixed-income side. US Treasuries were down 10.5% for the period.

So from one perspective, stock selection may provide potential upside, whereas rising rates could mathematically sink all bond portfolio holdings.

Take Away

Silicon Valley Bank is in a unique situation as its customer base is not very diversified. The challenges they face may be similar to other banks, but this does not appear indicative of the whole sector based on recent stress tests. Banks are restricted in what they can invest in, with rates having risen, and promised to rise more, fixed-income holdings are at a loss in many portfolios, SVB’s need to raise cash caused them to recognize what was already a market loss.

Investors, however, can take a lesson from the loss the bank took. While I have seen articles this year suggesting capitalizing on higher interest rates, the ten-year US Treasury Note is well below its historical average (40-yr. avg.+5.17% vs 3.73% today). And rates are not even returning a real rate of return relative to current and expected inflation. This would indicate a period of likely market losses on bond holdings put on today.

A Stock, or portfolio of stocks, of course, may also present losses, but the odds that any particular stock, or even an index, would seem less certain than bonds.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.gsam.com/content/gsam/us/en/advisors/market-insights/gsam-insights/2022/1q2023-fixed-income-outlook.html#section-#policy

https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

https://app.koyfin.com/share/c85b10bfc6

https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2022.htm

https://fred.stlouisfed.org/series/WGS10YR