The Dividend Cafe - The DC Today - Monday, March 20, 2023

Episode Date: March 20, 2023

Today's Post - https://bahnsen.co/3LBs0Z8 For the second week in a row, I get to do hours upon hours of reading and writing over the weekend, only to have Sunday interventions make obsolete much of that reading and writing. Keep reading to understand more … There is no question that the major story in markets right now is sort of the only story, and that is the day-to-day perceptions of the banking system at home and abroad. Last week the market was down a hundred points Monday but had been up +350 in the middle of the day. Then Tuesday was up +350 before Wednesday was down -280 (but had been down -700 points). Thursday was then up +375 points, and Friday was down -380 points. So all in, from beginning to end, the market was dead flat on the week. Yep. Dead flat but with substantial movement each and every day. And then, today, we were up +383 points, basically the exact same level as Friday’s downturn. THIS is the type of market where people have a chance to act truly, truly foolish. It is also a prime-time example of directionless volatility. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to a Monday edition of the DC Today, second Monday in a row coming off of a lot of fun and drama in financial markets. And so there is a sense of deja vu. And I recall vividly many Sundays going down this path roughly 15 years ago, where there was some sort of an announcement and intervention and whatnot that was quite newsworthy in the midst of financial markets back both before and during throughout the financial crisis. So we've had a couple weekends in a row, and yet there's a part of me that just wants to resist that temptation. The melodrama that is being provided at this moment by media is totally understandable.

It's very compatible with their business model, for one thing, but it also is true. There are significant and in some cases historical events playing out. And yet I don't like the idea of insinuating a sameness with the financial crisis when there is just so much categorically different. And so I'm going to talk about that today. I do think readers of that long form, what we call the old school version DC Today will like what we've put out here today. There is plenty on the Fed and on housing, a little update on energy. There's several charts. I want you to get to all that at the written the DC today.com. But I'm going to spend my main time here after I just quickly recap markets

here for you watching the video and listening to the podcast with a little explanation or update as to where we see things in the banking system, financial markets, potential policymaker response, et cetera. So the Dow ended up up 383 points. It's 1.2% today. The S&P was up 0.9%. The NASDAQ up 0.4. The 10-year treasury yield was up nine basis points, which still, by the way, only brings it to 3.48%. That's how far down yields were near the end of last week. You know, the Dow, to make a point I wrote in the DC Today yesterday, decided to help me out by almost to the penny going up today when it went down Friday. And the up-down action of last week where you were up a lot, down a lot, up a lot, down a lot each day, literally day by day.

I don't think there were two consecutive down days or two consecutive up days. I don't think there were any days that weren't triple digit drops. So this is just textbook back and forth volatility wrapped in an enigma of directionlessness. Listen, that is the worst environment to try to trade in. If you think you're going to know what is going up one day, down the next, I think you have some problems with reality. The markets are very susceptible to the possibility of certain things worsening. There is definitely gamesmanship. There is definitely hopes for some financial institutions to be able to pick through carnage of others waiting for whatever sweeteners policymakers may or may not offer.

All of that kind of stuff playing out that causes something to go up a lot on a headline one day. And I'll give you some more explanation on it in a moment. But my point is that with the Dow up 385 today, I'm going to get emails from people saying we're out of the woods. And we were down 385 on Friday. So we're out of anything. I don't know that we're dropping 500 tomorrow or going up 500. I have no idea. I do expect continued up and down volatility. I do believe there's a lot of uncertainty. And I do think it has nothing to do with a solvency crisis in financial markets. I think ultimately, we are dealing with a very

significant liquidity issue. And it has caused a problem on a couple banks that we talked about last week, the Silicon Valley Bank, and then Signature Bank. And right now it's First Republic that is a large depository institution, has a lot of great things going on about it. But clearly, that large uninsured depositor base is caught in the self-fulfilling vortex of whether or not the depositor withdrawals represent a drain on the capital base as a funding mechanism that then has to be met by selling treasury bonds at a loss due to interest rate risk. I don't think I would have guessed that you'd ever see banking issues so totally disconnected from solvency, meaning a credit impairment. But there is a certain storm here, and the guns appeared today, again, was different than last week, where a lot of regional banks

last week, day by day, were down or up. And today, they mostly were up. And in some cases, quite a decent amount. And First Republic was down 47% as they continue to be the big headline around where things are going to go there. So look, oil was up a bit today. Bonds were down a little bit today after being up huge last week. And equities were up quite a bit, primarily with the Dow. So I think I've given you that kind of summary of markets. But the recap of where we are is that as I discussed with you a week ago, Signature Bank and Silicon Valley, which was the larger one, 15th or 16th largest on deposit level, ran into a credit downgrade threat. And then upon that word, needed to go raise equity capital to try to please the credit rating agencies and tried to do that by

raising equity capital, which then somehow became known to certain depositors, particularly large venture capital firms that have a lot of money in different portfolio companies, that then telegraphed their fear about the depository health, which caused a big run on deposits, which caused them to not be able to raise equity capital, which caused greater fears around the deposit base. I've already explained all this and those facts haven't changed. There's no new information or nuance, but the bank went upside down in its equity value and the FDIC took over it. It was an insolvent bank. And then the policymakers announced that they would back above and beyond that level of insurance, $250,000 level, to avoid a further run on the bank and

other banking institutions. And here we are a week later. There are a lot of talks going on about the assets of Silicon Valley Bank, but that's all they are is the FDIC, which is now in charge, wants to recover as much value as possible for the underlying insurance of depositors. And that includes selling off things like their capital markets group and their securities group. And there is a loan book there, whether it's private equity or a consortium of Wall Street firms or a single buyer remains to be seen. But as of a week later, there's still been no announcement on picking from the carnage of Silicon Valley Bank. What was announced Sunday was New York Community Bank will take over for Signature Bank. And without any direct FDIC guarantees, although the FDIC has already covered, already

given protection to the uninsured depositors at Signature Bank. So those are the updates with those two local banks. In the meantime, you know that on Thursday, they announced a consortium of banks adding just a deposit money into First Republic, not taking an equity stake, not adding to the capital position of the company, but just adding deposits from 11 or 12 banks to try to beef up confidence it worked for a day and then it didn't work friday and it got much worse you know yet again today so clearly there's a run on that bank and there is a equity capital erosion equity value erosion that i think will end up resulting in a bank takeover of first republic uh but again, I don't have any specific inside information.

I'm using my instinct, intuition, and some knowledge of what various bankers I've talked to have stated would obviously be the case. People are going to want to try to get the best deal they can. And the deal they're going to get gets better every day as things get worse for First Republic and as things, you know, as perhaps policymakers get more desperate, whether it's FDIC or the Fed or even Treasury. So I suspect that something will end up happening. I have absolutely no fear of a contagion risk to depositors. The Fed and Treasury made that very clear a week ago. I don't know how they can go back on that now. But as far as what happens with the equity values of some of these others, it continues to be volatile. But then the big story, and I am going

to dedicate Friday's Dividend Cafe to this, I decided after spending about nine hours in this subject on Sunday, I really think that as much as I covered it in DC Today today, I want to share with you kind of where things are. There's so many nuances and other storylines behind it that I just think it will be really interesting to do a full Dimmie Cafe on this Credit Suisse deal. Credit Suisse is a gigantic financial institution out of Switzerland, of course, double the balance sheet size of Lehman Brothers. Their equity value, their market capitalization peaked at around $88 billion back in 2007. They never got back to that level even post-crisis, but they were a much, much larger institution in terms of equity value, and they just have not been able to find their own way.

And then finally, push came to head. There's a significant amount of bondholders out there. Sovereign banks own the debt. And then counterparties, both counter to various hedging agreements, swaps, derivative transactions, and other more traditional financial transactions, that the counterparty risk was quite substantial. financial transactions that the counterparty risk was quite substantial. And so effectively, what happened is Credit Suisse has sold to UBS, which is the bank that bought Payne Weber, which was the first Wall Street firm I worked for. And so it's ironic, but interesting to me anyways, that the chairman of UBS who's constructed this deal to acquire Credit Suisse is Colm

Kelleher, who was the CFO at Morgan Stanley when I was there and was there throughout the financial crisis, who orchestrated their deal with Mitsubishi back in October of 2008, which I remember vividly. And Mr. Keller became the president of Morgan Stanley, was there for 30 years. And I think very highly of him. And he now is once again involved in Sunday institution saving with this time UBS being the savior for Credit Suisse. They got $100 billion liquidity loan from the Swiss National Bank. So the Fed of Switzerland is very much involved in it. And there's no explicit deal announced to provide more backstopping. But I am quite confident that at this point, the Swiss bank is in this

infinitely. Hopefully $100 billion of liquidity collateralized by the assets of the combined entity will be enough. But if that Swiss bank had to put up more, I don't think at this point there's any choice that they would have to, other than a full-blown nationalization, which is what they were trying to avoid at Credit Suisse. Yeah, the market was up 380 points. You could say it was the reason why, but the futures by time I went to bed last night were flat. I was up for over three hours before the market opened this morning and they weren't up much. Then they kind of went higher by the right before the market opened, but there wasn't a huge rally at the news.

And again, I think that has to do with the fact that maybe a certain crisis over there was averted and some of the contagion risks that would have come there with, for the most part, I think markets know that they don't really know what the next shoe to drop may be. And there's a need to stop playing whack-a-mole here, kind of see some of this come to a conclusion. The Credit Suisse deal had different regulators, different central banks, different political oversight, not to mention different politics of the citizens of these countries. So there's a lot going on. And I do believe that there will be more headlines, whether it's off of Silicon Valley's sale, whether it's off of what ultimately happens in the First Republic, more backlash around this Credit Suisse event.

Equity holders are going to get a few billion dollars, which is down 97% almost from what it once was. The secured bondholders are going to be made whole, it appears. The counterparties are going to be made whole. And they live to fight another day. But that's a messy deal, messy story, and a messy world. And meanwhile, the Fed is supposed to meet tomorrow all day at the Fed Open Market Committee. And we'll see what they announce they're going to do on, what is it now, on Wednesday. They'll make their announcement. And futures now have come all the way down to 50-50 as to whether or not they will not raise at all or raise a quarter point. There's a 0% chance of raising half a point.

Where you recall a couple weeks ago, that was like 70% or 80% chance. chance of raising half a point where you recall a couple of weeks ago, that was like 70 or 80% chance. And I say in DC Today, the written portion of today, I can only tell you what I expect they will do. As far as what I think they ought to do, this is a no brainer. The notion of tightening monetary policy in the midst of a bunch of big failures is just the most ridiculous thing I've ever heard. But I do think they feel somewhat trapped. And I do think they feel a credibility gap of their own making. And I expect they probably will raise a quarter point and then yet soften that by basically telling markets we're done, like severely telegraphing, that they won't do anything beyond that. Maybe they won't even do the quarter point, but I don't

know. They haven't whispered that to sources. and I think they would be whispering that if they want to do. So perhaps they do one more quarter point. Remember, the ECB did go forward with a half point last week, and yet I will be utterly shocked if they are able to do more in the midst of everything going on right now. So that's kind of where I've got to leave things here. Quite an adventurous weekend. Lots happening in markets. More volatility than a big move down or big move up.

Markets still up on the quarter in certain indexes. Obviously down from where the highs were. But really, since a lot of this stuff reached peak volatility, as the Silicon Valley news about a week and a half ago was going, markets are either flat or up, depending on what day you want to use as the Silicon Valley news about a week and a half ago was going. Markets are either flat or up, depending on what day you want to use as the starting point. So that's the world we're in now. Thank you for listening to.

Thank you for watching. Thank you for reading the DC today. I look forward to coming back to you tomorrow, Tuesday, with another adventurous update of markets. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, update of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable.

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