The Dividend Cafe - The DC Today - Monday, March 27, 2023

Episode Date: March 27, 2023

Today's Post - https://bahnsen.co/3noFOMJ There is a lot today on Housing, which is a matter of practical significance to a lot of you, and there is a lot today on the banking mess and the Fed, which is also connected to Housing. So I think you’ll find today’s missive practical and interesting. After reports throughout the weekend that both First Citizens Bank and Valley National Bank were bidding with the FDIC to take over Silicon Valley Bank (both publicly traded, sub-$10bn market cap banks, the former out of North Carolina and the latter from New Jersey), the Monday morning announcement ended up being that First Citizens Bank would be the buyer. I don’t think the ownership of Silicon Valley Bank’s deposits, loans, brand, and locations is that important to markets overall, with the FDIC having already put unlimited depositor protection in place. The final resolution of their capital markets and securities business is more relevant to us at The Bahnsen Group, for a variety of portfolio-related reasons. And really the final resolution of what will happen with First Republic Bank is the most pressing issue across markets out of the wide array of contenders. Did you know the market closed at 32,254 the day of the Silicon Valley reports on Thursday, March 9, and closed at 32,238 on Friday, March 24, just two weeks later? In between there were ten days of extreme volatility and one day of light volatility, but from the start point to end point, it was dead. flat. in. the. market. And after today markets are UP since this soap opera began. Go figure. 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 the Monday edition of DC Today. I am actually recording at my desert house, and I think this might be the first time for DC Today that we've ever recorded before the market is closed. If I'm wrong about that, then it's a failure in my memory, which doesn't happen very often. But the market is closing in a little over 30 minutes. So we're pretty close to the end of the day. So if I say anything that proves to be wrong, it's purely a byproduct of market movement. But I kind of just want to go through the whole gamut of things that are in the DC today. And then the reason I'm recording before market closes is I have to run out

to another appointment from here. And so let's just kind of get into it. It was a much less exciting weekend than we've been having, which I say that is a good thing. And so let's just kind of get into it. You know, it was a much less exciting weekend than we've been having, which I say that is a good thing. And in fact, it was the subject of the whole dividend cafe on Friday was these recent, the recent batch of Sunday drama. Now, look, First Citizens Bank did surface as the suitor and the prevailer in a bid to purchase Silicon Valley Bank. And obviously, the FDIC takes the initial losses. Silicon Valley pays for the value that's left and takes over the deposits and the loans

and the locations of the traditional bank. and the loans and the locations of the traditional bank. And then the securities business and capital markets business in Silicon Valley is still on the market. That's not a part of this bank-on-bank takeover. So the reason why it isn't that dramatic of an event is newsworthy, and it makes a much larger bank with the combined total now of this First Citizens out of North Carolina. But the kind of systemic risk and I guess interest in other market actors had largely

been resolved at the point of the FDIC takeover and the backstop for depositors that was already in place for the last two weeks. So nobody was sitting around dangling or wondering the status of their deposit funds. And equity holders were bankrupt two weeks ago and they're bankrupt now. And bondholders are wiped two weeks ago and two weeks now. So really all it does is create the new home for the ongoing operation of the bank.

And that is a relevant fact, particularly to stakeholders of the two enterprises involved, but not really at a systemic or market level. I do continue to believe that some resolution around what will exactly kind of happen with First Republic Bank is an open market issue with broader or more systemic implications that continues. So, you know, the market kind of drama around Silicon Valley Bank began on Thursday, March 9th, and the Dow closed at $32,254. And we closed just Friday, two days ago at 32,238. So through that 11 market days from when the drama began until through us opening up here this morning, there had been 10 days of extreme volatility, high amounts up and high amounts down. And one day that was not quite so volatile.

amounts up and high amounts down. And one day that was not quite so volatile. And yet the market hadn't moved at all, dead flat for 11 trading days, despite 10 out of 11 days of really significant volatility. And then if you factor in today, which I assume as I'm sitting here talking, the Dow is up, you know, 275 points. It appears that the market's going to open up, or excuse me, close up quite a bit today. You're talking about the market being up over this period of time with all this bank drama, so go figure. Anyways, the other elements on market ramifications that I cover in this kind of long form, old school DC today, today is the bank failure issue. There were 25 banks that fell in 2008. Now there were 140 that fell in 2009, but it was the real large ones were in a way, if you recall, IndyMac. And then of course, Washington Mutual is the largest ever. The total deposits of those 25 banks was more than double the 140 that failed in 2009. And look, you have two failures so far in 2023, and they were pretty large in the grand scheme of things, but two banks versus 165, it does speak to a pretty,

to the 165 failures, meaning the 08 and 09 financial crisis quantity of bank failures. It's, it's not even like in the same stratosphere when you're looking at the breadth of the, of the analysis versus just the deposit level. One thing I do want to point out, because I'll be surprised if it doesn't end up meaning some further ramification, it may end up just reversing, but the capital markets have more or less shut down. I mean, since the Silicon Valley issue, you've had more or less no issuance of high yield bonds, no equity IPOs. There's been some M&A, but it's been entirely forced bank M&A. There's been almost no capital markets activity, just a teeny tiny bit of some investment grade bond issuance, but really debt and equity capital

is almost evaporated in this particular moment. And it's only been a couple of weeks. I know it feels longer, but that would indicate to me some consequences coming if it doesn't turn. By the way, the comment about how the market is up since it began and even with hyper volatility is really kind of flat. It's all true. I just, you know, only 40% of the companies in the S&P are above their 200-day moving average. There is right now a broad markets condition that doesn't feel that bad considering the volatility and the obvious, you know, weight of the news. But there also is a top-heavy issue that we've seen before that is a little misleading.

Under the surface, things are a little different than just the top-line index summaries might indicate. Speaking of the way in which things are, I had made the comment last week that I'd never seen the short end of the bond curve rally that way in a single day. We had a couple of days where the yields had just collapsed at the one-year, two-year, five-year, you know. And so those bond yields dropping,

pushing up the price of the short end of the curve substantially. And I wasn't sure if I was being precise or not. It felt like I'd never seen it before. But then I did go ahead and evaluate. It was, as a matter of fact, using the two-year treasury as our proxy, the largest movement in a 10-day period since 1987. And so you're talking about a two year that was over 5%, that's currently under 4%. And, uh, that's going back to when I was, uh, in, in the later years of middle school, a while back, quite a bit on housing in, um, the DC today written. And the only reason why I mentioned the written is because there are two charts there. But look, you had a year over year decrease in the national median home prices

from the National Association of Realtors for the first time since 2012. So it's been over 11 years, not a huge move down in the median price yet, but it is the first time it's happened at all in a long time. The strong price movement year over year, I think, is still capturing the base effect of where prices are moving up in Q1 of last year. So I expect it'll end up going down 5% to 10% in short order. percent in short order. But again, that house price appreciation, clearly seeing the negative price reality of the second half of 2022 as what had been a 17.5 percent home price appreciation a year ago, now coming down to the flat line. And so you can see kind of how those numbers have moved. I still think that the inventory, the lack of housing supply has been the best argument for a floor in housing prices. And inventory is up 13% from where it was a year ago.

But even up 13%, it's still 33% lower than it was in 2017, 18, 19. So we just still have a dramatic decrease in supply relative to where we were in the ancient history of five years ago. Commercial mortgage-backed securities are still not seeing a ton of defaults. That could change, but it's still a tiny fraction of what it was in the great financial crisis. So then finally, I want to close up a couple of comments on the Fed, they're in a very tough position that $700 billion has left the bank's deposit system, since they began raising rates, a lot of that has gone into

money market funds. And, and, you know, that's really not about bank safety, since money market funds don't have FDIC insurance. It's about a higher yield. And so the tightening has simply been done for the Fed by extracting a lot of liquidity out of the bank system and they really kind of get stuck in that sense. Now, $120 billion in the last few weeks has left small banks since that Silicon Valley deal,

and $67 billion has gone into big banks. So we can sort of deduce that about half of the money went into bigger banks out of an FDIC and bank size and stability concern, but half presumably went into money market. So it doesn't show up on the other side of being it's a withdrawal from one bank, but not a deposit into another. And again, that's yield driven, interest rate driven, not bank solvency driven. Evaluating the bank distress and overall economy, what it means for Fed intentions, was the subject of comments Neil Kashkari made over the weekend in the news. the subject of comments Neil Kashkari made over the weekend in the news. Neil is a pretty outspoken member of the Fed who is known for being one of the more hawkish and sometimes kind of provocative, rhetorically provocative Fed members. And he said that he was concerned about bank distress and tight monetary policy, increasing odds of recession, et cetera. So when you have one of the more hawkish members of the Fed coming out

and seemingly preparing to backpedal, you know what it means. All right. I got to leave you there. I had to run to my appointment. Hopefully the market doesn't reverse so much. We're up 300 now as I am sitting here recording 295 to be precise. So the final numbers will be in the written DC today. The NASDAQ is down a little bit, by the way. S&P is up about half a percentage point. And then it's the Dow that's up about 1%. So kind of reversal of how these indexes are doing from what they've been. But that's the scoop of the DC today. I'll be back at you tomorrow and look forward to hearing any questions you have sent to questions at thebonsongroup.com.

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