The Dividend Cafe - The DC Today - Monday, May 1, 2023

Episode Date: May 1, 2023

Today's Post - https://bahnsen.co/419OGnL The big news of the week has been First Republic Bank’s fate, which at midnight last night was still up in the air. By 3:30 am ET, the situation was clarified in the newswires – First Republic was put into FDIC receivership, and the FDIC was concurrently entering a purchase and assumption agreement with JP Morgan. All 84 offices of First Republic Bank in all eight states they are present will open as branches of JP Morgan immediately. JP Morgan has assumed all deposits and essentially all assets. Banking customers retain FDIC protection, and JP Morgan backs uninsured deposit levels effective immediately. Customers do not need to do or change anything to have all this affected. This covers $229 billion in assets and $104 billion in deposits. JP Morgan and the FDIC have entered into a loss-share agreement on the residential and commercial loans of First Republic, and the FDIC estimates it will lose a total of $13 billion in all of this. 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 special edition of the DC Today. It's special because it's the Monday edition. today. It's special because it's the Monday edition. It's special because I'm recording from Minneapolis, Minnesota, where I'll be in our Minnesota office the next couple of days for client meetings and a client dinner event and all those fun things. And because it was an eventful weekend in getting to the end of this banking system drama. So a special DC today for a few reasons. I'll go kind of quickly. First of all, just in terms of the market today, we did close down 46 points in the Dow.

The futures were dead flat from when they opened last night all through the night, waiting for this announcement to come as to what the fate of First Republic Bank was going to be with the FDIC. And there were bids being placed by other banks to kind of come take over First Republic all weekend. And it was more or less known that the FDIC would be putting the bank into receivership. And the announcement came just as I got up at three o'clock in the morning that they were indeed putting in receivership the FDIC and concurrently selling the bank the protection of J.P. Morgan.

All deposits backed there. Eighty-four branches of First Republic Bank that are in eight different states in total became J.P. Morgan. And the loans are now owned by them. The deposits are backed by them. The loans are now owned by them. The deposits are backed by them. And certainly there are losses that will be incurred, but far, far less than if it had gone to uninsured depositors. And the FDIC will share in those losses with J.P. Morgan.

So that sort of put an end to that systemic spread of that issue there. Now, there's still other banks out there getting their affairs in order, but this was a pretty large one. It's the second largest bank failure in American history. And ironically, both the first and second ended up going into the loving arms of JP Morgan. I, of course, refer with the first Washington Mutual back in September of 2008. So the markets didn't have a huge response. They were reasonably flattish. I think most of this was kind of known, not the specifics, not the particulars. But you recall, the market was up 7, 800 points, more than that, actually 550 and 270, close to 900 points between Thursday and Friday of last week. So really, the earnings season took over what's going on at the markets. We know the Fed is raising rates a quarter point this week, or almost certainly

is going to. I think the futures market closed today at an 89% implied probability of that quarter point rate hike coming. We knew of this banking drama going on and then markets up a lot in the face of it. So you really were dealing with kind of an earnings driven response. The Dow ended up the month of April up two and a half percent. The S&P was up one and a half. The Nasdaq was up just kind of a pinch, a little flattish. Bonds were also pretty flat, but they rallied a lot the last couple of weeks of the month. They'd been down in the first couple of weeks.

And in fact, yields today in the 10 year were up 13 basis points. So you had a little sell off in bonds today. Top performing sector today was health care up over half a point. Energy was down over 1 percent, was the worst. 1% was the worst. But I think the big story to watch the S&P is it's not a great story for index investors is that divergence between the equal weight S&P and the cap weighted, where really you do have a very small number of companies holding that index together, a very different story than what you're seeing like in the Dow, for example, which is in a much healthier state in terms of market performance. The FOMC, the Federal Open Market Committee, starts their meetings tomorrow.

They'll make their announcement Wednesday, followed by the famous Jerome Powell press conference. And we, of course, expect that quarter point hike, as we've been talking about for the last several weeks. Uh, the ISM manufacturing index did come in at 47.1. That's a six month in a row of contraction. Any number below 50 is contraction above 50 is expansion. And while services, the ISM non-manufacturing has been positive, the manufacturing side has continued to be negative. You had 13 out of 18 sectors seeing contraction.

Against doomsdayism, so many negative things, so many difficult things, so many problems, both in the economy and in the culture. And I make the case all the time that we believe it all represents doomsday to our own peril, and we owe it really to a lack of understanding of history. One of the things that's interesting that doesn't get better because of the nature of what it is, in the natural order of things, is sort of environmental, meteorological, hurricanes, tornadoes, earthquakes, you know, these aren't things that like starvation or famine have a technological cure necessarily. So you still have kind of the same amount of these

natural disasters you had a hundred years ago, yet deaths, mortalities, lethalities from those, the lethal consequences of these natural disasters are down over 75%. Same amount of natural disasters, but deaths only being not quite even 25% of what they were. Why is that? Obviously, the greater resolve for planning, for better construction, for better technology, for better preparation. Market forces creating better circumstances before, during, and after to lead to a safer outcome, even in the midst of an equal level of natural horror. It's a positive thing, friends.

Take it for what you will. Okay, I'm going to leave it there. I am running to a speaking engagement this evening here in Minneapolis. I am excited to be out here, see some of you who are clients of our firm. I'm very excited that today was opening day in Austin, Texas. Our brand new, beautiful offices on the top floor of 823 Congress Avenue, just steps from the Capitol building in downtown Austin. We are so excited to have Robert Graham back chairing that office effort and looking forward

to serving the great state of Texas for years to come. That's all I have for the update here from the Bonson Group in the D.C. today. Look forward to come back to you again tomorrow, Tuesday. Take care. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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