The Dividend Cafe - The DC Today - Tuesday, March 14, 2023

Episode Date: March 14, 2023

Today's Post - https://bahnsen.co/3Td4dAJ ASK DAVID “What do all these things happening with Silicon Valley Bank and the FDIC mean for small and regional banks? Are those banks going to have to pay even more in deposit rates to lure and retain banking customers?” ~ Dave That is certainly a concern, yes – that even with FDIC protection and solvency issues addressed, the smaller banks may be forced to really punish their own margins with punitive levels of interest paid on deposits. I personally believe the next few days are critical to getting a feel for what the aftermath will mean for regional and small banks. I expect there may be a better answer for “super regionals” and a worse answer for “community/small” banks, but both customer sentiment and policy ramifications are still in the TBD phase. Moody’s did put six good-sized regional banks on review for a credit rating downgrade, citing the level of uninsured deposits and mark-to-market losses in their asset portfolios. But at this time, there has been no need for these banks to sell hold-to-maturity assets. 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 Tuesday edition of DC Today. Probably a little bit better action in markets today than has been the last several days. Although I got to say today was quite an odd day. The market closed up on the Dow 336 points, which was a little over 1%. The S&P was up over 1.5%. The NASDAQ was up over 2%. But the thing is, is that the futures were kind of all over the place this morning, mostly positive, and then they gave it up and then came back. And the market opened up a bit and went up a lot, and then it gave it all back. And then at the very end of the day, rallied higher. And so I think there were two points in the day. One was at about 10 o'clock

Pacific, 1 o'clock Eastern, where the market gave up a few hundred points. And then one was really in the last 20, 25 minutes, where the market brought it back. And there's absolutely no explanation, no news, no trading block that I can find, no catalyst to a pretty violent move down in the middle of the day and a violent move up at the end of the day. And that's fine because that happens a lot. And I don't ever really feel a great need to understand why exactly something happened in markets. I've been doing this a very long time. But I will say that generally when that happens, it is indicative of exactly the kind of market I think we're in right now, which is one that is not going to lend itself to a lot of great explanations,

a lot of volatility, a lot of unwinding, a lot of irrational activity. So that to me is something we have to be used to. I don't particularly care, but I'm not going to go without saying it. I think it's kind of the lay of the land right now. Similarly, by the way, and I want to get to the CPI number and then let you go. Oil did something very similar at the end of the day. You know, commodities trade on a little different of a clock. But oil had been at about 74 plus change, and then it dropped all the way to near 70. Just kind of out of nowhere in the final

couple hours of trading. Came back, it closed at 71.50. But still down 4.5%. At one point, it was down about 5.5%. And there was no particular news. Now, oftentimes with commodities, that will happen because there was a large trade and you have a little less transparency. And there could have been a big futures market unwinding of a position or what have you. And I was unable to figure out what exactly may have transpired there. And there's no one out, you know, tweeting that they did the trade. But something funky seems to have happened in oil markets. So expect more things

like that. The bond market today, you saw yields push back up higher. The 10-year only closed at 3.68%. So you're not talking about giving up all of the gains that it had over the last couple of days. The yield by gains, I just want to keep reminding you, I'm saying it inversely, right? When the yields drop, the prices go up. When the yields go up, the prices come down. And the 10-year had been at 4%. It went to like 3.45% yesterday. And certainly the one and two year had gains that you just will very rarely see in a one or two day period. Yields moved a bit higher today, but not not a lot. So yields moving higher, stocks going higher. It's some indication of things settling a little bit,

but not necessarily the volatility, just the price level did kind of contain itself. No real big news. There are a lot of bidders out, some of whom are in our portfolio. So I talk about it in tomorrow's client portfolio bulletin. I'm not going to get in those details here on our public broadcast, but there are a lot of bidders out for some of the kind of assets with value, if you will, left in the remains of Silicon Valley Bank. And you have a number of private equity companies and whatnot looking to bid on some of the loan book and the credit and the availability of opportunity there. But no wholesale buyer for the bank or for the other failed bank of the last few days.

And there was a recovery in a lot of the big regional banks today, but still way underwater from where they were last week. And not all the regional banks recovered. So there appears to still be some skepticism as to what's going on in the regional bank world. I am firmly convinced it isn't fundamental, but more fear of some kind of a contagion, which right now looks contained. But depositors pulling funds to go to bigger banks, even apart from any real risk to the depositor now with the actions over the weekend, it can become a self-fulfilling prophecy. So CPI and then I'll let you go. It was up 0.4% on the month, which is exactly what was expected.

It came down to only 6% year over year. It had been 6.4% last month. So on the year over year basis, you got some decent size disinflation. But here's the thing. These numbers of 0.4% up on the month and 6% up year over year include an assumption for the month of 0.8% increase in rents and for the year, year over year from right now today, an 8.8% increase in rents. Just absolutely preposterous from where we really are. And so if instead of a number adding 0.8 to the monthly, it was subtracting, let's say, you know, 1 or 2 percent, then you can imagine what that would do to the overall number.

So that CPI lag from renters equivalent, owners equivalent rent, rather, I think is a very big deal. And the core goods inflation was up 0% of the month, and it's now up 1% year over year. So there's still some non-shelter services inflation. We know the food and energy volatility and services with shelter has to catch up with that lag effect. But I did not see anything surprising or concerning in the inflation data today. And I expect that the whole question as to what the Fed's going to do next week is really going to come down to the Fed's feel for how stable things have gotten in the financial system. I think if they were acting today, they would not be raising rates at all. I still think there's a chance to do a quarter point by next week. I think they'd like

to do another quarter point to give them some breathing room, but I think they're pretty close to done after that with everything going on. That's the scoop from our land. Thank you for listening to, watching, and reading the DC Today. If you missed it yesterday, check out the special Dividend Cafe. I know everything happening on our banking system. And tomorrow you will have Trevor Cummings, Thursday, Brian Saitel. I'm going to be out of town the next two days. And then Friday, I'll be back at you with a very, I think what's going to end up being a lot of fun, Dividend Cafe. Thanks for listening. Take care. This is not an offer to buy or sell securities. No investment process is free 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.

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