The Dividend Cafe - The DC Today - Tuesday, May 2, 2023

Episode Date: May 2, 2023

Today's Post - https://bahnsen.co/3LLhr5A Regional banks were hammered today as clearly, the fear is contagious at this time, with some major regionals down -15%, -28%, and even others still down -9% to -12%. Short selling has picked up substantially in this space, so there is a need to watch it rationally and not technically. The basic criteria for them to look for are easy – high amounts of low-rate mortgages on the books, a big gap between mark-to-market values and posted values of the bank’s assets, and the existence of commercial real estate. The average 3-month CD rate of a bank with $10-50 billion in deposits has gone UP by 0.24% since Silicon Valley Bank failed. The average 3-month CD rate of a bank with over $250 billion in deposits has gone DOWN by 0.36%. This is basically the story of what has gone on – a 60 basis point competitive disadvantage for small banks versus big banks in less than two months. So that the Fed would be looking to hike rates in this environment is an act of sheer ignorance, and some may say malice. More on that tomorrow. 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 DC Today. Greetings from beautiful Minnetonka, Minnesota, where the Bonson Group's office has been for a couple years out here in the wonderful Minneapolis region of the country. We have enjoyed a very busy day of some client meetings today, doing a lovely client dinner event tonight. Truly enjoying my time with the great team we have assembled out here in Minneapolis with Phil and Michelle and Stoddard and Sarah

and Reed and Matt and our newest member Megan. So a wonderful group of people that many of you know but I am here for your purposes to briefly talk about this sell-off in the market today. The market was pretty much up for the first hour or so, kind of flattish, and then sold off quite a bit, actually at one point down over 500 points, closed the day down 367. So for about the last four hours of the day, it had a steady comeback of about 150, 200 points, but nevertheless was coming back from a pretty deep sell-off. That was almost entirely related to ongoing anxiety in the regional bank sector. You had some pretty well-known regional banks down 25%, 18%, quite a few down in between 9% and 12%. After hours, I've gone through the particulars of about eight of these banks.

And so there's just no question that there's a pretty organized assault. You have short selling interest that has increased dramatically. And so the shorts are kind of having their day right now. And it's not rocket science. They're looking for companies that seem to have a high percentage of assets marked at a hold to maturity value versus marked to market value, you know, outside of the interest rate component where rates and duration risk have moved prices. And then, of course, banks that have a lot of low cost, low interest fixed mortgages that are probably mispriced from their carry value as well. And the shorts may have their fun and get out of the way. They may stick around a bit. We'll see. Of course, it strikes me as somewhat incomprehensible that in the middle of this,

in both the aftermath of what was the First Republic debacle and, of course, last month, Silicon Valley, that we're looking at Fed raising rates more. Right now, you have an average three month CD for banks that have $10 to $50 billion of deposits that has gone up a quarter of a point since March. And for the big banks, it has gone down 0.36%. And so you're talking about a 60 basis point difference in what a basic three-month CD the regional bank might have to pay out versus a bigger bank just in the last six weeks. That's how much of a difference you've seen. So the funding costs have gone way up for regionals and way down for large banks, and therein lies the rub. And for extreme cases with deposit outflows being bad enough

and certain questions on the loan nature and asset nature, particularly the high commercial real estate, on some of the asset, the balance sheet of these regionals, that's where this opportunity is. I continue to believe that it's not a decidedly fundamental story. I want to point out by fundamental story, I mean in the macro. I mean, obviously, it's incredibly fundamental in the moment for these individual companies in the micro. But I think that we want to take it all in the right context here. You got the VIX was up 10% or 11% today to a whopping 17%. I mean, the fear index in the broad markets is non-existent.

Bonds rallied big today. There was a fight to safety. The 10-year was down 10 basis points. But technically, even in a sell-off day in market, you had the Dow, S&P, and NASDAQ each down 1 point something percent, 1.06%, 1.08%, each being down roughly about the same amount. And you technically had consumer discretionary up a tad. Energy got walloped. The regional banks got walloped. But no, I believe that we're going to want to get through what the FOMC does tomorrow

with the Fed, not just the rate decision, but primarily the comments and direction given afterwards. We'll see how determined the Fed is to break something, because if they want to break the entire regional banking sector and force everybody in the country to be a client of a large bank, I guess they have the power to do that. It doesn't seem to me to be within their mandate. I'll leave it there. That's what's happened in the markets today. And we'll look forward to coming back to you with more of an update tomorrow. Thanks for listening. Thanks for watching. Thank you for reading the DC today.

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