Author: Tim McPartland

Bankers are getting hammered once again–PacWest, Zion, Western Alliance and First Horizon (because of a failed merger with TD bank).  If we are going to see another bank failure it is PacWest – this will play out within a week I think.  Personally I have a handful of banking preferreds, in small quantities, but even the small quantity caused some pain yesterday. My desire to balance treasury and CD holdings with higher yield small banks appears to have backfired for the time being–i.e. It was too early.  My hope is this plan will work out very well, but certainly now is probably not the time to buy.

After the FOMC rate hike yesterday we need to start watching for weakening  economic data – starting this morning with initial unemployment claims and then tomorrow with lower new job creation and higher unemployment. It is time to stop hiking interest rates, but we need to get affirmation from the data and employment is a giant factor in the Fed decision making.  Never underestimate the ability of the Fed to screw things up. We’ll see!

Here is today’s economic calendar.

I wrote yesterday that I bought some of the RiverNorth Opportunities Fund 6% preferred (RIV-A) via a good til canceled order at $22.50.  The 6.68% current yield provides a great yield for a closed end fund preferred with a A1 rating (assuming the rating is meaningful).  It is my intention to put in another good til canceled order today maybe at $22.

Equity futures are a bit soft today while the 10 year treasury yield is lower – now at 3.35%.  Let’s get to going and see what the day brings us!!

All eyes are on the FOMC for the interest rate decision at 1 p.m.(central) and the consensus is a ¼% rate hike.  More anticipated is the press conference with Jay Powell at 1:30 p.m.- what will he say about the future?  On one hand Powell can’t appear to be soft on inflation and on the other hand he can’t turn dovish.  We are likely to get major market moves regardless of what Powell says in the press conference.

Yesterday we had interest rates drop sharply after a large spike on Monday – the 10 year treasury closed Tuesday at 3.44% as the JOLTS report showed a decrease in job openings and layoffs are increasing – so a sign of a weakening economy.  Today we have a few other economic releases including the always unreliable ADP jobs report for April.

Most certainly I will sit on my hands today which is the typical day for me for many weeks (or has it been months).  We are not going to be able to buy any banking for quite a while–although for those willing to try to ‘catch a falling knife’ there are many issues of the smaller banks with current yield over 8%–stay with small positions and diversify across a basket.

Yesterday I was reviewing current offerings of CDs and there were issues available at 5.25%, but just like the terms of preferred stock and baby bonds banks  can play around with the terms. Most of the current offers pay interest at maturity and the highest coupons are callable – I like monthly payers that are non callable, which pay a lower interest rate. We’ll see what is available later this week after Fed actions–I may go ahead and lock down some more CDs since it is unlikely I will be buying preferreds or baby bonds for some time.

Well let’s get the day going – it is going to be a wild afternoon.

It is kind of silly to see what is going on in the banking sector – you have got to know that short sellers are planting rumors and reaping the benefits. The more folks talk and digest the rumors the more deposits leave the vulnerable banks.

PacWest (PACW) and Western Alliance (WAL) are todays targets–but the sector in total is taking a spanking. Just like yesterday we are seeing a solid sea of red in the preferreds. PacWest common is now at $6.14 – down $2.87 while WAL is trading at $28.59 which is down $7.93.

As folks have said in the comments – every bank is a potential target of a ‘run’ – no matter what their financials said for the quarter ending 3/31/2023. I have looked through many of the financial statements of the community/regional banks and on the surface they looked pretty damned good.

When the carnage is over there will be some dandy ‘bargains’ – unfortunately that won’t be anytime soon.

The banking preferreds are here.

The job opening and labor turnover report (JOLTS) is scheduled to be released at 9 a.m. (central) and this is a relatively important report–at least to the extent that the report gives us any insight into future employment.  Like all government reports sometimes it is questionable whether it is helpful – but it is what we have to work with and regardless of personal opinions markets move on these types of stats.  

I looked over the JOLTS report from last month (for February) and 1 interesting statistic is of the level of ‘separations’ –divided into 2 broad categories – quits and layoffs.  Last month quits were up while layoffs decreased.  It would seem to me that in a weakening economy that quits would be reducing while layoffs would be increasing so I will be looking at that for a hint at economic direction.

Of course the report contains the ‘job openings’ section and this number has been consistently falling—from 11.6 million back in 2/2022 to 9.9 million openings in February.  I have read that anecdotally this number is way over stated – by a magnitude of 2X – that companies advertise jobs whether they actually have openings or not.  So once again while I question the data it is data that folks looks and react to so one has to consider it.  The forecast today is for 9.6 million job openings in March.

So we have equity markets off a little today and interest rates are flat from yesterday, but yesterday’s close of 3.57% on the 10 year treasury was up 12 basis points from last weeks close of 3.45%.  It would not surprise me that markets trade relatively flat today as we await the Fed Funds rate hike tomorrow afternoon–but more importantly the Powell presser after the rate hike.

Today I will probably do nothing.  My good til canceled orders are way out of the money – none of them are likely to execute, but I will leave them in place.  I am on hold relative to any banking preferred purchases – yesterday proved that this story has plenty of time to run yet and no use trying to catch a falling knife.