Author: Tim McPartland

FRC needs to be watched – their preferred issues are trading around $10 premarket – some under $10.

Are these a buy? Of course they are non-cumulative so a suspension hurts.

I will be watching closely to see if a small nibble is in order. NOT a recommendation that ANYONE listen to what I do. I simply think the risk/reward at $10/share is coming into an attractive range–with the Fed backstop in place.

8:30 p.m. Central Sunday Evening

It is too early to know how markets will trade tomorrow, except we all know that this is one of those times we could see huge swings–up and down. Easily we could move in a 1000 point range on the DJIA.

We can be certain that regulators will close more banking company’s – who that will be is unknown of course. In my opinion every bank is at risk–because of old fashioned bank runs–actually not old fashioned because all I need to move money is a computer. Money moves fast.

As I understand it the U.S. Treasury will be backstopping deposits that are beyond the typical $250,000 account limit thus reducing reasons depositors would want to flee an institution–but depositors will do what they want to do. Banks, much like insurance company’s, are holding lots and lots of bonds and other fixed income securities many have very large losses on their portfolios. Now this is a manageable situation–if you look at Silicon Valley Banks financials on 12/31/2022 they were rock solid. Their capital position was stellar and way, way above required levels, but none of this means anything if capital starts to ‘flee’. Sales of securities are necessary to meet customer demand–thus requiring the bank to book a loss–and then it snowballs when folks like Billionaire Peter Thiel begin withdrawing funds and recommending to others they do the same.

From what I can see this all unraveled very quickly, BUT certainly bank officials and their regulators knew days in advance there was potential for the unraveling. During the weekend I found numerous ‘lists’ of banks with large portfolio losses published on line by various sources–these lists are NOT helpful at this time. I did note that Customer Bancorp (CUBI) made the lists–I hold 2 of their preferred issues at this time and don’t plan to sell them as they are modest positions and I believe they are money good–as are most banking issues.

So from what I can see NOW S&P500 futures are UP 1.3%, but there are 11.5 hours until markets open and so much can change. We know the markets will be wild–with news hitting the wire continually. ‘Rumors’ will be hitting the newswires – whispers of this bank or that bank being in trouble.

I am unlikely to be a buyer. I think there are likely deals out there NOW–but I am a low risk person and by and large leave the ‘hero’ role to others–but you never know, because I don’t know where the reward warrants the risk.

So folks always have to do what they have to do – some will panic, some will exit the market with large losses only to see shares bounce back sharply in a week or two. Some will reinstate their ‘mayonnaise jar’and bury their stash in the backyard. There will be the brave who step in front of the falling knife and buy, buy buy. Others like me will mainly ‘watch’ and see if this thing gets sorted out quickly.

Buckle up!!

Looking at my spreadsheet of banking and insurance issues shows a sea of red–California banker First Republic (FRC) seems to be taking one of biggest hits–common and preferreds–one issue off $6 right now.

I hold some Customers Bancorp (CUBI) and Bridgewater Bancshares (BWBB) preferreds and right now I have no intention to sell at this time–they are modest positions.

I would suggest that holders of banking preferreds review the balance sheets of their company’s–check their capital levels relative to the required levels. How much of their investment portfolio is ‘hold to maturity’ and watch for statements from the company on deposits leaving the bank–most bankers will be just fine with minor outflows–or maybe they need to up their CD rates. Many of the small banks offer inferior rates on deposits–locally one bank is offering 4.11% on a 21 month CD–1% under what I can get from the big banks..

We should get statements out of most banks today on their individual positions. Also I wouldn’t be surprised that we get a very major announcement from Silicon Valley Bank (SVB Financial) at any moment–they badly need an announcement to save the bank.

When interest rates move sharply higher in a quick fashion ‘things break’ eventually. I have noted many times the huge losses insurance companies have taken in their investment portfolios – anyone holding long maturity bonds for the last year is going to get hammered-we all know that is what happens.

Watching the Silicon Valley Bank situation is almost surreal–this is the 16th largest bank in the U.S.–very well capitalized according to the last 10K. Obviously investors are on edge after the Silvergate Capital (SI) collapse. To see their common shares fall maybe 75% in a few day while the company hunts for capital with a common share and preferred share offering. My question is where are the bank regulators? Do they have a handle on banks or not? The 5.25% (SIVBP) non cumulative preferred outstanding fell to the $15 area yesterday–I suspect it will fall further today.

So we will watch this all play out–seems like a potential Warren Buffett moment–he could provide a few billion in capital via a 12-14% preferred stock issue. Depends on the actual financials–I am certain the Berkshire Hathaway accounting wizards are looking at the situation right now as they could recapitalize the bank with ‘petty cash’.

So we have the jobs report in an hour – now maybe it is secondary to the banking situation – but just the same very important. It is expected that 225,000 new jobs were created–certainly anything less would be a positive. The unemployment rate is forecast to continue at 3.4%. We’ll see soon.

Preferred stock and baby bonds got hammered yesterday – in particular the banking and insurance company issues where my quick review showed losses of 1/2% to 8% – excepting the SIVBP issue which fell 25% or so. May see a bounce back depending on whether there is further clarification on the banking situation.

The banking situation has sent treasury yields sharply lower with the 10 year treasury yield has fallen from over 4% earlier in the week to 3.85% right now. The banking situation may or may not change the trajectory of interest rate hikes by the Fed–just one more piece to the giant puzzle–maybe they raise only 25 basis points when they really want 50? Maybe after a review of the banking system they pause? Who knows?

So with equity futures down just a bit this morning we await the news of jobs and banking. This will be a very good day to watch from the sidelines.

It’s an orderly day as equities have been falling since 1/2 hour after the market opened. Interest rates have moved 6 basis points lower to the 3.92% area.

All eyes are on the jobs report tomorrow at 7:30 a.m. (central). Today we had jobless claims that came in at 211,000 versus expectations for 195,000–while I wish no ill will on anyone (employed folks) we need this number to trend higher–Jay Powell wants it higher (or at least he believes that is an important sign the economy is weakening). Continuing unemployment claims rose to 1.72 million. With JOLTs (job openings and labor turnover) showing 10.5 million available jobs it is hard to believe that anyone is unable to find work–but if you are a software engineer, working at the local Holiday Inn Express is not really a workable solution.

Today I went ahead and bought a bit of a 1 year JPMorgan 5.40% CD–just $5,000. This issue is callable in June so I am betting that rates will be higher in the later part of the year than they are now. Most of the CD’s I have bought are not callable–they pay 20 basis points less, but at least one can count on the rate for 2 years. I have not bought anything further out than 2 years simply because I think we will be able to do better maybe in August.

Reviewing the preferreds and baby bonds today it is kind of ugly considering that the 10 year is lower in yield by 6 basis points. I have no focus on these issues now – risk/reward isn’t adequate for now. I think the average share price may be 4% lower in a couple months–we are going back to where we started the year so thus far lightening up on preferreds and baby bonds after the January rally and moving to more CD’s and bonds has been a stellar play–we may be able to do a ‘rinse and repeat’ later this year.