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Rates Falling on Powell Testimony

It is confusing to me that interest rates are falling – the 10 year treasury is now at 4.09%. Certainly the move is favorable to income investors–so who can complain? Powell testified yesterday to congress and said there would likely be a rate cut ‘this year’–no promises nor mentioning of number of cuts. Yesterday Minneapolis Fed president Kashkari said he sees 2 rate cuts this year ‘at most’. Kashkari was an ultra dove when we were at zero interest rates–and advocated for keeping rates this low right to the end–so what he knows or thinks is of little interest to me.

So the ‘smart folks’ originally thought 6 rate cuts—then 3–and now maybe 1 or 2? Well obviously there is demand for treasuries–so rates move lower. Let’s face it markets will do what markets will do.

Well we had a wild ride in the New York Community Bank (NYCB) common and preferred shares yesterday as the company remained under fire and an investor group stepped in with $1 billion in new capital. The common shares moved between $1.70 and $4.40/share and their preferred (NYCB-A) moved in a $8.50-$17.24 range before closing at $16.02. Personally I stay away from these situations–to be involved you better be very nimble and have the ability to lose your entire investment. Remember that when the regulators move in and seize a bank there is no notice they are coming–all of a sudden you see it on the news and your capital goes up in smoke.

I noted a number of banking preferred stocks are moving lower–i.e. Dime Community Bank 5.50% preferred (DCOMP) now trade with a current yield of 8.52% at around $16–shares had fallen even lower last month on signs of trouble in NYCB. I will stay away–too conservative to be involved now–maybe later, but not now.

Today Powell will again be testifying in Washington DC so who knows what may happen. We have jobless claims in 15 minutes–I love this data because we see it weekly and I personally believe employment is one of the most critical pieces of economic data relative to rate cuts and as a recession predictor. Yesterday we had the job openings and labor turnover report (JOLTS) and it showed 8.9 million job openings–seemingly plenty of jobs available.

Well let’s get the day going and see where interest rates head–continue down or pivot and shoot higher.

13 thoughts on “Rates Falling on Powell Testimony”

  1. Today From The Hill:
    “Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.

    Powell said the banks that are in trouble with falling office space and retail assets are not the big banks, which were designated as “systemically important” in the aftermath of the 2008 financial crisis. That episode, which resulted in a taxpayer bailout of the financial sector, was also triggered by unsound real estate assets.

    Rather, the banks at risk of failure now Powell identified as smaller and medium-sized.

    “This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” he said during a Thursday hearing on the Fed’s monetary policy in the Senate Banking Committee.

    “It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” he said.

    Powell didn’t go into detail about the specific regulatory actions regarding commercial real estate exposure that are now being undertaken by the Fed, which is both the federal currency issuer and one of the primary bank supervising agencies, though he did say he had identified the banks most at risk.

    “We are in dialogue with them: Do you have your arms around this problem? Do you have enough capital? Do you have enough liquidity? Do you have a plan? You’re going to take losses here — are you being truthful with yourself and with your owners?” he said.”

  2. Is there a transcript of the NYCB conference call anywhere online? The most recent one. I cannot seem to google and find it.

    Oh. It might not even be over yet. Sorry.

    https://archive.is/HxDx6 (bloomberg)

    ^^^^ Using tip another poster mentioned. Had to think hard to remember it.

      1. Danzeb,

        That appears to be the older transcript from the earnings call. There is a conf call discussing the big news earlier today that started at 8 AM.

  3. NYCB/A. Color me suspicious. Average 90 day volume listed as 281,000. That many shares changed hands in the last 15 minutes before the halt. Volume was accelerating all the way down into the halt. For the day volume was damn close to 25% of the shares outstanding at just over 5 million shares trading hands. Hopefully a million of those shares were the ones listed as short and they were covered.

    I find shorting the preferred odd. Maybe it’s all they could get. If you short the preferred you have to come up with the cash to pay the dividend. I never thought about it until now but I guess if you time it between dividends you could get almost three months of a short position without having to shell out the cash for the dividend.

    The SEC should look at the trading. If a bank gets downgraded to junk, there’s a lot of investment-grade-by-policy investors that would have to sell. People know this. It’s just the timing of the downgrade and the announcement, plus the pattern of the volume, all looks suspicious.

    1. > I never thought about it until now but I guess if you time it between dividends you could get almost three months of a short position without having to shell out the cash for the dividend.

      It’s generally difficult to short preferreds over a long period of time; for whatever reason their costs to borrow are usually very high. I don’t have my screen up at the moment but for NYCB-A it was over 20% per annum, and that’s in addition to having to pay out the dividend.

    2. cmcvpr-

      Yes, you can remain short for up to 3 months between dividends. But it’s not that simple.

      Occasionally, there are large drops and the Uptick rule comes into play. That’s not a problem if you’re already short but new positions can be problematic.

      Of greater consequence is the borrow cost. If memory serves, for a few months for NYCB-U last fall, it was 60% or so. That’s a hefty price to pay out. At least with the dividend, you get the offset of your short position increasing in value on the ex-div date (share price drops). And when the borrow cost is that high, shares tend to become non-borrowable and that can lead to forced buy-ins.

      Shorting is feasible but sometimes it’s a bit of a dance.

  4. Good morning Tim; Are you still working on your Deep Dive into CHS?? I would be very interested in learning what you find. As I mentioned I do own a very huge position in their CHSCL.

    1. I did own about 15,000 shares. I have been paring back over the last week as it continues to climb into the ex div, and then investing elsewhere. Im keeping 1/2 that amount. Was a great buy a little over $25 not too long ago. I need to keep the cap gains going to pay Uncle Sam.

    1. Pig Pile:

      That is correct. An excerpt from Bloomberg article this morning:

      “Catching the proverbial knife set up Mnuchin’s firm and the other investors for huge potential windfalls. The group will buy common shares at $2 apiece and get some convertible preferred stock with a conversion price also at $2, to raise $1.05 billion in total. Mnuchin said investors boosted the transaction from an original $700 million infusion. He described his conversations with the Federal Reserve and the Office of the Comptroller of the Currency as “extensive” over the past few days, saying regulators were supportive.

      The group will also get warrants with an exercise price of $2.50 per share. Their shares are expected to represent about 41.4% of the total outstanding on a fully diluted basis. NYCB also said it reduced its quarterly dividend to 1 cent per share from 5 cents.”

      I believe tangible book value for NYCB was about $10+ per share at 12/31/23. With 722M NYCB shares outstanding before the equity raise, common shareholders were diluted by 70%. This takes book value down to $6.75/share or so, which happens when you issue 70% more common shares at a price that is 80% below book value.

      Mnuchin and his co-investors are extremely likely to make a fortune on this deal, but obviously the long term common shareholders of NYCB got shellacked. But better than getting wiped out if the bank went down for the count.

      I dabble in a few select bank preferreds and none of us wanted to see another large bank failure. Maybe I’ll send Mnuchin a dozen roses as a “thank you”!

      1. There was a report yesterday that Berkshire was ready to step in with a offer also.
        Today a Bloomberg article came out that a confidential list the FDIC has for problem banks has grown from 8 to 52.
        Based on a key risk of measure called CAMELS 1 to 5 scale with banks being 4&5 are on the list.
        Think someone here posted a list recently of potential problem banks. Wonder if they could update it.

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