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Strong, But Calm Day

Interest rates have backed off a little–down 6 basis points on the 10 year treasury.

The S&P500 has moved higher virtually all morning in a very calm manner until a sell off at noon–dragging income issues along for the ride. Overall preferred stocks and baby bonds are mostly green, although the volume on these issues is pretty light–many issues have traded just 10 or 20% of their average daily volume at 11 a.m. (central).

I am just watching–my accounts are up around 1/2% as some issues such as the Arbor Realty perpetual (ABR-D) popped higher by 3%. Some of these issues are acting like ‘the bottom is in’. This issue traded as low as $16 2 weeks ago and now is at $18.50. Where the bottom is nobody knows–thus I have just ridden the shares down–added a little a prices dropped and now hopefully will ride higher.

Let’s see what these markets hold in the next few days–could be exciting.

15 thoughts on “Strong, But Calm Day”

  1. if you don’t like calm, try crypto today! exchanges blowing up, margin calls, forced sales of major players…

    1. crypto related…

      SI-A is almost priced for bankruptcy… which is odd… since they may make less money in case of a crypto collapse but they do have protections in place. It is almost like the preferred are being treated like it was the common. Darn bank has been profitable for the last 24 years. It is not like they sold 2 billion worth of preferred shares. I have no idea when those preferred will bottom but they could be a potentially good investment for the brave. I am buried with my shares but I don’t worry too much about them. Just pay me.

      1. Financial companies and others fund their operations in the overnight market typically everyday.

        UK Gilts which is the worlds 3rd strongest Government dept market seized up as no one wanted to bid and the swappers immediately marked the collateral down which caused the repo man to ask for more collateral.

        You now want exposure to a company that swaps illiquid coins for US dollars or for leverage to DeFi. Not to sure this is the time to leverage stack. Better wait until QE is back on the menu.

        1. micahc,

          Now we can argue back and forth about crypto.. but in the end they take in bitcoin and give out approx 25% (maybe a bit higher i forget. Not above 50%…) in cash. If bitcoin goes lower they ask for more bitcoin to keep the percentage correct. They do not handle any other crypto bro coins. So yes.. if bitcoin flash crashes and stays at 500 bucks a coin they eat losses. Yes indeed. No different then any small bank who borrows to a few very large clients and they go bankrupt with little to no assets. It is also not their main line of income either. The main line is allowing major crypto players to access banking services with cash (not crypto) and SI makes interest on their deposits.

          But even without any crypto stuff.. they have always been profitable before that. Lets not ignore that aspect…

          1. FTT exchange got bank run by their competitor and all assets snatched for dimes via buyout deal while depositors are on the hook.

            Let’s just say the lobster pot is in operation. Meaning consolidators will be checking books and repo man will be on the prowl in the coming weeks. We will see who is next needing a cash call as liquidity tightens.

      2. fc:

        “Just pay me”

        SI+A is a non-cumulative preferred. I said long ago that if any “bank” decided to skip a preferred payment or two, it could be them.

        A Wells Fargo analyst downgraded SI back in early October when the stock was selling for $74. Current price is $38. SI’s 3Q report issued a few weeks ago was ominous and the stock fell 20%.

        They reported massive transaction volume reductions on the Silvergate Exchange Network (SEN). Silvergate essentially takes in deposits (and pays depositors almost nothing) so these depositors can conduct business on the SEN payment rail.

        But the problem is that in the current higher rate environment (to go along with plunging crypto confidence and prices), SI will be one of the most deposit-sensitive banks. You will likely see a huge drop in deposits when they issue 4Q earnings, so they will have to start taking big realized losses on the agency RMBS and other Agency securities that comprise the bulk of their investment portfolio. How else to pay fleeing deposits?

        SI doesn’t really do any commercial real estate loans anymore. Just crypto loans to companies like MSTR. They truly threw all their chips on the table in support of crypto. It really is just a spread investing entity similar to a mortgage REIT with a payment rail business that is massively deteriorating.

        Sadly, it is becoming a perfect storm for them. I never understood how this stock could trade at 2X book value in the current environment (before today!).

        I have owned put options on SI throughout the year, but of course had none as of this morning. Damn it!

        1. Rob,

          Where exactly are these fleeing deposits going to if exchanges and etc.. need a place to do banking business when they are no other real options yet? It is future options that could cause them to flee but they do not exist yet like an exchange forming a real bank, correct? So deposits fleeing might not happen in bulk as some think. All of that is up in the air as we debate this.

          It is all these things that make a market and why the stock is so volatile. I agree SI is not doing as well as they did during the crypto boom obviously. I would not write them off yet considering how sticky crypto seems to be even though I do not use it myself. Their stock price was due to come down. True enough.

          1. fc:

            “It is future options that could cause them to flee but they do not exist yet like an exchange forming a real bank, correct?”

            Yes, it is my understanding is that the SEN may not be very “sticky” in the future.

            This is what one commenter who is extremely knowledgeable about SI posted on Seeking Alpha back in September:

            “The real problem comes when the Fed tells the coin exchanges and crypto houses they can deal directly with each other as non-banks using a new class of charter (Called Tier 3) that allows them special access to the Fed’s payment rails. This rule change is imminent, per Vice Chair Brainard. ”

            Of course, this would make the SEN pretty much irrelevant. But I have no knowledge of whether or not it will ever come to fruition.

            Just so many risks here for SI.

            1. Related to the Federal Reserves loan book being under water on a mark to market basis, this is also going to affect many banks. It is OK for the Fed to have that paper loss, but it MIGHT not be OK for smaller banks. With the value of the loan book dropping, some of them are going to become technically insolvent. And the regional Federal Home Loan Banks WILL stop lending to them. Likely game over in that case.

              I do not know if this will affect SI, but it theoretically could. Even if all of the crypto loans are one off, meaning they are not traded on any exchange, they will have to mark them to something. If the marks are low enough, it might cause a problem for them. Astute bank analysts have working lists of banks they think are heading that direction. The Fed could bail all of them out, but since they are NOT “too big to fail”, they might be allowed to fail.

              We discussed SI and SI-A here many months ago regarding their crypto loan book.

              1. Tex:

                Don’t think there is any chance the Fed would bail out Silvergate (if it ever came to that). My understanding is that the Fed specifically asked all banking institutions to wait on doing any large lending using crypto currencies as collateral until the Fed’s policies on crypto were set up and implemented.

                Silvergate blatantly ignored the Fed and did the huge $205M loan to MSTR anyway back in March of this year.

                I’m convinced the Fed and FDIC would have no problem letting SI go down the toilet. Of course depositors would be protected up to FDIC protection limits.

      3. That’s a special situation disaster. I believe it was IG too.

        What we are experiencing is the worst bond market since the founding of the USA. Few names are holding near par. Fiscal constraint looks out the window too. Did you see the details in the student loan bailout?

        New Income-Driven Repayment Plan

        The proposed income-driven repayment plan will cap monthly payments to 5% of your discretionary income. Any unpaid interest will be covered by the Department of Education, meaning that interest won’t accrue and your loan balance won’t grow if you make your monthly payments.

        Do you know what DISCRETIONARY income is? After tax after mortgage/ rent, after food after medical after clothing etc. And after 20 years its gone no more ‘burden’ loan forgiven….

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