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.
Banks today, commercial real estate tomorrow..with the Covid bonanza behind us and inflation upon us and a REACTIVE GOVERNMENT in place, we are going to get shock after shock..strap yourselves in!!
Tim, you asked 2 very important questions. “My question is where are the bank regulators? Do they have a handle on banks or not?”
“In 2018, a bill was signed that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which removed the requirement that banks with assets under $250 billion submit to stress testing by the Fed, and changed requirements for the amount of cash they had to keep on their balance sheets to protect against shocks.”
So where did the regulators go? By law, the regulators were told to significantly lower scrutiny for banks this small. The 16th largest in the country got less scrutiny and has now failed. I for one, do not consider the 16th largest bank in the country to be too small to get the highest level of scrutiny.
So, the answer is no – the regulators no longer have a handle on the banks. HERE WE GO AGAIN !
Calif closes Silicon Valley bank- sent to FDIC as receiver.
My stink bid in for WSBCP WesBanco 6.75% pfd w high reset rate off 5yrT hit at 24.50 this am..been wanting this to go w my WTFCP WinTrust w similar high reset rate off 5yrT. I didn’t think I’d get it on a run on a bank!! but hey, happy to hold, these are keepers; should this mess continue into next week I could add to these.
I bot some GOODN the other day at 19.10 and sold that at 19.81. Controversial REIT not something I want to hold. I have ALL-B small position;
WFC-Q again small position; some DRH-PA I got at 24.50 in Jan, keeping that.. holding one other spec name ATLCP which I had traded around to reduce basis when it fell to 17, reduced it quite a bit at 21, holding a little (not sure why in this environment!! jobs still strong -they should be ok large cash position in lastest q update)
I see SPAXX FIDO govt mmkt rate came down from 4.23 to 4.22 flight to T’s and safety maybe there will be a turn down in rates w the bank issues, FED having to rethink things as they are impacting the banking system;
((Added to some energy names, CPG and WDS this am; a stink bid to add to TFSL also hit at 12.50 ))
While the banking issue is a potential game changer allocating nibbles works for me w a massive base in 3-6mTs which start to mature in Apr. My gold miners acting as a nice hedge along w AGQ Ultra Silver+ for the black swans-which we are seeing today! I bookd big gains in Jan from last years swoon and am happy where I sit portfolio wise so far– GLTA. Bea
GLTA
Bea, what attracts you to Wesbanco at this point? I reviewed the 10-K posted on 27 feb, and see NII flat (despite a 10% increase in portfolio loans), deposits down, operating cash and net cash down. That said, the dividends are very well covered…
Bur– WesBanco and Wintrust pfds are from strong regional banks where deposits are sticky and held more by avg folks. Not immune from compression of NIM of course but earnings should more than cover pfd divs even in a downturn.
TFSL same, they are paying good rates on CDs as well already so I think the deposit base will be stickier.
(My investing strategy is quite conservative imo; some call it ‘barbell’ strategy and my barbell is mostly cash/equivalent now at 70%; pfd/bb’s at 7%; TIP CEF 2%; r/e (not REITs) 4%; energy stocks 3%; metals/mining 11%; other 3%.
Probably too conservative for a 64yr old w longevity in family hx. I trade around a core in conviction names using technical analysis somewhat which has served me well and allowed me to book profits to capital and reduce basis on those names. I have 9% in FIDO’s SPAXX which gives me trading flexibility to do the nibbles. I pour over research and 10Qs on names I am in or hot list to buy. The 3% allocation to energy is my newest position which I will probably build to 5%. )
A friend told me some CMBS tranches were at 45 cents yesterday. He said it’s looks like bond debacle all over again. FRC common closed at 96. Opened poorly today. Traded to FORTY FIVE, now back to 82… So a great name down 50% in the blink of an eye.
Some floating rate issues are trading at discounts even with rates of 8-11%.
One talking head made an interesting point this morning: CEO’s and CFO’s of banks and financials don’t want to subject themselves to special scrutiny for fear some minor flaw or risk will be overblown. I would interpret that to mean that bank and financials are less likely to be called and refinanced?
One issue raised on a couple of shows is the spectre of imbedded losses in fixed income securities whose market value has been depressed by rising rates. Maybe the Fed will play this down, if only to avoid stating the imbedded losses in its bloated portfolio?
At $30 a share would not be surprised to see old Warren up his stake in Bank of America.