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Waiting for the Next Shoe to Drop

Each day we hear less and less on the banking situation–is it gone? Resolved? Not a chance.

All through the financial system we are going to see band-aids being applied to deep problems–kick the can down the road some more, just like we have been doing since 20 years ago (or more). Regulators? I have little faith in the regulators of banks and insurance company’s – at least on the federal side of regulations – most insurance company’s operate under some sort of state regulators and maybe there is more nerve there to regulate–maybe.

So as we wait for another ‘shoe to drop’ it is near impossible to have huge amounts of confidence in investing–on one hand if you wring your hands and hold cash (or cash equivalents) you may miss out on some huge capital gains and very tasty current yields–on the other hand if you invest heavily and an ‘event’ happens you could get burned badly.

Yesterday I bought a position in the Jackson Financial 8% fixed rate reset preferred (JXN-A) and I added to my Lincoln Financial 9% preferred (LNC-D). These are small positions – 100’s of shares – not 1000’s of shares. I’m pretty conservative – and the odds I am going ‘all in’ on these issues (or similar issues) is exactly ZERO. I may add more in the next month or two, but I really want more data–i.e. earnings reports etc. I would rather look back and see that I missed some gains than to wake up some morning and find an ‘event’ has rocked the financial sector. It takes only 1 bad security to inflict massive portfolio pain on investors so I encourage folks to use caution and ‘leg in’ to positions.

So today we have a number of economic reports hitting starting in 90 minutes with retail and wholesale inventories at 7:30 a.m. followed up by the Case Shiller home price index and the FHFA home price index at 8 a.m. (central) and consumer confidence at 9. Market movers?–not likely too much. Fed vice chair Barr testifies to the house today–supposedly on banking, but who knows where this goes.

Well markets are quiet with little movement n the S&P500–let’s get it going and see if we can keep it quiet.

20 thoughts on “Waiting for the Next Shoe to Drop”

  1. speaking of dropping, FRC preferreds fell off a cliff today while the common’s drop was much smaller.
    Month end window dressing by funds?

    1. These preferreds are no longer being priced for yield and aligning to its optionality value, which is lower relative to where the equity is trading.

    1. dd–yes I had to ‘make room’ – I will get it in the side menu soon. I havedn’t been keeping up with it so will try to get the dividends credited in it.

  2. There is so much commercial real estate sitting empty from the 2008 real estate crisis. This could be a leg two downward spiral.

    Clearly Powell may turn out to be another Greenspan. Really makes me wonder how wise it was to go forward with another 1/4% interest rate hike when he has his DNA all over the scene of the accident or should it be crime?

    The Fed 12 times in the past has created economic disasters that has created pain and suffering for millions of hard working people.

    1. Yup.
      Boom / Bust cycles

      I would do a happy dance if the Fed was focused on a strong stable currency over a long period of time.
      I think that interest rates would reflect the good or bad economic policies.
      But that just sounds nuts.

  3. I owned a Countrywide Financial CD back in the day. They needed cash so they offered the highest rate available. We all know what happened to them but my CD was FDIC insured

  4. I think the next shoe to fall will be the debt limit on the national debt. I am holding several treasuries and I’m starting to get nervous.It seems impossible that any kind of default could hit the Treasury bills but nothing surprises me anymore.They could pay the Treasury bills and delay everything else such as Social security payments, payments to government contractors , and payments to states delayed. Who knows?

    1. I agree. I assume many here were quick enough to move from low-yielding bank accounts to safe, high yielding Government Money Market Funds offered by the big brokerages.

      Government Money Market Funds hold short term US Government obligations, 7 to 30 day maturities. In the event of a US debt default, it is possible that the MMFs will neither be able to have their maturing short term paper redeemed or buy new paper. So it is possible that there will be a return to 2008-2009 money market fund lock-up scenarios with suspension of withdrawals.

      I don’t think that you can depend on selective defaults to save you. If anything, I would guess that politically sensitive payments like Social Security would be pushed ahead of T-bills.

      FWIW, my game plan for the US debt default is to switch out of Government MMFs and into brokerage bank sweeps. Just my opinion. DYODD.

      1. I agree with you on selective defaults not going to save you. The optics of paying interest to China on their Treasuries while stiffing grandma on Social Security would be horrendous.

      2. Bear NJ-
        This is why I use one (SNOXX) of these exceptions from Schwab’s info sheet:
        “All Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury
        Obligations Money Fund, Schwab Government Money Market Portfolio, and Schwab Retirement Government Money Fund may impose a fee upon the sale of your shares or may temporarily
        suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. “

  5. IMHO, the immediate bank run crisis is over. Whoever panicked has pulled out their money.

    Coming attraction: Commercial real estate. IMHO, a credit contraction is likely. Big deposits left the regionals: there’s less to lend. CRE defaults were already in the news before the runs. Defaulted assets will land back on weakened bank balance sheets. Regulators were warning of too much CRE vs risk based capital in 2022.

    FWIW, insurers and banks have different business models. Banks have demand deposits. (Jimmy Stewart got that right: there is no money in the bank vault. That’s the way it works.) Insurers match assets against more or less predictable contractual payments. So underwater Treasuries are less of an issue. And as Buffet complains, insurers do mark to market.

    If I were younger, I would be buying banks hand over fist. But I’m not younger. With rates above my minimum draw target, I am content to go fishing for CDs and the occasional flash sale that volatility brings. Just my opinion.

    1. Bear—yes I agree with you on the insurers, but investors have painted them with ‘the same brush’ to a fair degree.

    2. BearNJ:

      You will definitely see more events like Blackstone’s recent default on a $325M mortgage on their Vegas office campus. Of course KeyCorp held the mortgage, as they have been very aggressive in their real estate lending. They were the bank that allowed Wheeler to pull off the Cedar fiasco by giving them a $130M loan on Cedar’s worst assets.

      But I expect most of the defaults to be in the office sector, and not all of “commercial real estate”.


  6. Any idea why ZION’s CD’s seem to offer 20-30 bp’s more than most? Beware bankers bearing gifts?

    1. Well, I guess they need money.

      You can see some other financial companies that the market thinks are having trouble near the top of the CD rate leaderboards too, like CUBI and SCHW.

    2. Zion was ID’d in a few news stories. I don’t have the links. FWIW, I have no concerns about buying CDs from any FDIC insured bank. (OT – Chase offers click-bait CDs at 20-30 BP higher than others, but the catch is the Chase CDs are callable.)

    3. If I am not mistaken Zions represents a set of banks: Amegy Bk, Nevada State, Vectra, Calif Bank and Trust, National Bank of Arizona, The Commerce Bank of WA.
      Health grade (Q4 2022):

      Scroll down to see Capitalization = C-
      Click on the upside down triangle on the right of the word “Capitalization.”

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