As for the stock market specifically:
We had a pullback last week in stock market terms for US stocks. Normally that takes place over the span of a few weeks or months, but this time, it came in five days.
This is going to be a fairly lengthy commentary, much of it is serious, and some of it will be another tirade regarding “our friends in Washington.” As usual, I don’t care about party affiliation, as both our major political parties have their own way of joining forces to become the Spending Party.
This week is quadruple witching week, which normally incurs more volatility than normal. As usual any substantial cash levels will act as a parachute if markets decline, and a drag if markets rise.
Now I am going to combine sports and investing. You can find multiple places for news on how to complete the college basketball tournament brackets, but there is a general rule that applies to both basketball tournaments, and investing. It also applies to horse racing.
The general rule is to favor the strong investment, team, or horse. Longshots may pay very well when they come in, but history shows that investors, and basketball tournament bracket pool players, tend to do well when they put their money on strong investments (high relative strength), and teams that get seeds 1 – 4 in the brackets.
Confining this to the scope of this article, relative strength is a very high indicator for me to use for client investments. Of course, having strong relative strength is no guaranty that we will get the desired results. High relative strength stocks can decline, too.
I will speak to the bank collapse in the economic section but will say anyone who wants to see a chart of the most prominent bank in the news, let me know.
It was a pretty bad week for the bullish percent indicators. All fell at least 5 percentage points for the week. We start the week off in WEALTH PRESERVATION mode across the board.
Remember, X’s mean OFFENSE or wealth accumulation, while O’s mean DEFENSE, or wealth preservation.
Below is where our indicators stand as of March 10, 2023 (Courtesy Dorsey, Wright, and Associates).
On a general note:
The Department of Labor announced the economy added 311,000 jobs in February. This was well above the estimate of 210,000. The report noted the unemployment rate rose to 3.6%. The gains for January and December each had downward revisions, although the numbers still were strong. Average hourly wages rose 4.6% in the past year, well below the inflation rate over the same period.
I want to say a few words about “our friends in Washington” before closing with a fair number of words about the bank failure situation.
“Our friends in Washington” put together a budget proposal last week, and immediately gave a tribute to Phil’s 1st Rule of Taxes. That states that for every dollar of new taxes the government raises, they will find a way to spend $1.41. The budget proposed likely will not become law, but if it did, tax rates would rise substantially, and some families would see marginal tax rates higher than 50%. Of course, that is before the current tax code expires on December 31st, 2025.
Let’s get to the bank failures, and this may go on for a good length. As usual, agreement is not required.
I will start by saying I know about 3 things required to be a banker, so the readers who are bankers can feel free to correct me. It appears the current set of bankers at those institutions that failed last week seemed to have cut their industry teeth during the period of easy money, and continually lower interest rates. As such, they apparently reached for yield by buying long-term debt that paid low levels of interest, but higher than using the Federal Reserve’s lending programs.
Reaching for yield by buying long-term debt in a rising rate environment is historically a way to lose principal. Professional bankers are not immune to reaching for yield. By the way, long time clients know that we have not held long term bonds in many years, and you are free to call me stupid for not owning them. What is most infuriating is/was that no one was watching the store! Where were the banks’ portfolio and/or risk managers? Didn’t they notice just how badly the bond market performed last year, nor the reasons why? For whatever reason, they did not adjust.
The banks failed to match their incoming loan repayments with their own capital requirements.
The bankers were not the only ones who failed in their due diligence. Many people and businesses ignored the $250,000 limit on FDIC insurance. That may work for some time, but these people and businesses put themselves at risk to lose their deposits. The businesses that had larger accounts failed to examine the SEC filings of the banks that showed the banks were playing with fire.
The banks’ risk management departments did not do their jobs effectively.
Most of us don’t want to spend time studying SEC filings. Here is a shortcut for determining the strength of a publicly traded company.
WATCH THE STOCK PRICE.
If the stock price is going down, and staying down, that is not a good sign of health for the company.
All banks that made the news over the weekend showed trouble based upon their stock charts.
If you don’t want to study the stock price, call me.
That said, publicly traded companies, venture capital firms, private equity firms, etc., are supposed to have people to manage risk. They all missed clear signs of trouble.
Over the weekend, a group of hedge fund managers, venture capitalists and the like, implored our “friends in Washington” to ignore the FDIC insurance limit, and back all deposits, not just those under $250,000.
I’d like to hope they were calling for that backup for the right reasons, not their own deposits, or the deposits of the firms they are backing, which likely have deposits well over the FDIC limit. Some of you may recall, one specific hedge fund manager being on financial TV at the outset of COVID, claiming that if the (now former) President didn’t take a particular action, the financial world could face collapse. For those who do recall, you’ll also remember that the former President did indeed take such an action. Seems the hedge fund manager “played” the system, he held positions that would profit by this action, he used his stature to get on TV, made his claim, and as soon as the action was completed…. He closed his trades and made in excess of $1 Billion literally overnight.
What should be added to the above paragraph, is that this exact same hedge fund manager called for the federal government to save this poorly managed bank. You can draw your own conclusions.
That brings us to the final set of characters in this saga – the banking regulators, which includes the politicians. The banking regulators from the Federal Reserve, the FDIC, the Treasury Department, and the state banking regulators all failed to see the problems at these banks (the same crew who also missed Sam Bankman Fried and his crypto calamity), despite continual oversight. I saw a number of reports attempting to attribute this to a regulatory change that occurred in 2018, that rolled back some requirements of the Dodd-Frank and Sarbanes-Oxley laws. I also read reports that stated the larger bank did not qualify for Dodd-Frank regulations, and, in fact, asked for a looser regulatory review process than what happened in 2018.
Just for fun, one of the aforementioned lawmakers is on the Board of Directors of one of the failed banks.
“Our friends in Washington” decided the way to deal with the bank failures over the weekend is to back all deposits with FDIC insurance. With this action it may become reasonable to believe that there no longer will be a limit on FDIC coverage.
That exposes the other banks in the country to larger FDIC premiums, which they will recoup in the form of higher charges to us, or lower interest rates to depositors.
I also believe it will lead to more bank failures as bankers may make riskier loans with the knowledge that depositors’ property will not go down the drain.
Another fear I have is now that “our friends in Washington” decided that large depositors are insulated from bank failures, someone will have to find a way to “protect the small stockholder.” After seeing how we went from protecting the small depositor, to deposits in the millions, it would only be a matter of time before “large stockholders” were backstopped.
Of course, none of these actions qualifies as a bailout.
I won’t pretend to know how to prevent another set of bank failures, but I want to close by recounting a conversation I had with a real estate professional in late 2008 regarding what could be done to prevent another market disaster.
I believe that new regulations will result in bank failures as “new” unforeseen problems will arise.
We will get more extremely lengthy disclosures which we won’t read, but we will be in a position to know we had a potential pitfall disclosed.
If you read all of this week’s commentary, thank you for your effort and diligence.
Please feel free to call me if you have any questions about this, or your portfolio. If I am unavailable at that time, please leave a message to suggest a good time to call back or an in-person meeting.