The markets searched for direction Thursday, with some wild twists and turns after a post-Fed morning bounce dissipated in the afternoon and then rallied again onto the closing bell.
It would be easy to be mesmerized by such action, but my advice is: Don't be. The machines control these wild swings. But those same machines have no intelligence -- artificial or otherwise -- regarding the state of the economy or the underlying earnings power of the stocks they ping-pong in and out of.
So, I am sticking with my mantra of avoiding non-energy equities like the plague. We just don't own Nasdaq stocks at Excelsior Capital Partners, and I don't have any in my personal account. Why? Because the high-end of the Fed's Fed Funds target rate is now 5%. Five percent! If you can get that return without risk of default or risk of erosion of those payments (Fed Funds is by definition, an "overnight rate") why gamble on the Nasdaq casino?
Here's a list of possible reasons:
1) Because Elon Musk is cool
2) Because Cathie Wood, according to a recent interview she gave to Bloomberg, has $2 billion in losses at ARK Invest (ARKK) that she can use to shield ... wait for it ... future gains.
3) Because the planet is melting and most climate change plays are listed on the Nasdaq
4) Because Silicon Valley Bank (SIVB) was an aberration
I reject all those hypotheses, although, to be fair, I have never met Elon Musk. So, at ExCap we choose to hide out in the relative safety of bonds and preferreds. So, that is where the market narrative leaves me drawing a blank.
There is just a jaw-dropping lack of knowledge. I certainly would not consider CNN a source for "news," but it occasionally mentions business topics. This is an actual transcript of actual CNN anchors talking about Silicon Valley Bank:
They can use some of the government bonds or assets like them on their balance sheet as collateral with the Federal Reserve. So they can get money from the Federal Reserve without being punished for the fact that those bonds have lost value due to the Federal Reserve raising interest rates.
So it means they don't have to sell them at a loss and this is crucial. Remember, it was the huge bond losses at Silicon Valley Bank that began this panic in the first place.
Huh?
U.S. Treasury Note prices have risen sharply in the past few days, and have been on an uptrend for all of 2023. On Dec. 30, 2002 the yield on the 10-year US Treasury note was 3.88%. Today it is 3.38%. So, unless you are unaware that bond prices and yields move inversely to each other, you would know that. Yes, short-term yields have risen, and, thanks to Powell and the Federal Open Market Committee, rose again Wednesday. However, that is less of a problem, because those securities will mature soon, anyway, so they are subject to less stimulation from interest rate changes, or possess what we bond nerds call "low duration." Add to that the fact that the U.S. Treasury bond market is the single most liquid securities market in the world, so if you had you to do a fire sale of your bonds, it would be quite easy to do so.
So, as William Goldman once wrote about Hollywood ... nobody knows anything. Changes in the value of their bond holdings did not kill SVB. A panic -- which turned out to be very legitimate -- among depositors did. SVB, apparently, did not have enough cash on hand to keep the doors open as panicked depositors withdrew their cash. Game over.
That lack of awareness is what scares the hell out of me about stocks. So, for the most part, I don't own them. Instead, at ExCap we are buying preferreds in energy companies (like NuStar Energy's (NS) NS-A and NS-C) Zions Bank's (ZIONP) , which offers floating-rate protection in the event the bond market reverses course and long rates rise again, as well as exposure to Zions' conservative bankers, and, MetLife (MET-A) , preferreds. MetLife is certainly more creditworthy than it was at year-end (not that MET had any credit problems then) as MetLife's bond portfolio (all insurance companies must have significant portions of their invested funds in U.S. Treasuries) must be having a very good year as bond prices spike.
So, how did Silicon Valley Bank with its well-below-industry-average loan-to-deposit ratio (43% as of Dec. 31, 2022 die, while Zion's, which had a 78% loan-to-deposit ratio as of the same date, (well above its year-ago level) is as rock solid as any bank I have analyzed in the past 30 years? It's not all about ratios. It is about counterparties and deposit level.
Silicon Valley Bank ran into trouble ... because Silicon Valley is in trouble. These cash-burning companies, SVB's main counterparties, just cannot finance their chronic cash burns with higher short-term funding costs. So, the very same 5% that is a very appealing alternative for your funds, as you could earn that rate on cash you park with The Fed instead of buying Nasdaq stocks, is the same 5% that costs too much for cash-burning start-ups to afford.
It's all economics. Leave the games of chance to casino gamblers.
