Nobody wanted to buy the bank?
That was my first thought. Equity index futures opened at 6 pm NY time on Sunday night. This is as they always do. These futures opened higher, then quickly fell in a matter of moments. S&P futures were trading just a few points above the unchanged mark when... Bang !!
All of a sudden at 18:15 on the East Coast, the Federal Reserve Board of Governors published two press releases on their website. These equity index futures popped faster than I could read the news, but then stopped in their tracks, holding the ground gained. All is well?
Hmm, more like the government agencies charged with safeguarding the US economy and the American banking system that supports that economy had taken some action. Nobody wanted to buy Silicon Valley Bank (SIVB) ? Guess not. Oh, and Signature Bank (SBNY) of New York would be shut down by state regulators as well.
Press Release Number One
The first of two press releases came straight from the Federal Reserve Board. The Fed "is prepared to address any liquidity pressures that may arise." In plain English, the release reads...
"The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress."
The release further clarifies....
"With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25B from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds."
Press Release Number Two
The second of two communications to the public and press was jointly issued by the Department of the Treasury, the Federal Reserve Board of Governors, and the Federal Deposit Insurance Corporation (FDIC). This release explains the "decisive actions' being taken in order to strengthen "public confidence in our banking system."
The key paragraph here reads...
"After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank (SIVB), Santa Clara, California, in a manner that fully protects all depositors. Depositors will have full access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
Note that there is no distinction made in the language between insured and non-insured funds. They mean to protect all depositors. The release quickly adds...
"We are also announcing a similar systemic risk exception for Signature Bank (SBNY), New York, New York, which was closed today (Sunday) by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer."
Lastly, and perhaps more importantly depending on one's interest, the release announces that "Shareholders and certain unsecured debtholders will not be protected."
There's More...
Late Sunday, First Republic Bank (FRC) issued a statement highlighting the continued strength in its liquidity and operation. First Republic announced that it had obtained additional liquidity from JP Morgan (JPM) and the Federal Reserve. That bank's total unused liquidity, according to the bank itself, now reached above $70B, which is up from the $60B worth of unused liquidity that had been disclosed by First Republic earlier in the day on Sunday.
Elsewhere, the Financial Times reported that HSBC (HSBC) had averted a crisis in the UK's tech sector by rescuing the British arm of Silicon Valley Bank for the symbolic price of 1 British Pound. In doing so, HSBC has prevented the government in the UK from having to step in to protect depositors. SVB UK supposedly had 6.7B pounds in deposits at the bank and 5.5B in loans.
As of 04:30 this morning, as I was writing this piece, shares of FRC were trading with a $33 handle in Europe (-59%) after having closed at $81.76 in New York on Friday.
My Thoughts On The Matter
We are a long way from being done here. That said, this does probably put to rest the idea that there might be a bank run, in particular at a number of regional banks early this week. Those banks that were in poor condition, or at least in sloppy enough shape to have to worry about it, will now have a year, in order to correct what ails (or fails) to a degree that at least prevents a panic in the moment.
Shareholders will take it on the chin. They always do in these cases. Unsecured lenders to these banks that have been shuttered will as well. Taxpayers supposedly, according to the material, will not be put at risk, but someone will be. Towards the end of the second press release, the sentence... "Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law." In other words... that someone, I believe will likely end up being other bank depositors who are also known at other times, as "taxpayers." Such is life.
The Week Past
What we have just witnessed is/was/ will continue to be incredible. At the start of the week past, the concerns for the investing public were two days of Testimony by Fed Chair Jerome Powell before, first the Senate Banking Committee and then the House Financial Services Committee and then February "Jobs Day'' which was set for last Friday.
First, the Fed Chair's comments were perceived as hawkish. The yield for the US Two Year Note peaked well above 5% as six month US paper paid almost 5.3%. It was then that the liquidation of the crypto-friendly Silvergate Capital (SI) and the pending collapse of SVB Financial, which is the parent of Silicon Valley Bank started to dominate financial markets. Yields started coming back in as the sale of equities, especially in bank stocks, started to greatly accelerate.
By Friday, the Bureau of Labor Statistics would release their survey results for February's US labor markets. The results were mixed. Job creation beat expectations, but wage growth slowed on a monthly basis and unemployment inched higher across most demographics.
The headlines, however... would be made by Silicon Valley Bank, which was shut down by the FDIC in the largest US bank failure since Washington Mutual failed in 2008. (The second largest US bank failure ever.) Investors started betting on a sooner than later US recession, started to price in lower interest rates and potentially easier monetary policy going forward despite what that might do to inflation.
At zero dark thirty on Monday morning, I now see Futures trading in Chicago showing a 94% likelihood for a 25 basis point increase to be made to the target range for the Fed Funds Rate on March 22nd along with a 6% probability for no hike this month at all. These markets are also pricing in a terminal rate of 5% to 5.25% that would be reached by May 3rd. That's down 50 basis points below what futures had priced in the terminal rate just about half of one week ago. Futures now show a 65% chance for a first rate cut as soon as November 1, 2023 and interest rates considerably lower than where they are now by summer of 2024.
Earnings
Fourth quarter earnings season is now complete. According to FactSet, 69% of companies have beaten earnings expectations, while just 65% of companies have reported revenue generation ahead of quarterly estimates. Staying with data provided by FactSet, the year over earnings decline for the S&P 500 for the fourth quarter of 2022 was -4.6%. Revenue growth for the quarter printed up 5.3%. The fourth quarter was the first year over year earnings contraction for the S&P 500 for any quarter since Q3 2020.
Looking out a bit, according to FactSet, the current quarter (Q1 2023) is seen at earnings "growth" of -6.1% on revenue growth of 2.0%. Q2 2023 is seen at earnings growth of -3.9% on revenue growth of 0.1%. For the full calendar year of 2023, consensus view is now for earnings growth of 1.9% on revenue growth of 2.1%. The full year numbers for profitability keep moving lower, while the expectations for revenue growth keep improving ever so slightly. The implication there is for some more margin contraction.
Marketplace
As mentioned above, equity markets in the US ended the week, catching a broad and in some cases severe beating. While Sunday night's news may move to ease immediate market concerns, it may also temper the Fed's ability to do what had been needed to be done in order to slow inflation and these moves do nothing to stave off such fears. In fact, I am not sure at all that the entire situation does not end up accelerating any coming economic contraction as financial institutions will almost certainly be forced to be far more conservative going forward, which will slow the velocity of money or speed of transaction.
There has been some technical damage to the major US equity indexes that will have to be unwound for markets to recover in the short-term. Let's look at the Nasdaq Composite. The index straddled its own 200 day SMA going into Thursday, breaking to the downside that day to find support at its 50 day SMA. Unfortunately, the 50 day line would act as resistance on Friday as the index sold off on heavy trading volume.
The S&P 500 surrendered its 21 day EMA on Wednesday, both its 50 day SMA and 200 day SMA on Thursday and made no contact whatsoever with any of those three key moving averages on Friday as stocks could not get out of their own way. Trading volume visibly accelerated on both Thursday and Friday as this index was simply put in "risk-off" mode.
For the past five trading days, the S&P 500 took a beating of 4.55%, after giving up 1.45% on Friday. The S&P 500 closed Friday up just 0.58% year to date. The Nasdaq Composite suffered a loss of 4.71% for the week after surrendering 1.76% on Friday. This left the index up 6.42% for 2023. The Philadelphia Semiconductor Index has been a relative outperformer. This index, which readers know is something that I always watch closely, gave up 1.89% on Friday and 3.45% for the week, but still ended the week up 15.47% year to date.
This leaves us with the Russell 2000. The small cap index got pasted last week as many regional banks call this index home. The Russell 2000 gave up 2.95% on Friday and an incredible 8.07% for the week. The Russell ended the week up just 0.65% for 2023.
I don't usually mention the KBW Bank Index in this weekly piece, but readers should be cognizant that the KBW Bank Index took the worst beating of all of the mid-major to major equity indexes last week. This index gave up 3.91% on Friday and 15.74% for the week.
All 11 S&P sector-select SPDR ETFs shaded red on Friday as well as for the week as a whole. Consumer Staples (XLP) were the only one of these funds to close down less than 2% (-1.97%) for the period, as the Financials (XLF) , Materials (XLB) , and the REITs (XLRE) gave up 8.5%, 7.59%, and 6.84% respectively.
According to FactSet, the S&P 500 now trades at 17.2 times forward looking earnings, which is down from 17.5 times a week ago. This ratio remains well below the S&P 500's five year average of 18.5 times, and has now also fallen below its ten year average, which just moved up a tick to 17.3 times.
The Week Ahead
Monday will be the day where we'll find out how Wall Street receives what the Federal Reserve, FDIC and US Treasury are doing. Then will come a ton of macroeconomic data. As the night has worn on, foreign markets have cooled as have US equity index futures. One nice aspect of the coming week is the fact that the Fed has gone into their media "Blackout Period" ahead of their March 22nd policy decision. At least we won't have their spoken (or written) words pushing the high-speed algorithms that control price discovery in 2023 in one direction or the other, playing games with our markets this week.
As mentioned above, this will be a heavy macro week. Tuesday brings February CPI. Wednesday brings February Retail Sales and PPI as well as the March edition of the Empire State Manufacturing Survey. On Thursday, we'll have to contend with February Housing Starts as well as the Philly Fed for March, and on Friday, we'll get data for February Industrial Production and the Conference Board's February print for its Leading Indicators. The Atlanta Fed is scheduled to revise its GDPNow model for the current quarter on both Wednesday and Thursday. The model currently shows Q1 at growth of 2.6% q/q SAAR.
As we are now in between earnings seasons. This week will be light on that front. That said, there will still be a few names reporting that will catch your attention. On Tuesday afternoon, Lennar Corp (LEN) reports, followed by Adobe Systems (ADBE) and Five Below (FIVE) on Wednesday morning. Then comes Dollar General (DG) and Williams Sonoma (WSM) on Thursday morning followed by FedEx (FDX) on Thursday afternoon.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (GTLB) (-0.14)
