Equity markets had sort of a delayed reaction to the news about First Republic Bank (FRC) being taken over by the FDIC and having most of its pieces picked up by JPMorgan Chase (JPM) . After managing to get through Monday trading with only minor losses, all three of the major indexes pulled back just over 1% Tuesday.
Now that First Republic has fallen, investors have turned their attention to some of its regional bank brethren. PacWest Bancorp (PACW) fell more than 25% in trading Tuesday (check out Bruce Kamich's charts on some of the regional banks here) and Western Alliance Bancorporation (WAL) was off 15% as the market speculated on which will be the next to head into FDIC purgatory. The SPDR S&P Regional Banking ETF (KRE) was declined more than 6% and was a major headwind to the overall market throughout the day.
The energy sector also proved to cast a pall on the market as oil prices plunged on increasing worries about the prospects for global economic activity. Crude oil fell more than $4 a barrel on the day and the Energy Select Sector SPDR Fund ETF (XLE) declined almost 4 1/2% Tuesday.
Still, the market remains quite resilient given the events so far in 2023. If I would have told you at the beginning of the year that the U.S. would experience the second, third and four largest bank failures in its history before April was up, that first-quarter GDP would fall to just 1.1%, and the yield curve would go as inverted as it has been since the early 1980s, I don't think most would have expected the performance we've had. That the Nasdaq would be up 20% and the S&P 500 would rise over 8% year to date. Something tells me you would have taken the other side of that bet.
Indeed, stocks seem to have adopted an Alfred E. Neuman, "What Me Worry" stance in 2023. But this complacency is likely to come back and bite investors over the next few months, in my view.
Still, while the music is still playing, I continue to make small incremental bets on down days in the markets. Tuesday, I opened two new "watch item" holdings using covered call orders for the additional downside risk mitigation.
The first new position is in Geron Corp. (GERN) . It looks like this small developmental concern will finally get its main drug asset, Imetelstat, across the finish line to FDA approval in the coming quarters. The company recently raised the cash it needed to support the drug's rollout.
Goldman Sachs (which actually is the lone pessimist on the stock among analyst firms) thinks Imetelstat can see $1 billion in peak sales for its primary indication to treat lower-risk myelodysplastic syndromes patients. Imelelstat is also being evaluated for other indications and GERN stock only has a market cap of approximately $1.3 billion.
I also took a new stake in an old friend called Great Lakes Dredge & Dock Corp. (GLDD) . The stock of the largest dredging outfit in North America and seems to be bottoming near current levels. The company also reported better-than-expected first-quarter results Tuesday.
Great Lakes has recently made some prudent cost reductions, has a decent order backlog and most of its projects are funded by government entities. This spending should be much less susceptible to being cut in any economic downtown.