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Please Watch My New YouTube video: The Fed’s Impending Disaster
Today’s topic is The Fed’s Impending Disaster. The CPI inflation numbers for February looked good from an annual perspective–headline at 6% and core at 5.5%–but if you look month to month, inflation ticked up slightly. In the big picture, inflation is lower, but we’re not seeing it fall at the speed the Fed would hope. The Fed wants to get inflation down to 2% and we’re currently around 5.5% core inflation–a long way off. If you look at those numbers alone, you’d expect the Fed to continue raising their rates. This is what the market was expecting just last week, projecting a 25-50 basis point increase for the March 22 meeting. The thing that puts the Fed between a rock and hard place is the Silicon Valley Bank collapse and additional banking stressors that could lead to more disasters inside the Treasury market. In February the FDIC said that insured banks had about $620 billion in undeclared losses. With $23 trillion in the banking system, $620 billion is less than 10% overall, but if it’s concentrated in certain areas, it could cause more blow-ups. We don’t know if we’ll see any big Wall Street banks go down, like Lehman Brothers back in 2008, but I am watching Credit Suisse closely, especially after the big hit to its share price this morning, March 15. Essentially, the rapid hikes in interest rates have put strains on the banking industry and the Fed will have to decide whether they will continue raising rates to fight inflation, or stop in favor of supporting banks while inflation is still high at 5.5%.
Now it’s Credit Suisse–the banking crisis goes international
Shares of Credit Suisse (CS) fell this morning–if a 31% drop at the worst moment can be called “falling”–after the bank’s biggest shareholder said it would NOT put more money into the challenged bank. As of noon New York time, shares of Credit Suisse were down 24.1%. The bank’s bonds fell to levels that signal deep financial distress, with securities due in 2026 dropping 17.75 cents to 70 cents on the dollar in New York. That puts their yield at about 20 percentage points above U.S. Treasuries.
Sure smaller regional banks are most at risk from big unrealized bond losses, but the biggest losses are at much bigger banks–like Bank of America
Yesterday, March 14, Moody’s Investors Service placed First Republic Bank (FRC) and five other US lenders on review for downgrade because of worries over uninsured deposit funding and unrealized losses in their asset portfolios. (the other banks include Western Alliance Bancorp (WAL), Intrust Financial, UMB Financial (UMBF)., Zions Bancorp (ZION), and Comerica (CMA).) But these smaller banks aren’t the companies in the sector sitting on the biggest bond portfolios with unrealized losses.
Where’s the contagion? Signature Bank’s shutdown was due to its crypto exposure but the biggest negative effects will be in the commercial real estate market
One of the lessons of the subprime mortgage crisis is that it’s hard to predict exactly how problems will ripple out from bad bets on one asset class to a crisis in a seemingly unrelated part of the financial market. That’s one reason that the current set of bank collapses–Silvergate Capital, Silicon Valley Bank, and New York’s Signature Bank–is so unsettling. We know–we think–how these institutions got into trouble. But we don’t know what other banks or sectors of the financial markets might be dragged into the problem.
CPI inflation numbers put Fed between a rock and a hard place next week
February core inflation, measured by the Consumer Price Index, climbed from January at a faster month-to-month pace, according to this morning’s report from the Bureau of Labor Statistics. Core inflation, which excludes theoretically more volatile food and energy prices, rose at a 0.50% month-to-month rate in the month after climbing at a 0.40% month-to-month rate in January. That put core inflation on a 5.5% annual pace. This wasn’t what the Federal Reserve needed to hear as it wrestles with the problem of what to do to contain inflation still running at well above the central bank’s 2% target (and which threatens to edge higher again) at a time when the banking system is showing systemic stress brought on by the Fed’s aggressive interest rate increases. Here are the Fed’s choices.
The consensus on peak interest rates goes forward into the past
Remember the financial market consensus that the Federal Reserve would raise interest rates by 50 basis points at its March 22 meeting and that we should expect to see peak short-term rates from the Fed above 5.5% and maybe even as high as 6%. Not any more. The collapse of Silicon Valley Bank and the exposure of exactly how fragile the banking system is has led to a return of the earlier (as in a month or two ago) consensus.
Please Watch My New YouTube Video: Voter Suppression…in China
This week’s Trend of the Week is Voter Suppression…in China. During the most recent National People’s Congress in China, two people were notably not invited–entrepreneurs Tony and Pony Ma, the heads of Alibaba and Tencent. Other entrepreneurs were also notable for their absence. Xi Jinping has made it clear that entrepreneurs have a much smaller role in his economy going forward, as he looks to consolidate power in the hands of the Chinese Communist Party and prevent any potential competition from power centers. Xi’s new policies, coming out of the National People’s Congress, focus on spending by state-run businesses and emphasize consumer spending, as opposed to infrastructure, as a source of economic stimulus. So how should you invest in China? Despite Pony Ma’s absence at the People’s Congress, Tencent Holdings (OTCMKTS: TCEHY) remains at the forefront of Chinese innovation and technology. It’s clear that China will not adopt US-made chatbots and will develop its own. Tencent looks likely to take a leading role in that effort. The company is also the dominant game producer in the world and gets a lot of its revenue from outside of China. It’s the China stock I’d look at for the long term. In the short term, I’d look at JD.com, which is well-suited to get a bounce from the emphasis on consumer spending. The current price is a good entry point. I’ll be adding it to my JubakPicks.com portfolio tomorrow.
Don’t forget tomorrow’s CPI inflation report for February
Tomorrow’s CPI inflation report for February will show whether the Federal Reserve faces a very difficult task in bringing down inflation without crashing the economy (and/or the banking system) or whether the job is simply impossible. Right now economists are pointing toward impossible. The annual inflation rate is likely to have come down in February from January but the month-to-month trend is likely to be flat. Which means that inflation has stopped declining with the annual rate well above the Fed’s 2% target rate.
Is today (or maybe tomorrow?) the moment of maximum short-term fear? I’m selling one of my Call Options on the VIX fear index today
Back on March 6, I bought Call Options on the CBEO S&P 500 Volatility Index (VIX) at a strike of 23 for the May 17 and June 21 expirations. My logic was that at 18 or so, the VIX was trading at a level that basically ignored all of the potential negative news and trends visible in the financial market for the next couple of weeks. I certainly didn’t count on the collapse of Silicon Valley Bank or the wave of fear that has today overwhelmed shares of every regional and fintech bank. I think the odds are that the crisis won’t go away, but that the extreme fear of today will turn into something less extreme over the next day or so. Fear tends to work like that in the financial markets: When investors and traders discover the sky has fallen today, they get more optimistic (not always reasonably) about tomorrow. So I’m selling the May 17 Call Option on the VIX that I bought on March 6. The purchase price that day was $$94 per contract. The price today closed at $420 per contract. That’s a gain of 116%.
What does the collapse of Silicon Valley Bank mean for your portfolio?
The collapse of Silicon Valley Bank means both a whole lot for your portfolio and very little. It depends. I’ll explain.
Saturday Night Quarterback (on a Sunday) says, For the week ahead expect…
Truthfully no one knows what’s going to happen as a result of the collapse of Silicon Valley Bank. Expect a lot of volatility, though, as the “smart money” tries to talk specific scenarios (watch out for shorts bearing expert commentary) and as the most likely scenario shifts from hour to hour.
Mixed news from February jobs report–jobs up more than expected, wage growth slows
The U.S. economy added 311,000 jobs in February, the Bureau of Labor Statistics reported on Friday, March 10. That was an expected drop from the January blowout of 504,000 new jobs. But it was significantly above the 225,000 jobs expected by economists surveyed by Bloomberg.
12 More Stocks to Sell Ahead of 10-days of Market Moving News (for Step 1 of my Special Report: 5 Steps for the Next 5 Months)
Back on February 16, I gave you a list of 12 stocks I’d sell into the rally after the February 1 meeting of the Federal Reserve. (Here’s the link https://jubakam.com/wednesdays-rally…re-the-12-stocks/). Yesterday in the first step of my Special Report: 5 Steps for the Next 5 Months” I promised another set of sell recommendations before Friday’s jobs report for February, the March 14 CPI inflation report, and the March 22 meeting of the Fed’s interest rate setting group, the Open Market Committee. Here’s that list of another 12 stocks to sell.
Please Watch My New YouTube Video: Quick Pick Apple (but not until it drops to $140 or so)
Today’s Quick Pick is Apple (NASDAQ: AAPL). For this Quick Pick, I’m suggesting you wait to buy until Apple falls to around $140 (which I think is coming.) Apple, like many tech stocks, is a seasonal stock, and we’re currently in one of the company’s traditionally weaker quarters. The Christmas buying quarters (the last two quarters of the year) are when Apple brings in the most revenue, and the first two calendar quarters are generally weaker. Apple took a hit during the big downward turn on the bear when all tech stocks were hit, but the stock recovered strongly during this early 2023 rally. If shares get down to $140, that’s a great place to get in before Apple announces new technology and updates to its product line. There are rumblings of an Apple VR headset announcement coming soon and we know that we’ll see new iMacs and Powerbooks. We can also look forward to the Apple Developer Conference in May and new product announcements in September. If you can get this cheap in the first half of the year, you can look for a big recovery in the second half of the year.
Stocks drop on fear of tomorrow’s jobs report even though data today shows labor market weakness
Two reports showing “some” labor market weakness haven’t been enough today to offset worry over tomorrow’s jobs report for February. At the close in New York, the Standard & Poor’s 500 was off by 1.85% and the Dow Jones Industrial Average was lower by 1.61%. Tech stocks led the market downward with the NASDAQ Composite lower by 2.05% and the NASDAQ 100 falling 1.80%. The small-cap Russell 2000 lost 2.81%.
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