Tag Archives: SVB

THE REMAINDER OF 2023 – BANKS & HOUSING

JULY 30, 2023 – This is my 3rd and last post regarding my forecasts for the remainder of 2023. Today’s topics are banks and housing.
BANKS – I have been saying since the SVB/SBNY closings that week after week goes by without any closures. Finally(!), last week we had a bank in Kansas get closed down by the FDIC. Also, PacWest was acquired. At this point, we remain closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people.
As for CRE loan defaults, I have dealt with an office building (100% leased – it appears the borrower went bankrupt for some other reason) and two churches (same loan). We shall see if this picks up.
The Regional Bank Index (KRE) continues to soar and is about 20% above the low set the Monday after the SVB/SBNY closings. It is a full 40%+ (!) above its most recent low. Please let all of them people that told you that banks were going down the tubes what you think of their opinions! They have cost the masses a 20%-40%+ return – in less than 4 months at that!!!
As an aside, the market is saying that it does not believe there will be a CRE loan debacle for banks. Either not many CRE loans will default and/or banks are well prepared and capitalized to handle the defaults.
HOUSING – Let me just present a bunch of stats that clearly shows the strength of the housing market. New home sales increased 28.4% from July 2022 to June 2023. According to the Case-Shiller Index, home prices are within 1% of their June 2022 peak. Redfin reports home prices are up 2.1% from a year ago. The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index was up 0.7% month-over-month in June. It has been up every month this year. Annual appreciation is at 2.9% and projected to increase to 6%-7% by yearend. The Homebuilders Stock Index is up an incredible 60% (!)from last year’s lows. Those who forecast a crash in the housing market continue to be way off the mark.
SUMMARY – With both bank and housing stocks at their highs, the markets are saying both industries will do very well through year end and into early next year. There is no sign yet of a slowdown occurring for either industry. Sadly, all of those economists, market forecasters, and pundits have kept the public from making 20%-60%+ returns in these industries. But, that has been the norm since the world’s largest casino came into existence.
To sum up up the 3 posts:
Inflation will be stubborn and rise slightly over the remainder of the year – probably stay in the 3.5%-4.0% range.
The economy has a near zero chance of going into a recession. Yes, GDP will slow down from the amazing 2.2% rate that occurred in the first half of the year. I will put this hidden little sentence out there to refer back to in 12-18 months – The chance of a recession occurring looks to be 4th Quarter 2024 into 2025. I suspect that a year from now the broken-clock recession mongers will have given up and admitted the economy is strong, et al. Just in time to be wrong again:)
And, per above, banks and housing should be rock solid into the 1st Quarter of 2024.
I will provide updates per usual. But, will revisit the 6-month forecasts (for 1st and 2nd Quarter 2024) around the Holidays. Yes folks, less than 5 months til Christmas:)
Shalom,
The Mann

INFLATION FORECAST, BANKS & HOUSING

UPDATE – JUNE 20, 2023 – I saw a few items of data today in regard to housing. Here they are. No need to add any commentary.

Construction on new American homes surged 21.7% in May, as homebuilders ramp up building single-family homes to meet strong demand from buyers. Housing starts rose to a 1.63 million annual pace last month from 1.34 million in April.

Builder confidence in the market for newly built single-family homes in June rose five points to 55, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the sixth straight month that builder confidence has increased and is the first time that sentiment levels have surpassed the midpoint of 50 since July 2022.

I saw a chart of this index going back to 1985. Every time the index crossed back above 50 it went up to about the 70 level before putting in a major top. The thing is it took about 1-5 years to get to that new top. Slow, but steady it goes. If it follows history, that means we are in for an extended period of positive sentiment by home builders for at least the next few years. As a side note, there is at least a 50/50 chance of the index dipping back below 50 before resuming its upward trend. This would be a great head fake to keep the recession screamers pessimistic.

JUNE 14, 2023 – As forecast, inflation dropped about a full percentage point and will do so again next month.
The 3-month annualized inflation rate is 4.4%. The 6-month annualized inflation rate is also 4.4%. These figures are above the annualized rate (4.0%) and thus indicate the decline in the annual CPI is likely to reverse after next month’s figure is reported.
Based on the data, my prediction for next month’s figure is 3.0%-3.1%. I like the data and am confident the next reading will be in that range.
This will finally be the July 12th figure I forecast over 6 months ago. My original expectation of a sub 2% reading will be wrong. Albeit, 3% is alot closer than those that were predicting 10%+ this year.
As I mentioned last month, it looks like inflation will rebound in the second half of the year to 4%+. There are a few indicators that are pointing towards significant deflation (e.g. diesel prices down 30% yoy). If this occurs, there is a chance inflation can stay around 3%.
BANKS – Regarding banks, week after week goes by without any closures. At this point, we are much closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people. I am lucky to have some incredible bank and credit union clients. Talking with them there has been almost no CRE loans going under. Even in good times, loans fail. So far, nothing significant has occurred. Yet, the world is predicting CRE loan defaults will be the next major shoe to drop. I just don’t see it. I will make a post with some numbers explaining why I don’t see the refi issue resulting in loan defaults.
The Regional Bank Index (KRE) has exploded and is about 7% above the low set the Monday after the SVB/SBNY closings. It is a full 27% (!) above its most recent low. And, you probably saw the headline that the stock market entered Bull Market territory (i.e. up 20%+ from its low) last week. I have been saying this was the case since just after the October lows.
HOUSING – The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index was up 0.7% month-over-month in April. It has been up every month this year. The Homebuilders Stock Index is up an incredible 50% (!)from last year’s lows. Those who forecast a crash in the housing market appear to be way off. As I forecast about a year ago, the housing market would slow way down and possibly go slightly negative (that has occurred in the hottest markets). A year later I am seeing a slightly improving market ahead.
SUMMARY – Sadly, if you have been waiting for the Recession of 2023 to occur (which as I have noted for 9+ months now, it was the Recession of 2022), you have already missed out on the stock market being up 20%, homebuilder stocks up 50%, and those dreaded bank stocks being up say 5%-25% from possible buying points. Even if a recession occurs later in the year (I still do not see two consecutive quarters of GDP being likely), the opportunity to make a large profit on your investments has already occurred. Plus, the stock market predicts the future 6 months out, and it is saying zero chance of a recession.
It seems like a longshot, but the wave theory I follow seems to indicate the possibility of a huge stock market rally directly in front of us. That is my interpretation. Regretfully, my idol who brought this theory to the forefront 44 years ago sees a huge leg down ahead. I hate disagreeing with him. We shall see how it turns out. The stock market has been in a boring trading range for several months now. It seems to be wrestling with the indicators that point up and those that point down at the same time. The future is never easy to predict:) Not even for the smart money.
Til next month.
Shalom,
The Mann

GDP & BANKS UPDATE

APRIL 29, 2023 – 1st Quarter came in at +1.1%. It continues to slow. But, another positive quarter. Early forecasts show 2nd Quarter GDP being slightly positive. However, with ample time for adjustments, there is a chance it could end up being negative.
Quick note, I received an email from the Fed last week showing it was expecting 1st Quarter GDP to be +1.13%. They appear to be the only one to get the forecast right. Of course, they have access to all of the data that goes into the GDP.
Regardless, it will be around Halloween before a recession can be in the books. And if the 2nd Quarter GDP does end up being positive, a recession cannot be official until late January 2024.
So far, the stock market says a recession will not occur this year. We shall see who is right – the stock market and the smart money or everyone else that is all but guaranteeing a recession will occur in 2023.
Will the Leading Economic Indicator that has declined for 10+ months and has been signaling a recession for many months be right?
Will the fact that bank credit tightening leads to a recession be right?
There are numerous other indicators signaling a recession will occur this year. The only problem they have is they are not the stock market.
My bet is, and always has been, on the stock market being correct. As always, we shall see.
BANKS – Still no new bank failures. First Republic Bank was part of this original crisis that occurred with the SVB and SNBY and Credit Suisse failures. The only other bank that is walking on thin ice is Deutsche Bank. Beyond this initial list, no banks have failed. The count remains 0 versus the 176-200 predicted by many people. (UPDATE – In 1907, JP Morgan the person came to the rescue of the banking system and in 2023 the company with his name did the same.))
The Regional Bank Index remains about 2% above the low set during the SVB/SBNY crisis with the drawdown to date being 3%. Money is not being made on these stocks. But, they sure have not fallen apart. Friday was a classic day that fools the public. The headline news was First Republic Bank heading towards failure. Instead of being down, both the Regional Bank Index and the Dow were up. The Dow is now above 34,000 again. Remember, a Bull Market climbs a wall of worry. The more negative news we have this year, the higher stocks should go. And it looks like all we will hear from the pundits is negative news. When the news turns positive, the stock market will have already topped.
Happy trading and investing.
Shalom,
The Mann

OVERNIGHT REVERSE REPO AGREEMENTS (ORRA)

MARCH 23, 2023 – The most critical issue the Fed has to address right away is stopping the outflow of deposits from banks. It started 2 quarters ago and accelerated with the SVB debacle. The outflow continues.
The consumer is aware of the risk of having money in banks and can get a 4%+ interest rate in money market funds. Why keep money in a bank at 0.5%?
Money market funds have a sudden excess of funds and are using the Overnight Reverse Repo Agreement market to park those funds with the Fed. This is where the Fed can start QE4 – put a limit on how much money can be deposited in the ORRA.
If they use this tool, they will be making a major statement and shift in policy. Watch for this. It might be like March 2009 when they went full throttle with QE and the stock market bottomed never to see that level again.
We shall see….
Shalom,
The Mann

SILICON VALLEY BANK SUPPORTS MY SUGGESTION

UPDATE MARCH 15, 2023 – An interesting investment class. Over the past 10 years, this is how this asset class has moved. From June 2013 to July 2016 it went up 26%. A simple annual increase around 8.5%. From July 2016 to October 2018 it declined 21%. A simple annual decline around 10%. From October 2018 to July 2020 it went up 33%. A simple annual increase around 18%. From July 2020 to October 2022 it went down 34%. A simple annual decline around 15%. That is a sum of 114% in moves up and down, which equates to about 11%/year. If you could have only timed those moves, you would have made a killing. As an investor, how would you rate this asset class? Low risk? Moderate risk? High risk? The point is the next time someone says U.S. Treasuries are a ‘safe’ haven, tell them about the above data. The next time someone says U.S. Treasuries represent a ‘safe’ rate of return, tell them about the above data. The above movements were made by the 30-Year U.S. Treasury Bonds. With the yield over the past 10 years probably averaging around 3%, that means you either gained or lost 3x-4x that simply due to the movement of yields!!!! Our government made treasury bonds act like a risky asset. It is not a low-risk asset. It is doubtful it ever will be again.

UPDATE MARCH 14, 2023 – We will see if Monday’s low in the SPDR S&P Regional Bank ETF (Symbol: KRE) at $41.92 is the panic low for banks. If you want to see a neat chart of an index slowly going over the waterfall and then collapsing look at KRE for the past month. You can see people were bailing out well before last Thursday when the news about SVB became a headline. As an aside, for those curious about this, I heard that depositors at SVB had requested $42 Billion in withdrawals. As many banks loan out over 100% of their deposits, SVB obviously didn’t have the funds available without selling their unhedged, unrealized losses 30-year treasury bonds. BTW, KRE declined 46% from its all-time high in late 2021. That is when the market predicted interest rates would increase significantly. It declined 36% in the past few months. This is into the low on Monday.

The pundits are predicting the next sector to get hit hard will be commercial real estate (CRE). And banks with a large portfolio of CRE loans may be the next to go under. So, for those interested in the banks with the highest CRE Loans/Total Assets ratios they are as follows. The only one above 50% is Valley National Bank. Home Bancshares and Glacier Bancorp are just below 40%. Signature Bank was at 30%. EastWest Bank is at 30%. Those between 20% and 30% include Webster Financial Corporation, First Citizens Bancshares Inc., M&T Bank Corp, Prosperity Bancshares, Western Alliance Bancorp, and Central Pacific Financial Corp. That doesn’t mean these banks will go under. Many other factors come into play. Most importantly, how large on their reserves. What are their Tier 1 Capital Ratios. That said, history shows that banks with the highest CRE Loan ratios are more likely to fail in a significant economic downturn. I have not looked at their stock prices. But, I wouldn’t be surprised these stocks are down the most already. It isn’t like this is new news to investors. If any of the above close down, you at least knew about it as of today:) FYI, SVB was down near 0% for this ratio. That wasn’t their weakness obviously.

UPDATE MARCH 13, 2023 – Total deposits in American banks is about $18 Trillion. I heard that about 1/3 of those deposits are NOT insured. Thus, about $6 Trillion in deposits at financial institutions are at risk if banks close in mass. If those deposit holders decide the risk of losing 100% of their money is too real and start withdrawing their funds, there simply is no way our banking industry can survive. To return those funds, banks would have to sell their treasury bonds and realize the unrealized losses (about 30%-40% of the original purchase price) they have – that is what was happening to SVB in its last days. Somehow the FED has to convince the holders of the $6 Trillion in uninsured bank deposits not to move their funds elsewhere. If they fail, the 2008 Crisis will look minor in comparison. I think they will succeed…for now. Afterall, where would the $6 Trillion move to that would be any safer than where it is now? Fun times eh:)

MARCH 13, 2023 – I have long said that the simplest solution to prevent financial institutions from making bad loans, poor policy decisions, etc., is to eliminate FDIC insurance for deposits. That simple.
If the public knew that every dollar they put in a bank or credit union could be lost, they would be extremely careful where they deposited their money.
Financial institutions would have to be beyond 100% transparent and show convincingly they were 100% safe. There would be no liar loans, 120% LTV loans, etc.
The companies that deposited more than $250,000 in SVB deserve to lose their money. How can an unnamed company put $480 million of cash in one bank? That CFO wouldn’t have a job if I were in charge. All of these startups are crying about their deposits at SVB. Did they overlook the FDIC Insurance print on every SVB document? $250,000…hello…$250,000 maximum. What is it you don’t understand about that!
I seriously doubt we will get rid of FDIC deposit insurance in my lifetime. But, it would solve alot of problems if we did.
Lastly, SVB was unique in that it had less than 10% of its deposits from retail customers and chose not to hedge its interest rate risk. The data does not suggest any other banks in America are like it. Signature Bank of NY was closed over the weekend and it also had less than 10% of its deposits from retail customers. But, I do not know if it refused to hedge its interest rate risk. The only remaining bank with less than 10% of its deposits from retail customers is Citigroup. But, they have probably been like this for 40+ years as they mainly deal with governments around the world.
I do not expect any other banks to go under from a run on their deposits. As usual, we shall see.
Shalom,
The Mann