Too Big To Fail? Too Small To Succeed?
“If you’re not confused by the stock market, you haven’t been paying attention."
The Portfolio Performance
The portfolio is UP +6.99% YTD
The S&P 500 is UP +3.59% YTD
I’ve updated all the consensus price targets. With the Fed interest rate increase of 25 basis points and the stress in the banking system, I assume there would be some additional downgrading of stocks. Most of our positions received modest downgrades, but several have been upgraded. AMD, NOW, NVDA, UBER, META, TMUS, TWLO, PEP, DE, GE, GEHC, BIO, MRNA, BRK-B, and SOFI all received upgrades to their consensus price targets. To receive an upgrade from analysts in this market, either earnings are expected to improve or some other significant catalyst is expected over the next 12 months.
I’ve added a column to the spreadsheet that tracks year-to-date performance. We’re not short-term traders, so please understand that the purpose of monitoring YTD performance is to see what sectors lift the market higher and which are dragging it down.
Looking at the various sectors, it’s evident that fossil energy has declined all year. Oil and natural gas have been declining steadily as producers have produced more oil and gas and brought more supply online. Most US oil producers profit above $30/barrel. With oil prices hovering above $70, we can expect these companies to continue to have strong balance sheets even if their stock price doesn’t fully reflect their performance. Given the dividends we receive from oil and gas companies, I’m happy to get paid to wait for the stocks to rebound. The cure for lower prices is lower prices. The impact of lower oil and gas prices is felt in the stocks of our sustainable energy positions. The theory is that lower prices at the pump will lead to fewer EV sales, and lower natural gas prices will lead to fewer solar panel installations. Declining stock prices for oil and gas companies is short-term thinking that ignores a seismic shift in the US and the global economy as we all shift to electric everything.
Our technology stocks tell a very different story. Year-to-date, Apple is up over 21%, Meta is over 65%, Nvidia is over 78%, and Uber is up over 20%. These are just some companies proving they can perform well even in these challenging conditions.
I’m sure all Stay Invested subscribers have been following the news about the recent bank failures. While the news may sound like a broken record from 2008, the current bank failures don’t have anything in common with the 2008 financial crisis. On March 8th, Silicon Valley Bank announced it had $1.8 billion in losses on the sale of securities. Why? SVB took in significantly more deposits than usual during 2020-2022. Almost all their deposits were beyond the $250,000 FDIC limit. The bank made loans like any other bank, but often to venture capital backed companies. To offset the risks, the bank bought US Treasury bonds. These actions are all regular banking business, except that when the Federal Reserve raised interest rates, SVB didn’t sell their bonds; they held them until they were worthless, at least until interest rates came back down. While the bank was in a vulnerable position, depositors were warned by their VC backers that their deposits might be at risk. This started the run on the bank. The bank was forced to sell those treasuries at a loss to meet withdrawal requests.
Silicon Valley Bank, First Republic, and Signature Bank all had one thing in common, significant deposits over the $250,000 FDIC insurance limit and a hedging strategy that didn’t keep pace with changing interest rates. Below is a chart illustrating unrealized losses vs. deposits over the $250,000 limit. In the upper right-hand corner, we see Silicon Valley Bank is in a class all by itself as a bank that catered to the executives and founders of venture capital backed companies, and almost all deposits were more than $250,000. JP Morgan/Chase appears to be the best positioned of the major money center banks.
As we’ve seen over the past month, fear raged through the markets as memories of the 2008 financial crisis appeared to be happening again. Unlike in 2008, the banks are better capitalized, and in the case of SVB, Signature, and First Republic, buyers have stepped in to take over operations. SVB is being bought by First Citizens, Signature Bank is being acquired by a subsidiary of New York Community Bancorp, and 11 top lenders have shored up First Republic. In Europe, Credit Suisse and Deutsche Bank just threw gasoline on the fire when those banks suddenly needed a bailout. I won’t review all the details, but both banks have been mismanaged for over a decade. Unfortunately, their assets and investments are too important to let them collapse, but it’s time they were put under better management.
Is this a bailout? A ‘bailout’ to me suggests that it’s a taxpayer obligation. It’s not a taxpayer bailout. The FDIC’s action to extend insurance beyond the $250,000 limit is a short-term stopgap to prevent further contagion in the banking system. The FDIC did the same thing in 2008-2009. The money the FDIC uses comes from fees paid by banks in return for FDIC insurance. Since not all banks are failing, there is enough money to cover excess losses until they can get back on their feet.
The biggest problem is that we have a crisis of confidence. All money and all banks rely on confidence. If the public doesn’t trust banks, they won’t use them. If the public doesn’t trust the dollar, they won’t use it. We’re already seeing a shift to banks like SoFi and using alternatives to the dollar like Bitcoin and Ethereum. These alternatives may have a place in the economy, but we must maintain and strengthen the US banking system. I’ll save the rest of my reasoning on this issue for another day.
What Should be Happening?
The FDIC or the banks should be selling insurance to depositors with more than $250,000 in their accounts. The $250,000 limit is simply too low; the FDIC needs to raise the limit to at least $500,000.
I see several positions where I would like to add shares. Our energy positions, in particular, look very attractive at these levels. I’m inclined to wait and see if there is any more fallout from the stress in the banking sector. I’ll try to set some target prices where I’d be inclined to buy. Check the ACTION column for any price target notes. All our financials were underweight coming into this crisis, so we dodged a bullet. The three financials we own are great companies, so I want to add to them. SOFI is expected to grow earnings by 50% this year and 100% next year; that’s impressive for a bank with no risky loans or depositors with more than $250,000 in their accounts.
Keep Me Honest 2023
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
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Rule #1: Don't lose money
Rule #2: See Rule #1
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMD, AMRN, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, IPOD, MSFT, NVDA, PSTH, TWLO, VBIV
I am invested short in these securities mentioned in this post:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.