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Take Advantage of the Bank Chaos With This Income Play

Investors Alley
Take Advantage of the Bank Chaos With This Income Play
Well, that was unexpected. The bank run we saw last week at Silvergate (SI) and…

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Investors Alley
Take Advantage of the Bank Chaos With This Income Play

Well, that was unexpected.

The bank run we saw last week at Silvergate (SI) and Silicon Valley Bank (SIVB) was stunning and completely unforeseen.

Unless, of course, you were listening to what I’ve been saying for 18 months: the Fed’s rate hikes make unprofitable, risky companies much less valuable, and fast.

But the vast majority of banks will be completely unaffected by this.

Which gives you and me a great opportunity to snap up some stellar banks at dirt-cheap prices…

Earlier this year, I spent some time at the Acquire or Be Acquired conference in Phoenix, Arizona, with more than 1,000 bankers and dozens of Wall Street analysts, plus investment fund managers, industry journalists, and private bank investors.

I can promise you that the subject of a bank run never came up.

We did talk at length, however, about the securities issue banks were dealing with this year. Banks that had been buying securities at very low rates since the start of the pandemic saw the value of these securities plummet as the Federal Reserve raised interest rates at a rapid pace to fight inflation.

While the losses on fixed-income securities impacted earnings and accounting measures of book value, they did not impact regulatory capital levels. Furthermore, these losses would be fully recovered if the banks just held the securities to maturity.

So, no one was losing any sleep over the securities portfolio.

Then we saw the deposit run at Silvergate as its crypto industry customers needed to withdraw deposits to pay off their investors. The bank had to sell securities to meet the demand for cash and, by doing so, turned paper losses into actual losses.

Silvergate took losses of more than $1 billion in the fourth quarter of 2022, and the forced selling continued into this year. Last week, the bank threw in the towel and announced plans to liquidate.

On Monday, January 6, the management of Silicon Valley Bancorp was overseeing a bank that was turning 60 this year and had a market capitalization of over $20 billion.

On Friday, March 10, the bank was out of business, with a market cap of zero.

What a wake-up call for the venture capital industry, which has now realized that there was a severe funding shortfall, especially for early-stage companies. Funding for early-stage companies has all but disappeared.

It seems that the reality of what I have been saying for 18 months finally occurred to the residents of Silicon Valley: rising rates make unprofitable, risky companies worth a lot less money.

Warnings of the possibility of losing access to whatever cash they had left caused many early-stage venture capital firms to transfer funds out of Silicon Valley Bancorp to smaller, more traditional banks all across the United States.

Other companies followed suit, and the run was on. Silicon Valley Bancorp had to sell securities to meet demand, turning billions of dollars of paper losses into real losses. The bank tried to raise capital, but buyers were nowhere to be found. And so early Friday afternoon, the FDIC seized the bank.

Bank stocks sold off across the board. After all, most banks have securities losses this year. It was hard to avoid with rates rising as fast as they did. Still, unless the news media sparks a national bank run with breathless headlines foretelling a repeat of 1929, 99% of all banks will be just fine.

Banks are going to have to raise the rate they pay on deposits to keep cash from walking out the door.

That will pressure earnings for the rest of 2023 and into 2024. It will not, however, cause any more banks to close their doors.

The current situation in banking does set up an opportunity for investors looking for a steady income stream with the potential for an eventual significant capital gain of 20% or more: bank-preferred stocks have also been selling off in the past week. This includes preferred stocks issued by some of the safest banks in the country.

Bank of Hawaii Corp. (BOH) is an excellent example of what I am seeing right now. This bank has been around since 1897. When it opened its doors, it had only been four years since Stanford Dole overthrew Queen Liliuokalani to assume control of the islands. Hawaii did not become a U.S. territory until the following year.

The bank has survived countless geopolitical events and economic crises since it opened; it will survive this one as well.

Bank of Hawaii has a preferred stock (BOH-A/BOH-PA) trading with a coupon of 4.38%. Based on the $25 par value, every share receives dividends of $1.09 annually (payments are made quarterly.) Thanks to rising rates and bank-related fears, the stock traded hands last week as low as $17.22. At that price, the shares yield 6.33%.

That is not the whole story.

When the current bank-related fear leaves the market, the shares will trade higher, possibly climbing back above the $21 level where it sold last month—a gain of more than 20%. And, the shares should move higher when the Fed stops raising rates.

If we have a recession later this year or early next and the Fed has to lower rates, Bank of Hawaii preferred shares could easily trade back toward the par value of $25, which would be a gain of more than 40%!

As long as the bank stays in business, you collect more than 6% on your capital.

The risk-reward for bank-preferred stocks is being skewed in a very positive manner, and the Bank of Hawaii preferred is a very attractive issue right now.

Is Your Portfolio Holding The Next Bank Seizure Stock?

Regulators recently seized Silicon Valley Bank due to concerns about its financial health and compliance practices, leading to investors losing confidence.

As a result, funds and investments tied to the bank could be vulnerable to significant losses and market volatility.

But this new AI investing tool can help you figure out if your investments are at risk, what to do about it, and find new opportunities for you to invest in.

Click here to see how.

 

Take Advantage of the Bank Chaos With This Income Play
Tim Melvin

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How much more financial pressure can Australian mortgagees take?

Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another….

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Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another. Inflation has risen steadily since the beginning of 2022 despite the determined efforts of Reserve Bank of Australia (RBA) to bring it back towards its target range of 2-3 per cent.

In less than 1 year and 11 interest rate rises later, official interest rates have risen from 0.10 per cent to 3.85 per cent but inflation remains stubbornly high at 7 per cent. Interest rates have never risen this fast before nor from such a historically low level either.

As previously outlined in an earlier blog entry on Commonwealth Bank (ASX:CBA), the big four banks of Australia have just under 80 per cent of the residential property mortgage loan market. In “normal” economic times of rising interest rates, banks should be natural beneficiaries of these conditions. However, these are not normal times.

The business model of banks has generally stayed the same for centuries, i.e. borrow money from one source at a low interest rate and lend it to a customer at a higher rate. Today, the Australian banks generally get their funding from wholesale and retail sources. However, the banks were offered a one-off funding source from the RBA called the Term Funding Facility (TFF) during the COVID-19 period to support the economy. This started in April 2020, priced at an unprecedented low fixed rate of 0.10 per cent for 3 years with the last drawdown accepted in June 2021 for a total of $188 billion. Fast forward to today and the first drawdowns from this temporary facility have already started to roll-off which means that these fund sources need to be replaced with one of considerably more expensive sources, namely wholesale funding or retail deposits. As a result of this change in funding, bank CEOs have unanimously declared that net interest margins, and hence its effect on bank earnings, have peaked for this cycle despite speculation that interest rates may still rise later in the year.

Prior to the start of the roll-off of TFF drawdowns, the entire Australian banking industry engaged in cutthroat competition for new and refinancing mortgage loans in a bid to maintain or grow market share. In the aftermath of the bank reporting season, two of the big four banks have stated they are no longer pursuing market share at any price, with CBA and National Australia Bank (ASX:NAB) announcing they will scrap their refinancing cashback offers after 1 June and 30 June respectively.

Turning our attention back to the average Australian, the big bank mortgage customers have been remarkably resilient. The Australian dream of owning the house you live in is still alive for now, with owners willing to endure significant lifestyle changes in a bid to keep up with mortgage payments. The big banks have reflected this phenomenon with a reduction in individual loan provisions and only a modest increase in collective loan provisions.

Time will tell how much more financial pressure Australian mortgagees can take, especially with the RBA still undecided on the future trajectory of interest rates. What has been agreed on by the big banks, is that things are not going to get easier. At least not in the short-term.

The Montgomery Funds own shares in the Commonwealth Bank of Australia and National Australia Bank. This article was prepared 29 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

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U.S. Breakeven Inflation Comments

I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.Background note: the breakeven inflation rate is …

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I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.

Background note: the breakeven inflation rate is the inflation rate that results in an inflation-linked bond — TIPS in the U.S. market — having the same total return as a conventional bond. If we assume that there are no risk premia, then it can be interpreted as “what the market is pricing in for inflation.” I have a free online primer here, as well as a book on the subject.

(As an aside, I often run into people who argue that “breakeven inflation has nothing to do with inflation/inflation forecasts.” I discuss this topic in greater depth in my book, but the premise that inflation breakevens have nothing to do with inflation only makes sense from a very short term trading perspective — long-term valuation is based on the breakeven rate versus realised inflation.)

The top panel shows the 10-year breakeven inflation rate. Although it scooted upwards after the pandemic, it is below where is was pre-Financial Crisis, and roughly in line with the immediate post-crisis period. (Breakevens fell at the end of the 2010s due to persistent misses of the inflation target to the downside.) Despite all the barrels of virtual ink being dumped on the topic of inflation, there is pretty much no inflation risk premium in pricing.

The bottom panel shows forward breakeven inflation: the 5-year rate starting 5 years in the future. (The 10-year breakeven inflation rate is (roughly) the average of the 5-year spot rate — not shown — and that forward rate.) It is actually lower than its “usual” level pre-2014, and did not really budge after recovering from its post-recession dip. (My uninformed guess is that the forward rate was depressed because inflation bulls bid up the front breakevens — because they were the most affected by an inflation shock — while inflation bears would have focussed more on long-dated breakevens, with the forward being mechanically depressed as a result.)

Since I am not offering investment advice, all I can observe is the following.

  • Since it looks like one would need a magnifying glass to find an inflation risk premium, TIPS do seem like a “non-expensive” inflation hedge. (I use “non-expensive” since they do not look cheap.) Might be less painful than short duration positions (if one were inclined to do that).

  • Breakeven volatility is way more boring than I would have expected based on the recent movements in inflation. The undershoot during the recession was not too surprising given negative oil prices and expectations of another lost decade, but the response to the inflation spike was restrained.

  • The “message for the economy” is that market pricing suggests that either inflation reverts on its own, or the Fed is expected to break something bigger than a few hapless regional banks if inflation does not in fact revert.

Otherwise, I am preparing for a video panel on MMT at the Canadian Economics Association 2023 Conference on Tuesday. (One needs to pay the conference fee to see the panel.) I have also been puttering around with my inflation book. I have a couple draft sections that I might put up in the coming days/weeks.

Email subscription: Go to https://bondeconomics.substack.com/ 

(c) Brian Romanchuk 2023

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“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

"What’s More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years…

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"What's More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years ago, I wrote columns about companies pouring money into Black Lives Matter to establish their bona fides as “antiracist” corporations. The money continued to flow despite serious questions raised about BLM’s management and accounting. Democratic prosecutors like New York Attorney General Letitia James showed little interest in these allegations even as James sought to disband the National Rifle Association (NRA) over similar allegations. At the same time, Black Lives Matter co-founder Patrisse Cullors cashed in with companies like Warner Bros. eager to give her massive contracts to signal their own reformed status. It now appears that BLM is facing bankruptcy after burning through tens of millions and Warner Bros. cut ties with Cullors after the contract produced no — zero — new programming.

Some states belatedly investigated BLM as founders like Cullors seemed to scatter to the winds.

Gone are tens of millions of dollars, including millions spent on luxury mansions and windfalls for close associates of BLM leaders.

The usual suspects gathered around the activists like former Clinton campaign general counsel Marc Elias, who later removed himself from his “key role” as the scandals grew.

When questions were raised about the lack of accounting and questionable spending, BLM attacked critics as “white supremacists.”

Warner Bros. was one of the companies eager to grab its own piece of Cullors to signal its own anti-racist virtues.  It gave Cullors a lucrative contract to guide the company in the creation of both scripted and non-scripted content, focusing on reparations and other forms of social justice. It launched a publicity campaign for everyone to know that it established a “wide-ranging content partnership” with Cullors who would now help guide the massive corporation’s new programming. Calling Cullors “one of the most influential thought leaders in American public life,” Warner Bros. announced that she was going to create a wide array of new programming, including “but not limited to live-action scripted drama and comedy series; longform/event series; unscripted docuseries; animated programming for co-viewing among kids, young adults and families; and original digital content.”

Some are now wondering if Warner Bros. ever intended for this contract to produce anything other than a public relations pitch or whether Cullors took the money and ran without producing even a trailer for an actual product. Indeed, both explanations may be true.

Paying money to Cullors was likely viewed as a type of insurance to protect the company from accusations of racial insensitive. After all, the company was giving creative powers to a person who had no prior experience or demonstrated talent in the area. Yet, Cullors would be developing programming for one of the largest media and entertainment companies in the world.

One can hardly blame Cullors despite criticizism by some on the left for going on a buying spree of luxury properties.

After all, Cullors was previously open about her lack of interest in working with “capitalist” elements. Nevertheless, BLM was run like a Trotskyite study group as the media and corporations poured in support and revenue.

It was glaringly ironic to see companies like Warner Bros. falling over each other to grab their own front person as the group continued boycotts of white-owned businesses. Indeed, if you did not want to be on the wrong end of one of those boycotts, you needed to get Cullors on your payroll.

Much has now changed as companies like Bud Light have been rocked by boycotts over what some view as heavy handed virtue signaling campaigns.

It was quite a change for Cullors and her BLM co-founder, who previously proclaimed “[we] are trained Marxists. We are super versed on, sort of, ideological theories.” She denounced capitalism as worse than COVID-19. Yet, companies like Lululemon rushed to find their own “social justice warrior” while selling leggings for $120 apiece.

When some began to raise questions about Cullors buying luxury homes, Facebook and Twitter censored them.

With increasing concerns over the loss of millions, Cullors eventually stepped down as executive director of the Black Lives Matter Global Network Foundation, as others resigned.  At the same time, the New York Post was revealing that BLM Global Network transferred $6.3 million to Cullors’ spouse, Janaya Khan, and other Canadian activists to purchase a mansion in Toronto in 2021.

According to The Washington Examiner, BLM PAC and a Los Angeles-based jail reform group paid Cullors $20,000 a month. It also spent nearly $26,000 on meetings at a luxury Malibu beach resort in 2019. Reform LA Jails, chaired by Cullors, received $1.4 million, of which $205,000 went to the consulting firm owned by Cullors and her spouse, according to New York magazine.

Once again, while figures like James have spent huge amounts of money and effort to disband the NRA over such accounting and spending controversies, there has been only limited efforts directed against BLM in New York and most states.

Cullors once declared that “while the COVID-19 illness is tragic, what’s more tragic is capitalism.” These companies seem to be trying to prove her point. Yet, at least for Cullors, Warner Bros. fulfilled its slogan that this is all “The stuff that dreams are made of.”

Tyler Durden Sun, 05/28/2023 - 16:00

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