This is an excerpt from Tom’s guest article in the InvestorPlace Digest e-letter. To sign up for this newsletter, please click here.
“Just keep raising rates until something breaks.”
That’s what Federal Reserve Chair Jerome Powell was thinking on March 16, 2022 when the U.S. central bank began raising rates to stem inflation. Rate hikes are designed to throttle consumer spending, and something has to give for American consumers to… well… stop consuming.
But it turns out that consumer spending wasn’t the first thing to break.
Instead, it was the overleveraged, undercapitalized SVB Financial (NASDAQ:SIVB) that folded. Here’s how Louis Navellier puts it.
When the Federal Reserve began to aggressively hike key interest rates last year and bond yields climbed higher – values dropped and SVB Financial found itself with a big capital problem on its hands.
The effect has been nothing short of breathtaking: an old-fashioned banking crisis that’s giving everyone a taste of the 1986-’95 savings and loan (S&L) debacle or the 1997 Southeast Asian one. (The 2008 financial crisis was a bit different, which we’ll get into later).
Of course, the writers at InvestorPlace.com — our free market news and analysis website — have been on top of the story since it all began.
Here are the five things you need to know from our work this week…
1. The Domino Effect Is Happening
This month saw the first “Twitter-fueled bank run” unfold before our eyes.
Skittish depositors at Silicon Valley Bank quite literally swiped their corporate accounts away via mobile app and caused a liquidity crunch. Nervous business owners then did the same at Signature Bank (NASDAQ:SBNY)… First Republic Bank (NYSE:FRC)… and so on.
The writers at InvestorPlace.com had the story. On Thursday, Dana Blankenhorn published articles outlining why contagion could bring First Republic down and how Western Alliance Bancorp (NYSE:WAL) remains on watch.
To be clear, InvestorPlace.com’s writers all agree with our top analysts – Eric Fry, Luke Lango, and Louis Navellier – that this is not a 2008-style banking crisis, where gummed-up repo markets choked off all banks, big and small. That’s a problem where “helicopter” TARP money was needed to unclog the system.
Instead, depositors are moving their cash from regional banks into larger ones, sparking panics at some institutions while enriching others. On March 14, Bloomberg reported that Bank of America (NYSE:BAC) had already seen $15 billion in new deposits. And until markets calm down, the weakest dominos continue to see the risk of falling over. Louis tells investors to stick with companies with solid financials.
2. Insiders Are Buying Stock
Meanwhile, the InvestorPlace.com team noticed some insiders doing quite the opposite. Rather than run away, certain banking executives were making high-profile purchases of their stocks instead.
CVB Financial (NASDAQ:CVBF) and PacWest Bancorp (NASDAQ:PACW) are particularly noteworthy. These purchases were made with little fanfare, suggesting that insiders were jumping in for personal profit, rather than attempting to calm markets. These transactions also represented “cluster buys,” a phenomenon where multiple insiders all purchase shares at once. CVB saw four insiders buy shares, while PACW had 10.
As a reminder, my own Insider Track system tells us these are generally bullish signs for corporate stocks. And because bank balance sheets are notoriously opaque, insider purchases are an unusually strong “buy” signal for investors.
For the full list of notable purchases, click here.
3. SoFi Remains a Top Pick
Growth investors will quickly notice that SoFi Technologies (NASDAQ:SOFI) also made the list of companies with significant insider buying. On March 10, CEO Anthony Noto purchased almost $1 million of his fintech company’s stock, making it the second-largest purchase this week next to Charles Schwab (NYSE:SCHW) CEO Walt Bettinger’s $3 million purchase of company stock.
Luke is also a fan of SoFi. In this article, he outlines why SoFi remains a buy-the-dip stock for potential 20x gains in 10 years.
Essentially, the risks at SoFi are different from the ones at Silicon Valley Bank. It’s a crisis that’s ensnared the wrong victims! And with some patience, the “Amazon of Finance” could enrich long-term investors many times over.
4. Retail Investors Are Bottom-Fishing
But try telling that to retail investors. This week, our social media channels have seen enormous interest in the “broken” banks like First Republic and Credit Suisse (NYSE:CS) instead. These institutions have seen shares fall by some of the greatest margins, and the “meme” crowd has swooped in for quick price action.
On Monday, First Republic saw 134 million shares trade hands, 80x the volume it typically sees. Credit Suisse’s 434 million traded shares on March 15 shows similarly hyperactive trading.
These retail investors might prove right in the end. Multinational banks and central banks are lining up to prop up these liquidity-starved financial firms. On Wednesday night, Switzerland’s central bank fired off a $54 billion “bazooka” loan to Credit Suisse. The following day, a consortium of U.S. banks deposited $30 billion with First Republic to keep it afloat.
In the end, it’s anyone’s guess where the chips will land. According to InvestorPlace.com writer Larry Ramer’s calculations, Credit Suisse could fold anyway.
5. SIVB Was Fatal, But Not Serious
There’s a lot of action in the banking stock world right now. But if you’re a depositor, it’s a different story. Here’s from Eric Fry:
What we are facing today is just a bad case of “stupid”…
SIVB does not pose a systemic risk at this point. It is simply the latest example of corporate hubris that will become the newest case study in business school curriculum.
In other words, the banking crisis will be contained, at least from the consumer side. There’s no need to rush out and yank your savings from Schwab or Vanguard.
Eric goes on to say:
Investors with an investment horizon beyond one year should be using the current weakness to invest in some their favorite names from their shopping list.
I would also point out that today’s inflation reading of 6% continues the downtrend that began last fall. That’s fantastic news for stocks, and yet one more reason to step into the market and make a few buys.
We shouldn’t, however, expect a smooth ride to the top. The Fed still needs to break more things before we reach its 2% target inflation rate. And we’ve long warned that the United States still will likely see a mild recession before a recovery happens in the second half of 2023. Caution and conservatism will be rewarded.
Staying Calm in a Bank Run
In 2002, Eric wrote a clear-eyed report on Silicon Valley Bank.
We theorize that SIVB is stuck holding a book of loans in which credit was underpriced because now-worthless equity warrants were included in the original calculations.
It took two decades, but these risks eventually caught up with the “gunslinging” bank.
That’s the tough thing about buying banks and insurers. These institutions can exist for years doing unsafe things without anything going wrong. Management can:
- Write bad loans…
- Underestimate mortality rates…
- Write too much insurance in a hurricane’s path…
It’s essentially like playing the lottery, only in reverse.
Then, in the words of Ernest Hemingway:
How did you go bankrupt? Two ways. Gradually, then suddenly.
It’s the reason why banks tend to trade at 10% earnings yields, rather than the 5% to 6% levels seen by industrial and consumer companies. Investors know that these leveraged stocks are risky, and they penalize them for it.
On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.