Economy:
Fed Chair Powell says interest rates are 'likely to be higher' than previously anticipated
FDIC: Speeches & Testimony - 03/06/2023 - Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers ("The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year end 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry." emphasis added)
The FED's extremely abnormal monetary policies contributed to the Silicon Valley Bank collapse. The FED's failure to abandon ZIRP until March 2022, when the annual CPI rate was already at +8.5%, followed by a rapid increase in the federal funds rate, caused a wide spread between the yields that banks had to offer depositors and the yields on owned securities.The average weighted yield on available for sale securities at SIVB was only 1.56% as of 12/31/22.
2022 Annual Report at page 65-66
The much larger position in held to maturity securities had a weighted average yield of only 1.66%.
Notwithstanding the Fed's monetary policies, which made major interest rate management risks possible, a 1.56% and 1.66% yields on available-for-sale and held-to-maturity securities respectively as of 12/31/22 represents IMO extremely poor interest rate management (see my comments attached to the last post) Reuters reported that Moody's was preparing to downgrade SIVB's debt in response to the unrealized security losses. Silicon Valley Bank's demise began with downgrade threat | Reuters
Silicon Valley Bank is shut down by regulators in biggest bank failure since global financial crisis Banks can collapse when there is excessive reliance on deposits that exceed FDIC insurance limits and large depositors lose confidence in the bank's solvency, irrespective of whether that concern is justified. {SIVB reported 2022 4th quarter net income of $275M and 2022 net income of $1.509B. SEC Filed Earnings Press Release} As of last December, about 95% of the banks deposits were uninsured. Silicon Valley Bank customers scramble to meet payroll, pay bills
Even though the FED has caused problems for banks through an extended period of extremely abnormal monetary policies, the SIVB officers, possibly with a major assist from GS who advised the bank, were largely responsible for this collapse IMO, since they created the conditions last week that created a wildfire panic that resulted in large depositors pulling over $42B out of the bank just on 3/9/23, according to a filing made by a California agency. ORDER TAKING POSSESSION OF PROPERTY AND BUSINESS SIVB is no longer the parent company of Silicon Valley Bank. 8-K
It was an obvious mistake to announce that the available for sale securities were liquidated at about a $1.8 billion loss, and that the incinerated capital would be replaced by a large common and preferred stock offerings. SEC Filed Press Release (3/8/23) Those actions caused the panic.
Silicon Valley investors and founders express shock at SVB collapse Some firms who had large uninsured deposits may fail as a result since it is not likely that the FDIC will cover deposits in excess of $250,000, though additional funds will likely become available over time through asset sales.
If everyone had remained calm, both depositors and investors, the bank could have survived by completing its common and preferred stock offering, but that is not what humans do under those circumstances. Even if a rational person could remain calm, knowing that thousands would panic would lead that person, who saw no rational reason to panic, to withdraw large deposits.
Etsy delays payments to sellers due to Silicon Valley Bank collapse
Employment Situation Summary - 2023 M02 Results According to the BLS, the economy added 311,000 jobs in February. The gains for December and January were revised down by 34,000, lowering the combined total for those 2 months to +743,000. Average hourly earnings rose 8 cents and were up 4.6% Y-O-Y. The U-6 rate rose to 6.8% from 6.6% in January. Table A-15. Alternative measures of labor underutilization - 2023 M02 Results
+++++
Allocation Shifts Discussed in this Post:
Using a 1 year S&P 500 interactive chart, that index pierced its 200 day SMA line to the downside yesterday. Chart
The VIX is in an Unstable Vix Pattern.Vix Asset Allocation Model Explained Simply (5/17/2009 Post); Vix Asset Allocation Model | Seeking Alpha; VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern (5/2/2009 Post); More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988 (5/8/2009 Post); VIX and S & P Compared 1990 to 1997 (5/20/2009 Post)
Interests rate declined on Friday as part of a flight to safety move.
 |
| March 2023 Treasury Yield Curve |
Treasury Bills: +$7,000 in principal amount
Corporate Bonds: +$5,000 in principal amount
FDIC Insured CDs: +$5,000
Individual Common Stock Net Outflow: -$2,307.6
(consisting of $2,990.98 in proceeds minus $683.38 in purchases)
Weighted Average Yield Stock Purchases: 9.84%
Outflow CEF Stock Fund Sells: -$2,756.52
Net Outflow Stocks/Stock Funds: -$5,064.12
Realized Gain Individual Stocks and Funds: +$1,120.27
2023 Net Outflow Stocks and Stock Funds: -$34,224.33
Outflow Exchange Traded Bonds: -$331.48 in proceeds
Realized Gain Exchange Traded Bonds: +$174.82
++++
Putin and His Servile Orcs:
Last Thursday, Russia launched 95 missiles targeting Ukrainian residential buildings and civilian infrastructure facilities. Six of the missiles were hypersonic (the Kinzhals), which can not currently be shot down by Ukraine's air defense systems. Russia said this was a response to what it termed a "terrorist" attack inside Russia where someone allegedly killed two citizens in a small village by spraying their car with bullets. Russia claimed Ukraine was responsible which makes no sense. What makes sense to me is that Russia killed them for propaganda purposes.
For Russia, it is not a terrorist act for it to routinely target apartment buildings, homes, hospitals, energy and water infrastructure facilities, nursing homes and schools in Ukraine, but it is a terrorist act for Ukraine to target a military installation inside Russia that is used to attack Ukrainian civilian targets.
Documenting the horror of mass rape in Ukraine - YouTube
Russian State TV Host Vladimir Solovyov Sounds Battle Cry Against U.S., NATO and the "Collective West Solovyov needs to volunteer his son for the front lines in Ukraine where the Russian army has proven to be incompetent and ineffective over the past 1+ years. If his son survives that conflict, then he can volunteer him for his sought after conventional war with the U.S. and Nato. Solovyov is the most popular commentator on Putin TV.
How Russia kidnapped thousands of Ukrainian Children - YouTube
Russian soldiers execute unarmed Ukrainian PoW after he says ''Glory to Ukraine'' (video included); Tymofiy Shadura, Ukrainian PoW executed by russian orcs. Vlog 313: War in Ukraine - YouTube The Orcs were proud of this war crime and posted the video online.
Russia-linked individuals working to trigger insurrection against Moldovan government
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Trump and His Party:
Fox Cuts Out Trump Saying in Interview That He May Let Russia Take Over Areas of Ukraine
A Troubling Sign for the 2024 Presidential Election - The Atlantic Of the 5 Maricopa County election commissioners, 4 are republicans including the outgoing Chairman Bill Gates. All have been harassed and threatened repeatedly with violence by Trumpsters for certifying as required by law the 2020 and 2022 election results that had democrats carrying that county. Kari Lake, the 2022 anti-democracy candidate for Arizona's governor, stated that the Maricopa election commissioners needed to be "locked up" and were part of a "corrupt house of cards" who are "daring us to do something about it". What should the Trumpsters in Arizona do about it? Lake referred to the Second Amendment and then said "We're going to burn it to the ground".
Tucker Carlson Used the January 6 Footage to Try and Gaslight America | Vanity Fair In TrumpWorld, the 1/6 insurrection consisted just of some innocent sightseers visiting the capitol. Carlson: "These were not insurrectionists. They were sightseers." It is a sorry state of affairs that anyone watches him.
Fox has not hurt its brand by peddling false claims to the Trumpster True Believers since those listeners believed the false claims and watched Fox to validate their reality creations about the "stolen election" and other firmly held opinions. Fox has hurt its brand by having to produce documents in the Dominion defamation action that show the disdain that several prominent Fox "news" personalities had for Trump. What Tucker Carlson said about Trump in private texts vs. on Fox News - The Washington Post
Elon Musk publicly mocks Twitter worker with disability who is unsure whether he's been laid off; Elon Musk tweets support for 'Dilbert' creator after racist tirade
++++
1. Small Ball - Exchange Traded Bonds:
Proceeds: $331.48
A. Eliminated ARGD in 2 Taxable Accounts - Sold 5 at 22.1 and 10 at $22.12:
Quote: Argo Group International Holdings Ltd. 6.5% Senior Notes Due 2042 (ARGD)
Investment Category: Exchange Traded Baby Bonds
Profit Snapshots: +$53.85
 |
| Market Discount $1.75 |
Remaining Position Schwab Taxable Account: 110 shares
 |
| 110 Shares AC at $22.67/Price Intraday on 3/1/23 |
Previous Sell Discussions (includes trades under former symbol AGIIL):
Item # 5.A. Pared ARGD in Schwab Account- Sold 25 at $25.4-Part of Highest Cost Lot (5/23/20 Post); Item # 3 Sold 50 AGRD at $25.87 (9/25/19 Post); Item # 4 Sold 100 AGIIL at $25.11 (9/25/17 Post); Item # 4 Sold 50 AGIIL at $26.89 - Update For Exchange Traded Bonds And Preferred Stocks Basket Strategy As 6/3/16 - South Gent | Seeking Alpha; Item # 2 Sold 50 AGIIL at $24.21-Roth IRA (6/28/14 Post); Item # 2 Sold: 50 AGIIL at $24.48 (6/7/14 Post)
ARGD-AGIIL Realized Gains to Date: $653.79
B. Eliminated DDT in 2 Taxable Accounts - Sold 8 at $25.5 and 5 at $25.5:
Quote: Dillard's Capital Trust Preferred 7.5%
Issuer: Dillard's Inc. (DDS) - Department Stores
DDS Analyst Estimates | MarketWatch
DDS SEC Filed Earnings Press Release for the Fiscal Quarter Ending 1/28/23
Investment Category: Trust Preferred Securities, a subcategory of Exchange Traded Bond (see also Regular Preferred and Trust Preferred (1/1/2009 Post)
Profit Snapshots: +$120.97
 |
| Market Discount +$2.21 (profit classified as interest income) |
Last Buy Discussions: Item #3.B. Added 1 at $17.15; 1 at $16; 1 at $15.28; 1 at $14.17 (5/16/20 Post); Item # 3.C. Bought 10 DDT at $21.61, 2 at $19.31, 1 at $14.08; 1 at $13.34 (3/21/20 Post)
Remaining Taxable Account: 20 shares with AC at $16.72 per share
 |
| Price Intraday on 3/1/23 |
Yield at $16.72 = 11.21%
Security: Prospectus
Par Value: $25
Coupon: 7.5%
Legal Form of Ownership: Trust Preferred
Placement in Capital Structure: Junior bond allowing for interest payment deferrals subject to Stopper Clause.
Interest Payments: Quarterly
Last Ex Interest: 1/13/23 (owned as of)
Next Ex Interest: 4/13/23
Maturity: 8/1/2038
Issuer Optional Call: Callable now at par value + accrued and unpaid interest
DDT Realized Gains to Date: $354.89
The lowest price paid for this junior bond was $5.82. Item # 4. Bought 50 DDT at $5.82 (3/18/2009 Post)
2. Small Ball Common Stock Sells: Proceeds = $2,990.98
I am reducing my allocation to non-dividend paying common stocks. This is part of a risk reduction approach when I view MM and Treasury Bill yields to be satisfactory given my objectives.
The Silicon Valley Bank collapse may also have an impact on BDCs who lend money to firms that had uninsured deposits at this bank. I have no way of assessing that impact now. Based on a regulatory filing, $42B in deposits were withdraw on 3/9/23.
Until I have a better handle on that potential problem, I am going to quit my small ball buying in the BDC sector starting today. I had a net outflow in that niche sector last week of $1,289.18. The sales were prior to the SIVB news.
A. Eliminated BRK/B - Sold 2 at $304.25:
Quote: Berkshire Hathaway Inc. Cl B (BRK.B)
Proceeds: $608.49
Website: BERKSHIRE HATHAWAY INC.
Profit Snapshot: $240.37
Last Discussed: Item # 1.C. Bought 1 BRK/B at $186.5; 1 at 181.97 (6/13/20 Post)
Dividends: None and none expected
Last Earnings Report (Q/E 12/31/22):
Class B E.P.S. = $8.27, down from $17.79 in the 2021 4th quarter
2022 Class B E.P.S. = ($10.36), down from +$39.64
The loss resulted in having to included unrealized depreciation in investments in GAAP net income as explained here:
Operating Earnings:
B. Eliminated GD - Sold 1+ Shares at $229.5:
Proceeds: $304.57
Quote: General Dynamics Corp.
GD Analyst Estimates-MarketWatch
Website: General Dynamics | Home
Profit Snapshot: $104.82
Last Discussed: Item # 1.L. Several Fractional Share GD Purchases - Prices $147.26 to $152.55 (1/9/21 Post)
Dividend:
Yield at $229.5 =
Last Earnings Report (Q/E 12/31/22): SEC Filed Press Release
E.P.S. = $3.58, up from $3.42 in the 2021 4th quarter
Revenues: $10.9B
2022 E.P.S. = $12.19 on $39.4B
Free Cash Flow: $175M, down from $1.297B
2022 Free Cash Flow: $3.465B up from $3.384B
C. Eliminated TRST in 2 Taxable Accounts - Sold 5 at $36.84; 5 at $37.02:
Quote: Trustco Bank Corp. (TRST)
Proceeds: $369.31
Profit Snapshots: +$41.28
Last Discussed: Item # 3.D. Bought 5 TRST at $32.91 (1/30/23 Post) I discussed the last earnings report in that post and nothing substantive to add here. SEC Filed Earnings Press Release
TRST Trading Profits to Date: $1,408.67
Sell Discussions: There was a 1 for 5 reverse stock split in 2021 that explains the lower prices. TRST Split History; Item # 3.A. Eliminated TRST in Schwab Taxable Account - Sold 20 at $38 (12/13/22 Post)(profit snapshot = $129.8); Item # 3.G. Eliminated TRST-Sold 15+ in Schwab Taxable at $7.45 and 40+ in Fidelity Taxable at $7.44 (5/14/21 Post)(profit snapshots = $111); Item # 1.D. Pared TRST-Sold 10 at $6.72 (1/9/21 Post); Item # 2.B. Sold 125 TRST at $8.6 (11/2/19 Post); Item # 2 Sold 100 TRST at $6.69 Update For Regional Bank Basket Strategy As Of 7/26/16-South Gent | Seeking Alpha; Item # 1 Sold 315+ TRST at $6.92 (1/11/15 Post); Sold 50 TRST at $7.29 (11/25/13 Post); Sold 308 TRST at $6.64 (10/28/13 Post)(largest gain to date = $549.47)
I am keeping the 20 shares owned in my Fidelity taxable account that have a $31.83 AC per share. I will consider adding to that position when a purchase will lower my average cost per share.
D. Eliminated PFLT in Fidelity Taxable Account - Sold 15 at $10.93:
Proceeds: $164.02
Quote: PennantPark Floating Rate Capital (PFLT)
10-Q for the Q/E 12/31/22 (summary list of investments starts at page 8)
Website: PFLT - PennantPark
Annual Report for the fiscal year ending 9/30/22
Management: External
In January 2023, PFLT sold shares at slightly below GAAP net asset value per share as of 12/31/22. PennantPark Floating Rate Capital Ltd. Announces Pricing of Public Offering of Common Stock (priced at $11.1) PFLT received $11.1998 due to a contribution from the external manager.
The prior public offering completed in August 2022 was at $12.4 per share. PennantPark Floating Rate Capital Ltd. Announces Pricing of Public Offering of Common Stock (8/8/22)
I am keeping the shares owned in my Schwab account:
 |
| Price as of 3/3/23 Close; 95+ shares |
Profit Snapshot: +$74.78
Last Discussed: Item # 2.H. Added to PFLT in Schwab Account - Bought 10 at $10.95 (1/3/23 Post)
Prior Buy Discussion: Item # 1.G. Bought 10 PFLT at $6.06; 4 at $5.75 (6/6/20 Post)
Net Asset Value per share history:
12/31/22: $11.30
9/30/22: $11.62
12/31/21: $12.70
3/31/21: $12.71 Press Release 2021 1st Q Earnings
3/31/20: $12.20 10-Q at page 5
12/31/19: $12.95
9/30/19: $12.97
6/30/19: $13.07
3/21/19: $13.24
12/31/18 $13.66
9/30/18 $13.82
6/30/18: $13.82
9/30/17: $14.10
9/30/16: $14.06
9/30/15: $13.95
9/30/14: $14.40
9/30/13: $14.10
9/30/12: $13.98
PFLT Dividend History | Nasdaq
Sell Discussions: Item # 7.E. Sold Highest Cost 20 PFLT Shares Purchased with Dividends at $14.07 - Schwab Taxable Account (4/28/22 Post)(profit snapshot = $46.13); Item # 3. Sold 102 PFLT in Schwab Taxable Account at $13.26 -Highest Cost Lots (7/30/21 Post)(profit snapshot = $30.92); Item # 2.A. Eliminated PFLT in Fidelity Account-Sold 81+ at $12.01 (12/14/19 Post)($29.66) If I still owned the shares sold at the highlighted prices, I would probably be unable to achieve my goal for BDC stocks, which is to realize any gain on the shares, prior to any ROC adjustments to the tax cost basis, plus the dividends.
E. Eliminated SLRC in 2 Taxable Accounts - Sold 37+ at $15.79 and 30 at $15.79:
Proceeds: $1,061.95
Quote: SLR Investment - Externally Managed BDC
2022 Annual Report (risk summary starts at page 24 and ends at page 55; summary of investments starts at page 92; SLRC debt discussed starting at page 112; five year financial data at page 113)
Profit Snapshots: +$66.68
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| Vanguard 30 Shares +$22.81 |
 |
| Schwab 37+ Shares +$43.87 |
Last Discussed: Item #4.H. Added to SLRC in Fidelity Taxable Account - Bought 1 $13.38; 4 at $12.53; 3 at $12.34 (10/11/22 Post)
Remaining SLRC Taxable Account Position: I am keeping the 137+ SLRC shares owned in my Fidelity account that have a $15.32 average cost per share. I am reinvesting the dividends given the current price discount to net asset value per share.
Discount at $15.32: -16.42% (using 12/31/22 NAV per share)
Yield at $15.32: 10.77%
Dividends: Monthly at $.136667 per share ($1.64 annually)
Net Asset Value per share history:
12/31/22: $18.33
6/30/22: $18.53
12/31/21: $19.93
12/31/20: $20.16
9/30/20: $20.14 10-Q
12/31/19: $21.44
12/31/18: $21.75
12/31/17: $21.81
12/31/16: $21.74
12/31/15: $20.79
12/31/14: $22.05
12/31/13: $22.50
12/31/12: $22.70
12/31/11: $22.02
Initial Public Offering: Prospectus February 2010, priced to the public at $18.5 and at $17.205 to the underwriters
Last Earnings Report (Q/E 12/31/22): SEC Filed Earnings Press Release
Net Asset value per share: $18.33
NII per share = $.41
Portfolio Composition:
Risk Ratings:
99.7% performing
Last Sell Discussion: Item # 3.C. Sold 60 SLRC at $21.56 (10/17/18 Post)(profit snapshot = $37.14) Other sell discussions are mentioned in this post near the end: Update For Portfolio Positioning And Management As Of 3/13/16 | Seeking Alpha
SLRC Realized Gains to Date: $166.75
Goal: Any total return before ROC adjustments to the tax cost basis in excess of the dividend payments.
F. Eliminated PSEC in 2 Taxable Accounts - Sold 20 at $7.39, Sold 20 at $7.4:
Quote: Prospect Capital Corp. (PSEC)- An Externally Managed BDC
Investment Category: Monthly Income Generation
Profit Snapshots: +$95.56
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| Vanguard +$49.06 |
There was a slight ROC adjustment to the tax cost basis.
For example, the tax cost basis per share for the Vanguard PSEC position was $4.95. Those shares were bought at $5.02 on 11/3/20:
I am keeping the 20 shares owned in my Fidelity taxable account that have a $4.92 average cost per share. I will consider adding to that position when a purchase will lower my AC per share.
Last Discussed: Item # 1.G. Sold 5 PSEC at $8.12 (9/24/21 Post)(profit snapshot = $13.71)
Last Buy Discussion: Item #1.P. Multiple Small Ball Purchases of PSEC-Sold 105 and Kept 42+ (2/27/21 Post)(profit snapshot = $38.88)
Dividend: Monthly at $.06 per share ($.72 annually)
Dividend History: Unfavorable IMO with several dividend cuts.
Net Asset Value Per Share History: Unfavorable IMO over its history as a public company, but showing signs of stabilization since 2015.
12/31/22: $9.94
12/31/21: $10.01
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| Page 54, 10-Q |
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| 2017 PSEC 351 Shares Net of +$62.19 |
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| 2012 PSEC 100 Shares +$60.47 - Roth IRA |
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| 2010 Regular IRA +$68.04 |
G. Eliminated KW - Sold 10 at $18.68:
Quote: Kennedy-Wilson Holdings Inc.
Proceeds: $186.81
"As of December 31, 2022, our AUM stood at $23.0 billion. The real estate that we hold in our global portfolio consists primarily of multifamily apartments (57%) and commercial (39%) based on Consolidated NOI and JV NOI. Geographically, we focus on the Western United States (61%), the United Kingdom (16%) and Ireland ((21%). "
KW is not organized as a REIT.
2022 Annual Report (risk summary starts at page 14 and ends at page 30; debt discussed starting at page 49)
Proceeds: $186.81
Profit Snapshot: $58.67
Part of Profit Due to ROC Adjustments to the Tax Cost Basis:
 |
| 2022 ROC Adjustments |
 |
| 2021 ROC Adjustments at 100% of Dividends Paid |
The 2021 ROC adjustment for the 10 shares sold was $.88 per share.
The 2022 ROC adjustment for those shares was $.60, rounded up, per share share.
$14.8 of the $58.67 profit was attributable to the 2021 and 2022 ROC adjustments.
As discussed earlier, the ROC adjustments can benefit a person's heirs, provided the tax cost basis can be stepped back up to market value on the DOD (or alternate valuation date). That is the current law. The taxpayer avoided taxation of the dividends classified as ROC; and the ROC adjustments that lowered the tax cost basis become irrelevant to the person's heirs under the current stepped up cost basis rule.
I will look at the ROC adjustments when making a before tax total return calculation. The total return is the profit using original cost basis + the dividends.
Last Discussed: Item # 2.A. Sold 2+ KW at $20.1 (5/28/21 Post)(profit snapshot = $17.81)
Buy Discussions: Item # 3.J. Added to KW-Bought 1 at $14.26; 1 at $13.81; 1 at $13.2 (11/7/20 Post); Item # 1.F. Started KW-Bought 10 at $14.89 (8/8/20 Post)
Dividend: Quarterly at $.24 per share, last raised from $.22 effective for the 2022 first quarter payment. The rate was $.12 in 2015.
Dividend Information | Kennedy Wilson
Last Ex Dividend: 12/29/22 (owned as of)
Last Earnings Report (Q/E 12/31/22): SEC Filing
GAAP Net Income: 22.6M or $.16 per share
Non-GAAP Net Income: $69.4M or $.505 per share
GAAP to Non-GAAP Reconciliation:
In making the GAAP to Non-GAAP adjustment, KW does not deduct realized gains from property sales which an equity REIT would do when calculating FFO. An adjustment is made in the "Net Operating Income" calculation.
I am concerned about KW's debt level which was at $7.941+B as of 12/31/22.
KW's complexity makes it difficult for me to invest.
Current Position: None
3. CEF Stock Fund Eliminations:
Proceeds: $2,756.52
A. Eliminated JRI in Fidelity Taxable Account - Sold 130 at $12.13:
Proceeds: $1,577.48
Quote: Nuveen Real Asset Income & Growth Fund Overview - A Leveraged CEF
Asset allocation as of 1/31/23:
Investment Category: Monthly Income Generation
Sponsor's website: JRI - Nuveen Real Asset Income and Growth Fund | Closed-End Fund | Nuveen
I am keeping the shares owned in my Vanguard taxable account.
Profit Snapshot: Net of +$184.6
Last Discussed: ,Item # 6.A. Bought 10 JRI at $10.98 in Vanguard Taxable Account (11/1/22 Post)
Leveraged at about 29.36% as of 1/31/23
Last SEC Filed Shareholder Report: Nuveen Real Asset Income & Growth Fund (semiannual period ending 6/30/22) Debt financing costs were at a .7% spread to the 1 month Libor rate as of 6/30/22, with .125% charged on undrawn balances. Borrowing costs are going up. Net asset value per share has gone down significantly over the past year. Buying securities with borrowed money that is rising in cost does not work so well when the securities are going down in value.
Data Date of 3/3/23 Trade:
Net Asset Value per share: $13.99
Closing Market Price: $12.11
Discount: -13.44%
Sourced: JRI - CEF Connect
Dividend: Monthly at $.087 per share ($1.158), reduced from $.0965 effective for the April 2023 payment, which was reduced from $.117 per month effective for the April 2020 payment.
(JRI) Dividend History | Nasdaq
To reduce ROC supported dividends, a CEF needs IMO to cut the dividend rate when leverage costs are in a strong uptrend.
The dividend has significant ROC support, click distribution tab at JRI - CEF Connect.
Some Prior Sell Discussions: Item # 1.I. Pared JRI Again-Sold 12.661 shares at $16.31-Remaining Shares Bought With Dividends in Fidelity Taxable Account (10/1/21 Post)(profit snapshot = $53.03); Item # 2.C. Pared JRI-Sold 22.235 at $16.11(8/6/21 Post)(profit snapshot = $42.31); Item # 2.A. Pared JRI-Sold 30 at $15.9-highest cost shares (6/19/21 Post)(profit snapshot = $14.73); Item # 1.K Eliminated JRI in Schwab Taxable Account-Sold 100 at $11.48 (6/6/20 Post)(profit snapshot = $69.35); Item # 2.A. Sold 102+ JRI at $17.98 (12/22/19 Post)(profit snapshot = $140.67); Item # 1.A. Sold 100 JRI at $17.51(10/30/19 Post )(profit snapshot = $100.41); Item # 4 Sold 100 JRI at $17.23 (10/2/19 Post)(profit snapshot = $40.45)
JRI Realized Gains to Date = $665.52 (includes $19.97 realized gain from selling 9 shares in my Vanguard account in July 2021 that was not discussed in posts)
Goal: Any total return in excess of the dividend payments.
B. Eliminated IGR - Sold 180 at $6.54:
Proceeds: $1,179.04
Quote: CBRE Clarion Global Real Estate Income Fund Overview
Investment Category: Monthly Income Generation
Profit Snapshot: +$253.51
Last Discussed: Item # 2.G. Pared IGR in Fidelity Account - Sold 10 at $6.69 (2/5/23 Post)(profit snapshot = $8.17)
Last Buy Discussions: Item # 1.D. Added to IGR-Bought 10 at $5.79; 5 at $5.59 (11/21/20 Post); Item # 1.E. Added 5 IGR at $3.75; 50 at at $5.69; and 10 at $5.1 (5/16/20 Post)
Dividends: Monthly at $.06 per share with some ROC support.
Data Date of 3/3/23 Trade:
Net Asset Value Per share: $6.76
Market Price: $6.57
Discount: -2.81%
Average 3 year discount: -9.74%
Average 5 year discount: -10.92%
Sourced: IGR - CEF Connect (click "Pricing Information" tab)
One reason for eliminating IGR is that the discount to net asset value is significantly below the averages.
Other reasons include duplication in owned securities, leverage of about 31% in a rising interest rate setting, and generally unsatisfactory performance compared to my REIT equity and preferred stock purchases.
Borrowings: .75% spread to the federal funds rate
 |
| SEC Filed Annual Report at page 29 |
2022 ROC: $2.375+M
5 Year Annual Average Total Return = 7.21% (as of 3/6/23, using price)
Sourced: CBRE Global Real Estate Income (IGR) Performance | Morningstar
Total annual average return for 10 years was then at 4.45% and 3.64% for 15 years.
IGR is about to do a subscription rights offering. Prospectus; Press Release dated February 27, 2023
Other Sell Discussions 2013 to 2022: Item # 2.H. Pared IGR - Sold 2 at $9.09 (8/27/21 Post)(profit snapshot = $6.29); Item #3.H. Sold All IGR Shares Purchased with Dividend (6/12/21 Post)(profit snapshot = $49.1); Item # 1.R. Sold 42+ IGR at $8.1 (4/17/21 Post)(profit snapshot = $43.23); Item # 1.A. Pared IGR-Sold 100 at $7.64 (4/9/21 Post)(profit snapshot = $63.6); Item # 1. I. Eliminated IGR Vanguard Account-Sold 100 at $5.95 and Eliminated IGR in Schwab Account-Sold 100 at $5.96 (6/13/20 Post) (profit snapshots = $113.32); Item # 1.C. Sold 9 IGR at $8.33 (2/19/20 Post)(profit snapshot = $4.99); Item # 2.A. Sold 100 IGR at $8.01 (12/28/19 Post)(profit snapshot = $42.98); Item # 1 Sold 283 IGR at $7.89+ (8/24/13 Post)(profit snapshot on all 2013 sales = $77.62)
A. Bought 2 FMC 4.1% SU Maturing on 2/1/24 at a Total Cost of 98.693:
%202:1:24%204.1%25%20.png)
Issuer: FMC Corp. (FMC)
FMC Analyst Estimates | MarketWatch
FMC SEC Filed Earnings Press Release for the Q/E 12/31/22
Finra Page: Bond Detail (prospectus linked)
Credit Ratings: Baa2/BBB-
YTM at Total Cost = 5.6%
Current Yield at TC = 4.154%
Last Bond Offering (9/2019): Prospectus
B. Bought 2 Affiliated Managers 4.25% SU Maturing on 2/15/24 at a Total Cost of 98.835:
%20.png)
Issuer: Affiliated Managers Group Inc. (AMG)
AMG Analyst Estimates | MarketWatch
AMG SEC Filed Earnings Press Release for the Q/E 12/31/22
FINRA Page: Bond Detail (prospectus linked)
Credit Ratings: A3/BBB+
YTM at Total Cost: 5.533%
Current Yield at TC = 4.3%
I now own 4.
C. Bought 1 Nextera Capital 4.255% SU Maturing on 9/1/24 at a Total Cost of 98.106:
%209:1:24%204.255%25.png)
Issuer: Wholly owned by NextEra Energy Inc. (NEE) who guarantees the notes.
NEE SEC Filed Earnings Press Release for the Q/E 12/31/22
Finra Page: Bond Detail (prospectus not linked)
Note that the Finra page has the incorrect coupon. This bond was originally issued as part of an Equity Unit offering and later remarked as a standalone bond with a 4.255% coupon, as explained in the prospectus linked above.
Credit Ratings: Baa1/BBB+
YTM at Total Cost: 5.582%
Current Yield at TC = 4.337%
The last Nextera Capital bond offering was last month Prospectus ($2.5B of 6.051% SU maturing on 3/1/25, originally offered in February 2021 as part of an Equity Unit offering)
I now own 6.
5. Treasury Auction Buys: $7,000 in principal amount
A. Bought 5 Treasury Bills at 3/6/23 Auction:
%206:8:23.png)
%206:8:23%20.png){kind=small}
91 Day Bill
Matures on 6/8/23
Interest: $60.2
Investment Rate: 4.903%
%207:11:23.png){kind=small}
119 Day Bill
Matures on 7/11/23
Interest: +$33.35
Investment Rate: 5.216%
6. CDs-FDIC Insured: $5,000 in principal Amount
In my Schwab account, I am redirecting some proceeds received from maturing short term T Bills (2-3 months) into longer term CDs (A and B below).
I have never even considered the possibility of having uninsured deposits at a bank.
A. Bought 2 Schwab Bank 5.25% CDs Maturing on 9/16/24:
%209:16:24%20%20.png){kind=small}
Interest Paid Semiannually.
B. Bought 2 Pinnacle Bank 5.3% CDs Maturing on 3/24/25:
%205.3%25%20CDs%20MI%203:24:25%20.png){kind=small}
Interest Paid Monthly.
C. Bought 1 Renasant Bank 5.2% CD Maturing on 12/22/23:
%2012:22:23%205.2%25%20.png){kind=small}
Interest paid at maturity.
7. Small Ball Buys:
A. Added to VNO - Bought 1 at $19.53; 4 at $18.76, 1 at $17.5:
Quote: Vornado Realty Trust (VNO)
Investment Category: Equity REIT Common and Preferred Stock Basket Strategy
Last Discussed: Item # 3.B. Added to VNO - Bought 2 at $20.78; 2 at $20.6 (1/10/23 Post)
Average cost per share: $22.98 (31+ shares)
Dividend: Quarterly at $.375 per share ($1.5 annually), slashed from $.53 effective for the 2023 first quarter payment. The dividend was at $.66 until the 2020 third quarter when it was cut to $.53.
Dividend History: Negative.
Yield at Current Rate: 6.53% (assumes no further cuts)
Last Ex Dividend: 1/27/23
Last Earnings Report (Q/E 12/31/22):
SEC Filed Press Release and Supplemental
Adjusted FFO per share = $.91
Revenues: $446.94M
GAAP Loss: $493.28M
"By way of background, in April 2019, we recognized a $2.559 billion gain upon the transfer of seven properties to the Retail JV, which included a GAAP required write-up to fair value of its retained interest in the properties. The $483,037,000 impairment charge recognized this quarter together with the $409,060,000 impairment charge previously recognized in 2020, effectively reverse a portion of the $2.559 billion gain attributable to the 2019 required write-up"
I am now in an average down mode in 1 share lots.
Quote: Oaktree Specialty Lending Corp. (OCSL) - Externally Managed BDCs
Annual Report for the F/Y Ending 9/30/22 (risk factor summary starts at page 22 and ends at page 47; summary of investments starts at page 87) A new risk factor for BDCs is that one or more of their portfolio companies may go bankrupt by losing uninsured deposits at Silicon Valley Bank.
Last Discussed: Item # 4.B. Bought 10 OCSL at $7.09 in Schwab Account (1/23/23 Post) Subsequent to that purchase, there was a 1 for 3 reverse split. The split caused the formation of a fractional share which was sold before it reached my account, leaving me with 3 shares out of the original 10 purchased.
Average cost per share: $19.76 (20 shares)
Dividend: Quarterly at $.55 per share ($2.2 annually), raised from $.54 effective for the next payment.
Yield at New AC = 11.13%
Next Ex Dividend: 3/14/23
Last Earnings Report (Q/E 12/31/22): SEC Filed Press Release and 10-Q
GAAP Net Investment Income per share = $.63, up from $.59
Adjusted NII per share: $.61, up from $.55
The adjustment to GAAP relates to interest income accretion due to merger accounting adjustments. I would use the adjusted number.
Net asset value per share: $19.63
No investments were on nonaccrual as of 12/31/22.
Weighted Average Yield on Debt Investments: 11.6% (some PIK interest with cash yield at 10.3%)
Floating Rate at 87.3%; Fixed Rate at 12.7%
Estimated Impact from Interest Rate Changes:
 |
| Pages 104-105, 10-Q |
C. Bought 10 WU at $12.7; 5 at $12.37; 5 at $12.05; 5 at $11.82; 5 at $11.67; 5 at $11.25: Cost $422.71
Quote Western Union Co. (WU)
These are my first purchases. The recent price decline and current dividend yield makes this stock slightly more attractive as a contrarian value play IMO. By slightly, I mean multiple purchases that have now totalled 35 shares.
WU Analyst Estimates | MarketWatch
2 Year Basic Financial Data:
 |
| P. 46, Annual Report |
Average cost per share: $12.08 (35 shares)
Dividend: Quarterly at $.235 per share ($.94 annually)
The Western Union Company -- Dividend History
Yield at AC = 7.78%
Next Ex Dividend: 3/16/23
Last Earnings Report (Q/E 12/31/22): SEC Filed Earnings Press Release and Slide Presentation
GAAP E.P.S. = $.65, positively impacted by a $96.9M gain selling WU's U.K. Business Solutions Business
Non-GAAP E.P.S. = $.32, a 50% decrease compared to the 2021 4th quarter. The sold U.K. Business solutions unit and operations in Belarus and Russia contributed about 8 cents and 6 cents to the 2021 4th quarter non-GAAP E.P.S. WU ceased operations in those 2 countries last year.
Excluding the contribution from the U.K. sale, 4th quarter revenues were done 15% compared to the 2021 4th quarter and down 9% on a constant currency basis.
2023 Outlook: GAAP E.P.S. range $1.48-$1.58; Non-GAAP E.P.S. range at $1.55-$1.65
2022 GAAP E.P.S. $2.34 (includes $243M gain on sale of a business)
2022 Non-GAAP E.P.S. = $1.76
WU bought back $175M in stock during the 2022 4th quarter.
Cash and Cash Equivalents as of 12/31/22: $1.2859B
Debt at $2.6168B
The commercial paper borrowings stood at $180M, down from $370M as of 12/31/21, had a weighted average annual interest rate of 4.6% and a weighted average term of 3 days. I would hope that the company would use some cash to cut down on that borrowing source.
Risk Mitigation Measures:
Maximum Position: 100 shares based on WU's negative earnings and revenue trends
Purchase Restriction: 5 share lots with each subsequent purchase required to be a the lowest price in the chain.
Trading Small Ball Rules
D. Added to BDN - Bought 5 at $5.61:
Our Properties | Brandywine Realty Trust
Investment Category: Equity REIT Common and Preferred Stock Basket Strategy
Chart: Major Bear Market Trend-No indication of a bottom yet
I discussed BDN in my last post. Item # 4.C. Added to BDN - Bought 10 at $5.79 (3/6/23 Post) I discussed the last earnings report in that post and have nothing substantive to add here.
Dividend: Quarterly at $.19
New AC per share = $7.67 (145+ shares)
Yield at New AC = 9.91%
Yield at $5.61 = 13.55%
Next Ex Dividend: 4/4/23
Disclaimer: I am not a financial advisor, but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sale of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals, and situational risks. I can only make that kind of assessment for myself and my family members.
Companies are starting to make SEC filings disclosing how money they had in uninsured deposits at the Silicon Valley Bank.
ReplyDeleteRoku Inc. Cl A (RUKU) disclosed that it had $487M in deposits or about 26% of its cash assets.
https://www.sec.gov/ix?doc=/Archives/edgar/data/1428439/000142843923000010/wk-20230310.htm
Rocket Lab USA Inc. (RKLB) disclosed that it had $38M in deposits:
https://www.sec.gov/Archives/edgar/data/1819994/000095017023007358/rklb-20230310.htm
There will be a deluge of these filings next week, but those filings will be only for public companies.
It will be interesting to see whether publicly traded BDCs disclose how much their private portfolio companies had in deposits, when the uninsured deposits are material to those companies.
I believe that it would require special legislation for the U.S. government to extend insurance beyond what the FDIC covers by its existing legislative authority. I doubt that Congress would be able to pass any such legislation, particularly with the republicans controlling the House and having antipathy to the VCs who contribute mostly to Democrats.
It is possible that JPM or some other major banking institution could step up by taking over all of the FDIC seized operating bank's assets and liabilities.
The alternative for other banks is to pick over the carcass and to selectively buy loans and other assets only, leaving it to the FDIC to deal with uninsured deposits. I suspect that JPM received several billion in deposits previously held at Silicon Valley last Thursday and Friday.
The Treasury, FDIC and the Federal Reserve came up with a plan that they claim will protect all depositors at Silicon Valley Bank.
ReplyDeleteJoint Statement:
https://home.treasury.gov/news/press-releases/jy1337
The plan will include the FED providing a $25B emergency lending facility that will act as a backstop.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
The Fed will lend money for up to 1 year in exchange for bank owned treasuries, agency debt and mortgage debt that will be value at par value. The facility could be used by banks who need an alternative to selling those types of securities at a loss which contributed to the Silicon Valley Bank demise.
FDIC also just seized Signature Bank (SBNY)
Any FDIC losses from those two bank closures will be funded by increasing insurance premiums.
I do not see the SIVB or Signature Bank (SBNY) common shares having any value. I am not familiar with SBNY.
SIVB is a holding company and has assets other than its former 100% ownership of Silicon Valley Bank. I can not assess the value of those assets but my best guess is that the value will be meaningfully less than the holding company senior debt.
Some value will be assigned by the bond ghouls to that SIVB SU debt tomorrow. My guess now is about 30 to 40 cents on the dollar.
I do not own the common shares but will take a hit on 2 SIVB senior unsecured bonds and 20 shares of its equity preferred stock which I currently assign a zero value. Just to take a reportable tax loss, I will sell those preferred shares when I can receive more than zero. The only value those shares have to me is as a tax loss that can offset short term capital gains.
For now, I am lifting my hold on buying BDC stocks which did not go into effect since I was to start tomorrow.
My view is that the failure of SIVB is idiosyncratic. The primary catalyst was that over 92% of deposits were in excess of the FDIC insurance limit which is a rarity. The regional banks that I follow will generally have a fraction of deposits that are not covered by FDIC insurance and consequently depositors have no reason to panic and withdraw funds.
SIVB's failure was not due to bad loans, but a run on the bank by depositors that had too much money in their accounts.
35%-50% of an average regional bank deposits are in non-interest bearing deposits that would mostly be checking accounts. I will discuss one of those, COLB, in my next post where the split is about 50/50% in interest bearing and non-interest bearing deposits.
All banks have an unrealized loss problem for owned fixed coupon securities.
Another catalyst was Moody's threatening to downgrade SIVB's debt and what I would call the idiotic way SIVB and its advisor GS handled that problem. Other banks were taught a good lesson on what to avoid doing.
And, the new emergency facility will allow banks an option to borrow money using as collateral owned securities that will be valued at par rather than the currently depressed below par value prices. Thus, stressed banks can avoid rapid distressed sales, one of the primary triggers for the Silicon Valley panicked induced bank run.
So taxpayers will be bailing out banks because while any bonds will hold are depressed, we won't let our banks pay the consequences. Well I guess that's what taxes are for.
ReplyDeleteRoku at $487M, and on.... that's a lot of disappearing money, at least in the short term. These companies too will be bailed out with par value for depressed bonds.
It sounds like this won't take down the economy or put much of a dent, due to rescue methods. The bright green futures charts agree.
I have a Signature credit union account from when it was 3.5% on up to $25k & rates were .7%. So I've seen Signature "Bank" in google results a lot. Otherwise not a clue. :).
It's good to be diversified. Frustrating to lose but 20 + 2 is at least wisely on the smaller side.
Good to know all this. I've gotten a much better idea of what's happening here, than any of the skimmed many articles about 'what this means' that are all over the place.
Land: The government is claiming that no taxpayer funds will be used in bailing out uninsured deposits.
DeleteThe FED is apparently the major source of the bailout:
"The Federal Reserve is prepared to address any liquidity pressures that may arise. The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress."
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
The Fed makes a lot of money. The 2021 profit remitted back to the treasury was $109B, up from $86.9B in 2020.
https://www.federalreserve.gov/newsevents/pressreleases/other20220321a.htm
I have not seen a release yet for 2022.
It is easy to make money when the FED can buy interest paying securities using money that it creates.
To the extent the FED eats into its profit to compensate depositors at Silicon Valley and Signature, it is not technically money paid into the treasury by taxpayers, but use of profits for that purpose would increase the deficit.
On top of that, there is a backstop to the BTFBP of up to $25B from the Treasury's already approved and funded Exchange Stabilization Fund. I don't think that those funds will be needed.
As the creator of dollars, and a huge balance sheet that throws off a lot of cash, the FED can take the qualifying owned bank securities and then loan out money valuing the collateral at par value. This will be an effective way of avoiding future distressed securities sales without spending taxpayer money.
Federal Reserve Balance Sheet: $7.847+ trillion as of 3/9/23:
https://www.newyorkfed.org/markets/soma-holdings
That explains a lot of the details! I did learn as I'd read last night that it's the insurance premiums and not tax payers. The three, Yellen etc, are saying they'll raise the premiums to cover this. However, with these details that seems like it's is merely an easy way to avoid explaining that the Fed is rolling in dough making abilities (that media might make a lead story out of.)
DeleteLand: The FDIC raises insurance premiums in response to a significant increase in claims, as it did during the Near Depression period and its aftermath. There is always a concern that too much of an increase will cause marginally capitalized banks to become more financially stressed.
DeleteThe issue is how much will premiums be raised by including all deposits at Silicon Valley and Signature under the insurance umbrella. It depends in part on how much can be received for their loans and other other assets. There will be a deficit but how much is pure guesswork now. On the positive side, the failures were not due too many loans going on nonaccrual which was the case back in the Near Depression period. The NPL ratio at SIVB was at .18% as of 12/31/22, which is very low.
It's very good that it was from poor judgement and not economic squeezing from unpaid loans.
DeleteWith Signature Bank being bitcoin focused, that raises the question to ponder of how bitcoin and the Fxx (what were the letters?) corruption failure will effect the issues for regular banks and the economy now.
Land: I was not familiar with Signature until the weekend. I would not call it a cryptocurrency focused bank. It did have digital asset banking deposits, but it was mostly a regular commercial bank with 40 banking offices in 5 states. In the 2022 4th quarter, it reported net income of $300.8M. The NPL Ratio was only .25% and the charge-off ratio was just .1%. Total assets were at $110.36+B.
Deletehttps://investor.signatureny.com/pme/press-releases/news-details/2023/Signature-Bank-Reports-2022-Fourth-Quarter-and-Year-End-Results/default.aspx
Looking at the numbers, there was no reason for the bank to fail but it just did.
Bank stock investors have just experienced 2 significant bank stocks rapidly go to zero, not due to bad loans which is the normal reason, but a major run on deposits which is still an ongoing fear contagion notwithstanding what the government has done.
With SIVB's preferred stock likely worthless, other bank preferred stocks are being hammered today, not just the ones issued by still functioning banks whose prices have fallen more than 50% today.
I have been doing some small ball buying today and currently expect a net inflow into stocks this week, which I believe will be the first week that has happened this year. The net add will probably be less than $1K.
I'm starting to wonder if there's semi-inside information somewhere that's not being revealed.
DeleteOn the other hand, if I remember, the subprime loans were known about by the time the market started getting volatile. It wasn't being believed.
Also all the current banks can be explained by panic.
___
I got the crypto idea from CNBC's articles.
"Crypto bank Signature slides on Friday amid troubles at Silicon Valley Bank, Silvergate"
But near the bottom of this article they add "Signature has said it has minimal exposure to crypto."
So it's being blamed on depositors perceiving inaccurately and panicking.
https://www.cnbc.com/2023/03/10/crypto-bank-signature-slides-on-friday-amid-troubles-at-silicon-valley-bank-silvergate.html
I'm holding off on moving a chunk of my 401k to IRA. Want to recheck return rates & see if cash dividends are going to start sliding.
Futures are running a lot higher (greener) than the market today, on Finviz.com
DeleteThat's unusual.
First Foundation just put out an assurance email that they're strong, diverse and solvent. Plus a little sales pitch for the investing advisors.
ReplyDeleteLand: If you are referring to First Foundation Inc. (FFWM), its stock is one of those tanking today.
Delete$7.94 -$3.64 (-31.43%)
As of 01:40PM EDT.
https://finance.yahoo.com/quote/FFWM?p=FFWM&ncid=yahooproperties_stockrecom_g40boan2td8
I am not familiar with that bank but have put it on my monitor list for a possible small ball purchase this week (as in 10 shares). I will need to do more research first. The issue for stocks in the regional bank sector can not be resolved by research into past financials but only by a psychoanalysis of herd behavior that has become unmoored from facts.
Neither SIVB nor SBNY should have failed based on their respective 2022 4th quarter financial reports.
FFWM bank is really small but looks sound based on its last earnings report.
https://www.sec.gov/Archives/edgar/data/1401564/000093905723000010/ffnw8k12623exh991.htm
But, then, many other banks that look sound based on the last earnings report are nonetheless getting crushed today. Past financial soundness is currently irrelevant for as long as uninsured depositors pull those deposits, buying treasuries or other high quality bonds or sending the money to a JPM or other too big to fail bank.
Land: I linked the earnings report for another small bank, which had a similar stock symbol, rather than the 2022 4th quarter report for First Foundation (FFWM).
DeleteThat report is okay, but financial soundness based on past financial reports is not relevant today:
First Foundation 4th quarter report
https://www.sec.gov/Archives/edgar/data/1413837/000155837023000553/ffwm-20230126xex99d1.htm
The NPA ratio was only .13% (nonperforming assets to total assets). The capital ratios are at best adequate. The ROA and ROE numbers are low. NIM fell significantly to 2.45% from 3.15% in the 2021 4th quarter and this indicates a mismatch between what First Foundation is now having to pay depositors and the yields on owned securities and loans.
So it's okay but doesn't have a quality buffer.
DeleteThat would be consistent with how slow they were to do the last interest increase. Money was probably flowing out. I started to move out. Other increases came more quickly based on fed action and before I started moving out.
Land: First Foundation's stock is taking a big hit at least in part due to unfavorable interest rate risk management which is reflected in the significant decline Y-O-Y in NIM. I will pass on the stock. Investors are spending time looking through the recently filed annual reports to see whether a bank has a similar pathetic interest rate risk management as Silicon Valley.
DeleteNet interest income is estimated by the bank to go down as interest rates rise.
Page 62
https://www.sec.gov/Archives/edgar/data/1413837/000155837023002423/ffwm-20221231x10k.htm
The Fed needs to abandon raising the FF rate at the next meeting (3/22/23) At the moment the stability of the banking system is far more important than the fight against inflation. Banks need more time to increase their weighted average yields on owned securities.
The odds are currently at 65% that the FED will increase the FF rate by .25%, taking it to a 4.75% to 5% range. The odds for a 50 basis point hike is at zero.
At first I didn't think the inflation fight would slow, but by now I'm fully onboard with slowing the rate increases to get stability.
DeleteI don't own FF stocks or bonds, just their online savings account. Rather than move money back into FF to get below the $500k SIPC limit at Vanguard...
How does Salem Direct look (part of Salem of Massachusetts)? They're at 4.1% APY. I have an account already & it'd be easy to move into.
There's a few other banks offering similar rates but they were all a little off, and I avoided them. Popular Bank was also ok seeming. Salem's part of a Brick & Mortar bank and seemed regular with A ratings in Baur's
Smart move to buy those >5% 18mo-24mo CDs.
I'd heard a comment that unemployment is up (6.6 -> 68%), but with the details it looks like the rest of labor is strong enough that it doesn't point to anything yet.
ReplyDeleteLand: The BLS claims that the unemployment rate rose to 3.6% last month from 3.4% in January.
Deletehttps://www.bls.gov/news.release/empsit.nr0.htm
The 6.8% rate is called the U-6 number, and it includes unemployed "plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force"
https://www.bls.gov/news.release/empsit.t15.htm
Both the unemployment rate and the U-6 number are near modern historic lows.
Unemployment Rate Chart 1948-
https://fred.stlouisfed.org/series/UNRATE/
U-6 Chart 1994-
https://fred.stlouisfed.org/series/U6RATE
From a article about the chart a while ago, the shift in unemployment was a key indicator of the recession starting. So a shift in direction would matter. But these are in the channel range of results, not an break upwards. Those charts make it easy to see.
DeleteFrom article, this answers about whether 'this time is different':
ReplyDelete"Inverted yield curves tend to always signal an eventual unwind of carry trades somewhere in the financial system or economy that were done in previous quarters or years," Deutsche Bank's Jim Reid added.
"In my opinion, the yield curve works more through what it does for behavior of economic agents/investors rather than what it tells you about what the market thinks of the economic environment."
__ So if true then the "this time is different because it was Fed created" doesn't matter! It's the carry unwinding that matters.
So, it matters only to the extent that big money could be aware of the hikes and inversion and prevent more 'carry trade",
...than when inversion comes with bull exuberance, so there's a lot of blue sky leading to lack of anticipation and preparation.
The only problem I have with the argument is that I don't know what a carry trade is. I'm assuming it's part of the complexities of banking and spreads for both banks, and businesses, when positioned for bull rates, and bear rates start showing up.
The stock market's decline in pre-market trading is linked to a continued crash in several bank stocks, notwithstanding the government's actions.
ReplyDeletehttps://www.cnbc.com/2023/03/13/first-republic-drops-bank-stocks-decline.html
First Republic Bank (FRC)
$30.92 -$50.84 -62.18%
Before Hours Volume: 16.1M
Last Updated: Mar 13, 2023 at 9:07 a.m. EDT
https://www.marketwatch.com/investing/stock/frc?mod=search_symbol
Given what is happening and the FED's responsibility through its extremely abnormal monetary policies, I would agree with GS that the FED needs to refrain from hiking interest rates later this month which would only throw gasoline on the fire.
Currently the odds of no increase are at 24% with a .25% FF increase at 76%, and no chance of a .5% increase.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Must be fears that FRC and others are at risk.
DeleteThis feels unstable, like an...unstable VIX pattern...
I don't have much in bank stocks.
2-3 each in
JPM,
KRE ETF (down 9.7%)
MTB (down 5.5%)
With 5 UNM in a sympathy decline.
Land: The bank stock prices so far today tell me that there would have been a stock market crash this morning if the government had done nothing. An economy can not prosper with a meltdown in the banking system.
DeleteI'm glad they took action. Much as a market crash would be great for my finances (to buy into)... it's not good for people or life.
DeleteBut that's ominous. Crashes come in small jolts, then more weakness or corruption causing weakness is uncovered, until something causes the big drop. Maybe it won't happen this time.
The annual CPI rate through February was reported at 6%, down from 6.4% through January 2023.
ReplyDeleteThis will cause the FED to raise the FF rate by .25% next week. The odds are currently at 83.4%:
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
As previously discussed, I expect the annual rate to decline in the coming months due in part to monthly increases in February-June 2022 being higher than what is being reported this year.
see discussion at
https://tennesseeindependent.blogspot.com/2023/02/atlo-d-gnl-kmi-matv-opbk-pdm-stew-vktx.html
What has changed the most is the probability for rate increases after next week's .25% raise.
For year end 2023, the probability is now at 81.4% that the FF range will be at 4.5% - 4.75%, where it is now, or lower. That would mean that the Bond Ghouls are back to forecasting at least 1 FF .25% cut by year end.
While regional bank stocks remain far lower than a week ago, there is a nice ongoing rally in their prices this morning.
SPDR S&P Regional Banking ETF (KRE)
$47.73 +$3.34 +7.50%
Last Updated: Mar 14, 2023 at 10:42 a.m. EDT
https://www.marketwatch.com/investing/fund/kre?mod=search_symbol
The early morning rally has gone into reverse after Moody's downgraded its outlook of U.S. banks to negative from stable.
ReplyDeletehttps://www.cnbc.com/2023/03/14/moodys-cuts-outlook-on-us-banking-system-to-negative-citing-rapidly-deteriorating-operating-environment.html
Part of the uncertainty is whether uninsured deposits will be withdrawn from regional banks.
Most depositors are covered by FDIC insurance and there is no reason for them to move money.
The issue involves whether large depositors will move money out of regional banks, either to the too big to fail banks or to direct ownership of treasuries and high quality, short term securities.
For some individuals that have uninsured deposits, retitling ownership can increase the limits (e.g. each spouse with $250K, Totten Trusts such as John Doe Pay on Death, usually abbreviated to "POD", Jane Doe)
https://smartasset.com/checking-account/how-much-is-fdic-insurance
I had an estate lawyer many years ago who told me to get rid of "totten trust" accounts. Maybe he gave me a reason at the time, but I have forgotten it if he did.
Even if some uninsured deposits are pulled from one bank, that bank may receive deposits from a new customer who moves money to gain FDIC coverage. This can easily be done with online brokerage accounts where money can quickly be disbursed into multiple CDs at different institutions. This is an easy way to gain insurance coverage.
I have everything in Totten trusts. Until I have a better plan, it's at least something.
DeleteI wonder why not to use them? I've heard hints before. I've been concerned that I can't layout a line of inheritance with contingencies well enough on some accounts. I think Vang's is very good. Others aren't. That may be why?
Also you need power of attorney and from what I read, sometimes the bank's specific own POA form previously completed before death, or some will give a particularly hard time.
This is yet another reason why setting up Estate planning needs an Estate planning attorney and not just auto-fill forms!
Another meltdown in bank stocks is occurring this morning. The catalyst is a possible failure of Credit Suisse as the Saudi National Bank made clear that it would make no further equity investments in that Swiss bank.
ReplyDeleteConfidence in the banking system is not going to be easily restored and is absolutely necessary for the banking system to function.
During the Near Depression banking crisis, resulting in significant part from improvident home loan lending, the FDIC responded in part by insuring all non-interest bearing accounts under its Temporary Liquidity Guarantee Program:
https://www.fdic.gov/regulations/resources/TLGP/index.html
That program needs to be brought back now IMO.
Banks also need to use the strong rally in intermediate and longer term treasuries to lighten up and deploying the proceeds into short term treasuries.
I'm tempted to buy today, because I expect some sort of guarantee to come in place.
ReplyDeleteI'm a little puzzled why it hasn't come already today. It has to be part of the discussion that the three of them had with the other back stop already in place from the prior closures.
I'm hesitating because even IWM isn't far enough down for the bounce.
The more I think about it too the more puzzled I am that silicon valley Bank & others handled thinks so poorly. I wouldn't be surprised if there's some underlying reason that hasn't come to light yet. But I've seen bad management. It could just be pure and competence or poor judgment.
Land: The banking problem involves fear and panic, rather than too many bad loans.
DeleteIt is hard to say when the current bank runs will end since the underlying cause is human psychology, at least under the current circumstances.
The most effective way to deal with this herd panic is for the FDIC to guarantee all non-interest bearing bank deposits.
The panic response among uninsured depositors may resolve itself without any further government intervention. SVB Financial was technically sound 2 weeks ago, though in a problematic financial position given the unrealized losses on its owned securities portfolio, extremely poor interest rate management, and far higher costs to attract deposits, until uninsured depositors decided to pull $42B in one day. Banks can not remain solvent when they have to honor that kind of bank run.
The primary contributing cause, which was not under the banks' control, was the extended and extremely abnormal monetary of the FED which suppressed intermediate and long term treasury and MBS yields to 1-2%, and then the rapid increase in yields last year that resulted in (1) a huge mismatch between yields needed to attract deposits and the weighted average yield of owned securities and (2) huge unrealized losses on securities bought during that extended period of interest rate suppression. The FED bears a lot of responsibility for what is happening no in the banking system and the high rate inflation since it failed to abandon ZIRP until annual CPI hit 8.5%.
"since it failed to abandon ZIRP until annual CPI hit 8.5%"
DeleteThe key problem.
++++++
Does this seem right?:
I'd posted at the start of the week, a quote that the unwind of inversion is why inversion triggers trouble in the weak spots in the economy/banking/markets that leads to recession.
Essentially that it's the unwind, not what caused the inversion, that will cause problems. So it's irrelevant that the cause is different this time.
The bank failures are from the unwind of the inversion. Question is whether they'll be more weakness to show up in the whole economy, as this inversion continues. (Could be elsewhere such as a caused by crypto.) Enough to bring down earnings and therefore market prices.
The only significant difference is the robust employment (probably due to less workers).
(The idea is from Deutsche Bank's Jim Reid & quote is earlier in this blog entry.)
++++
While writing that, First Foundation emailed a new rate of 4.5% from prior 4.2%.
I'll use that to spread out and keep FF & Vang under FDIC limits.
Land: I would have to read what Reid is saying because your quote from him makes no sense to me.
DeleteThe reversal of the carry trade would not generally contribute to yield inversion.
Prior to last year, there was a lot of money that was borrowed short term and used to buy higher yielding and longer term bonds, MBS or other risk securities.
By jacking up short term rates, the incentive is to unwind that carry trade. The selling pressure occurs in liquidating the longer term assets and then paying back the short term borrowings. If that reversal was impacting yields, it would be pressuring the longer end yields up.
The bank problems are linked to the inverted yield curve. Short term CD rates are much higher than the average weighted yield of bank owned securities. That is not healthy for the banks. Interest rate mismanagement, as in the case of SIVB, can aggravate the problem.
And, on top of that problem, the FED's suppression of interest rates, starting in 2008 and continuing until inflation was already embedded and problematic, resulted in the banks having huge unrealized losses in securities purchase prior to 2022, estimated to be $620 billion as of the 2022 4th quarter. If the accounting rules required banks to mark those assets to current market prices, which is not the case, many more would be characterized as insolvent.
I view the current inverted yield curve to primarily be a FED creation, but there is a signal in the much lower intermediate and longer term treasury yields. The signal is either a consensus opinion that the FED will soon subdue the inflation beast or cause a recession. A major banking crisis by itself can cause a recession, and those generally last longer than the garden variety ones.
https://scholar.harvard.edu/files/rogoff/files/aer_104-5_50-55.pdf
The 2008 Near Depression was a major worldwide financial crisis.
Thanks! I don't think He's saying that the carry trade causes the inversion. Rather, the opposite, the inversion is an indicator and reflects that there's a carry trade setup happening. That's the short versus long rate problem for banks that you've been pointing out.
ReplyDeleteThere's been an question whether the inversion is going to mean a recession the way it has in the past , since this time the inversion is caused by the Fed, and not by naturally driven forces in the economy.
He's saying unwinding the carry trade is what causes the problems that ultimately lead to the recession.
If that's true...!
Then the inversion that always points to recession, again points to recession and this time isn't different.
I'll look for the article when I'm on my computer.
Land: If that is what Reid is claiming, then he is giving too much weight to the unwinding as a recession.
DeleteBanks are in 2 senses are involved in a carry trade, paying depositors either no or what has been extremely low rates for time deposits until 2022 and then (1) lending longer term to customers and (2) using deposits to buy longer duration bonds, MBS and other securities.
I do not see the first part of that carry trade as being a current problem. The loans that reset at prime or a spread to prime or some other short term rate are providing a positive net interest margin for banks, and nonperforming loans and charge offs are not yet a problem for most banks and were not a problem for Silicon Valley.
The second part of the carry trade which may result in the forced selling of longer term securities but only when there is a run on deposits that depletes capital to such an extent that the bank is forced to sell the securities.
So the core of the problem is having a large uninsured deposit base, far exceeding the insured deposits; a fast rise in short term rates due to the FED's inaction in 2021 that causes deposit costs to spike rapidly in 2022; an extremely long period of rate suppression that would leave even the best managed bank with unrealized losses on owned securities; and a deposit base that is involved in a serious cash burn which was the case for Silicon Valley's concentration in start up companies. Those events, when combined, can create a forced unwinding of that kind of carry trade, creating huge realized losses and a need to raise additional equity capital, all to the detriment of existing shareholders.
As to Totten Trusts, most people use them to avoid probate.
https://smartasset.com/estate-planning/what-is-totten-trust
This form of ownership can currently be used to increase FDIC insurance for deposits at a single bank.
Possibly I was told to get rid of them because they could interview with my estate plan. I just do not recall.
I am no longer interested in doing the TT for FDIC insurance purposes since I can quickly move money to a variety of banks through my brokerage accounts and my ownership of treasuries and short term investment grade corporate bonds cuts down on my need to have bank deposits.
The ECB raised rates by .5%, which is causes more angst in earlier trading today given the still ongoing turmoil in the bank sector:
ReplyDeleteExcerpt ECB Decision:
"The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.50%, 3.75% and 3.00% respectively, with effect from 22 March 2023."
https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230316~aad5249f30.en.html
Those rates will IMO have zero impact on Europe's current problematic inflation standing alone.
As I started to say more than 1 year ago, central banks were so far behind the curve that they needed a telescope to even see the curve.
The last reported Euro area annual inflation rate through February 2023 was 8.5%.
https://ec.europa.eu/eurostat/documents/2995521/16138299/2-02032023-AP-EN.pdf/91fa331d-8f61-adff-5e42-d92a64b6ee81
The ECB staff projects that inflation will be brought down to 2.9% next year and 2.1% in 2025.
The recent turmoil in the banking sector and some other economic data, primarily in the manufacturing sector, are pressuring commodity prices to the downside. That will help cool inflationary pressures some.
In June 2022, for example, the EIA has the spot price for WTI going over $120 per barrel.
https://www.eia.gov/dnav/pet/hist/RWTCD.htm
The futures price is now near $66.
Crude Oil WTI (NYM $/bbl) Front Month
$66.24 -$1.37 -2.03%
Last Updated: Mar 16, 2023 at 10:46 a.m. EDT
https://www.marketwatch.com/investing/future/cl.1
The price went over $77 on 3/13/23.
The carnage in the regional bank stock sector is far less widespread today and limited to a few names that have been extremely volatile over the past week (E.G. FRC)
SPDR S&P Regional Banking ETF
$44.81 +$0.17 +0.38%
https://www.marketwatch.com/investing/fund/kre?mod=search_symbol
I need to start reviewing my comments before publishing which I do not like doing.
ReplyDeleteMy last comments first sentence shows what happens in my aged brain when I am writing in a stream of consciousness without reviewing the sentence.
I meant to say that the "ECB raised rates by .5%, which is causing (not "causes") more angst in early trading today. . "
The market recovered after 11 banks came to the aid of First Republic (FRC) which has been one of the most volatile bank stocks, made even more so after Moody's downgraded its debt to junk based on deposit outflow.
"Wall Street rides to the rescue as 11 banks pledge First Republic $30 billion in deposits"
https://www.cnbc.com/2023/03/16/group-of-financial-institutions-in-talks-to-deposit-about-20-billion-in-first-republic-sources-say.html
First Republic Bank (FRC)
$34.27 +$3.11 +9.98%
Regular Trading Range: $19.80 - $40.00
52 week range: $17.53 - $174.21
After Hours: $29.12 -$5.15 -15.03 %
After Hours Volume: 4.9M
Last Updated: Mar 16, 2023 at 4:58 p.m. EDT
I have never owned that stock, though I have been tempted to buy a few shares this week as a Lotto.
In the 2022 4th quarter, FRC reported net income of $386M. NIM contracted to 2.45% from 2.71% in the prior quarter which is a negative of course. Non-performing assets to total assets was only .05%. Charge offs were zero.
All of the stops need to be pulled out to prevent another bank failure caused solely by a run on the bank. The contagion effect has already gone too far.
So far banks have borrowed $11.9B from the Fed under its new Bank Term Funding Program. Qualifying securities are used as collateral, valued at par rather than the current market values, and the FED lends dollar for dollar on that valuation.
Fed lending using its discount window (up to 90 days) stood at $148.2B this week.
Fed bridge loans were reported at $142.8B.
https://www.cnbc.com/2023/03/16/banks-take-advantage-of-fed-crisis-lending-programs-.html
So not exactly out of the eddy of swamp muck yet.
In an effort to quell the contagion, 11 banks deposited $30 billion in uninsured deposits in First Republic (FRC) yesterday. Some have criticized that action as spreading the financial contagion by exposing more banks to the ongoing crisis. While that is at least superficially true, an unchecked contagion will result in the insolvency of more profitable banks with low loan losses and charge offs. If FRC fails, then more profitable banks will end up being seized by the FDIC as uninsured depositors flee.
DeleteThe question is not whether the contagion needs to be contained now but how. The infusion of deposits into FRC is not working:
First Republic Bank
$27.24 -$7.03 -20.51%
Last Updated: Mar 17, 2023 at 9:43 a.m. EDT
https://www.marketwatch.com/investing/stock/frc?mod=search_symbol
SPDR S&P Regional Banking ETF
$44.23 -$1.99 -4.30%
https://www.marketwatch.com/investing/fund/kre?mod=search_symbol
As I maintained earlier, the FDIC needs to extend insurance protection to all non-interest bearing deposits, regardless of the size, as it did during the Near Depression period.
https://www.fdic.gov/regulations/resources/TLGP/index.html
Large depositors would have the option to receive insurance coverage by simply converting an interest paying account into a non-interest bearing one. FDIC premiums would be increased but bank runs would probably cease.
A Barron's article noted that bank borrowing from the Fed's discount window occurred primarily last Thursday and Friday in response to Silicon Valley Bank seizure.
Subscription Publication:
https://www.barrons.com/articles/federal-reserve-bank-bailout-program-8f6284f1?mod=Searchresults
The data for loans under the new, and more favorable to banks, FED Bank Term Funding Program (BTFP) was only for Monday-Wednesday of this week. I would expect a surge in FED lending under that program in the coming days and weeks.
An interesting article in Barron's links the current banking crisis to the FED's long period of QE which drastically increased the amount of uninsured deposits at the banks.
" Quantitative Easing Left the Banking System Vulnerable"
https://www.barrons.com/articles/sbv-fed-qe-banking-crisis-22175ec0?mod=hp_LEAD_1_B_5
This was an update of the author's earlier report published last August:
https://www.kansascityfed.org/Jackson%20Hole/documents/9040/JH_Paper_Acharya.pdf
So much to absorb!
ReplyDeleteProtection extension would take a lot of shock out of this problem. They're supposedly an emergency meeting happening. Maybe a plan will come out of it.
The quantitative easing article in barons is really interesting. I haven't seen commentary like that. But I've been expecting vulnerability, and this lays out some possibilities with depth I haven't been seeing in articles.
I should be asleep, so I'm going to go try doing that.
I have published a new post:
ReplyDeletehttps://tennesseeindependent.blogspot.com/2023/03/bbdc-bdn-colb-hpp-hppprc-hr-htbk-jpm.html