Some concerns about financial contagion crept into the markets on Thursday. SVB Financial Group (SIVB) fell 60% during the trading day and plummeted again on Friday.
SIVB is the parent company of Silicon Valley Bank, an important part of the startup and venture capital ecosystem in the San Francisco area. The company blinded investors by selling almost all of its available-for-sale securities (AFS), which would have resulted in a loss of $1.3 billion for the company. SVB also announced a massive capital raising plan to boost liquidity.
The reason the bank did this is because management believes interest rates are likely to stay higher for longer than they previously predicted. Obviously, if this is the right position, it will be a huge obstacle for the banking industry. Unsurprisingly, banks were among the weakest parts of the market on Thursday as the S&P 500 fell nearly 2% on the day. JPMorgan Chase (JPM) fell nearly 5 1/2% and Wells Fargo (WFC) fell just over 6% during the trading day.
The news appears to have triggered a rush into Silicon Valley Banks as venture capital firms withdraw their deposits. Stocks under $40 a share in early trading. As a gauge of how quickly things can go down in this environment, SVB Financial had a book value north of $200 a share at the end of the fourth quarter.
Pershing Square founder Bill Ackman is calling a potential government bailout “The failure of SVB Financial could destroy an important long-term driver of the economy as VC-backed firms rely on SVB to borrow and hold their operating cash.” This story could be a constant source of volatility for the market until resolved.
My regular readers know that for the past few quarters I have been repeating my view that the most aggressive monetary policy since the early 1980s won’t stop until the Fed “breaks the law”. what”. We have seen some spectacular explosions in the crypto market and we can add SVB Financial to the list of “naked swimmers” affected by higher interest rates.
The inversion between two-year and ten-year Treasury yields hit 110 basis points earlier this week. The last time that happened was in 1969, 1978, 1979 and 1980. For those too young to remember, those were not good years for the economy or investors.
My portfolio is positioned as conservatively as it has been since the start of the Great Recession. About half of my holdings are now cash and short-term bills. The rest consists almost entirely of framed holdings in covered call positions for the downside risk mitigation features of this simple options strategy.
I moved some of my extra cash into a six-month Treasury note on Thursday. I suspect I’m the only investor making this “flight to quality” move. Getting a return above 5% risk-free due to market and economic uncertainty seems like a no-brainer at the moment. There comes a time when it is prudent to move money back into stocks significantly. However, we are not yet there.
Until then, my main investment focus will be on return versus return.
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