The Big Dance

By Matthew Gutierrez, Weronika Pycek and Shawn O'Malley · March 16, 2023

*LinkedIn newsletter is posted at a one-day delay.

???Folks, let the (real) March Madness begin.

After the Silicon Valley Bank crisis spurred chaos in the banking industry, creating a March Madness of its own, the NCAA Tournament tipped off today. It's a unifying event in America.

Good luck with your brackets: The odds of a perfect bracket are 1 in 9,223,372,036,854,775,808 via random guesses, or 1 in 120.2 billion with some basketball knowledge, per the NCAA.?

Light work???

Elsewhere, the Fed's European counterpart, the European Central Bank, is pushing forward with?large rate hikes ?despite worries about the banking system.?

Here's the market rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we'll discuss two items in the news:?

• The banking saga continues
• Where $100k feels more like $36k
• Plus, our main story on the glory of the NCAA Tournament

All this, and more, in just?5?minutes to read.

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IN THE NEWS

???First Republic Gets Downgraded, Rescue Plan Pending (Bloomberg )

Explained:

• The banking saga continues with First Republic Bank getting its credit rating cut to "junk" status by S&P Global Ratings and Fitch Ratings on Wednesday. That's not the sort of thing that inspires confidence after several banks have already failed. Government officials and banking leaders are now racing to finish a rescue plan.?
• While First Republic was reportedly reviewing its options, including a possible sale, to boost liquidity and position itself to better respond to deposit withdrawal requests, that wasn't enough to keep its stock from falling 21% yesterday and another 30% in early trading today.?
• The bank had shed over 85% of its market value in the past year as of this morning until the stock reversed and actually gained on the day following a report that the U.S. government was orchestrating a rescue plan involving the country's biggest financial institutions.
• Per the?Wall Street Journa l, bank leaders finalized a joint deal to inject more than $30 billion into First Republic. JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo will each deposit $5 billion into First Republic. Goldman Sachs and Morgan Stanley will put in $2.5 billion apiece while BNY Mellon, PNC Bank, State Street, Truist, and US Bank are depositing $1 billion each.?

Why it matters:

• First Republic hopes to avoid adding its name to a list of recent bank collapses, including Silvergate, Silicon Valley Bank (SVB), and Signature Bank. Unlike SVB, which was heavily exposed to startups and the venture capital space, First Republic claims that no sector represents more than 9% of its total business deposits.
• The big banks have benefited from a flight of deposits from regional banks to relative safety, at the expense of banks like First Republic's financial health. Bank of America, for example, has mopped up more than?$15 billion ?in new deposits in a few days, though the rescue plan would partially offset this by transferring deposits back to First Republic.?
• Importantly, the rescue plan and deposit transfer would, hopefully, restore confidence in regional banks again, slowing the exodus of deposits. The focus is on stemming once and for all a banking panic that risks ultimately damaging the entire industry.

?????$100k Feels like $36k in NYC (Bloomberg )

Explained:

• A new study by SmartAsset measuring how far a $100,000 annual salary goes in 76 of the U.S.'s largest cities found that New York ranked last, with take-home pay of $35,791 after accounting for taxes and the steep cost of living.
• Alongside NYC?as notoriously expensive cities: San Francisco, Washington, DC, Los Angeles, Boston, and Seattle. Memphis ranked the best, with over $86,000 in take-home pay.
• SmartAsset applied federal, state, and local taxes to a $100,000 salary earned in each city and then adjusted for housing prices, groceries, utilities, transportation, and other goods and services. The firm's managing editor of financial education commented: "I think it's very intuitive: $100,000, a six-figure income — it feels like this big milestone, but it also feels very different depending on where you live."

Why it matters:

• Rents are now rising faster in New York than in any other U.S. city. While salaries are certainly higher in New York City than in Memphis — New York's median household income in 2021 was around $70,000, whereas Memphis's was about $44,000 — elevated prices, high taxes, and rent surges, combined with slowing wages gains, are prompting Big Apple residents to reconsider.?
• From July 2020 to July 2021, New York City lost more than 300,000 residents, according to the U.S. Census Bureau. State comptroller, Thomas DiNapoli, warned against further tax increases that might push out more of New York's wealthiest residents, who represent an important part of the government's revenue base.
• Ex-New Yorkers' favorite destinations have been low-tax areas like Texas and Florida, enabled by the rise of remote work spawned during the pandemic. And the data backs up these decisions, as Texas claimed seven of SmartAsset's 10 best-ranked cities for affordability.

CHART OF THE DAY

The Glory of March Madness

Introduction

All week, Americans filled out their NCAA Tournament brackets in anticipation of one of the most significant sports events on the calendar: the Big Dance.?

The NCAA Division I men’s basketball tournament, or “March Madness,” is played every spring. It has become the second biggest event in American sports after the Super Bowl.

It’s a unifying event across the country, punctuated by Cinderella stories of tiny schools topping bluebloods and inspiring human stories of juggernauts and underdogs alike.?

It’s also a cash cow for the NCAA, a nonprofit with more than $1 billion in annual revenue. Nearly 90% of that revenue will be flush in over the next three weeks.?

Welcome to the big business of the NCAA Tournament.?

Revenue driver

The three-week, single-elimination tournament includes 14 host cities and 68 teams. But the real big numbers lie in the massive TV contracts.?

In 2010, CBS and Turner Sports signed a 14-year, $10.8 billion deal with the NCAA for exclusive game rights. In 2017, they extended the deal through 2032 for $8.8 billion, or an average of $1.1 billion annually.?

In 2019, the NCAA posted $1.07 billion in total revenue, with $855 million coming from TV and radio rights. CBS and Turner pay so much in advertising because they make it back given how many eyeballs are glued to screens, especially for the opening four days (March 16-19) and the Final Four (April 1 & April 3, in Houston).

Consider how much TV networks received in advertising from just three brands alone in 2021:

• Capital One: $48.7 million
• Geico: $46.7 million
• Buick: $39.5 million

Probabilities?

The role of luck and surprise also makes the NCAA Tournament captivating. Routinely, low-seeded teams win one or two games, sometimes three of four. (The national championship team must go 6-0.)

Why do upsets happen? Investing legend Howard Marks notes that improbable things happen frequently in markets, and it’s not different with a large, single-elimination tournament where a few quick decisions can dictate a game’s outcome.?

Sometimes, top teams can get caught up in their reputation, statistics, track record, or the name on their jersey. These teams often start off nervous and uptight, while the underdogs play loosely, with “nothing to lose.”

Third, some teams are simply overlooked because they play in a smaller conference. Then there’s the role of streakiness, as most basketball gurus will tell you: It’s not necessarily the best team that wins the NCAA Tournament. It’s the team that gets hot at just the right time, combined with a dash of luck (more on that tomorrow) and favorable matchups.?

Other neat facts

• In 2022, 45 million Americans wagered an estimated $3.1 billion on the tournament, according to the American Gaming Association.?
• Big brands also take some of the profits, but the NCAA conference commissioners and executives see the heftiest cash-out.
• Each conference will get a piece of a pot of money known as the basketball performance fund. The fund was nearly $170 million in 2022
• Overall, the money generated during the annual tournament is divided among the various conferences and is dependent upon the performance of schools in their division, not directed by the NCAA.
• The first NCAA Division I men’s basketball tournament was played in 1939, not long after the Great Depression, just as World War II was underway in Europe. It had eight teams, and Oregon beat Ohio State for the title.?
• People tend to root for and ascribe positive qualities to entities they think are less likely to prevail or inherently disadvantaged. Thus, Americans tend to root for the NCAA Tournament “Cinderella.”
• Now, nearly all Division I schools dream of an NCAA Tournament appearance, mainly because of the exposure it provides the school. Most colleges see an uptick in applications, donations, and revenue in the years after NCAA Tournament appearances.?

Dive deeper

You can follow all the action on TBS, TNT, and CBS, with games running all afternoon and evening from March 16 through 19, then again March 23-26, and then again April 1 and 3.?

SEE YOU NEXT TIME!

That's it for today on?We Study Markets !?

See you later!

All the best,

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