Risky Business

Sometimes the hardest thing about writing this blog is actually just starting to write. This weekend I found myself going down a ton of rabbit holes. The SVB issues that were brought to light last week had me going through article after article find new tidbits. I'm not sure how only a few people saw this one. There are so many pieces to this puzzle. Most of you have seen the highlights. This was a mismatch of durations at the sixteenth largest bank in the U.S. and became the second largest bank to collapse, behind Washington Mutual. What you may have not seen, unless you follow people who really understand this stuff. SVB had no risk officer for much of 2022. Her and the company mutually decided to part ways early in the year. She also unloaded a bunch of stock and options in late 2021. The CEO, Greg Becker, also sold some shares a short period after enacting a 10b5-1 plan. The thing with 10b5-1 plans is they are supposed to be a mechanical selling plan, not a rush for the doors when you find an issue. Mike at Non-GAAP covered this well in his latest post. Those are the signs, not the reasons the company failed. I thought Macro Alf ( Alfonso Peccatiello ) cover this very well in his Macro Compass post and the Macro Trading Floor podcast . Essentially, SVB had one of the largest investment portfolios as percentage of assets, 57% versus the average of about 24%, and there was little to no hedging of rates in their portfolio. So their $200B balance sheet, went down the drain over the past few months in a rate rising environment. They also had a terrible allocation of held to maturity versus available for sale assets. . If you want even more details around SBV, check out Mark Rubenstein's Net Interest post on it .

A couple more things on SVB, before we move on. Can't remember in which of the dozen or so posts, but someone mentioned a large short seller out there since about December. Looking at the short interest there was definitely some action there, so someone saw all this coming to a head.

The Starmine Credit models were not happy with SVB either. The estimated 1.38% probability of default. That's more than three comparable competitors.

Oddly, enough even with a large cap bank failing, U.S. equities were not the worst performer of the week. Bitcoin was off almost 10% in a risk off environment. Nat Gas continues to be super volatile and was off almost 20%. Government Bonds caught quite a bid giving yields a rest from the climb. JGBs were slightly off, but they're dealing with some other things in Japan right now . High Yield bonds sold off as well as investor looked for protection. If we look at the Commitment of Traders report on U.S. Bond futures, we can see some extreme positioning from the last report. The short end of the yield curve is a more than five sigma reading on positioning. The other three tenors are roughly three sigma. Those traders probably got shaken up a bit in Friday's rally.

I wanted to look at the sector performances last week across three major regional large cap indices. These U.S. via the Russell 1000 was all negative, but Telecom and Utilities in Europe were up. Asia Pacific was even more mixed, but I'm guess it will be a rough Monday for them after a terrible Friday in the other regions.

Earnings Watch

Last week was dominated by the SVB saga, but there were still some earnings releases worth looking at. First, a look back at the stock I was tracking, Thor Industries. The company missed huge on the bottom line and a bit on the top line, and the stock was punished. It opened down 5% and slide further to close the week down more than 10%. A few positive names for the week were Sea Ltd and Dick's Sporting Goods.

For this week, Saudi Oil is far and away the largest name reporting. There's also some European autos and a mix of more retailers. Evergreen Marine out of Taiwan stands out with a 36% Predicted Surprise and a 20% rise in EPS estimate in the last month. Companies will continue to trickle in to finish Q4 up.

Before we get into the content from last week. We have an active macro calendar with CPI from US, Sweden, France, and Italy. At the end of the week, we have big option expiration and index changes on Friday. Before that, at Tuesday's close Insulet (PODD) will replace SIVB in the S&P 500.

Best of the Week

Rich Bernstein is a legend in the investment strategist space. He started at Merrill trying to advise value managers around Quant research. Started his own firm right in the teeth of the GFC. He's been known as a perma-bull, but tells a funny story of clients not wanting to invest after the crisis, because he was too bullish. He walks through his firm's three pillars, profits, liquidity, and sentiment. Liquidity is not the micro, but more of the macro like monetary supply. For sentiment they actually include valuation. He also covers a term he patented called Pactive management, which is the active investment of passive assets. Rich also talks through secular disinflation being caused by globalization, but he things we will see a shift away from it over the next 10-15 years. An important point he makes is the decimalization of the economic numbers is a bit overdone. The final point he makes that I'll share is that fixed income money management will change and become more difficult over the next 10+ years. Fixed income managers will need to be more tactical without the wind at their backs. Listening time: 65 minutes

Best of the Rest

Brent does a great job looking at some of the impact SVB has had on other parts of the market. There's a lot packed into this short video. Brent looks at how positioning has changed. Watch Time: 23 minutes

This one is a partial post as the whole thing sit behind the paywall, which I don't subscribe to. It still worth a read. The Variant Perception team takes a statistical look at the S&P and the Monetary Base of the G4 (US, China, Eurozone, and Japan). The regression from these two is super high, and that's important because money supply is shrinking.

This was surprising. The article talks through survey results from 257 North America, UK, and the EU. Reddit was found to be a useful source for 58% of responders and 49% even found it to be high importance. The site wasn't a high for data harvesting that was Google and YouTube.

This one is something I'm working through with a recent acquisition for LSEG. Our clients and brokers have been pushing for direct connections for executing fixed income flow. The poses a challenge for Tradeweb, which LSEG holds a majority ownership position in, and other venues. The key to this was ESMA's recent finding that as long as a system doesn't facilitate interaction of third-party interests related to financial instruments, then they should not be considered multilateral. The industry is still waiting on commentary from the FCA.

That is a lot of fees for someone that has lost more than $10B for investors. Just goes to show that it's all about the flows. More than 70% of the $300M in fees has been earned post its early 2021 highs. As the article, highlights that investor psychology plays a big part in them sticking around hoping the fund comes back.

One for the Road

This one is so great. I've never lived in The City either, but I've work here for 23 years now, and grew up a stones throw from it. It's such a different place, but I love it. I love it, because I'm a maniac and I fit in here. I may not be quite the ass that many people associate with "real" New Yorkers, but my wife definitely tells me to calm down, A LOT. I'm looking forward to the days after my wife retires from teaching and we move back to her hometown of Pittsburgh. This is a great read, if you want to understand the people of the concrete jungle.

Thanks for reading. Have wonderful week.

Michael