The Dividend Cafe

Today's Post - https://bahnsen.co/42hbBOA

So the Fed today raised rates a quarter point as expected, now to a range of 5%-5.25%. They indicated a “wait and see” approach about the next meeting though futures right now reflect a 91% implied probability that they are done raising rates. The language change of their statement implies that this is correct – this time, they are really done.

TheDCToday.com

Today's Post - https://bahnsen.co/3LLhr5A

Regional banks were hammered today as clearly, the fear is contagious at this time, with some major regionals down -15%, -28%, and even others still down -9% to -12%. Short selling has picked up substantially in this space, so there is a need to watch it rationally and not technically. The basic criteria for them to look for are easy – high amounts of low-rate mortgages on the books, a big gap between mark-to-market values and posted values of the bank’s assets, and the existence of commercial real estate.

The average 3-month CD rate of a bank with $10-50 billion in deposits has gone UP by 0.24% since Silicon Valley Bank failed. The average 3-month CD rate of a bank with over $250 billion in deposits has gone DOWN by 0.36%. This is basically the story of what has gone on – a 60 basis point competitive disadvantage for small banks versus big banks in less than two months.

So that the Fed would be looking to hike rates in this environment is an act of sheer ignorance, and some may say malice. More on that tomorrow.

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Today's Post - https://bahnsen.co/419OGnL

The big news of the week has been First Republic Bank’s fate, which at midnight last night was still up in the air. By 3:30 am ET, the situation was clarified in the newswires – First Republic was put into FDIC receivership, and the FDIC was concurrently entering a purchase and assumption agreement with JP Morgan. All 84 offices of First Republic Bank in all eight states they are present will open as branches of JP Morgan immediately. JP Morgan has assumed all deposits and essentially all assets. Banking customers retain FDIC protection, and JP Morgan backs uninsured deposit levels effective immediately. Customers do not need to do or change anything to have all this affected. This covers $229 billion in assets and $104 billion in deposits. JP Morgan and the FDIC have entered into a loss-share agreement on the residential and commercial loans of First Republic, and the FDIC estimates it will lose a total of $13 billion in all of this.

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Today's Post - https://bahnsen.co/3ncX8V7

The subject of bank stability has really been a big conversation topic since the failure of Silicon Valley Bank and Signature Bank back in mid-March.  People have wondered who was to blame, what went wrong, what could have been different, and what else is still going to happen that we may not know about.

I have written in these pages already about Sunday afternoon dramas and the market instabilities that generally create such events.  Notice how I worded that, for it was intentional.  Sunday afternoon dramas do not create market instabilities; market instabilities create Sunday afternoon dramas.  And as we navigate through a change in the present financial cycle, a little perspective is warranted on what has been driving financial cycles.  In fact, if we do this well we may just understand not only how this fits into Sunday afternoon dramas and the broad reality of market disruption risk; we may also understand a lot more about the federal reserve, interest rates, and basic financial behavior.

So let's jump into the Dividend Cafe ...

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Today's Post - https://bahnsen.co/3oR1amD

Rally day and then some as earnings continue to outperform expectations. Add that to a weaker-than-expected economy (because everyone knows bad news is really good news in Fed-bizarro land), and voila – the Dow goes up over +500 points.

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Today's Post - https://bahnsen.co/3V6B23f

The House Rules Committee voted at 2:20 am to send the House spending legislation to the floor for a vote, implying that Speaker McCarthy has the 218 votes needed to pass a debt ceiling increase that also cuts $4 trillion from government spending over the next ten years. We watch and wait.

The Fed Funds Futures have come down to a 77% implied probability of a quarter-point rate hike next week (it had been 93% a couple of days ago). That’s still pretty high and still pretty close to a “sure thing,” but maybe if the First Republic Banks continue that you see in the news, it won’t be a sure thing.

That issue is the primary driver of markets right now, today even outweighing what was a pretty solid beat from some big tech companies.

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Today's Post - https://bahnsen.co/3LESWXT

It was sell-off mode today in stocks, with the Dow down -1% and the Nasdaq down -2%, yet it really was the -50% drop today in First Republic stock that seems to be the catalyst for the market turmoil (the drop lower in the broad market that accelerated around 10:00 am PT was just minutes after the acceleration of sell-off in First Republic).  Of course, the challenging news there was known all afternoon and night yesterday and all morning today, so it was really a mid-day realization that those problems are not going to be easily resolved (selling assets and raising new equity), and then the broad market has to digest that spill-over effects that could create.

Lots more earnings news to come this week.

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Today's Post - https://bahnsen.co/3oDNT0y

Earnings season is off and running and, so far, looks pretty good (or at least not that bad). But it is really early, and the heart of earnings season will be this coming week and next week, and we will keep you posted each step of the way.

Dividend Café took a real look inside the inflation story of the last couple of years, particularly the lag effect of shelter. But it did so not merely in how it overstates the CPI now but how it understated it in 2021.

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Today's Post - https://bahnsen.co/40qjm3u

I enjoyed a wonderful dinner with my long-time friend, John Mauldin, last week, and something we discussed is going to be the subject of today’s Dividend Cafe.

John is one of the most well-known newsletter writers in our industry, and I have been reading him every single week – no exceptions – for 23 years. Around ten years ago, after a shared CNBC appearance, he and I became friends and quickly connected the dots that John actually knew my late father and even published some of his writings back in the early 1980s. A small world, indeed. Well, since then, John and I developed a friendship of our own, I am a regular speaker and panelist at his annual Strategic Investment Conference, and we are known to do dinners together that can last for four hours, with all aspects of the economy, the market, the Fed, and the American political system on the table for discussion.

At this dinner event last week, John brought something up that inspired me for this week’s Dividend Cafe. You will not be surprised to hear that it is going to involve the Fed, inflation, and all the adjacent topics that so energetically fill the pages of Dividend Cafe quite often.

So jump on into the Dividend Cafe …

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Today's Post - https://bahnsen.co/3mP5Ad0

The talk is warming up for the debt ceiling debate to become a major market story for a time. As I was writing months ago, there is no leverage for the Republican House if they don’t first pass their own debt ceiling bill (essentially, a bill they actually pass with 218 or more votes that does raise the debt ceiling but gives House Republicans what they want by way of spending cuts). It is what John Boehner first did in 2011 that then forced the Obama administration to have to take a stance against it, and then ultimately pushed that stand-off to the point of the “sequester” where hundreds of billions of dollars came out of the deficit. In this case, I (a) Do not know if Speaker McCarthy will get his 218 votes, (b) Do know that the Biden administration will oppose whatever that is, and (c) Do not know what the twists and turns will be when they find themselves at their version of a “Boehner-Obama” stand-off. I only know this: Without “A” – there is no “B” or “C.” So we shall see if the House GOP can pass a bill and then take it from there. A debt ceiling lift that comes with the spending cuts they want does force the White House into a tougher political play (they can’t see the Republicans are forcing the government to default if the House has actually passed a bill to not do so). But these things have a way of moving and shaking quite a bit before we get to the end, and I can promise you media coverage of it all is going to be … unhelpful.

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