By Nigam Arora & Dr. Natasha Arora
Signal Limited is a Signal(s) with a great record in similar situations but does not meet all of the stringent criteria for a Signal. Typically Signal Limited has higher risk-reward compared to a Signal over the short term.
Bank Seized
The latest news is that First Republic Bank (FRC) has been seized by the government and assets sold to JP Morgan (JPM).
Four Bank Failures
So far this year, the following banks have failed:
- Silicon Valley Bank (SIVB)
- Silvergate Capital (SI)
- Signature Bank (SBNY)
- First Republic Bank
Making Money From Bank Failures
The best way to make money from bank failures is to short sell the failing bank when risk reward becomes favorable. Here is where The Arora Report’s decades of experience helps. If you short sell a bank stock when there is not clarity that the bank will fail, you can lose a lot of money because a buyer may emerge.
First Republic Bank
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If the momo crowd did any analysis, they should have known that there was a $20B – $30B hole in First Republic Bank’s balance sheet and First Republic Bank’s tangible bank value when adjusted for mark to market was negative.
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The foregoing was a clear indication that the most likely course would be for regulators to seize the bank and then sell some or all of the assets.
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When regulators seize a bank, the stock is often worthless.
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The Cockroach Theory
Momo Crowd Did Not Understand
From the Morning Capsule:
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The momo crowd not only did not understand the balance sheet, negative tangible book value, and the mark to market adjustment, they also did not understand that typically a bank is first seized and then sold. They were simply excited about the bank being sold. Based on their hope strategy, they were hoping for a big payoff when the bank was sold.
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Over the weekend, many were gloating on social media about how much money they were going to make Monday when the bank was sold and that investors who short sold would be in trouble.
Momo Behavior
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The chart shows that the momo crowd was buying First Republic Bank stock as soon as trading started at 4am ET even though it was clear that the stock was likely to be worthless.
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The momo crowd was also buying this stock aggressively over the last several days.
Wipe Out
There are indications that many among the momo crowd were selling good stocks, so they could raise cash to buy more FRC stock. Now their accounts are wiped out.
JP Morgan
Often, the stock of a bank acquiring assets from receivership gets a great deal, and that stock does well. Such stocks should be bought long. JPM stock has moved up because it is buying assets at a cheap price. Buying First Republic Bank assets is accretive to JP Morgan’s earnings. JPM is in The Arora Report’s ZYX Buy Model Portfolio. If you are interested in JPM and not subscribed to ZYX Buy, consider subscribing to ZYX Buy.
As you can see, money is to be made from both the long side and the short side from bank failures.
New York Community Bancorp
New York Community Bancorp (NYCB) is on our radar to potentially give a buy signal from the long side. New York Community Bancorp bought assets of the failed Signature Bank. New York Community Bancorp got a great deal.
The plan is to buy NYCB on a pullback. For the buy zone, see a new post in ZYX Buy.
Holy Grail Achieved
The holy grail in short selling is to short sell a stock that goes to zero. This generates maximum profits. Over the years, there have been many stocks where ZYX Short gave a signal to short sell and ultimately such stocks went to zero.
What To Do Now
Congratulations if you short sold First Republic Bank. The stock is halted at the time of this writing. If it never reopens or if it is delisted, you do not need to do anything, and you get to keep the money forever that you received when you short sold the stock.
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This post was just published on ZYX Short Sell Change Alert.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
