By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Classic Run On The Bank
Please click here for a chart of the stock of SVB Financial Group (SIVB), owner of Silicon Valley Bank.
Note the following:
- The Morning Capsule is about the big picture and not an individual stock. The chart of SIVB is being used to illustrate the point.
- A classic run on the bank is happening at Silicon Valley Bank (SIVB).
- Contagion fears have spread not only across other banks in the U.S. but also among banks in Asia and Europe. Bank stocks all across the globe are under severe pressure.
- SIVB has long been a favorite of the momo crowd.
- The momo crowd ran the stock up to $763.22 in November 2021. The chart shows that the stock had pulled back to about $268 on Wednesday.
- On the chart, pay attention to the price on the Y-axis. The price had fallen to $58.39 when the chart was prepared. The stock is halted at the time of this writing.
- It is estimated that about 50% of startups in the U.S. and Europe have exposure to SIVB.
- Here is what happened at SIVB.
- Due to the liquidity caused by free money and rocketing valuations of companies in Silicon Valley, deposits at SIVB jumped from $61.76B at the end of 2019 to $189.20B by the end of 2021.
- SIVB purchased $80B worth of mortgage backed securities.
- 97% of mortgage securities have an average yield of 1.56% and a duration of over 10 years.
- As the Fed raised interest rates, these mortgage securities fell in value.
- The update was that the bank sold $21B of these securities at a $1.8B loss, and the bank was raising $2.25B in equity and debt.
- The update indicated that there is a mismatch between bank assets and liabilities in terms of duration.
- Clearly, the bank forecasted that there would be no inflation and interest rates would stay at zero for over 10 years. If only they had listened to The Arora Report. The Arora Report was the first to predict that inflation and interest rates would rise. The Arora Report even gave buy signals in ZYX Buy and ZYX Allocation on inverse leveraged bond ETF TBT. Bond prices fall when yields rise.
- As the run on the bank started, Peter Thiel, a major Silicon Valley investor, lit the match by asking his portfolio companies to withdraw funds from SIVB.
- The concern is that banks all over the globe might have a mismatch between the duration of assets and liabilities.
- The Arora Report gave you an early warning. Please see the Morning Capsule dated March 8 showing that regional bank stocks were dropping.
- At this time, it is not clear if the drop in bank stocks all across the globe is a reason for major concern or an opportunity to buy these stocks. Prudent investors should keep a close watch on regional bank ETF KRE.
- The VUD indicator is the most sensitive measure of net supply demand in real-time. The orange represents net supply and the green represents net demand.
- The VUD indicator is orange, indicating a net supply of SIVB stock.
- Money is rushing into the safety of U.S. Treasuries. With the rush of money, Treasury bond prices are going up and yields are falling.
There are rumors that large financial institutions are looking at purchasing SIVB. This may be similar to the purchase of Bear Stearns by JP Morgan (JPM).
In The Arora Report analysis, if the bank contagion starts spreading, the Fed will have no choice but to rapidly cut rates to increase the value of securities held by banks.
The most prominent takeaway from the jobs report is that wages have cooled. Here are the details:
- Nonfarm payrolls came at 311K vs. 205K consensus.
- Private payrolls came at 265K vs. 203K consensus.
- Unemployment rate came at 3.6% vs. 3.4% consensus.
- Average hourly earnings came at 0.2% vs. 0.3% consensus.
- Average work week came at 34.5 hours vs. 34.6 hours consensus.
Even though wages have cooled, the highest quality number in the report is nonfarm payrolls, which came significantly above consensus. Nothing in this report is going to change the Fed’s course, irrespective of what momo gurus say.
The next big economic report is CPI next week. Also due are PPI and retail sales.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is 🔒 in the early trade.
Money is rushing into the safety of gold.
The momo crowd is 🔒 gold in the early trade. Smart money is 🔒 gold in the early trade.
For longer-term, please see gold and silver ratings.
Iran and Saudi Arabia have agreed to resume relations. Both are increasingly aligning with Russia and China. This has negative implications for the U.S.
Smart money is 🔒 oil on the news.
The momo crowd is 🔒 oil in the early trade.
For longer-term, please see oil ratings.
Bitcoin fell below $20,000. The momo crowd is buying the dip and has now moved bitcoin above $20,000.
Our very, very short-term early stock market indicator is 🔒. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Interest rates are ticking down, and bonds are ticking up.
The dollar is weaker.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
Gold futures are at $1846, silver futures are at $20.46, and oil futures are at $75.90.
S&P 500 futures are trading at 3929 as of this writing. S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3950, 3860, and 3770.
DJIA futures are down 22 points.
Protection Bands And What To Do Now
It is important for investors to look ahead and not in the rearview mirror.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.
You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.
It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.
Traditional 60/40 Portfolio
Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.
Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.
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