Money Fad

There has been a ton of news about regional banking. And its for good reason, regional banks have been failing in the US with the most recent failure being First Republic Bank. Here are some of the reasons as to why they are failing.

1. Economic conditions: Regional banks may struggle in economic downturns, particularly if they have a high concentration of loans in industries that are particularly sensitive to economic conditions, such as real estate or energy.
2. Increased competition: Regional banks may face increased competition from larger banks that can offer more products and services, as well as from fintech companies that can offer innovative digital banking solutions.
3. Regulatory environment: The regulatory environment can also impact regional banks, particularly if they are subject to regulations that place a heavy burden on smaller institutions.
4. Technology: Regional banks may also struggle to keep up with technological advancements, which can impact their ability to compete with larger institutions and fintech companies.
5. Mergers and acquisitions: Some regional banks may fail due to poor management or financial difficulties, which can lead to mergers or acquisitions by larger institutions.

Above are some of the cliché reasons of why banks are failing but in reality, regional banks are failing because they have awful management. The people in charge of the regional banks do not care if they fail because they know the government will step in and save them just like in 2008. It really is a great business model. Start a bank and lend vast amounts of money while not caring about risk and all else fails, Uncle Sam with the help of the US Taxpayer will come and save you.

Let’s see if more regional banks continue to fail.

Bank earnings are coming in pretty strong despite the failure of Silicon Valley Bank and Signature Bank in March.

I do want to point out the two banks did fail toward the end of the first quarter which means the pain could be reflected in second quarter’s earnings. Let’s take a look at the chart below to see how banks have done over the past five trading days.

Banks were trading sideways until JPMorgan, PNC, and Wells Fargo reported on Friday. JPMorgan surged on Friday while Wells Fargo and PNC sat out that rally until participating on Monday’s trading day.

All the banks that reported on Friday delivered earnings beat, except PNC, missing on revenue 5.6B reported vs. 5.62B expected.

M&T Bank reported an earnings beat today and surged more than 7%

Let’s check back in tomorrow to see how Goldman Sachs, Bank of America, and Bank of New York Mellon do on earnings as those banks report tomorrow.

There’s been a ton of talk in the news about trade deals in other parts of the world, but let’s be real – do they really matter?

I don’t think so. The talking heads on the news keep talking about how other countries are diversifying away from the US dollar, but in reality, that doesn’t benefit them, especially China.

Here are some reasons why a strong dollar is not beneficial for China:

1. Currency Reserves: China is the world’s largest holder of foreign exchange reserves, which includes a significant amount of US dollars. A strong dollar increases the value of China’s dollar-denominated assets and helps to maintain the value of its foreign exchange reserves.
2. Trade: China is one of the world’s largest exporters, and a strong dollar can make Chinese goods cheaper for US consumers. This can increase demand for Chinese exports and help to boost China’s economy.
3. Investment: A strong dollar can also make US assets more attractive to foreign investors, including those from China. This can lead to increased investment in the US economy and help to strengthen economic ties between the two countries.
4. Debt Repayment: China is a major holder of US Treasury bonds, which are denominated in US dollars. A strong dollar makes it easier for China to repay its US dollar-denominated debt.

In addition, here are some reasons why the dollar will continue to be the currency of preference for quite some time:

1. Stability and liquidity: The US dollar is one of the most stable and liquid currencies in the world. It is backed by the world’s largest economy and the US government’s reputation for financial stability and fiscal responsibility. This makes it a reliable currency for international trade and investment.
2. Reserve currency status: The US dollar is also the world’s reserve currency, meaning that many central banks hold US dollars as a reserve asset. This gives the US dollar an inherent advantage in international transactions and makes it easier for foreign entities to obtain and exchange US dollars.
3. Large market for US dollar-denominated assets: The US has the world’s largest financial markets, including the New York Stock Exchange and the Nasdaq. These markets offer a wide range of US dollar-denominated assets, including stocks, bonds, and other securities, making it easy for foreign investors to invest in US assets.
4. Wide acceptance: The US dollar is widely accepted in most countries around the world, including those that do not use it as their own currency. This makes it a convenient currency for international transactions.
5. International trade: The US is one of the world’s largest trading nations, and many commodities, such as oil, are priced in US dollars. This has helped to establish the US dollar as the preferred currency for international trade.

Markets have some good data to price in off the printers this morning. Core PCE Price Index month-over-month (MoM), which excludes volatile food and energy prices, came in lower than expected at 0.3% versus 0.4% expected.

PCE Price Index month-over-month (MoM), including food and energy, came in lower as well at 0.3% versus 0.5% expected.

What does this mean? Well it means the Fed’s interest rate hikes are working – sort of. Inflation is still sticky and the Fed’s inflation war has taken a back seat to bank’s failing to manage balance sheet risk properly. The S&P 500 is set for a winning week and up on Friday.

Here is some more bad news on the Fed’s inflation war. US Personal Income has been below Core PCE since 2022. This means Americans are making less while prices are increasing.

You would think banks failing would cause bad returns in the stock market due to the economic and financial implications that result when banks fail.

But that’s not the case for Megacap Stock at the moment. In the last three months – Meta, NVIDIA, and Tesla have notched huge gains, with huge spikes around March 10th, the date Silicon Valley Bank announced its failure. Apple and Microsoft have had some good gains in the last three months, but not as much as the other names. Here is the chart below.

Now why in the world would the biggest market cap names rack up huge gains after banks are failing?

The above chart shows the dip in borrowing costs over the last month. Since the Fed’s fight against inflation has taken a back seat to financial stability, the cost to borrow money has fallen and led to a rally in high growth names that borrow a ton of money.

Tomorrow is a big day for economic data! I will be keeping an eye on jobs, GDP, and Core PCE. The Core PCE numbers will show if the Fed’s previous rate hikes have made any progress on inflation. If it comes in higher than 4.3%, the Fed may keep its foot on the hiking pedal.

So there’s been a ton of news about the failure of Silicon Valley Bank (SVB) and Signature Bank in the news. Let me tell you why it doesn’t matter.

Even though a bank failure is something that shouldn’t be taken lightly, the troubled banks failing are not mega banks like Citi, JP Morgan, or Wells Fargo. As long as one of these banks don’t go down we should be good. Unless all regional banks failed at the same time.

In addition, the government has stepped in and guaranteed all deposits for the troubled banks and the FDIC is using some of the insurance funds that all banks have to pay into to help out so no tax payer money is being used.

First Citizen Bank is buying a large portion of SVB’s deposits which sent the stock soaring.

Bitcoin has also been soaring due to the shakiness of the financial system. Some investors think Bitcoin will be stable in the event of financial system turmoil.

Long-term rates have come down with questions around if the Fed can still keep raising rates due to financial instability so the 10 year and mortgage rates have come down as well.

I’ve been meaning to write this article topic for a while. Nothing like getting a kick in the ass from Scott Jackson to pump this one out.

Let’s get started

The major US stock market indexes are a set of indices that track the performance of the US stock market. Here are the explanations of the most commonly followed indices:

1. Dow Jones Industrial Average (DJIA): This index is often referred to as “the Dow” and consists of 30 large, blue-chip companies listed on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow is the oldest index and tracks the performance of the US economy through the performance of these 30 companies. Most of the Dow stocks you will most likely be familiar with. Names like Coca-Cola, Disney, Apple, and Microsoft. Companies that are included in the Dow are very stable and usually considered the leader in their respective industry. When a company is admitted to the Dow it is a big deal as it is not easy and changes to the index do not happen frequently. Keep in mind this index is price-weighted. This means a certain stock could drag the entire index down. If a stock in the Dow declines by $10 in one day that single stock will be responsible for about a 70 point decline on its own. Here is a list of Dow stocks: https://www.cnbc.com/dow-30/
2. S&P 500: This index tracks the performance of 500 large-cap companies listed on the NYSE or NASDAQ. The S&P 500 is considered to be a more accurate representation of the overall US stock market, as it includes a broader range of companies across different sectors. The S&P 500 is not price weighted like the Dow is, it is market capitalization (market cap) weighted. This means the bigger the market cap of a company, the more its price increase/decrease effects the S&P 500. Right now Apple (AAPL) is roughly 7% of the S&P 500 boasting a $2.5 trillion market capitalization. This means when Apple increases or decreases significantly, it will have a huge effect o n the index. Link to all S&P 500 companies: https://www.slickcharts.com/sp500
3. NASDAQ Composite: This index tracks the performance of all the companies listed on the NASDAQ exchange, which is primarily made up of technology companies. The NASDAQ Composite is often used as an indicator of the performance of the technology sector. List of NASDAQ Composite: https://www.barchart.com/stocks/indices/nasdaq/nasdaq-composite
4. The NASDAQ-100 Index is a stock market index composed of the largest non-financial companies listed on the NASDAQ exchange. It is often referred to as simply the “NASDAQ 100”. The index includes 100 companies, which are selected based on a combination of market capitalization, liquidity, and other factors. Unlike other indexes, the NASDAQ 100 is not limited to US-based companies, and includes companies from various countries. The NASDAQ 100 is often used as a benchmark for technology stocks, as it includes many well-known technology companies such as Apple, Amazon, Facebook, and Microsoft. However, it also includes companies from other sectors such as healthcare, consumer services, and industrials. Don’t get the NASAG Composite and NASDAQ 100 confused. Link to NASDAQ 100: https://www.cnbc.com/nasdaq-100/
5. Russell 2000: This index tracks the performance of 2,000 small-cap companies listed on the NYSE or NASDAQ. The Russell 2000 is often used as an indicator of the performance of small and mid-cap companies, which are believed to have greater potential for growth than larger companies. Link to Russell 2000: https://www.barchart.com/stocks/indices/russell/russell2000

These indexes provide investors with a snapshot of the overall performance of the US stock market and are commonly used as benchmarks for investment portfolios.

Let’s start out with comparing the two:

Passive investing and active investing are two different approaches to investing that investors can choose from.

Passive investing is a strategy that seeks to match the performance of a particular market or index, such as the S&P 500, rather than trying to outperform it. Passive investors typically invest in a portfolio of diversified index funds or exchange-traded funds (ETFs), which offer exposure to a broad range of stocks, bonds, or other asset classes.

On the other hand, active investing involves actively managing a portfolio of investments with the goal of achieving better returns than the market or a particular benchmark. Active investors make investment decisions based on market trends, economic conditions, and other factors that may influence the performance of individual securities or asset classes.

Passive investing is often associated with lower fees and a more hands-off approach, while active investing is associated with higher fees and a more involved approach. However, both approaches have their advantages and disadvantages, and the choice of which approach to take depends on the individual investor’s financial goals, risk tolerance, and investment philosophy.

For the most part, unless you are a hedge fund manager on Wall Street, passive investing is the way to accumulate wealth. Worrying about day-to-day market swings is a dangerous game and a majority of professional money managers still can’t beat the S&P 500 consistently.