Stocks clawed their way back from deeper losses for a mixed close yesterday following misfortune and fortune of Credit Suisse. Bond yields are all over the place as investors struggle to see a clear path for the Fed – wide spreads are a telling sign of confusion.
Another day, another kick in the b*tt. Just when you thought it was safe to get on with your business, one of Europe’s largest banks falls to its knees and clutches its throat. It was apparent yesterday morning when I wrote my note, WHILE YOU SLEPT, that something was amiss. I attempted to report big losses in banks overnight in my “WHAT’S SHAKIN’” section, but the leaderboard was so active that I could not pin down price moves. First in the red were the regional banks that recovered the day before from deep routs 2 days before, then suddenly it was the bigger banks that started to move up on the biggest overnight losers list. By yesterday every money manager who owns positions in any financial companies had carefully looked at the latest financials of their holdings. It looked like a bullet may have been dodged… unless you owned the 2 now-defunct ones and perhaps, 1 other severely weakened one. What now?
Credit Suisse has been struggling for some time. It was still reeling from mishaps with companies like Archegos Capital and others. Remember those? Yeah, well CS is not a typical bank, though at its core, it still does rely on core banking… you know borrow money at low rates and lend it at higher rates. We also know that when depositors pull their money out of the bank… need I go on? That can add some stress to a company which had already been in a challenging position, having most recently been thrown a lifeline from the Saudi National Bank. Now, most of this stuff goes on behind the scenes on a daily basis in many banks, but Credit Suisse is a big bank with its hand in lots of businesses, and recent events throw a bit of a spotlight on banks known to be on the, shall we say, weaker leg. If you look at CS’s Moody’s rating, it is currently rated Baa2 with a “negative” outlook. If it is downgraded to Baa3, it is just a whisker away from being considered… non-investment-grade, or the more colloquial term, junk. It got its most recent rating last summer, a downgrade from Baa1, which it received in December of 2020, which was an upgrade. You would only need to go back to 2015 to find that it had an A2 rating. The Global Financial Crisis marked the beginning of its downfall from a Aa2 rating, and it has struggled ever since. If you owned the stock over that period, you would have lost money every year since, except for three. This past year of upside-down yield curves, huge swings in the bond markets, and aggressively hawkish central banks, even healthy banks are under pressure. So, when its big shareholder, the Saudi National Bank said that it would not inject anymore capital, investors… well, they started to get concerned. Not only is CS too big to fail, but it may be too big to save. That caused investors to ditch shares in all larger diversified banks yesterday. Later in the day, healthy banks began to circle around CS in support, which helped the markets catch a bit of a bid, and after the close the Swiss National Bank, which is like the Fed but with cooler clothing, pledged that it would cover CS’s liquidity requirements. Sound familiar?
The question remains, did we just avoid a global 2008-like crisis? Is this a systemic risk event, meaning, is this a broader problem, or is it just company-specific risk, or idiosyncratic risk. It is true that when times get tough, the weakest fall first. Times are tough. The banking system is an important structure that girds all economies, and you know what they say about chains and their weakest links. The Fed will announce policy next week, and the ECB, which will announce its monetary policy today, needs to tread carefully now. These bank failures and near-failures may just be that proverbial “canary”.
WHAT’S SHAKIN’
First Republic Bank / CA (FRC) shares are down by -23.59% in the premarket after reports surfaced that the bank was seeking “strategic options,” which usually means a sale. The bank, at the center of much of recent days’ banking mini-crisis, was freshly downgraded to junk status by Fitch and Standard & Poor’s. Dividend yield: 3.44%. Potential average analyst target upside: +350.1%. WHY IS THIS SO HIGH considering the company’s situation? This number is simply the difference between the stock’s price and the average 12-month price targets of Wall Street analysts. It is in no way a recommendation and it does not mean that the stock will actually achieve the targets. Analysts are likely to revise their targets in response to current events.
Adobe Inc (ADBE) shares are higher by +5.51% in the premarket after it announced that it beat EPS and Revenue estimates by +3.41% and +0.61% respectively. The company also raised its full year guidance. Potential average analyst target upside: +16.4%.
YESTERDAY’S MARKETS
Stocks swooned earlier in the session as news of Credit Suisse’s woes shook financials. Later in the session, stocks recovered as lifelines started to appear for the bank. The S&P500 fell by -0.70%, the Dow Jones Industrial Average dropped by -0.87%, the Nasdaq Composite Index advanced by +0.05%, and the Russell 2000 Index gave up -1.74%. Bonds gained and 10-year Treasury Note yields slid by -23 basis points to 3.45%. Cryptos traded lower by -4.28% and Bitcoin slipped by -0.99%.
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