McCormick delivers spicy results

Stocks traded higher yesterday after fears of a complete bank meltdown abated… for the moment. Bond yields climbed as investors shifted funds into the equity markets.

Don’t kid yourself. The announcement that First Citizens BankShares would acquire the majority of now-defunct SVB Financial was calming news to some. It was added to growing evidence that a full-blown banking disaster had been avoided. The FDIC-brokered deal would be less likely had the feds or First Citizen’s management expected a system-wide meltdown. Remember that, despite profitability problems, the bank’s ultimate failure occurred when depositors rapidly withdrew their funds leaving the bank with no alternative but to tap into its long-term reserves which were deeply under water. SVB’s mismanagement of its balance sheet made a bad situation worse which led to its ultimate demise. The events exposed a situation that was apparently missed by regulators. The extremely inverted yield curve made worse by an unprecedented rate hiking regime and falling bond prices left banks, which rely on bonds for their longer-term reserves, highly exposed to not only markets, but also, indeed, bank runs. This all happened under the noses of regulators and the events sent the now-awoken analysts scouring all banks’ balance sheets, and while not all of them are in perfect shape, the vast majority of them appear to be in reasonably good condition. Of course, as you will note by my careful wording, that does not mean that there are no further disasters lurking below the surface. Funds have been actively shifting from bank to bank as depositors seek to not only diversify their deposits, but also attempt to avoid banks that appear weak on paper. The shifting is certainly causing an ongoing strain on the banking system.

Last week’s rate hike by the Fed simply added to this strain along with the delayed effect of the prior 8 hikes which happened in just under a year. The financial system is, indeed, tight at the moment, and that is exactly what the Fed has been attempting to achieve. Folks, we are there. Inflation, though still high, appears to have peaked last year. The threat of a recession now looms large on the horizon for later this year. On the surface, unemployment appears to be low, but there are many signs that it will begin to trend higher in coming months. The Fed now points to services as the last remaining inflation holdout to be reckoned with. Excluding shelter and energy, the culprit in that category remains transportation services. If you break that aggregate down, the perpetrators are motor vehicle insurance and airline fare, which are up by +14.5% and +26.5% from last year. Now to be sure, food inflation is still high, but not as extreme as services. Why do I bring all this up? Because the Fed is going to come under increased pressure to not only halt its hiking, but even to possibly start cutting interest rates. The futures markets, the swap markets, and the bond markets are reflecting this scenario.  Despite all the rhetoric from FOMC members and despite even the Fed’s own projections, that can come quicker than we expect. Keep your eyes on the data. Any deterioration in economic numbers or even stock market weakness can change the Fed’s direction on a dime.

WHAT’S SHAKIN’ THIS MORNING

McCormick & Co Inc (MKC) shares are higher by +3.5% in the premarket after it announced that it beat EPS and Revenue estimates by +19.92% and +1.75% respectively. The company reaffirmed its full year guidance which was above or in line with analysts’ expectations. Dividend yield: 2.10%. Potential average analyst target upside: +0.1%. WHY IS THIS SO LOW? Because the stock’s price is near the average of analysts’ 12-month price target. While this can be viewed as the stock being expensive, it does not mean that the stock cannot continue to rally.

Occidental Petroleum Corp (OXY) shares are higher by +2.38% in the premarket after Cowen upgraded the stock to OUTPERFORM and raised its 12-month price target. Additionally, Berkshire Hathaway dumped as much as $216 million into the stock over the past three days. The company’s forward PE of 10.29X is richer than the 6.53X average of its peers. Dividend yield: 1.20%. Potential average analyst target upside: +16.1%.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday driven by banks. Higher bond yields depressed growth stocks, as evidenced by the decline in the Nasdaq Composite Index (-0.47%). The S&P500 gained +0.16%, the Dow Jones Industrial Average climbed by +0.60%, and the Russell 2000 Index gained +1.08%. Bonds declined and 10-year Treasury Note yields gained +15 basis points to 3.52%. Cryptos fell by -3.64% and Bitcoin declined by -2.73%.

NEXT UP

• FHFA House Price Index (Jan) is expected to have declined by -0.3% after slipping by -0.1% in the prior period.
• Conference Board Consumer Confidence (March) may have fallen to 101.0 from 102.9.
• Fed Vice Chair for Supervision Michael Barr will testify before the Senate Banking Committee.
• Earnings after the close include Micron Technologies and Jefferies Financial Group.