All about Investments!

[Jeor]

Here we go with some market volatility and potential crisis moments. Not that I take delight in others' misery, but this is the time when it can get exciting (or at least action-packed) for an investor. 

Sure, my portfolio took a bit of a hit the past week, but it's mostly large-caps and I exited one position this week (Origin Energy) completely unrelated to the market volatility - their price just crept too close to the current takeover offer for me to resist cashing in.

So there is a little warchest ready (35% cash) and the real issue now will be trying to find the right time and place to deploy. I know you're not supposed to time the market or try to pick the bottom, but some stocks in my wishlist probably quite aren't at attractive prices yet so we'll see. 

The dilemma that's probably hitting most people right now is that my cash is sitting there earning a safe 4.5% as well, so the bar is a little higher for finding the right investment.

Edited March 11 by Jeor

[Paxter]

As Dimon said: there’s a storm coming. The SVB collapse is likely to cause a large flight to safety next week as material questions are raised about the tech sector and regional banks.

And we are still nowhere near a full-blown recession…

[Kalnestk Oblast]

It's interesting to me that arguably this is entirely caused by the Fed raising interest rates. Between the tech sector acting as if it is in a recession due to the higher interest rates and the bond values dropping due to the higher interest rates SVB was hosed. 

Which may cause panic and people to act like a worse recession despite there being no actual problem with the other banks.

[timmett]

21 hours ago, Jeor said:

The dilemma that's probably hitting most people right now is that my cash is sitting there earning a safe 4.5% as well, so the bar is a little higher for finding the right investment.

I just moved $100k in life insurance money from a no-interest checking account into a 13-month bank CD at 4% APR yesterday. Which puts that money to work & also gets it out of a (theoretically) hackable checking account. But yeah, +4% with FDIC insurance versus -8% on all the various mutual fund, money market, and IRAs investments over the past year with possibly worse to come.... Whoever is managing the Pershing account forked me for -18% in 2022. Where'd you get your MBA -- Trump University? The minute I get legal control of that puppy ...  I'm gonna ... uh ... should I wait til it recovers value (don't need those funds in the foreseeable) or just take my beating now & roll it into a more retirement-shaped IRA?

[Jeor]

4 hours ago, timmett said:

But yeah, +4% with FDIC insurance versus -8% on all the various mutual fund, money market, and IRAs investments over the past year with possibly worse to come.... 

Yep. I'm getting 4.5% on a savings account with my money on call, and Australia has a 250K bank deposit guarantee as well. That's looking like a pretty safe bet at the moment.

On your growth assets, I think these always live and die by the sword. I'm no financial adviser, but I think it just depends really on your peace of mind. There's every chance a high growth asset will recover in a few years' time, but if you need that money sooner rather than later then a safer option makes sense.

Assuming there is a lot of behind the scenes negotiations at the FDIC and Federal Reserve to find a buyer for SVB with some government support. Every regional bank is going to have a truckload of outflows this coming week and I suspect quite a few of them will be in the same boat as SVB with impaired bonds backing the deposits. Regional banks with more retail customers (as opposed to SVB's concentrated business base) might be okay though, as a higher percentage of their deposits would be insured so people theoretically shouldn't bother moving them.

Either way, I think consumer sentiment is really going to tank and that's not going to be a good look for equities markets. Not to mention the riskless deposit rates on order look even more attractive in a market that's weighted towards the downside now.

[Paxter]

34 minutes ago, Jeor said:

Assuming there is a lot of behind the scenes negotiations at the FDIC and Federal Reserve to find a buyer for SVB with some government support. Every regional bank is going to have a truckload of outflows this coming week and I suspect quite a few of them will be in the same boat as SVB with impaired bonds backing the deposits. Regional banks with more retail customers (as opposed to SVB's concentrated business base) might be okay though, as a higher percentage of their deposits would be insured so people theoretically shouldn't bother moving them.

 A few points:

• I'd expect the other regionals not to be hit anywhere near as badly as SVB. As you mention, their deposits will be stickier, smaller and below the insured limit. But next week will undoubtedly be tense for the regionals, given how fast the run was on SVB. 
• I'd be shocked if the other regionals are anywhere near as exposed to higher interest rate as SVB. Diversification is the name of the game on the asset side - SVB unfortunately missed this memo. And even if they were exposed, they won't have to book any losses on these portfolios unless the drawdowns from depositors are significant.
• I wouldn't assume government support is on the table. I think we are looking here at a (hopefully) orderly wind-down or a private recapitalization/sale of parts of the business. This bank is not TBTF and the government shouldn't be using taxpayer funds to bail out SVB, its creditors or customers. 

Edited March 12 by Paxter

[Jeor]

6 minutes ago, Paxter said:

• I wouldn't assume government support is on the table. I think we are looking here at a (hopefully) orderly wind-down or a private recapitalization/sale of parts of the business. This bank is not TBTF and the government shouldn't be using taxpayer funds to bail out SVB, its creditors or customers. 

A wind-down means all these tech startups won't be able to access their money for a while, which is not ideal. I'm assuming no systemic bank is going to buy out SBV unless there is some government support, so it depends on how far the feds want to let it run its course or step in.

In most crises I think government tends to err on the side of non-bailouts (politically toxic) so it will be interesting to see the market reaction next week.

[Paxter]

1 hour ago, Jeor said:

A wind-down means all these tech startups won't be able to access their money for a while, which is not ideal. I'm assuming no systemic bank is going to buy out SBV unless there is some government support, so it depends on how far the feds want to let it run its course or step in.

Congress can barely fund the government, let alone a private bank!

The regulators will be trying hard to find a marriage partner over the weekend but these types of takeovers aren’t easy to pull off. SVB is such a unique bank that it probably wouldn’t be a logical acquisition for a lot of the big players. 

[Jeor]

4 hours ago, Paxter said:

Congress can barely fund the government, let alone a private bank!

The regulators will be trying hard to find a marriage partner over the weekend but these types of takeovers aren’t easy to pull off. SVB is such a unique bank that it probably wouldn’t be a logical acquisition for a lot of the big players. 

Yes, with only 24 hours to go they don't have much time to stitch up a deal. Market conditions are sure to deteriorate over the next few weeks. I think the Fed now has to only raise by 25 basis points.

[Paxter]

Credit Suisse under serious pressure again, with some of its major shareholders ruling out further increases in funding. This one is a G-SIB (although at the lower end) and will be a fairly serious failure if it occurs. Swiss authorities may well do some sort of local bailout.

I would say that losing Credit Suisse wouldn't be a mortal wound for the wider global financial system, though no doubt it is a much more significant event globally than the failure of SVB. 

Edited March 15 by Paxter

[Jeor]

Well, Credit Suisse and First National Bank have both got the help they need, so that should shore up the system for now. However, in this day and age, bank runs can happen in the blink of an eye so I suspect there's going to be some wariness and market jitters on and off for the next few months.

This also feels like only the opening act of the denouement to high interest rates. It feels like there will be more acts to follow, all mostly based on the fact that a lot of assets haven't taken the hit yet that they should have. SVB was because a lot of banks are sitting on underwater bonds but don't have to reflect this in their accounts if they hold to maturity (just that SVB couldn't hold with all the withdrawals).

Commercial real estate is another one where valuations have yet to materially drop, which may blow a hole in some company's balance sheets. I suspect there are also a lot of worthless mortgages on the books now (locked in for low interest rates for 30 years) that banks aren't able to shift for very much money.

[Paxter]

16 hours ago, Jeor said:

I suspect there are also a lot of worthless mortgages on the books now (locked in for low interest rates for 30 years) that banks aren't able to shift for very much money.

I wouldn’t say worthless. This isn’t (yet!) an asset quality issue like in 2008 (a ton of subprime debt backed by depreciating residential property).

Edited March 17 by Paxter

[Madame deVenoge]

22 hours ago, Paxter said:

I wouldn’t say worthless. This isn’t (yet!) an asset quality issue like in 2008 (a ton of subprime debt backed by depreciating residential property).

My strong opinions here are that you are correct. The subprime issue is….no longer an issue. Non-agency mortgages have some very strict credit boxes - credit scores in the 750 plus range with a max of 70% LTV.

Just take a look at MFA, EFC, RWT.

***

I’m just here to cry about having to sell some stock to meet my tax obligations. Tax obligations that came about from a stock that was issued to me at call it $50 per share, then it vested at $20 per share, and now it is worth $10 per share.

That means my comp package was scheduled at a $50 share price. It vested and settled at $30, so I owe taxes on that. It’s now worth $20. And since my base pay just got reduced by 1/3, coming up with this cash is not easy.

Yes, you can add the obligatory three zeroes.

Edited March 18 by Chataya de Fleury

[Jeor]

4 hours ago, Chataya de Fleury said:

I’m just here to cry about having to sell some stock to meet my tax obligations. Tax obligations that came about from a stock that was issued to me at call it $50 per share, then it vested at $20 per share, and now it is worth $10 per share.

That means my comp package was scheduled at a $50 share price. It vested and settled at $30, so I owe taxes on that. It’s now worth $20. And since my base pay just got reduced by 1/3, coming up with this cash is not easy.

Yes, you can add the obligatory three zeroes.

Ouch, that hurts. Forced selling of stock at any time is a doozy but even more if it's caused by paper machinations. I've had to sell stock a couple of times for cashflow reasons and it's always been a wrench.

My wife has worked in financial services but is off work now to care for our baby son (and older daughter), so we're relying on my low (but stable) pay as a high school teacher. We have a general principle to try not to sell assets to pay for everyday expenses, but sometimes you don't have a choice if something big comes up and it just has to be paid. At the moment, though, I'm holding a bit of cash in the portfolio so at least can dip into that if needed.

Still, years ago I remember selling a bunch of stock when we had to get together a deposit for the house. I know I'm probably breaking an investment rule but I still keep a watchlist of that portfolio to see how it would have gone if I held onto it. Makes for some painful reading now, but I just pretend that the capital appreciation of our house makes it worth it...

[Madame deVenoge]

I’m still kind of low-key crying. I’m sure the Doctor is sick of it. 2008 wasn’t so bad for me, I literally had $2k in the bank and I made it work - all of it - and made bank, both on the strength of some solid investments and my work ethic.

That will not be going to happen this time around. “Afloat” will happen. Maybe. If I’m lucky.

Edited March 19 by Chataya de Fleury

[Jeor]

3 hours ago, Chataya de Fleury said:

That will not be going to happen this time around. “Afloat” will happen. Maybe. If I’m lucky.

We were catching up with friends on the weekend and the outlook truly is dire for some. Two children, still a large mortgage that is being ratcheted up (in Australia most mortgages are floating rate and hence move with the interest rate rises) and the husband is potentially about to lose his job with his company cutting a third of his team next week. He's optimistic with his skillset he'll find something else reasonably quickly but that's not a worry you want to have at a time like this.

Hoping things turn out well for you @Chataya de Fleury and that it will be better than just staying afloat!

Edited March 20 by Jeor

[DireWolfSpirit]

14 hours ago, Jeor said:

We were catching up with friends on the weekend and the outlook truly is dire for some. Two children, still a large mortgage that is being ratcheted up (in Australia most mortgages are floating rate and hence move with the interest rate rises) and the husband is potentially about to lose his job with his company cutting a third of his team next week. He's optimistic with his skillset he'll find something else reasonably quickly but that's not a worry you want to have at a time like this.

Hoping things turn out well for you @Chataya de Fleury and that it will be better than just staying afloat!

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

[BigFatCoward]

1 hour ago, DireWolfSpirit said:

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

I wouldn't be able to sleep at night with less than a 5 year fix (ive currently got 7 years left at current rate which was fixed at bottom of market). 

 

[Iskaral Pust]

Most of the anglosphere outside of the US have mortgages that are variable or else re-set very quickly.  They’ve had a very easy run for the past decade or more but they’ll be suffering some hardship now.  Places like Australia, NZ, Canada, Ireland and the southern half of England also had a significant run up in house prices, so any recent buyers are especially at risk once their first re-set arrives.

We have a 7yr ARM with five years remaining at the initial fixed rate (unusually short in the US these days).  I hope that’s long enough to see short rates decline again but even if it isn’t, my entire mortgage is only ~1.2x my current annual gross income.  I’m not overextended unless my income declines a lot permanently.

There is enormous uncertainty right now whether we’re in a (1) temporary cyclical phase of higher interest rates (driven by unusual overheating by excessive stimulation, both monetary and fiscal, during COVID) that will soon return to secular stagnation and low rates, or (2) a new secular era of higher inflation potential due to more labor bargaining power for wages, transition to green energy and re-shoring/friend-shoring that will keep interest rates higher than the past decade.

My long term accounts are all still in stocks, but my discretionary accounts (which are just as large) are all in cash earning a very nice yield.  I have in mind a valuation at which I’d move that cash into stocks, but we’re not close yet. 

[Jeor]

10 hours ago, DireWolfSpirit said:

Having an adjustable rate in this environment sounds like a nightmare. So many people got burned by these in 70"s and 80's that a lot of folks wont touch them with a pole.

Believe it or not, in Australia it's commonplace to have variable rate mortgages and most banks only offer to fix rates for 1-5 years. In terms of the efficacy of the Reserve Bank raising rates, it does mean that it flows through the economy much quicker. But the historic pace of these rate rises has caught a lot of Australians off guard. We fixed ours for 3 years at 2.09% but in August 2024 we'll roll off onto an adjustable rate and who knows what that will be.