The extraordinary events of this past week, the failure of SVB and Signature banks, plus the Fed moves and the Russian aggression with our Reaper drone, have caused havoc in the markets.
The first thing you need to see is that I updated the Circle today, on Wednesday March 15th. Here is what it looks like today.
We are just about the exact same place as we were at the beginning of the year. The main difference being we were on the way up on 12/30/22 and we are on the way down today.
Silicon Valley Band and Signature Bank
The failures of the banks are essentially being caused by the rise in interest rates PLUS gross mismanagement.
When banks take in deposits they are required to maintain certain capital ratio’s and lending ratio’s. They buy bonds to increase the income from the deposits.
They have a choice of how those deposits can be held. A portion of the bonds will be held in order to maintain liquidity for making loans as well as satisfying depositors demands for cash. The bonds for those deposits must be very liquid and also marked-to-market (MTM) daily. This means that they are valued on the books daily at current market prices. They also buy longer term bonds in order to increase their income. These bonds are for insurance purposes against their deposits and these are not re-valued daily. They are referred to as Mark-to-Maturity.
The problem in a rising rate environment is that the higher interest rates go up, the lower the value of the bonds. The losses on the mark to maturity bonds allows a loss to accumulate while the valuation on the books of the bank is not adjusted daily.
The price of a $1000 par10-yr treasury with a 2% coupon like we had at the beginning of 2022 with the then10-yr rate at 1.51% would have been $1,032.48, If they had $1 billion of bonds, it would have cost the bank $1,032,484,796.36 to buy them. During the year 2022, they would have earned $20 million on the bonds. During 2022, the 10-yr interest rates rose to as high as 4.091 and closed the year at 3.879%. At the end of the year, it’s now a 9-year maturity on the bond and at 3.879% the $1B is now worth $857,829,016.78.
On the bank’s books, these bonds are still carried at a valuation of par at $1,000,000,000 (This calculation doesn’t include the $20 million of interest they earned less the taxes on that income.) They lost $174,655,779.58 on a $1 Billion investment.
SVB had $330 Billion in total deposits and about 80% of that was in mark to maturity bonds. That’s roughly a $50 Billion loss.
This was not their actual loss because they likely did not solely buy 10 yr bonds. This is just an illustration of what bonds can do to you when rates rise and initially rates are ultra low.
The 10-yr yield only went from 1.51% to 3.879%, less than 2.4%. These banks actually got quite lucky the yield curve inverted this past year. The Fed raised the Fed funds rate 3.75% in 2022 and the 10-yr only went up 2.4%. The bank losses would have been about 50% more if the yield curve had not inverted.
Here is a link to the bond calculator if you wish to get accurate bond calculations
Finally, I mentioned mismanagement. SVB did not have a risk management officer for 8 months of 2022. It’s just stunning that was allowed to happen by both management and the bank regulators.
I am working on a video to illustrate the progression of the circle Year-to-Date. It is quite remarkable as 10 days ago the circle score was 47, and today it is 16. It’s getting very close to the October low again.
Also, 10 days ago there were 378 of the S&P 500 stocks in Positive Trends. As of Wednesday 3/15, we now have 221 still in a Positive Trend. 156 stocks changing Trend in 10 days is a huge number. For reference, we will likely bottom with 125-150 in a Positive Trend. We had about 127 at the bottom on Oct. 10th and 109 at the bottom last June.
Let’s Go Get the Money,
or at least keep what we have.
JimB
hey Jim, really interested in your strategies here. Are u still uploading any time soon?
many greetings
WHY YOU,MR. BEEKHUIZEN, HAVEN'T POSTED ANYTHING ON SLAY SPYDER IN THE LAST TWO MONTHS?...I'M SUSCRIBED AND I FEEL DISAPPOINTED.