Good morning contrarians! It is Thursday, May 4. Fed Day +1 but there was some other news to preoccupy us overnight…
State of Play
PacWest Bancorp (PACW 0.00%↑), one of three main problem banks identified in this space, is exploring alternatives including a sale. This type of move does not inspire confidence the bank can avoid the fate of First Republic and others, and led to shares cratering in the after-market.
As of 0635 things are surprisingly mixed:
Stock futures are moving lower led by small caps. The Russell 2000 is pointing to a drop of 1% at the open. Other parts of the market are far less affected so far;
Bonds are far more reflective of risk-off, with the yield on the 2-year down 9 basis points to 3.85%. The 10-year yield is down 4bps to 3.37%. Neither has recaptured their March low quite yet, but they’re getting close (yields move inversely to prices);
Commodities are showing some signs of life. WTI crude oil is up 0.5% to trade around $69/barrel. Copper is up 0.8%;
Cryptos continue to gain with Bitcoin up 1% to move north of $29,000.
Known Events
Seeing how it’s Thursday we’ll get initial jobless claims at 0830. Economists expect 240,000 new claims after 230,000 last week.
US trade balance is also out at 0830. The expectation here is for a trade deficit of $63 billion, down from $71 billion last month. If it’s below that it could be a sign of trouble because the US has long been a net importer of goods to satisfy Americans’ need to buy things they don’t need.
It’s another big day for earnings, with Apple (AAPL 0.00%↑) the biggest draw though that isn’t until after the close at 1600.
At that point we’ll also hear from Shopify (SHOP 0.00%↑), Square (SQ 0.00%↑), Coinbase (COIN 0.00%↑), Draftkings (DKNG 0.00%↑), Carvana (CVNA 0.00%↑), Lyft (LYFT 0.00%↑), Doordash (DASH 0.00%↑) and others.
Narrative Emerging
The PacWest news came hours Powell proudly proclaimed how “the US banking sector is sound and resilient.” Can’t make this stuff up. This is potentially even worse than the “transitory” inflation comments and erodes whatever credibility the Fed might have had left. Suffice it to say we have now arrived at a place where nothing the Fed says about the banking system can safely be believed. That’s not good. For anybody.
As for the Fed, the policy statement and Powell’s presser basically pointed to data dependency. The only concern there is that it may take a little bit for the data to catch up with the reality on the ground. Banks could continue to fail but the official inflation rate, a trailing indicator, may not reflect that in time for the Fed to loosen monetary policy should it be needed.
The Opportunity
Could this be an opportunity to buy regional bank stocks? Sure, if you enjoy a friendly game of Russian roulette. Many of these guys have now dropped below even the lows of March. The main problem children are Western Alliance (WAL 0.00%↑), Metropolitan Bank (MCB 0.00%↑), and potentially Zions Bancorp (ZION 0.00%↑). It looks like the damage is by no means contained. It doesn’t mean they’ll all go bankrupt of course, but the situation looks very hairy indeed.
Having said that, the non-problem children banks haven’t sold off as much (yet) this morning. For those feeling especially brave (or reckless. Or maybe just insane) there may be some to pick over here. We’ve mentioned Bank of Hawaii (BOH 0.00%↑) and New York Community Bank (NYCB 0.00%↑) as two possibilities but there are certainly others as
points out here.Otherwise there may be an opportunity to take out insurance in other parts of the market that have not gone along with the overnight selling. Take tech for example. If you’re of the belief that there is more bad stuff to come from regional banks and that the economy will fall off a cliff as a result, then you can’t really have much faith in growth stocks either. Of course, insurance involves things like inverse ETFs or options, which both come with their own pitfalls that need to be examined before being invested.
Not investment advice (duh). There are likely other opportunities, contrarian or otherwise. More information will be necessary. Do your own research. Make your own decisions.
Pac-Next?