Morning Report: Stocks down as Credit Suisse gets slammed

Vital Statistics:

S&P futures3,895-57.75
Oil (WTI)70.35-0.91
10 year government bond yield 3.49%
30 year fixed rate mortgage 6.62%

Stocks are lower this morning as investors fret over problems at Credit Suisse. Bonds and MBS are up.

Some encouraging news on inflation: The Producer Price Index fell 0.1% MOM and 4.6% YOY. Interestingly, 80% of the drop was due to a 36% decline in the price of eggs. The index for final demand after stripping out food and energy rose 0.2% MOM and 4% YOY. The Consumer Price Index is more important than the PPI, but it demonstrates that commodity prices are falling.

Yesterday, Credit Suisse announced in its financial filings that it has identified “material weaknesses” in its reporting and financial controls. Credit default swaps on the company are approaching 1200 basis points on one-year senior debt.

Top Credit Suisse shareholder and Saudi National Bank Chairman Ammar Al Khudairy was asked by Bloomberg if he was willing to put in additional cash into the company, he said: “The answer is absolutely not, for many reasons outside the simplest reason which is regulatory and statutory.” 

The stock is down 29% in Swiss trading and is trading at a record low.

Chris Whalen had a great piece on the issues in the banking sector. His argument is that the issues in the banking system stem directly from quantitative easing. The problem is that these extremely low coupon mortgage backed securities become illiquid and hard to hedge when interest rates start to rise. Who wants a 2.5% Ginnie? I found this part good:

“It seems that SVB management anticipated a recession on the heels of last year’s tech meltdown,” notes a veteran fund manager and long-time reader of The IRA. “Not only was new biz going into hibernation but the credit quality of the SIVB loan book was going to be in jeopardy as were the potentially juicy returns of their warrant book and other holdco assets.”

He continues: “So, in anticipation of recession and the consequently assumed Fed pivot, they decided to proactively make a very large, long duration Treasury/MBS bet, figuring they’d hit the ball out of the park on that play which would more than offset the ensuing pain in the loan book, warrants, etc.”

This was nothing more than an outsized interest rate bet. The bank was doubling down on its MBS position as it went more and more underwater in hopes of making back the losses. It was entirely human (albeit bad) trading instincts.

Ken Griffin’s hedge fund Citadel has taken a 5.4% stake in Western Alliance, and UBS has initiated the stock with a buy this morning with a price target of $85. The company has proactively taken steps to improve its liquidity position and UBS thinks fears of contagion are overdone.

Retail sales fell 0.4% in February, driven by decreases in autos and gasoline prices. Excluding these items, retail sales were flat.

Mortgage applications increased 6.5% last week as purchases rose 7% and refis increased 5%. “Treasury yields declined late last week, as market concerns over bank closures and the potential for broader ripple effects triggered a flight to safety in Treasury bonds. This decline pushed mortgage rates for all loan types lower, with the 30-year fixed rate decreasing to 6.71 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Home-purchase applications increased for the second straight week but remained almost 40 percent below last year’s pace. While lower rates should buoy housing demand, the financial market volatility may cause buyers to pause their decisions.”

The Mortgage Credit Availability Index fell in February. “Mortgage credit availability decreased to its lowest level since January 2013 with all loan types seeing declines in availability over the month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The conforming subindex decreased 4.3 percent to its lowest level in the survey, which goes back to 2011. This decline was driven by the ongoing trend of shrinking industry capacity as mortgage rates stayed significantly higher than a year ago. Additionally, in this volatile rate environment and potentially weakening economy, there was also a reduction in refinance programs offered for low credit score and high-LTV borrowers.” 

29 Responses

  1. My favorite paragraph:

    Several supervisors said they were surprised to hear pushback from politically liberal San Franciscans apparently unaware that the legacy of slavery and racist policies continues to keep Black Americans on the bottom rungs of health, education and economic prosperity, and overrepresented in prisons and homeless populations.


  2. The comments are a fun read, think “Freedom Fries” of 2003.

    The Swiss are getting their Progressive come-uppance.


  3. If you’re familiar with James O’keefe and the reasons behind his canning from Project Veritas, you’ll find this video hilarious. It’s obvious to me that PV will fully collapse and all the money will flow to JO.


  4. I can’t even begin to keep up with you guys and your posts, links, comments etc. Even when I object to something I never get back to the comments to rebut…………..LOL Life here is complicated by me running the business, Walter’s ill health, trying to unwind our business and personal life and move to CO in the next year. And besides that I’ll be 73 in 3 weeks………………YIKES!!!!

    I’m totally freaked out about some of the political dynamics right now but don’t have time to formulate my opinions into cohesive discussions here…………….in part because I get bombarded and have no time to debate all the issues.

    This doesn’t mean I’m not politically active though. Still working on several fronts between donating and discussing in other venues.

    So, I wanted to share something personal and potentially interesting to some of you. You may remember our youngest daughter was coined as the Golden Girl when she received her Master’s from the School of Mines 10 years ago. She went to work for Anadarko because they offered her the best deal and she could work in exploration (her specialty), development and also have a say in environmental issues regarding the oil and gas industry, and stay in Denver.

    When Anadarko was bought out by Occidental the only reason she stayed instead of taking the buyout was because they promised her a position in the field of carbon sequestration.

    Fast forward to last fall and one of her bosses at Anadarko, who left with the takeover, offered her a job as the lead geologist in a start up company in alternative energy. She signed the NDA and was very interested but couldn’t leave her position at OXY that early because of stock vesting and her bonus, which she needed this year to pay off the last of her student loans and a HELOC they used to upgrade their home in Golden.

    After interviewing other geologists they decided to wait for her and so she starts her new job April 10th……………you might never guess but hydrogen is going to be the next big thing in alternative clean energy sources. I can’t disclose the name of the company or their extraction processes yet because the company is still in stealth mode, but her work in the oil industry directly impacts her ability to make this a ground breaking venture!

    Super proud of our Smarty Pants. One of her bosses told her that there wouldn’t be a Powder reserve of oil without her work so I think they might miss her at OXY!


    • Good for her! Maximizing potential and doing what’s interesting to her is great, the best of all worlds! Sorry about Walt’s healtj and hopefully the air in CO will improve his condition.

      Also, Happy Birthday!


      • LOL, thanks McWing I can always count on you for a heart felt response……………’s appreciated!

        Considering that she’s essentially been deaf since 15, I think she’s pretty impressive…………and actually all our kids are but she’s the one I think might be able to support me eventually………………LOL


        • Unless your used to a million dollar lifestyle I think she could already! Colorado is a beautiful state, love the area around the Springs as well as the four corners area. Only Arizona is prettier.


        • Yeah she’s making bank for sure. We still have some things (property/money) to pass on even though she might not need it…..LOL

          Here’s a link to the new company but you can’t tell much about it yet. They’re still kind of in stealth mode and not sharing too much info re extraction!

          You and I don’t agree on many things politically but I do appreciate your humanity if that makes sense! 😉


    • Congrats to her lmsinca. Glad she is able to use her education to work in a field that she enjoys and that compensates her well.


  5. Totally.

    Only Nazis would question the wisdom of the state.


    • Love that they went without a risk manager because of DEI quotas.


      • What is clear from financial disclosure documents is that the bank, which was founded in 1983, had not properly managed the risk on large investments it had made in recent years as it rapidly grew, experts agreed.

        From 2019 to 2021, SVB purchased tens of billions of dollars in mortgage backed securities, U.S. Treasury bonds and other relatively conservative investments at low interest rates, explained Aaron Klein, a financial expert at the Brookings Institution, a D.C.-based think tank. But the bank didn’t hedge those bets with other investments.

        As interest rates rose rapidly this past year, the value of those investments declined just as the bank’s customers were increasingly drawing down on their funds to make ends meet in a worsening economy, he and other experts said. The bank was forced to sell $21 billion securities at a nearly $2 billion loss.

        “Bottom line: The bank failed because of liquidity issues,” Chittenden wrote in an email. “The failure had nothing to do with the quality of any ‘woke’ bank’s loans.”

        Another crucial factor in the bank’s demise was its client base, according to Klein.

        The bank served mostly technology workers and venture capital-backed companies, including some of the industry’s best-known brands. But nearly all of them were considered uninsured depositors, meaning their accounts contained more than the $250,000 covered by the Federal Deposit Insurance Corporation in the event of a bank’s failure, he said.

        “Uninsured depositors are more likely to run, making the bank inherently less stable,” Klein wrote.


        • “Bottom line: The bank failed because of liquidity issues,” Chittenden wrote in an email. “The failure had nothing to do with the quality of any ‘woke’ bank’s loans.”

          But did it have something to do with the quality of their risk management? SBV spent 9 months, thru January, without a head of Risk Management. I’d be willing to bet that the reason they spent so long without one is because they had hiring quotas for women in senior positions and there aren’t that many qualified women available, so it took much longer than it should have.


        • I’d be curious to know why they, and not most other banks, had a liquidity issue?


        • The bank runs may have just started first with them due to issues in the tech industry. Just like the layoffs may have just started first there but may not be done.

          And I still find it ironic that they got screwed for buying “safe” Treasury bonds.


        • jnc:

          And I still find it ironic that they got screwed for buying “safe” Treasury bonds.

          They got screwed by duration, not credit. Had they bought short term treasuries or t-bills instead of long term bonds, they would have been fine. But they wanted to maximize yield and presumably thought rates wouldn’t go up. It was bad risk management.


        • Wow, Scott………..nice blaming it on the women! Most banks have women in at least some positions of power, some investments in diversity and even a trickle of investment in long term or even short term environmental start ups. This bank apparently didn’t anticipate the rise in interest rates and somehow thought they could out last the conditions that were apparent to all of us. Woke’ism’ is the scapegoat right now but honestly that’s pretty much bullshit IMO.


        • lms:

          Wow, Scott………..nice blaming it on the women!

          I didn’t blame women. I blamed woke hiring policies that left a crucial position empty for 9 months while they searched for a suitable woman instead of simply a suitable candidate of any sex.

          Woke’ism’ is the scapegoat right now but honestly that’s pretty much bullshit IMO.

          If I was woke, I would probably say that too.


        • Risk managers are not hard to find. Risk manager that check all of the hippest DEI identity boxes are though.


  6. I had no clue this was going on………………

    Over half of the people in America actually love Russia and love Russians and know that they’re being lied to,” Seagal said. “My father was pure Russian, and I was raised in a pure Russian household, because my mother was completely immersed in the Russian culture and she did not have parents. So I grew up with Russian culture.”

    The Michigan native continued, “I grew up loving Russia and loving all of what I learned about it from a very early age. And for me, I am one million percent Russophile and and one million percent Russian.”

    Seagal was named the Russian Foreign Ministry’s special representative for Russian-American humanitarian relations in 2018. The Order of Friendship medal this year was to celebrate Seagal’s “great contribution to the development of international cultural and humanitarian cooperation,” as Putin said.

    In 2020, Seagal recorded a birthday message for Putin, saying, “Today is President Putin’s birthday. I just think that we are now living in very, very trying times. He is one of the greatest world leaders and one the greatest presidents in the world. And I am really hoping and praying that he gets the support and the love and the respect that he needs. And that all the tribulations that are going on now will be over soon, and we will be living in a world of peace.”

    “For anyone to think that Vladimir Putin had anything to do with fixing the elections, or even that the Russians have that kind of technology, is stupid,” Seagal also said. “And this kind of propaganda is really a diversion…so that the people in the United States of America won’t really see what’s happening.”

    Seagal was previously banned from Ukraine and deemed a threat to national security


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