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| By Jon Markman |
Editor’s Note: Silicon Valley Bank’s failure was the second biggest in U.S. history. It was quickly followed by Signature Bank's shutdown, the nation's THIRD biggest bank collapse. Because you aren’t on the list to receive Weiss Ratings Daily, you missed Jon Markman’s timely way to play what’s coming next. Click here to change your fortune now. And read on to see that article for an idea you won’t see in Wall Street’s playbook.
For the first time in three years, bears are going to try to take advantage of a bank panic. This is what investors should do.
The S&P 500 skidded last week by 4.5% after a specialty West Coast bank imploded. Bears are talking about contagion, meaning the possibility that many more financial institutions will follow. However, the fallout is more nuanced than that.
Traders should consider shorting Roku (ROKU). Let me explain why …
Shares of SVB Financial Group collapsed on March 8, after executives announced a plan to raise $2 billion in new capital. Bloomberg reported that the firm incurred large losses after being forced to sell a large batch of fixed income securities.
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In 1972, members started writing in, asking about the safety of their savings and loan banks. Back then, there was no data available. Today, Weiss Ratings has decades’ worth of data PLUS a long history of warning against collapse. Today, S&L banks no longer exist. And while we have fewer institutions today, they are bigger. Many are also at risk of failing 2008-style. While the Silicon Valley Bank debacle is unique in that it largely serviced tech and venture capital outfits, it may not be the last to be taken over by regulators. Click here to look up your own financial institution for FREE. |
SVB operates in a niche market, servicing venture capital firms, startups and their employees. According to the corporate website, in 2021, nearly half of the healthcare and technology firms that issued public shares were customers.
To be fair, SVB’s business has been under pressure for a long time.
Shares peaked in November 2021 at $763 when the Federal Reserve abruptly began raising interest rates. However, it was the pace of increases that ruined the SVB business model.
An unprecedented eight increases have occurred since 2021, boosting the federal funds rate from zero to 4.75%. The Fed funds rate is the rate of interest charged to member banks for uncollateralized loans.
The Fed funds rate, last week’s weakness in the S&P 500 and the implosion of SVB are all related.
Fed Chair Jerome Powell shocked investors on Tuesday when he reversed a one-month-old position on the state of the domestic economy. In early February, Powell said signs of disinflation were evident, and investors rejoiced. He told Capitol Hill lawmakers last week that the Fed fund target rate would need to rise faster and further than previously anticipated, and that led to a collapse in stocks.
The message to VCs and bankers was grim.
Banks operate on trust. They take in deposits, and either lend those funds to borrowers at a higher interest rate or invest the money for safekeeping in government and other fixed income securities. Unfortunately, as rates have risen sharply since 2021, new loan generation has collapsed and fixed income investments have generated huge paper losses.
The SVB fixed income losses, coupled with the prospect of even more rate hikes per the Fed last week, sent VCs into panic, according to CNBC. VCs instructed their startup clients to remove funds. Within 48 hours, SVB was functionally insolvent.
Bears argue that the problems at SVB are rampant, and they are partially correct.
Most banks are carrying considerable unrealized losses given the unprecedented run-up in the Fed funds rate. If Powell is trying to break the economy, he’s getting close to that point.
However, most banks do not cater to tech startups with larger cash balances. They do not make it easy to withdraw extremely large balances. And most importantly, deposits at most banks are not in excess of coverage by the Federal Deposit Insurance Corporation. In fact, FDIC insures balances upward of $250,000.
That is going to be a big problem for Roku.
In a document filed Friday with the Securities and Exchange Commission, executives of the connected TV software maker noted that $487 million of its cash was held at SVB, about 26% of the firm’s cash reserves. The filing notes that these funds are uninsured and may not be recovered.
The losses would be another blow for shareholders who have been decimated by a drastic reset in business fortunes. Well-heeled competitors are ramping up connected TV platforms.
At a share price of $59.99, Roku stock trades at 2.6x sales. The company is currently not profitable, a situation that will not be helped by losing nearly half a billion dollars in the SVB debacle.
The SVB situation is bad, yet investors focused on the fallout in banking may be looking at the wrong sector. SVB is a specialized, niche operation. Its uninsured customers are likely to absorb the worst of its collapse.
Thanks for reading,
Jon D. Markman
