Run on the Bank
There are large mark-to-market losses in bonds across the economy…even at the Fed
Succinct Summary: SVB failed last week. Before Wednesday, it was perceived as one of the highest-quality banks in the country. But in the course of one trading day, it effectively vaporized. The bank’s issue was that it grew deposits too quickly and improperly managed duration against its leverage. The bank didn’t fail because of credit risk, it failed because interest rates rose and depositors got spooked. Because rising rates were central to the failure, it will be interesting to see whether the Fed changes course. There are large mark-to-market losses in bonds across the economy…even at the Fed.
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Macro
On March 8, Silicon Valley Bank, the 16th largest bank in the US, tried to raise liquidity
“We have sold substantially all of our Available for Sale (AFS) securities portfolio with the intention of reinvesting the proceeds, and commenced an underwritten public offering, seeking to raise approximately $1.75 billion between common equity and mandatory convertible preferred shares…we will realize a one-time, post-tax earnings loss of approximately $1.8 billion in connection with the sale” - Silicon Valley Bank (SIVB 0.00%↑) CEO Greg Becker
By March 10, the bank was closed
“Silicon Valley Bank, Santa Clara, California, was closed today [March 10th]by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver” - The Federal Deposit Insurance Corporation
No one stayed calm
"For 40 years, we have helped investors, the world’s most innovative companies, and the people behind them achieve ambitious goals…My ask is to stay calm because that’s what is important. We have been long-term supporters of you — the last thing we need you to do is panic. We knew that would create a lot of noise which it has. But what we wanted to do was reposition…a low-yield asset to a high-yield asset. I know this is a strange call. But everyone talks…that creates an issue so I wanted to make sure we got in front of you” - Silicon Valley Bank (SIVB 0.00%↑) CEO Greg Becker
It was a classic bank run
“Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. The precipitous deposit withdrawal
has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.” - California Department of Financial Protection and Innovation Commissioner Clothilde V. Hewlett
Most client deposits were uninsured
“As of December 31, 2022, on a consolidated basis, we had total assets of $211.8 billion, total investment securities of $120.1 billion, total loans, amortized cost, of $74.3 billion, total deposits of $173.1 billion and total SVB Financial stockholders' equity of $16.0 billion…As of December 31, 2022, and December 31, 2021, the amount of estimated uninsured deposits in U.S. offices that exceed the FDIC insurance limit were $151.5 billion and $166.0 billion, respectively” - Silicon Valley Bank (SIVB 0.00%↑)
At first, the administration said no bailouts
"Well let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we're certainly not looking. And the reforms that have been put in place mean that we're not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs." - US Treasury Secretary Janet Yellen
But then changed its mind
“Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer….Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed” - Treasury, Federal Reserve, and FDIC Joint Statement
“This morning, the Government and the Bank of England facilitated a private sale of Silicon Valley Bank UK to HSBC. Deposits will be protected, with no taxpayer support I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise…” - UK Chancellor of the Exchequer Jeremy Hunt
Perhaps prompted by worries by SVP depositors and the contagion effect of a failure
“Signature Bank, New York, NY, was closed today [March 12th] by the New York State Department of Financial Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver” - The Federal Deposit Insurance Corporation
“We could have seen some of our most important companies wiped out and that would have been extremely dangerous” - UK Chancellor of the Exchequer Jeremy Hunt
“Silicon Valley Bank’s failure has a real risk of systemic contagion. Its collapse has already instilled fear among founders and management teams to look for safer havens for their remaining cash, which can trigger a bank run on every other smaller bank..30% of YC companies exposed through SVB can’t make payroll in the next 30 days.” - Y Combinator CEO Garry Tan
“Approximately $487 million is held at SVB, which represents approximately 26% of the Company’s cash and cash equivalents balance as of March 10, 2023….The Company’s deposits with SVB are largely uninsured" - Roblox (RBLX 0.00%↑)
There will probably be some knock-on effects
"Anytime something like this happens, we're always very focused on the knock-on effects. We called and spoke to a number of our portfolio companies both last night and this morning, and I think it's a little too early to assess, but obviously, there will be some flow-through effects on certain tech businesses given they're a big lender there as well as a whole lot of the cash." -
Portman Ridge Finance Corporation (PTMN 0.00%↑) CIO Patrick Schafer
“First Republic Bank…today [March 12th] said it has further enhanced and diversified its financial position through access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co. The additional borrowing capacity from the Federal Reserve continued access to funding through the Federal Home Loan Bank, and the ability to access additional financing through JPMorgan Chase & Co. increases, diversifies and further strengthens First Republic’s existing liquidity profile. The total available, unused liquidity to fund operations is now more than $70 billion” - First Republic Bank (FRC)
One effect may be that the Federal Reserve slows rate increases
"We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation…We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy." - US Federal Reserve Chair Jerome Powell
How will the Fed weigh these events against persistent inflation and strong labor markets?
"...the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time." - US Federal Reserve Chair Jerome Powell
“Total nonfarm payroll employment rose by 311,000 in February, and the unemployment rate edged up to 3.6%, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, retail trade, government, and health care. Employment declined in information and in transportation and warehousing.” - US Bureau of Labor Statistics
Anything is possible
"I think it's still possible, but I would, I look at possibilities. Feel possible. It's possible. I think a mild recession's possible. A harder recession's possible. I think there's a good chance that inflation will come down, but not enough. By the fourth quarter, the Fed may have, may actually have to do more" - JPMorgan (JPM 0.00%↑) CEO Jamie Dimon
“I think there's no question I'm in the camp of higher longer. I think that the chance of our having a soft landing here as we go through '23 into 2024 is meaningfully higher than I thought it was 6 months ago, but we've got a war in Europe. It's still very tough” - Goldman Sachs (GS 0.00%↑) CEO David Solomon
This week’s data (CPI) and events (resolution of the SVB fall) will be crucial
“If - and I stress that no decision has been made on this - but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes” - US Federal Reserve Chair Jerome Powell
International
Chinese travel picking up quickly
"We've seen a big pickup into the obvious places going into Hong Kong and Macau and so on, then into Southeast Asia, especially Thailand. Travel to Canada has picked up faster than in other parts of the world, I guess, because maybe airline slots have opened up more in Canada faster, and so there's more capacity coming online faster. We are very bullish on the Chinese travel recovery" - Visa (V 0.00%↑) CFO Vasant M. Prabhu
WhatsApp is integrated into business in Brazil
"General Motors in Brazil. They run a campaign and over 60% of their cars that are sold were started in WhatsApp conversations… I think there's a real interesting potential that might be the first time that I see Meta, a business model really starting in emerging markets and then backing back into the developed world. So that's an area that I'm definitely very focused on." - Meta Platforms (META 0.00%↑) COO Javier Olivan
Consumer
Consumers are still spending
"Consumer conference is dropping, but I think their pocketbook trump's confidence. They have a lot of money. They tend to spend it and they, and you see here, look at the travel in Miami and the building and the optimism. If you ask 'em how they're doing, it's very good" - JPMorgan (JPM 0.00%↑) CEO Jamie Dimon
February was stronger than January
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E-commerce bouncing back?
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Monetizing short-form video is taking time
“Monetization is early days. The feedback is positive. You're absolutely right, there's a gap to the traditional long-form, and we're working to close that gap, but it's still very, very early days." - Alphabet (GOOGL 0.00%↑) CFO Ruth Porat
"Reels is still sort of earlier in its ad load journey than more mature surfaces like Stories and Feeds… And we saw that it took years for Stories to catch up to Feed on Instagram in the United States. And we expect Reels may take also years and probably a little longer than Stories" - Meta Platforms (META 0.00%↑) CFO Susan Li
Technology
AI is real
"AI is real. This is not crypto. No, it's not crypto. This is a technology which is staggering…We have thousands of people involved, thousand involved in data machine learning, natural language processing. We have 200 people in AI research labs, but, and we're already used to do risk fraud marketing, prospecting, and it's the tip of the iceberg. To me, this is extraordinary." - JPMorgan (JPM 0.00%↑) CEO Jamie Dimon
There will be good uses and bad uses
“And the other thing to keep in. There's good use, but bad guy's gonna use it too. So it's a little bit of an arms race in how you have to use it to protect your company, protect your clients, protect that, et cetera. And we're fully engaged. And the other thing you have to keep about ai, you need to be in the cloud to use the compute power fundamentally that you need for AI. And so that's why the cloud digital AI, they're all kind of related that way." - JPMorgan (JPM 0.00%↑) CEO Jamie Dimon
Costs will continue to drop
"And we're continuing to just sort of really optimize these models. I think a lot of people were surprised last week when OpenAI lowered their prices by a factor of 10. That's partly because they found a way to lower the cost of inferencing correspondingly. And they said, hey, we can get a lot more revenue, open up a lot more opportunities when it's more effective. And that model that's cost-optimized didn't exist 30 days ago. So we're in still early innings" - Microsoft (MSFT 0.00%↑) EVP of Cloud + AI Scott Guthrie
AI is already replicating software engineers
"We're now seeing that developers using GitHub Copilot are 55% more productive with -- on tasks. And that's sort of measured by independent studies. And 40% of the code they're checking in is now AI generated and unmodified. And so if I talk to a CIO or to a CTO and sort of say, if I can give you 55% more developers overnight, would you take that? They're all looking for talent. They're all constrained in terms of the number of engineers they can hire. They're gladly going to pay for that" - Microsoft (MSFT 0.00%↑) EVP of Cloud + AI Scott Guthrie
There’s more demand for AI processing than there is available capacity
"There's actually more demand for AI processing than there is available capacity. So -- and we're the only ones, again, that can dynamically -- and by the way -- and we're short. We are expanding as fast as we can. It's really -- it's an exciting opportunity, but it's challenging when there's more demand than supply." - Oracle (ORCL 0.00%↑) CTO Lawrence Ellison
Google is planning a response to Microsoft's invitation to a dance
"...we're on the verge of launching a number of LLM-based products and services, you can think of it as a portfolio. And I'm not going to get ahead of those sitting here today, but we do very much look forward to continuing to unveil what we're doing there…look forward to sharing more in the next weeks to months." - Alphabet (GOOGL 0.00%↑) CFO Ruth Porat
Traditional IT spend has remained slow
"Late in Q2, we talked about a slowdown in the server business…that backdrop has persisted. It is the operative word, I would say, is just caution in the spending environment. We're seeing customers be very deliberate in their spending. IT budgets have held up reasonably well, maybe eaten in a little bit by inflation but held up reasonably well, but there's just a lot of deliberation, more approvals, all the types of things that you kind of see in a caution environment" - Dell Technologies (DELL 0.00%↑) Co-COO Anthony Charles Whitten
PC inventory channels still elevated
"In terms of especially on PC, the situation on channel. Channel is elevated in both sides. So we expect that the correction of channel is going to be impacting both businesses." - HP (HPQ 0.00%↑) CEO Enrique Lores
"Where we have the best view is in the kind of PC OEM space because we get somewhat detailed views of what the inventory looks like. And it has been burning. And actually, in the second quarter of last year, it actually -- we had a meaningful burn. And then the third and fourth quarters were more modest but definitely burning. This quarter, we expect a pretty meaningful burn. And the likelihood is that it continues to burn into the second quarter." - Intel (INTC 0.00%↑) CFO David Zinsner
Industrials and Transport
Supply chains are better but not fully healed
"As we shared on our last earnings call, we are seeing project delays resulting from external real estate and construction issues, as well as supply chain disruption for key equipment. We continue to expect to open about 100 stores over the next two years, but the timing of openings are expected to shift between fiscal 2023 and 2024 as we navigate these external challenges." - Ulta Beauty ( $ULTA) CFO Scott Settersten
“...with the supply chain being that it is, our actual cycle times are elongated relative to historical norms. We're at 166 days today versus a historical norm of 92. So we'll be seeking to actually carve time out of our cycle times. All of those things can influence that available closing universe for fiscal '23." - Pultegroup (PHM 0.00%↑) CFO Robert O’Shaughnessy
"I am pleased to report that for the fourth quarter and into Q1 of this year we are seeing further easing in supply chain constraints." - SmartRent (SMRT 0.00%↑) CEO Lucas Haldeman
Leisure travel demand remains robust
"Our preparations for the coming summer are also vitally important because we continue to see very high booking demand among our customers. For the first quarter of the year, we expect our yields to be around 20% above 2019 levels, thanks primarily to the demand for leisure travel. This trend is set to continue and even accelerate in the second quarter. Booking levels here are so high, especially for Easter and the weeks thereafter, that based on current bookings, we expect our second quarter yields to be even higher above 2019 levels than the ones of the first quarter." - Deutsche Lufthansa AG (DLAKF) CEO Carsten Spohr
"And there's a lot of pent-up demand. There's been capacity constraints in a lot of markets for travel. So travel hasn't been able to meet the level of demand. You see the prices have gone up a lot. So you're going into a situation where employment levels are still very high. Wage rates have been pretty good. The consumer for all intents and purposes seems to be doing fine." - Visa (V 0.00%↑) CFO Vasant Prabhu
Tesla reducing prices seems to have a big effect on demand
"One of the things we weren't sure about was the price elasticity of demand for Tesla. So like as we lower the price, how much does demand increase? And we found that even small changes in the price have a big effect on demand, very big. So that was a good thing to learn, yes." - Tesla (TSLA 0.00%↑) CEO Elon Musk
Materials & Energy
Oil rigs are at near capacity
"I don't think there's a structural change in the service company industry. We are seeing -- it's near capacity, right? Rigs are near capacity, sands are near capacity, lots of things… if we saw sustained high inflation, then, of course, that at some point in time, we could revise our CapEx guidance." - Chevron (CVX 0.00%↑) CFO Pierre Breber
Nuggets of Wisdom
SVB CEO had a last piece of Wisdom before the collapse: Succeeding in business is about the people
"It is all about the people. And I know it's an -- it's such an obvious answer, but it is about the people. It is about how they connect together, how they push each other, and how they challenge each other. And then if it doesn't work, you've got to be willing to make changes quickly." - Silicon Valley Bank (SIVB 0.00%↑) CEO Greg Becker