Weekly rollup | March 13-19 2023
Stocks Mentioned: PacWest Bancorp (PACW), FRC, Marathon Digital Holdings (MARA), iShares MSCI Europe Financials ETF (EUFN), ING ADR (ING), MicroStrategy Incorporated (MSTR), iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI), Credit Suisse (CS), First Solar (FSLR), Las Vegas Sands Corp. (LVS), Wynn Resorts (WYNN) and MGM Resorts (MGM), Royal Carribean (RCL), Cameco (CCJ), Tesla (TSLA) and Coinbase (COIN), NVidia (NVDA), Invesco DB (UUP), SPDR S&P 500 ETF (SPY)
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March 13 2023
"Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law."
In other words, depositors at the conservative banks, which did not get wiped out, get to subsidize the VC funded risk takers when they go down. That's the law. You now get paid to reach for yield and bank at the riskiest of all banks. You'll always get your money back, guaranteed.
Joint Statement by the Department of the Treasury, Federal Reserve, and FDIC
The FDIC is now irrelevant except as a rubber stamp for the joint actions taken by the Fed and Treasury.
The Treasury has pitched in $25 billion to cover the Fed's losses from lending money willy-nilly to banking institutions on the verge of collapse.
Conservative banks have been incentivized to play around with depositors' money. Worst case scenario, they get a bonus before the bank gets taken over.
Depositors are incentivized to seek yield, which means capital goes from the prudent to the imprudent.
Unlimited QE is back. 50 bps rate hikes next FOMC? Forget about it. They don't even have the spine to resist the calls from a few tech billionaires seeking bailouts. And there will be calls from more billionaires if they hike 50 bps and cause other regional banks to fail. Like TARP, which was a bail-out disguised as a "funding program", now we've got BTFP. Expect more acronyms to be made up, to go with all the fresh money they will now print up.
The economy is now going to swing wildly between a deflationary depression and early stage hyperinflation. If you're betting on either outcome, you will get whipsawed to shreds. Nobody knows which way they'll go next. Yellen went from no bailout on Sunday morning to free money for all by 6 pm. No telling how Congress will react to this.
Our short positions should be able to withstand the volatility. Tech executives will continue to de-risk even though they got a bailout. Maybe they buy a bunker in Montana and stockpile gold, but they sure aren't going to add more tech shares to their portfolio. Tech investors will party on, but at a slightly lower level of risk than before. The bail out doesn't change the trauma these people went through. Also, now that all deposits are safe across all commercial banks in the US, there will be money flowing out of every other asset class and into bank deposits. This is not bullish for asset prices.
Stay the course.
As for copper, the situation changes. Copper is going to get caught up in the deflation-hyperinflation debate. I'm aware of this, and will update accordingly.
Bailout nation is long term bearish for the dollar and means the inflation trade makes a comeback. Which is bullish for gold, and gold and bitcoin have reacted accordingly. At the same time, the overnight fear driven buying of gold and bitcoin will now evaporate. As will the fear driven buying of treasuries. The trade now is to short gold, bitcoin and US treasuries. Bitcoin and treasuries are too volatile for me to recommend the trade (poor risk-reward), so short gold.
The 26th April expiry MGC is at 1887. Short at this level with a stop at 1936.
Bank stocks are getting pummelled pre-market. Does this mean the money printer goes brrr right away? Maybe. If so, I'll not think twice about getting max long all the shitcos and crappy altcoins.
PacWest Bancorp (PACW) first to get halted.
FRC next, down 65% and halted.
Still looking ugly.
"Marathon Digital Holdings (MARA) currently holds approximately $142 million cash deposits at Signature Bridge Bank, N.A. The Company has access to its funds for treasury management purposes and is paying all invoices in the normal course of business. Additionally, Marathon continues to hold over 11,000 bitcoin, which the Company believes provides it financial optionality that extends beyond the traditional banking system.
Separately, Marathon confirmed that it had no direct business relationship with Silicon Valley Bank".
One reason I expect the bitcoin/crypto rally to fizzle is that when faced with a liquidity crunch, investors and corporate treasurers first sell the most liquid asset. That way, you can book the least loss. Plus, it's easier. As long as new money struggles to enter the system (the closure of three crypto-friendly banks does that), crypto cannot rally like it logically should in response to a banking crisis.
Bought FRC, ZION and KEY. NOT a recommendation!
Buy iShares MSCI Europe Financials ETF (EUFN)
Financials in the US are still too risky for me to recommend, but EU banks which shouldn't have the same exposure as US banks are a proxy bet on central banks riding to the rescue of their banker friends. Bill Ackman has covered his KRE shorts and gone long, so the worst is probably over. Stop loss at $17.7 for a risk of under 4%.
Buy ING ADR (ING) with a stop loss at $11.72 for a risk of 5.6%
Buy MSTR 31 March '23 $220 Puts at $22.
Finally, some longs to neutralize the heavy short bias in the portfolio. Mean reversion on bank run contagion fear, and the resumption of the inflation driven downtrend will make both the long and short trades work. These are not hedges but trades which I believe have a chance of working on a standalone basis. Added to the list of current trade recommendations, it lowers the risk of holding onto all the trades.
March 14 2023
Explanation for yesterday's cryptic MSTR put trade recommendation.
Chart of US 2-Year Treasury Note Futures. Captures the fear that's in the market today.
The banking crisis appears to have passed. Which is terrible news for stocks since it means the Fed can go ahead and launch Fed Funds rate into orbit on a SpaceX satellite. At the very least, it means Powell isn't going to invite ridicule by pausing rate hikes. 25 bps appears to be the politically correct move for the Fed now. Unless today's CPI comes in really cold, then we can dance on the rooftops and scream with joy because it means The Pause is here. Today's going to be wilder than yesterday, if that's even possible.
CPI at 6%, with core CPI excluding food and energy at 5.5%. Core CPI rose on a month-on-month basis from 0.4% in Jan to 0.5% in Feb, the highest since Oct 2022.
"The food at home index rose 10.2 percent over the last 12 months. The index for cereals and bakery products rose 14.6 percent over the 12 months ending in February. The remaining major grocery store food groups posted increases ranging from 5.3 percent (fruits and vegetables) to 12.4 percent (other food at home).
The index for food away from home rose 8.4 percent over the last year. The index for full service meals rose 8.0 percent over the last 12 months, and the index for limited service meals rose 7.2 percent over the same period".
TLDR version: inflation is still scorching hot, although down from 6.4% in Jan to a mere 6%.
This puts pressure on the Fed to continue hiking, especially after Powell doubled down on hawkish rhetoric earlier this month.
Buy IAI at the open
Banking crisis seems to be past. But I don't want to recommend banks so this is a proxy trade.
On days like today, when it is easy to second guess your approach, take a look at this chart. The Fed is printing money to save the banks, but that money is only going to plug the hole in the banks' balance sheet, not make its way into the economy as new loans.
Bank reserves are still way below peak levels, reflecting a dwindling in savings and the flight to T-bills. QE was not inflationary in 2008 because the Fed was fighting deflation. As long as the Fed is only doing a mild QE to increase banks' liquidity metrics, the overall environment is still deflationary. This is not the time to get bullish.
But it would be time to get bullish if they pause rate hikes at the next meeting or hint at cuts or more outright QE. QE + 6% inflation + blanket coverage of $17.6 trillion in commercial bank deposits will change the environment from deflationary collapse to stagflation/hyperinflation in a heartbeat. The Fed is not dumb, they know this. Their best bet is to collapse the economy and eliminate inflation as quickly as possible so they can rescue the banks and save the Treasury from $1 trillion+ in annual interest payments. Like in 2008, they need to trigger a massive deflationary collapse so that their QE will not result in stagflation. I don't see them succeeding at this, but this is the path they are most likely to take.
Rallies are to be faded if I'm right about this. If I'm wrong, wait until the money printer really starts going brrr again and you can YOLO trade all you want to make up for lost time. But not now.
Put option volume chart. This is not a contrarian indicator. Note that the last few spikes were actually accompanied by subsequent down moves in the market, with the collapse in put volume late October last year coinciding with the market bottom.
March 15 2023
Oil finally appears to be breaking down from that frustrating range, right on time for Kevin to make the leap from pumping crypto to pumping gas.
Update IAI stop loss at $86.95 for a risk of 3.6%.
Kashyap's Mid-March 2023 Market Outlook
Credit Suisse (CS) is down 20% today, European banks are down hard (7.4%). The EUFN and ING trades should get stopped out today. Take the hit. Catching falling knives is a risky business. May work out fine if you endure the horrible drawdowns, but in the end all you'll have to show for it is breakeven (and a cracked egg).
European bank futures. I avoided the frying pan and jumped straight into the fire. This is driven by news that Credit Suisse will not be getting a liquidity injection from its top shareholder, Saudi National Bank. This is sending US regional banks tumbling again pre-open, although from much higher levels than seen on Monday.
March 16 2023
Stopped out on the gold short at $1936. It turned out, I was wrong on contagion risk. Spilled over into Europe, fear remains high in the US, and bonds are starting to act as if lower rates are coming soon, CPI be damned. But this is a fast changing situation so I'll stay the course until I get stopped out.
Signature Bank’s Prospective Buyers Must Agree to Give Up All Crypto Business: Reuters
Sell short First Solar (FSLR)
The company is unprofitable, trading at 3.7x book, 8.3x 2022 sales and 6.2x expected 2023 sales. Balance sheet is in good shape, so this is more of a valuation short. It appears as if there was massive short covering post earnings release. Short interest now is a mere 3.26%, so there should be no squeeze. And the broad solar ETF (TAN), of which FSLR is the biggest component, is below the 100 DMA. So the setup looks good. Stop at $221.44, which is slightly above the 52-week high.
Initial jobless claims dropped 9% week-on-week to 192,000, continuing claims rose slightly. Worse still for the Fed, housing starts jumped 10% last month while new permits shot up 14%. Their efforts to destroy the economy to bring inflation down have been met with continued economic resilience, while banking stocks are continuing to collapse. Regional bank stocks are down again pre-market.
ECB has to decide on a 50 bps hike today. Euro zone inflation was 8.5% in Feb vs 8.2% expected. The Swiss National Bank is already embarking on QE by lending money to Credit Suisse. Will the ECB follow their lead, or stick to the narrative of taming inflation? We'll know in another 34 mins. This will also offer a clue on which way the Fed will move, since these central bankers talk to each other and coordinate policies when possible.
The overall situation is still deflationary. It's tempting to go long here, frontrunning the money printer going brrr. But it's not worth the risk. Not the time to FOMO.
Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target.
European Central Bank - Monetary policy decisions
Short the casino stocks LVS, WYNN and MGM. Stops at:
LVS - $61.58
WYNN - $121.41
MGM - $47.32
Short Royal Carribean (RCL) with a stop loss at $67.
Short uranium miner/downstream play Cameco (CCJ) with stop at $29.87.
Short Tesla (TSLA) with stop at $217.44 and Coinbase (COIN) with stop at $71.84. Update stop on NVidia (NVDA) to $273.
ECB raised the odds of a Fed hike, which will bring in a deflationary depression. I picked shorts in diverse sectors for the correlation benefit.
The market is celebrating the abatement of the banking crisis, all the while forgetting that this opens the door for the Fed to hike 50 bps, following in the ECB's footsteps. This is the level at which the Nasdaq rally should end if I'm right on a deflationary collapse. A move above 12,800 will make me re-think my positioning.
WSJ News Exclusive | First Republic Bank Executives Sold $12 Million in Stock in Months Before Crash
March 17 2023
The Fed printed $297 billion last week, on top of guaranteeing $17.6 trillion in commercial bank deposits. Another week of printing and the Fed's balance sheet will be back to April 2022 levels. They printed $3 trillion from Feb-June 2020 citing covid, so the current run rate of $1.2 trillion a month is actually higher than that period. JP Morgan says the Fed could print as much as $2 trillion soon.
A banking crisis is deflationary, but printing money and handing it out to tech billionaires and VCs to invest in startups is not. As first recipients of the newly printed money, they get to buy assets at a 20-30% discount from last year. They get to throw freshly printed money at the labor market and hire quality engineers laid off from the likes of Meta. Not very consequential for the broader economy if the Fed stops here. The 4.75% Fed Funds rate will continue draining liquidity from the system.
But the market is forward looking. It anticipates $1.2 trillion a month in QE, as per the current run rate. It anticipates Powell sending the Fed Funds to zero in a single meeting. It anticipates yield curve control. It anticipates inflation quickly going back to the 40-year high of 9.1%.
Some Fed commentators/apologists are claiming that this $297 billion is not money printing, because it was a "loan" to commercial banks and not dropped out of a helicopter in Manhattan. Maybe they're right, and the price of your morning cup of coffee stays the same but Blackstone buys your house using freshly printed money.
The knee-jerk reaction is to equate this situation to 2020 and start buying Dogecoin. $3 trillion over 4 months back then, $1.2 trillion a month run rate now. Asset prices could explode given all the money sitting on the sidelines will be competing with the Fed's money printer to buy claims on anything of real value, like dog money. I'm temped to throw in the towel on expecting a deflationary collapse and just go with the stagflation -> hyperinflation environment that's getting set up.
But not yet. Yellen is facing a lot of pushback for bailing out the VCs. Powell will be excoriated by the press and more importantly, his colleagues, if he does not hike 25 or 50 bps following in the ECB's footsteps. So maybe they continue to print money, but send borrowing costs higher for anyone who does not have access to the Fed's discount window. Only the banks get to put 60 cents worth of bonds and receive 100 cents on the dollar from the Fed. And they may only lend that money to Blackstone so it can meet redemptions and buy up all the single family housing that's on the market.
The next bubble - IF money printer goes brrr - will be different. Wait until next week. Until then, stay short but honor the stops.
To sum up, a banking crisis is deflationary, but money printing is inflationary. Money printing at the rate of $1.2 trillion a month is hyperinflationary. The economy could go in completely different directions based on what the Fed is doing now and what they do next. Wait for the evidence before FOMOing, and stick to the plan.
Marathon Digital (MARA) reported a 2022 net loss of $686.74 million (market cap: $876.32 million), of which $332.9 million was mining equipment impairment. The company had an operating loss of $490.65 million excluding digital asset impairments. Stay short, unless the stock tanks today in which case we cover.
I'm moving my cash reserves out of dollars and into euros and yen. After no bail out to "not a bail out" bailout, to hawkish rhetoric followed by money printing, to now doubts about upcoming interest rate hikes, the dollar is not a stable store of value. At yesterday's Senate Finance Committee, Yellen encouraged savers to move money out of community banks and into their favored financial institutions if they want the same treatment as the bailed out billionaires and VCs. I was checking the four banking collapses in 2020 - West Virginia, Kansas, Nebraska and Florida - and they did not receive any preferred treatment because they did not have billionaires lobbying on their behalf or rooting for them on social media.
The ad hoc approach taken by the Treasury and Fed is literally playing with people's life savings. I don't see how the dollar regains trust after this fiasco.
Coinbase (COIN) should get stopped out today. One reason for shorting across the board is to make sure I can take the hits and let the winners pay for the rest.
What a difference a week makes!
When I said the overnight fear driven buying of safe havens would evaporate, I did not know that:
This was the beginning of the panic in financials
That the panic would spread over to the EU and Switzerland, causing a run on Credit Suisse and hitting EU banks just as hard
The supposed $25 billion cost of the BTFP would morph into a $297 billion 1-week stealth QE by the Fed
That JP Morgan would "save" First Republic but at the cost of $2 trillion in expected payback from continued QE
That the Treasury Secretary would misuse the "systemic risk" exemption and choose favorites among the banks, leading to a deposit run from unfavored community banks
Wasn't it Kissinger who said that when it comes to important things, of course you have to lie? Powell lied quite well when he sounded hawkish during his March 7 and 8 visits to Capitol Hill. Little did I suspect how the week would transpire.
So, I got this wrong. What's puzzling is that copper and oil are pricing in a deflationary depression, while equities are rallying like unlimited QE is here. Long gold may seem obvious now, but gold topped out at the start of the Russia-Ukraine war, at the peak of the covid money printing in August 2020, and at the height of the Eurozone crisis in 2011. It has not always behaved as a safehaven should. Nor did I suspect that the fear in markets was only at the early stages on Monday morning pre-open. So mea culpa. At least I didn't recommend shorting treasuries or bitcoin.
I'm not buying gold ahead of the Fed's decision. I'm still waiting to see if they stick to their stance on inducing a deflationary depression to cure inflation.
March 18 2023
First known casualty of the rate fiasco this week. Powell said it's safe to short near term rates, then blew up the funds who listened to him. Last year, he blew up equity longs who refused to believe him when he said QT and rate hikes to infinity. The central bankers have too much power.
Levinson’s Graticule Macro Hedge Fund to Shutter After Losses
As of Q3 2022, total equity capital in the banking system was $2.16 trillion. And they were sitting on over $600 billion of unrealized losses by year end. This is how you get deflationary collapses going.
The MSTR puts took a hit this week. Everyone says the $SI loan is not callable, that this is not a risk. Had you asked me a week ago whether the FDIC would abandon its charter and ding conservative banks to bail out Silicon Valley, I would have scoffed. Do investors trust the FDIC to treat a crypto related loan with kid gloves after they took down Silvergate and Signature Bank's 24x7 crypto on/off ramps and are unofficially applying pressure on banks to cut ties to crypto businesses? If that loan gets called, legal or not, MSTR will be in trouble.
Let's say Coinbase, as the custodian, gets a call from the FDIC saying the loan needs to be closed out. With the implied threat that failing to comply will mean more trouble with the SEC and trouble maintaining banking relationships. Do they side with MSTR? I don't think so. If MSTR makes it through this month without any trouble, that loan is likely safe. I'll not re-attempt this trade. For now, stick with it. Risk happens fast in this market.
Some metrics to help you interpret my performance. As of the previous week, I closed 108 trades, of which 54 were winners and 54 were losers. That's a 50% win rate. I'd shoot for 60% but 50% is not terrible given how horrible the market has been. On the winning trades, the average gain was 23.8%. The losing trades lost 17.3%. The overall gain from all trades is net positive, at 3.25%. Not great, but nearly every newsletter I follow excluding the energy and shipping guys had it worse. Plus, we're sitting on some fat 100%+ unrealized gains on the tech stock puts and 10-15% gains on the copper mining shorts.
March 19 2023
Investors added $7.3 Billion of funds into the SPDR S&P 500 ETF SPY last Thursday. That's the biggest inflow since November 2020 and the 6th largest in the last decade.
Money printer going brrr. But not enough to cause hyperinflation yet in my opinion. The value of money is predicated on others accepting it in future, so if inflation expectations soar in response to this money printing, that would be sufficient to cause the dollar to lose value rapidly, which feeds on itself to become a self-fulfilling prophecy. Early days, but we can veer from deflationary depression to hyperinflation based on how the market perceives this. So far, it seems like the majority think TARP 2.0 is not inflationary since the money is being given out selectively to the worst financial institutions, who will in turn give it to their worst customers, who will in turn use it to make the worst kind of financial decisions which started off this crisis in the first place. Rewarding terrible behaviour with more money to continue doing more of the same isn't inflationary, according to FinTwit.
That may be true, but if every arsonist is given a brand new house as a reward for burning the old one down, you're creating incentives for arson. And the firefighters (holders of USD as a reserve in this analogy) are going to quit their jobs in disgust.
The biggest shock came as CTAs were forced to rapidly deleverage legacy positions on short-term interest rates and eurodollar futures. They covered around $127.7bn in shorts amid expectations that Silicon Valley Bank’s collapse will force the Federal Reserve to capitulate on tightening. Read the full Financial Times Article here.
Financial Times Article on Tiger Global Management