Morning Toast April 6th

$7 trillion US banking problem | Jobs start to cool.


The number of U.S. job openings dropped below 10 million for the first time since 2021, showing that perhaps the historically hot labour market is starting to cool off due to the Fed’s rate hikes. It’s still very much wait and see whether the Fed stops rate rises as we watch the effects of Oil prices on inflation.

Stock Spotlight

Silicon Valley Bank has been sold to First Citizens in a Government Backed Deal. 

This is the 11th time that First Citizens has bought another distressed bank. Their playbook seems to be a smart one. Buy high-value distressed assets at a basement price and get the government to back the deal to lower any risk of failure. Good news for depositors though as this deal maintains their protection and government guarantees. 

The deal for the bank, renamed Silicon Valley Bridge Bank after the F.D.I.C. seized it, included the purchase of about $72 billion in loans, at a discount of $16.5 billion, and the transfer of all the bank’s deposits, worth $56 billion. Roughly $90 billion in Silicon Valley Bank’s securities and other assets were not included in the sale, and remained in the F.D.I.C.’s control.

Silicon Valley Bank had roughly $175 billion in deposits before its collapse, an illustration of how extensive the withdrawals were before regulators seized it. A test for First Citizens is whether it can maintain relationships with the tech-heavy client base that Silicon Valley Bank cultivated.

“Perhaps the Silicon Valley V.C. dudes feel they’re too cool for a North Carolina bank,” wrote analysts at Autonomous Research, who said they had been fielding questions from investors about the logic of the deal.

Shares have popped since the announcement of the deal on Sunday.

Banking Sector Spotlight

Today, there is at least $7 trillion in uninsured bank deposits in America. This comes at a time when Toronto-Dominion Bank becomes the most shorted financial institution in the world. According to Bloomberg, investors have placed $3.7b in bearing bets against the bank.

The $7tn dollar value is roughly three times that of Apple’s market capitalization, or about equal to 30% of the U.S. GDP. Uninsured deposits are ones that exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation (FDIC), which was actually increased from $100,000 after the Global Financial Crisis. They account for roughly 40% of all bank deposits.

In the wake of the Silicon Valley Bank (SVB) fallout, we look at the 30 U.S. banks with the highest percentage of uninsured deposits, using data from S&P Global.

* Visual Capitalist

Sustainability News

Another month, another progressive policy announcement from the European Union, this time aimed at stamping out greenwashing by companies operating within its borders.

Consumers today face a barrage of eco-friendly messaging from the corporate world, as it hopes to cash in on increasing concern for the environment. At the same time, an absence of common rules for companies making voluntary green claims has left the door open to greenwashing, making it increasingly difficult to gauge the fact from fiction when it comes to sustainable business practice. This is not just a problem for the eco-conscious shopper, who must now sift through reams of "sustainable" products to find one with bona fide green credentials — it is a problem for businesses, too.

Companies making a genuine effort to reduce their environmental impacts, often at significant cost, are having to compete against others making the same claims but without putting in the work. This effectively negates the economic rewards for caring about the planet, particularly in industries with complex supply chains, where clearly communicating environmental impacts can be tricky.

Conversely, businesses caught practicing greenwashing, or even those who are perceived to be, can expect drops in customer satisfaction and serious financial repercussions.

The Green Claims Directive, proposed by the European Commission in late March, seeks to address this issue by establishing "common criteria against greenwashing and misleading environmental claims." The hope is that by homogenising the standards for claims made by businesses across the trading bloc, consumers will have "more clarity, stronger reassurance that when something is sold as green, it actually is green, and better quality information to choose environment-friendly products and services." 

Businesses will also benefit, "as those that make a genuine effort to improve the environmental sustainability of their products will be more easily recognised and rewarded by consumers … rather than face unfair competition."

Quote of the Day

“I clearly had to grow into it…I thought that the public focus on Apple was because of Steve [Jobs]. And so that was my mentality taking over the CEO role, particularly without him, after his death, I thought the fixation and so forth would go. And it didn’t.”—Tim Cook, CEO of Apple, in a GQ profile.

Douugh, did you know?

For the Bears, it’s already time to look to the future. 

Bank of America has identified three clear signals that indicate the shift from a Bear market to a new Bull market. So, grab your popcorn and let's dive in!

First up, we have earnings bottoming out. According to BofA, the year-over-year percent change in S&P 500 trailing earnings typically troughs in the month after the market finds support. But hold on to your hats - BofA predicts there's still more pain to come on the earnings front.

Next, we have the 10-month moving average. This one's a pure price metric, and the S&P 500 index price reliably crosses above its 10-month average four months after a big market low. The S&P 500 crossed above that threshold in January of this year, but we wouldn't be surprised to see it fall below again if economic conditions deteriorate.

Finally, we have the peak unemployment rate. The unemployment rate typically peaks four months after big lows. However, our economists expect a peak of 4.8% in the second quarter of 2024, up from 3.6% today. Looks like we'll need a wave of job layoffs for the unemployment rate to surge higher, and so far, that hasn't happened. Although based on the latest jobs data, there is the first hint of a slow down. 

Typically non professional investors and media wait for the official confirmation from the National Bureau of Economic Research (NBER) to declare a change in Markets - sometimes taking anywhere from 4 to 21 months to trigger after a recession has officially ended. So instead, BoA thinks these three reliable signals are a reliable way to avoid waiting four months after a market bottom, which usually means giving up about 15% of the early-stage rally, but that's a relatively small price to pay for increased confidence in positioning for the >300% returns until the next market peak.

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