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Financial Sector Stress Continues… What Does it Mean for Investors??

As most will know, three banks-- including Silvergate Capital, Silicon Valley Bank (SVB) and Signature Bank --have recently shuttered. While this is certainly not good for the equity or bond holders in these organizations, officials have confirmed that depositors’ funds will all be insured….even above the FDIC $250,000 limit. This action, which was taken last week, certainly calmed the fears in the markets and may have reduced the contagion risk of many other banks who were experiencing a flood of withdrawal rates that could not be satisfied. However, while these actions seemed to give investors a temporary collective “sigh of relief”, markets still remain on edge.

Compounding the banking uncertainties (even after the SVB situation seemed to be under control), last week Credit Suisse’s (CS) stock came under pressure for fear that its collateral was insufficient, fueling the market’s general worry that the stability of the entire global banking/financial system may be a risk. Credit Suisse is Switzerland’s second-biggest bank and had already been struggling through a restructuring plan, company scandals and other negative issues resulting in poor performance. Nonetheless, it was another example of where the government had to step in…again. This time it was the Swiss National Bank that made a loan to Credit Suisse. It was a similar government bailout, but it is important to note that CS has been struggling to generate profits for a number of years and the issues that they had were more on their earnings, rather than the liquidity issues that brought down SVB and Signature Bank. [In hindsight, that loan maybe have just been made to buy time for the Suisse financial regulator, Finma, and the Swiss National Bank to secure a government-brokered takeover of Credit Suisse by UBS Group AG in a deal worth about $3.3B.]

In summary, while all these current banking crises are disconcerting, we continue to believe that we are NOT facing a similar issue as we experienced in 2008-2009. The main cause of that crisis (i.e., leveraged and securitized loans with defaulting borrowers) is very different from the current landscape. Most, if not all, U.S. domestic major banks appear to be much more well capitalized. Late last week, in a sign of trying to instill more confidence in the banking system, 11 of the largest financial institutions collectively deposited $30 billion into First Republic Bank. From what we currently know, this latest crisis appears to be caused by one bank’s (SVB) utterly gross mismanagement and the involvement of another two banks which were too heavily involved with crypto businesses. However, all this being said, we can’t rule out the possibility of further contagion. Remember, in the short term markets are driven by fear and greed and computerized trading that is very momentum driven.

So, what does this all mean for us and our investment and retirement plans? Should we react to all the panic in the media and on Wall Street? Please take 4 minutes to watch this clip from the very successful investor Ron Baron.

Ron Baron - CNBC Video Link 

To summarize his comments: Ron Baron, who has over 50 years of investing experience, emphasizes that the markets are always facing serious events or "dire" situations which create panic and investor uncertainty, yet the market continues to march forward, and, ultimately, upwards.

Similarly, we can consider the actions of another successful long-term investor, Warren Buffett. Do we think Buffett is influenced by the media and headlines this week into selling his stocks? Hardly….In fact, he bought more stocks this past week. In many of our writings we have spoken about an important and underrated concept called “yield on cost.” Yield on cost is the dividend return on the original cost of the investment. Buffett’s yield on cost on Coca Cola is over 50%; he is currently receiving dividend checks that return 50%+ off of his original investment. Did he achieve this by timing the markets and reacting to all the current news and headlines? Most definitely not.

Baron’s opening line says it all……”There is only bad news in the media and headlines.” The media is short-term focused, intent on maintaining daily "eyeballs;" it is highly unlikely that they will ever preach the importance of thinking LONG-TERM, ignoring day to day market volatility, and keeping emotions in check by sticking with a good long-term plan. This type of unexciting-- yet prudent!--advice does not promote ratings.

However, even though we are long-term investors, we must also be acutely cognizant of how our portfolios are positioned in this ever-changing market environment and use the volatility to find us new opportunities to invest in. Additionally, the exposure we have to alternative investments & high-quality bonds have been a ballast in the recent market volatility – this was not the case for bonds last year! Speaking of bonds, we are introducing a new idea in fixed income that pairs treasury bonds with options that we think gives us a good combination of high income and protection from an economic downturn. Just like our equity/option overlay strategies were significant contributors to our 2022 portfolios, we think this investment can perform the same role in our fixed income portfolios.

As always, we are here to field your questions about the markets, investing or anything else that may be on your mind.


NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.