The stock market, as measured by the S&P 500 Index SPX, has struggled to maintain the rally that began in mid-March, and now we are getting new sell signals from some of our internal indicators.
SPX was turned back by resistance near 4200 for the third time since last August. That is an extremely strong resistance area now. Moreover, there is further resistance at 4300. On the downside for SPX, there is technically support at 3970, where the small gaps exist on the SPX chart. A close below 3950 would be extremely bearish and…
David Rosenberg honestly doesn’t want to be bearish on stocks or bash the Federal Reserve. The veteran market strategist will get no satisfaction if he’s right about Americans having to slog through recession and consequently endure deflation, job losses and a wallop to the stock market.
“As I play the role of economic detective, I can see the smoking gun,” says Rosenberg, a former chief North American economist at Merrill Lynch and now president of Toronto-based Rosenberg Research.
When is it a good time to buy stocks? Some investors would say the current negativity dominating the financial media means you are better off sitting on the sidelines. Others would say it is always a good time to buy stocks, provided you can get them for good prices.
Count John Buckingham, editor of the Prudent Speculator, in the latter camp. He is a value investor with decades of experience. During an interview, he emphasized the importance of remaining disciplined through all market conditions. While he favors the value…
The SVB Private logo is displayed outside of a Silicon Valley Bank branch in Santa Monica, California on March 20, 2023.
Patrick T. Fallon/AFP via Getty Images
About the author: Christopher Smart is chief global strategist and head of the Barings Investment Institute and is a former senior economic policy official at the U.S. Treasury and the White House.
Remember your reaction the first time someone explained how banks work?
“Wait, what?”
The magic of maturity transformation is at the heart of modern economic progress. And yet, the sleight of hand that accepts a dollar in deposits and lends it out many times over is also at the heart of every financial crisis.
As the clouds lift on last month’s market turmoil, bank stock prices still reflect fears of worse to come. But better financial conditions overall suggest that fears of global cascading defaults look misplaced. We’ll see more accidents, but no systemic multi-vehicle pile-ups.
The risks are clear. Just as the changing climate has raised the risks of severe turbulence for airline passengers, so have rising interest rates created the conditions for more mismatches in assets and liabilities. Nothing surprising here after decades of declining rates drove investors to reach for yield in long-duration assets.
These risks are distinct from previous crises. During the 1997 Asian crisis, for example, current account deficits and external borrowing exposed banks to exchange-rate and funding risks. And the global financial crisis in 2008 was more of a classic case of underpriced loans going bad as U.S. housing losses engulfed securitized mortgage markets and upended wobbly financial institutions.
Today’s risks come mainly from the stress of mismatches in asset and liability liquidity. It’s precisely what you wondered about in that first introduction to fractional reserve banking. But it’s now aggravated by social media and technology that makes it easier than ever to pull your deposits without crowding around the teller counter to speak to Jimmy Stewart.
This means lots of balance sheets that will be forced to make painful and costly adjustments if they are forced to mark down even very safe holdings like government bonds to current market valuations. While many Monday-morning quarterbacks denounced the managers of Silicon Valley Bank for not hedging interest rate exposure, last year only 6% of aggregate U.S. bank assets were hedged with interest rate swaps, according to a recent study.
Meanwhile, U.S. regional banks look especially exposed to commercial real estate, which may take a long time to reprice as managers and employees radically reassess their office needs. Stress in venture capital and technology sectors will aggravate the pain.
The International Monetary Fund has also been taking a closer look at nonbank financial institutions, the so-called shadow banks that have grown from 40% to 50% of global financial assets since 2008. While asset managers and insurance companies can sometimes calm market turmoil by offering financing when traditional banks pull back, the IMF worries about the accumulation of leverage, hidden pockets of illiquidity, and unexpected spillovers.
Risks from these strains mount every day that interest rates notch higher, as they are likely to do in the months ahead as the Federal Reserve and the European Central Bank wage their final battle against inflation. Net interest margins will contract as banks pay higher interest on deposits and loan losses will start to accumulate.
But herein lies some comfort that the bumps ahead should be manageable. If rate cuts are unlikely before price pressures wane decisively, then we’re closer to the end of the tightening cycle than the beginning. Risk appetite will get a significant boost as markets become convinced that the next rate move is down.
Second, the largest banks in the U.S. and Europe still have large cushions of capital and ample pools of liquidity to see them through any further turmoil. If anything, America’s financial giants benefited from large inflows from depositors at smaller regional banks. European banks have little exposure to commercial real estate and boast nonperforming loans near record lows.
Finally, last month’s bank failures may have been less of a surprise than the rapid and vigorous response by regulators. No one had ever seen a deposit run as rapid as the $142 billion that would have evaporated from the balance sheet of Silicon Valley bank had the FDIC not intervened. And intervene it did.
Perhaps the most reassuring part of the recent crisis was the Fed’s timely announcement to backstop all deposits at failed banks and offer others funding against collateral at par value. There are plenty of questions around whether oversight should have been tighter or whether broad backstops encourage risky behavior. But in assessing the next risks to the economy, such measures go a long way to eliminating the great duration mismatch—at least for banks.
Naturally, there are no guarantees against future calamity. A system that allows lending out the same dollar again and again will unravel collapse whenever confidence starts to wobble. But the end of the tightening cycle, the resilience of the largest financial institutions, and the responsiveness of regulators should keep financial accidents isolated. And the magic of maturity transformation will power the next recovery when it comes.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
During a period of high interest rates, it might be more difficult to impress investors with dividend stocks. But the stocks can have an important advantage over the long term. The dividend payouts can increase over the years, helping to push share prices higher over time.
When considering stocks for dividend income, yield shouldn’t be the only thing you consider. If a stock’s price has tumbled because investors are worried about the company’s business prospects, the dividend yield might be very high. A double-digit yield might mean investors expect to see a cut to the dividend soon.
There are many ways to look at companies’ expected ability to maintain or raise their dividend payouts. But one can also take a simple approach to begin researching stock choices.
For investors who would rather aim for long-term growth to go along with dividend income, or take a relatively conservative approach to growth while reinvesting dividends, a screen of stocks in the S&P 500 SPX, +0.33%
produces only 10 stocks with dividend yields of 4.5% or higher with majority “buy” or equivalent ratings among analysts polled by FactSet. Here they are, sorted by dividend yield:
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The dividend yields for this group of 10 companies are based on current annual regular payout rates, with all paying quarterly except for Realty Income Corp. O, +1.30%,
which pays monthly.
These two oil and natural gas producers would have passed the above screen based on their most recent dividend payments and analysts’ sentiment, however, they pay a combined fixed-plus-variable dividend every quarter, with the fixed portion relatively low:
Shares of Pioneer Natural Resources Co. PXD, -0.77%
closed at $230 on April 14. Among analysts polled by FactSet, 59% rate the stock a “buy” or the equivalent, and the consensus price target is $257.42. The company pays a fixed quarterly dividend of $1.10 a share, which would make for a dividend yield of only 1.91%. However, the most recent variable quarterly dividend was $4.48 a share, for a combined quarterly dividend of $5.58, which would translate to an annualized dividend yield of 9.70%. The consensus estimate for dividends in 2025 is $4.63 — the analysts are only estimating the fixed portion of the dividend. Pioneer has held preliminary merger discussions with Exxon Corp. XOM, -1.16%,
according to a Wall Street Journal report.
Devon Energy Corp.’s DVN, -0.72%
stock closed at $55.70 on April 14. The shares are rated “buy” or the equivalent by 55% of analysts and the consensus price target is $67.66. The fixed portion of Devon’s quarterly dividend is 20 cents a share, for an annualized dividend yield of 1.44%. The variable portion of the most recent quarterly dividend was 69 cents a share. The total payout of 89 cents would make for an annual dividend yield of 6.39%. Analysts expect the fixed portion of annual dividends to total $3.61 in 2025, according to FactSet.
After a long period of underperformance when compared with the U.S. equity market, stocks in other countries are holding their own this year. One way to lower your overall risk with real diversification is to add exposure to an active international management style that doesn’t mirror a broad stock index.
One example is the $2.7 billion Columbia Overseas Value Fund COSZX, which is rated four stars out of five by Morningstar in its Foreign Large Value category. Fred Copper and Daisuke Nomoto co-manage the fund and described…
The deep uncertainty that the COVID pandemic created in the workforce hasn’t waned. U.S. workers are struggling with inflation, burnout, and fresh waves of layoffs. This comes as people expect more from employers — more leadership, more urgency, more action, and better jobs.
The public’s perspective is clear and consistent: companies need to prioritize their employees. In today’s unstable economic climate, worker wages and treatment are more important to Americans than ever.
When it comes to creating U.S. jobs with strong wages, good benefits, safe environments and opportunities for upward mobility, a handful of companies lead the pack.
Bank of America BAC,
NVIDIA NVDA
and Microsoft MSFT
are the top-three companies in JUST Capital’s 2023 rankings of America’s most JUST companies. They all share one crucial thing in common — a clear commitment to addressing worker issues and investing in employees.
Since 2018, JUST Capital’s rankings have provided a snapshot of how U.S. companies are measuring up to the public’s priorities, as determined through an annual survey to identify issues that define principled business behavior. Companies that are just provide a clear benefit for investors. For example, If an investor purchased an index tracking the JUST 100 companies at its March 2019 inception, the index would have generated 13.3% in excess return versus the Russell 1000 as of December 2022.
Worker issues have risen to the forefront of Americans’ vision for what is a just business. Paying a fair and living wage, supporting workforce advancement, protecting worker health and safety, and providing benefits and work-life balance are top priorities for the public. Notably, regardless of demographic differences including political affiliation, Americans agree that companies should do more to address worker needs.
What makes a great company?
Bank of Americademonstrates strong leadership on the top priority — paying a fair, living wage – by raising its minimum wage to $22 per hour, a key step in its pledge to offer a $25 starting wage by 2025. In addition, employees receive an extensive benefit package, including 16 weeks of paid parental leave for primary- and secondary caregivers, and career development opportunities through tuition assistance and professional training.
NVIDIA works to ensure equal pay for equal work, performing detailed pay equity analyses, and is one of only a few companies to disclose pay-analysis results separated by racial and ethnic categories. Like Bank of America, NVIDIA is one of 10% of Russell 1000 RUI
companies that offer at least 12 weeks of paid parental leave for both caregivers, providing 22 weeks of paid leave to primary caregivers.
Microsoft offers at least 12 weeks of parental leave for both caregivers, in addition many other generous paid-time-off benefits, including 15 days of paid vacation and an additional 10 days of paid sick leave for every worker — a policy still rare for many companies. Additionally, Microsoft discloses the results of its pay-equity analyses, going above and beyond other companies by disaggregating pay ratios for specific racial and ethnic categories — including Black, Asian and Latinx — all of whom are paid on par with their white counterparts.
“ When companies ensure the economic security, advancement, equity and safety of their workforces, employees are more engaged and productive. ”
These efforts provide tangible benefits to employees, but prioritizing workers offers much more to companies than just an assurance of moral good. When companies ensure the economic security, advancement, equity, and safety of their workforces employees are more engaged and productive, strengthening their companies’ business in turn.
Americans expect the private sector to better support employees. Effective business leadership today puts workers at the center of an organization’s strategy. When businesses take this approach, we get much closer to an economy that works for all Americans.
Alison Omens is chief strategy officer at JUST Capital.
The U.S. economy added 236,000 jobs in March, just shy of the 238,000 forecast by economists polled by the Wall Street Journal. The unemployment rate declined to 3.5% in March from 3.6% in February.
The latest data was calculated before the collapse of Silicon Valley Bank and Signature Bank last month, an event that…
April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
Do you know the difference between a stock and a bond, or a mutual fund and an exchange-traded fund? MarketWatch put together a meat and potatoes — although that’s always relative — quiz for our savvy readers. We’ve stuck to some familiar topics — taxes, stocks, interest rates, savings and inflation. There are 10 questions — with one bonus question thrown in for good measure.
You don’t know what you don’t know until you get an incorrect answer in a financial literacy quiz. Some of the questions are tricky, but we hope they are fun and that — most importantly — readers learn something new. Financial literacy helps us to plan for the future, gives us peace of mind and brings more understanding and less fear about the complex world of investing and retirement.
Our aim is to raise awareness of Financial Literacy Month. If you get 10/10, including the bonus question, buy yourself (and a friend) a popsicle. If you didn’t answer all the questions correctly, buy yourself a popsicle anyway. We, at MarketWatch, aim to democratize and demystify financial news, and make this sometimes intimidating subject as accessible as possible.
If you found it useful and/or entertaining, share it with a friend.
–Quentin Fottrell
Question 1: What is the difference between a tax deduction and a tax credit?
(a) A tax deduction reduces your income taxes directly. A tax credit reduces your taxable income.
(b) A tax deduction reduces your taxable income. A tax credit reduces your income taxes directly.
(c) Both reduce your income taxes directly.
Question 2: Which way do bond prices move when interest rates rise?
(a) Bond-market prices fall as interest rates rise. Bond prices rise when interest rates decline.
(b) Bond-market prices rise as interest rates rise. Bond prices fall when interest rates decline.
(c) Bond-market prices fall as interest rates rise, but bond prices also fall when interest rates decline.
Question 3: What has been the average annual total return, with dividends reinvested, for the S&P 500 over the past 30 years?
(a) 9.7%, according to FactSet.
(b) 3%, according to FactSet.
(c) 6.5%, according to FactSet.
Question 4: What is compound interest and how does it work?
(a) Compound interest reflects the linear gain that comes from all the reinvested interest of your savings and investments, which allows your initial investment/deposit to gain value regardless of the amount of interest you pay.
(b) Compound interest reflects the exponential gain that comes from all the reinvested interest of your savings and investments, which allows your initial investment/deposit and the additional interest to increase in value.
(c) Compound interest reflects the amount of interest you pay every month on a loan, and the total amount of interest you have paid over the lifetime of that loan.
Question 5: What is APR and how is it different from a regular interest rate?
(a) APR is the annual interest on a loan calculated on the initial loan, including additional costs and fees, but not on the accumulated interest incurred on the loan.
(b) APR is the annual interest on a loan calculated on the initial loan and the accumulated interest over the first year.
(c) APR is the annual interest on a loan calculated on the initial loan, including additional costs and fees, and the accumulated interest over the lifetime of the loan loan.
Question 6: What percentage of your income should you spend on rent?
(a) Most real-estate experts say you should spend no more than 20% of your income on housing costs, which is considered to be a tipping point for becoming “cost-burdened.”
(b) Most real-estate experts say you should spend no more than 50% of your income on housing costs, which is considered to be a tipping point for becoming “cost-burdened.”
(c) Most real-estate experts say you should spend no more than 30% of your income on housing costs, which is considered to be a tipping point for becoming “cost-burdened.”
Question 7: What’s an ETF?
(a) ETFs, or Exchange-Traded Funds, are baskets of investments — stocks, bonds, or commodities — that investors can buy throughout the trading day like stocks.
(b) ETFs, or Exchange-Traded Funds, are baskets of investments — stocks, bonds, or commodities — that investors can only buy at the end of the trading day.
(c) ETFs, or Exchange-Traded Funds, are baskets of investments — stocks, bonds, or commodities — that investors can only buy during or at the end of the trading day.
Question 8: What is the difference between a stock and a bond?
(a) A stock is a temporary investment in a company, while a bond is issued by a company to reward shareholders.
(b) A stock is a share in the ownership of a company, while a bond is issued by a company to finance a loan.
(c) A stock is a share in the ownership of a company, while a bond is issued by a company to finance the stock.
Question 9: If you were born in 1960 or later, at what age can you receive your full Social Security in the U.S.? Bonus question: At what age can you receive your maximum Social Security benefit?
(a) Full retirement age in the U.S. is 65 for those born in 1960 and after. While you can start collecting your Social Security retirement benefits as early as 62, your benefits are permanently reduced. Your Social Security benefits max out at age 70. By delaying until 70, your benefit is 76% higher than if you had claimed at the earliest possible age (62).
(b) Full retirement age in the U.S. is 65 for those born in 1960 and after. While you can start collecting your Social Security retirement benefits as early as 62, your benefits are permanently reduced. Your Social Security benefits max out at age 67. By delaying until 67, your benefit is 76% higher than if you had claimed at the earliest possible age (62).
(c) Full retirement age in the U.S. is 67 for those born in 1960 and after. While you can start collecting your Social Security retirement benefits as early as 62, your benefits are permanently reduced by a small percentage each month until you reach 67. Your Social Security benefits max out at age 70. By delaying until 70, your benefit is 76% higher than if you had claimed at the earliest possible age (62).
Question 10: What is the Federal Reserve’s desired rate of inflation?
(a) 2%
(b) 3%
(c) 2.5%
Bonus question! What is considered a good credit score?
(a) 560
(b) 680
(c) 800
If you get 10/10, including the bonus question, buy yourself a popsicle.
Getty Images/iStockphoto
Answer 1:
(b) A tax deduction reduces your taxable income. A tax credit reduces your income taxes directly.
Answer 2:
(a) Bond-market prices fall as interest rates rise. Bond prices rise when interest rates decline.
Answer 3:
(a) 9.7%, according to FactSet.
Answer 4:
(b) Compound interest reflects the exponential gain that comes from all the reinvested interest of your savings and investments, which allows your initial investment/deposit and the additional interest to increase in value.
Answer 5:
(c) APR is the annual interest on a loan calculated on the initial loan, including additional costs and fees, and the accumulated interest over the lifetime of the loan.
Answer 6:
(c) Most real-estate experts say you should spend no more than 30% of your income on housing, which is considered to be a tipping point for becoming “cost-burdened.”
Answer 7:
(a) ETFs are Exchange-Traded Funds. These are baskets of investments — stocks, bonds, or commodities — that investors can buy or sell throughout the trading day.
Answer 8:
(b) A stock is a share in the ownership of a company, while a bond is issued by a company to finance a loan.
Answer 9:
(c) Full retirement age in the U.S. is 67 for those born in 1960 and after. While you can start collecting your Social Security retirement benefits as early as 62, your benefits are permanently reduced. Your Social Security benefits max out at age 70. By delaying until 70, your benefit is 76% higher than if you had claimed at the earliest possible age (62).
Answer 10:
(a) 2%
Answer for bonus question!
(b) 680. Although credit scores vary depending on the model, according to Experian, credit scores between 580 and 669 are considered “fair,” scores between 670 and 739 are regarded as “good”; 740 to 799 are considered “very good”; and scores of 800 and above are considered “excellent.”
If you invest in dividend stocks, you are probably looking for long-term growth to go with the income. Otherwise you might be content to hold one-month U.S. Treasury bills, which yield 4.5% or park your money in an online savings account for a yield close to 4%.
Below is screen of stocks with current dividend yields ranging from 4.14% to 8.46%. What sets these apart from other stocks with high dividend yields is that their payout increases are expected to accelerate in 2023 and 2024 from those in 2022.
On Tuesday, S&P Dow Jones Indices said in a press release that it expected dividend payments by publicly traded U.S. companies to continue to hit record levels in 2023. But Howard Silverblatt, a senior index analyst with the firm, said that the pace of dividend increases in the first quarter had slowed and that he expected this year’s increases to be “at half the pace of the double-digit 2022 growth.”
Silverblatt also said current events in the banking industry were “expected to negatively impact future spending from both consumers and companies, which in turn may curtail corporate dividend growth.”
For many banks, there’s another big item on the table. A focus on share buybacks in recent years is very likely to end — this is a use of cash that can raise earnings per share if the share count is reduced, but there can be consequences, especially after a year of rising interest rates that pushed down the market value of banks’ investments in bonds.
In a note to clients on March 16, Dick Bove, a senior research analyst with Odeon Capital, predicted that stock repurchases in the banking industry would be “meaningfully cut back if not flat out eliminated.” He made three general points about buybacks in the banking industry:
Buybacks remove working capital that would otherwise provide returns to a bank.
Buybacks mean a bank’s board of directors is “in favor of flat-out giving capital away to investors that want nothing to do with the bank — they are selling its stock.”
Buybacks do “nothing to increase bank stock prices – many bank stocks are selling at below their prices of five years ago.”
A company might find it much easier to curtail or stop buying back shares to preserve cash than it is to cut regular dividends. Preserving and increasing the dividend over time has been correlated with good performance for stocks over time. These articles provide examples of how dividend compounding is correlated with long-term growth as income streams build up:
The S&P Dow Jones Indices report raises the question of which stocks might buck the trend.
Starting with the S&P 500 SPX, -0.50%,
there are 71 companies stocks with current dividend yields of at least 4.00% indicated by annual payout rates. Among these companies, 68 increased dividends during 2022, according to data provided by FactSet.
Then we looked at the pace of dividend increases in 2022 and the consensus estimates for dividends paid during 2023 and 2024, among analysts polled by FactSet. Among the remaining 68 companies, there are 29 for which the estimated 2023 dividend increase is higher than the 2022 dividend increase. Narrowing further, there are 14 for which the estimated 2024 dividend increases are higher than the estimated 2023 dividend increases.
Here are the 14 stocks that passed the screen, sorted by current dividend yield:
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Any stock screen is limited, but can be useful as a starting point or supplement to your own research. If you see any companies of interest, do some research to form your own opinion of how likely they are to remain competitive over the next decade, at least.
The collapse of Silicon Valley Bank sent shockwaves through the global economy and had the makings of another crisis. Depositors raced to withdraw money. Banks worried about the risk of contagion. I spent that weekend on the phone with small business owners in Ohio who didn’t know whether they’d be able to make payroll the next week. One woman was in tears, worried about whether she’d be able to pay her workers.
The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve responded quickly, took control of the bank, and contained the fallout. Consumers’ and small businesses’ money was safe. That Ohio small business was able to get paychecks out.
The regulators were able to protect Americans’ money from incompetent bank executives because when Congress created the Federal Reserve in 1913 and the FDIC in 1933, it ensured that their funding structures would remain independent from politicians in Congress and free from political whims.
But now, as the U.S. Supreme Court considers the case of Community Financial Services Association v. CFPB, these independent watchdogs’ ability to keep our financial system stable faces an existential threat.
The Consumer Financial Protection Bureau is the only agency solely dedicated to protecting the paychecks and savings of ordinary Americans, not Wall Street executives or venture capitalists. Corporate interests have armies of lobbyists fighting for every tax break, every exemption, every opportunity to be let off the hook for scamming customers and preying on families.
“ The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC. ”
Ordinary Americans don’t have those lobbyists. They don’t have that kind of power. The CFPB is supposed to be their voice — to fight for them. The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC. Otherwise, its ability to do the job would be subject to political whims and special interests — interests that we know are far too often at odds with what’s best for consumers.
Since its creation, the CFPB has returned $16 billion to more than 192 million consumers. It’s held Wall Street and big banks accountable for breaking the law and wronging their customers. It’s given working families more power to fight back when banks and shady lenders scam them out of their hard-earned money.
The CFPB can do this good work because it’s funded independently and protected from partisan attacks, just as the Fed and the FDIC are. So why, then, does Wall Street claim that only the CFPB’s funding structure is unconstitutional?
Make no mistake — the only reason that Wall Street, its Republican allies in Congress, and overreaching courts have singled out the CFPB is because the agency doesn’t do their bidding. The CFPB doesn’t help Wall Street executives when they fail. It doesn’t extend them credit in favorable terms or offer them deposit insurance like the other regulators do. The CFPB’s funding structure isn’t unconstitutional — it just doesn’t work in Wall Street’s favor.
If the Supreme Court rules against the CFPB, the $16 billion returned to consumers could be clawed back. What would happen then — will America’s banks really go back to the customers they’ve wronged with a collection tin?
“ Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk. ”
Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk. For more than a decade, the CFPB has set rules of the road for mortgages and credit cards and so much else, and given tools to help industry follow them. If these rules and the regulator that interprets them disappear, markets will come to a standstill.
By attacking the CFPB’s funding structure and putting consumers’ money at risk, Wall Street is putting the other financial regulators in danger, too.
The Fifth Circuit’s faulty ruling against the CFPB is astounding in its absurdity — the court ruled that the authorities that other financial agencies, like the Federal Reserve and the FDIC, have over the economy do not compare to the CFPB’s authorities. In other words, the court is claiming that the CFPB supposedly has more power in the economy than the Fed.
That’s ridiculous. Look at the extraordinary steps taken to contain the failures of Silicon Valley Bank and Signature Bank — the idea that the CFPB could take action even close to as sweeping is laughable.
But we know why the Fifth Circuit put that absurd assertion in there — they recognize the damage this case could do to these other vital agencies, and to our whole economy.
“ Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading.”
The FDIC’s own Inspector General has stated that the Fifth Circuit ruling could be applied to their agency. If that happens, the FDIC and other regulators could be subject to congressional budget deliberations, which we all know are far too partisan and have resulted in shutdowns. Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading, or the Deposit Insurance Fund to protect depositors’ money. Imagine if politicians caused a shutdown, and we were without a Federal Reserve.
U.S. financial regulators are independently funded so that they can respond quickly when crises happen. It’s telling, though, that plenty of people in Washington don’t seem to consider the CFPB’s issues in the same category. Washington and Wall Street expect the government to spring into action when businesses’ money is put at risk. But when workers are scammed out of their paychecks, that’s not an emergency — it’s business as usual.
When Wall Street’s abusive practices put consumers in crisis, the CFPB must have the funding and strength it needs to carry out its mission — to protect consumers’ hard-earned money.
U.S. Sen. Sherrod Brown (D-OH) is chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
The run on Silicon Valley Bank (SVB) SIVB— on which nearly half of all venture-backed tech start-ups in the United States depend — is in part a rerun of a familiar story, but it’s more than that. Once again, economic policy and financial regulation has proven inadequate.
The news about the second-biggest bank failure in U.S. history came just days after Federal Reserve Chair Jerome Powell assured Congress that the financial condition of America’s banks was sound. But the timing should not be surprising. Given the large and…
Silicon Valley Bank has failed following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.
Trading of SVB Financial Group’s SIVB, -60.41%
stock was halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.
Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we will show how much they reported in unrealized losses on securities — an item that played an important role in SVB’s crisis.
Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses, as a percentage of total capital, as of Dec. 31.
First, a quick look at SVB
Some media reports have referred to SVB of Santa Clara, Calif., as a small bank, but it had $212 billion in total assets as of Dec. 31, making it the 17th largest bank in the Russell 3000 Index RUA, -1.70%
as of Dec. 31. That makes it the largest U.S. bank failure since Washington Mutual in 2008.
One unique aspect of SVB was its decades-long focus on the venture capital industry. The bank’s loan growth had been slowing as interest rates rose. Meanwhile, when announcing its $21 billion dollars in securities sales on Thursday, SVB said it had taken the action not only to lower its interest-rate risk, but because “client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”
SVB estimated it would book a $1.8 billion loss on the securities sale and said it would raise $2.25 billion in capital through two offerings of new shares and a convertible bond offering. That offering wasn’t completed.
So this appears to be an example of what can go wrong with a bank focused on a particular industry. The combination of a balance sheet heavy with securities and relatively light on loans, in a rising-rate environment in which bond prices have declined and in which depositors specific to that industry are themselves suffering from a decline in cash, led to a liquidity problem.
Unrealized losses on securities
Banks leverage their capital by gathering deposits or borrowing money either to lend the money out or purchase securities. They earn the spread between their average yield on loans and investments and their average cost for funds.
The securities investments are held in two buckets:
Available for sale — these securities (mostly bonds) can be sold at any time, and under accounting rules are required to be marked to market each quarter. This means gains or losses are recorded for the AFS portfolio continually. The accumulated gains are added to, or losses subtracted from, total equity capital.
Held to maturity — these are bonds a bank intends to hold until they are repaid at face value. They are carried at cost and not marked to market each quarter.
In its regulatory Consolidated Financial Statements for Holding Companies—FR Y-9C, filed with the Federal Reserve, SVB Financial, reported a negative $1.911 billion in accumulated other comprehensive income as of Dec. 31. That is line 26.b on Schedule HC of the report, for those keeping score at home. You can look up regulatory reports for any U.S. bank holding company, savings and loan holding company or subsidiary institution at the Federal Financial Institution Examination Council’s National Information Center. Be sure to get the name of the company or institution right — or you may be looking at the wrong entity.
Here’s how accumulated other comprehensive income (AOCI) is defined in the report: “Includes, but is not limited to, net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and accumulated defined benefit pension and other postretirement plan adjustments.”
In other words, it was mostly unrealized losses on SVB’s available-for-sale securities. The bank booked an estimated $1.8 billion loss when selling “substantially all” of these securities on March 8.
The list of 10 banks with unfavorable interest margin trends
On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.
Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Ally Financial Inc. ALLY, -5.70%
— the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.
To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.
Banks with the highest percentage of negative AOCI to capital
There are 108 banks in the Russell 3000 Index RUA, -1.70%
that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:
Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has hurt SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc. CMA, -5.01%,
which tops the list, also improved its interest margin the most over the past four quarters, as shown here.
Another bank on the list facing concern among depositors is Signature Bank SBNY, -22.87%
of New York, which has a diverse business model, but has also faced a backlash related to the services it provides to the virtual currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.
Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”
What advice would you give to a widow and widower considering marriage on how to manage finances — and deal with adult children?
We are both 60 years old and plan to work a few more years, mostly for health insurance. We both have about $1.5 million in retirement savings accounts. Our spouses’ 401(k)s and IRAs rolled into our accounts.
I have another $500,000 in a brokerage and he has almost another $1 million. We both own homes with $300,000 mortgages. Mine is worth $500,000, Paul’s (not his real name) home is worth $1 million. We have no other debt.
We both have one married, and one unmarried child that we help. We both have two grandchildren.
We should be set up very well. Here’s the concern: His married, well-off daughter is very aggressive about inheritance. She wants the family home retitled in a trust. She wants all life insurance and brokerage beneficiaries in her name. Her brother has had drug-addiction problems, so she’s cutting him out even though it seems he’s the one who will need help.
“‘She wants the family home retitled in a trust. She wants all life insurance and brokerage beneficiaries in her name.’”
The daughter isn’t thrilled about our relationship and suggests we just live together. For religious reasons, I would never do this. Grandma shacking up? What example would I set for my grandchildren?
As a widowed couple, we are realistic enough to plan for the time one of us is left alone. Paul has diabetes, high blood pressure and already sees a cardiologist. What if he has a heart attack? Stroke? Or if he dies?
What’s a fair way to mingle finances and allow security for me should he predecease me while allowing Paul’s daughter to ultimately inherit?
By the way, my children have never raised money as an issue. After we both cared for spouses through cancer, they know life is short and just want us to be happy.
Happy to Have Found Love Again
Dear Happy,
She is overstepping the line, and overplaying her hand.
The first rule of inheritance is that it’s not yours until the decedent’s money is sitting in your bank account. Your fiancé’s daughter can make all the demands she likes, but the only thing your fiancé has to do is say, “You don’t need to be concerned. My affairs are all in order. I’ve always taken care of my own affairs, and I am not changing now.”
How your fiancé decides to split his estate is entirely up to him, and can be done in consultation with a financial adviser and attorney, taking into account each of his children’s individual needs. For instance, if you move in together, he could give you a life estate, allowing you to live in the home for the rest of your life, and dividing the property between his two children thereafter.
Given that you have your own home, however, you may decide to rent it out, and move back there in the event that he predeceases you. There are so many ways to split an inheritance. You could look at the intestate laws of your state, and follow them. In New York, the spouse inherits the first $50,000 of intestate property, plus half of the balance, and the kids inherit the rest.
“Paul” may decide to set up a trust for his son, so he can provide an income for him over the course of his life. If he has or had issues with addiction, this will help him while not putting temptation in his way with a lump sum of money. The best kind of trust is the one that deals with any recurring issues directly, and takes into account the person’s circumstances.
Martin Hagan, a Pennsylvania-based estate-planning attorney who has practiced for four decades, writes: “First, it would authorize distributions only if the beneficiary is actively pursuing treatment and recovery. Second, it would limit distributions to paying only for the expenses incurred in carrying out the treatment plan that will have been developed for the beneficiary.”
You have $2 million collectively in a retirement and brokerage account and $200,000 equity in his home, and you can use these next seven years or so to pay off your mortgage, while your fiancé has $2.5 million and $700,000 in equity on his home. You are both well set up for retirement, and let’s hope you have many years to spend together.
The financial services industry has many opinions. You should, advisers say, have 10 times your salary saved by the time you’re 65 years old. You don’t mention your salary, but I would be surprised if many people in America had that much money saved, especially given all of the unexpected events — divorce, illness, job loss — that can occur in the intervening years.
You also have other priorities than dealing with an aggressive daughter/daughter-in-law. AARP suggests that most people should look into long-term care insurance between the ages of 60 and 65, around the time most people are eligible to qualify for Medicare. If you do it earlier, it can serve as a savings account in the event that you never need long-term care, AARP says.
As retirement columnist Richard Quinn recently wrote on MarketWatch, everybody’s circumstances are different. “Living in retirement isn’t about averages. It isn’t about what other people do or the opinions of experts, especially online instant experts who don’t know anything about you and have yet to experience many years of retirement themselves.”
Don’t give too much oxygen or power to your future daughter-in-law. Her father should give her a stock answer, and be firm. If she persists, he can say, “The subject is closed. I need you to respect the decisions I make about my own life, respect my privacy on these matters, and it would be nice if you would be happy for us, and support us in our marriage together.”
You can’t change people. But you can change wills.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebookgroup, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
David Rosenberg, the former chief North American economist at Merrill Lynch, has been saying for almost a year that the Fed means business and investors should take the U.S. central bank’s effort to fight inflation both seriously and literally.
Rosenberg, now president of Toronto-based Rosenberg Research & Associates Inc., expects investors will face more pain in financial markets in the months to come.
“The recession’s just starting,” Rosenberg said in an interview with MarketWatch. “The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” Investors can expect to endure more uncertainty leading up to the time — and it will come — when the Fed first pauses its current run of interest rate hikes and then begins to cut.
Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 SPX, -0.61%
could drop 30% from its current level before that happens. Said Rosenberg: “You’re left with the S&P 500 bottoming out somewhere close to 2,900.”
At that point, Rosenberg added, stocks will look attractive again. But that’s a story for 2024.
In this recent interview, which has been edited for length and clarity, Rosenberg offered a playbook for investors to follow this year and to prepare for a more bullish 2024. Meanwhile, he said, as they wait for the much-anticipated Fed pivot, investors should make their own pivot to defensive sectors of the financial markets — including bonds, gold and dividend-paying stocks.
MarketWatch: So many people out there are expecting a recession. But stocks have performed well to start the year. Are investors and Wall Street out of touch?
Rosenberg: Investor sentiment is out of line; the household sector is still enormously overweight equities. There is a disconnect between how investors feel about the outlook and how they’re actually positioned. They feel bearish but they’re still positioned bullishly, and that is a classic case of cognitive dissonance. We also have a situation where there is a lot of talk about recession and about how this is the most widely expected recession of all time, and yet the analyst community is still expecting corporate earnings growth to be positive in 2023.
In a plain-vanilla recession, earnings go down 20%. We’ve never had a recession where earnings were up at all. The consensus is that we are going to see corporate earnings expand in 2023. So there’s another glaring anomaly. We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates – at least not yet.
There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom. 2022 was the year where the Fed tightened policy aggressively and that showed up in the marketplace in a compression in the price-earnings multiple from roughly 22 to around 17. The story in 2022 was about what the rate hikes did to the market multiple; 2023 will be about what those rate hikes do to corporate earnings.
“ You’re left with the S&P 500 bottoming out somewhere close to 2,900. ”
When you’re attempting to be reasonable and come up with a sensible multiple for this market, given where the risk-free interest rate is now, and we can generously assume a roughly 15 price-earnings multiple. Then you slap that on a recession earning environment, and you’re left with the S&P 500 bottoming out somewhere close to 2900.
This is just pure mathematics. All the stock market is at any point is earnings multiplied by the multiple you want to apply to that earnings stream. That multiple is sensitive to interest rates. All we’ve seen is Act I — multiple compression. We haven’t yet seen the market multiple dip below the long-run mean, which is closer to 16. You’ve never had a bear market bottom with the multiple above the long-run average. That just doesn’t happen.
David Rosenberg: ‘You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios.’
Rosenberg Research
MarketWatch: The market wants a “Powell put” to rescue stocks, but may have to settle for a “Powell pause.” When the Fed finally pauses its rate hikes, is that a signal to turn bullish?
Rosenberg: The stock market bottoms 70% of the way into a recession and 70% of the way into the easing cycle. What’s more important is that the Fed will pause, and then will pivot. That is going to be a 2023 story.
The Fed will shift its views as circumstances change. The S&P 500 low will be south of 3000 and then it’s a matter of time. The Fed will pause, the markets will have a knee-jerk positive reaction you can trade. Then the Fed will start to cut interest rates, and that usually takes place six months after the pause. Then there will be a lot of giddiness in the market for a short time. When the market bottoms, it’s the mirror image of when it peaks. The market peaks when it starts to see the recession coming. The next bull market will start once investors begin to see the recovery.
But the recession’s just starting. The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle when the central bank has cut interest rates enough to push the yield curve back to a positive slope. That is many months away. We have to wait for the pause, the pivot, and for rate cuts to steepen the yield curve. That will be a late 2023, early 2024 story.
MarketWatch: How concerned are you about corporate and household debt? Are there echoes of the 2008-09 Great Recession?
Rosenberg: There’s not going to be a replay of 2008-09. It doesn’t mean there won’t be a major financial spasm. That always happens after a Fed tightening cycle. The excesses are exposed, and expunged. I look at it more as it could be a replay of what happened with nonbank financials in the 1980s, early 1990s, that engulfed the savings and loan industry. I am concerned about the banks in the sense that they have a tremendous amount of commercial real estate exposure on their balance sheets. I do think the banks will be compelled to bolster their loan-loss reserves, and that will come out of their earnings performance. That’s not the same as incurring capitalization problems, so I don’t see any major banks defaulting or being at risk of default.
But I’m concerned about other pockets of the financial sector. The banks are actually less important to the overall credit market than they’ve been in the past. This is not a repeat of 2008-09 but we do have to focus on where the extreme leverage is centered.
It’s not necessarily in the banks this time; it is in other sources such as private equity, private debt, and they have yet to fully mark-to-market their assets. That’s an area of concern. The parts of the market that cater directly to the consumer, like credit cards, we’re already starting to see signs of stress in terms of the rise in 30-day late-payment rates. Early stage arrears are surfacing in credit cards, auto loans and even some elements of the mortgage market. The big risk to me is not so much the banks, but the nonbank financials that cater to credit cards, auto loans, and private equity and private debt.
MarketWatch: Why should individuals care about trouble in private equity and private debt? That’s for the wealthy and the big institutions.
Rosenberg: Unless private investment firms gate their assets, you’re going to end up getting a flood of redemptions and asset sales, and that affects all markets. Markets are intertwined. Redemptions and forced asset sales will affect market valuations in general. We’re seeing deflation in the equity market and now in a much more important market for individuals, which is residential real estate. One of the reasons why so many people have delayed their return to the labor market is they looked at their wealth, principally equities and real estate, and thought they could retire early based on this massive wealth creation that took place through 2020 and 2021.
Now people are having to recalculate their ability to retire early and fund a comfortable retirement lifestyle. They will be forced back into the labor market. And the problem with a recession of course is that there are going to be fewer job openings, which means the unemployment rate is going to rise. The Fed is already telling us we’re going to 4.6%, which itself is a recession call; we’re going to blow through that number. All this plays out in the labor market not necessarily through job loss, but it’s going to force people to go back and look for a job. The unemployment rate goes up — that has a lag impact on nominal wages and that is going to be another factor that will curtail consumer spending, which is 70% of the economy.
“ My strongest conviction is the 30-year Treasury bond. ”
At some point, we’re going to have to have some sort of positive shock that will arrest the decline. The cycle is the cycle and what dominates the cycle are interest rates. At some point we get the recessionary pressures, inflation melts, the Fed will have successfully reset asset values to more normal levels, and we will be in a different monetary policy cycle by the second half of 2024 that will breathe life into the economy and we’ll be off to a recovery phase, which the market will start to discount later in 2023. Nothing here is permanent. It’s about interest rates, liquidity and the yield curve that has played out before.
MarketWatch: Where do you advise investors to put their money now, and why?
Rosenberg: My strongest conviction is the 30-year Treasury bond TMUBMUSD30Y, 3.674%.
The Fed will cut rates and you’ll get the biggest decline in yields at the short end. But in terms of bond prices and the total return potential, it’s at the long end of the curve. Bond yields always go down in a recession. Inflation is going to fall more quickly than is generally anticipated. Recession and disinflation are powerful forces for the long end of the Treasury curve.
As the Fed pauses and then pivots — and this Volcker-like tightening is not permanent — other central banks around the world are going to play catch up, and that is going to undercut the U.S. dollar DXY, +0.70%.
There are few better hedges against a U.S. dollar reversal than gold. On top of that, cryptocurrency has been exposed as being far too volatile to be part of any asset mix. It’s fun to trade, but crypto is not an investment. The crypto craze — fund flows directed to bitcoin BTCUSD, +0.35%
and the like — drained the gold price by more than $200 an ounce.
“ Buy companies that provide the goods and services that people need – not what they want. ”
I’m bullish on gold GC00, +0.22%
– physical gold — bullish on bonds, and within the stock market, under the proviso that we have a recession, you want to ensure you are invested in sectors with the lowest possible correlation to GDP growth.
Invest in 2023 the same way you’re going to be living life — in a period of frugality. Buy companies that provide the goods and services that people need – not what they want. Consumer staples, not consumer cyclicals. Utilities. Health care. I look at Apple as a cyclical consumer products company, but Microsoft is a defensive growth technology company.
You want to be buying essentials, staples, things you need. When I look at Microsoft MSFT, -0.61%,
Alphabet GOOGL, -1.79%,
Amazon AMZN, -1.17%,
they are what I would consider to be defensive growth stocks and at some point this year, they will deserve to be garnering a very strong look for the next cycle.
You also want to invest in areas with a secular growth tailwind. For example, military budgets are rising in every part of the world and that plays right into defense/aerospace stocks. Food security, whether it’s food producers, anything related to agriculture, is an area you ought to be invested in.
You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios. If you follow that you’ll do just fine. I just think you’ll do far better if you have a healthy allocation to long-term bonds and gold. Gold finished 2022 unchanged, in a year when flat was the new up.
In terms of the relative weighting, that’s a personal choice but I would say to focus on defensive sectors with zero or low correlation to GDP, a laddered bond portfolio if you want to play it safe, or just the long bond, and physical gold. Also, the Dogs of the Dow fits the screening for strong balance sheets, strong dividend payout ratios and a nice starting yield. The Dogs outperformed in 2022, and 2023 will be much the same. That’s the strategy for 2023.
Do you want the good news about the Federal Reserve and its chairman Jerome Powell, the other good news…or the bad news?
Let’s start with the first bit of good news. Powell and his fellow Fed committee members just hiked short-term interest rates another 0.25 percentage points to 4.75%, which means retirees and other savers are getting the best savings rates in a generation. You can even lock in that 4.75% interest rate for as long as five years through some bank CDs. Maybe even better, you can lock in interest rates of inflation (whatever it works out to be) plus 1.6% a year for three years, and inflation (ditto) plus nearly 1.5% a year for 25 years, through inflation-protected Treasury bonds. (Your correspondent owns some of these long-term TIPS bonds—more on that below.)
The second bit of good news is that, according to Wall Street, Powell has just announced that happy days are here again.
The S&P 500 SPX, +1.05%
jumped 1% due to the Fed announcement and Powell’s press conference. The more volatile Russell 2000 RUT, +1.49%
small cap index and tech-heavy Nasdaq Composite COMP, +2.00%
both jumped 2%. Even bitcoin BTCUSD, +1.00%
rose 2%. Traders started penciling in an end to Federal Reserve interest rate hikes and even cuts. The money markets now give a 60% chance that by the fall Fed rates will be lower than they are now.
It feels like it’s 2019 all over again.
Now the slightly less good news. None of this Wall Street euphoria seemed to reflect what Powell actually said during his press conference.
Powell predicted more pain ahead, warned that he would rather raise interest rates too high for too long than risk cutting them too quickly, and said it was very unlikely interest rates would be cut any time this year. He made it very clear that he was going to err on the side of being too hawkish than risk being too dovish.
Actual quote, in response to a press question: “I continue to think that it is very difficult to manage the risk of doing too little and finding out in 6 or 12 months that we actually were close but didn’t get the job done, inflation springs back, and we have to go back in and now you really do have to worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage. Whereas…of course, we have no incentive and no desire to overtighten, but if we feel that we’ve gone too far and inflation is coming down faster than we expect we have tools that would work on that.” (My italics.)
If that isn’t “I would much rather raise too much for too long than risk cutting too early,” it sure sounded like it.
Powell added: “Restoring price stability is essential…it is our job to restore price stability and achieve 2% inflation for the benefit of the American public…and we are strongly resolved that we will complete this task.”
Meanwhile, Powell said that so far inflation had really only started to come down in the goods sector. It had not even begun in the area of “non-housing services,” and these made up about half of the entire basket of consumer prices he’s watching. He predicts “ongoing increases” of interest rates even from current levels.
And so long as the economy performs in line with current forecasts for the rest of the year, he said, “it will not be appropriate to cut rates this year, to loosen policy this year.”
Watching the Wall Street reaction to Powell’s comments, I was left scratching my head and thinking of the Marx Brothers. With my apologies to Chico: Who you gonna believe, me or your own ears?
Meanwhile, on long-term TIPS: Those of us who buy 20 or 30 year inflation-protected Treasury bonds are currently securing a guaranteed long-term interest rate of 1.4% to 1.5% a year plus inflation, whatever that works out to be. At times in the past you could have locked in a much better long-term return, even from TIPS bonds. But by the standards of the past decade these rates are a gimme. Up until a year ago these rates were actually negative.
Using data from New York University’s Stern business school I ran some numbers. In a nutshell: Based on average Treasury bond rates and inflation since the World War II, current TIPS yields look reasonable if not spectacular. TIPS bonds themselves have only existed since the late 1990s, but regular (non-inflation-adjusted) Treasury bonds of course go back much further. Since 1945, someone owning regular 10 Year Treasurys has ended up earning, on average, about inflation plus 1.5% to 1.6% a year.
“Real yields of 1.5% today are very attractive,” he tells me. “We know that real yields are in a centuries’ long secular decline because markets become more efficient and real growth is declining due to demographics and other factors. That means that every year real yields drop a little bit more and the average over the next 10 or 30 years is likely to be lower than 1.5%. Looking ahead, TIPS are priced as a bargain right now and they provide secure income, 100% protected against inflation and backed by the full faith and credit of the United States government.”
Meanwhile the bond markets are simultaneously betting that Jerome Powell will win his fight against inflation, while refusing to believe him when he says he will do whatever it takes.
Make of that what you will. Not having to care too much about what the bond market says is yet another reason why I generally prefer inflation-protected Treasury bonds to the regular kind.
The initial version of this story had incorrect price changes for 2023. It is now updated with information as of the market close on Jan. 31.
Investors staged a January rally, with solid gains for the S&P 500 and an even better showing for technology stocks that led the dismal downward action in 2022.
These are tricky times in the stock market, so it pays to look to the best stock-fund managers for guidance on how to behave now. Veteran value investor Bill Nygren belongs in this camp, because the Oakmark Fund OAKMX he co-manages consistently and substantially outperforms its peers.
That isn’t easy, considering how many fund managers fail to do so. Nygren’s fund beats its Morningstar large-cap value index and category by more than four percentage points annualized over the past three years. It also outperforms at five and…
Short selling can be controversial, especially among management teams of companies whose stocks traders are betting that their prices will fall. And a new spike in alleged “naked short selling” among microcap stocks is making several management teams angry enough to threaten legal action:
Taking a long position means buying a stock and holding it, hoping the price will go up.
Shorting, or short selling, is when an investor borrows shares and immediately sells them, hoping he or she can buy them again later at a lower price, return them to the lender and pocket the difference.
Covering is when an investor with a short position buys the stock again to close a short position and return the shares to the lender.
If you take a long position, you might lose all your money. A stock can go to zero if a company goes bankrupt. But a short position is riskier. If the share price rises steadily after an investor has placed a short trade, the investor is sitting on an unrealized capital loss. This is why short selling traditionally has been dominated by professional investors who base this type of trade on heavy research and conviction.
Brokers require short sellers to qualify for margin accounts. A broker faces credit exposure to an investor if a stock that has been shorted begins to rise instead of going down. Depending on how high the price rises, the broker will demand more collateral from the investor. The investor may eventually have to cover and close the short with a loss, if the stock rises too much.
And that type of activity can lead to a short squeeze if many short sellers are surprised at the same time. A short squeeze can send a share price through the roof temporarily.
Short squeezes helped feed the meme-stock craze of 2021 that sent shares of GameStop Corp. GME, +10.45%
and AMC Entertainment Holdings Inc. AMC, +2.54%
soaring early in 2021. Some traders communicating through the Reddit WallStreetBets channel and in other social media worked together to try to force short squeezes in stocks of troubled companies that had been heavily shorted. The action sent shares of GameStop soaring from $4.82 at the end of 2020 to a closing high of $86.88 on Jan. 27, 2021, only for the stock to fall to $10.15 on Feb. 19, 2021, as the seesaw action continued for this and other meme stocks.
Naked shorting
Let’s say you were convinced that a company was headed toward financial difficulties or even bankruptcy, but its shares were still trading at a value you considered to be significant. If the shares were highly liquid, you would be able to borrow them through your broker for little or almost no cost, to set up your short trade.
But if many other investors were shorting the stock, there would be fewer shares available for borrowing. Then your broker would charge a higher fee based on supply and demand.
For example, according to data provided by FactSet on Jan. 23, 22.7% of GameStop’s shares available for trading were sold short — a figure that could be up to two weeks out-of-date, according to the financial data provider.
According to Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear ETF HDGE, -2.65%,
the cost of borrowing shares of GameStop on Jan. 23 was an annualized 15.5%. That cost increases a short seller’s risk.
What if you wanted to short a stock that had even heavier short interest than GameStop? Lamensdorf said on Jan. 23 that there were no shares available to borrow for Carvana Co. CVNA, +10.63%,
Bed Bath & Beyond Inc. BBBY, -12.24%,
Beyond Meat Inc. BYND, +11.31%
or Coinbase Global Inc. COIN, +1.45%.
If you wanted to short AMC shares, you would pay an annual fee of 85.17% to borrow the shares.
Starting last week, and flowing into this week, management teams at several companies with microcap stocks (with market capitalizations below $100 million) said they were investigating naked short selling — short selling without actually borrowing the shares.
This brings us to three more terms:
A short-locate is a service a short seller requests from a broker. The broker finds shares for the short seller to borrow.
A natural locate is needed to make a “proper” short-sale, according to Moshe Hurwitz, who recently launched Blue Zen Capital Management in Atlanta to specialize in short selling. The broker gives you a price to borrow shares and places the actual shares in your account. You can then short them if you want to.
A nonnatural locate is “when the broker gives you shares they do not have,” according to Hurwitz.
When asked if a nonnatural locate would constitute fraud, Hurwitz said “yes.”
How is naked short selling possible? According to Hurwitz, “it is incumbent on the brokers” to stop placing borrowed shares in customer accounts when supplies of shares are depleted. But he added that some brokers, even in the U.S., lend out the same shares multiple times, because it is lucrative.
“The reason they do it is when it comes time to settle, to deliver, they are banking on the fact that most of those people are day traders, so there would be enough shares to deliver.”
Hurwitz cautioned that the current round of complaints about naked short selling wasn’t unusual and even though short selling activity can push a stock’s price down momentarily, “short sellers are buyers in waiting.” They will eventually buy when they cover their short positions.
“But to really push a stock price down, you need long investors to sell,” he said.
Different action that can appear to be naked shorting
Lamensdorf said the illegal naked shorting that Verb Technology Co. VERB, +69.65%,
Genius Group Ltd. GNS, +45.37%
and other microcap companies have been recently complaining about might include activity that isn’t illegal.
An investor looking to short a stock for which shares weren’t available to borrow, or for which the cost to borrow shares was too high, might enter into “swap transactions or sophisticated over-the-counter derivative transactions,” to bet against the stock,” he said.
This type of trader would be “pretty sophisticated,” Lamensdorf said. He added that brokers typically have account minimums ranging from $25 million to $50 million for investors making this type of trade. This would mean the trader was likely to be “a decent-sized family office or a fund, with decent liquidity,” he said.
