Looking Backwards …
LB #1
This week was a firehose of financial news. The Fed meeting resulted in the Fed leaving interest rates alone, but Jerome Powell said that a March rate cut was probably off the table. Treasuries were strong early in the week after seeing the Treasury refunding announcement, more on that in a minute, but then bonds got crushed on Friday after a blowout Jobs report with the economy supposedly creating twice as many jobs as expected. Almost lost in the shuffle was the news coming from the nation’s 32nd biggest bank, New York Community Bank. NYCB was down 38% on Wednesday after posting a huge 4th quarter loss and they cut their dividend. This is the bank that purchased some of the assets from Signature Bank, the one that failed last spring. The key takeaway here is something that we have talked about for months. Banks are insolvent. This bank was being forced to confront its commercial real estate problem and announced a net loss of $252 million in the fourth quarter.
Gina Heeb and Will Fleur write for the Wall Street Journal, “Net charge-offs surged to $185 million from $1 million a year earlier, driven by two loans in that space. One was an office loan that had gone bad after an updated valuation in the third quarter. The other was a co-op loan that wasn’t in default but that the bank expects to sell in the first quarter.
“I don’t see systemic issues within their loan portfolio that I’m overly concerned about,” said Mark Fitzgibbon, head of financial services research at Piper Sandler. “It felt like this was a cleanup quarter…the company said we’re going to rip the Band-Aid off all at once.”
Well, kudos to this bank for facing their losses, but this is two loans, and it caused the bank to decline 38%. The regional bank ETFs were down almost double digit %s this week as most regional banks got hit again. Aozora Bank, Japan’s 16th largest bank got hammered this week as it revealed that it too had commercial real estate exposure in America, and in Europe Deutsche Bank are raising their provisions for loss in American CRE by 4x. This problem hasn’t gone away it has merely gone out of sight. The Fed also recently announced that they would not be renewing the BTFP, the bank term funding program, that it created last year during the banking crisis. Things are getting difficult for banks again, and we are seeing their strain.
LB#2
I want to pivot now, using my pivot foot and not travelling and discuss women’s basketball next. An article out of the soon to be defunct Sports Illustrated caught my eye. Daniel Chavkin writes, “South Carolina’s 76–70 win over LSU officially averaged 1.56 million viewers, topping the NBA’s matchup between the Boston Celtics and Miami Heat on TNT at the same time, which only averaged 1.38 million viewers, according to Sports Media Watch.”
Whoa. That has to be concerning for the NBA as well as a celebration for women’s college basketball. Now LSU are the defending national champions and South Carolina are ranked number 1 and they do have a rivalry, but to outdraw the NBA, and two marquee teams at that. I think this is great for women’s sports in that they need to stop trying to piggyback off of men’s sports and promote their own product and grow their own sets of fans. These two universities have done that and they have their own rabid fan bases and they are voting with their television sets. The free market is undefeated just like South Carolina.
The NBA needs to seriously look at its product, not because of a women’s game beating them but because no one is watching. In a country of 340 million people, I don’t think they lost viewership to the 1.56 million that tuned into the ladies game. I think they lost their viewers to other things or telecasts. They had better fix their product and soon if they are going to sell advertising because TNT has already paid a fortune for those games, and if they start losing head to head to women’s basketball, the NBA business model is in trouble.
Women’s sports having a moment at the NBA expense
LB#3-
As we said the treasury refunding announcement came out Wednesday, but bonds rallied early in the week after seeing the estimates for that announcement that were released Monday. Wednesday confirmed that the Treasury would be selling more long-term debt. ZeroHedge writes, “As a result, the auction sizes of the 2-, 3-, 5-, and 7-year will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of April 2024. Turning to the all-important Bills, which the Treasury used to fund much of the budget deficit in late 2023 when it funded deficit spending using the Reverse Repo drain (whose proceeds were used to fund Bill issuance), the Treasury said it “expects to maintain bill auction sizes at current levels into late-March,” with modest reductions by then into early April, during the tax-filing season.”
The total borrowing was less than expected and bonds rallied during the week as they liked what they heard. However, the shift to longer term paper was largely expected, as they are having to slow down on the Treasury bill issuance because the reverse repo just hit $503 billion this week, meaning this source of funding will be dry in a month or two at this rate. So, Yellen used this source for short term funding, but now she is trying to move longer dated treasuries which have struggled at auctions since October.
Why is this concerning? Here is why, did you see the stock market making new highs this week? The facebook jumping 20% in one day and acting like a crypto asset? The money flowing into the system is drying up rapidly. From ZeroHedge again, “the numbers also mean that the Reverse Repo facility will be fully drained by Q2, and we expect that on Wednesday we will learn that the bulk of the reduction in Q1 and Q2 estimates will be due to sharply lower Bill issuance for one simple reason: there is just no more Reverse Repo cash to buy it all.” Money in reverse repo gets paid at 5.3% by the Fed currently so if the money comes out of the reverse repo and buys T-bills at 5.4% the difference is pretty minimal, but it does incent the holders of that money to buy T-bills. The people that can get more yield. This is another Fed slush fund that was loaded during Covid and will be empty in two months. This is why Yellen has to sell more long-term Treasuries, her buyer for bills is out of money. Now we are going to see a huge $245 billion decline in T-bills outstanding, why? It is really expensive now that we aren’t exchanging money in one pocket and moving it to another. The US government just announced that it sucks paying $1T in interest expense and it is going to try and issue longer term Treasuries at 4% vs short term T-Bills at 5.4%. They can’t fund the government 1.4% higher when it isn’t a pocket-to-pocket exchange. This is why Powell verbally pivoted because he needed time to prep the markets to be able to reduce QT, which adds to the Treasury’s problem and to stand by in case this causes a credit event. We said Yellen kicked the can down the road, well she did but this is awful news. Now she has backed herself into a corner where long-term bond sales have to be strong, and at 4% I don’t think this is enough yield to satisfy the market. Who is going to buy the bonds, and at what price. Yep, we are back here again.
Looking Forwards…
LF#1
Speaking of Covid programs coming to an end… Rudy Blalock write for the Epoch Times via ZeroHedge, “Starting Feb. 1, Los Angeles renters owe, in full, any unpaid rent between Oct. 1, 2021, and January 31, 2023, ending a pandemic-era policy.” Good Lord Rudy, how about a little foreplay, you can just jump into it like that. My god, full rent is due. Rudy also tells us that Los Angeles mayor Karen Bass has assured Angelenos there are abundant resources to help renters in arrears. Like what extra jobs, a moving truck, maybe another pandemic. From Blalock’s article, last year 77,000 eviction notices were sent out with 96% being for overdue rent at an average of $3,774, and this is a big one January 31 was the last day when landlords were prohibited by law from raising rents on any properties built before 1978. Now rent can go up 4-6% until June 30. Folks, the covid bill is coming due in so many ways. Student loans started up again Oct. 1, rents are going to have to be paid and back rent also, and the banks are not going to have the BTFP. Somebody everyone is going to have to start paying their bills, everyone that is except the US government who can print money forever it seems.
LF#2
In another way that American life is getting back to pre Covid norms, UPS joined JP Morgan Chase and Boeing requiring 5 days a week in the office. Chip Cutter writes for the Wall Street Journal, “It is still relatively uncommon for large employers to require corporate staff in person full time. In the Fortune 500, 82% of employers offer at least some remote-work opportunities, according to data from Scoop Technologies, a software firm that tracks return-to-office efforts…At tech company HP, the printer and laptop maker has asked that employees come into the office a few days a week, as determined by teams. CEO Enrique Lores said a younger generation of workers, including his own children, won’t tolerate a five-day-a-week plan.
“They value flexibility so much that they will not work for a company that will tell them you need to come to the office five days per week. They will not do it,”
Perhaps Enrique, but here is another perhaps. Perhaps, they can find another job and there will not be many available. The most recent JOLTS labor report shows that the quits rate has dropped to a three-year low. The status quo has changed youngsters, and I think the new criteria for employers to use will be, be fantastic at your job and you can work anywhere and let’s be honest, not many fantastic ones out there so then it will be come back to the office or find another job. This will be traumatic, and many blue cities are setting up nap pods and safe places for decompression afterward. Welcome to doing what you don’t want to do, it is called adulthood.
bye bye cry cry now get to work
LF#3
Last week UPS announced that package volumes were down 8% as their stock sold off and they announced layoffs. This week C.H. Robinson Worldwide, announced earnings and they came in at 50 cents a share vs the expected 80 cents after stripping out one-time charges and blaming it on low levels of freight demand and a negative pricing environment. Sabela Ojea writes in the logistics report for the Wall Street Journal, “Revenue dropped 17% to $4.22 billion, missing analysts’ expectations of $4.33 billion, according to FactSet. C.H. Robinson reported a 18% drop in transportation revenue.
“Weak freight demand in an elongated market trough, combined with excess carrier capacity, continued to result in a very competitive market,” Chief Executive Dave Bozeman said, noting he expects 2024 will present some of the same challenges and headwinds seen in 2023.”
It isn’t just in shipping and freight, but consumer purchases as well. Sabrina Escobar writes for Barron’s “Adidas surprised the markets Wednesday by pre-announcing its fourth-quarter results. While the quarter itself was good enough, the company’s guidance for fiscal 2024 reignited concerns that demand for athleticwear was slowing in key markets, sending shock waves through the sector…Part of the reason for the blowback is that Adidas’ announcement comes on the heels of Nike’s guide-down in December, and Puma’s disappointing preliminary results last week.”
The pandemic ushered in a lot of programs that allowed people to not pay bills, receive money to spend above their means, and live a lifestyle that they have not yet earned. I am referring to work from home, which is reserved for people that have earned it, not entry levels dumb dumbs that don’t know what they are doing but simply don’t want to commute. The world is realigning itself and there will be changes, and they are happening fast.
The Dow Jones finished trading at …..38,654.
The 10 year Treasury bond is at …4.024%.
The price of Brent Crude is …$77.33 per barrel.
The price of gold is … $/2,057oz.
The price of silver is ….$22.79/oz.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.