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Howard Capital Management Reviews - Weekly Update
Silicon Valley Bank Goes Under, Where Do We Go From Here?
FROM THE DESK OF VANCE HOWARD
MARCH 13, 2023
To start the Wealth Watch I would like to let everyone know that we had almost no exposure to SIVB or the banking sector in general, and we do not own any bitcoin. Neither met our requirements for an investment.
While I have been writing to expect volatility over and over for weeks, I think it is now clear to see that I was not kidding, was I? The last week has weakened the HCM-BuyLine® and we are watching closely for any break. The markets have been trading just about as we had anticipated, with a nice run-up in January, then a pullback followed by a period of consolidation which is to be expected. What was not anticipated was a bank failure. That caused a two-day selloff that was very hard. The trend is still intact, but just barely. Even if the HCM-BuyLine® is breached, we do anticipate a recovery back above the trend in short order.
We spent a lot of time over the last three days analyzing whether we felt other banks were not being managed very well, and our conclusion is that this is most likely a one-off. In other words, the bigger banks look to be more sound. They are not taking on high-risk loans like Bitcoin and tech startups like SIVB was. Furthermore, most of the larger banks are very well diversified whereas SIVB was not. I’m not sure how they were able to give loans to a lot of these startups, but it has created some good buying opportunities in the banking sector. Our top pick would be Bank of America, and while we do anticipate investing in that bank soon, we will give the banking sector time to stabilize before looking to invest.
SIVB, the 16th largest bank in the US, is one of Tech industry’s largest lenders and media stories suggest VC and PE firms might be advising founders to move cash away from SIVB — essentially fueling a panic among Financials that continued right up until regulators shut it down.
SIVB’s failure highlights the fact that banks collectively are sitting on sizable losses on loans due to the rise in interest rates. The FDIC reported that at the end of 2022, the total unrealized losses is $620 billion (vs ~$15b 2021), and if these banks had to liquidate their portfolios, would substantially deteriorate book value.
But with investors and depositors rattled by the troubles at SIVB, financial conditions are tightening. This potentially reverses some of the hawkishness one would expect from the Fed. Basically, restricted lending by banks amplifies the impact of Fed hikes in place now and would reduce the need for future hikes.
While the NFP jobs report will be very important for the Fed, the SIVB-induced bank scare actually offsets the inflationary risks for the Fed to an extent. That is, even if Feb jobs are really strong, the continued second-order effects of the SIVB issues will likely contribute to a tightening of financial conditions. This means the odds of the Fed having to accelerate its pace of hikes might be reduced.
“We aim to take emotion completely out of the equation. Trading with emotions, in our opinion, ruins long-term returns.”
— VANCE HOWARD, CEO + PORTFOLIO MANAGER
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