A Surgeon's Guide to C&I Loans | The Daily Peel | 3/28/23

Mar 28, 2023 | Peel #428

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Market Snapshot

Happy Tuesday, apes.

It was Monday Funday on Wall Street to kick start this wonderful week of degeneracy, and we can't wait to see how the rest of it plays out.

Equities opened higher on Monday, not by much, but enough to make me want to cry just a little less when I walked into the office. Subsequently, shares danced around in the classic "we don't know wtf is going on" kinda style for the remainder of the session.

Ultimately, U.S. indices closed mostly flat once again, running from a -0.47% day for the Nasdaq to a +0.60% day for the Dow. At the same time, it was a bad day to be a treasury bond. Yields spiked nearly all day, with the 2-year climbing from as low as 3.57% to a good few basis points over 4%. The dollar saw some movement as well, although slightly less, as it sold off compared to a basket of other currencies.

Let's get into it.

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• Let's talk traction: GoSun's sales clocked in at $5.87M in 2021, up 50% over 2020; the company's leadership team also has multiple exits under its belt
• $570B TAM between outdoor recreation and disaster relief application for portable solar tech (GoSun's NGO partners include the American Red Cross)
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GoSun's current round is closing soon and you participate now by investing as little as $250.

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Banana Bits

• Disney to begin layoffs of 7,000 staffers this week; Bob Iger needs more money for his yacht
• Salesforce escapes Elliott's clutches after flexing its profits and slimming down
• TSMC is going to Arizona to make chips and dip
• This company is going down faster than a TikTok trend; thanks, Hinder-burn

Macro Monkey Says

C&I or Die

People who do work that feels important but isn't actually (wonder who that could be) often like to say things like, "well, it's not like we're performing surgery." Well, in this case, we kind of are.

Except, in our case, the patient isn't some 54-year-old father of three getting his appendix removed. Our patient is the +$23tn hoard of goods and services that the U.S. has turned into the most powerful and dynamic economic machine the world has ever seen.

So, why are we performing surgery on this big, beautiful economy? Because even supermodels get acne.

In actuality, the reasons are obvious. Hindsight is 20/20, but I think deep down, even the most "live-by-the-hype, die-by-the-hype" investors knew there would eventually be a reckoning to come after a +10-years of ZIRP.

And that's exactly what the last year has been, thanks to JPow and his 475-bps adventure. The question facing investors now centers around whether or not we're on the way out of that reckoning or just getting started.

Going by equity prices, you might think we're on the way out. But, according to a recent report out of Bank of America, the "real" economy still matters.

And when I say real economy, I, of course, mean construction and industrial (C&I) loans issued by (mostly) small and medium-sized banks.

According to Bank of America, the net percentage of banks reporting tighter standards for issuing C&I loans has exploded from roughly -20% to nearly 50% in a period of just over 6 months. According to the chart below, growth like that is far from a good sign for those still holding out hope for a "soft landing."

The market for C&I loans is almost a $3tn engine to the economy. When a bank issues a loan to a developer looking to build, say, new apartment units, there's an enormous amount of economic activity created. Prime examples include:

• Hiring workers to take part in the construction
• Hiring developers, architects, consultants, engineers, etc., to plan the building
• The bank paying people to underwrite the loan
• Those working on the building contributing to the local economy
• When finished, landlords collecting rent from the tenants in the building
• Ongoing living expenses like utilities, maintenance, etc., etc., etc.

You get the point. Yeah, the size of the loan market is just under $3tn, which seems massive in itself, but greatly understates the true economic impact sparked by these loans.

Moreover, C&I loans are like the #3 batter in a small/mid-sized bank's lineup. First, there are checking and savings accounts, then mortgages, then C&I loans step up to the plate. When the other two strike out, C&I better step up, or the inning is over.

With 30-year fixed rates at +6.5% and $300bn of checking and savings deposits fleeing to money market funds in the last two weeks alone, it sure seems like it's C&I loans' turn at the plate. Considering the tightened standards, this is something you're gonna want to keep on your radar.

So, we're definitely performing surgery, as your cocaine / adderall laced hands clearly can't hold still, but ensuring the C&I loan market doesn't utterly collapse like in '08 will be key to the soft vs. hard landing debate if that's still a thing.

What's Ripe

First Citizens BancShares ($FCNCA) ↑ 53.74% ↑

• It wasn't Jamie Dimon, it wasn't Warren Buffett, but it was First Citizens Bank CEO Frank Holding that saved the day.
• Announced late Sunday / early Monday, First Citizens agreed to buy a substantial majority of the failed SVB's assets, including deposits and branches, sending shares on a +50% ride yesterday.
• Unlike what you'll see below, this move actually does grant some clarity to a sector that desperately needs it. Frank Holding stepped in big time, taking his chance to hold up the regional bank sector but also taking the risk of holding a major L. Let the games begin.

First Republic ($FRC) ↑ 11.81% ↑

• If their goal really is to make us as confused and uncertain as possible, federal financial regulators are doing a damn good job of it.
• In the same report released this past weekend, regulators, including the Treasury, Fed, and FDIC, issued statements and other nonsense about how "recent strain" could be easing. Sounds great, but in the same breath, regulators said more help could be on the way.
• I'm sorry, but who hired Big Brother? This is a professional level of double-speak George Orwell could only dream of. "Things are fine, but we're providing additional support just cuz" is essentially what they said.
• Now, we're left to wonder if 1) things are fine, 2) things are fine because additional help is on the way, or 3) things are definitely not fine, but we want you to think they are so we can minimize the additional help that we're not providing but definitely might be providing if we really need to. Confused yet?
• Me too. Either way, the prospect of further support seems to have been enough for investors, sending shares up almost 12%.

What's Rotten

Coinbase ($COIN) ↓ 7.80% ↓

• Is Coinbase the new Tesla? I mean, some of the best and most well-respected financial news outlets in the entire world (*cough* *cough* The Daily Peel) have been reporting on this name seemingly nonstop for weeks now.
• Anyway, shares tumbled once again to start the week. This time, the plummet comes amid a big middle finger from the CFTC to Coinbase competitor Binance, but we won't step on any more content included below.
• Traders likely dumped shares due to elevated regulatory fears aroused by the CFTC's shenanigans. Despite being a U.S.-based, publicly traded exchange, it's clear that regulators are out for blood wherever they can find it. I mean, the firm legit just got hit with a Wells notice last week, so…
• Oh yeah, and notable as well is the fact that the CFTC called both BTC and ETH "commodities." Recently, the SEC used the same language to describe only BTC and implied that every other digital currency is a security, including ETH. Something tells me this debate is only heating up.

Carnival ($CCL) ↓ 4.77% ↓

• Despite what the name suggests, nobody at this company is going to any carnivals, or on any cruises, for that matter, anytime soon, and the reason why is simple: they can't afford it.
• Yesterday, Carnival shot itself directly in the foot by reporting last quarter's earnings alongside updated guidance for the coming periods. EPS and revenue annihilated estimates, yet the company's expectations for a wider loss sent shares sinking.
• The Street had been expecting a loss of $0.28/sh in the C-19-mangled cruise operator, but yesterday, Carnival upped the ante to a loss of $0.34 - $0.42/sh next quarter, causing Mr. Market to get a little queasy.

Thought Banana

Bye-Bye Binance?

As if the world wasn't experiencing enough war right now, the CFTC has officially entered a battle against the world's largest digital currency exchange, Binance.

The Commodity Futures Trading Commission (CFTC) is a U.S. regulator of all things futures, swaps, and options. To give a gross analogy, they are to derivatives as the SEC is to securities, with some (confusing) overlap.

As nobody on Earth knows what the f*ck digital currencies are classified as, least of all the SEC Chair, regulatory showdowns in the industry are kind of up for grabs. Here, the CFTC went big, like Captain Ahab hunting a certain white whale.

KYC & AML (know-your-customer and anti-money laundering) laws are a crucial piece to global financial regulation. Stringency in these laws varies, but the U.S. stands head and shoulders above (most) of the rest of the world with robust and borderline manic KYC-AML regs. Combine those with requirements around registration and reporting, and it becomes really hard (and expensive) for internationally-based financial firms to operate on our shores.

Naturally, then, some financial firms decide to snub the U.S. market. On the other hand, some accept the regulatory L handed to them by the U.S. government. Finally, some choose another strategy (the wrong one) in deciding to operate in the U.S. but not actually following any of those laws.

According to the CFTC, Binance chose that final option.

There appear to be infinite violations committed by Binance in the CFTCs view. These range from encouraging customers to use VPNs in order to illegally use the network in the United States to flouting KYC-AML rules because $600 "can barely buy an AK-47," according to leaked Binance internal messages contained in the report.

Further, there may be direct action against Binance's Chief, Changpeng Zhao (CZ), as he and other execs were (allegedly) messaging about topics related to optimizing access to Binance's network by U.S. users. If true, that's about as red-handed as one can be caught.

Right now, it's all allegations. But for the digital currency space, the last thing they need right now is their biggest player to be starting sh*t with the biggest economy.

But hey, BTC is up about 65% YTD, so maybe you cryptoheads smell something the rest of us don't.

The big question: Was Binance really dumb enough to commit such blatant violations of U.S. law? How will this impact the development of the U.S.-based digital currency industry and globally? Is it time for a homegrown player to step in now that FTX is dead?

Banana Brain Teaser

Yesterday - What is something that you always have but you always leave behind?

Fingerprints.

Today - It's 50 bananas off the Consulting Interview Course for the first 3 correct respondents. LFG!

An open ended barrel, I am shaped like a hive. I am filled with the flesh, and the flesh is alive! What am I?

Shoot us your guesses at [email protected] with the subject line "Banana Brain Teaser" or simply click here to reply!

Wise Investor Says

"When you lend money, you're taking someone else's risk. When you invest, you're taking your own risk." - Peter Lynch

Happy Investing,

Patrick & The Daily Peel Team

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