SVB Everywhere, All At Once | The Daily Peel | 3/14/23

Mar 14, 2023 | Peel #418

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Market Snapshot

Happy Tuesday, apes.

Who had “Nasdaq up half-a-percent amid massive banking failure” on their Bingo card? Yeah, definitely not my first guess, but I guess JPow and his ever-so-calming ways were enough to let everyone relax. The S&P and the Dow didn’t fare so well, both down for the day, but surely not by much.

Big balance sheet names basically carried the market on Monday, regardless of what sector, as long as you aren’t a bank, basically. Treasuries took that positive price action and ran as government bonds rallied, causing yields to plummet the most in a 3-day period since 1987.

Meanwhile, the U.S. Dollar fell for most of the day, starting to see a spike later into the evening. Commodities were mixed while gold hit a multi-week high as “digital gold” in the form of BTC is up nearly 10% in the last 24 hrs at the time of writing.

Let’s get into it.

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Banana Bits

• From majority odds of a 50 bps hike just last week, Mr. Market now says there’s a >25% chance of no rate hike at all this month.
• One person’s trash is another person’s treasure? More like one person’s bank failure is another person’s way-lower mortgage rate
• Calls for updates to banking regulation are already underway, and politicians have wasted zero time to start finger-pointing
• Our favorite macro nerd Joseph Wang, aka “Fed Guy,” blesses us with another golden rundown of just wtf happened at…I think you know where

Macro Monkey Says

SVB Everywhere, All at Once

A shot-down Chinese balloon, a burgeoning debt ceiling crisis, and the second and third largest bank failures in U.S. history coming within three days of each other: Welcome to 2023!

So, I probably don’t need to tell you that a lot has gone down around SVB in the last 24 hours. Before we dive into the full extent of the lunacy, let’s try to summarize some key events

• All depositors at SVB and the also-collapsed Signature Bank were fine
• The 2-year treasury yield plunged the most it has since Black Monday in 1987
• First Republic and Western Alliance lost 62% and 47%, respectively, while $KRE, a regional bank ETF, shed 12.3% and traded nearly 10x its average daily volume
• The Federal Reserve, Treasury, and FDIC announced a Bank Term Funding Program (BTFP) with a $25bn backstop from the Exchange Stabilization Fund
• SVB U.K. was bought by HSBC for 1 Euro, while JP Morgan gave CPR to First Republic and is considering buying SVB’s assets

And that only scratches the surface, but we’re not tryna be out here looking like this:

I mean, what do we expect? It’s the second and third largest bank failures in U.S. history, and while bank failures aren’t exactly uncommon throughout the nation’s past, collapses of this scale sure are.

To stop the contagion, the Fed, through the BTFP, will provide up to 1-year loans to banks, S&Ls, and other qualifying depository institutions that offer U.S. treasuries, ABSs, MBSs, and other high-quality assets as collateral. If only it was that easy with C-19.

Anyway, JPow and the gang don’t anticipate needing it, but the Exchange Stabilization Fund is also tossing a cool $25bn in the “just in case” pile. Further, the rescue will come at “no cost” to the taxpayer as the primary source of funds backing withdrawals will come from the FDIC, particularly the $100bn Deposit Insurance Fund (DIF), which is funded by quarterly fees from FDIC-member banks.

Based on language like “more than fully sufficient” to describe the DIF and the Fed saying, “The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient,” it doesn’t really seem like regulators are all too worried.

But others, like the Twitter people and pundits, sure are.

Most of the fear is stemming from the absolute annihilation regional bank shares faced along with what has been described as an “extinction event” for the “innovation economy.”

As far as I’m concerned, we should’ve stopped using language like that two bear market rallies ago. But still, SVB was like none other to the startup ecosystem in the United States. It was the bank of choice for the VC community, with 56% of loans going to venture or PE institutions while further providing banking services for 55% and 44% of venture-backed IPOs in 2021 and 2022, respectively.

In short, these people might just be f*cked. It took 40 years for a startup funding and banking provider like SVB to get to where it was at the close of 2022, causing this aspect to remain as arguably the biggest “what if?” remaining.

Still, the good thing is those deposits are safe, and that’s all that really matters. Part of investing in equities is accepting the risk of those monies going to $0, especially for the idiots apparently (and formerly) running this company. Don’t even get me started on those dumb enough to be shareholders…

What's Ripe

Provention Bio ($PRVB) ↑ 259.70% ↑

• Even amid massive failures occurring in the banking system, someone’s always making a buck (or $2.9bn bucks).
• Yeah, that’s at least how much the team at Provention Bio is making, as it was announced yesterday that French drug conglomerate Sanofi intends to buy out the smaller U.S. firm.
• For Provention, it’s a nice check to a company that just last week was valued at less than 1/3rd yesterday’s closing value. For Sanofi, it’s a way to get the shareholders goin’ about the company’s drug pipeline again. Win-win, as long as regulators don’t kill the party, of course.

Illumina ($ILMN) ↑ 16.97% ↑

• Besides tech bros, finance bros, and every shareholder of SVB, the person who got slapped in the face hardest yesterday was easily Francis deSouza, CEO of Illumina.
• To be fair, his company’s stock did surge almost 17% on the day, but thanks to the exact opposite of him, yesterday’s surge came in the form of a letter to shareholders from none other than legendary activist investor Carl Icahn.
• Icahn knows how to right a ship, to say the least, so investors were pumped. Explicitly, Icahn absolutely tore apart Illumina’s “ill-advised (and frankly inexplicable)” 2021 acquisition of Grail, where Illumina used an M&A technique known as “intentionally screwing yourself ove-” I mean, “jumping the gun.”
• Basically, jumping the gun means you violate the law and close a deal before getting the thumbs up from mommy and daddy, aka regulators. Now, the firm has to divest Grail at a >$1bn associated tax cost, along with a 10% penalty applied to this year’s revenue. Not a great way to start the week (or is it?)

What's Rotten

Regional Banks ($KRE) ↓ 12.31% ↓

• Sound the alarms, flash the Bat Signal, do whatever you need to do because regional banks are losing their damn minds amid the SVB fallout.
• Names like $FRC and $WAL fell well over 50% and up to 81% at certain points yesterday as a result of the utter frenzied selling of regional banks. There’s no shortage of reasons, to say the least, as equity holders in the collapsed $SVB and $SBNY are gonna get the same payout as my dog.
• Moreover, fears of a bank run remain and remain all too possible. Deposits have been guaranteed by the FDIC for now, sure, but there are far from any guarantees that this would be extended in the same manner if this spreads.
• For now, uncertainty is still the only certainty. We didn’t get to mention it above, but the VIX surged another 6.9% (Nice.) on the day as the market went full schizophrenic. Stay tuned.

2-Year Treasury Yield (US2Y) ↓ 0.59% ↓

• 1987 was a time of big hair, big movies, and big losses in the stock market. Not since Reagan was in office have we seen a 3-day decline in the 2-year treasury yield – and a corresponding rise in 2-year price – like we have since Wednesday’s close.
• From a several-month high of just und 5.1% last week, the 2-year now sits below 4% at the time of writing. For bond-phobic people, that might not seem like a major move, but in an asset like the goddamn U.S. 2-year treasury note, it’s literally wild.
• We don’t need to explain why (*cough* *cough*, see above, 2nd & 3rd largest banking collapses), but this kind of move doesn’t come without implications. Keep in mind the 2-year is basically a proxy for moves in the fed funds rate, meaning we swung from well above to well below the current rate in a matter of like 36 business hours.
• Not that the 2-year is the primary maturity impacting mortgage rate, but from over 7% just days ago, average 30-year fixed rates now sit as low as nearly 6.5%. For home buyers, it’s ain’t much, and it might not exactly be honest, but it sure does work.

Data Peel

Source

Thought Banana

Pfizer Sees a Gem

I don’t know about you, but I might throw up if I think about SVB for another second today. Let’s take a breather, come out of our bunkers, and do something nice, like enjoy the wonderful world of big pharma again.

First and foremost, dealmaking is (maybe now, *was*) confirmed back in 2023. Shrugging off the collapse of several massive banking failures, Pfizer is picking up the oncology biotech firm Seagen at a $43bn enterprise value.

This price tag values Seagen at about a 35% premium, according to the FT. Seagen shareholders will receive $229/sh. $31bn in funding for the deal will come in a mix of primarily long-term debt along with shorter-term instruments and cash.

Like Sanofi, Pfizer is looking to hype up shareholders over its all-important drug pipeline. Analysts use these pipelines as key inputs for assumptions made on these companies, meaning a less exciting or certain pipeline will decrease both visibility and hype applied to the stock, often leading to lower multiples.

And if you want a sick-a** drug pipeline, it doesn’t get much better than Seagen. Most notably, analysts noted that oncology-related medicines are the fastest-growing segment in the pharma drug market. Shares in Seagen surged nearly 15% on the news.

For its part, Pfizer needed this deal too. Those C-19 vaccines were a huge help for a while there, but now the firm faces over 30% revenue declines now that we’ve kicked that damn virus’s ass. Still, the vaccines did contribute to the phat cash pile Pfizer is sitting on of over $22bn.

Now all eyes turn to the FTC for the thumbs up. Apparently, no one on the Street really expects any trouble from the regulator as the companies don’t really overlap too much with their products. Still, buying Roomba was too much for Amazon, according to this FTC, so who the hell knows.

The big question: Are deals back, or is M&A like this limited to the pharma and biotech industries? Will Lina Khan and the FTC allow Pfizer to complete the deal?

Banana Brain Teaser

Yesterday — When it’s alive, we sing, and when it’s dead, we clap our hands. What is it?

Birthday candles.

Today — It’s 150 bananas off the Venture Capital Course for the first 3 correct respondents. LFG!

People buy me to eat, but never eat me. 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

“The only way to consistently make money in the stock market is to be in the top 5% of risk managers at all times.” — William O’Neil