An Old Friend and Regional Banks

By Jeff Kelly on October 17, 2025

I spoke to an old friend this week who’s having some health issues. We aren’t that close anymore, but we email from time to time. He’s a guy I grew up with. We played tackle football in my front yard when we were 8. We went through elementary, middle and high school together. We were roommates for a time after college. He was in our wedding. A good man.

I have trouble thinking of him as old or even older. My memories are not of that person. In my minds eye he’s always about 25. Quick witted, charming and outgoing. As I spoke with him this week, I was having trouble keeping my emotions in check. He did exactly what he’s done over the years. He told me a story from our past that made me laugh. I was calling to cheer him up, but talking with him helped me a lot more. He’ll get some news next week that will go a long way towards determining his course of treatment. I hope it’s good news.

But whatever the news is we are going to talk a little more often, relive a few more of those old days and laugh a bunch more. After all we aren’t likely to make any new friends with so many years of common experiences, we need to hold on to those we have. If you can send any white light his way, I’d be grateful.

Markets are correcting modestly from an overbought condition. It doesn’t feel good but it’s part of the process.

Yesterday we saw markets have a tough day. The regional banks sold off hard, the ETF for regional banks, KRE, had a 2.9 standard deviation decline. This was the fifth largest decline we’ve seen in the ETF since the pandemic, comparable to what we saw in the Spring of 2023 when the Silicon Valley Bank crisis occurred.

Yesterday two regional banks filed 8-k’s ahead of their earnings next week. These filings detailed some issues with a small number of borrowers. Given previously reported problems with some higher profile bankruptcies, Tricolor and First Brands, markets shot first and waited to ask any questions.

This morning 5 regional banks reported earnings. The numbers were good and there were no new disclosures of similar issues. In fact, credit metric for the banks who reported this morning were stable or improved. This gave the markets a chance to breathe and observe that yesterday may have been an over reaction to the news from two regionals.

Realized volatility reached the 98^th percentile. That’s high and would need some further bad news to maintain that level. So far, we haven’t seen it.

Was it an overreaction? Unfortunately, we won’t know for a while. Jamie Dimon, CEO of JP Morgan in talking about private credit said, “When you see one cockroach, there are probably more”. The initial reaction to any bad news is an attempt to restore confidence. This was true in the great financial crisis and it’s true today. There’s little question some capital has been misallocated. But the economy is huge, and the misallocations need to be large to impact the overall market.

Also, it’s worth noting issues were identified in the summer of 2007 with the mortgage market. It took until the spring of 2008 when Bear Stearns was bought by Citigroup and the fall of 2008 when Lehman Brothers went bankrupt for these issues to affect the system.

Next week earnings season really kicks in. We will have a chance to see if the companies report news that’s as good as the market expects. If they do, this week’s nervousness will likely be forgotten. But it has been a shot across the bow of the markets. We will see more issues with the kind of market we have observed in the past few months. Good markets will always allow capital to be allocated more aggressively than hindsight would warrant. It’s only after the fact that we see how aggressive the allocation was.

Markets are also dealing with the government shutdown. This is becoming one of the longest on record. At some point it will begin to impact the economy. Most of what I read still believes we have another week or two to go before a settlement is reached.

As we get closer to the holiday season its possible to see multiple things occur which would be viewed as positive for markets. An agreement could be reached to reopen the government. We will likely see accelerated spending by corporations to take advantage of accelerated depreciation. We could see movement towards an end to the war in the Ukraine. The decline in oil prices will be helpful for lower gasoline prices. Gasoline is down about 15% since June.

Perhaps we could even have the beginnings of the long-awaited trade agreement with China. All these factors can help the economy to finish the year on a strong note.

CHARTS FROM THE WEEK PAST

October Empire Manufacturing Index up to +10.7 vs. -1.8 est. & -8.7 prior … new orders +3.7 vs. -19.6 prior; shipments +14.4 vs. -17.3 prior; prices paid +52.4 vs. +46.1 prior; prices received +27.2 vs. +21.6 prior … employment +6.2 vs. -1.2 prior.

Average age of a U.S. passenger car on road is up to 14.5 years … compares to 8.4 years back in 1995 per Polk data.

Company guidance looking strong heading into this earnings season per bloomberg.

US air travel (TSA total traveler throughput in million passengers – 7 day average) 7-day average 8.9% above 2019 level.

Bank of America global Fund Manager Survey sees cash levels at the lowest point in years.

Our broadest measure of FMS sentiment, based on cash levels, equity allocation, global growth expectations rose to 5.8 from 5.3, the highest level since Feb’25.

Sentiment is very high.

Allocations to gold crypto remain very low.

LVMH owner of many luxury brands such as Hermes, Givenchy, DeBeers, Hennessy and many more, had their best day in many years.

Can luxury retail turn higher?

Stocks with the biggest call option volume are performing the best.

China approved 10 reactors in ONE DAY.

The US approved 2 reactors in 45 YEARS. China is building more nuclear capacity than the rest of the world combined.

Negative yielding debt is back in Switzerland.

5 times leverage on some new ETFs. Okay then.

_{Source: Volatility Shares, 10/15/2025}

One country takes power needs seriously, the other does not.  

Interesting look at top 10 Internet Stocks from 1999-2000 and top 10 AI today.

There are a number of loan receivables 60 days or more past due.

Soft prints for soft data today … Philly Fed Manufacturing (blue) -12.8 vs. +10 est. & +23.2 prior … NY Fed Services (orange) -23.6 vs. -19.4 prior (lowest since January 2021).

There are lots of rare earths, but they are difficult to mine.

China has a huge edge here.

Manufacturers surveyed by the New York Fed continue to expect higher prices in next six months … outlook near upper end of historical range.

New year-to-date high for New York area manufacturers’ new orders 6-month outlook as of October per Empire Manufacturing Index.

Active managers are underperforming in 2025: Just 21.9% of active funds have beaten the market YTD, the worst performance in at least 26 years.

This is in sharp contrast to 60.4% and 60.5% seen in 2021 and 2022. This is also well below the average of 42%.

There have only been 50 of 500 S&P 500 companies report so far.

The earnings that have been reported are very good. Sales up 8.11% and earnings up 16.78%. The reaction to good earnings has not been good so far. Many companies are selling off after a one day positive reaction.

CDS spreads are off their lows but have not broken out, at least not yet.

Lots of noise on Thursday but little follow through.

We have seen 1 month realized volatility (blue line) break above 3 month realized volatility (red line).

This can bring higher volatility going forward.  

The VIX, volatility Index, does appear to have broken out.

When it’s above 20 it’s tougher to be a long-term investor.

WEEKEND HOMEWORK

Interesting but wonky.

In 1929, the world watched in shock as the unstoppable Wall Street bull market went into a freefall, wiping out fortunes and igniting a depression that would reshape a generation. But behind the flashing ticker tapes and panicked traders, another drama unfolded—one of visionaries and fraudsters, titans and dreamers, euphoria and ruin.

With unparalleled access to historical records and newly uncovered documents, New York Times bestselling author Andrew Ross Sorkin takes readers inside the chaos of the crash, behind the scenes of a raging battle between Wall Street and Washington and the larger-than-life characters whose ambition and naivete in an endless boom led to disaster. The dizzying highs and brutal lows of this era eerily mirror today’s world—where markets soar, political tensions mount, and the fight over financial influence plays out once again.

This is not just a story about money. 1929 is a tale of power, psychology, and the seductive illusion that this time is different. It’s about disregarded alarm bells, financiers who fell from grace, and skeptics who saw the crash coming—only to be dismissed until it was too late.

A great weekend ahead. Soon Louise will be two. The time has gone so fast. Don’t let another day get away from you. Do it today. Whatever you know is right for you. No matter what get that exercise done, get outside and enjoy the fall weather. Reach out to a friend. Help a stranger. Make someone’s day better just because they met you. Have a great weekend.