Report Cards and April

By Jeff Kelly on March 31, 2023

“Your strongest moments will often make you think of your weakest”
David Goggins Navy Seal and Author of Never Finished & Can’t Hurt Me

Many years ago, when I went to school, we were given a Report card each quarter. At my school you received a grade for effort and a grade for accomplishment. In elementary school (now called lower school) they gave you the report card and it had to be returned signed by your parents. Several weeks prior to when the cards were sent home, I’d begin to explain to my parents why a particular grade wouldn’t be up to par. “Teacher is mean”, “I hate that subject” or “that’s something I’ll never use in a job” were my go-to lines. I got that last one from my brother Jim.

My mom was always unmoved. “Your older brothers had much better excuses than yours”. Any poor grade resulted in punishment. One subject had a perfect grade for effort but mediocre grade on accomplishment. My brother explained, “your grade in effort just means you are a suck-up”. “Your grade in accomplishment means you’re stupid”. Nice and encouraging as only brothers can be.

On Friday April 14^th many of the large financial companies report earnings. They have borrowed close to 1 trillion dollars from the Fed and the FDIC in the past couple weeks. In the next 18 months 1.4 trillion dollars in commercial real estate loans need to be rolled over. The market says it’s all bullish. I’m less than convinced. The market doesn’t have any obstacles until the Consumer price index is reported on the 12^th. The month of April is statistically the best of the year. We can party on until then. Just remember, the report cards are coming, and the payments will still be due.

CHARTS FROM THE PAST WEEK

No change to EPS for 2023 Despite Significant Bank Failures.

Big banks will not be the center of the coming crisis.

*Source: FDIC, Bank of England, Financial Stability Report December 2022, ECB, Deutsche Bank, 03/27/2023*

Oil has gone from loved to now being the 3^rd largest short position among non-commercial futures accounts.

*Source: Bloomberg, Strategas, 03/29/2023*

Small banks with lots of commercial real estate exposure and dwindling deposits.

The fed has been busy as a lender to banks.

More than the great financial crisis.

When stocks stay above the previous December low in the 1^st quarter, markets have historically had good years.

*Source: Carson, @ryandetrick, 03/28/2023*

Homebuilding stocks have traditional followed lumber.

Quite a divergence now.

*Source: Bloomberg, Piper Sandler, Michael*

Banks are less willing to make loans.

As the issues in regional banks persist and expand, this will accelerate further.

Stocks vs bonds using leading indicators points to bonds.

*Source: Topdown Charts, Refinitiv, Datastream, 03/30/2023*

The Nasdaq had a great 1^st quarter.

However, the number of stocks participating has declined.

Energy importing countries currencies have benefited from dollar weakness.

Banks are now faced with paying more on deposits or having deposits leave for higher paying alternatives.

This isn’t a positive for bank profits.

Tighter standards form consumer loans across the board.

Household expectations around personal financial conditions at all-time lows.

*Source: Fannie Mae, Hedgeye, 03/29/2023*

Private companies aggregate cash – total debt is at new lows.

*Source: Tavi Costa, Crescat Capital LLC, 03/27/2023*

Services Activity measured by the Fed has been in contraction for 10 months.

*Source: Fed Regional Surveys, Hedgeye, 03/29/2023*

Liquidity Growth is at all-time lows.

Deposits now below any other level going back to 1975.

Party on NASDAQ!

Credit Impulse is lower.

*Source: Institute of International Finance 2023 credit impulse figure are forecasts, 0329/2023*

Commercial Real estate prices moving lower puts pressure on regional banks.

They have outsized amounts of this paper on their balance sheets.

*Source: Bloomberg Reit Office Property Index, United States Real estate Property index, Green Street Advisors, 03/30/2023*

CDS (cost of bond insurance), spiking for Deutsche Bank.

Lots of Construction of Apartments.

This will be a significant amount of new supply.

*Source: US Census Bureau, re:venture, 03/28/2023*

Move index 2007-2008.

This measures treasury bonds volatility.

Move Index Currently.

Solid work by the Fed.

Total bank failure assets rival 2008.

Tech layoffs by year and sector.

2023 is way out front.

*Source: Layoff.fyi, arborresearch.com. 03/30/2023*

Guns now the leading cause of death in children 1 through 18.

*Source: Center for Disease control, 03/26/2023*

WEEKEND HOMEWORK

We see commercial real estate as the big area of worry for regional banks.

This podcast outlines the issues.

Where Stress Is Showing in the $20 Trillion Commercial Real Estate Market

First banks, now commercial real estate? Hear where cracks are starting to appear and what areas are at most risk in this episode detailing the state of the market.

A great book about living longer and better.

Wouldn’t you like to live longer? And better? In this operating manual for longevity, Dr. Peter Attia draws on the latest science to deliver innovative nutritional interventions, techniques for optimizing exercise and sleep, and tools for addressing emotional and mental health.

For all its successes, mainstream medicine has failed to make much progress against the diseases of aging that kill most people: heart disease, cancer, Alzheimer’s disease, and type 2 diabetes. Too often, it intervenes with treatments too late to help, prolonging lifespan at the expense of healthspan, or quality of life. Dr. Attia believes we must replace this outdated framework with a personalized, proactive strategy for longevity, one where we take action now, rather than waiting.

I hope you have a terrific weekend. Cheer for those San Diego State Aztecs!!!

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