More Ramblings
Once again, we are seeing a divergence taking place. The equity markets, while still tender, seem to have stabilized and there seems to be a lot of positive thinking out there. Yet, we have a banking sector that is one sneeze or errant Tweet away from potential disaster.
Taking a step back from the market and trying to figure out what is going on is a cottage industry that has been around for probably 50 years or so. Seems everyone is an expert. Everyone called this move or that move correctly. Everyone is smarter than everyone else.
Just keep a scoreboard. Watch CNBC or Fox Business News and tally all the supposed geniuses out there. Amazing how smart these guys are but when you actually look at any fund manager or any hedge fund manager , over time, most are mediocre at best.
Managers that produce those outsized gains last year will most likely fall on their faces this year. It is a fact. Guys like Peter Lynch are few and far between. He might have a great year in an up year but his following years returns were almost always good. My point is that you can jump on some hot portfolio managers bandwagon but odds are he cooled off by the time you climbed aboard and what he thought was the greatest idea of the 21st Century is now languishing badly and you, as a late investor, will suffer his arrogance.
Thats what they do best, tell you what you already know and take credit for knowing it before anyone else. Yea, ok. I don’t ascribe to that model. I like to look at what’s happening, what could be the potential ramifications of not one idea, but many, and then decide what my action or inaction will be.
Very important thing to always keep in mind, sometimes the best trades are the ones you don’t make. In my career as a floor broker I can’t tell you how many times I have been yelled at for not making a certain trade and my instincts were usually spot on. I always have felt you couldn’t put a price on what your gut was telling you. I was fortunate that I had the trust of my clients and with that, the trust of the people I worked with so when I decided it wasn’t right, they left me alone.
Our firm had a very interesting motto: “You don’t get paid for Nothing Dones”. Simply put, if you had an order to sell 100,000 shares of a stock and you only sell 25,000 shares, 75,000 is considered nothing done. You only get paid for what you execute. My feeling was why execute 100,000 shares poorly when you can execute 25,000 exceptionally well and then have a better opportunity to sell them when the price was more advantageous to the client? Without breaking an arm patting myself on the back, I was right way more often than I was wrong.
My point with all this is simple: People on TV keep an eye on the current term, what has happened and what may happen today. I keep an eye on the longer term. The bigger picture. I either act on this or I don’t. You don’t have to be in every moving trend all the time. Yes, it’s nice to catch that wave every so often but the reality is, no matter what you do, you may beat a benchmark periodically but long term you will be about average if you do it on your own.
That’s why I don’t believe rushing out of the banking or financial sector is a smart move. Yes, we have all taken a bit of beating but the problems today are not the same as they were in 2008. The flags thrown up at Silicon valley Bank, Republic Bank and Signature Bank should allow investors, regulators and bank risk officers to do the deep dive that they should have been doing for the last two years plus and dealing with the risky, money losing holdings and take their medicine.
Again, I don’t know enough about the inner workings of most banks but what I do know is that risk managers are in place to assess current risks and future risks and they have models out the Yin Yang about where their risks lie in every conceivable interest rate environment. How is it possible that any bank, large or small, not be fully prepared for this eventuality? Yes, these rate hikes came at unprecedented speed but come on, they didn’t raise the Fed Funds rate overnight to 4.5% did they? No, while historically quick, this tightening has been going on for quite a while now, they should have been prepared.
Hind sight. Just like everyone else, I have 20/10 vision looking in the rear view mirror but great hid sight should make for better foresight and this is why I think the selloff in the banking sector was overdone. Banks know now what their risks truly are and the Fed has been telegraphing it’s intensions pretty well also. So, any bank that gets smoked from here on out deserves it. Sorry.
Admittedly, as an independent investor it is hard for me to know who screwed the pooch here. I don’t get to look at any banks P&L or their current balance sheet so my assumptions are from my gut. Knowing the bank, knowing it’s deposit class, knowing the management and it’s experience and historical risk model. That’s what guides me. Yes I am old school but I don’t think old school is all that bad.
One last thing. The Fed is meeting today and tomorrow and the vast majority of economists and Fed watchers are saying that there will be an additional 25 basis points tacked on to the Fed Funds rate tomorrow. I will say it again, I am in the minority but I think it is the perfect time for the Fed to pause. With all of the upheaval and uncertainty in the banking sector. With all the mistakes made when it comes to portfolio (deposits) protection. The last thing the financial sector needs is a rate hike. That, to me, will put additional stress on banks that might be feeling the stress of miscalculations. I know fighting inflation is priority number one at this time, but I think the Fed has to remember that in it’s charter it is stated pretty clearly that a major function of the Federal Reserve Bank is to protect the strength of the banking system itself and any rate rise will knock another Jenga block out from an already unstable system.