Random Thoughts on the Economy and the Stock Market - No. 3

* Last week a black swan flew over the markets in the form of the failure of the Silicon Valley Bank (SIVB) with assets of $211 billion, making it the second largest bank failure in U.S. history. Although shorts were hovering over the stock for awhile, the suddenness of the collapse shocked the markets. The failure was the result of two cardinal sins of banking: 1) like an early 1980's S&L the yield on its assets were far below its funding cost due to the rapid rise in interest rates and 2) like the Texas banks of the 1980s its assets and deposits were concentrated in one industry; oil in the case of Texas and technology in this case.

Thus far, unlike in 1984 when the FDIC bailed out all of the creditors of the Continental Illinois National Bank, with $40 billion in assets and the it being the 7th largest bank in the U.S., Silicon Valley depositors above the $250k insurance threshold (87% of the deposits) will have to wait in line to get paid out of the receivership. Thus there are more than a few companies that will not be able to meet payroll. Just to note the Continental Illinois bailout gave rise to the term "too big to fail."

* The bank failure triggered a 4.5% weekly decline in the S&P 500 and the yield on two year Treasury notes cratered from 5.07% to 4.59% in two days, the biggest such decline since the Lehman crisis of 2008. As result the Fed will likely ignore the 311,000 February jobs gain accompanied by a modest 0.2% increase in average hourly wages and whatever this week's CPI will bring thereby ignoring the hawkish 50 basis point increase talk of the earlier last week. Thus,  making for a modest 25bps increase in the federal funds rate. Of course, if there is wide fallout from the bank failure any increase would be off the table.

* My sense is that banks stocks will continue to trade under pressure given the recent FDIC report highlighting the fact that the banking system was sitting with $620 billion in embedded securities losses as of yearend and the growing awareness on the part of depositors that the minimal rates banks now pay are unsustainable. Part of Silicon Valley's problem was that deposits were leaving to find higher yielding alternatives. Simply put, net interest margins will be under severe pressure.

*For the stock market as whole, as I wrote previously, I believe we will soon retest the October 3600 low for the S&P 500.