Bank Contagion, Bond Investing, META Thoughts, And Much More

Here’s the transcript from this week’s live Q&A chat:

Q. Can you give us the state of the market now? Do you think the bank withdrawal contagion will spread further and even some large banks’ balance sheets need to be revised?

A. It’s not just the withdrawals contagion risk that’s the issue here. There’s also the risk that banks, even the biggest banks, turn into zombified versions of themselves as they deal with billions of dollars of losses from having bought Treasuries that yielded just about zero that now yield 3-5% meaning they are in trouble. The state of the market remains one that is probably path-of-least-resistance is lower but that we’ll get some big bear market rallies along the way. It might take some time for the economy and stock markets to work through the excesses and misallocated capital of the last three to ten years.

Q. Cody are you close to thinking of going all cash like you have before? Are you more bullish or bearish?

A. I’m nowhere near going to all cash like I did in 2007. I should have gone to cash back when I got outright bearish when the markets did their blow off top back in November of 2021: “there are plenty of other stocks out there right now that are probably in a blow-off top phase that will end up with them being down 70% from these current levels. I implore you to go through your portfolios right now and consider getting out of one or two names that have gone vertical but that probably are way too speculative to justify the moves. I’d also suggest trimming some NVDA and other names in your portfolio if you haven’t yet. I’m doing some additional hedging and decreasing my net long exposure in the hedge fund today. I’m going to trim a little bit of ABNB, QCOM, NVDA, GOOG and maybe a couple other names in my personal account today too.” While I’m not outright bearish here, I’m not outright bullish here either. It’s a market that’s trying to get more fairly priced and still isn’t wildly undervalued yet. But it’s far from that blow-off top where I’d be more inclined to go to cash and get outright bearish.

Q. @Cody: maybe you can help me understand. I was reading about negative AOCI to capital and how it got SVB and other banks into trouble. Shouldn’t this be an open book on the balance sheet as mark to market losses and shouldn’t red flags be raised much earlier? Sorry if this is a stupid Q.

A. Not a stupid question at all. It’s shameful that all those bank analysts and bank investors didn’t have any clue about how much losses these banks were carrying on Treasuries when rates started spiking. I’m not a bank analyst, but I’d been concerned about this very thing enough that I did some homework on the topic and ended up shorting BAC and recently some XLF in the hedge fund. Yes, this stuff should be open book on the balance sheet and the companies disclose the unrealized losses on the bottom of their reports but the market freaked out when these things suddenly became realized even though nothing really changed. These balance sheets at the banks are in trouble if they own long-dated Treasuries from the last few years as most of them do but I do think much of that is now priced in. Except they might be zombified for a few years as they work out those losses.

Q. Cody: next week Fed rate: Stay put, raise 25 or 50 pts. And the market reaction to them?

A. Fed will likely raise rates 25 bps. The market response is too early to call as it will depend a lot on how the markets trade into the report in the next few trading days. If the markets are down 5-7% from these current levels heading into the rate announcement next week, it’ll be set up for a nice rebound relief rally. If the markets are up 3-5% from these current levels heading into the rate announcement next week, it’ll be set up for a sell-the-news reaction.

Q. How would you buy T bills, treasury direct or through a broker? Or, CDs?

A. Bryce helped me answer this question: In terms of placing your funds in bonds, there are a couple of things for you to think about. First, right now is maybe the first time in the last 15 years that fixed income has paid high enough yields that they present a reasonable alternative to some stocks. As you probably know, a lot of money market funds are paying around 4% right now which is great for a cash alternative. You might talk to your broker about available money market funds. However, keep in mind that the yield on those money market funds will fall concurrently with rates so they are not good if you are looking to lock in money for a significant period of time at today’s rates. Another option you have is to buy bond ETFs. There are several prominent ETFs we have used in the past. You can look at TLT (Government), AGG (Investment Grade), and HYG (High Yield) depending on the amount of risk you want to take in exchange for higher yield. These are good options because they provide diversification and liquidity, but they will fluctuate in price just like a stock. If you want to buy actual bonds, you might take a look at the 6 month and 1 year treasuries. Unfortunately, the longer-term treasury bonds actually pay less interest right now as the yield curve is inverted, so I would not recommend those. Outside of treasuries, I am not high on individual investors having too much exposure in any single corporate bond. If I had to buy some, I might look at buying some AAPL or MSFT bonds maturing in the next 3-4 years which look to be yielding about 4.5%. Again, the price of these bonds will fall if rates continue to rise, but if you hold them to maturity, the downward price movements will not affect you. Lastly, just keep in mind that I would not recommend blowing into any one security/investment all at once. You might consider spreading your money across a few strategies and then scaling into them over the next few months.

Q. Feet to the fire. What’s the price of Bitcoin in 5 years? And do you still think we’ll see it hit $12K to $15K again anytime soon?

A. I think Bitcoin will be at $100,000 in five years. I do think we’ll see some major whooshes lower on it along the way though and that it might still head down to $15,000 this year but only because I think 99.999% of the 22,000 cryptos out there are headed down 99% or more in the next year or two.

Q. Cody are your top 4 positions this week still the same as last week’s?

A. Yes, in alphabetical order: GOOG, ROK, TSLA, UBER.

Q. Anyone have any idea why ROK is down 21 points today? Are they a bank? Hmmmm.

A. Most of the industrials were down big today and ROK was included in that. ROK was down 7% at about the same time that CAT Caterpillar, for example, was down 5%+. ROK has been a stalwart and could use a little pullback to keep the chart from going too vertical.

Q. Hi Cody, read your recent comments about flashbacks in the flashbacks and wonder if you’d wait for a pullback to put some cash to use? I trimmed some META in the recent uptrend and wonder about any new recommendations?

A. Today was quite a bit of a pullback and as I said I would, I put some money to work on the long side and covered some shorts/sold some put hedges I had on. I think owning a core position in all of our stocks is probably the right idea but that having some cash on the sidelines ready to come in on another major whoosh is probably the right idea too. I’m still long META but I too trimmed some on this major rally after we’d been buyers of it much lower late last year. META was a screaming buy at an 8 p/e but is just okay at a 16 p/e where it is now.

Q. Hey Cody. RIVN keeps going down. Time to get out, buy more, or sit tight?

A. I nibbled some May calls options, with strikes about 10-20% out of the money on RIVN for the hedge fund today when the price went below $13 as I’d mentioned I’d planned to. Easy does it for now though, not making a huge bet on it here or anything right now.

Q. Cody other than Rivian, buying anything else today?

A. In the hedge fund today, we bought a little WOLF around $62, some MP around $27-28 and some Verizon around $36.50.

Q. Hi Cody, Was wondering what your biotech friend had to say about GPCR.

A. We’ll dig in and I’ll let you know if he likes it.

Q. Cody: any purchases in your personal account today? It would be great to always mention what do you do in personal account as risk profile and objectives are very different. Thank you!

A. No trades in my PA today. I do always send out a Trade Alert and mention that it’s a personal account trade whenever I do a trade in the PA. The hedge fund is much more active and much more hedged than my PA ever is so that’s why I mention that today’s trades were in the hedge fund specifically so that you know that weren’t in the PA.

Thanks all. That’s a wrap!