SUMMARYThe S&P is at an inflection point. Both a sharp relief rally following bank earnings on 4/14 or the start of the next major decline driven by greater than expected deposit outflows are possible. The Fed balance sheet expansion of $400B in 3 weeks is a major positive near-term. We have a bias towards a short-term rally. However, longer-term we see earnings cuts & Fed balance sheet shrinkage driving the market to new lows in the second half of 2023. DetailsA relief rally could start on 4/14 given $JPM $WFC $C should see deposit inflows in aggregate despite future EPS estimates having to get cut due to worse Net Interest Margins (NIM). We expect $JPM to have the least downside to EPS (<5%) and to see the largest deposit inflows by far. Both $WFC and $C have more risk to EPS (5-10%) and deposit levels do pose some downside tail risk for both .
However, the key to whether the next major market near-term move is up or down is likely to be $PNC results. $PNC also reports on 4/14 but does not have the benefit of being a systematically important bank. As a consequence, their results may be a better reference point for the health of the banking system. We continue to expect more bank failures this year despite the implicit guarantee by the FDIC on depositor funds like we saw at SVB and Signature Bank. During the Global Financial Crisis, bankruptcies increased in 2009 despite the Troubled Asset Relief Program (TARP) being passed in October of 2008 as can be seen in the chart. In fact, it increased even further in 2010. To be clear, we believe there is still further downside risk to regional bank stocks as a whole even if we see a short-term relief rally. Therefore, we plan to have minimal directional exposure & wait for results & stock reactions on 4/14 before committing more capital either long or short. We are biased towards a short-term rally due to expansion of the Fed balance sheet from its near-term low of $8.340T on 3/1/23 to a high of $8.734T on 3/22/23. The balance sheet has dropped slightly since then to $8.632T on 4/5/23 but has still undone 5 months’ worth of declines in less than a month due to the banking crisis. For reference, $8.965T was the balance sheet peak on 4/13/22. As a reminder, during the Global Financial Crisis, following the passage of the Troubled Asset Relief Program (TARP) in October 2008 and another temporary bottom in November 2008, the S&P rallied 24% in six weeks till January 6th of 2009. During this time, the Fed balance sheet expanded from $0.906T in early September 2008 prior to the Lehman failure to $2.24T by year-end. Eventually earnings mattered as the S&P fell 28% in 2 months to its ultimate bottom in early March of 2009. We would also note, however, that the Fed balance sheet fell to $1.900T by early March before the Fed started to expand the balance sheet once again. More recently, the S&P was up 16% in 2020 despite a global pandemic driven by the Fed expanding their balance sheet by $3.2T to $7.363T. The S&P was up 48% in total over 2020 and 2021 combined as the Fed expanded their balance by $4.6T to $8.757T. Either global pandemics are wonderful or easy money covers up a lot of problems over the short-term. Longer-term, we still believe the lows are ahead for market in the second half of 2023 due to:
10 Comments
Silo
4/12/2023 12:12:28 pm
But why shall we have a rally if you expect PNC to bring bad news. Are you implying that in the case of bad numbers and guidance FED start to expand its balance sheet again?
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christopher russo
4/13/2023 06:30:07 am
Dan, thanks again for your wisdom and opinions. 90% of the CNBC guys are jokers or talking their book. Men vs boys. I appreciate you.
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Dan
4/13/2023 06:40:09 am
Thank you!
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Enipla
4/13/2023 10:57:16 am
Insightful analysis accompanied by bold conclusions, and for me, being Europe-based, I agree 100%, but for a reason that is common to both Europe as well as USA: huge shortage of skilled, young, 'modestly ambitioned' but 'driven' workers to be able to provide ST and LT scalability to these regions' economic growths, in key sectors like manufacturing, IT, healthcare, public services, security (defence and policing) as well transport & logistics. Yes, we're likely looking at perma stagflation, and of course, OPEC+China is moving major chess pieces on the other side of the economic, social and political fronts.
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Tony Frank
4/13/2023 06:57:44 pm
One of the few analysts/asset managers who I believe has any degree of credibility and tells it like he sees it. A breath of fresh air in today's highly biased investment research/advisor community.
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Lorde
4/14/2023 08:18:00 am
Thanks, Dan. This helps clear some of the confusion in these rallies, and reminds us of how long it truly takes the stock market to react to major financial events.
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SalP
4/19/2023 09:56:27 am
I watched your interview on Charles Payne’s program. Very enjoyable.
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Sidney H Gilberg
4/24/2023 06:16:36 am
Did you sell Intel? For three months it seemed every time I saw you on different shows you gave the illusion you were in Intel for a very long time - at least two years. If you sold you should qualify when you are on tv that you are in a stock right now, but that could change. We glamorize hedge funds and traders in this environment. There doesn't seem to be a place for a long term investor.
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Sidney H Gilberg
4/29/2023 06:46:05 am
I wrote a message on 4-24-23 because even at age 74 I can still be disappointed. I have followed Mr. Niles entire career. In case the public is not aware Dan, if I may use that, was the top semiconductor analyst. He is a brilliant man who, in my humble opinion, a retired Tax CPA, is about as honest as they come on Wall Street. My wife follows Dan on Twitter. She told me yesterday Dan tweeted out he bought back Intel after the earnings release and it is now one of Satori's top five picks. Thank you Dan Niles - regarding Intel I take your word over any sell side Wall Street analyst CNBC had to offer to destroy Intel yesterday. One other thing, please communicate to the public that Nvidia chose Intel's Xeon Sapphire Rapids CPU to pair with its H100 GPU, now the AI chip of choice. Nvidia dropped AMD's CPU's for the H100. I heard these chips sell for $40,000 - why did Nvidia drop AMD - I have never heard this fact mentioned on any show on Bloomberg or CNBC.
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AuthorDan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund. Archives
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