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ALERT: We’re ‘Raising Cash’ in the Newsletter Portfolios

publication date: Mar 13, 2023
author/source: Brian Nelson, CFA

Image: American Union Bank, New York City. April 26, 1932. Public Domain

“We firmly believe that an investment in a bank must come with the acknowledgement of the distinct possibility that another financial crisis may occur at an unknown time in the future. Why? Banks do not keep a 100% reserve against deposits. Our good friend George Bailey knew this very well when he tried to discourage Bedford Falls residents from making a “run” on the famous and beloved Building and Loan.”Brian Nelson, CFA, September 4, 2013  


Best Ideas Newsletter Portfolio

Johnson & Johnson (JNJ): 4%-6% à 0%

Exxon Mobil (XOM): 4%-6% à 0%

Chevron (CVX) 3%-5% à 0%

Dollar General (DG): 3%-5% à 0%

Korn/Ferry (KFY): 1%-2% à 0%

Dividend Growth Newsletter Portfolio

Johnson & Johnson (JNJ): 8%-12% à 0%

Exxon Mobil (XOM): 5%-7% à 0%

Chevron Corp. (CVX): 3%-4% à 0%

Newmont Mining (NEM): 3%-4% à 0%

Realty Income (O): 3%-4% à 0%

High Yield Dividend Newsletter Portfolio

Global X SuperDividend ETF (SDIV): 5% à 0%

Chevron Corp. (CVX): 5% à 0%

Exxon Mobil Corp. (XOM): 5% à 0%


By Brian Nelson, CFA

When rates go up, asset (bond) prices tend to go down. It’s sometimes as easy as that for a bank business model to get wrecked. During the Great Financial Crisis, it was bad mortgage debt that lost value due to poor lending standards that put the backs of many banks against the wall. Today, it’s long-duration Treasury securities whose values have plummeted due to lower re-pricing from higher interest rates that have many banks reeling.

The Fed’s fight against inflation with rate increases has sent the values of long-duration bond portfolios at many banks tumbling, and this has threatened their capital positions and their solvency on a mark-to-market basis. The good news is the Fed and Treasury are aware of the problem and may take another hard look at the pace of future potential rate increases. The bad news: More regional banks may fail, and this market could feel more pain, having broken through support levels late last week.

The collapse of SVB Financial (SIVB) last week and Signature Bank (SBNY) of New York over the weekend may be among the first of several regional banks to fail or be rolled into larger institutions. We’ll have to see if there are any deals this week. The big concern at the moment is whether uninsured deposits across the regional banking ecosystem will be made whole; the Fed has said such uninsured deposits will be made whole [I, II], but that may just mean the Fed will “fund” bank runs, not that bank runs will stop. Most depositors don’t want to take the risk of losing any of their deposits regardless of what the Fed/Treasury say with implicit guarantees on uninsured deposits. It’s just not a game depositors want to play.

First Republic Bank (FRC), PacWest Bancorp (PACW), Western Alliance Bancorp (WAL) may be among the next of the regional banks to topple, as shares have come under considerable pressure in the early hours of March 13. Once confidence is lost in a bank, its livelihood is threatened. Schwab’s (SCHW) equity is also acting unusually. We’ve never been fans of the bank business model. Banking entities are fragile. An organization such as a bank that operates at the whim of the financial markets will eventually be tested, and bank business models will always be exposed to a bank run. Banks simply do not hold 100% reserve against all deposits. It’s their business model to lend and take on leverage.

That’s why we like iron-clad ideas. We love stocks that have net cash positions on the balance sheet and generate strong free cash flow in excess of cash dividends paid because at some point, their business models are going to be tested by tough economic and credit conditions. We’ve never been huge fans of capital-market dependent entities such as real estate investment trusts (REITs) and master limited partnerships (MLPs) either, as these entities tend to operate at the whim of the health and stability of financial markets, too. With the financial system between a rock and a hard place, capital-market dependent entities are at severe risk of equity declines.

The largest of the banks will once again make it through this crisis, but the potential for capital raising by smaller banks at higher rates may squeeze both their net interest margins and return on equity, while potential equity raises could be dilutive to existing bank shareholders. We’ve been talking about making a number of changes to the newsletter portfolios for some time, and we’re doing so today. The equity markets have broken through their technical support, and a widespread regional banking crisis is now a growing non-zero probability. Though the Fed and Treasury may handle such a crisis effectively as they have done before, we think the equity markets have become much more fragile as a result. Please note the newsletter portfolio changes above, changes that will be incorporated in the next editions of the respective publications. We plan to re-deploy this 'newly-raised cash' in the newsletter portfolios in the near future when the dust settles.

We’re available for any questions. 

Also tickerized for IAT, KBWB, KRE, KBE, SIVB, SBNY, FRC, PACW, WAL, SCHW, RY, APO, VNQ, SCHH, O, JNJ, XOM, CVX, KFY, DG, NEM, SDIV, COIN, GBTC, BITO, CS, DB, TD, XLF, SI, TFC, ZION, CMA, AIG, and various others.

Banks & Money Centers: AXP, BAC, BBT, BK, C, DFS, FITB, GS, HBC, JPM, KEY, MS, NTRS, PNC, RF, STI, USB, WFC


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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.        

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2 Comments Posted Leave a comment

Ken Cavalluzzo (DOYLESTOWN)
Rick Siebert (Town and Country)

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