Silicon Valley Bank Goes Under, Where Do We Go From Here?

March 13, 2023

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From the desk of Vance Howard:

To start the Wealth Watch I would like to let everyone know that we had almost no exposure to SIVB or the banking sector in general, and we do not own any bitcoin. Neither met our requirements for an investment.

While I have been writing to expect volatility over and over for weeks, I think it is now clear to see that I was not kidding, was I? The last week has weakened the HCM-BuyLine® and we are watching closely for any break. The markets have been trading just about as we had anticipated, with a nice run-up in January, then a pullback followed by a period of consolidation which is to be expected. What was not anticipated was a bank failure. That caused a two-day selloff that was very hard. The trend is still intact, but just barely. Even if the HCM-BuyLine® is breached, we do anticipate a recovery back above the trend in short order.

We spent a lot of time over the last three days analyzing whether we felt other banks were not being managed very well, and our conclusion is that this is most likely a one-off. In other words, the bigger banks look to be more sound. They are not taking on high risk loans like Bitcoin and tech startups like SIVB was. Furthermore, most of the larger banks are very well diversified whereas SIVB was not. I’m not sure how they were able to give loans to a lot of these startups, but it has created some good buying opportunities in the banking sector. Our top pick would be Bank of America, and while we do anticipate investing in that bank soon, we will give the banking sector time to stabilize before looking to invest.

SIVB, the 16th largest bank in the US, is one of Tech industry’s largest lenders and media stories suggest VC and PE firms might be advising founders to move cash away from SIVB — essentially fueling a panic among Financials that continued right up until regulators shut it down.

SIVB’s failure highlights the fact that banks collectively are sitting on sizable losses on loans due to the rise in interest rates. The FDIC reported that at the end of 2022, the total unrealized losses is $620 billion (vs ~$15b 2021), and if these banks had to liquidate their portfolios, would substantially deteriorate book value.

But with investors and depositors rattled by the troubles at SIVB, financial conditions are tightening. This potentially reverses some of the hawkishness one would expect from the Fed. Basically, restricted lending by banks amplifies the impact of Fed hikes in place now, and would reduce the need for future hikes.

While the NFP jobs report will be very important for the Fed, the SIVB-induced bank scare actually offsets the inflationary risks for the Fed to an extent. That is, even if Feb jobs is really strong, the continued second-order effects of the SIVB-issues will likely contribute to a tightening of financial conditions. This means the odds of the Fed having to accelerate its pace of hikes might be reduced.

Vance Howard

_{This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. Howard Capital Management is an SEC-registered investment advisor which only does business where it is properly registered or is otherwise exempt from registration. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. Past performance is no guarantee of future results.HCM-022223-WW05 (02/2023)}