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Now you know what a fire sale looks like

Mar 10, 2023

Good morning! 👋

Yesterday’s selloff was not your run-of-the-mill decline.

It was a fire sale.

And evidently, there’s still some fuel left in the tank.

Here’s my playbook.

What a fire sale looks like

Yesterday’s pasting was not a run-of-the-mill selloff.

It was a liquidity event.

A fire sale.

Tech-focused Silicon Valley Bank announced that it sold off $21B worth of holdings at a $1.8B loss.

That’s material, for two reasons.

First, and unbeknownst to most investors, Silicon Valley Bank is one of the key players in the technology start-up space and considered the backbone of the US venture capital industry.

Second, Silicon Valley Bank had put money into US Treasuries that have lost value as the Fed has raised rates. And now, apparently, they were forced to liquidate to shore up capital.

Effectively, it was and is a massive margin call.

You can’t exactly walk into the stock exchange and unload $21B worth of anything without people noticing. It’s the financial equivalent of throwing chum in the water.

Wall Street’s sharks didn’t waste any time going for the kill.

There’s a brilliant scene in the 2011 movie Margin Call depicting something similar. Please watch it so you can get the “feel” for how this works. Director J.C. Chandor did a magnificent job capturing the sentiment and what happens to the markets as it unwinds.

So now what?

That depends entirely on what happens today.

Wall Street’s computers are programmed to identify mean reversion, amongst other things—so an upside move wouldn’t be outta line, especially for tech and financials, which is where the liquidity is concentrated. Whether we get one depends on whether or not leveraged traders are back onsides.

What I’m wondering is simply, “Who’s next?”

You constantly hear me talk about liquidity and leverage; now you know why.

OBA Action Item: I think doing a little—emphasis on little—shopping makes sense. Even a share or two will do it. The point is to keep your mind in the game, not to go for the kill. Personally, I’m starting with my favourite bank and then a few tech shares if there’s an opening at prices I want to pay. Upgrade to Paid

Begs the question why the US regulates the snot outta the likes of JPM but can’t be bothered with SVB... but that’s a story for another day!

The Fed’s next hike will add $3.4B in credit card payments next year

I don’t know whether to laugh because this is so predictable... or cry because it’s so sad.

Both, I suppose.

WalletHub released data showing Americans racked up a jaw-dropping, wallet-popping $180B in credit card debt last year. A 15% jump from 2021. (Read)

Credit card interest rates are rising in parallel.

Which means—you guessed it—that the next Fed rate hike will boost the cost of payments associated with all that debt by an estimated $3.4 billion if it’s the 0.50% hike widely expected by markets.

Naturally, the economically illiterate boffins running our Fed and huge swathes of our government think Main Street “needs” it to cool the economy.

Yeah, like a hole in the head.

Investing Thought Point: We’ve been talking for a long time about the importance of buying stock in companies making “must have” products and services with margin protection power. Certainly well before that narrative became popular on Wall Street. It’s STILL a good idea. Energy in particular.

Bang for your buck

Sometimes the biggest profits come from the most unlikely sources.

I think there’s a good case to be made that ammo-makers will go on a run in the next 12–24 months given how nasty everything and, indeed, everybody seems to be at the moment.

Finding one now could make sense if you’ve got a few speculative dollars lying around while nearly everybody is betting in the other direction. Some of the companies that come to mind include RGR, POWW, SWBI, and NPK.

Speculative dollars ONLY!

Bitcoin at $10,000 won’t surprise me if liquidity evaporates

Crypto markets lost $70B in a matter of hours as bitcoin dipped under $20,000.

Don’t say I didn’t warn you.

Yesterday, I wrote to you saying specifically that,

“Any time you have a drop in liquidity, you usually get a corresponding rise in volatility.”

I wouldn’t be surprised to see bitcoin at $10,000 if the liquidity dries up and there’s a run on SVB because leverage will dry up faster than an ice cube on a hot summer day.

Tread carefully or not at all.

If you’ve really got some chutzpa, consider betting against it outright using futures, options, or even bitcoin itself.

There’s also the ProShares Short Bitcoin Strategy ETF (BITI), which offers investors seeking short bitcoin exposure the possibility of profiting on days when bitcoin drops while potentially avoiding the costs and fees typically required with shorting bitcoin.