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Good morning. Yesterday, Western Alliance Bancorporation announced that its deposit levels have continued to recover. This sparked a broad rally in bank stocks. Can we declare the banking micro-crisis of 2023 over? Regional banking indices are still down 25% since Silicon Valley stumbled in March. But it seems that at least we have gone through the acute phase. Disagreement? Email us: robert.armstrong@ft.com & ethan.wu@ft.com.

Also, listen to Katie Martin and Harriet Agnew because no one wants to list in London.

Stock paralysis

The S&P 500 is where it was 45 days ago and volatility is absent. Since early April, there have been only six trading days where the S&P is up or down more than 1%, including yesterday, and zero days with a 2% move in any direction.

What does it give? The trivial answer: The forces pushing US stocks up are, approximately, equal and opposite to those pushing stocks down. In a recent note, Citi business strategist Stuart Kaiser offers a more concrete answer. He identifies four opposing forces pushing in each direction. Those that push stocks up are:

1. Many funds have already offloaded the risk. In other words, many sales have already taken place. Kaiser points out that U.S. large-cap mutual funds ended 2022 with the lowest average beta (that is, exposure to the generic market) in at least a decade.

2. Having reduced risk, investors are sitting on big money. This also suggests that the sale has already taken place. Portfolios can easily be rebalanced towards equities if opportunities present themselves. The chart below shows cash allocations in Bank of America’s latest survey of fund managers, which are still high but have declined since late 2022. The decline coincided with this year’s decline AI hype rally. It’s probably not a coincidence.

   

3. Investors bought a lot of protection, protecting themselves from forced selling. The Cboe Skew Index captures investor demand for downside hedges, based on the price of out-of-the-money options. As the chart below shows, the Skew Index is well above its long-term averages. Demand for protection remains elevated by historical standards, and that, Kaiser argues, means fewer investors forced to sell in an unexpected jump to the downside:
   

   

4. Systematic funds that buy when volatility is low are putting money into the market. As the FT’s Nicholas Megaw reported, quanta are playing an important role in this market. The main culprits are “volatility control” funds, whose mandates focus on a volatility target, rather than a return target. When volume is high, they sell; when it’s low, they buy. This, coupled with share buybacks, has provided the market with a constant source of demand. Nomura estimates purchases at $72 billion over the past three months; For context, daily S&P 500 buyback demand is about $4 billion to $5 billion a day, according to Citi.

The forces acting on stocks are more familiar:

1. ‘Tina‘ is dead; there are alternatives. Stocks need a lot more upside now to impress, and with the questionable exception of tech stocks, few segments appear capable of delivering results. As one portfolio manager told us yesterday: “From hedge funds to private and retail banks, all my clients tell me: Why do I need to own stocks? Treasuries are at 4 percent. I’ve been hitting that offer all day. I can get the same risk-reward ratio living in fixed income, without having to consider equities.”

2. However, equity valuations are not very attractive. Standard p/e ratios are slightly above historical averages, the Shiller cycle adjusted p/e ratio is very high and the equity risk premium is close to a decade low. If there is one valuation metric that makes the market look cheap, we haven’t seen it.

3. The risks to growth and corporate earnings are always present. Unhedged can’t stop writing about them. Bottom-up analyst earnings estimates are still for modest EPS growth of 2% this year and a return to strong growth in 2024:
   

   

4. Options traders can sell shares wholesale. Based on options open interest, Kaiser suspects dealers may hold large inventories of call options expiring between now and the end of June. If so, retailers covering that inventory would be selling stock on the market, though Kaiser added in an interview that this is “our impression based on conversations with customers” and could be a “wild card.”

The punchline here is that stocks are paralyzed, they need a hard push to start moving decisively. So what could unlock the shares? A debt ceiling disaster or much worse economic data could restart the bear market. On the upside, it’s hard for us to see what might do the trick. Kaiser speculates that a soft landing and dovish pivot from the Federal Reserve could send stocks higher by “creating Fomo momentum.” Maybe; as we wrote last week, the the soft landing dream is not dead Still. But in the meantime, there’s more to fear than getting lost. (Ethan Wu)

Pay the FDIC in Treasuries

Last week the Federal Deposit Insurance Corporation proposed a special assessment on banks, aimed at recovering the costs of protecting uninsured depositors in the failures of Silicon Valley Bank and Signature Bank. The assessment would charge more to the banks that benefited the most from uninsured depositor protection, i.e., those with the most uninsured deposits.

It would work like this: Banks would pay off the equivalent of 12 basis points of all uninsured deposits over $5 billion a year for two years, in quarterly payments. How big is this hit to earnings and capital? The FDIC says:

Assuming that the financial and income effects of the entire amount of the extraordinary assessment are produced in a single quarter, it is estimated that an average quarterly reduction in income of 17.5 per cent would result

Banks that had a lot of uninsured deposits at the end of 2022 (the balance sheet date at which the valuation is to be calculated) would take a slightly bigger hit. Take Comerica for example, which had $45 billion in uninsured deposits as of Dec. 22. That brings its proposed fee to $97 million over two years, 1.6% of its current capital and about a third of its net income in the most recent quarter.

So it’s no surprise that banking industry leaders like the FDIC to consider another idea. The WSJ relationships:

Banks have spent the past week or so testing what would have been a smart move: Paying billions of dollars they collectively owe to replenish a federal deposit insurance fund using Treasury bills instead of cash.

The idea — pitched to regulators and lawmakers by the PNC Financial Services Group and supported by others — could allow banks to take securities currently worth, say, 90 cents and give them to Federal Deposit Insurance Corp at full price. ..

An FDIC spokeswoman said agency rules do not allow banks to pay him in Treasuries

The obvious problem here is that, as the FDIC points out, a rule change would be needed to make this proposal work, and when that’s completed, who knows where the banks will be. But other than that, it could be argued that Treasuries have been discounting market values ​​because rates have risen, but if the FDIC holds the Treasuries to maturity, it will eventually be paid in full.

If you argued like this, you would be wrong. A Treasury trading at 90 cents is actually worth 90 cents; not worth 90 cents unless you can hold it to maturity, in which case it’s worth 100 cents. The time value of money and lifetime risk are real things with real prices. Banks just say “we would like to pay less, please”.

Alternatively, you could argue that the FDIC could actually save money by taking Treasuries at face value, because doing so would remove mark-to-market losses and maturity risk from bank balance sheets. This would make banks less risky, leaving the FDIC with fewer potential problems to clean up later. But this is also wrong. The FDIC could only downgrade the rating, and the cash left on banks’ balance sheets would have a similar risk-reducing effect.

The idea of ​​banks is just a sleight of hand. The FDIC should reject it, if it hasn’t already.

A good read

Because Ukraine is counteroffensive must be successful.