Macrosynthesis

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Fear is Back

The U.S. market was rocked last week by news that Silicon Valley Bank had completely collapsed in a wild 48-hour period. Other banking stocks sold off on fear the losses would spread throughout the banking sector. Thus far, those fears seem to not have come to much fruition but it's early, and there will be ripple effects of so much cash disappearing.

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Analyst are trying to determine the industries most affected. Private companies relying on venture capital and loans from SVB that match it are the most heavily impacted. But venture capital firms will be hit as well and even more risk averse in the coming quarters. The industry is already sitting on the largest stockpile of cash ever, which forces private companies out of business. The situation is bad for the entire startup ecosystem.

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Companies like Roku, which came out of the VC-backed world, are also reporting they will be heavily impacted by a lack of access to their money.

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The indexes sold off by almost -5% last week. The flight to safety was visible in a spike in prices for government  bonds, driven by demand, and a sharp rise in the VIX.

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Investors were already rattled by Fed Chairman Powell's comments that the Fed might have to raise rates higher for longer than expected, due to the sticky nature of inflation.

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Yields on the 2-year government Treasury bond rose above 5% prior to the SVB debacle in a sign the markets have finally gotten the message the Fed is not going to back down from rate increases until the economy is sent to the morgue.

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Emergency Plan to Backstop Deposits

The U.S. Federal Reserve and the Federal Deposit Insurance Corp are reportedly considering creating a fund to support deposits at banks that encounter difficulties following the collapse of Silicon Valley Bank. The agencies have held discussions with banking executives about this special vehicle, hoping to reassure depositors and prevent panic.

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This planning is part of an effort to address mounting concerns about the financial health of banks that focus on venture capital and startups. The U.S. Federal Reserve has declined to comment, while the FDIC has yet to respond to requests for comment.

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The collapse of Silicon Valley Bank occurred after depositors withdrew their funds, alarmed by the lender's instability. The two-day run on the bank blindsided observers and wiped out over $100 billion in market value for U.S. banks.

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The UK government is also coordinating an emergency meeting with tech firms, who are expected to call for state intervention to avoid the failure of hundreds of firms following the collapse of Silicon Valley Bank UK, per the Guardian.

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Most of the funds inside the bank were not insured by the federal government.

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Noteworthy Events

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Silicon Valley Bank Corp Goes Bust  

The United States has just experienced the second-largest bank failure in its history, with the collapse of Silicon Valley Bank. This marks the biggest bank failure since the 2008 financial crisis. Silicon Valley Bank was the 16th largest bank in the US, with $210 billion in assets. According to CNBC, approximately 95% of Silicon Valley Bank's deposits were uninsured by the FDIC as of December.

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On Wednesday, the stock price of SIVB was at $200 per share, but just two days later, trading was halted at around $100 before the FDIC was ordered to close the bank and act as its receiver.

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Prior to the collapse, many of Silicon Valley Bank's executives had sold their shares. CEO Gregory Becker sold 11% on February 27, 2023. On Friday, SVB Financial Group Chief Executive Officer Greg Becker was no longer a Federal Reserve Bank of San Francisco director, according to a Fed spokesman. General Counsel Michael Zucker sold 19% on February 5, and CFO Daniel Beck sold 32% on February 27. Additionally, CMO Michelle Draper sold 25% of her shares on February 1.

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In the aftermath, news about companies' exposure to the bank has emerged. Roku had $487 million, Blockfi had $247 million, Circle USDC had $3.3 billion, and Roblox had $150 million in exposure to Silicon Valley Bank. Bank stocks, as a whole, were hit heavily following SVB’s collapse.

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The Financial Select Sector SPDR Fund fell -9% last week.

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In the coming week, investors expect further aftershocks in the financial sector as speculation of more 'bank runs' increases.

USDC Depegs From the Dollar  

Circle's USDC coin detached from the dollar Friday after reports that they held over $3.3B of their reserves at the fallen SVIB. Falling from 1:1USD, USDC is now trading as low as $0.81 per dollar.

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USDC was the second largest stablecoin, valued at roughly $40 billion. USD Coin (USDC) is a stablecoin issued by CENTRE-- a joint venture between Circle and Coinbase. Due to the situation, crypto exchanges such as Coinbase have announced a suspension of USDC conversions into USD.

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Additionally, Coinbase exchange volume has tanked by 99% within the last 48 hours.

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The full list of banks that held over $9 billion in cash for Circle’s USDC are Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank (a division of Flagstar Bank, N.A.), Signature Bank, Silicon Valley Bank, and Silvergate Bank. Circle also keeps some part of USDC reserves in a dedicated BlackRock fund.

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CASE STUDY: Dick's Expands Dividends

Sporting Goods Retailer, Dick's, reported an earnings beat and increased the size of its dividend over 100% last week. The event caused a run-up of the stock price over multiple days.

Tuesday morning, DKS opened at $146/share. On Thursday, the stock reached $152.45/share - a gain of +11% from the alert time - before pairing gains.

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Key Earnings Announcements This Week

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March 13

Notable Earnings:

• Gitlab (GTLB)

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March 14

Notable Earnings:

• Lennar (LEN)
• Guess (GES)
• StoneCo (STNE)
• IHS Holding (IHS)

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March 15

Notable Earnings:

• Five Below (FIVE)
• Oatly Group (OTLY)
• Proterra (PTRA)
• ZTO Express (ZTO)
• Adobe (ADBE)

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March 16

FedEx

• Consensus estimates for fiscal Q3 predict a YoY decrease in earnings per share by 39.9% to $2.73 and a YoY decline in revenue by 3.8% to $22.8 billion.

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Other Notable Earnings:

• Hello Group (MOMO)
• Dollar General (DG)
• Yamana Gold (AUY)

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March 17

Notable Earnings:

• Ballard Power (BLDP)

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Economic Reports:

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Tuesday

• Core CPI

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Wednesday

• Retail Sales
• PPI
• Homebuilder Survey

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Thursday

• Jobless Claims

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Friday

• U.S Leading Economic Index
• Consumer Sentiment

The LevelFields Team