Fear is palpable! Market crashing again? Reminders.

The week started with the shutting down of Silicon Valley Bank and Signature Bank by U.S. regulators.

The U.S. regulators announced measures which ultimately bailed out the banks.

Then, we saw Credit Suisse reporting "material weaknesses" and the Swiss National Bank stepping in to backstop the troubled bank.

Credit Suisse took a 50 billion Swiss Francs loan from the Swiss National Bank to strengthen liquidity.

Then, a consortium of 11 largest U.S. banks rescued First Republic Bank, the 13th largest bank in the U.S.A., by jointly depositing US$30 billion in the troubled bank.

After all that happened, Mr. Market ended the week with a dramatic down day in the U.S. stock market on Friday.

The Fed increased interest rate a year ago in March 2022 for the first time since 2018. 

Since then, the rapid rate at which interest rates have been increased has caused a lot of pain for homeowners as well as investors in the real estate space.

The pain is most keenly felt in the high growth but negative earnings tech space and if you are a tech investor, you know this firsthand.

The people who said that something would break under the growing pressure of such rapid rate hikes are now looking rather prescient.

What would they say now?

Not surprisingly, that things will continue breaking as long as the Fed continues to hike interest rates.

With the ECB having hiked interest rates in the EU by another half a percentage point, the Fed is probably going to hike interest rates in the U.S. next week too as they stick to their plan to fight sticky inflation.

Mr. Market, already jittery, while initially assured by the show of solidarity in the U.S. banking industry, became depressed again on Friday when First Republic Bank suspended dividends.

In an environment where depositors could lose their savings and where investors in both stocks and bonds are losing money, heightened volatility in the stock market is unsurprising.

Fear is palpable.

It drives Mr. Market into self-preservation mode.

If the confidence deficit continues, then, more money could flow to the perceived safety of U.S. government bonds, and we could see yields lower.

During the COVID-19 pandemic, I blogged about how I was worried because my passive income was reduced due to my businesses either suspending or reducing dividends.

My relatively high level of CPF savings was the only "investment" that continued to pay what I expected it to pay, uninterrupted, which highlighted to me the importance of having an allocation to high quality fixed income in any portfolio.

So, I can understand Mr. Market's negative reaction to First Republic Banks's decision.

Many people depend on dividends for a living or to at least fund part of their expenses.

The still troubled bank saw its stock price recovering from a day ago on Thursday only to see it plunging 32% on Friday.

When the bear comes out of its cave, none is spared, and we saw the stock prices of large U.S. banks beaten down too as even JP Morgan saw a 3.78% decline in its stock price.

When Mr. Market is gripped by fear, he becomes irrational, and the baby gets thrown out with the bathwater.

As U.S.A. is still the largest economy in the world, what happens there often spreads to the global markets.

So, we could see Asian markets echoing that fear in the U.S. stock market.

I have said many times before that we cannot predict what will happen but if we are prepared, we need not worry and we could instead benefit.

Don't be overly pessimistic.

Don't be overly optimistic.

Be pragmatic.

This week, I was on steroids. 

I have published too many blogs regarding the stock market and what my plan might be.

So, if this is your first visit in as long a time, you will have a lot to read.

Have a good weekend.

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US$30b rescue! T-bill 3.65% p.a.! Banks or REITs? Good?

I am not feeling too good today.

So, if this blog feels a little incoherent, you know why.

I have so many things flying around in my mind now. 

I just need to deposit them here in my blog, my Pensieve.

So, it seems that the U.S. banking crisis is contained once again with eleven big U.S. banks pledging $30billion to First Republic Bank.

This is a significant move to shore up confidence in the U.S. banking system as the individual sums of $1billion to $5billion in deposit are, obviously, uninsured by the F.D.I.C.

It is pretty impressive as it should be quite obvious to anyone that the U.S. Fed is unable to fight high inflation and to bail out the U.S. banking system at the same time.

Choosing to hike interest rate to fight inflation would increase the fallout risk in the banking system while not hiking interest rate might result in higher inflation.

The $30billion joint deposit made to First Republic Bank did not happen because the largest banks in U.S.A. decided all at once that it was in their industry's best interest.

The CEO of J.P. Morgan, the largest bank in U.S.A., Jamie Dimon, together with Jerome Powell and the Treasury secretary, Janet Yellen, seeded the idea. 

Jamie Dimon approached his peers and the $30billion package was born.

So, with the banking crisis contained once more, the Fed will be able to hike interest rate next week with one less thing to worry about. 

This move will follow the ECB, which just hiked interest rate by 0.5% to fight inflation in the EU.

Bond yields sank for many days in a row, because Mr. Market was betting on the Fed choosing to manage the risk of further fallout in the U.S. banking sector rather than to continue hiking interest rate to fight inflation.

There was also a flight to safety as Mr. Market moved money to the relative safety of treasuries.

With the Fed likely to hike interest rate as planned, investors in Singapore should see yield on the short end of the curve rising again. 

So, we should see 6 months T-bill yield going higher from the relatively low cut-off yield of 3.65% per annum we saw in the 16th March auction.

As for DBS, OCBC and UOB, the Monetary Authority of Singapore has issued a statement to say that the exposure which DBS, OCBC and UOB have to troubled Credit Suisse is “insignificant”.

I am staying invested in DBS, OCBC and UOB for income as I expect them to continue to bring home the bacon. 

With higher dividends declared, I look forward to getting bigger portions in future too.

What about REITs?

In the current environment, U.S. banks are going to be more selective and risk averse. 

So, I believe that it could be harder to secure loans or to refinance for some commercial properties in U.S.A. now.

So, I would avoid those U.S. REITs which have very high gearing and which need to refinance in the next 12 to 18 months.

Digital Core REIT, which is a data centre REIT, saw its unit price crashing because one of its largest tenants, Cyxtera, which accounts for 22% of its income has not been able to refinance a revolving credit facility that matures in Nov 2023. 

Moody's downgraded Cyxtera's credit rating to junk as it believes the possibility of default over the next few months is significant.

Only a couple of months ago, there was a chorus of BUY calls for Digital Core REIT by analysts and some finance social media influencers.

It pays to remember not to ask barbers if we need a haircut.

It pays to remember that no one cares more about our money than we do.

Eat crusty bread with ink slowly for peace of mind.

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