March 14th, 2023

Too Small To Succeed

In 2008 we heard, “Too Big To Fail” as the motto for the banks during the financial crisis, and yesterday we were introduced to the phrase, “Too Small To Succeed.”

Signature Bank and Silicon Valley Bank were heavily involved in mortgage back security bonds, tech industry startups, and cryptocurrency. They were considered regional banks and both failed and put the market into a tailspin. Let’s look at each of them for a second.

Here’s Signature Bank’s press release headline from Thursday:

One day later the 29th largest bank in the country, one that was serving companies in the crypto sector, ultimately closed operations.

But leading the way was Silicon Valley Bank, the second-biggest bank failure in U.S. history. Many of the tech companies it served have been burning through cash and drawing down their deposits. To cover the withdrawals, the bank had to sell some of the bonds it invested in. They sold $21 billion worth of bonds at a $1.8 billion loss. News spread and a run at the bank occurred.

In other words, SVB had too much of its money invested in long-term treasuries and mortgage-backed securities that tanked in value as the Fed raised interest rates over the last year.

The bank crisis of 2023 is vastly different from the one we saw in 2008. While these are large banks, we’re talking about billions of dollars at stake vs the trillions in 2008 and this crisis doesn’t have the same global effect. So no, this is not a time for widespread panic.

The FDIC and the U.S. Treasury Department announced an emergency program that aims to give banks nationwide the ability to cover all deposits on demand. I have to think that the Fed isn’t happy with the various U.S. financial institutions for coming in and saying all deposits at the two banks will be fully covered at no expense to the taxpayers.

So why would the Fed want the collapse to happen?

We would have had a rapid collapse in a select part of the economy, an accelerated time frame for a recession, and an increase in unemployment. All the things the Fed wants.

Compass Coffee, Roblox, Vox Media, Etsy, Roku, Vimeo, and LendingClub are just a few companies with deposits at Silicon Valley Bank. Imagine if those companies couldn’t make payroll. Inflation would be fixed!

Instead, we have a 50-car pile-up in a fog storm. We can’t see the whole situation through the fog, so we’re assuming everyone has been wrecked.

Everyone assumes that all banks are part of the problem and so you have big-named companies like Schwab down 40% in four days. We don’t really know what the impact will be to the bigger banks yet until the fog lifts and we realize who made it out of the pile-up unscathed. I think the brokers and bigger names will bounce back faster than the regional banks.

The crisis has been averted for now, but the fallout will likely be felt for months.

Will this be enough for the Fed to stick to a 25-basis increase? We’ll find out next week.

This market has too many unknowns this week, so understand that risk levels are heightened this week and next. This is a trade idea to stalk. Do not make trades if you are uncomfortable with accepting the risk.

Shell PLC (SHEL) is on an uptrend on a weekly chart and has been since mid-2022.

The daily chart broke through the trend line intraday, but closed back on the line after a tumultuous day of trading.

Starting the week of March 24th, SHEL has a history of closing higher over the next 6-week period. Based on 38 years of history, it’s closed higher 71.05% of the time during that 6-week period, for an average gain of 2.39%.

With all of the other mess going on right now, I’m waiting to see if the stock can break over its 50-day moving average of 59.46. It’s still an aggressive play to make a bullish directional move here, but I’d look to buy a long call since the volatility of the 21 APR option chain is 30.70%. The 57.50 calls are going for 3.20 – 3.40.

With the expected move bringing the stock up to just past $60, you could look to create a debit spread by selling the 21 APR 60 call for between 1.85 – 1.95. You might as well cap the potential profit if the stock isn’t likely to go higher than $60 by expiration. You could go out and sell the 62.50 calls if you wanted to give the stock more room to run.

It’s a risky play with the bank mess, but it is a stock that is moving higher and has the historical accuracy around this time frame to possibly run higher. It just needs to close about the 50-day before it’s a go.

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 


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