Dow rose 272 with buying into close, advancers over decliners better than 2-1 & NAZ gained 84. The MLP index remained flat in the 224s & the REIT index was up 3+ to the 372s, Junk bond funds hardly budged & Treasuries continued to see heavy buying for the entire session. Oil rebounded 1+ to the 76s & gold was off chump change at 1998 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
The Federal Reserve released its assessment of what led to Silicon Valley Bank's (SVB) collapse, saying the lender's failure was due to a "textbook case of mismanagement" while taking some responsibility for insufficient supervision of the institution. The report details the bank's rapid growth, the challenges Fed supervisors faced in identifying SVB's vulnerabilities and their reluctance to force the bank to fix them. The review was led by Fed Vice Chair for Supervision Michael S Barr, who wrote in a letter summarizing the report that SVB "failed because of a textbook case of mismanagement by the bank. "Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable." Barr added, "And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report." The report said SVB's leadership did not fully appreciate the bank's vulnerabilities, pointing to foundational & widespread managerial weaknesses, its highly concentrated business model catering overwhelmingly to the venture capital community, and its reliance on uninsured deposits which left the bank "acutely exposed to rising interest rates" amid a slowdown in the tech sector. The probe found SVB had failed its own internal liquidity stress tests with no plan for accessing liquidity & scrapped interest rate hedges rather than managing long-run risks 7 the risk of rising interest rates. The bonuses SVB execs received before the failure were a major talking point in the wake of the failure. The report addresses this issue, saying, "Compensation packages of senior management through 2022 were tied to short-term earnings and equity returns and did not include risk metrics. As such, managers had a financial incentive to focus on short-term profit over sound risk management." But the report also blamed weaknesses in the Fed's oversight of SVB, noting that at the time of its failure, the bank had 31 unaddressed safe & soundness supervisory warnings — triple the average number of peer banks. Barr recommended that going forward, stronger regulatory standards are needed for smaller banks & said the Fed will evaluate liquidity risk of uninsured depositors. "Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned," Barr said, adding he has a "high level of confidence" these things will get done.
Fed reveals what led to the worst bank failure since Great Recession
Shares of First Republic (FRC) dropped sharplytoday as hopes dimmed for a rescue deal that could keep the bank afloat. Sources said that the most likely outcome for the troubled
bank is for the Federal Deposit Insurance Corporation (FDIC) to take it into
receivership. The stock slid about 40% & was halted for volatility
multiple times. The stock has fallen more than 90% this year as investors have lost
confidence in the bank after 2 regional lenders failed in Mar. The
FDIC is asking other banks for potential bids on FRC if the
regulator were to seize the bank, sources say. There is still
hope for a solution that doesn't include receivership. FRC said that “we are
engaged in discussions with multiple parties about our strategic options
while continuing to serve our clients.” A report Wed that FRC's advisors were preparing to
pitch larger banks on a plan that would let the regional lender sell bonds & other assets
at an above-market rate and then raise equity. The sales would result
in a loss for the banks that buy the bonds but could be cheaper
long-term than letting the bank fail & get seized by regulators. A report today said that US officials — including from the FDIC, Treasury
Dept & Federal Reserve — are coordinating meetings with other
banks to broker a rescue plan for FRC. Shares
of First Republic closed at $16 on Mon before the bank reported its Q1 results, which showed a decline in deposits of about 40%. The stock fell more than 60% over the next 2 days, hitting a new
all-time low. FRC is a regional bank that has focused
on high net worth individuals & their businesses, including offering
mortgages at low interest rates to those customers. Those
mortgages, as well as other long-term assets on the bank's balance
sheet, have fallen in market value since the Fed began hiking rates last
year, making investors worried that the bank would have to book a
sizeable loss if forced to sell those assets to raise cash. The stock settled today at $1,00.
First Republic most likely headed for FDIC receivership, sources say; shares drop 40%
US consumer spending was unchanged in Mar, while underlying inflation pressures remained strong, which could see the Federal Reserve raising interest rates again next month. The unchanged reading in consumer spending last month, reported by the Commerce Dept, followed a downwardly revised 0.1% gain in Feb. Consumer spending, which accounts for more than 2/3 of US economic activity, was previously reported to have increased 0.2% in Feb. The forecast called for consumer spending dipping 0.1%. The data was included in the advance GDP report for Q1 published yesterday, which showed consumer spending surging at a 3.7% annualized rate that period after rising at a 1.0% pace in the Oct-Dec qtr. The overall economy grew at a 1.1% pace as the acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year. The economy expanded at a 2.6% rate in Q4. Last month's flat reading in consumer spending set consumption on a lower growth path in Q2. It likely reflected Americans becoming more averse to higher prices as well as the expiration of a temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits authorized by Congress to cushion low-income people & families against the hardships of the COVID-19 pandemic. SNAP is commonly known as food stamps. Researchers from the Commerce Dep''s Census Bureau yesterday estimated the end of the extra benefits had resulted in roughly 32M people getting smaller monthly SNAP payments. They estimated that a household of 4 with a net monthly income of $2000 was now getting $600 less in food stamps each month. The economy is facing several headwinds, including higher interest rates as the Fed fights inflation & tightening credit conditions, which could crimp both consumer & business spending. A standoff to raise the federal gov's $31.4T borrowing cap also poses a threat. The Fed is expected to increase interest rates by another 25 basis points next week, potentially the last hike in the central bank's fastest monetary policy tightening cycle since the 1980s. The Fed has raised its policy rate by 475 basis points since Mar of last year from the near-zero level to the current 4.75%-5.00% range.
US consumer spending flat in March; core inflation still strong
Gold futures finished a few pennies higher, leading to an only modest climb in prices for the week & the month of Apr. Range-bound interest rates & equity markets likely mean the near term for gold will be driven by the $ trends & emerging market buying. Still, recession fears are supportive for gold prices, especially as inflation remains stubbornly high. Gold for Jun edged up by a dime to settle at $1999 an ounce. For the week, prices based on the most-active contract added 0.4% for the week & climbed nearly 0.7% for the month.
Gold Futures Settle with Modest Gains for the Week and Month
Oil prices took a roller coaster ride this week, with WTI crude finishing the day 2.7% higher at $76.78, the largest one-day gain in nearly 4 weeks. This comes after prices fell by 3.6% Wed, the largest one-day decline in 6 weeks. The reason for the volatility may have been technical in nature & several analysts argue that prices now may be set to rise. Brent crude ends 1.5% higher at $79.54.
Oil Ends Higher at End of Volatile Trading Week
Dow is back over 34K again, the higher part of its recent range (see below). Last week for stocks was strong with Dow gaining 950, good enough to put Apr in the black. But there are dark clouds, FRC is more than just shaky & somebody needs to bail it out to avoid this situation from spreading to other banks. And there are numerous signs the economy is struggling while interest rates are at the highest in decades. In the meantime, enjoy the elevated values for the Dow.
Dow Jones Industrials
