Peter Boockvar

While it’s easy for the rest of us to say, ‘Yeah, the Swiss government will just take over/backstop Credit Suisse,’ and while the SNB is lending them $54b, we have to understand just how big Credit Suisse and UBS are relative to the Swiss economy to understand that it is not that easy. The Swiss economy is about $800b and Credit Suisse has about $570b in assets (down from about $800b pre Covid). UBS has almost $1.2T of assets. So taken together we’re talking about almost $1.8T of assets at the two largest Swiss banks, more than 2x the size of the Swiss economy. For perspective, relative to the US economy of about $25T, JPM has $3.7T of assets and BAC has about $3T. Taken together that is 27% of US GDP. 

The bounce in CS on the SNB news has the Euro STOXX bank stock index up by 1.4%. Credit default swaps are getting cheaper too after the recent spike. And even with the jump in the cost of insuring against default the past two days, the big European banks still have pretty low ‘insurance premiums’ with some less than the major US banks. JPM’s 5 yr CDS is at 97 (USD) and BAC is at 92 (USD). BNP Paribas is at 69 converted to USD, Deutsche Bank’s 5 yr CDS is at 134 bps (USD). Barclays is at 100 bps (USD). And, Intesa Sanpaolo is trading at 119 bps and Banco Santander at 104 bps. 

While CS has gotten another life preserver, and I’m not worried about the viability of most of the larger European banks, it’s important, as it is now in the US, to watch how banks respond to their business because about 80% of ALL lending to European business is done via the banks. That compares with about 25% in the US. 

Now getting to the US regional banks, my friend Torsten Slok noted to me a great stat that of all commercial bank loans extended, small banks made up 38% of that total. That is up from about 33% in 2019 and about 28% ten years ago. The local restaurant is not going to Chase or Citi to finance two restaurants, they are going to their local bank. It is why the focus now from the regional bank perspectives that balance sheet and deposit competitiveness are the two biggest priorities and less so bank loan growth which means we’re on the cusp of a notable cut back in commercial bank loans. 

I want to give you some notable quotes from the Exec Chair of Lennar in yesterday’s earnings call:

“The quarter started in December with traffic in sales stalled moving only with incentives and price adjustments. We entered January with interest rates declining and energized customer and improving margins and then closed out February with rates again rising and challenging consumer confidence, although sales remained relatively strong as adjusted prices, traffic was slowing. Of course, the quarter ended and the past couple of weeks has added new issues and questions that are reflective of a market that is looking for a bottom and looking for stability. With the Federal Reserve and Federal govt trying to reconcile the unintended consequences from aggressive interest rate hikes in order to curb the inflation, there’s simply no way to see around corners and anticipate with certainty what comes next.” They are ready to cut price/raise incentives from here if needed to drive sales. 

They also highlighted that the rise in rates is negatively impacting the ‘purchase for rent buyer.’ “Higher capital costs together with higher cap rates have made the purchase of single family for rent homes less financially attractive as well.” They are, of course, bullish on the long term demand for homes and also said in the short term, “The sudden sticker shock of rapidly rising interest rates in 2022 has mellowed, and while net prices are lower, incentives are moderating, cancellations have been normalizing lower and margins have been bottoming as cost reductions are beginning to provide an offset.” 

And finally, Lennar is now trying to get cheaper prices from their sub contractors. “As our margins have now contracted, we are driving cost reduction participation from our trade partners. Our trade partners are working side by side with us to reduce costs and to keep the production machine working.”

With respect to stock market sentiment, not surprisingly the retail Bull has bailed. AAII today said Bulls fell 5.6 pts to 19.2, the least since last September. Bears were higher by 6.7 pts to 48.4, the most since the end of December. The II figure, thru last Friday so before the drama filled weekend, Bulls fell to 40.3 from 45.2 while Bear rose to 27.8 from 24.7. The CNN Fear/Greed index closed yesterday at 19. Bottom line, the AAII figure could be setting the market up for a short term bounce from a contrarian perspective, same with the CNN data but II still has obviously a bullish stance, though nothing close to extended. The Fed’s meeting next week will certainly be the big influence on how the quarter will end. 

Overseas, the Bank of Indonesia kept its reverse repo rate unchanged at 5.75% as expected. Australia reported a better than expected February jobs report. Japan said its February exports rose 6.5% y/o/y, just under the estimate of up 7%.