In another wild trading week the S&P regained some lost ground, rallying +10%, with our Wolfe Banks / Brokers Index outperforming (+13%). EVR, SF, LPLA posted the strongest gains this week, with LAZ, STT, and RJF lagging. Despite the strong performance this week, our coverage is still lagging YTD by a wide margin (-35%, vs. S&P -21%) so there remains much ground to cover.
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ZIRP, 25% market correction, capital markets slowdown, deteriorating credit quality… our prior bear case scenario has now become the base case for investors, with the road to recovery uncertain. Our updated forecasts reflect this new reality with our modeled base case reflecting a recession in ‘20, with gradual recovery in ‘21. That said, the risk of a deeper and more protracted recession is real, prompting us to include a more bearish scenario (25% probability) in our valuation framework.
Wolfe Research Senior Diversified Banks & Brokers Analyst, Steven Chubak, hosted a webcast to help clients in identifying dislocations in a Volatile Market
This week has taken a severe mental and physical toll on many of us – on a personal note I hope everyone’s families are doing well and people are managing OK during this difficult period. Since transitioning to working from home the workdays have gotten much longer – I have spent most of my days on the phone, and my evenings jamming through models and stressed scenarios w/ the team. While our discussions have been fairly wide-ranging as investors have focused their attention on multiple themes (rates / markets sensitivities, trading / funding stress, capital / liquidity risk, and credit exposures), it’s clear that credit is the #1 perceived boogeyman since it’s the hardest risk to quantify / handicap. We expect bank investors will be paying very close attention to the new claims figures, which should continue to climb…
First things first - Steven is on vacation this week (shoop, shoop, shoop), so you guys are stuck with Team Chubak taking the reins on this week’s Weekly (Team) Chu; apologies in advance if the dad jokes in this week’s edition are not as amazing as you all have come to expect. Steven keeps telling us he “needs a vacation from his vacation” - because apparently the ski conditions at Snowbird are far from ideal (and admittedly, he has lost five whole hours of slope time fielding urgent client calls) - the next time you speak with him, if you could please remind him that some of us would actually just like a vacation, that would be greatly appreciated*.
The Fed issued a statement Sunday (3/15/20) announcing significant measures including: 1) 100bps rate cut; 2) $700B QE program; and 3) Joint Central Bank effort to shore up USD liquidity. This represents the largest emergency cut in the Fed’s history and is more aggressive than the market was anticipating, with Fed Futures (FF) pricing in 75bp cut at the March FOMC and no QE (though we alluded to this possibility in our note on Thursday). Bottom Line: While the FF was already pricing in ZIRP by mid-year, we believe the initial reaction could prompt more weakness in asset-sensitive fins., with the selloff in the S&P Futures (limit-down as of this writing) supporting our strong preference for BK which screens as the most defensive stock in our coverage (lower credit / equity market sensitivity, greater NIM resiliency, QE beneficiary). Buyback suspension from the eight G-SIBs may also garner a negative reaction, with suspended buyback representing 3-4% of market cap on average.
The Fed announced it is offering $1.5trn total three-month and one-month repos today and tomorrow, with $1trn of weekly offerings to continue on a weekly basis at least through mid-April. It will maintain $60bn a month of asset purchases, expanding its purchases to include different asset classes (e.g., bills, TIPS, floating rate notes, etc.). Bottom line: Significant increase in repo operations should drive a commensurate increase in Fed assets. While these increases may be more short-term in nature, today’s announcement signals greater willingness from the Fed to step in and pursue more significant balance sheet actions to bolster the economy. If we see the Fed follow in the footsteps of the ECB and expand its asset purchase program as well, we could see more meaningful expansion in total Fed assets.
We had the opportunity to host Matt Audette, CFO of LPLA for a virtual fireside chat at the Wolfe FinTech Forum. Below are our key takeaways.
We recently had the opportunity to host Stephen Scherr, CFO of Goldman Sachs for a virtual fireside chat at the Wolfe FinTech Forum. Below are our key takeaways.
WHAT A WEEK…. There is a story in the Talmud about Rabbi Elazar ben Azariah who was eighteen years old when anointed the Chief Rabbi – and people took issue with his age / lack of experience. The next day there was a miracle and he woke up with the appearance (and wisdom) of a seventy year old man and everyone’s concerns faded. I don’t know what it feels like to gain 52 years of wisdom overnight but this week I sure feel like I have aged 50 years.
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