The Weekend Edition is pulled from the daily Stansberry Digest.
It has been "buy, buy, buy," you might say, for the "best in show" and the market in general...
Earlier this week, my colleague Dan Ferris sent me a link to a Bloomberg interview. In it, the economist known as "Dr. Doom" – Nouriel Roubini, a past speaker at our annual Stansberry Research conference – explained why even he is bullish on the economy now...
I'm less worried than in the past... There is a serious possibility of what people refer to as a "no landing" – that growth remains above potential and inflation remains sticky... because of technology and other factors and the Fed doesn't cut three times, only two, one maybe, some people say zero.
"Last Bear Gored," Dan wrote to me.
But I take Roubini's main point...
His takeaway was that the unrealized "risk" to the market right now isn't a recession like many folks have been talking about. Instead, the risk is continued growth.
Without an economic slowdown, the Federal Reserve won't cut rates as much as folks have expected. (We might even see another rate increase first.) And remember, the idea of rate cuts is the catalyst for the present four-month rally in the major U.S. indexes.
Either of these outcomes would lead to adjustments in market expectations... and volatility for stocks and bonds.
If that's the case, the market may get bumpy in the short term...
But in the end, economic growth isn't a terrible thing. Nor is a continued "Fed pause." It means the economy is at just the right temperature today... not so hot that the Fed will want to raise rates, nor cooling off so much that millions of Americans will lose their jobs.
However, that doesn't mean we'll remain at this "Goldilocks" point indefinitely.
In the macroeconomic world, investors received the latest labor market data yesterday...
The unemployment rate rose to 3.9% in February. That was up from 3.7% in January... and its highest mark since January 2022, when the rate was in the process of trending lower from a pandemic peak. The unemployment rate has incrementally moved higher in the past year.
And on Wednesday and Thursday, Fed Chair Jerome Powell testified in Congress for a good five hours. He said essentially the same things we've been hearing for months – that the federal-funds rate is likely at its peak.
But Powell was also his most direct about the possible path of rates ahead, telling a Senate committee on Thursday that the Fed "can and will begin" to lower rates this year. A majority of fed-funds futures traders are betting that the first rate cut will happen at the Fed's June meeting.
None of this news was all that shocking. We'll continue to monitor the Fed's movements.
In the meantime, we shouldn't keep our heads in the sand about other risks in the market, either...
Today, I want to take a look at a sector that deserves the title of "worst in show" – and share what the story might mean about the economy and markets in general...
Without further ado, the "worst in show" is...
New York Community Bancorp (NYCB)... and loans gone bad, generally speaking.
While the idea of a "soft landing" for the U.S. economy (or "no landing," as Roubini suggested) is getting more popular these days, NYCB's flight in this higher-interest-rate era is crashing hard... And it's indicative of more potential problems for certain banks.
You've probably seen recent headlines about NYCB. This regional bank has been struggling for a while now. Its shares are down about 65% from where they were in late January.
That's when it disclosed a $260 million quarterly net loss... and said it was cutting its dividend by 70% to build up more than $500 million needed for potential loan losses tied to declining real estate values in New York.
Though the stock has recouped some slight losses – and got a billion-dollar-plus capital injection this week, partly from an investment group led by former Treasury Secretary Steve Mnuchin – NYCB shares remain at their lowest level (adjusted for splits) since the great financial crisis.
There are two reasons behind the recent pain...
First, credit-ratings agency Moody's downgraded NYCB's ratings for the second time in a month. That put NYCB's deposit rating three levels below investment grade... and pushed the stock price down.
Second, news broke that two executives at NYCB left the bank after the discovery of "material weaknesses in internal controls" about the vetting of loans to commercial real estate clients.
NYCB was focused on multifamily and office properties. These areas of commercial real estate have declined in value as more companies have shifted to remote-work setups, or at the least downsized the number of workers required to be in an office regularly.
Moody's said that NYCB may need to increase its estimates for losses over the next two years, above what it already has. That's due to both the risk tied to office loans and a drop in the value of multifamily loans.
As Mike DiBiase wrote in February's issue of his Stansberry's Credit Opportunities newsletter – before the downgrades – the losses for NYCB were already staggering when it reported its earnings earlier this year. As Mike wrote...
The regional bank – which bought parts of bankrupt Signature Bank last year – shocked investors when it reported 2023 earnings. It recorded a massive increase in its reserve for loan losses that was 10 times higher than analysts expected.
The bank said it was building its reserves to "address office sector weakness." The $552 million charge wiped out all of the bank's profits.
This is only the beginning. The charge was just a tiny portion of NYCB's commercial real estate portfolio, which totals more than $13 billion.
The continued sell-off is emblematic of growing fears and realities for regional banks that may be exposed to defaults. Nearly $1 trillion in loans will come due this year, including roughly $500 billion in commercial real estate loans.
The tale of NYCB is essentially a shade of the regional-banking crisis that unfolded one year ago this month. And we could see more trouble for bank stocks from here.
And speaking of banks...
If we experience higher interest rates for longer... that creates challenges throughout the economy that many folks might not be prepared for.
Higher rates put more pressure on businesses that need to refinance loans. They lead to more debt costs for the U.S. government. And they make things worse for banks already sitting on losses.
Mike told his Credit Opportunities subscribers to expect more regional-bank failures this year. And that means even tighter credit for individuals and businesses.
We've already been concerned about debt costs coming due this year, even with rate cuts possibly ahead. Without them, the risk grows for banks – and for other entities that might not be top of mind, like city governments.
Here in Baltimore, for example, the city is losing tens of millions of dollars' worth of its tax base tied to commercial real estate – from just one building...
When the investment firm T. Rowe Price decided to move its headquarters to a new location in downtown Baltimore, the building that used to be its home saw its assessed value drop by nearly $80 million. As the Baltimore Banner reported recently...
The city has seen its property tax base shrink by $181 million just since July 1, largely a consequence of updated appraisals to major commercial properties that have lost business and tenants since the pandemic.
Commercial real estate activity screeched to a halt post-pandemic. As it picks up again, this kind of thing could become commonplace.
So, as important and fun as it might be to enjoy the bull market trends everyone is talking about right now... make sure you do what you can to avoid the "worst in show."
There's always a bull market somewhere – but there are always big losers, too.
Switching gears, primary voters in 15 states and one territory (American Samoa) headed to the polls on Super Tuesday...
This day marks one of the bigger dates in a presidential-election year.
From here on out, we usually have a good picture of what the race to the White House will look like, with the leading candidates of the two major parties clear. We hesitate to trust much of anything when it comes to politics anymore.
But we also like to look at history, for what it's worth. As I wrote in the Digest back in January...
As much as it may feel and appear that "this time will be different" in politics – and maybe it will be if all hell breaks loose come November – we like to see what history suggests about future market behavior.
So we watched with interest as Marc Chaikin, our friend and founder of our corporate affiliate Chaikin Analytics, went on camera to discuss the election cycle a little more than a week ago in advance of Super Tuesday (and this week's State of the Union address).
Marc explained precisely what he's expecting from the markets in 2024 – and why it matters that this is an election year.
The political outcome isn't the difference-maker, Marc said, but something else...
Marc has traded through 13 presidential-election years over five decades as a professional investor. And every four years, he has seen patterns repeat themselves over and over.
As he noted, in every election year going back nearly 100 years, we tend to see a shift occur in the markets right about now...
When you look at the market this way, nothing is a coincidence. It's a pattern.
Marc revealed all the details in his presentation, which will only be available for a few more days. We urge you to take some time to watch the free replay while it's still available.
Without giving too much away, I can tell you that Marc says Super Tuesday tends to be a spark for how the market will perform in a presidential-election year – and he shared plenty of evidence in his presentation.
Not only that... but Marc also offered up precisely how he plans to trade the rest of this year, shared details on his powerful Power Gauge tool, and gave away a pair of free recommendations – one buy and one sell. You can still get those if you tune in now. As he says...
There's really no such thing as a "losing" year if you, one, understand what's coming to the U.S. stock market, per the election indicator... and, two, know exactly which stocks to buy and avoid.
Click here to watch now and learn more.
Good investing,
Corey McLaughlin
Editor's note: Marc predicted 2023's historic banking crisis five months ahead of time. In fact, his Power Gauge system issued a warning for Silicon Valley Bank back in July 2022. Now, a massive real estate "debt bomb" is looming over regional banks. That's why Marc is stepping forward with a critical update to share how you can protect yourself in 2024... and even profit. Click here to learn the details.
