Thank you for your excellent analysis. You have given teeth to my gut feeling: failure by Schwab is an asymptotic event. I just hope I can buy in the mid-$50s: if a bailout is announced before the market opens, Schwab will open up $10.
my thoughts exactly. with the SVB news and the depositors being backstopped, I think we're all expecting pretty big positive moves at the open here. I'm probably targeting low-60s for SCHW if I can get it, definitely not expecting $58.
But who knows - this market has had the capacity to surprise!
Thank you for the heads up on a great opportunity. I aggressively sold puts at massive premiums in the first 30 minutes of mayhem today, and it's looking like I will be buying them back at much lower prices. And if I get exercised and have to buy SCHW in the low 40s, I'm fine with that, too.
yeah I went long common but I think the put selling strategy makes sense here as well, certainly with premiums blowing out this morning. Quite a ride already so far today!
Sorry to disappoint you; but it's spooky how we think alike.
SCHW was my instinctive go-to trade. Then I scrolled through the charts of IAI holdings (we're talking deep dive fundamental analysis here) and thought that MS might be a lower risk albeit lower reward trade, especially given the stock's favorable response to Q4 earnings, all of which has now been retraced. I've owned LPLA for a while as a play on higher rates (and because it has a pretty chart; though I have been known to listen to earnings calls, comb through SEC filings, and build models when circumstances warrant).
(again from a distance) to me it seems like MS/LPLA and a lot of other financials are pretty clear buys on the dip - unless you buy the argument we alluded to briefly in this piece, that the SVB/SBNY mess will lead to a change in Fed policy.
I really think that misreads the situation, and to my eye this all looks more like panic-selling than the market rationally discounting a change in the forward curve. But it's possible the market is being more rational than I'm giving it credit for.
I think trying to take the biggest swing (within reason) is the way to go, which is why I settled on SCHW (and not, say, FRC). Don't think long KRE (the regional bank ETF) is a bad move, either.
it is nice to be back in a world where it feels like earnings calls and SEC filings provide some mooring again, as opposed to 2020-2021 when it felt like they just made you miss out :)
I mean, that's a project that requires a team of analysts working all week. I'm sure every major firm is doing that as we speak.
The year-end figures have to get adjusted for the forward curve - which moved more today and is the subject of quite a bit of debate. (Is this mess going to change Fed policy?)
We may try and add some color on the regulatory capital situation here, which is where the risk might be. If you model Schwab having to raise equity (at this valuation or worse) and then facing lower net interest income due to cash sorting, that's where you get your bear case here.
But, more broadly, I'm not sure SCHW really should get thrown in with the bank bucket. They have a bank subsidiary, but it largely serves the brokerage.
To me, as crazy as it is to say, this is more of a 'feel' situation. We know this is a wonderful business, the idea of a bank run blowing up the business seems remote, and we know that *at some point* there's going to be a normalized rate environment in which their NIM rises.
Schwab has been through 1987 and the 2000 bust and the housing crisis and the pandemic; every time you did well to buy it then. My feel here, and why I'm long, is that this is none of those cataclysmic events, yet we're getting the kind of price you're getting during those times.
I bought the stock with the intention of it being a longer-term play. Excellent franchise at ridiculously low price. Plenty of other names that are probably better suited for a trade based on the thesis that the market broadly overreacted. (And if you hit those names at the right time, you could have made your *year* over the past session and a half. Looks like WAL is about +400% from yesterday's low, PACW is +250% or so.)
Now, in this market, things are changing *very* rapidly and my strategy and intention will have to do the same. Given that I'll update immediately, maybe via the chat room, if I exit. But, based on what I see right now, I'm happy to own SCHW below $60 and probably above.
FWIW, we're also going to provide an update tomorrow morning with a little bit more context and discussion after the last two days.
at the end of the day, trying to keep the focus on the 3-5 year outlook here. Against 2021 EPS - again, a trough in terms of NIM - we're at a 15x P/E. To me, barring a significant need to raise capital (and we may try and add some work here on that front) that's a steal, and even if you face some near-term dilution you're still getting this franchise at a pretty healthy valuation.
Oh and I forgot to mention the twit rumor on SCHW having issue with their FHLB loans.. I was assuming this is fear mongering but who knows maybe these annonymous fintwit guys are outsmarting me
Hi Vince I wodner would you be able to do an update on this one and generally the US banking sector? With 10y yield up significantly there are again rumors about banking crisis. Thanks.
For background, I read this comment from SA which sounds very convincing to me:
"There is nothing safe about this balance sheet. Avoid.
They note that they are bringing in investment funds about as fast as they are losing bank deposits. So brokerage+bank about steady. Don't confuse the two as remotely equal. They are losing bank deposits from brokerage accounts (extra cash) that they were paying very little for (under 1%), way below current market. This cash is staying at SCHW, but moving into money market and T-bill ETFs, under SCHW custody, around 5%. This is a big difference. The bank needs to replace the lost deposits with alternate funding (5% CDs, 7% corporate bonds, Fed liquidity at 5%).
The brokerage side gets revenue from the extra custody assets, but it's miniscule- they will make a few basis points on a typical cash proxy ETF. But this means having to replace bank funding under 1% with funding over 5%.
The stock is priced for growth but NIM will get crushed. The fact that they are raising long term capital at 6-7% while their asset yields are 3% or worse should be ringing alarms."
I think that comment is very convincing — about what is happening in 2023.
But I think the point we made here, and the point we made in our update this week, is that what is happening in 2023 is really not all that material, unless someone is arguing that there's a material risk this business is going under.
We're pretty skeptical on that front. And everything the commenter is saying is already 100% known. Much of it was known *before March*.
What matters at this point is 2024 and 2025. Are customers going to stay really aggressive with pulling cash out of the investment account to gain yield? Or are they, as has happened in past interest rate environments, going to settle at a new equilibrium?
The answer is most likely the latter. And while Schwab is paying these higher costs and getting low yield in the interim, over time the current government bonds are going to roll off and get replaced with much better yields.
At some point, net interest margin is going to normalize. I'm personally happy owning this business and waiting until that happens, because what keeps getting forgotten is the mid- to long-term benefit of higher interest rates, not just the short-term hit.
I haven't seen the FHLB talk but if they're really having issues, then someone at Schwab is probably going to jail given their public pronouncements. I'm fine taking that risk too.
Thank you for your excellent analysis. You have given teeth to my gut feeling: failure by Schwab is an asymptotic event. I just hope I can buy in the mid-$50s: if a bailout is announced before the market opens, Schwab will open up $10.
my thoughts exactly. with the SVB news and the depositors being backstopped, I think we're all expecting pretty big positive moves at the open here. I'm probably targeting low-60s for SCHW if I can get it, definitely not expecting $58.
But who knows - this market has had the capacity to surprise!
Capacity to surprise indeed! I was able to fill at $48 and have limit orders for even lower if the run continues to be overdone.
Thank you for the heads up on a great opportunity. I aggressively sold puts at massive premiums in the first 30 minutes of mayhem today, and it's looking like I will be buying them back at much lower prices. And if I get exercised and have to buy SCHW in the low 40s, I'm fine with that, too.
yeah I went long common but I think the put selling strategy makes sense here as well, certainly with premiums blowing out this morning. Quite a ride already so far today!
Got in at $48 !
I had an order fill as low as $45.
Yeah, I got in at $47.46
Investing in an arb deal on non-deal related market volatility is smartest trade going.
Any thoughts on LPLA and MS?
Disappointed in this time of crisis you don't have a pun or two for us, to be honest.
I personally really don't know either name well enough right now to have a strong opinion on either. Both seem interesting from a distance.
Sorry to disappoint you; but it's spooky how we think alike.
SCHW was my instinctive go-to trade. Then I scrolled through the charts of IAI holdings (we're talking deep dive fundamental analysis here) and thought that MS might be a lower risk albeit lower reward trade, especially given the stock's favorable response to Q4 earnings, all of which has now been retraced. I've owned LPLA for a while as a play on higher rates (and because it has a pretty chart; though I have been known to listen to earnings calls, comb through SEC filings, and build models when circumstances warrant).
(again from a distance) to me it seems like MS/LPLA and a lot of other financials are pretty clear buys on the dip - unless you buy the argument we alluded to briefly in this piece, that the SVB/SBNY mess will lead to a change in Fed policy.
I really think that misreads the situation, and to my eye this all looks more like panic-selling than the market rationally discounting a change in the forward curve. But it's possible the market is being more rational than I'm giving it credit for.
I think trying to take the biggest swing (within reason) is the way to go, which is why I settled on SCHW (and not, say, FRC). Don't think long KRE (the regional bank ETF) is a bad move, either.
it is nice to be back in a world where it feels like earnings calls and SEC filings provide some mooring again, as opposed to 2020-2021 when it felt like they just made you miss out :)
Thank you for such a deep analysis,
I wonder if you could bring some light on how Charles' BS compares to othe banks to assess the depth of the problem.
Best
I mean, that's a project that requires a team of analysts working all week. I'm sure every major firm is doing that as we speak.
The year-end figures have to get adjusted for the forward curve - which moved more today and is the subject of quite a bit of debate. (Is this mess going to change Fed policy?)
We may try and add some color on the regulatory capital situation here, which is where the risk might be. If you model Schwab having to raise equity (at this valuation or worse) and then facing lower net interest income due to cash sorting, that's where you get your bear case here.
But, more broadly, I'm not sure SCHW really should get thrown in with the bank bucket. They have a bank subsidiary, but it largely serves the brokerage.
To me, as crazy as it is to say, this is more of a 'feel' situation. We know this is a wonderful business, the idea of a bank run blowing up the business seems remote, and we know that *at some point* there's going to be a normalized rate environment in which their NIM rises.
Schwab has been through 1987 and the 2000 bust and the housing crisis and the pandemic; every time you did well to buy it then. My feel here, and why I'm long, is that this is none of those cataclysmic events, yet we're getting the kind of price you're getting during those times.
Are you still holding on this ?
Yes.
I bought the stock with the intention of it being a longer-term play. Excellent franchise at ridiculously low price. Plenty of other names that are probably better suited for a trade based on the thesis that the market broadly overreacted. (And if you hit those names at the right time, you could have made your *year* over the past session and a half. Looks like WAL is about +400% from yesterday's low, PACW is +250% or so.)
Now, in this market, things are changing *very* rapidly and my strategy and intention will have to do the same. Given that I'll update immediately, maybe via the chat room, if I exit. But, based on what I see right now, I'm happy to own SCHW below $60 and probably above.
FWIW, we're also going to provide an update tomorrow morning with a little bit more context and discussion after the last two days.
couple notes from WS today:
Citi upgrades to Buy, higher cash sorting than past cycles, no "material risk to deposits"
MS thinks $275B of securities portfolio eligible for discount window.
https://seekingalpha.com/news/3946832-charles-schwab-stock-sinks-even-after-upgrade-to-buy-at-citi
at the end of the day, trying to keep the focus on the 3-5 year outlook here. Against 2021 EPS - again, a trough in terms of NIM - we're at a 15x P/E. To me, barring a significant need to raise capital (and we may try and add some work here on that front) that's a steal, and even if you face some near-term dilution you're still getting this franchise at a pretty healthy valuation.
Oh and I forgot to mention the twit rumor on SCHW having issue with their FHLB loans.. I was assuming this is fear mongering but who knows maybe these annonymous fintwit guys are outsmarting me
Hi Vince I wodner would you be able to do an update on this one and generally the US banking sector? With 10y yield up significantly there are again rumors about banking crisis. Thanks.
For background, I read this comment from SA which sounds very convincing to me:
"There is nothing safe about this balance sheet. Avoid.
They note that they are bringing in investment funds about as fast as they are losing bank deposits. So brokerage+bank about steady. Don't confuse the two as remotely equal. They are losing bank deposits from brokerage accounts (extra cash) that they were paying very little for (under 1%), way below current market. This cash is staying at SCHW, but moving into money market and T-bill ETFs, under SCHW custody, around 5%. This is a big difference. The bank needs to replace the lost deposits with alternate funding (5% CDs, 7% corporate bonds, Fed liquidity at 5%).
The brokerage side gets revenue from the extra custody assets, but it's miniscule- they will make a few basis points on a typical cash proxy ETF. But this means having to replace bank funding under 1% with funding over 5%.
The stock is priced for growth but NIM will get crushed. The fact that they are raising long term capital at 6-7% while their asset yields are 3% or worse should be ringing alarms."
I think that comment is very convincing — about what is happening in 2023.
But I think the point we made here, and the point we made in our update this week, is that what is happening in 2023 is really not all that material, unless someone is arguing that there's a material risk this business is going under.
We're pretty skeptical on that front. And everything the commenter is saying is already 100% known. Much of it was known *before March*.
What matters at this point is 2024 and 2025. Are customers going to stay really aggressive with pulling cash out of the investment account to gain yield? Or are they, as has happened in past interest rate environments, going to settle at a new equilibrium?
The answer is most likely the latter. And while Schwab is paying these higher costs and getting low yield in the interim, over time the current government bonds are going to roll off and get replaced with much better yields.
At some point, net interest margin is going to normalize. I'm personally happy owning this business and waiting until that happens, because what keeps getting forgotten is the mid- to long-term benefit of higher interest rates, not just the short-term hit.
I haven't seen the FHLB talk but if they're really having issues, then someone at Schwab is probably going to jail given their public pronouncements. I'm fine taking that risk too.