Update - September 26, 2023

Banks Hold Tight as Investors Sweat

Things sure can change in just a few months.

In August, the major stock market benchmarks seemed to be on track to post new all-time highs. Now investor sentiment has taken a sudden turn toward the downside.

What happened?

For one, investors are still taking in the “new normal” of higher interest rates. Hopes that the Fed would quickly pivot to a cycle of rate cuts had been going strong since the start of the year… but now those hopes are being dashed to pieces.

Then there’s the unfolding liquidity crisis…

Not only have banks seen net withdrawals surge over the past year… but the cash they have left to lend out is being held onto much more tightly.

Putting it all together…

With banks losing cash, less money available to borrow and borrowing costs remaining high… it’s really no wonder that pesky “r word” is back again.

By that, I of course mean recession.

The odds of a recession occurring in the next 12 months remain above 60% according to a popular Fed model based on Treasury yield spreads.

The liquidity crisis doesn’t help… especially when you consider that corporate financing costs are rate-sensitive and that high rates tend to dampen economic growth.

Overleveraged businesses will soon need to refinance. But refinancing costs are now sky-high… which means businesses that rely mostly on debt to grow are going to struggle big-time in this environment.

So what does it all mean for us?

We should expect market uncertainty for a while… and we shouldn’t be surprised if it impacts our portfolio in the near term.

Consider our position in SmartRent (SMRT).

Earlier this month, short-selling firm Bleecker Street Research published a hit piece on the company, citing falling product orders as an omen that the business is in dire straits.

It also alleged that SmartRent was misleading investors by chalking up the trend as an anomaly instead of a direct consequence of losing one of its customers, the venture capital fund RET Ventures (which was also an early investor in SmartRent).

SmartRent has issued an early response to the accusations, saying they are unfounded and based on misinformation. But that hasn’t stopped shares from falling sharply in recent weeks.

We have a protective stop in place on our position. If the short sellers succeed in spooking investors, we may end up exiting our position far earlier than we’d like.

That’s what our stop-loss policy is for, though. It protects us against unexpected risks. If it comes to it, we’ll follow our discipline and move on to other opportunities… like the one you’ll find in our upcoming issue of Manward Letter.

Until then, be well.