Worst in Show

Last bear gored... The 'risk' today... It gets worse for New York Community Bancorp... Commercial real estate fallout... Bitcoin pops and drops... Why Super Tuesday is a catalyst for the rest of the year...

---

Even Dr. Doom is bullish now...

Yesterday, we wrote about the strong bull markets in cryptos and AI. We shared Stansberry Research editors Eric Wade and Mike Barrett's take on bitcoin and Nvidia, respectively – with a little bit of Jim Cramer opining thrown in...

It's been "buy, buy, buy," you might say, for the "best in show" and the market in general lately. This morning, Dan Ferris sent me a link to a Bloomberg interview in which even "Dr. Doom," Nouriel Roubini – a past speaker at our annual Stansberry Research conference – explained why he's 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. Maybe time to take some profits, we thought. Apparently, some bitcoin traders agreed today. More on that momentarily...

But I (Corey McLaughlin) 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, but continued growth.

Without an economic slowdown, the Federal Reserve won't cut rates as much as folks have expected. (I would add perhaps even 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 – i.e., volatility – for stocks and bonds.

If that's the case, the market may get bumpy in the short term...

We don't chalk this up to Roubini's interview, but that was the case today. The major indexes all fell... led lower by the tech-heavy Nasdaq Composite, which dropped 2%. The benchmark S&P 500, Dow Jones Industrial Average, and small-cap Russell 2000 closed roughly 1% lower.

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 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, I'm watching the jobs market for signals of potential weakness. Investors will be looking closely at updated labor market data over the next few days, in addition to whatever hints Fed Chair Jerome Powell might drop in his congressional testimony starting tomorrow. We'll have reports.

But we don't have our heads in the sand about other risks in the market, either. Today, I want to take a look at a sector that deserves a "worst in show" nod – and share what the story might mean about the economy and markets in general...

Without further ado, '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 some headlines about NYCB lately. And if not, we wrote about this troubled regional bank about a month ago. From the February 7 edition...

Last week, the stock price of New York Community Bancorp (NYCB) fell 38% in a day after the company reported terrible fourth-quarter earnings ($260 million net loss) and announced it was cutting its quarterly dividend by 70%.

In part, investors are fearing NYCB's exposure to the commercial real estate market in New York.

About 56% of NYCB's total loans are tied to commercial real estate, Goldman Sachs reported. The dividend cut will help build up about $550 million for potential loan losses.

The stock fell another 11% in a day last week, and it's down another 25% this week. If nothing else, this should serve as a reminder: When you think a stock can't go lower, it always can.

Ain't that the truth. Ironically, a year ago, NYCB bought a chunk of Signature Bank's assets when it was in the process of failing as clients made a run on the crypto-focused bank. Now, NYCB finds itself staring down the same fate.

Yesterday, NYCB shares plunged another 23%...

Though they've recouped some of those latest losses today, they remain near their lowest level since 1996.

A second ratings downgrade by Moody's in a month – putting NYCB's deposit rating three levels below investment grade – did the trick. And it followed news on Friday 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 narrowly focused on multifamily and office properties. These have declined in value in the post-pandemic era as many companies 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 have 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 this month'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 come due this year, including roughly $500 billion in commercial real estate loans.

We said last month that 'we could see more trouble for bank stocks'...

And that's still true.

The tale with NYCB is essentially a shade of the regional-banking crisis that unfolded one year ago this month. This one has more to do with unrealized losses tied to commercial real estate rather than massive unrealized bond losses in general.

I do find it notable that the "rescue" operation that the Fed came up with about a year ago to mute panic in regional banks is about to expire as well. As we wrote last month...

After Silicon Valley Bank and Signature Bank failed last March, the Federal Reserve launched the Bank Term Funding Program as essentially a liquidity pool for banks at low rates. It's scheduled to stop making new loans on March 11...

In the meantime, the Fed also raised the interest rate on the program, which was effectively ending an easy way for banks to make money. At the very least, more talk about the lapse around this program could stoke volatility in the banking sector – again.

As we also said a month ago, it bears repeating...

This is a reminder of why we recommend stop losses so strongly at Stansberry Research. Our Income Intelligence newsletter stopped out of NYCB in October for an 8% loss. That was a disappointment... But if you'd ignored the stop loss and hoped for a turnaround, you'd now be down about 70%.

Consider this...

I don't think many people on Wall Street or in Washington are going to complain about economic growth today, so long as the rate of inflation isn't reaccelerating with it and unemployment isn't rising.

But one of the possible consequences of that scenario is higher interest rates for longer... And that brings with it a set of challenges that many folks might not be prepared for...

Higher rates put more pressure on businesses that need to refinance loans, lead to more debt costs for the U.S. government, and increase trouble 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 of more trouble emerging grows for banks – and for other entities that might not be first of mind, like city governments.

Here in Baltimore, 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 here last week...

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...

As more commercial real estate activity picks up, after screeching to a halt post-pandemic, this kind of thing could become commonplace.

So, as important and fun as it might be to enjoy the bull market trends we talked about yesterday... make sure you do what you can to avoid the "worst in show."

Because like how there's always a bull market somewhere, there are always big losers, too.

Switching gears, to crypto watch...

Bitcoin, the world's most popular crypto, took a bumpy ride today...

It briefly traded above $69,000 for the first time since 2021. Financial-news websites sent out e-mails about the milestone the moment it happened. And then the price promptly dropped about 10% (to around $62,000, as we write, back where it was late last week).

Our Crypto Capital team remains bullish on bitcoin and Ethereum and the lesser-known cryptos they recommend. But as we've said over the past two weeks as bitcoin approached new highs, many cryptos will be volatile as their prices reach nearly uncharted territory.

And finally, it's Super Tuesday...

Primary voters in 15 states and one territory (American Samoa) head to the polls today.

While the outcomes don't seem in doubt – especially after the Supreme Court cleared the deck yesterday for former President Donald Trump to remain eligible on the ballot – today 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 January 10 edition...

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 last week. Marc explained precisely what he's expecting in the markets the rest of the year – and why the fact that this is an election year has a lot to do with it.

The outcome isn't the difference-maker, Marc said, but something else...

Marc has traded through 13 presidential election years over his five decades as a professional investor and has seen patterns repeat themselves over and over and over every four years.

He said in every election year for nearly 100 years, we 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 explained 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... and as today's key date on the election calendar is unfolding as I write.

Without giving too much away, I can tell you that Marc says that 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... 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.

New 52-week highs (as of 3/4/24): Advanced Micro Devices (AMD), A.O. Smith (AOS), ASML (ASML), Broadcom (AVGO), AutoZone (AZO), Booz Allen Hamilton (BAH), Builders FirstSource (BLDR), Ciena (CIEN), CME Group (CME), Costco Wholesale (COST), Copart (CPRT), Commvault Systems (CVLT), Disney (DIS), Dow (DOW), iShares MSCI Emerging Markets ex China Fund (EMXC), Comfort Systems USA (FIX), SPDR Gold Shares (GLD), W.W. Grainger (GWW), ICON (ICLR), Intuitive Surgical (ISRG), iShares U.S. Aerospace & Defense Fund (ITA), JPMorgan Chase (JPM), KraneShares MSCI Emerging Markets ex China Index Fund (KEMX), Linde (LIN), Eli Lilly (LLY), LyondellBasell (LYB), VanEck Morningstar Wide Moat Fund (MOAT), MSA Safety (MSA), Motorola Solutions (MSI), Micron Technology (MU), Neuberger Berman Next Generation Connectivity Fund (NBXG), Novo Nordisk (NVO), Sprott Physical Gold Trust (PHYS), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), Spotify Technology (SPOT), SPDR Portfolio S&P 500 Value Fund (SPYV), Stryker (SYK), Trane Technologies (TT), Textron (TXT), ProShares Ultra Semiconductors (USD), Veeva Systems (VEEV), and Viper Energy (VNOM).

In today's mailbag, feedback on yesterday's Digest – which included a take on CNBC host Jim Cramer and raised the question of whether hamburgers and hot dogs are sandwiches... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Don't be too tough on Cramer. In a time when pensions were becoming history and 401k's with investment choices and IRA accounts for tax advantages became the new thing, I didn't quite grasp mutual funds and that they held stocks. Cramer did extol to educate yourself and brought back old accounting class terms such as EPS, EBITDA and P/E ratios. [I thought] yikes, this is way over my head, yet I better start getting a handle on all of this, as we have all been handed our destinations, with a hell of a lot more risk than any pension plan offered.

"So my laptop and a lot of research become my new passion. Mainly for the preservation of my family and having a good retirement. In my new-found internet research, I ran across this Stansberry Research group. I kind of like this Dr. [Steve Sjuggerud] and his buy what's hated and in an uptrend thesis.

"Long story short, Cramer got me thinking and Stansberry helped me become an investor with Dr. [Sjuggerud], Porter [Stansberry], and Doc [Eifrig]. I'm retired now, with an okay nest egg built by following Stansberry recos and research. My day isn't finished until reading the daily Digest :)

"We're okay and starting to knock off those bucket list trips, etc. Thanks guys!" – Subscriber Steve R.

"Of COURSE a hamburger is a sandwich. Sandwich is the macro category defined by a conveyor (bread, bun, lettuce leaf, even) and a filling/toppings. Then underneath that sandwich category you have a thousand versions: hamburger, hot dog (yes, they are), vegetarian, subs, pitas, on and on. And under every one of those categories you have more subcategories: burgers with toppings, burgers with meat substitutes, burgers with cheese, however many categories you choose to argue over.

"But the overriding idea is a sandwich. It's like saying that spaghetti is not spaghetti if you plop some chili on it. Or that chili isn't chili if it contains beans. The CATEGORY is chili and then there are bean-filled and beanless subcategories. Arguing over chili is for people who don't want to do the dishes.

"People who can't think in categories may even carry this into their investing. 'I'm not getting into commodities,' someone says. Yet the news (and our Stansberry service) is discussing weather patterns that are killing the coffee or the sugar crops and it doesn't take a floor trader to see there is money to be made in the short term in a subcategory of commodities. Buy the sugar; sell the sugar; spend the profit on Hershey; hold Hershey. Rinse. Repeat.

"There's outside-the-box thinking, but thinking linearly is a good thing, too." – Subscriber Jacqueline G.

Corey McLaughlin comment: A pair of A+ replies here. Thanks for reading and writing in.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 5, 2024