Fears of credit problems have caused a regional bank sell-off; How Nvidia and OpenAI's web of circular deals are fueling the AI market; Crypto ATM and text scams
1) The stocks of regional banks had a wild ride last week...
Zions Bancorporation (ZION) announced it would take a $50 million charge-off for the third quarter related to two troubled commercial loans. Meanwhile, Western Alliance Bancorporation (WAL) revealed it was suing a borrower over fraud allegations.
This is following the bankruptcies of auto-industry-related companies First Brands and Tricolor in September. Major financial firms like JPMorgan Chase (JPM) and Bank of America (BAC) were exposed to the companies' debt.
These back-to-back events have raised fears that credit problems could be more widespread.
As a result, the SPDR S&P Regional Banking Fund (KRE) has diverged from both the Russell 2000 Index and the S&P 500 Index. You can see this in the chart below on social platform X, reposted by my friend and former colleague Enrique Abeyta:
A sell-off like this gets my bargain-hunting heart racing. So for further insight, I asked my friend who runs a bank-focused hedge fund for his thoughts on the sector. He replied:
So far, overall third-quarter credit trends and charge-offs have been very reasonable for most banks. The reported problems have been mostly one-off issues, but clearly too many one-offs is the beginning of a trend. We are definitely concerned about credit risk, particularly with consumer loans, unguaranteed Small Business Association portfolios, and low-yielding commercial real estate and multifamily loans that are maturing and resetting to higher rates. But the trends this quarter are not showing a massive systematic problem.
We do note, however, that we believe most banks, when faced with problem real estate loans, instead of foreclosing or reporting a problem loan, are instead reverting to the "extend and pretend"/"delay and pray" strategy that worked well after the last financial crisis.
The loan losses that triggered the sell-off in banks last week were more related to commercial and industrial loans and frauds that banks are unable to sugarcoat.
My team and I will do some more digging in this sector. If we find a compelling idea to recommend, as always, Stansberry's Investment Advisory subscribers will be the first to know. You can become one by clicking here.
2) The media and message boards are filled with opinions and analysis about the bubble in artificial intelligence ("AI").
This Bloomberg article is the most compelling I've seen, focusing on the circular deals between Nvidia (NVDA) and OpenAI that are reminiscent of the Internet bubble:
Never before has so much money been spent so rapidly on a technology that, for all its potential, remains largely unproven as an avenue for profit-making. And often, these investments can be traced back to two leading firms: Nvidia and OpenAI. The recent wave of deals and partnerships involving the two are escalating concerns that an increasingly complex and interconnected web of business transactions is artificially propping up the trillion-dollar AI boom. At stake is virtually every corner of the economy, with the hype and buildout of AI infrastructure rippling across markets, from debt and equity to real estate and energy...
The companies, which ignited an AI investment frenzy three years ago, have been instrumental in keeping it going by inking large and sometimes overlapping partnerships with cloud providers, AI developers and other startups in the sector. In the process, they're now seen as playing a key role in ratcheting up the risks of a possible AI bubble by inflating the market and binding the fates of numerous companies together. OpenAI alone has now struck AI computing deals with Nvidia, AMD and Oracle Corp. that altogether could easily top $1 trillion. Meanwhile, the AI startup is burning through cash and doesn't expect to be cash-flow positive until near the end of the decade.
This brilliant chart from the article illustrates the companies' web of deals:
I continue to be torn about AI...
As I've written many times, I think the technology could be as impactful as the Internet. But I get déjà vu almost every day because stories like this remind me of the Internet bubble.
When the bubble burst back in 2000, the stocks of dicey smaller companies – many of them promotions, if not outright frauds – blew up first. That gave investors time to sell the bigger blue chips of the day like Cisco Systems (CSCO) and Intel (INTC) before they declined by 80% to 100%.
So if you're riding AI stocks today, it's a good idea to stick with the big ones. And make sure you're managing risk appropriately – a smart way to do so is by using stop losses.
3) Speaking of fraud, it's everywhere these days, as the following three articles highlight...
This first one by CNN exposes how crypto ATM operators like Bitcoin Depot, CoinFlip, and Athena Bitcoin profit when Americans are victimized by overseas scammers (and here's a related video that shows a scammer trying to steal from a CNN reporter):
The victims were led to the Arizona convenience store by an increasingly familiar scam: Crooks had tricked them into believing they were in legal trouble, their bank accounts were hacked or that they had to pay off debts. To fix the "crisis," they were told to feed cash into the crypto ATM – where it was promptly routed to scammers' accounts.
Shockingly, local police knew about this crime but had no way to stop it. As the article continues:
What truly frustrates investigators is that US companies, which own and operate crypto ATMs around the country, profit from the fraud while doing too little to help stop it. Prosecutors have likened the machines to a "getaway vehicle" exploited by thieves to quickly escape with the money.
A CNN investigation, which included a review of more than 700 criminal cases and complaints, has found that crypto ATM companies make money by often marking up the price of cryptocurrency by 20% to 30% or more on transactions, including the illicit ones. Despite public claims, they often fail to refund money to victims and aggressively fight police to claw back scam money seized from machines.
This senator has the right idea:
"These machines are nothing more than conduits for fraud and criminal activity. Period," said New Jersey state Sen. Paul Moriarty, who sponsored a bill in his state to outright ban the machines. "There's no other use for them, because if you wanted to buy cryptocurrency you could buy it somewhere else for less."
Next, this article in the Wall Street Journal details how Chinese criminals made more than $1 billion over the last three years from phishing texts:
Your highway toll payment is now past due, one text warns. You have U.S. Postal Service fees to pay, another threatens. You owe the New York City Department of Finance for unpaid traffic violations.
The texts are ploys to get unsuspecting victims to fork over their credit-card details. The gangs behind the scams take advantage of this information to buy iPhones, gift cards, clothing and cosmetics.
Criminal organizations operating out of China, which investigators blame for the toll and postage messages, have used them to make more than $1 billion over the last three years, according to the Department of Homeland Security.
Behind the con, investigators say, is a black market connecting foreign criminal networks to server farms that blast scam texts to victims.
A friend of mine shared three scam texts he received – and almost fell for:
Lastly, this New York Post article profiles one of these scammers:
The Justice Department has seized $15 billion in bitcoin from a global "pig butchering" fraud operation that a Chinese-born businessman orchestrated with forced-labor camps in Cambodia – using the ill-gotten gains to snap up artwork, luxury watches and pricey real estate.
Prosecutors in Brooklyn federal court on Tuesday charged 37-year-old Chen "Vincent" Zhi, the founder and chairman of Prince Holding Group – with alleged wire fraud, bribery, and money laundering conspiracy stretching over the past decade.
Authorities allege Chen directed "phone farms" in Cambodia where trafficked workers were forced to execute what the DOJ called "pig butchering" – slang for a scam that lures "fattened up" victims online with pleas for financial help, fake romantic relationships or promises of lucrative crypto investments.
I can't emphasize this enough: Be careful out there!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.