Fri, Mar 31, 2023|Whitney Tilson

My recent interview: Grind it out, hold on, and avoid 'the crazy nonsense'; Jamie Dimon Reprises 2008 Role as Rescuer of a Failing Bank; A Rapid-Finance World Must Ready for a Slow-Motion Banking Crisis; Banks, Panic, and Arson: Opportunities Amidst The Q1 Wreckage; Mike Burry says he was wrong to say sell

1) Two days ago, I did an interview with the podcast Money Life With Chuck Jaffe, which you can listen to here (Apple Podcasts) and here (Spotify). Here's a summary:

Whitney Tilson, chief executive officer at Empire Financial Research, says that while headlines are driving investors to distraction, the stock market right now is neither too hot nor too cold.

Other than regional banks, he says there's no blood in the streets, the market "isn't screaming cheap or hugely overvalued either," making this a time for investors to grind it out and work on their holding, rather than buying or selling. "The key," he says, "is not in picking the next calamity, but avoiding the crazy nonsense."

2) This is a good piece of investigative journalism in today's New York Times about the role JPMorgan Chase (JPM) CEO Jamie Dimon played in the recent banking crisis (with a cameo by my buddy Bill Ackman): Jamie Dimon Reprises 2008 Role as Rescuer of a Failing Bank. Excerpt:

Mr. Ackman asked Mr. Dimon, who had led the rescue of two banks during the 2008 financial crisis, if he would consider buying Silicon Valley Bank, according to two dinner attendees.

Not this time, Mr. Dimon said.

Four days later, on March 14, Treasury Secretary Janet L. Yellen pressed him into service. The previous day, shares of First Republic, the nation's 14th-largest lender, went into free fall. If the bank collapsed, the financial panic that had started with the implosion of SVB, followed by Signature Bank, could spiral out of control.

Ms. Yellen and Mr. Dimon discussed a plan to rope in other banks to steady First Republic. As the chief executive of the nation's largest bank, Mr. Dimon would carry it out. The plan, which some executives at rival banks privately called "the Jamie and Janet show," involved 11 banks collectively depositing $30 billion into First Republic, and was meant to signal confidence in the teetering lender.

Whether the $30 billion loan helped steady the lender and stave off financial contagion – First Republic shares tanked the day after the announcement, and remain down nearly 90 percent for the year – remains an open question, even though its shares have moved a little higher this week, along with other bank stocks, as fears of a bigger crisis recede. First Republic is still seeking a buyer, and JPMorgan is among the suitors, a person with knowledge of the situation said.

But answering Ms. Yellen's call gave Mr. Dimon an opportunity to reprise a role from 15 years ago.

"If my government asks me to help, I'll help," Mr. Dimon, 67, said in a recent interview.

Here are additional stories about the banking sector in the NYT and Wall Street Journal:

3) I continue to think the sector is ripe with opportunity for both short-term and long-term investors, in contrast to this bearish take by WSJ columnist Greg Ip: A Rapid-Finance World Must Ready for a Slow-Motion Banking Crisis. Excerpt:

Unless federal insurance is extended to all deposits, this suggests small and medium-size banks could be in for a prolonged period of pressure on their deposits, which could in turn force them to be acquired, or limit their lending. It won't be a crisis in the usual sense of the word. But the end result may be the same.

My view is that politicians will do whatever it takes – guaranteeing all deposits? – to maintain the health of small and medium-size banks.

Silicon Valley Bank, Signature Bank, and First Republic Bank (FRC), headquartered in Santa Clara, California, New York City, and San Francisco, respectively, are not good examples of these types of banks. Far more common are banks in small towns and rural areas in places like Iowa, Wisconsin, and New Hampshire that do bespoke lending like loans to local farmers that require intimate knowledge of a particular farm and farmer.

These are states that decide presidential elections and control of Congress. Do you really think politicians in Washington are going to let their local banks come under pressure that "could in turn force them to be acquired, or limit their lending"? I don't think so...

4) For more insight, I turn to this interview posted on QTR's Fringe Finance substack with my friend Chris DeMuth Jr. of hedge fund Rangeley Capital: Banks, Panic, and Arson: Opportunities Amidst The Q1 Wreckage. Excerpt:

If the equity markets aren't scared enough and regulators are mostly helping the people in on it (so far FCNCA CEO Frank Holding is the biggest winner), then where are the opportunities in the wreckage to underpay for good banks? Think small. The mid-sized regional banks are getting squeezed, with tens of billions of dollars flooding out to the TBTF banks. But the best community banks are getting overly punished. I'm especially focused on up listing candidates, the Emergency Capital Investment Program (EPIC) beneficiaries, and banks with strong shareholder control...

All sorts of misery is still ahead for banks that have done dumb things. We have not really even gotten started in marking down bad credit across the industry. The regulators are certain to punish the responsible banks with more red tape to make up for their total dereliction of duty overseeing the irresponsible ones. But price solves almost all problems and WTBFB, PDLB, and BNCC trade at big discounts to TBV with good reason to expect them to eventually trade for big premiums. I just underpay and wait. If things go really badly, perhaps WTB settles out at $500 instead of $700. Fine. PDLB might destroy value (it would exaggerate their virtue to claim management is okay; they are somewhat worse than meh) such that we end up with $16 instead of $18 per share. BNCC should get $40 in a deal; they might get $35. But in each case there is a big margin of safety at today's beat down prices.

So folly has led to disaster, the broad equity indexes are complacent, regulators are exploiting the crisis for their own ends, and sloppy overgeneralizations caused a few little bargains to fall through the cracks. I'm picking away here and there but warily.

Keep plenty of ammo handy, at least some figuratively.

5) In my March 22 e-mail, I wrote this about Bill Ackman and billionaires:

Bill's ability to listen respectfully to those who disagree with him and sometimes change his mind might not sound like a big deal – isn't that what any intelligent person does? – but I think it's actually quite rare among billionaires, based on the two dozen or so I know personally and the many more I've observed closely.

You see, two things happen when you become a billionaire...

First, you're generally riding a long hot streak – usually at least a decade – in which everything you've touched has turned to gold: Your business has gone public and its stock has soared and/or your investments have paid off spectacularly.

Naturally such a hot streak tends to make a guy (they're almost all men) think he's infallible, so anyone who disagrees with him must be an idiot who should be dismissed. And heaven forbid he should admit a mistake and change his mind!

The second thing that happens when you become a billionaire is that you become surrounded by sycophants and "yes men." When you have so much money, just about everyone is either on your payroll or wants something from you, so these folks aren't going to disagree with you no matter how idiotic your behavior. Rather, they will pour gasoline on the already raging fire of your ego.

The results can be calamitous...

With this in mind, I want to give a hat tip to another old friend, Mike Burry of The Big Short fame, whose recent mea culpa is rare: 'Big Short' Investor Congratulates Market Dip Buyers. 'I Was Wrong to Say Sell.' Excerpt:

Big Short investor Michael Burry admitted Thursday that his bearish warning about the stock market earlier this year has so far been proven wrong by traders lining up to buy the dip.

"I was wrong to say sell," Burry wrote on Twitter on Thursday.

Burry is best known for his bet against the housing market ahead of the 2007 subprime mortgage collapse, which was featured in the book and movie The Big Short.

His comment Thursday was referring to a Jan. 31 tweet that simply said "Sell." The post had circulated widely online and was interpreted as a bearish call on the broader market from the investing celebrity. It was later deleted, as Burry tends to delete his posts.

"Going back to the 1920s, there has been no BTFD generation like you. Congratulations," Burry added in a follow-up tweet Thursday. BTFD translates to "buy the dip" – with an added profane flourish. Burry also shared a Bloomberg chart showing that the S&P 500's average return following a down day has been elevated this year.

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.