Comment of the Day
18th April 2023
Eoin Treacy
Apr 19
Video commentary for April 18th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: US Regional Banks accelerate lower relative to big banks, 10-yr-3-mth continues to invert, precious metals steady, agricultural commodities extend breakouts, stocks short-term overbought.
Lessons from Silicon Valley Bank
Thanks to a subscriber for this memo from Howard Marks which may be of interest. Here is a section:
Total U.S. bank assets exceed $23 trillion. Banks collectively are the biggest real estate lenders, and while we only have rough ranges for the data, they’re estimated to hold about 40% of the $4.5 trillion of CRE mortgages outstanding, or around $1.8 trillion at face value. Based on these estimates, CRE loans represent approximately 8-9% of the average bank’s assets, a percentage that is significant but not overwhelming. (Total exposure to CRE may be higher, however, as any investments in commercial mortgage-backed securities have to be considered in addition to banks’ holdings of direct CRE loans.)
However, CRE loans aren’t spread evenly among banks: Some banks concentrate on parts of the country where real estate markets were “hotter” and thus could see bigger percentage declines; some loaned against lower-quality properties, which is where the biggest problems are likely to show up; some provided mortgages at higher loan-to-value ratios; and some have a higher percentage of their assets in CRE loans. To this latter point, a recent report from Bank of America indicates that average CRE loan exposure is just 4.5% of total assets at banks with more than $250 billion of assets, while it’s 11.4% at banks with less than $250 billion of assets.
Since banks are so highly levered, with collective equity capital of just $2.2 trillion (roughly 9% of total assets), the estimated amount the average bank has in CRE loans is equal to approximately 100% of its capital. Thus, losses on CRE mortgages in the average loan book could wipe out an equivalent percentage of the average bank’s capital, leaving the bank undercapitalized. As the BofA report notes, the average large bank has 50% of its risk-based capital in CRE loans, while for smaller banks that figure is 167%.
Eoin Treacy's view
The exposure of smaller banks to both the rise in long-dated yields and the looming restructuring of commercial property leases raises important questions for depositors. The most pressing is why take the risk?
This section continues in the Subscriber's Area.
EU Hydrogen Quotas Raise Global Demand For Green Molecules
This article from Bloomberg may be of interest. Here is a section:
European Union (EU) lawmakers have agreed on the world’s first binding quotas for using renewable hydrogen (H2) and derived fuels. The March 30, 2023 rules will create significant demand for renewable H2, mandating existing industrial hydrogen users replace at least 42% of their demand with renewable H2. They also mandate at least 1% of transport energy to be H2-based.
Member states should ensure 42% of existing industrial H2 demand is renewable by 2030, rising to 60% by 2035. The industry quota targets companies such as fertilizer and methanol producers, but excludes refineries, which are covered under the transport mandate. Member states will be legally required to adopt this agreement as national law and the European Court of Justice will determine penalties for states that fail to comply.
In transport, fuel suppliers need to replace 5.5% of final energy demand with H2 or advanced biofuels, with a minimum target of 1% for H2-based fuels by 2030. BNEF expects the hydrogen share to be closer to the minimum goal as meeting the combined target using H2 alone would require extensive use of the molecule in road transport. Advanced biofuels had already reached a 2.1% share in transport by 2021.
Eoin Treacy's view
The EU remains committed to the zero carbon emissions quest and is pioneering the development of markets in alternative energy. High carbon emission prices are one half of the strategy and subsidies for wind, solar, biomass and hydrogen are the other half.
This section continues in the Subscriber's Area.
Rains Seen Hurting Start of Coffee Harvest
This article from Bloomberg may be of interest. Here is a section:
Heavy rains are expected in both arabica and robusta producing areas this week, Climatempo meteorologist Nadiara Pereira says in a Tuesday report.
Increased rainfall and lower temperatures over robusta areas in Espirito Santo and southern Bahia may delay the final maturation phase of crops.
Heavy rains are expected for arabica areas in Sao Paulo and Triangulo Mineiro through Wednesday
Temperatures will fall in arabica region of southern Minas Gerais by the end of the week, though the risk of frost is low.
Rains could knock fruits off trees and in extreme cases cause them to ferment on the ground, HedgePoint analyst Natália Gandolphi says in report.
That would reduce uniformity of the beans and decrease quality of the crop for both varieties.
Eoin Treacy's view
Brazil’s weather has been more volatile than usual over the last few years. With an El Nino on the brink of being confirmed there is a strong likelihood that drought is likely to be a more pressing fear later this year than excess moisture.
This section continues in the Subscriber's Area.
Eoin's personal portfolio: another commodity long initiated April 17th 2023
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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