Pershing Square Capital Management’s Bill Ackman said that regional bank stocks are an “incredible bargain” right now as long as the government does the “right thing.”

The trade is not without real risk but offers “very attractive asymmetry,” he said in a tweet, adding that a decline in rates makes this an even better investment. 

The turmoil that has hit bank stocks deepened on Monday with regional banks hit the hardest as the KBW Regional Banking Index sank as much as 12%. That is the sharpest intraday drop since March 2020. 

Eoin Treacy's view

The clear conclusion from the announcements over the weekend is that all deposits are now insured. President Biden said in this morning’s press conference that the FDIC will absorb the costs. That implies much higher fees for the mid-sized banking sector in future. However, it also suggests bank runs will be avoided and the majority will survive and possibly thrive.

So what does Ackman mean by the “right thing”. The answer is simple. The banks need to be recapitalised and that means making them whole. Portfolios of Treasuries, which are supposed to be Tier 1 capital, have lost billions in value over the last year. That suggests rate cuts will be required to support the value of those low coupon bond issues.

The challenge for the Fed is inflation has not yet come down enough to suggest the issue is solved and cutting rates now raises a significant risk of moral hazard. Meanwhile, the commercial real estate sector remains under pressure and is an additional source of market to market risk. The risk is the Fed will adopt a similar strategy to the bank of England and persist in tightening rates while simultaneously supporting the banking sector. 
The 2-year yield followed through on the downside today to confirm a peak of a least near-term and potentially medium-term significance.

The next Fed meeting will be on the 22nd so bond traders will be unwilling to make bigger bets between now and then. If the Fed signals a pause in the hiking cycle that would be viewed as a major concession to the need for loser monetary policy.

It is widely accepted they would keep hiking until something broke. The demise of first Silvergate and now Silicon Valley Bank means something has broken. It is reasonable to conclude we are at the end of the hiking cycle.

The only real question is whether the hiking cycle has already gone for too long and has already set the process in motion for a recession. A reversionary rally is now underway in the stock market.
The Dollar is pulling back from the region of the 200-day MA. That is lending support to the gold price which continues to extend its rebound from the $1800 area.

The prospect of more abundant liquidity is also spurring interest in bitcoin. As a liquidity barometer, its strong rebound suggest traders are betting quantitative tightening is over.
Triumph Financial has largely avoided the recent stress and is firming within a developing base formation. The firm focuses on plant and machinery financing.
Bank OZK focuses on retail and commercial banking. The share dropped last week but steadied today in the region of the lower side of its range.
Texas Capital Bancshares was best performing back on the KBW Regional Banks Index on Friday but erased its gain for the year today. The share rebounded following the restart of trading this morning to close back inside the two-year range. The company focuses on commercial customers but also has investment banking and trust divisions.