To The Moon

Bank stocks have plummeted in the midst of the banking crisis. The SVB stock halted due to the SVB collapse, First Republic is down roughly 90% in its wake, and dozens of other bank stocks have slid down with them. Regional bank stocks seem to all have plummeted 20 some percent or more in the last two weeks, with several notching more than 50 percent drops. This is due to investor fear that banks are exposed to interest rate risk on their fixed income assets and fleeing depositors. A 25% drop in a bank stock largely reflects investor weariness that the bank could be the next one in trouble. I see this as a buying opportunity. Pretty much every bank stock has seriously suffered. There are a few that are relatively protected — nobody expects JPMorgan to fail, for example — but generally people are pricing in the possibility of banks failing. Investors are being cautious, wanting to err on the side of caution and play it safe, flee to sectors that don’t have concerns with systematic risk. This means that people are overselling the whole banking sector in order to avoid potential exposure to the next bank to fail (if there is a next bank to fail). This breeds opportunity. All midsize banks are trading down, but certainly not all of them will collapse. In fact, it is likely that very few banks will collapse relative to how many there are. Yet every bank stock is pricing in fear of collapse. I’m not sorting through each bank’s balance sheet and determining which I can buy at a discount. There are hidden risks, and unpredictable risk, involved in this crisis. For example, it may be difficult to accurately measure a bank’s risk of experiencing a run. So I wouldn’t pick bank stocks. What I’m doing right now is buying bank ETFs. The whole banking sector has price declines due to fear, and ETFs that track bank stocks are trading down. By buying ETFs, I’m avoiding the chance of picking up a bank stock that proceeds to collapse and instead I’m owning the whole sector. Even if individual banks get bought or fail, my exposure is watered down because I own a basket of numerous banks rather than just 1 or 2. That way, I can make a bet that investors may have oversold every bank due to fear. People are scared of the individual stocks’ risks within the sector, so investors that own bank stocks are selling them. The Nasdaq Bank Index KBW reflects this fear: it is down 27.5% in the last month. I don’t think that the banking sector as a whole is worth nearly 1/3 less than it was 30 days ago. It seems like there is either panic selling, investors being overly cautious, or a mixture of both. Sometimes the price at which you buy something matters more than what you’re buying. Banks may not look pretty, but they are pretty cheap.