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Why Silicon Valley Bank Collapsed, In Simple Language

3/10/2023

 
I have been reading on SVB to figure out what happened and why?

It's important to me for two reasons:
1) I'm an investor (not in SIVB). Always be learning!
2) I'm a customer (of SVB), which directly impacts us (not critical).

Let's dive in!
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Interest Rates (Part I)

SVB had a bunch of bonds. Those bonds' values declined as the interest rate went up. That's just what bonds do. SVB could have held the bonds and gotten paid the coupon value at maturity.

But instead, SVB sold tons of bonds at a loss! WHY?

Revenue

Look at the last earnings results slide (attached). Does it look like a company that goes out of biz in 2 days?
  1. Record fee income in 22 ($1.2B)
  2. Healthy loan growth (show bring higher interest income)

So why did it sell tons of bonds at a loss and raise money?
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Interest Rates (Part II)

You need to know that lots of the banks' customers started moving their cash to interest-bearing accounts, which means higher costs for SVB. According to SVB, each % point decrease in non-interest-bearing deposits would reduce its net interest income by $3M.

In summary:
  • SVB's net income was going down due to customers wanting interest.
  • It would've been fine if startups were raising & depositing money. But that wasn't happening.
  • VCs & PEs have ~2.6T cash collecting interest & not being invested.

Didn't SVB have cash on the balance sheet?

Balance Sheet

The company targeted $7-$11B in cash. GOOD
It also had $117B Corp bonds, T Bills, Municipal bonds: GOOD

Really, Good?

If you have $117B in securities, why do you need to raise $2.2B, which started the SVB collapse this week?

Embrace yourself...
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Interest Rates (Part III)

Context: banks hold their securities in two buckets: Available to Sales (AFS) and Hold to Maturity (HTM).

With HTM, if the value of your securities goes down, you don't take any loss on the balance sheet. It's held to maturity.

With AFS, you take the loss on the balance sheet if the value goes down.

As the interest rate increased, the value of those lovely "secure" assets SVB held dropped rapidly.

Technically, any bank can be insolvent, but the balance sheet doesn't show.

Now, we hit the real story!

My educated guess: SVB realized that with the deposits not coming as fast, VCs not investing, everyone wanting interest & their assets losing value by the minute, they may be insolvent.

What to do:
  1. Sell AFS
  2. Raise capital

GOOD? No!

Market Phycology & Mechanics

Market Psychology
  1. SVB announced on the day crypto bank Silvergate collapsed.
  2. VCs warned startups.
  3. Founders Slack groups & WhatsApp chats blew up! To survive, you must be faster than the other founder and withdraw your money.

The madness began, and market mechanics took over:
  1. The stock market went crazy, shorting & some buying the dip!
  2. Trading halted several times, and that's always the worst.
  3. Regulators intervene (FDIC) and shut it. (Regulation isn't that bad, huh?)
​

Some Observations (3/10/2023)

That's what I have learned so far. Thanks for reading!  Things may change, and new information may impact my conclusions.  Here are some observations and lessons:
  1. There are other banks with the same at-risk balance sheet. Which ones?
  2. The Fed must watch the situation. It's not just interest rates and inflation that they are influencing. 
  3. Retail investors: Don't buy any dip?
  4. If you are a customer, like we are, and in the FDIC threshold, like we are, calm down! But get ready for a hell of admin work and emails from every other vendor you work with. They all want you to have you (ahem, help).

Hope you found this helpful!

Fortune favors the intelligent!
Hoda, Founder and CEO of StockCrd.io
​

How to use the COVID-19 Testing Kit list to diversify

9/12/2020

 
Hey folks, it's Karen, Head of Data Science at Stock Card. This week I used the COVID-19 Testing Kit and meshed it with one fundamental indicator and two technical indicators using the new Filter function on the Discover page, used to result to come up with stock on my Watchlist. Let me share with you how I went about this screening.
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Steps to follow

Visit Stock Card's Discover page, and follow these steps:
  1. Type in “testing” in the search bar underneath “Industry, Sector, and Keywords.
  2. ​Stock Exchange -  NYSE or Nasdaq.
  3. Past investment return - Good: outperformed the market.
  4. Chaikin Money Inflow - Good: Bullish 20-day money inflow.
  5. Relative Strength Index - Stable (in between 30 and 70)  or Bearish (less than 30) RSI. Note that RSI is a contrarian indicator. With an RSI less than 30, a stock is considered “oversold.”  When this status is combined with positive 20-day Chaikin Money Flow, it is a signal that a trend reversion is likely to happen.
​
​If you are a Stock Card user (on our free Starter plan or premium plans), you can see the final results by clicking on this link. It is noteworthy that the results may vary day to day due to price changes in the stocks included in the collection. As of the closing on Friday, September 11, 10 stocks are included in the screening results. Click to view the results, or continue reading.
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Using filter results

The overall market has been quite volatile since the indices (e.g., Nasdaq-100, S&P 500) peaked on September 2. In particular, the rally of tech stocks fueled by Softbank has receded, and cautious investors may be inclined to refrain from “buying the dip” in the FAANG and tech stocks resulting in drastic declines in some of Stock Card most popular stocks. What other stocks can investors consider to diversify their portfolios away from the technology sector? Investing in the stocks in the COVID-19 Testing Kit collection could be an excellent way to get exposure to the biotech and healthcare sectors and diversify one’s portfolio. 

Let’s take Thermo Fisher Scientific Inc (NYSE: TMO), one of the ten stocks in the filtering results, as an example. 
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Add to watchlist

The chart below shows that TMO has outperformed the S&P 500 index throughout the year and is very close to the Nasdaq-100 (NDX) Year-to-Date returns daily based on returns. In the most recent pullback since Sept 3, as both S&P 500 and Nasdaq have been laggard, TMO has shown increasing strength, which is reflected in the daily returns. This may qualify TMO as a good addition to your watchlist.
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View TMO's Stock Card

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This new brokerage app lets you start slow by investing any amount of money you'd like, and could be a good tool for you to try investing in the COVID-19 testing kit stocks!
Check it out ...
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Introducing our new "Work-From-Home" stocks collection

7/2/2020

 
The outbreak of Coronavirus has changed the way we live and work dramatically. The impact is not limited to people having masks on, and sitting 6 feet apart. The more prominent but less visible change is the transition of work from offices and commercial physical spaces to our homes. Working from home is not just limited to having a desk set-up, although that's certainly a necessity. The more critical enabler of the working-from-home era is digital infrastructure, such as a smoother log-in and access to the tools employees need to do their job. The more digital works become, the more significant is the need for easier online communications, document management, payment, and cybersecurity. Such a simultaneous and rapid shift to a new way of working has boosted companies' growth prospects associated with "work-from-home" products. At Stock Card, we live by the belief that our investment is a financial image of our lives, and it was only a matter of time before we completed our research to introduce a new list of companies that enable the work-from-home era. 
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Launching Stock Card's "Work-From-Home" collection
Last week, we introduced a collection called "Companies Shaping the Future." Many users told us that it helped them discover new growing companies to add to their portfolios. We hope the new "work-from-home" collection does the same. To build this list, we picked themes and markets associated with making "work-from-home" possible, less expensive, and more reliable. We have included companies from 40 different markets to create this new list. Some of these markets are:
  • Cybersecurity
  • Cloud services
  • Cloud communication platform
  • Web conference software
​You can click on the above links to see the individual market collections.
Results
The above screening gave us a list of 450 companies as a starting point for your research. The best way to use this new collection is to look it up in the search bar, use the "advanced filters" to add your criteria and get a list of stocks that fit your investment goal. The video below shows you how, or click here to get the full list...
Visit the Work-From-Home stocks collection

If you don't have a brokerage account to invest in Work-From-Home stocks, here is one of the best. We like the M1 Finance app that has an easy-to-use interface. Give it a try if you are in the market for a new brokerage account:
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Introducing Stocks for Risk-Takers

6/12/2020

 
Risk-taking is an art! Not every risky stock is worth investing in. It's prevalent among stock market investors to justify a wrong decision as a risky one. However, a well-researched and informed risky decision can generate an outsized return, while being protected from total ruin. In this blog post, we explain a simple set of criteria we use to discover stocks worthy of your attention if you are a risk-taker. The list of Stocks for Risk-Takers can be a starting point for those who understand only some risks are worth taking.
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Launching Stock Card's "Stocks For Risk-Takers" collection
We started the process by looking for smaller companies using the market capitalization of less than $10 billion. Doubling a $100 billion company is much harder than doubling a $2 billion company. Therefore, when it comes to risk-taking, small is more beautiful than big. 
​
By just only one filter, the universe of publicly-traded stocks in the U.S. stock exchanges shrinks to a list of slightly a few more companies than 4,000. 
Not every small-cap stock is worth your attention!
Finding noteworthy risky stocks is not just about searching for smaller companies. It would help if you also weed out those companies that cannot grow their revenue. Notice that we didn't talk about profitability. When companies are small and profitable, the chances are the stock market algorithms have already found them, and prices are adjusted to reflect the positive earnings. Therefore, stocks with growing revenue in the last 12 months to 3 years can narrow the list to a more manageable list. 
If not profitable, then what?
While being profitable is good, being able to generate free cash flow is better. Earnings and profit are metrics heavily influenced by accounting principals. Highly profitable operations can become unprofitable if the management decides to reinvest the money it makes back into the company. However, a reliable, rapidly-growing company are typically cash flow positive before they are profitable. 

Before wrapping up this blog post, here is a pro tip to share. Making well-informed bets are great. But, not before you have set up a foundation for your financial well-being. Here is a platform we have come across recently that made us want to manage our 401K account. Check it out below:
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What else?
The last criterion to consider is the company's ability to survive a period of economic hardship (such as the economic slowdown induced by the COVID-19 pandemic in 2020) or possible fluctuations and cyclicality in demand (such as demand cycles for chip technology). A reliable, risky company has enough cash to fund its operating expenses easily without the need to raise additional money or borrow. 
Final results
The result of the above screening is a list of 189 reliable but risky stocks worthy of the attention of a risk-taker investor. We added them to Stock Card's collections, and you can access them for free by typing "Stocks for Risk Takers" in the search box on our website. Log in and check the list!
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​This portfolio is for individuals who have an ample appetite for risk. Higher the risk, higher the return! It reminds us of the angel investors and venture capitalists who invest in the companies' vision for the future and bet on the leadership's ability to make that vision come true. The same thinking applies to this portfolio. While the companies in this portfolio are not yet making any significant revenue, the indicators exist to justify the risk. ​Visit the Risk-Taker Portfolio.

A V-shaped recovery, followed by extreme volatility? Now what?

6/11/2020

 
Without a doubt, the U.S. stock market has staged a historical “recovery rally” since late March, regardless of the drastic price drop mid-June. The S&P 500 index erased all its losses for the year as of June 8. The Nasdaq index hit an all-time high past the 10,000 level the following day. There are various conjectures about what has fueled the rally. Some associate it with a possible wave of FOMO by the so-called Robinhood bros. Others believe that the optimism about the reopening of the economy has driven the rally. Regardless of what the catalyst is, a prevailing sentiment in our private Facebook community recently has been caution. What are the available choices to investors as they navigate the V-shape recovery, so far, and another possible sharp decline moving forward? How does an investor protect her gains, without sitting on the sidelines to let the volatility subside? 

In this blog post, Stock Card's Head of Data Science and a technical trader, Karen Sheng shares her thoughts and strategies that could be employed to address these questions, mainly using one general and three specific options strategies. ​
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PART ONE: FOR ALL INVESTORS
​
Cash is also a position!
Cash is also a position - This is lingo that is commonly used in the traders' community. When a trader has low conviction about either direction of the market, one of the choices available is "going flat." This rule applies to investors who "buy and hold" as well. Doing nothing is a strategy worth considering, especially when there is doubt. Holding cash or selling to have cash come with a few important considerations:
  • What's my risk tolerance for a possible draw-down of my investment account? If the value of my portfolio goes down 50%, am I willing to take the risk and sit through the correction?
  • What are the tax implications for capital gains if I sell all of my holdings and harvest the gains?
  • For particular stocks, do I have strong enough conviction for the company's growth in the next 2-5 years to tolerate a pullback?
  • If the market keeps rallying and in hindsight I could have gained much more, am I going to regret?

​This strategy is specifically important and easy-to-use by starter investors. However, for those willing to put the time and effort required to learn more sophisticated approaches, I'm sharing three possible hedge strategies using options. If you are a more advanced investor, read along. 

Before sharing the more advanced hedging strategies, have you heard of Public, one of the easiest and best-looking brokerage apps out there?
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Promoted

PART TWO: FOR MORE ADVANCED INVESTORS
​Protect long-term investments with three options strategies
Many investors use options as a "hedge" strategy. This strategy allows the investor to continue investing while having the fallback option to recover possible losses in case the market takes the reverse direction, as it has done so in mid-June. For the rest of this post, I will focus on hedging with various options strategies, all of which have defined maximum risk and risk/reward ratios. All these options strategies assume that you are willing to lose all the premium paid for the trade. Consider it a premium that you pay for insurance to protect your investments against a downturn of the market. If the market keeps rallying, your long-term investments are safe for the time being, and yet you may lose all the debit you have paid for hedging. On the other hand, in the case of a correction or crash, the gains from the hedging trade may offset the losses from the long-term investments. Compared to the "staying in cash" approach, you get to keep the stock holdings in your portfolio for long-term investments.
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For illustration purposes, I'm going to use options of SPY for the reviews below. The prices of both stocks and options reflect close prices as of the end of June 9. Furthermore, I want to limit the premium paid to each trade, as this is the money that I'm committed to losing completely. In practice, I usually set the maximum in the range of $150-$250 per trade. For illustration purposes, though, I'm going to set the maximum at a much higher level, $1000, because I would like to compare the P&L for comparable Delta. I'm assuming that you have some basic understanding of the components of options pricing. With that, let's get to it!

Strategy one: ​A naked put option
Buying put options appears to be the most straightforward way to hedge against a pullback of the market. The advantage of a naked put option, compared to a debit spread or calendar spread, is that the upside profit is almost unlimited. Also, it is simpler to understand and get started. However, in addition to the break-even point, we have to consider time decay, which erodes the value of a naked call or put option. It is illustrated in the following chart (Source). Time decay accelerates typically as an option nears its expiration date. 
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Example one - ​Buy an ATM (at-the-money) put option with 10 DTE (days to expire): I added two screenshots to explain how you go about buying this put option. The screenshot on the left shows a portion of the option chains. The maximum loss of this trade is the debit I'd pay - $582 plus any commission. The screenshot on the right is the projected P&L as of June 9. Note that if SPY starts to consolidate around the 320 level and doesn't make a significant downward movement, by 7 DTE (4 days from June 9), the trade would start to turn into a loss. 
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Example two - ​Buy an ATM (at-the-money) put option with 31 DTE (days to expire): The debit required for this trade per contract is $931, as the extrinsic value (time value) has almost doubled relative to the 10 DTE ATM contract. Recall the time-decay chart shown above. The time decay in this 31 DTE trade does not accelerate as fast as in the 10 DTE trade. Again, this is the projected P&L as of June 9. Notably, it's a break-even trade (zero loss, zero profit) if SPY consolidates around the 320 level by 22 DTE (9 days from June 9). The additional premium I'd pay gives me more time to wait for a pullback of the market. 
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Strategy two: ​Construct theta-positive options trades
Theta-positive, in plain English, means that the passage of time works in our favor. I'm going to review two theta-positive strategies - put debit spread and put calendar spread.
Example - ​Buy a put debit spread with 10 DTE (days to expire): I'd buy the 320 SPY put option and, at the same time, sell the 315 SPY put option. The debit required for this trade is $186, and the risk/reward ratio is approximately 1:1.7. Note that the premium paid is significantly less than buying a naked put option. Furthermore, since the trade benefits from time decay, I don't mind placing a trade with fewer days to expiration. 
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To better explain the results, I added the projected P&L of this put debit spread trade. Notably, if SPY stays at the same level, it's still a break-even trade by 4 DTE (7 days from June 9). The disadvantage of a debit spread is that the maximum profit is capped. It's evident in the P&L table that the maximum profit is $314, no matter how much further down the market pulls back.
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Strategy three: ​Buy an OTM  (out-of-the-money)  put calendar spread
In this strategy, I'd buy the 305 put option with 31 DTE and, at the same time, sell the 305 put option with 10 DTE. The trade will be closed before the expiration date of the front-month contract (the one with 10 DTE). The debit required for this trade is $301, and the risk/reward ratio is 1:1.84. What's unique about this trade is that the trade will be profitable as long as SPY stays within the range between 290 and 320 and that the trade will achieve maximum profit if SPY stays around 305 by the expiration date. The disadvantage of this trade is that there's a downside risk - it'll turn into a loss if SPY falls below 290. Also, the calendar spread benefits from a spike of implied volatility. As shown in the table, with a 1.4  IV factor, the maximum profit will go up from $552 to $890, and the "profit zone" widens to the range between 279 and 333.
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Final words
I hope you find these strategies and examples helpful. Don't forget the first thing I shared with you. Cash is a position too. You can always keep some money and only invest the money that will not endanger your financial well-being if you lose it all. 

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Have you visited our "Risk Hub"?
​
The Risk-Takers' Hub provides a list of resources for Stock Card users and the community who look for well-informed and researched, high-risk, high-reward investments. Have a look now ...
​

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