Why Banks Fail

A lot, if not everything, in the world of finance, is based on trust: trust that the future would be better than the present; trust that a dollar bill would guarantee an equivalent worth of goods and services at a given point in time; and trust that wealth created would be safe, accessible, and transferable at all times.

So, when events like those unfolding over the past fortnight undermine one or more of the aforementioned collective beliefs, the ensuing risks can quickly become systemic and existential.

On February 24, KPMG signed an audit report giving SVB Financial, Silicon Valley Bank’s parent company, a clean bill of health for 2022.

On March 10, federal regulators announced that they had taken control of the bank, which reopened the following Monday as Deposit Insurance National Bank of Santa Clara.

This was the second-biggest bank failure since Washington Mutual’s collapse during the height of the 2008 financial crisis. It was soon followed by the third-biggest, with Signature Bank shuttered by the regulators to stem the fallout from Silicon Valley Bank’s failure.

The resulting crisis of confidence has somehow been contained with an assurance that all insured and uninsured depositors would get their money back, the announcement of a new lending program for banks, and 11 banks depositing $30 billion in the First Republic bank.

However, the contagion risk subsided only after claiming an illustrious victim from the other side of the Atlantic, with UBS agreeing to take over its troubled rival Credit Suisse for more than $3 billion in a deal engineered by Swiss regulators.

Since we are more or less up to speed, let’s look deeper into what can make banks seem unbankable in a little over two weeks. Continue reading "Why Banks Fail"

2 Tech Stocks For The Long-Term

High-growth tech stocks have had to bear the consequences of the Federal Reserve’s aggressive rate hikes since last year. Amid concerns of a recession, most tech stocks have suffered a correction in their share prices due to fears of softening demand.

However, with continued digital transformation and the growing interest in AI, the tech industry is well-positioned to grow.

Earlier this year, Fed Chair Jerome Powell said the “disinflationary process” had begun. However, inflation still remains above the central bank’s comfort level, as evidenced by February’s CPI report.

The Fed has indicated that it intends to hike rates higher than previously predicted.

Although the recent bank failures are likely to stop the Fed from undertaking a bigger rate hike at the policy meeting, it is expected to return to its hiking spree once the banking crisis eases.

However, that should not make investors stay away from quality tech stocks.

Wedbush analyst Dan Ives believes that cost-cutting by major tech giants will likely show improved profits this year. The recent banking crisis made investors count on reliable tech stocks, as is evident from the tech-heavy Nasdaq Composite’s 13.3% increase year-to-date and 3.2% gain over the past month. According to Gartner, worldwide IT spending is expected to rise 2.4% year-over-year to $4.50 trillion in 2023.

Several technical indicators look positive for Microsoft Corporation (MSFT) and Salesforce, Inc. (CRM), so it may be worth investing in these stocks now.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. It has a market capitalization of $2.03 trillion. Continue reading "2 Tech Stocks For The Long-Term"

What to Do When Interest Rates Rise

Last year, when the Federal Reserve realized that the inflation, which was earlier thought to be “transitory,” might be feeding on itself and soon spiral out of control, it acted swiftly to respond with an aggressive interest rate hike cycle, one of the quickest on record.

As a result, we have gone from living in a world of virtually free money, marked by a target federal funds rate of 0% to 0.25%, for more than 12 years since the global financial crisis to a world of constricted credit, with a target rate at 4.50% to 4.75%, the highest since 2007.

Right on cue, the market and economy responded to the end of the era of easy money with withdrawal tantrums. Although the Fed has been able to bring down CPI inflation from a 40-year high of 9.1% in June 2022 to 6.4% in January 2023, it has come at the cost of increased market volatility, stressed margins due to increased borrowing costs, and bank runs due to bond price devaluations.

Given that the federal funds rate appears to be nothing short of a force of nature for the capital markets and the economy at large, its deeper understanding would serve market participants well.

What is the Federal Funds Rate?

The federal funds rate is the interest rate that banks charge other institutions for lending excess cash to them from their reserve balances on an overnight basis.

Legally, all banks are required to maintain a percentage of their deposits as a reserve in an account at a Federal Reserve bank. This mandated amount is known as the reserve requirement, and compliance of a bank is determined by averaging its end-of-the-day balances over two-week reserve maintenance periods.

Banks, which expect to have end-of-the-day balances greater than the reserve requirement, can lend the surplus to institutions that expect to have a shortfall.

The Federal Open Market Committee (FOMC) guides this overnight lending of excess cash among U.S. banks by setting the target interest rate as a range between an upper and lower limit. This target interest rate is called the federal funds rate. Continue reading "What to Do When Interest Rates Rise"

Best Growth Stock? One To Watch Now

Twilio Inc. (TWLO) enables developers to build, scale, and operate real-time communications within software applications through a cloud communication platform and a customer engagement platform. The company operates both in the United States and internationally.

Over the past three years, TWLO’s revenues have increased at a 50% CAGR. Its total assets increased at a 34.6% CAGR during the same time horizon.

TWLO has adopted sweeping changes to improve the efficiency of its execution and accelerate its path to profitability. On February 13, the company announced its decision to reduce its workforce by approximately 17% to drive meaningful cost savings. To rationalize expenses further, on December 9, 2022, it announced its voluntary delisting from the Long-Term Stock Exchange (LTSE) to remain solely listed on the NYSE.

TWLO has also announced that, moving forward, it will operate two separate business units: Twilio Communications and Twilio Data & Applications. This strategic realignment enables Twilio to execute each business's key priorities better.

TWLO’s management has expressed its confidence regarding the effectiveness of the abovementioned changes by announcing the authorization of a share repurchase program of up to $1.0 billion of its outstanding Class A common stock.

TWLO’s stock has gained 17.1% over the past month to close the last trading session at $73.88.

TWLO is trading above its 50-day and 200-day moving averages of $57.86 and $70.99, respectively, indicating an uptrend.

Here is what may help the stock maintain its performance in the near term.

Improving Financials

During the fourth quarter of the fiscal that ended December 31, 2022, TWLO’s revenue increased 21.6% year-over-year to $1.03 billion, while its non-GAAP gross profit increased 19.9% year-over-year to $517.78 million. Continue reading "Best Growth Stock? One To Watch Now"