![]() ![]() In fact, I'm surprised it hasn't been worse. selling by financial institutions to raise assets. ![]() ![]() But that doesn't mean, based on current events and heightened regulatory scrutinization all over again, that they wouldn't look to try and raise assets where they could given the current regulatory environment.Īnd this has probably been a big contributor to the weakness we've seen in the markets, i.e. Now SIVB had other problems since they were losing other assets fast, either through their venture capital depositor base that was burning through cash or through their own investments, many of which were probably VC based too.īut for most banks, even if they had to 'mark-to-market' down these securities they held on their books, it wouldn't necessarily be a debt/asset problem. Thus, this was looked upon by the markets as a desperate move and created the run on the bank that we saw. without any hedging strategies in place, meant that their current values should have been marked down (called mark-to-market) to reflect their lower prices.īut because of current accounting rules, financial institutions can carry these low-yield securities at the higher purchase price since ultimately, that's where they would mature and they would get all of their money back.īut if they had to sell, like what SIVB said they would do to raise assets, they're selling at the $0.90 on the $1.00 face value, and when you're talking about many billions of dollars invested in these conservative securities like treasuries, a -10% loss is a lot of money. There's little question that overall market weakness since last week is in direct correlation with financial institutions raising cash and trying to make their balance sheets look better.įinancial institutions like money center banks, regional banks, and investment banks like Morgan Stanley, are all highly leveraged and the recent revelation that many regional banks, like Silicon Valley Bank ( SIVB), continued to hold lots of extremely low-yield treasuries, mortgage-backed securities, etc. I believe the recent carnage in the regional bank space has probably contributed a lot to the recent valuation decline in CEFs. And because CEFs are owned by a lot of financial institutions, even if there is much greater diversification among smaller investors, they can drive prices up or down with much greater volatility and small shareholders can only go along for the rideįor example, Morgan Stanley ( MS) is by far the largest holder of CEFs across the board, and if they want to move out of a position or lower their stake, it's going to drive the price and valuation down. That's because retail shareholders are more emotional than institutional shareholders and they will be the last ones to buy on the way up and the last ones to sell on the way down.īut institutions sometimes have to sell and when they do, they generally don't care about price or valuations. And this happens on the way up as well as on the way down. That is, they tend to lag the market moves but once they get going, they tend to overshoot. One thing about CEFs is that they can act a bit like a sling shot. CEFs may generally be held by smaller retail investors, but it's still the big institutions that dictate price direction. Whether it's because of the Federal Reserve's Quantitative Tapering that started last year or simply a buyer's strike due to 5% rates you can get in short term places to park cash, liquidity in the equity markets seems to be draining before our eyes.Īnd for CEFs, that generally means lower valuations, made all the more worse due to the recent financial crisis in the regional banks. Note: This article was released to members of CEFs: Income + Opportunity on Thursday morning, March 16th ![]()
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