♒ SVB Collapse: A Prophecy Foretold

A look into Silicon Valley Bank's news sentiment leading up to it's collapse, and the search for who called it first...

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SVB: Generational Bank Collapse 🧨

Okay fine, we’ll do a quick review of Silicon Valley Bank’s news sentiment leading up to its collapse since ~everyone~ wants to know. The Q: who saw it coming?

I. THE SETUP 📖

For those of you still living under a rock like Patrick Star 🪨, last week we saw the 2nd largest bank failure in US history, as regulators shuttered Silicon Valley Bank (SVB) following a classic run on the bank. The quick story:

  • 🏦 SVB was the 16th biggest bank in the US, catering mainly to tech startups

  • With a giant influx of deposits during the pandemic, SVB invested these deposits ~heavily~ into long-dated government bonds 💸

  • But as interest rates climbed over the past year, 1) SVB’s bond investments lost A LOT of their value, and 2) the tech sector suddenly needed its cash back 📉

  • SVB was then forced to sell its bonds for a big loss. This caused a frenzy, and everyone panic-pulled their money from SVB (a classic bank run) 🫠

  • Finally, SVB’s stock cratered -60% & halted overnight, and before they knew it: the bank collapsed, forcing the federal government to step in 👇

Luckily for the bank (and basically the entire world economy), the government moved to contain the damage & prevent contagion over the weekend, ensuring SVB’s depositors would get their money bank, & basically saving us all from another ‘08 Financial Crisis.

We’ll save you the rest of the details (since literally every blog & news outlet has already covered ‘em) — here’s a few more comprehensive writeups:

II. THE SENTIMENT 🔴

Now, let’s dissect the ~reaction~ to all this bank failure shock & awe. First, a look at the raw words most-associated with SVB in news coverage over the past week as the collapse took place. As you can clearly see, the reaction was about as negative as things get. Common words used in conversation included 'collapse’, ‘failure’, 'halted’, & ‘liquidity crisis’. 👇

Zooming out a bit, we took a look at SVB’s average daily mention volume & sentiment expressed in news articles over the past 3 months — to see how it fared leading up to its failure. As you’d guess, SVB’s mentions went parabolic last week, while it’s sentiment absolutely TANKED. No surprise there. Now what about before last week? 🤔

At surface level, up til last week it paints the picture you’d probably expect from a relatively under-the-radar regional bank: low mention volume and slightly positive sentiment on average. Still nothing crazy.. right?

BUT if we focus in on the negative spots (highlighted with little arrows) we start to see something interesting — little blips where people began calling their shots & expressing concern about Silicon Valley Bank’s potentially risky balance sheet. 👀

And in hindsight, these were the first warning signs that something pretty bad could happen here. Had you listened to the negative ones, perhaps you could have even seen it coming, like Michael Burry in The Big Short. A closer look:

III. THE SAGES 🧙‍♂️

In the three months leading up to Silicon Valley Bank’s demise, there were roughly ~100 dedicated articles written about the stock from major market news outlets. Most of these tended to be positive or neutral about the bank’s outlook (~85%).

But there were a handful of overwhelmingly bearish articles about SVB that painted a cumulative picture of potential doom for the bank. Piecing them together, the impending red flags for SVB looked clear as day. Here’s what they said:

📆 11/28 | 📰 Zacks | 🚩 Why SVB Financial (SIVB) Is Out of Favor for Investors

“As the loan demand slowed, SVB Financial’s top line [has] started getting affected adversely. Also, the company witnessed a decline in non-interest-bearing demand deposits… Management lowered its 2022 average deposit balance and net interest income (NII) guidance. The company also noted that its NII has peaked for this rising-rate cycle.”

📆 12/27 | 📰 MarketInsider | 🚩 The 10 biggest losers in the S&P 500 this year…

“The company has cut its 2022 outlook for net interest income as it's seen market challenges hitting liquidity flows to private companies and the overall tech landscape hurt by fears of recession and spiking borrowing costs… It's also been a rough year for innovative companies seeking to go public, with the global IPO market volumes down 45%.”

📆 1/19 | 📰 SeekingAlpha | 🚩 SVB Expects 2023 NII to Slump After Q4 Earnings Miss

“The company turned in worse-than-expected Q4 earnings that dropped from the prior quarter and Y/Y as market volatility and rising interest rates continue to limit growth and drive higher credit costs… the company also issued its outlook for 2023. Average deposit balances are expected to dip by "mid-single digits" from 2022, and net interest income is expected to see a "high teens" decline.”

📆 1/27 | 📰 SeekingAlpha | 🚩 SVB: 30% Down After Rally That Makes No Sense ⭐

“I continue to see this bank as majorly overvalued, if not a candidate to start seeing major impairments from its loan book. I believe at the very least we will see a continued bleed in VC investment, continued cash burn at early-stage companies and continued mark-downs from prior funding rounds. Moreover, I believe this dynamic is likely to last for years, not quarters. In that environment, I see SIVB trading at a discount to book value and a low multiple of earnings (to the extent they exist), which implies ~30% downside from current levels.” [This dude was spot on holy f]

📆 2/15 | 📰 InsiderMonkey | 🚩 Rising Interest Rates Challenged SVB in Q4

“The rapidly rising interest rate environment has been exerting pressure on SVB’s net interest margin as well as impacting the innovation economy, which is the company’s primary area of focus. Upon revisiting our long-term thesis, we decided to sell our position in favor of more attractive opportunities.”

📆 3/3 | 📰 InsiderMonkey | 🚩 SVB: 30% Down After Rally That Makes No Sense ⭐

“Restrictive financial conditions have virtually closed the new issue market. We sold SVB Financial Group due to ongoing headwinds in the startup and venture capital industries due to tightening liquidity and rising interest rates that have virtually closed the window for financing. The company has also seen a deposit run off which was raising its financing costs.”

So there you have it folks. First interest rates rise, then loan & deposit demand slows into the end of 2022. From there, earnings miss & management issues pessimistic guidance in January. That’s when the smart cookies realized there were some systemic issues afoot, and ultimately some big funds began selling their stakes. Then (as you know), all hell broke loose. 🔥

It all goes to show: if you know where to look & who to trust, you just might be able to find the diamond in the rough (or avoid the avalanche, whichever analogy you prefer). 💎🏂

That’s all for today — subscribe for more analysis like this, or let us know what else you wanna see by commenting or replying to this email. ✌️

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

SENTIMENT KEY: 🟢=bullish, 🌑=neutral, 🔴=bearish