Birkoa Newsletter 34 (short update re: regional banks)

Dear Birkoa LPs and prospective LPs:

This is a very short update on an ongoing situation re: the regional banks.

During my last email on May 5th, I had said that the possibility of another regional bank going under was low. I believe we might be one step closer to it. Regional banks they look like they should be able to recover given that the weakest remaining bank last night sold off one of its divisions to shore up liquidity to withstand the depositor onslaught (linked here). So while they’re already in the process of recovering, I think a pop up is imminent.

Furthermore, although the debt ceiling extension negotiations between the Republicans in Congress and the White House are still in flux (in fact at an impasse today), there's widespread expectation that they will come to a conclusion very soon as at minimum both sides agree that a default is virtually off the table - the only question is how they get there. Once that happens, our positions, which following yesterday's news of impasse until today have given back their massive initial pop, will recover. It's almost like we know the end game, but have to tolerate the interim nonsense. As an example, PacWest shares were up 20% at 12pm yesterday, until Republicans signaled an impasse in negotiations, which led it to finish yesterday at a relatively modest 8%. Similarly, at pre-market today following the sale of its real estate lending unit, PacWest was up 8%, only to give it all back on souring sentiments of the debt ceiling impasse.

These 2 factors alone could give us a major pop us at any time, and since this is still an evolving scenario, I'll keep it short. I thought the news of the sale signals at least the very worst is probably behind us, so I thought it was worth an update.

Furthermore, there's a 3rd factor that too will prove to only help the regional bank holdings - the Federal Reserve is increasingly settling on a rate pause beginning next month, and might even cut later this year. Fed Chair Jay Powell indicated at least the former during his talk last Friday, so once this debt ceiling deal happens, other macro factors will only help our thesis for regional banks.

We might after all get the boost we're looking for from the regional banks segment of our portfolio, and once that happens, there's additional teeing up of positions to go after, including oil market, and tech names, that I've just been waiting to get into.

I'll be in touch.

Sincerely,

Pranjit Kalita
CIO