Trade what you see, and hedge what you don't...

"Trade what you see, and hedge what you don't." Words to the wise. The regional bank fiasco is an example of an out-of-left-field unknown event that can lead to dominos falling in unpredictable ways. SVB was likely poorly managed, overly concentrated in one area, and in the wrong place at the wrong time (rates rising as deposits fled, assets needing to be sold). But it did have a very large percentage of uninsured deposits.

PacWest, by comparison, has been TAKING IN deposits since March, has 75% of deposits fully insured and boasts tons of liquidity. So why the massive drop? It just may be a victim of downward momentum and guilt by association. It's a solid bank, but one that may succumb to perception becoming reality. This is a crisis of confidence, and confidence is rather fleeting these days.

In this day and age it's easy to spread fear. It's easy to move your money out of a bank with a click of a mouse (instead of lining up around the block and hoping to get into the teller before closing time). But again, perception becomes reality as falling share prices make depositors nervous, which puts upward pressure on funding costs, which hurts profitability and... rinse and repeat as the stock keeps getting hit. Downside put buying has also exacerbated downward gamma squeezes, feeding the selling frenzy. Traders have no doubt had something to do with this – the sharks smelled blood…

So sometimes things just don’t make sense, but they are a culmination of a series of events that in the end form a perfect storm - this has been a black swan for the sector. And it’s for these kinds of moves that makes “Trade what you see, and hedge what you don’t” resonate. Hedging isn’t just for gardeners, and every now and then we are reminded of that. At Gamma Capital Advisors we have some good gardeners, and hedgers.