Chris DeMuth's State of the Markets for March 2023

Episode Summary

Executive Summary: The discussion centered on March 2023 market turmoil, especially bank failures, regulatory fallout, merger-arbitrage risks, and the improving odds of Microsoft closing Activision Blizzard. Chris Demuth argued that many bank failures were idiosyncratic, but the sector faces lasting damage from tighter regulation, higher funding costs, and impaired trust. He was skeptical of aggressive merger blockers and remained bullish on Activision as UK/EU review risk eased.

Main Topics: Bank failures and regional banking stress (Priority: 5/5): The hosts debated the collapse of Silicon Valley Bank, Signature, and First Republic, questioning deposit concentration, asset valuation, and whether contagion is truly contained. Regulatory backlash and moral hazard (Priority: 5/5): They argued that government responses to bank and crypto crises mixed stabilization with selective score-settling, potentially worsening future moral hazard and distorting market outcomes. Investment approach in volatile markets (Priority: 4/5): Demuth described whether to stay focused on individual mispricings or take a broader directional bet, concluding he mostly kept working through specific ideas rather than making dramatic sector calls. Merger control and government intervention (Priority: 4/5): The Spirit/JetBlue deal was used to discuss increasingly aggressive regulatory tactics, including agencies using jurisdictional power to block deals without typical judicial review. Activision Blizzard merger-arbitrage outlook (Priority: 5/5): The conversation turned to Microsoft’s acquisition of Activision, with improving CMA/EU signals making the deal look more likely to close and raising questions about timing, Sony’s leverage, and potential settlement dynamics. Crypto enforcement and SEC/CFTC posture (Priority: 3/5): They interpreted SEC/CFTC actions against Coinbase and other crypto firms as a sign that regulators are now using prior leniency less as safe harbor and more as a basis for later enforcement.

Key Arguments: Many bank failures were highly idiosyncratic, so not every regional bank should be treated as a “zero” risk. Even if contagion is contained, bank equity values can be permanently impaired by tighter regulation, higher liquidity requirements, and higher FDIC costs. Underpaying for smaller, prudently run community banks can offset credit risk and regulatory pressure; cheapness matters more than perfect confidence. Government crisis responses often interfere with private-market rescues and can use the moment to settle policy or ideological scores, especially in crypto and banking. Merger control is becoming more aggressive and less reviewable, with agencies like the DOJ, DOT, and FCC using broader power to derail deals. The Spirit/JetBlue transaction looks effectively doomed, but the legal and political environment makes analysis harder and spreads wider. Activision Blizzard’s odds improved materially as the UK CMA narrowed its review and the EU appeared to soften, making a U.S. court fight more likely than a coordinated global block. If Sony loses leverage or drops opposition, Activision’s deal probability could rise sharply. Crypto firms cannot rely on earlier regulatory tolerance as permanent protection once enforcement priorities and evidence change. Banking crises and regulatory crackdowns may favor large national banks and well-run community banks over mid-sized regionals.

Data Points: Expert transcript library size: 26,000+ - Stream’s claimed library of expert transcripts in the ad read Estimated cost advantage: 40% less - Stream said its model costs 40% less than 20 calls in a traditional expert network model FDIC cap: $250,000 - Used in discussion of uninsured deposits at SVB and corporate treasurers' risk awareness Silicon Valley Bank top-10 deposits: $16 billion - Illustrated concentration of uninsured deposits and relationship banking Circle cash at SVB: over $5 billion - Speaker cited this as an example of massive corporate cash parked at one bank Circle cash at SVB at failure: $3 billion - Amount still in SVB when it failed, per discussion Roku cash at SVB: $500 million - Another example of large corporate balances exposed to bank failure First Republic stock move: Opened at $8 and closed at $6.60 after closing prior day at $80 - Used to emphasize extreme volatility in bank equities First Republic trading level: mid-teens - Current equity value referenced as potentially headed toward zero or heavy dilution Regional bank valuation examples: Under tangible book / ~5x 2022 earnings / 1.8x tangible book - Used to show how quickly valuations compressed after bank stress SVB loan portfolio sale valuation: ~75% of book - Referenced as evidence that even modest haircuts can wipe out levered banks First Seacoast capital raise: $10 per share - New equity financing cited as supporting a small community bank investment thesis First Seacoast trading price: $8.59 - Used to argue the bank remained cheap relative to its recent raise Spirit trading price: about $16.70 - Referenced as market price while discussing merger-arb and standalone value Spirit tangible book value: about $14 per share - Used as a valuation anchor if the JetBlue deal fails Activision trial timing: early August - Expected start date for the U.S. trial if needed Activision ruling timing: November - Estimated timeframe for a court ruling after trial Potential merger probability shift: 45% to 55% / 55% to 75% - Speaker used these ranges to describe how Sony or regulatory moves could change deal odds

Pivotal Quotes: "Most strong reactions are overreactions." — Chris Demuth: Explaining his instinct not to make a dramatic sector-wide bet during the banking panic "The banks that need the bailouts don’t like the prices that the market clears at." — Chris Demuth: On how government rescues can conflict with private-market pricing and bargaining "Underpaying solves for everything there." — Chris Demuth: Describing why some smaller community bank investments still looked attractive despite sector turmoil

Implications: Regional banks may stay under pressure as regulation, funding costs, and trust reset lower. Merger-arb becomes harder where agencies can block deals outside courts. Activision looks more likely to close, but timing and Sony’s role still matter.