The timing is almost too uncanny.
We’re rolling up on the one-year anniversary of the failures of three regional banks. On Tuesday, Janet Yellen commented that she is concerned about looming commercial real estate stresses on the banks and property owners.
This morning, you may have seen that New York Community Bank (NYCB) is popping after announcing a new Chairman after the bank’s credit rating was downgraded yesterday. Guys, that’s an example of controlling the message, right?
Yellen’s comments and NYCB’s credit downgrade are signs that the ticking timebomb surrounding commercial real estate and other business loans still hasn’t been defused.
Three things continue to contribute to this risk.
1. Vacancies
Take a walk down Main Street, any Main Street. You’ll note the huge number of “Available” signs on office buildings and retail centers. The landscape of our cities and small towns are littered with empty spaces where we all once worked and shopped.
The problem is that these spaces are still holding real estate loans that are coming due over the next two years. Billions and billions of loans that were originally written at lower interest rates are likely to not be renewed or even default as interest rates have blown up the costs to finance. This is going to put a lot of pressure on those property owners causing a crash in values.
2. Interest Rates
Jerome Powell just hinted that rates are going to remain higher for longer, and the Fed will be very deliberate and slow when they do start dropping rates.
This maintains the pressure on the situation that I described above.
3. Lower Forward Demand
Banks are already feeling the pressure of the loans on existing properties, additional pressure is coming to bear as demand for new commercial real estate is extremely light, which means the banks are writing fewer loans, loans that have historically been the foundation of their business.
Don’t expect this to change until interest rates make their way back to historically low levels.
The Fed wanted a slowdown, they got it. The problem is that the slowdown is in an area of the economy that can trigger another round of bank failures like we saw in 2023.
Bottom Line
On Monday, we talked about the fact that the regional bank ETF (KRE) was teetering at critical short-term prices and that there is a high probability we will see a 10% drop in the banks. Janet Yellen’s comments yesterday should start putting some traders on the defensive. Which may cause the regional bank and other financial stocks to trigger a 10% bearish move.
The market has an incredible muscle memory when it comes to these situations. The KRE chart is displaying that muscle memory as current prices are looking exactly like February 2023, ahead of a historic crash of these stocks.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.