Nathan Worden's avatar
$337.7m follower assets
Charles Schwab swing trade
Yesterday Charles Schwab was down 12% along with other banks with massive bond holdings of longer maturities. The sudden awareness and fear around bond holdings of longer maturities was sparked by Silicon Valley Bank closing on Friday, whose bond portfolio was pummeled by quickly rising interest rates over the last year.

The main fears around $SCHW can be summarized as:

  1. Management has clearly been caught flat-footed by rising interest rates, as evidenced by a 1.5% return on their securities held to maturity, the majority of which have a more than 10-year duration.
  2. Deposits are decelerating as clients search for yield outside of savings accounts.
  3. Liquidity concerns if a bank run occurs (which seems unlikely now that the FDIC stepped in to protect depositors of Silicon Valley Bank

So is $SCHW in trouble? Probably not:

  1. Charles Schwab is well-capitalized with a low loan-to-deposit ratio.
  2. More than 80% of its total bank deposits fall within the insurance limits of the Federal Deposit Insurance Corp. which is further reason that depositors wouldn't be scared about losing funds. (This was a major factor which spiraled Silicon Valley Bank out of control, as the vast majority of depositors were startups with much, much more than $250k held at $SIVB. The game theory just isn't the same at Schwab)
  3. Charles Schwab had 12% YoY revenue growth last year, driven in part by 4 million new accounts and $428 billion in annual core net new assets.

My bet was that the fears regarding the similarities between Silicon Valley Bank and Charles Schwab would be short lived, as investors looked closer, they'd realize that the dip in Charles Schwab was unwarranted.

Therefore, I bought $SCHW at $53.77 yesterday.

Today, $SCHW was up 6%.

Since my thesis was short in nature, and appeared to be confirmed, I decided to take the 6% win and call it a day.

For those of you who bought $SCHW and are looking to hold longer term, what is your thesis?

Image upload
Jonathan's avatar
Why not hold it longer?
Nathan Worden's avatar
@jonathanjohnson My thesis boiled down to: "Charles Schwab isn't Silicon Valley Bank", i.e. the market all of a sudden priced in insolvency risk that I thought was unwarranted. Once that appeared to be confirmed by todays jump, I decided to exit.

There's a lot to like about Charles Schwab's business long term— are you long?
David McDonough's avatar
@jonathanjohnson because @nathanworden has paper hands! I'm still in and we're climbing!
Nathan Worden's avatar
@mcd It's already a dollar higher than when I sold! I should have held longer. Paper hands indeed 🥲
Image upload
Nathan Worden's avatar
I'm happy with the 6% gain— but I hope it goes higher for you! @mcd
Image upload
Nathan Worden's avatar
One other relevant note about yesterday, was that people were feeling extremely fearful (here's a screen shot of the Fear & Greed Index yesterday). When things go extreme, they often overshoot and bounce back.

I knew that most of the fear in the market was surrounding Silicon Valley Bank and the risk of bank runs. So my $SCHW buy was an expression that I thought the market was overreacting.
Image upload
Gary's avatar
There's a piece from the Macro Compass today talking about how Charles Schwab’s Held-To-Maturity bond losses are almost double(!) their capital position.

Thats kind of scary.

Image upload
Chris Tolvkin's avatar
@charity The article seems to imply that because of accounting rules, US banks don't hedge their bond portfolios well. Could that be true?

Is Charles Schwab really "well capitalized" if they have $8b in capital, but a $315b bond portfolio that is mostly losing value and not hedged?
Nathan Worden's avatar
@charity Great share, will take a look.
Nathan Worden's avatar
@charity Alf (from the Macro Compass) made a comment on his LinkedIn post with the chart you posted, saying that he had an error with his chart, where he misstated Charles Schwab's capital. Instead of $8b it is $25b.
Image upload

Jazzi Young's avatar
This is sooo good.
Well done Nathan. Fantastic scalp trade.
Nimble day traders must be really enjoying the level of intraday volatility we've been having. Big profits can be made in such a short time if you get the direction right.
Meanwhile, medium-term trend traders like myself have to sit on the sidelines, biding our time until we get a more "accomodating" market environment. Choppy markets are Kryptonite to most trend traders.
The daily chart for Schwab looks insane. Look at that spike in selling volume when fear gripped the market. Crazy intraday price movement. You definitely don't want to be on the wrong side of these moves.
Image upload
Nathan Worden's avatar
@jazziyoung great points Jazzi! And yes, it is worth saying that this is a pretty risky bet because there’s always the possibility that you get the direction wrong.
Conor's avatar
Can we update Nathan's name to Nathan "Paper Hands" Worden @mcd? I mean what type of folks do you have running this joint. I hope Nathan doesn't own equity in Commonstock. Sheesh!
Dissecting the Markets's avatar
My thesis is that their asset management business to grow to become a more meaningful provider of profits in the business. Also, they are profitable and more sustainable than Robinhood.
Nathan Worden's avatar
@dissectmarkets oh yeah, wayyy better fundamentals than Robinhood.
Joshua Simka's avatar
Impressive! I think you and @mlemuel are playing from the same book!

Image upload



Already have an account?