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We are only 4 months through 2021, yet the annual deal value of bank and thrift M&A is already near the long term average. This year is easily going to beat out every year from 2011 to 2020 except 2019. At the current trajectory, it will also beat the 2019 spike, but it’s not clear if deal flow will stay at this rate. There are thousands of small banks in America. There is so much room for activity. It seems like activity is getting back to the trajectory it was on prior to the pandemic. One of the key trends in banking is having few branches. We can call these branch-light banks.
Bank stocks were very cheap in late October prior to the positive vaccine data being released. The banks are doing really well because this was a quick credit cycle. Most of the worst fears haven’t come true. We are a couple months away from the worst parts of the economy, which include leisure and hospitality, fully recovering. Obviously, the strong housing market is helping banks.
The rising 10 year yield is also helping net interest margins. The chart also shows the average deal size is exploding. Many thrift banks trade on the OTC or are thinly traded on traditional exchanges. The plan should be to buy a small bank for its deposits and strong loans and implement new technology that they haven’t utilized. Banks fell behind the finance apps like Cash App and Venmo. It’s time for the small banks to fight back. The best way to do this is to invest in new technology; it’s not as expensive as it once was.
What A Housing Market
The February 20-city Case Shiller home price index was up 11.9% from last year (national was up 15%). That’s up from 11.1% growth in January. Keep in mind, we still haven’t gotten to weak comps. Price growth will be very high next month.
As you can see from the chart below, there was double digit home price growth in each price tier. The difference between the low and high tier is the narrowest in 20 years. That’s because there is massive shortage in entry level housing. In fact, low tier housing price growth is very close to the peak following the worst of the housing bubble burst. That price growth was based on easy comps. This strength is caused by demand due to low rates and demographics.
The ratio of home price appreciation to inflation is the same as the peak in the housing bubble. Inflation is going to spike in the next few months, but home prices should be strong too. This isn’t a housing bubble that causes a burst in defaults. Instead, it will cause an increase in building because we have a housing shortage. Home price growth was in the double digits in 18 of 20 metro areas as the table below shows.
Only Miami, Las Vegas, and Chicago are below the prior peak. Miami probably will hit a new high in the next month because it is just 1% below its prior peak 170 months ago. Las Vegas had the 2nd weakest price growth in February because it is heavily impacted by travel. That will change this summer because domestic travel is going to explode. It will be safer for Americans to travel within the country than it will be for them to visit places like Europe. Specifically, 38.8% of people in Nevada have gotten 1 dose and 26.6% have been fully vaccinated. In Clark county (Las Vegas’ county), the 7 day average of new COVID-19 cases is 321. The 7 day average of deaths is 9.
The Labor Market Looks Great
The labor market is on fire. You will only see weakness if you are looking at old or inaccurate data. As you can see from the chart below, the improvement in the labor market can’t be going any better. Seasonally adjusted job postings on Indeed are up 22.4% from pre-pandemic levels as of April 23rd. We are within a few months of a labor shortage at this pace. The April labor report is going to be fantastic.
The hospitality & tourism industry has had a 9.2% decline in job postings since last February, but in the past 4 weeks it has had 14.3% growth. If it had 14.3% growth in the spring, imagine how much growth it will have in the summer when the country is done with pandemic policies.
Loading & stocking had the highest job postings growth since the pandemic (65%). You would think this would be slowing down as the economy gets back to more in-person shopping. However, it had 13.4% growth in the prior 4 weeks. Early indicators are that this isn’t a zero sum game. Instead of physical retailers taking back some share from online retailers, both are doing well. Not many consumer discretionary firms are doing poorly given all the money that was saved up during the pandemic.
Furthermore, after consumer spend their stimulus checks and the money they saved up, they will be getting pay increases because of the incoming tight labor market. We are close to making a seamless transition from an economy boosted by the government to one that stands on its own. The minimum wage increase won’t be as relevant because firms will be forced to pay workers more due to market effects.
The banks are quickly acquiring one another. 2021 is on pace to have the highest M&A activity in over 10 years. The housing market is very strong. Prices are exploding especially in the entry level market. Las Vegas will see a spike in price growth as travel spikes. Job postings are exploding. Not only are we close to a full labor market, we are within quarters of a labor shortage. The economy is overheating. The worst parts of the labor market are recovering quickly. Within a few weeks no industries will have fewer job postings than before the pandemic.
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