John, an electrical engineer living in New Jersey , was conversing on the phone with his close friend Bob. John tells Bob that the plan for himself and his wife to retire at 45 is going as planned. This required overtime at work, reduced consumption and traveling, and aggressive investing – all to be able to meet their goals. The two friends say their farewells. And John hangs up the phone.
Later that evening, John was up watching CNBC as his wife slept. Suddenly he spit his cognac out and could not believe what he was seeing.
“Bishop Regional Bank (BRB), a mid-tier lender, shockingly defaulted on their creditors. BRB declared huge losses in their after hours earnings release, startling analysts that expected a modest profit for the quarter. The CEO of BRB said the huge losses were from a substantial drop in their corporate debt portfolio. As the economy has slowed and the Federal Reserve recently raised interest rates, corporations have suffered diminishing profit margins. Junk bond yields have soared, crippling already suffering companies from having less sales. This comes as a surprise as 81 of the economists we surveyed expected stronger growth in the market this year. Aswell as consensus on The Street for BRB was safe of any toxic loans. Yet, it appears things were worse than thought.
The CEO went on to further state that the economy surprised everyone and that they will be entering talks with their creditors for liquidation. Be wary of what the contagion will be when markets open tomorrow. BRB stock is down 85% in the after hours and still falling.
John feels he is going to vomit. Bishop Regional Bank was his largest position in his portfolio. How did this happen? His expensive financial adviser, who was an expert in the financial/banking sector, said this was a must own. He raved how it could pay its 6% dividend with no problems at all. He said it was risk free with big reward; a rare combination.
