There is a risk-on sentiment in recent market activity the likes of which I (and others) have rarely seen in the past four decades of watching the markets. As I am swamped with working through the minutiae of the PacWest (PACWP) /Banc of California (BANC) merger (to be clear, I haven't sold a single share of PACWP), I keep asking myself if I am taking enough risk.
In the world of deep discount preferreds, as a wise buy-side client once told me, valuation is in the eye of the beholder. There are retail preferreds that primarily trade on a $25/par. So does that mean that we should just look for the most-discounted names and buy them? Oh, God, no. I do a little more research than that. But as my "fifties" grow in number -- 50% returns from buying Valley National pfds (VLYPO) , and PacWest pfds PACWP at deep discounts to par and then watching those discounts shrink -- the raging Nasdaq is forcing me to search to find the next 50.
But don't fixed income securities trade at discounts to par value when the market perceives there to be a greater business/financial risk at the company? Oh, hell yeah. I have lived through a few bankruptcies in my day, and other than some once-in-a-lifetime equity-for-debt swapping post-2008, when an issuer fails you generally lose your entire investment.
But if you have been watching the talking heads on FinTV... risk does not exist anymore!!!! Everything is great!!! The U.S. economy is perfect. A cynic might suggest that those in the overwhelmingly left-wing-biased U.S. news media might be painting everything with rose-colored glasses because there is a presidential election next year. Politics are above my pay grade, but if you can't master a flight of stairs or dismount a bicycle, I probably won't be voting for you.
But I have to keep pace with the markets, so I am going to debut another model portfolio here on Real Money. As my first model portfolio, my baby, "HOAX" keeps performing majestically on the wings of hydrocarbons, you might think that to embrace risk, I might create a new model portfolio and name it "RISK."
Nope. What fun would that be?
So then, behold my latest choice of faux-ticker symbol model portfolio: "CRAPP." Yes, CRAPP. If you want risk, CRAPP has it in spades. Leveraged balance sheets? Businesses that are hurt by higher interest rates (what we finance nerds call high-duration names) ? Regional banks with high loan-to-deposit ratios (making them more susceptible to potential bank runs)? Mortgage companies that deal with higher funding costs and an extremely stressed US consumer? Check, check, check, and check.
My model portfolios and the "in real life" trades that surround them are proprietary to my firm Excelsior Capital Partners and my asset management clients and newsletter subscribers. Even CRAPP cannot be given away for free. Note also that CorEnergy Infrastructure REIT's preferreds, (CORR-A) , which I have mentioned in many Real Money columns, are not included in CRAPP despite trading at a 65% discount to par.
I am still on the CORR-A bandwagon and in fact bought some more this afternoon. CRAPP is composed entirely of new names for ExCap and its clients, so existing holdings like CORR-A did not qualify. As is my wont, I will give you one freebie.
Western Alliance Bancorporation, Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series A, liquidation preference $25 per Depositary share, redeemable at the issuer's option on r 09/30/2026 at $25 per Depositary share and with no stated maturity.
Make no mistake, WAL-A is a God-awful piece of paper. I guess on its IPO date of 9/15/21, 4.25% seemed like a fair coupon for a regional bank lacking critical mass, but now it just looks stupid. Hence WAL-A trades at $16.54 or 66 cents on the dollar. That gives you a 6.5% current yield, and one that is fixed-rate, and will be until its reset rate, which is also its first call date, on 9/30/2026.
But when I created CRAPP on 7/15, WAL-A was trading at $14.70, so we have already booked a 15% unrealized gain on this bad boy. Why? Because Western Alliance, just like PacWest, could be a merger target. I am not predicting that, nor have I done the deep-dive into WAL's financials that I did onto PACW's, which gave me an inkling that someone might buy PACW. Stranger things have happened, though.
WAL-A was mispriced when issued. But was it really priced less fairly than ZERO-coupon debt issued by the likes of Twitter (Elon Musk barely bailed Silver Lake out of that tranche) or by Peloton (PTON) , which is basically insolvent? Nope.
In a market that loves crap, you have to follow the leader and buy some CRAPP. It is what it is.