Extraordinary times. The markets are freaking out today in a fashion I have not seen since 2008. To take advantage of these hysterics, I try to take the other side. My followers, that ragtag group known as the Portfolio Guru Army knows that tactic very well.
I am buying securities today, but no common stocks, for my firm, Excelsior Capital Partners, and with the combined buying power of the PGA behind me. Today (real-time) I have bought:
Zions Bancorporation (ZIONP)
Nustar Energy (NS-A)
Metlife (MET-A)
All three are preferred stocks that have currently floating-rate features. So as bond prices skyrocket in a flight-to-safety trade these names pay quarterly interest based on 3-month LIBOR (5.1% today and barely moving, as it should be ahead of an FOMC meeting next week) and yet are valued by the market based on a benchmark, usually the 10-year UST note, which has seen an extraordinary explosion in price/implosion in yields in the past two trading days and was yielding 3.51% as of my last check.
If the existential problem here is the inverted yield curve - short-term (2-year) interest rates are higher than long-term (10-year) ones by 62 basis points today - then we are benefiting from that, not being hurt by it.
I have put particular weight behind my ZIONP trades, a name that has been part of my WYLD model portfolio, which my subscribers know to be composed only of currently-floating-rate preferreds.
But wait? Isn't Zions a regional bank? A conglomeration of several smaller regional banks, actually. And haven't regional banks been losing deposits? Silicon Valley Bank (SIVB) was an extreme example, but, yes, the "deposit attrition" phenomenon has been real for the past few years among regional banks. In fact, Zions' loan-to-deposit ratio rose to 78% in 4Q from 61% in the prior period. And haven't regional bank stocks been getting crushed? Yes, (ZION) common has been halted multiple times in Monday's trading and is currently showing a 23% decline from Friday's close.
But, sometimes you have to look at the bigger picture. We are buying ZIONP, not ZION. Preferred stock offers the security of quarterly dividends, and trading at 73 cents on the dollar, ZIONP offers upside if there were a corporate takeover of ZION (bonds/pfds would be paid out at par in such a scenario,) however unlikely that might be. The record date for ZIONP's next preferred dividend payment is March 15, which means if you want to buy it and receive that payment, you should buy ZIONP today. That's what the Army and I have been doing today. Why?
A deep-dive into Zions latest corporate presentation showed me:
Half of Zions' deposits are non-interest-bearing. Who on Earth would have NIB deposits? Corporations, that's who. A more predictable cohort than individuals. Also, Zions' median corporate deposit balance was less than the FDIC insurance limit of $250,000 at 4Q22 and Zions median consumer deposit balance was less than $40,000. Zions would be hard to sink, to say the least.
I am confident in saying that there will be no run on Zions, which had $27.3 billion in marketable securities on its balance sheet as of 12/31/22, as compared to Zions' $4.6 common equity market capitalization today.
And, here is the kicker. Unlike SIVB, Zions is a best-in-breed name, famous in the banking industry for good corporate governance. These guys have a reputation, the kind that you want. Even if there were some kind of depositor-run on Zions, I believe the FDIC could arrange a marriage with a money-center bank (Jamie Dimon would answer his phone in about two seconds for such a call, in my opinion) in under an hour.
In contrast, the FDIC had all day Friday and the entire weekend to find a suitor for SIVB. Why couldn't anyone find a partner for SIVB... barring the UK government finding (HSBC) willing to pay one pound for SIVB's tiny UK operation?
Because Silicon Valley Bank was the go-to bank for crap companies. Yeah, I said it. Companies that burn cash are beyond out of favor now... they are actually risky. If Cathie Wood liked it... Silicon Valley Bank probably banked it. Potential acquirers were scared away by SIVB's start-up-heavy/cash-flow-light customer base, in my opinion, hence SIVB's incredibly rapid demise.
That is the existential difference with Zions, which actually has billions of dollars hedged against lower interest rates - which is what is happening in this crisis... I told you these guys were smart. Instead of handing out money like Halloween candy to any and all "disruptive" companies with an idea that Cathie's Clowns thought was cool.
Last ZION factoid from the corporate presentation. Loan book: 55% commercial, 23% commercial real estate, 22% individual. That's solid, kind of boring, and exactly what you want in these markets.
There is a difference between an old-fashioned deposit-taking, loan-making bank, and a VC fund - or, even scarier, as Signature Bank holders found out, a Crypto Fund in disguise. Please do not forget that.
Buy ZIONP today. I am.
