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"My wife and
I are excited about following your plan to build our personal
CDx3 portfolio. The information, charts and spec sheets you
provide are great. Thanks!"
- George K. - Troy, IL
Welcome to all of the new readers
of the CDx3 Newsletter and thank you for your interest in
Preferred Stock Investing.
Since early June, we have seen
dividend rates being paid by CDx3 Preferred Stocks steadily
increase; November was no exception. In the Last
Month's CDx3 Investor Results article below, you'll find the
details of the latest CDx3 Preferred Stock issues.
This month's CDx3 Special
Announcement article highlights a special event in the
history of preferred stocks that is happening right now.
The supply of high quality preferred stocks trading in the
fixed-income market is about to take a massive step up.
Read how this historic event will benefit CDx3 Investors.
Famously successful investor
Warren Buffet just made two huge investments in the financial
sector - and both were for issuers of CDx3 Preferred Stocks.
The CDx3 Company Spotlight article describes Buffet's
position and one of the financial institutions that he is
favoring.
We have sure been reading a lot
about the mess in the mortgage lending and housing markets
lately. Did you know that it all started with the dot-com
boom/bust in the late 1990's? The CDx3 Question Of The
Month article traces the bread crumbs, and the key events
along the way, that led to today's "buyer's market" for
CDx3 Preferred Stocks - high dividend rates available at bargain
basement prices.
For our new subscribers, there is a free calculator available
to you that allows you to correctly calculate the effective annual return of
preferred stock investments. The Free Special Offer
article below provides you with a download link.
During December, two newsworthy events
will be watched very closely. First,
the U.S. Treasury is negotiating
with the country's major mortgage
lenders on a relief package, of
sorts, for subprime borrower's with
adjustable rate mortgages that are
about to adjust upward.
Secondly,
the
Federal Reserve Board's Open Market
Committee is scheduled to meet on
December 11 to consider lowering
interest rates again. Next
month's CDx3 Newsletter will fill
you in on what happens and how these
moves affect CDx3 Preferred Stocks. |
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CDx3 Preferred
Stock Dividends Climb To 7.875%
While Bank Certificates of
Deposit (CDs) Fall Below 5%
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There was
something for everybody in the November 2007
market for CDx3 Preferred Stocks.
Buyer's looking for downstream capital gain
opportunities found bargains, while those
looking for high dividend rates were not
disappointed.
Dividends Climb
Again: Subscribers to the
CDx3
Notification Service received a great
Thanksgiving surprise when two new CDx3
Preferred Stocks were offered, one on November
14 and a second on November 20, just as many
were heading for the carving knife sharpener.
Here is an update
to the CDx3 Preferred Stock dividend chart that
has been published in the last two
CDx3 Newsletters.
Each navy blue bar shows the dividend rate being
paid by an individual CDx3 Preferred Stock
introduced this year (the month of introduction
is indicated below each bar).
On November 14, a
CDx3 Preferred Stock was introduced that pays a
7.850% annual dividend, up from October's 7.75%
and 7.25% offerings. But, if that wasn't
enough, a second CDx3 Preferred Stock issue hit
the market Thanksgiving week, paying an annual
dividend rate of 7.875%.
Historically, CDx3
Preferred Stocks are offered at a rate of 1-2
per month, and 2007 is no different; CDx3
Investors have now had 15 CDx3 Preferred Stocks
to choose from this year.
And remember,
these are not ordinary preferred stocks; these
are CDx3 Preferred Stocks. That means
that they meet the ten CDx3 Selection Criteria
that are presented in Chapter 1 of Preferred
Stock Investing. To give you an
idea of how ordinary preferred stocks are
filtered out, here are just three of the ten
CDx3 Selection Criteria:
-
Must be issued
by a company that has never suspended
dividends on a preferred stock (these are
multi-billion dollar companies and, mostly,
decades old);
-
Must have a
Moody's credit worthiness rating of
"investment grade"; and
-
Must be
"cumulative," meaning that if the issuing
company misses a dividend payment to you
(which I have never seen happen with a CDx3
Preferred Stock) they are still legally
obligated to make it up to you - they still
owe you the money.
Readers of
Preferred Stock Investing know that the ten
CDx3 Selection Criteria eliminate about 90% of
the preferred stocks that are available on the
stock market. |
One of the many preferred
stock statistics that are tracked and reported to
subscribers to the
CDx3 Notification Service is the
average dividend rate being paid by CDx3 Preferred
Stocks over the last three months (called a "moving
average").
A moving average is a
simple statistical technique that smoothes out trends,
so that you can better see what is really going on.
I have been reporting to
you over the last several months that CDx3 Investors
entered a "buyer's market" in early June of this year.
A buyer's market is characterized by an (usually
short-term) increase in the dividend rates being paid by
CDx3 Preferred Stocks, at the same time that market
prices for them are falling. High dividends for
low prices - a buyer's market.
The below chart makes it
pretty clear what has been happening with the dividend
rates being paid by new CDx3 Preferred Stocks (for you
statisticians, the trend line is a 2nd degree
least squares polynomial).
The dividends being earned
by CDx3 Investors have jumped over 1% in the last six
months. This is extra significant since the
interest rate being paid by bank Certificates of Deposit
(CDs) has done just the opposite (source:
bankrate.com). Look at the grey bars on the
chart in the left column. CDs ($10k, 24-month)
have gone from about 5.25% in May to less than 5% now,
when CDx3 Preferred Stocks are approaching 8%.
Prices Fall Again:
Many CDx3 Preferred Stocks that usually cost $25 to $27
dollars per share, can be purchased right now for less
than $23 per share. Why are the highest paying,
highest quality preferred stocks selling on the open
market for such a low price?
There are several reasons,
but in the following articles I will tell you about
(1) an extraordinary event that is happening right now
in the world of preferred stocks that has put enormous
downward pressure on market prices and (2) how the
dot-com boom of the late-1990's, and the 2001 terrorist
attacks, led to policies that have created the bargain
basement prices we are now enjoying for high
dividend-paying CDx3 Preferred Stocks. |
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Freddie Mac Announces Historic 240 Million Share
Preferred Stock Offering
Huge Increase In The Supply Of
High Quality Preferred Stock Fuels Buyer's Market
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November's preferred stock
announcement from mortgage investment company Freddie
Mac (NYSE: FRE) was important for CDx3 Investors.
This might seem odd at first, since this new preferred
stock offering by Freddie Mac, as high quality as it is,
does not meet the CDx3 Selection Criteria and is
therefore not a CDx3 Preferred Stock (the issue
is not "cumulative," so if Freddie misses a dividend
payment to you, they do not have to make it up
later).
But it is, nonetheless, a
huge gift to CDx3 Investors and fully deserving of
finding itself in this month's Special Announcement
section.
For reasons that I explain
in the time line presented in the CDx3 Question Of The
Month article below, November saw a significant increase
in the volume of new preferred stocks.
How Significant? Normally,
preferred stock offerings raise a few hundred million
dollars for the issuing company. They will
involve, say, 30 million shares offered at $25 per
share, raising $750 million. That would be
considered a fairly large offering, but not unusually
so.
On November 28, Freddie
Mac announced a high quality preferred stock offering
for 240 million shares at $25 per share, raising $6
billion in cash. |
This followed an offering
in mid-November by Freddie's sister, the federally
chartered Federal National Mortgage Association (Fannie
Mae, NYSE: FNM). Fannie's offering was a more
typical 20 million (non-cumulative) shares.
November also saw new issues from other large financial
institutions, but nothing like the historic offering of
240 million shares from Freddie Mac.
Supply Up, Price Down:
What happens to the market price of any product if you
suddenly increase the supply? When supply
increases, price decreases - simple economics there.
This historic offering by
Freddie Mac was a nice surprise for CDx3 Preferred Stock
buyers.
As illustrated by the charts in the above article, CDx3
Preferred Stocks are now paying the highest dividend
rates that we have seen in a long time and, thanks to
Freddie, at a time when increased supply is helping to
drive purchase prices downward.
To see how the dot-com
boom of the 1990's also contributed to the low market
prices for CDx3 Preferred Stocks that buyers are
now enjoying, see the CDx3 Question Of The Month article
below.
High dividend rates at low
prices - a buyer's market.
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Who Are
These Companies That Issue CDx3 Preferred
Stocks?
Wells Fargo & Company.
(NYSE: WFC)
In
addition to being an issuer of
CDx3 Preferred Stock, Wells
Fargo (NYSE: WFC)enjoys one of the most
recognizable brands, not just of
financial institutions, but
brands of any kind.
Speaking of things Well Fargo
enjoys, they are the only
U.S. bank to have the highest
credit worthiness rating from
both Moody's (Aaa) and Standard
& Poor's (AAA).
Most people have heard of
famously successful investor
Warren Buffet, the Chairman and
CEO of investment company
Berkshire Hathaway (NYSE: BRK-A).
Buffet has a decades-old history
of outperforming the market,
year after year. If you
want to own a share of Berkshire
Hathaway stock, and share in Mr.
Buffet's success, it will cost you
$140,100 - one share (closing
price, Friday, November 30,
2007). "I want to know my
shareholders" says Buffet.
As
well known as the man himself,
is his investment philosophy -
buy undervalued companies that
have an easy to understand
business model and great brand
recognition.
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As of
September 30, 2007, Buffet had
increased his position in the
financial sector by buying the
shares of two financial institutions
- Wells Fargo and US Bancorp.
Of all
of the financial institutions to
choose from, Mr. Buffet chose just
two - and both are issuers of CDx3 Preferred
Stock.
Wells
Fargo is now Warren Buffet's second
largest holding at, get this, 279.9 million
shares. That's shares, not
dollars. WFC trades for about
$35 per share. Got a
calculator?
Wells
Fargo is a $109 billion dollar
financial institution founded in
1852 and headquartered in San
Francisco.
Through its subsidiaries,
Wells Fargo provides banking and financial
products and services throughout the United
States. Wells serves its
customers through approximately
3,200 locations and 6,800 ATMs.
Click here to see if there is
one in your neighborhood.
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From
JasonB:
Can
you explain, in plain-English,
how this subprime mortgage
problem started and what the
problem is today?
The problems in the housing and
mortgage lending sectors of our economy, that we are currently
reading so much about, can actually be traced back to the
dot-com technology boom of the late-1990's.
The dot-com boom and bust,
followed by the terrorist attacks of 2001, triggered specific
economic policy decisions by the Federal Reserve Board (the Fed)
that have led directly to the housing and mortgage lending
problems we see today.
Here's a quick timeline and
summary:
 he technology
sector has been booming for several years. The Fed repeatedly
raises interest rates (federal funds rate) past 6% to try and
slow an overheating economy down and hold off inflation. Venture
capital firms finally realize that most dot-com's are never
going to produce any tangible products, other assets, profits or
even sales. Mid-1999, they shut off cash to the technology
sector.
 ot-com bubble bursts. Economy slips toward
recession. The Fed changes direction on interest rate policy and
starts cutting interest rates to hold up economy.
It is
this decision that, ultimately, leads to the current housing and mortgage
market turmoil; keep reading.
 errorists attack. Economy slips further,
forcing the Fed to continuously cut interest rates below 3%.
Mortgage rates start getting pretty attractive.
 he Fed wins its battle. The economy turns
around, but not before the federal funds rate has sank all the
way down to 1% - money is essentially free for anyone who wants
it. The repeated interest rate reductions, caused by the
dot-com bust and exacerbated by the 2001 terrorist attacks, have
left mortgage rates irresistibly low.
 trong economy starts to show signs of
inflation. The Fed starts to raise interest rates again. Low
income buyers, and those with poor credit, figure they better
get that cheap home loan while they have a chance. This
group, by the millions, get 3-year adjustable loans with low
first- and second-year rates. Home prices increase with
incredible demand.
 enders continue
issuing millions of adjustable rate mortgage loans to people
with bad or no credit ("subprime" loans). People making minimum
wage are signing up to $1 million in mortgage debt. Interest
rates steadily increase, fueling the panic to buy now. Home
prices continue upward accordingly.
 he Fed wins battle with inflation. The federal
funds rate tops out at 5.25% (up from 1%, over a 5x increase).
Panic to get a mortgage loan now levels off accordingly. Demand
for homes wanes. Home prices fall back to 2005
levels.
 hose
3-year adjustable loans from 2004 start to adjust to the now
much higher interest rates. Monthly mortgage payments double.
Borrowers try to sell their homes in order to get out from under
the monthly payments that they have no way of paying, but find
that the market value of their home is now lower than the
remaining balance due on their mortgage.
In order to sell their
house, they will have to come up with tens or
hundreds of thousands of dollars in cash. Home
values drop to 2004 levels as panic selling sets in.
For many, foreclosure is the only way out.
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The U.S.
mortgage foreclosure rate hits its highest level
since statistics began being kept in 1953; and
subprime adjustable-rate delinquencies hit 10.13% (source:
Mortgage Bankers Association). Correspondingly,
regulators increase the amount of cash that mortgage
lenders and other financial institutions are
required to hold in reserve, as a safety valve
against bad loans.
Credit standards are tightened throughout the
economy; cash gets hard to come buy. Mortgage lenders who made a lot of these
subprime loans start to go under, starting with New
Century.
 nvestors (Fannie Mae, Freddie Mac and
other large financial institutions) who normally
purchase mortgage bundles from mortgage lenders
start to question the risks they are taking; they
stop buying all but the highest quality mortgage
bundles from mortgage lenders. Subprime
adjustable-rate delinquencies jump from 10.13% to a
whopping 16.95% by the end of June (source:
Mortgage Bankers Association).
Mortgage lenders
start to run out of cash for new loans. The Fed
pumps billions of dollars into the banking system
and lowers the "discount rate", which is the cost
that the Fed charges banks for short-term loans.
Twice, the Fed also lowers the federal funds rate
(from 5.25% to 4.5%) to put downward pressure on
mortgage rates, hoping to save more adjustable
mortgages that are about to adjust upward through
the end of 2007.
 ll of this makes investors very nervous. Large
investors (pension funds), fearful that the credit
crunch will inhibit corporate profitability and
growth, pull billions (some say hundreds of
billions) of dollars out of the stock market and
park it in Treasury bonds and gold. The market
price of almost every other type of stock investment
drops by about 15%. The market price of Treasury
bonds skyrockets, reducing their yield to 2-1/2 year
lows; gold goes from $640 per ounce to $840.
 here are now 2.5
million subprime mortgage loans that are scheduled
to adjust upward during 2008; 2 million of them in
the first half of the year (source: FDIC).
Consequently, the bargain basement prices we now see
for very high quality CDx3 Preferred Stocks, which
are paying close to 8% dividends, are likely to come
to an end by the middle of next year. If so,
CDx3 Investors who purchase cheap CDx3 Preferred
Stocks now should be set up for a very nice capital
gain in 2008/09.
So, this all started with the dot-com bubble burst,
exacerbated by the 2001 terrorist attacks, and the
Fed's historic lowering of the federal funds rate,
beginning in 2000,
all the way down to 1%, in order to help the
economy recover.
Millions of barrowers who normally
could not qualify for a home loan suddenly could (an
adjustable one, anyway) and they could not resist
taking on massive amounts of debt that they must
have known they would have no way of repaying;
lenders are equally guilty, lending to people who,
lenders must have known, were unlikely to be able
to make the payments after these loans adjusted
upward...and adjust upward they did.
Thanks to JasonB for
the great question. You will receive a
complementary copy of the CDx3 Special Report
Dividend Accounting.
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Free CDx3
Special Report Also Has Free Companion Excel
Calculator
See How To Correctly Calculate Your
Effective Annual Return - FREE
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The Preferred Stock Investing Reader's Forum provides a
free special
Excel spreadsheet calculator that you can use to
calculate the effective annual return (EAR) of your
preferred stock investments. The calculator allows
you to just plug in a few parameters from your preferred
stock (such as purchase date, purchase price, sell
price, etc.) and see what your effective annual return
really is, or will be if you sell.
 When
you initially download the EAR calculator, it is set up
using the Series A CDx3 Preferred Stock from Dominion
Re-sources (D-A) as an example. This is the same CDx3
Preferred Stock that is used as an example through-out the CDx3
Special Report titled "Calculating Your Rate Of
Return."
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As a
recipient of this monthly CDx3 Newsletter,
you are entitled to a FREE copy of "Calculating Your
Rate Of Return." So, get
them both - FREE - and use them together to
learn how to correctly calculate your rate
of return on this type of investment. To download your free copy
of Calculating Your Rate Of Return, just click on
the following email address:
CDx3Newsletter@PreferredStockInvesting.com .
No need to type anything in the body of the
message, just click the Send button.
You will receive an auto-reply email message
with download instructions for your free
CDx3 Special Report.
To see the entire library of useful and
educational CDx3 Special Reports, including
three sample pages from each one,
click here.
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Market Bets On Federal Reserve Board To Lower Rates Again
CDx3 Investors Eye December 11 FOMC Meeting
The Fed is scheduled to consider
lowering interest rates again on
December 11. Doing so will
help the mortgage lending and
housing markets, but at the expense
of the exchange rate of foreign
currencies versus the U.S. dollar
(the dollar will drop - see the CDx3
Question Of The Month article in the
October issue of the CDx3 Newsletter).
That means that, to American's, the
price of all foreign products that
we buy (think oil) will become more
expensive virtually overnight.
Stock prices have started raising
over the last several days, as
investors are already anticipating
that the Fed will lower the federal
funds rate for the third time in the
last few months.
Next month's CDx3 Newsletter will
summarize the Fed's action and
provide an analysis of how their
interest rate policy, and the U.S.
Treasury's efforts to negotiate help
for subprime barrowers, will affect
CDx3 Preferred Stocks.
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Remember, I'm not a stock broker;
I'm not trying to sell preferred
stocks to you; and I don't sell
investment advice. I'm an
investment researcher with a
economics and statistics
background who has developed a
simple way to earn a respectable
return at "CD-like" risk. And I've
written it down in
Preferred Stock Investing.
I'm hopeful that you find these
monthly CDx3
Newsletters interesting, and
will consider learning more by
purchasing my book, Preferred
Stock Investing.
Please
take a look at
http://www.PreferredStockInvesting.com. And don't forget
about my
FREE SPECIAL OFFER.
Know
someone who might be interested in simple,
low-risk investing for non-investment
experts? Have them send an email
message to
CDx3Newsletter@PreferredStockInvesting.com and
they will automatically
begin receiving this monthly CDx3
Newsletter
next month (plus a
CDx3 Special Report) - all FREE.
Then they can make up their own mind.
Many Happy Returns,
Doug K. Le Du
P.S.: If you do not want to receive news
regarding Preferred Stock
Investing, just
send an email message to
OptOut@PreferredStockInvesting.com
and you will be automatically removed
from my address list. Best wishes to
you.
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