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Quick Summary

Last Month's CDx3 Investor Results

Special Announcement

CDx3 Company Spotlight

CDx3 Question Of The Month

FREE Special Offer

Next Month's Sneak Peek

2010 Update to Preferred Stock Investing Now Available!

Readers of my book, Preferred Stock Investing, Third Edition, are entitled to free periodic updates to the preferred stock tables presented throughout chapter 15 of the book as long as the Third Edition is in print. Providing free periodic updates helps keep readers of Preferred Stock Investing up to date.

The 2010 update to Preferred Stock Investing is now available!

And I am also happy to announce that as a special service to readers, the 2010 update goes beyond an update to the preferred stock tables found in chapter 15. In this update I also take the opportunity to provide you with the results of the "CDx3 Income Engine" (the preferred stock investing method explained throughout the book) as implemented throughout the Global Credit Crisis (2007 - 2009). The nature of the preferred stock market since June 2007 deserves special attention and the 2010 update to the book would not have been complete without wrapping up the method's performance during these historic (extreme) conditions.

Specifically, the 2010 update to the Third Edition of Preferred Stock Investing includes updates to the following chapters:

• Chapter 4, "The Global Credit Crisis": how the CDx3 Income Engine performed during the Global Credit Crisis for CDx3 Investors;

• Chapter 15, "Results - How You Would Have Done": the list of CDx3 Preferred Stocks issued during 2009 and an update to the tables of previously issued CDx3 Preferred Stocks that were sold during March 2010 when the market for CDx3 Preferred Stocks returned to one favoring sellers; and

• Chapter 18, "The CDx3 Notification Service": five new preferred stock investing resources have been provided to subscribers to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) since the Third Edition was published.

Preferred Stock Investing, Third Edition is one of the most highly reader-rated books of any kind available for sale in the United States. To receive the free 2010 update to Preferred Stock Investing, Third Edition just follow the instructions on the first page of chapter 15 in the book.

If you have yet to pick up your copy of Preferred Stock Investing, Third Edition you can do so at any of your favorite online retailers (see retailers). Please pick up your copy today then follow the instructions on the first page of chapter 15 to download the free 2010 update.

Just Posted On The Preferred Stock Investing Reader's Forum: On September 23 I posted an early alert to the Preferred Stock Investing Reader's Forum (my blog) regarding a discussion taking place within banking circles that may lead to the early redemption of Big Bank-issued trust preferred stocks (TRUPS). One Big Bank actually announced that it will be implementing a controversial interpretation of their prospectus that, in the mind of this bank, gives them the right to start redeeming their TRUPS right now.  (jump to Forum)

On September 17 Standard and Poor's started a three month effort to "rebalance" its S&P U.S. Preferred Stock Index. The Index is calculated every day by passing the market prices of a list of specific preferred stocks through a weighting formula. S&P's rebalancing has launched the buying and selling of millions of preferred stock shares by an outfit called iShares. iShares has a fund (specifically an Exchange Traded Fund, which is like a mutual fund) that is pegged to the S&P U.S. Preferred Stock Index; changes to the Index must be reflected by changes in the fund. The Last Month's CDx3 Investor Results article identifies eight specific preferred stocks that iShares is buying and selling in massive quantities between now and the end of November. (jump to article)

The Special Announcement article provides you with an updated list of trust preferred stocks (TRUPS) that will be among the first to be affected by Section 171 of the Wall Street Reform and Consumer Protection Act. Remember that subscriber's to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, receive this same list with all of the trading symbols. This month's list identifies eight of the highest rated, highest quality trust preferred stocks. Secondly, I have summarized some of the research from my book, Preferred Stock  Investing, Third Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article)

In the CDx3 Company Spotlight article I introduce you to Hawaiian Electric Industries, Inc., a $2.15 billion company that has continuously paid a dividend to shareholders of its common stock since 1901. HEI provides electricity to 95% of the Hawaiian Islands. Facing challenges that are unique to the island state, HEI is in the process of converting its fossil fuel based business and infrastructure to support the generation of 70% of its energy from renewable sources over the next twenty years.    (jump to article)

The CDx3 Question of the Month is presented both here and on the Preferred Stock Investing Reader's Forum. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article. This month's question - "What is the lowest preferred stock dividend rate that I can buy and still have some price protection?"  (jump to article)

Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. In the Free Special Offer article below I provide you with a link that allows you to receive my posts via an email message rather than having to visit the Forum to see what's new. Any time a new article is posted, you will receive a message in your email inbox automatically - free. (jump to article)

Coming Up For Preferred Stock Investors: The G20 summit is coming up in November and the world's banking regulators want to put a proposal on the table for consideration by this group of world leaders. The "Basel III" proposal is going to suggest that the capital required to be held in reserve by banks be more than tripled from today's 2% of assets all the way up to 7%. Read about the initial reaction of our Big Banks and what it may mean for preferred stock investors in the Next Month's Sneak Peek article. (jump to article)

I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.

Next Eight Weeks: S&P Preferred Index Change Creates Opportunity For Buyers

New Index Weights Force iShares To Buy/Sell Millions Of Preferred Stock Shares In Short Order

 On September 17 Standard & Poor's began a three month process to substantially rework ("rebalance") the list of preferred stocks that make up its S&P U.S. Preferred Stock Index. Since the iShares Preferred Stock Exchange Traded Fund (PFF | quote) is pegged to this S&P Index, iShares will be buying and selling substantial quantities (millions of shares) of these preferred stocks over the next few weeks as well. This massive and short-term adjustment has shined a very bright light on eight specific preferred stocks.

The S&P U.S. Preferred Stock Index is just that - an index (a number), much like the Dow Jones Industrial Average or the S&P 500 numbers that we see every day that give us an idea of how the market is doing, in whole or in part. Every day, Standard and Poor's takes the market prices of the list of preferred stocks that make up their S&P U.S. Preferred Stock Index and run them through a formula to get the daily Index value.

Investors cannot invest (buy shares) in an index. That's where the iShares PFF fund comes in. The good folks at iShares have built a fund (similar to a mutual fund) that is composed of the preferred stocks used by the S&P U.S. Preferred Stock Index. Investors so inclined then purchase shares of the fund, giving them an interest in all of the preferred stocks that make up the fund (read about investing in preferred stock Exchange Traded Funds).

So when S&P makes changes to the preferred stocks that go into their Index, the PFF managers at iShares make corresponding adjustments to the fund by buying or selling shares. In this way, PFF is able to meet its primary objective of mimicking the daily movements of the S&P U.S. Preferred Stock Index.

If we were just talking about a few shares here and there, there would be no need to bother with this. But that's not what we're talking about this time. S&P is adding over 200 individual preferred stocks to their Index plus changing the weights assigned to each preferred in the new mix. And this major reconfiguration is going to be completed in November.

That means that the managers of the iShares PFF fund will be buying and selling millions of shares over the next two months which, as you might guess, creates a significant opportunity for preferred stock investors who know (a) which preferred stocks are going to be involved and (b) for how many shares.

Example: Wells Fargo FWF (non-CDx3)

Take a look at this example. Wells Fargo has a preferred stock that trades under the symbol FWF. FWF is a trust preferred stock (TRUPS) with a declared annual dividend rate (coupon) of 6.25%.

Prior to the rebalance, S&P assigned a weight of .22 to FWF in its Index and iShares PFF held about 492 thousand shares accordingly. But under the new rebalanced Index, S&P will be assigning a weight of .65 to FWF. In other words, the importance of FWF in the S&P U.S. Preferred Stock Index is going to roughly triple over the next two months.

Remember that the total net asset value of PFF does not change with these adjustments, so changes in the S&P Index lead directly to corresponding buying and selling of individual preferred positions within the fund.

Assuming that the managers of the iShares PFF fund continue to configure PFF in lock-step to the Index, iShares will have to increase its stake in FWF to about 1.4 million shares by the end of November. That's a buy of over 922 thousand shares (see Table 1).

Purchasing this many shares over a relatively short period of time puts upward pressure on the market price of FWF, a consideration that may be important to you as a preferred stock investor when considering a purchase or sale in your own portfolio.

To continue this example, there is another, long-term consideration as well with FWF. FWF (a non-CDx3 compliant preferred stock) has a call date of June 15, 2012. That's prior to January 1, 2013 which is when the provisions of section 171 of the Wall Street Reform Act kick in (see the Special Announcement article below for an explanation of why this is important to preferred stock investors).

As a Big Bank-issued TRUPS, section 171 makes it extremely likely that Wells Fargo is going to call (buy back from you at $25.00 per share) FWF on or near January 1, 2013. Since FWF is currently selling for $25.48, there is likely to be downward pressure on its market price as January 1, 2013 approaches (toward $25).

This example shows how we can combine the new S&P Index weights with data from the iShares PFF Exchange Traded Fund and section171 of the recently-signed Wall Street Reform Act to inform short- and long-term purchase decisions of select preferred stocks.

Now watch what happens when we apply this analysis to just the highest quality preferred stocks...

Identifying The Highest Quality Candidates

As shown by the FWF example, by applying the new S&P Index weights to the current preferred stock holdings of the iShares PFF fund, we can identify (a) which specific preferred stocks iShares will likely be buying and selling over the next two months and (b) the approximate number of shares for each that will be involved.

These data give us a list of preferred stocks that are likely to be bought or sold by iShares in significant quantity over the next two months.

By applying the ten preferred stock selection criteria from chapter 7 of my book, Preferred Stock Investing, the list can then be tightened down even further to just the highest quality, highest rated preferred stocks.

Then, lastly, to position yourself for a downstream capital gain (on top of the great dividend income that these preferreds pay), we just want to see preferred stocks that are currently available for less than $25 per share.

Results: Eight Preferred Stocks; Two For Now...

The eight preferred stocks shown on Table 2 are the preferred stocks that (1) would have to be bought or sold by iShares over the next two months in order to keep the PFF fund in sync with the new S&P U.S. Preferred Stock Index (its stated fund objective); (2) are among the highest quality, highest rated preferred stocks available and (3) are currently available for less than $25 per share (October 1 prices).

Take a look at the first two preferred stocks listed on the table, PFD-A and PFD-B (note that to protect the values of subscriptions to the CDx3 Notification Service, my preferred stock email alert and research newsletter service, the trading symbols used here are fictitious. Subscribers can find the trading symbols on the CDx3 Discussion Group).

Notice the massive number of shares that iShares will presumably be purchasing over the next two months (if they want to keep PFF in sync with the new, rebalanced S&P Index). That means that there will be upward pressure on the market prices of these two preferred stocks between now and the end of November beyond what there might have been otherwise.

But there is a longer-term aspect of these two preferred stocks that should be of interest to buyers as well. Both PFD-A and PFD-B are Big Bank-issued trust preferred stocks (TRUPS) that, come January 1, 2013, will be subject to the provisions of section 171 of the recently-signed Wall Street Reform Act. As such, these two preferred stocks, available for less than $25 today, will almost certainly be called by their issuing banks (in which case, shareholders will receive $25 per share from the issuing bank).

While S&P's rebalancing of their U.S. Preferred Stock Index provides some short-term price protection for investors in these two specific preferred stocks, there is also a layer of long-term price protection courtesy of the Wall Street Reform Act.

Both the rebalancing that is just getting underway and the provisions of section 171 of the Act are putting upward pressure on the market price of PFD-A and PFD-B as indicated on Table 2.

...Six For December

In addition to shining a bright light on purchase candidates, these data from S&P and iShares also allow preferred stock investors to identify specific preferred stocks that might be better off purchased in December rather than right away.

In addition to making large scale purchases of some preferred stock issues, iShares will also be selling off some positions in order to reflect lighter weights assigned by S&P. This large volume selling activity, all to be completed by the end of November, is likely to put short-term downward pressure on the market prices of the preferred stocks that S&P is deemphasizing under the new formula.

Take another look at the bottom six preferred stocks on Table 2. These are all great preferred stocks; they too meet all ten of the preferred stock selection criteria from chapter 7 of Preferred Stock Investing and each pays respectable dividend returns (have you checked the interest rates offered by bank CDs lately?).

But if you are a buyer, you are likely to get a better price if you wait until December to purchase any of these six specific preferred stocks. Even though their market prices are currently less than $25, the indicated iShares sell-off that you see on Table 2 puts short-term downward pressure on these values well beyond what we may have otherwise seen. [Many thanks to subscriber Daan Everts for contributing to this article]

Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks

Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.

Invest in the best. Subscribe to the CDx3 Notification Service (see reader comments) today.

These 8 Preferreds Will Be Among The First To Come Under The Wall Street Reform Act

This table presents an updated list of Big Bank-issued trust preferred stocks (TRUPS) that will be among the first affected by section 171 of the Wall Street Reform and Consumer Protection Act, signed into law on Wednesday, July 21, 2010.

Section 171 creates the largest single opportunity for preferred stock investors in history (how's that?). And like most investments, the highest returns will tend to favor those who get in earlier rather than later.

The new law prohibits Big Banks (assets greater than $15 billion) from counting their TRUPS in their "Tier 1 Capital" calculation, a measure regulators watch when assessing the adequacy of a bank's reserves. These Big Banks are therefore likely to retire ("call") their TRUPS. Investors who hold shares of a TRUPS when it is called will receive $25.00 per share, so investors who purchase shares now for less than $25 position themselves for a capital gain on top of the above-average dividend income that they will be earning in the meantime.

The far right column of this table shows you the effect that adding a capital gain onto the regular quarterly dividend income has on your Effective Annual Return...courtesy of the U.S. Government.

By watching this list each month, you will be able to monitor this opportunity as the January 1, 2013 implementation date approaches (expect prices to generally increase toward $25.00 per share).

Since market prices change every day, the list of affected TRUPS selling for less than $25 per share changes as well. So I will provide you with an updated list in this Special Announcement article every month. These are the highest rated, highest quality issues that are going to be first affected by section 171 of the new law that are also selling for less than $25 per share right now.

Subscriber's to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) are provided with this same TRUPS list, including the trading symbols, on page 7 of each monthly issue of the subscribers' newsletter, CDx3 Research Notes. Please consider becoming a subscriber to the CDx3 Notification Service today.

Brokers And Investment Groups: New Meeting Materials Now Available

As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service.

My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing.

The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing.

The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts:

Part 1: Approach and Objectives To Preferred Stock Investing

Part 2: How and When To Buy and Sell Preferred Stocks

Part 3: Preferred Stock Investing Resources

To request the Preferred Stock Investing Group Materials just send an email request to:

InvestmentGroupMaterials@PreferredStockInvesting.com

You will receive an auto-reply email message with current download instructions.

Who Are These Companies That Issue CDx3 Preferred Stocks?

Hawaiian Electric Industries, Inc. (NYSE: HE)

Hawaiian Electric is a $2.15 billion Honolulu-based company that owns the Hawaiian Electric Company and American Savings Bank. HE has continuously paid a common stock dividend to its shareholders since 1901 and, through Hawaiian Electric Company, provides 95% of the electricity to the Hawaiian Islands.

The Hawaiian Electric Company faces some unique challenges due to is geographic location and isolation. Mainland utilities have the ability to meet demand cycles by sharing electricity over long-distance transmission lines. Since doing so in the Hawaiian Islands is not possible (being islands), each island must be able to meet all of its electricity demand needs independently. Shifting population and usage present difficult cost and infrastructure challenges that most other utilities do not face.

In addition to these challenges, the state of Hawaii launched an aggressive initiative in 2008 to transition its fossil fuel-based energy infrastructure to renewable resources. Specifically, the state's goal is to meet 70% of its energy needs (including transportation) from renewables by 2030. The big island of Hawaii appears to be well on its way with energy from wind, geothermal, biomass, hydro and solar already providing 30% of the island's needs.

Customer-sited renewable energy is also a cornerstone of the utility's supply initiative. But by pushing generation to customer sites (such as solar and wind), revenues from an outdated usage-based model were starting to have a negative impact on the company's financial performance. Customers who historically purchased electricity from the utility (at profitable rates) have suddenly stopped doing so. HE rightly informed regulators that as their state's renewable initiative unfolds over the next 20 years, this legacy revenue model will ultimately bankrupt the utility.

In February of this year, the Hawaiian Public Utilities Commission approved a new revenue model for Hawaiian Electric Company that decouples the utility's revenues from the amount of electricity sold (see press release). Rather, the new model pegs rates more directly to the utility's costs.

Learn more about Hawaiian Electric Industries: Company website | Profile | Upgrades/Downgrades | Recent News.

Reader Note: The purpose of the CDx3 Company Spotlight article is to give you a sense of the types of companies that issue CDx3 Preferred Stocks. Companies that appear in the CDx3 Company Spotlight either currently, or in the past, have issued CDx3 Preferred Stocks. Since I am not familiar with your financial goals, resources or risk tolerance, my mention of these companies here should not be taken as a recommendation by me for you to buy, or not buy, securities issued by these companies. Companies can issue multiple series of preferred stocks, some of which may meet the CDx3 Selection Criteria while others do not.

What is the lowest preferred stock dividend rate that I can buy and still have some price protection?