"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.

CDx3 Preferred Stock Dividends Climb To 7.875%

While Bank Certificates of Deposit (CDs) Fall Below 5%

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.

Freddie Mac Announces Historic 240 Million Share Preferred Stock Offering

Huge Increase In The Supply Of High Quality Preferred Stock Fuels Buyer's Market

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. 


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.

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. 


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.

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.

If you have a question regarding the CDx3 Income Engine, just send an email message to FAQ@PreferredStockInvesting.com or visit the Preferred Stock Investing Reader's Forum, join the group (using an anonymous nickname) and post your question there for others to see.

Free CDx3 Special Report Also Has Free Companion Excel Calculator

See How To Correctly Calculate Your Effective Annual Return - FREE

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."

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:


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.

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.

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 Investingjust send an email message to OptOut@PreferredStockInvesting.com and you will be automatically removed from my address list.  Best wishes to you.

Copyright (c) 2007 by Doug K. Le Du
CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock are trademarks of Doug K. Le Du.  All rights reserved.
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DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory.  There can always be exceptions to trends and/or generalizations that may be discussed herein.  Consider your financial resources and goals before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.